Before MAJOR, Chief Judge, FINNEGAN, Circuit Judge, and BRIGGLE, District Judge.
This proceeding involves income tax deficiencies asserted by the Commissioner against Charles R. Whitworth and Sarah M. Whitworth, his wife (since deceased) for the taxable year 1945 in the sum of $1,099.64, and for the taxable year 1947 in the sum of $1,768.88. The sole issue is whether the sum of $12,000 received by Charles R. Whitworth in each of the years in question from the accounting firm of Touche, Niven and Company was taxable income or capital gain. The Tax Court held it to be taxable income and petitioner seeks review.
Touche, Niven and Company was at all pertinent times a co-partnership of international scope engaged in an extensive business as accountants and auditors. Taxpayer became a co-partner in the firm in 1919, at which time he made a capital contribution of $12,500 to the firm. The management of the co-partnership was vested in five of the partners known as "administrative" partners, of which taxpayer became one. On October 1, 1936, the seventeen co-partners entered into a new partnership agreement, the construction of certain parts of which has an important bearing upon the question here involved.
This agreement contained the following provisions worthy of note:
"Article I, * * *. The partners shall have the right to retire or withdraw and this Agreement may be terminated as to one or more partners and new partners may be admitted under the provisions hereinafter set forth but neither such retirement, withdrawal, or termination, nor the death of any partner nor the admission of any new partner shall dissolve this partnership.
"The partners shall devote their entire time, attention and influence to the business and interests of the firm and shall not engage in any other business except with the approval of a majority in interest of the Administrative partners. * * *.
"Article IV, * * *. Section 2. In the event of the death, retirement, or withdrawal of any of the partners during the term of the partnership, the deceased, retiring or withdrawing partner shall have no interest in the firm name and shall have no right to receive any payment therefor.
"Article VII, * * *. Section 3. In the event of the death, retirement or withdrawal of any of the partners as hereinafter provided, there shall be repaid to such retiring or withdrawing partner or the legal representative of such deceased partner, in the manner provided in Section 1(o) of Article II hereof, an amount equal to his paid-up participation in the stated capital at the date of his death, retirement or withdrawal. * * *.
"Article X, * * *. Section 2. Any partner may retire from the partnership at any time after the first day of October, 1936, upon giving six (6) calendar months prior notice in writing of his intention so to do * * *. * * *. Section 4. The partnership may be terminated at any time as to any partner if a majority in interest of the administrative partners shall decide that such termination is for any reason in the best interests of the partnership, * * *. Section 5. Any partner as to whom this Agreement shall be terminated as provided in Sections 3 or 4 of this Article X shall be deemed to have withdrawn from the firm within the meaning of this Agreement and shall not be entitled to receive any payments except as provided in Section 1 of Article XI hereof. Section 6. Upon the death, retirement or withdrawal of any of the partners during the term of the partnership the interest of the deceased, retiring or withdrawing partner in the firm assets and business shall be and become vested in and transferred to the surviving or continuing partners in the proportion of their participations in the stated capital and distributable profits and the retiring or withdrawing partner or the legal representative of the deceased partner shall have no interest in or claim against the firm assets and business or the firm name except the right to receive the payments hereinafter provided for in Article XI hereof.
"Article XI. Section 1. If any partner shall die, retire or withdraw for any reason whatsoever during the term of the partnership there shall be payable to such retiring or withdrawing partner or to the personal representative of such deceased partner the following payments, * * *:
"(a) Any balance standing to his credit in his current account * * *
"(b) Such proportion of the distributable profits, as defined in Article II hereof, to which he would have been entitled for the then current fiscal year * * *.
"(c) An amount equal to the sum of (1) any indebtedness due from the firm to him, other than the sums due under paragraphs (a) and (b) hereof and (2) his paid-up participation in the stated capital, as set forth in the Participating Schedule in ...