Hathaway v. Commissioner

LESTER G. HATHAWAY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ALTON H. HATHAWAY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ELMER F. HATHAWAY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. WALTER W. HATHAWAY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Hathaway v. Commissioner Docket Nos. 27360-27363. United States Board of Tax Appeals 16 B.T.A. 1318; 1929 BTA LEXIS 2408; July 9, 1929, Promulgated *2408 Payment by partners of a sum of money to the widow of their father, pursuant to an antenuptial agreement, does not serve to reduce their distributive shares in the partnership profits. Edward G. Fischer, Esq., for the petitioners. T. M. Mather, Esq., for the respondent. ARUNDELL *1318 These proceedings, which were consolidated for hearing and decision, involve the redetermination of the following deficiencies in income tax for the years 1922 and 1923: [1923] Lester G. Hathaway $243.14 $363.54 Alton H. Hathaway 145.35 155.55 Elmer F. Hathaway 150.24 195.54 Walter W. Hathaway 48.58 159.84 The issue common to all of the cases is whether certain payments made by the partnership of which the petitioners were members to the widow of a former member thereof are deductible from gross income as ordinary and necessary expenses of the partnership. Alton H. Hathaway assigns as an additional error, respondent's disallowance, as a deduction, of the cost of certain worthless stocks. The proceedings were submitted on the pleadings and admissions made at the hearing by the respondent. FINDINGS OF FACT. On October 9, 1913, Charles*2409 F. Hathaway, the deceased father of the petitioners, and Emma J. Small entered into an antenuptial agreement, the pertinent provisions of which read as follows: That whereas marriage has been contracted and is intended shortly to be solemnized between said parties; *1319 And whereas it is the purpose of said Hathaway to make a suitable provision for the support of said Small in lieu of the right she would be entitled to in case said marriage takes place and she becomes his widow; And whereas the said Small has agreed and wishes to accept of said provision in place of and as a substitute for all the rights, claims and interest to which she may hereafter be entitled in and to the real and personal estate of said Hathaway in the event of said marriage taking place and she being his widow; Now, THEREFORE, in order that the above objects may be secured and accomplished the said Hathaway and Small have mutually entered into and agree to perform the following to and with each other, their heirs, executors, administrators and assigns. 1st. The said Hathaway covenants with said Small as follows, namely: That he hereby authorizes said Small to contract and dispose of all of*2410 her estate and property by will or otherwise as she pleases without his assent. 2nd. That he hereby releases all the rights to which he may be entitled and will make no claim to the estate and property of said Small in case of said marriage and his surviving her, excepting such property as she may give him by will or otherwise. 3rd. That in case said Small shall survive him and become his widow she shall be paid out of the income of the firm now known as C. F. Hathaway & Sons the sum of two thousand dollars ($2000) annually during her life, payable semi-annually, the first payment to be made to her within six months after his decease by his legal representatives. And the said Small covenants with said Hathaway as follows, namely: 1st. That she accepts of the aforesaid premises and covenants of said Hathaway in lieu of and in full satisfaction of all dower and homestead, and of all right to the same, and in full of all other rights to which she may at any time hereafter be entitled by reason of said marriage in or to any land or real estate of said Hathaway, wherever the same may be situated. 2nd. That she accepts the aforesaid provisions in full satisfaction of, and*2411 as a substitute for any distributive share, part, or allowance to which she would be entitled in or to the personal estate of said Hathaway in the event of her becoming his widow. Thereafter, on the same day, the petitioners, in consideration of the execution of the aforesaid agreement and undisclosed promises of Charles F. Hathaway concerning the disposition by will of his estate, executed the following endorsements to the agreement: We, Lester G. Hathaway, Alton H. Hathaway, and Elmer F. Hathaway, co-partners in the firm of Charles F. Hathaway & Sons with our father, Charles F. Hathaway, know the contents of the above contract and hereby agree that the provisions as to the payment of two thousand dollars ($2000) annually shall be carried out in accordance with said agreement. Also that the aforesaid Emma J. Small shall, in the event of her outliving our father, Charles F. Hathaway, continue to reside in the old homestead at No. 97 Huron Avenue, said Cambridge, free of rental, and control same as long as she desires; that the one-fifth (1/5) interest of our sister in above mentioned homestead be paid her in yearly instalments such amount as she and the trustees under my will*2412 may deem fair and just for rental; or in full cash for her proportionate one-fifth when proper time shall elapse. And that in the event of sickness at any and all times we, Lester G., Alton H. and Elmer F. Hathaway *1320 will promise to see to it that said Emma J. shall have the best of medical and otherwise necessary attendance as long as she needs same at our expense. In testimony whereof we hereto set our hands and seals the day and year first above written. LESTER G. HATHAWAY. (Seal.) ALTON F. HATHAWAY. (Seal.) ELMER F. HATHAWAY. (Seal.) I, Walter W. Hathaway, hereby agree that if I become a member of the firm of Charles F. Hathaway & Sons after I become twenty-one years of age that I will sign the above contract made by my brothers and bind myself equally with them to carry out the provisions contained therein. In testimony whereof I hereto set my hand and seal the day and year first above written. WALTER W. HATHAWAY. (Seal.) Charles F. Hathaway died testate May 17, 1918. Under his last will and testament, executed February 1, 1917, which was admitted to probate in Middlesex County, Massachusetts, the decedent gave (1) to his wife, the right to*2413 continue to reside in