Before MAJOR, Chief Judge, and KERNER and DUFFY, Circuit Judges.
This is a petition to review and set aside a decision of the Tax Court*fn1 which affirmed the Commissioner's determination that the gain realized by taxpayer upon the sale of a partnership interest was taxable as ordinary income rather than gain on the sale of a capital asset.
Taxpayer is an attorney at law who was admitted to practice in Illinois in 1927. His first place of employment was with the law firm of Levinson, Becker, Frank, Glenn and Barnes. The firm was nationally known, and the members thereof were of prominence in the legal profession. One became a U.S. Circuit Judge, another a U.S. District Judge, and another a U.S. Senator. Mr. Levinson, the author of the Kellogg Peace Pact, was very prominent in corporate financing and reorganization matters. Since 1912 the names of Levinson, Becker had been the first two names in the law firm.
On January 1, 1932, Mr. Becker purchased the interests of Levinson, Glenn and Schwartz. Levinson retained an office with the firm and for two or three years thereafter was paid an annual salary of $15,000, and for four years thereafter $9,000 annually, and he in turn permitted the firm to retain his name.Becker fixed the value of the firm at $100,000 although this sum was substantially greater than the aggregate of all of the assets of the firm, including accounts receivable and accrued but uncollected fees. Taxpayer on January 1, 1932, purchased from Becker a 10% interest in the firm and paid $10,000 therefor. The firm was thereafter known as Levinson, Becker, Gilbert, Peebles and Swiren.
In 1934, Gilbert withdrew from the firm and taxpayer purchased another 10% interest, paying $14,750 therefor. Again the amount paid was substantially in excess of 10% of the aggregate of all the physical assets, the accounts receivable and the fees earned but unpaid. Thereafter taxpayer made purchases from other partners of portions of their capital interest in the partnership until by 1944 he had a 30% interest for an aggregate cash investment of $33,500. During the same period taxpayer had received a partial return (amounting to $14,897.74) of his total cash investment. When taxpayer sold his interest in the partnership in October, 1944, his net capital investment amounted to $18,602.26.
A short time prior to the dissolution of the partnership taxpayer prepared a statement setting forth his idea of the value of his partnership interest and the value of the partnership assets. The eight items listed totaled $151,021. Two of these items were "billed fees (excluding entirely all fees billed prior to January 1, 1944), $12,800" and "unbilled fees (exclusive of Midland), $106,093." After deducting a junior partnership share, the balance shown on the statement was $145,621, and taxpayer's 30% interest amounted to $43,686.30.
Taxpayer negotiated exclusively with Becker, telling him he believed his interest in the partnership was worth $45,000 to $50,000. No discussion was had as to the value of any of the items appearing in the memorandum. Several days later Becker offered taxpayer $40,000 for his interest, which offer was accepted. In addition to the cash consideration taxpayer received some office equipment having a book value of $506.18.
The written agreement for the sale of taxpayer's interest in the partnership was executed on December 13, 1944. Taxpayer sold and assigned "all of his * * * share and interest in the Firm, excepting only and excluding the Midland fee."*fn2 The agreement recited, "Max Swiren's share and interest in the Firm sold and assigned hereby shall include his share and interest in the name and good will of the Firm, all furniture, fixtures, library, cash, fees earned whether or not billed, and accounts receivable, excluding, however, the Midland fee." It was also agreed that as a basis for accounting the partnership be terminated as at October 31, 1944, and that the partners participate in income and expenses up to that date.
Taxpayer prepared his income tax return for the year 1944 on a cash receipts basis, and reported therein as ordinary income the fees of $29,917.26 he had received from the partnership during that calendar year. However, he listed the sum which he received from the sale of his partnership interest as a capital gain and did not include it among the figures comprising his ordinary income.
The Tax Court, adopting the Commissioner's determination, recognized that taxpayer had a proprietorship interest in the partnership, and permitted him to recover "the full amount of his unrecovered capital outlay" in acquiring his partnership interest. However, the balance of the money received by taxpayer for the sale of his interest in the partnership was taxed to him as ordinary income. This was despite the fact that he sold his partnership interest as a whole.
When the Commissioner made his determination in this case the persistent view of the Bureau had been that the sale of a partnership interest was a sale of the selling partner's interest in each specific partnership asset. However, later acknowledging that "the overwhelming weight of authority*fn3 is contrary to the position heretofore taken by the Bureau" the general counsel announced on May 15, 1950,*fn4 "* * the sale of a partnership interest should be treated as the sale of a capital asset under the provisions of section 117 of the Internal Revenue Code, 26 U.S.C.A. § 117. The application of this rule should, of course, be limited to those cases in which the transaction in substance and effect, as distinguished from form and appearance, is essentially the sale of a partnership interest."
There is an inconsistency between the opinion of the Tax Court in the instant case*fn5 and its opinions in several other cases. The Tax Court has held generally, in situations involving similar or analogous facts, that the sale of a partnership interest constitutes the sale of a capital asset. Estate of Jones v. Commissioner, 3 T.C.M. 97; H.R. Smith v. Commissioner, 10 T.C. 398, affirmed 5 Cir., 173 F.2d 470, certiorari denied 338 U.S. 818, 70 S. Ct. 61; Long v. Commissioner, 6 T.C.M. 614, affirmed 5 Cir., 173 F.2d 471, certiorari denied 338 U.S. 818, 70 S. Ct. 61; Estate of Nitto v. Commissioner, 13 T.C. 858.
Discussion of these cases except the last cited is not deemed necessary. Estate of Nitto v. Commissioner, supra, was decided after the decision in the instant case and was reviewed by the entire court. In that case the decedent was a partner in a firm which operated slot machines. He had paid $10,000 for his partnership interest and some years later sold his interest for $20,000. The profit on the transaction had been reported as a long-term capital gain. The Commissioner contended that the gain constituted ordinary income, taxable in full. The Commissioner's contention was rejected by the Tax Court ...