Before DUFFY, FINNEGAN and LINDLEY, Circuit Judges.
Plaintiff taxpayer sold his interest in a partnership, conducted with two other men in Milwaukee, Wisconsin, under written articles of partnership. Taxpayer transferred that interest to the wife of one of his partners, receiving in payment thereof her check, equivalent to taxpayer's original capital contribution plus his share of accumulated unwithdrawn partnership profits, credited to his capital account. On the facts, hereinafter detailed, we are asked to decide if capital gains treatment should be accorded to the entire payment received by this taxpayer.
Dismissal of plaintiff-taxpayer's complaint to recover $8,156.10 of taxes paid, on individual income, and deficiency interest for the calendar year 1945 precipitated this appeal of the lower court's judgment. Taxpayer properly invoked the jurisdiction of the district court, under 28 U.S.C. § 1346(a)(1), to claim a refund of income taxes which he asserts were erroneously collected under adjustments made by the Commissioner*fn1 to his tax return for that calendar year. The Commissioner had proposed a deficiency assessment of $7,109.12. Though this taxpayer disagreed with a part of these adjustments, he paid that deficiency plus interest of $1,158.49, on December 6, 1948, in order to toll the running of interest. Taxpayer's subsequent claim for refund of $8,156.10 was rejected by the Commissioner, and this complaint followed. Sitting without a jury the district judge made findings of fact and conclusions of law resolving issues crystalized by that complaint and the government's answer.
Portions of the stipulated facts, pertinent to our opinion, follow. Taxpayer, an engineer, entered into a written partnership agreement, on December 1, 1943, with Joseph Doering and David C. Fee to operate a job machine shop business under the name of Brenner Manufacturing Company, in Milwaukee, Wisconsin.*fn2 Capital contributions made by these three partners and their respective profit and loss sharing arrangements were:
Partner Capital Contribution Share of Profits or
Plaintiff-Taxpayer $5,500 25%
Joseph Deering $11,000 50%
Books of the partnership were kept and its income tax returns filed on an accrual and fiscal basis of accounting, ending June 30. Taxpayer filed his tax returns on a cash and calendar year basis. He received and reported, for calendar year 1944, his distributive share of Brenner's net profits for the period December 1, 1943 to June 30, 1944.
A breakdown of the taxpayer's partnership interest as of February 28, 1945, reflected in his investment account, on Brenner's books, showed:
Original Investment: $5,500
Profits: July 1, 1944 to February 28, 1945 $24,531.92
Less: Withdrawal made January 14, 1945 1,885.92 22,646
No balance sheet was shown taxpayer, he merely accepted the word of his partner, Joseph Doering that this was the book value. But the partnership books and records were open ...