the homestead for life free of rent and control, as provided by the antenuptial agreement; (2) to his daughter, Clara H. Fischer, in the event she survived him, one-fifth of his capital account as a member of the partnership, and (3) to his son Walter, if admitted as a member of the partnership after becoming 21 years of age, one-eighth of the net profits of the firm, payable from his interest therein. The will also contained the following additional material provisions: I direct that the capital I have in said firm may remain in the business for three years after my decease, or such portion of three years as the firm may desire, they paying at the rate of four and one-half per cent interest per annum for the time it is so used. I also direct that the firm may use my real estate for three years after my decease, at the rate of four and one-half per cent per annum, paying in addition the taxes and insurance, and make suitable repairs. The net profits of my capital and real estate for the time used by said firm after my decease shall be divided equally among my children, the issue of a deceased child to take the parent's share by right of representation. At*2414 the expiration of said three years, or at an earlier date if the said firm so desires, the firm may make a settlement with my daughter Clara, or her heirs, paying her the share given her by this will in either the real or personal estate, or both. If any disagreement shall arise in the division of either the real or personal estate, I wish it settled by said firm appointing one referee - Clara one - and they two a third, and that the award of the majority of the three shall be accepted by each party as a final settlement. The residue of the estate, after certain specific bequests, was left to the testator's children in equal shares. Walter W. Hathaway had no interest in the partnership prior to January, 1920, when he acquired an interest therein by exercising the option granted to him in his father's will. Emma J. Hathaway, decedent's wife, never held any interest in the partnership property. *1321 During the years 1922 and 1923 the partnership paid to Emma J. Hathaway, pursuant to the provisions of the antenuptial agreement and endorsements thereon, the respective sums of $5,050.71 and $5,903.51. In his audit of the partnership's returns the respondent disallowed*2415 as ordinary and necessary business expenses of the firm the sums paid to Emma J. Hathaway under the provisions of the antenuptial agreement, and included the amounts so disallowed in the gross income of petitioners, according to their interest in the profits of the firm. The deficiencies in controversy result from this action of the respondent. OPINION. ARUNDELL: The contention of the petitioners, briefly stated, is that by virtue of the antenuptial agreement Emma J. Hathaway acquired a right to participate in the net income of the partnership to the extent of the amount they agreed to pay her, and they are legally bound to make the payments provided for by the agreements before any partnership profits accrue to them. In the case of , the taxpayer, a member of a partnership, purported to assign a part of his interest in the partnership, and in filing his income-tax return he did not include in income the amount of partnership earnings which he claimed represented his assignee's share. We held, on authority of a number of cases, that the assignee acquired no interest in either the partnership property or in the profits of the partnership*2416 as such; that the utmost the assignee acquired was a right to demand of the assignor an accounting for a portion of his share of the partnership profits, and that such right was founded "upon the contract, not in re." Here the contract upon which petitioners rely does not purport to assign even as much as did the contract in the Harris case. All that the petitioners bound themselves to do was to pay to the elder Hathaway's widow a sum certain "out of the income of the firm." They did not contract to admit her to the partnership or to assign to her any part of or interest in the partnership. , cited by petitioners, was decided upon the theory that the persons to whom certain monthly payments were to be made by the partners "had an interest in the business." There, the partners inherited the business under the will of their father and the will imposed upon them the obligation of making the payments involved. Here, the petitioners had their partnership interest at the time they agreed to pay over a part of the income and it is not shown that their interests were changed upon the death of the father, except that they and*2417 the other children were vested remaindermen *1322 with respect to the father's interest in the partnership. Certainly their respective interests were not diminished by either the contract they endorsed or by the elder Hathaway's will; hence, their distributive protions of partnership profits were not decreased. Whatever part of the partnership profits ultimately came to the widow, came not from the partnership, for she had no interest therein, but from the partners. ; . While Emma J. Hathaway, under the antenuptial agreement, may have acquired an enforceable claim against the petitioners in their individual capacity, a question we need not decide, it is clear that the agreement did not give her any enforceable legal right against the partnership or to any of its profits. The payments made in the taxable years were not, in our opinion, ordinary and necessary business expenses of the partnership. . See also *2418 . If the antenuptial agreement, by reason of all the partners having signed it, be regarded as one having for its purpose the purchase of Mrs. Hathaway's dower rights in the elder Hathaway's interest in the partnership, then the payments made by petitioners must be considered to be capital expenditures. The situation is analogous to the purchase of a deceased partner's interest by the surviving partners out of partnership income, which we have held in , does not serve to reduce the distributive shares of the partners. There being no evidence of any kind before us on the additional issue raised by Alton H. Hathaway, the action of the respondent in declining to allow him a deduction for the cost of worthless stocks is sustained. Judgment will be entered for the respondent.