Morvay v. Commissioner

ZOLTON V. MORVAY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. VICTOR W. MORVAY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Morvay v. Commissioner Docket Nos. 38983, 38984. United States Board of Tax Appeals 19 B.T.A. 928; 1930 BTA LEXIS 2302; May 12, 1930, Promulgated *2302 Respondent's determination of gain from the sale of partnership interests sustained. Harry Lore, Esq., for the petitioners. O. J. Tall, Esq., for the respondent. BLACK *928 In these proceedings, which have been consolidated for hearing and decision, the petitioners seek a redetermination of their income-tax liability for the calendar year 1926, for which year the respondent has asserted a deficiency of $3,362.08 as to Zolton V. Morvay and of $2,544.98 as to Victor W. Morvay. The proposed deficiencies are occasioned principally by increases in the profit derived from the sale of partnership interests in the taxable year. Certain other adjustments were made by respondent in petitioners' income for 1926, but these are not contested. The petitioners allege that the respondent erred (1) in failing to take into consideration in determining the taxable profit on the sale of the interests in the partnership the value of good will; and (2) in his determination of the amount invested in the partnership as of December 31, 1925. FINDINGS OF FACT. The petitioners are individuals, both residing at Bridgeton, N.J. In 1906 Victor W. Morvay began*2303 the business of manufacturing women's dresses at Vineland, N.J. Later he opened factories at Tuckerton, Clayton, and Millville in that State. About 1911 he took his son, Zolton V. Morvay, into the business. The complete records of the business were kept at the plant at Tuckerton and were destroyed by a fire, which occurred in this plant in 1919. In 1920 a son-in-law of Victor W. Morvay, named Schrank, was taken into the business and the name of the partnership changed to Morvay & Schrank. On February 4, 1925, the three members of the partnership - the two Morvays and Schrank - entered into an agreement whereby the elder Morvay, the founder of the business, was to retire and the business was to be continued by his son and son-in-law. The agreement provided for the payment of an annuity to Victor W. Morvay, but after a period of less than two years this agreement was abandoned and the petitioners herein on December 9, *929 1926, sold their partnership interest to Schrank for a consideration of $125,000, which transaction gives rise to the profit in controversy. Victor W. Morvay and Zolton V. Morvay each received $62,500 for his interest in the partnership. An analysis*2304 of capital accounts from August 25, 1920, to December 31, 1925, shows the following: Victor Morvay Zolton Morvay Capital Aug. 25, 1920 $14,057.96 $14,057.95 Dec. 31, 1921, profit and loss 3,134.41 3,134.41 Dec. 31, 1922, profit and loss 1,715.18 1,715.18 Dec. 31, 1922, adjustment 438.83 438.83 Mar. 17, 1923, adjustment 684.95 684.94 Dec. 31, 1923, profit and loss 6,290.94 6,290.93 Dec. 31, 1923, adjustment $329.08 $329.08 January, 1924, investment, Bridgeton homes 5,000.00 January, 1924, adjustment accounts receivable 133.54 133.54 Dec. 31, 1924, profit and loss 6,530.15 6,530.16 Dec. 31, 1924, charges 141.17 141.17 Dec. 31, 1925, additional investment 2,547.09 Dec. 31, 1925, profit and loss 6,133.83 6,133.83 Dec. 31, 1925, withdrawals 13,276.20 15,918.25 13,746.45 44,119.79 16,388.50 41,666.86 13,746.45 16,388.50 30,373.34 25,278.36 In his tax return for the year 1926 the petitioner Zolton V. Morvay reported a profit of $5,274.64 on the sale of his one-third interest in the partnership of Morvay & Schrank, computed as follows: Amount received $58,500.00 Cost 53,225.36 Profit 5,274.64 *2305 The respondent in his determination computed the profit as follows: Amount received $62,500.00 Less: Cost of investment, 1920 to 1925 $25,278.36 One-third of the undistributed partnership profits Jan. 1 to Dec. 9, 1926 22,847.74 Total investment 48,126.10 Profit 14,373.90 On his return for the calendar year 1926 the petitioner Victor W. Morvay reported a profit of $5,274.64 on the sale of his one-third interest in the partnership of Morvay & Schrank, computed as follows: Amount received $58,500.00 Cost 53,225.36 Profit 5,274.64 The respondent in his determination computed the profit as follows: *930 Amount received $62,500.00 Less: Cost of investment, 1920 to 1925, inclusive $30,373.34 One-third of the undistributed partnership profits for the period Jan. 1 to Dec. 9, 1926 20,913.42 Total investment Dec. 9. 1926 51,286.76 Profit 11,213.24 The respondent added the increase in profit as computed by him to each of the petitioners' incomes for the calendar year 1926, resulting in a proposed deficiency as to Zolton V. Morvay in the amount of $3,362.08 and as to Victor W. Morvay*2306 in the amount of $2,544.98. OPINION. BLACK: The petitioners allege that the respondent erred in failing to take into consideration in determining the taxable profit on the sale of their interest in a partnership the value of their services in building up alleged good will. Since the petitioners have failed to produce sufficient evidence to enable us to determine the value of good will on March 1, 1913, or subsequent thereto, this contention must be resolved in favor of the respondent. The other issue deals with the determination of the profit realized by each of the petitioners on the sale of their interests in the partnership of Morvay & Schrank. The respondent in computing the gain arising from the sale of the partnership assets deducted from the sale price the cost of the interest in the partnership plus the undistributed net income earned since the formation of the partnership. These computations are in accord both with the facts as proven as well as article 1603 of Regulations 69, which reads as follows: Readjustment of partnership interests. - When a partner retires from a partnership, or it is dissolved, he realizes a gain or loss measured by the difference*2307 between the price received for his interest and the cost to him of his interest in the partnership, including in such cost the amount of his share in any undistributed partnership net income earned since he became a partner on which the income tax has been paid. * * * Judgment will be entered for the respondent.