People ex rel. Speyer v. Gilchrist

Hinman, J. . The main question is whether the $300,000 payment is a proper deduction from gross income under the State Personal Income Tax Law even as to the partnership business of Speyer & Co. The right of the relator to claim it as a personal deduction in its entirety presents the ultimate question to be decided. The specific question first presented is whether the payment was for [161] an ordinary and necessary business expense within the Tax Law, section 360, subdivision 1, or a loss incurred in trade or business within subdivision 4 of that section. The points raised by the relator are as follows: (1) The law provided that a taxpayer may deduct from gross income, in computing net income, all ordinary and necessary business expenses and all losses incurred during the taxable year in carrying on a trade or business; (2) the above allowable deductions include items such as damages paid for patent infringement, damages paid for personal injury and similar expense items paid out during the taxable year in the course of the taxpayer’s business; (3) the payment of $300,000 to Sir Edgar Speyer under the contract of May 15, 1922, between Speyer & Co. and Sir Edgar Speyer was not made for good will or any other capital asset; (4) the payments made by Speyer & Co. to Sir Edgar Speyer under that agreement were made specifically “ in settlement of all interest in the profits heretofore earned and in commutation of future and prospective profits;” (5) being a payment in settlement of a disputed claim against Speyer & Co. it was a business expense or loss to Speyer & Co. and properly deductible from gross incorpe of the firm and of the relator by reason of his assumption of it, whether it was paid on account of profits or in settlement of a claim based on good will. As we read the agreement of May 15, 1922, the payment to be made was a capital sum paid to purchase and extinguish every interest claimed by Sir Edgar Speyer. The relator, himself, in his letter of the same date to the other members of Speyer & Co. assuming the obligations of the settlement, stated: “The claims made by my brother, Sir Edgar Speyer, which have been settled by an agreement of this date, related (1) to the good will and firm name of Speyer & Co., and (2) to his participation after he left the firm in the profits, past and prospective.” He had no capital invested in the business at the time. It had been fully withdrawn unless he had retained an interest in good will and firm name. He had performed no labor for the firm. The sum paid could not have been income representing profits from capital or labor except upon the theory that he had retained an.interest of some kind in the business and a right to re-enter the firm and enjoy prospective profits at least. If he had any remaining capital invested in the business, it was in good will and firm name and anything paid to him by way of “ profits ” whether accrued or prospective must have been a recognition of a partnership interest of some sort which had not theretofore been extinguished. The word “ profits ” as ordinarily used and understood, must be taken [162] to mean the net income from the work in hand. The relator calls our attention to a provision in article 12-B of the Personal Income Tax Regulations of New York State to the effect that amounts paid on account of damages for patent infringement or otherwise, is deductible from gross income. Under this rule, the relator urges that, being a disputed claim, any sum paid in settlement of it was similar to damages paid for infringement of a patent. “ Damages ” under the patent laws, refers to what the plaintiff lost, and “ profits ” to what the defendant has earned in the past by the unlawful use of the patented invention. Surely the word “ profits ” as used in the agreement of May, 1922, between these former partners contemplated more than damages for past profits earned by an unlawful act. The language is: “As a compromise the party of the first part is willing to make the payments specified below in settlement of all interest in the profits heretofore earned and in commutation of future and prospective profits.” A judgment in patent infringement would naturally foreclose the earning of future profits by the inclusion therein of a permanent injunction precluding further infringement. In the present case the sum paid was for all interest in the profits, accrued and prospective, and was based upon a claim to a capital interest in good will and the use of the firm name. The extinguishment of that interest by the payments made was in the nature of a capital outlay and the purchase price is not deductible as “an ordinary and necessary expense ” or as a “ loss incurred in trade or business.” (Matter of Lee v. Gilchrist, 215 App. Div. 576; affd., 244 N. Y. 514.) The mere fact that the relator inserted in the agreement, in a paragraph preliminary to the covenants, a statement of denial of the right to re-enter the firm; of refusal to pay anything for good will and firm name; and of resisting any such payment on the ground that any such interest was released by the settlement of June 1, 1916, does not determine the character of the thing paid for. It simply defined the controversy. The covenants set forth the things agreed upon. The things paid for included prospective profits. Sir Edgar expressly relinquished his claimed rights to re-enter the firm. He expressly released whatever rights he had in the business, the good will and the firm name. He relinquished the right to the future use of his name in any business in the United States or Great Britain. Speyer °& Co. purchased something of value from him. The controversy as to the right to compel any payment whatsoever undoubtedly lessened the amount of the recovery. If the sum paid included any item for damages which were unrelated to the capital outlay to purchase Sir Edgar’s renunciation of his claimed rights, the record affords no basis for the segregation. [163] If the good will had no substantial value, there is no persuasive proof of that fact in the record. (Matter of Brown, 242 N. Y. 1.) In the absence of proof to the contrary, we cannot assume that Sir Edgar’s agreement to withdraw his name from the field of competition did not give promise of advantage to Speyer & Co. The burden was upon the relator to prove error and its exact amount. (People ex rel. Kohlman & Co. v. Law, 239 N. Y. 346.) We reach the conclusion that the $300,000 payment, by reason of James Speyer’s agreement with Speyer & Co. to assume it, was not a proper deduction by him in the computation of his personal income tax. The determination should be confirmed, with fifty dollars costs and disbursements. Cochrane, P. J., Van Kirk, McCann and Davis, JJ., concur. Determination confirmed, with fifty dollars costs and disbursements.