Wener, Harold, et ux. v. Comm.

Decisions will be entered under Rule 50.

Franklin K. Lane III, Esq., and Robert M. Himrod, Esq., for the petitioners. John J. Burke, Esq., for the respondent.

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The respondent determined deficiencies in income tax against the petitioners, Harold Wener and Molly Wener, of 5,279.53 and 238.59 for the taxable year 1947. The only question for determination is whether certain losses sustained by them in the taxable year were or were not capital losses within the meaning of the statute. FINDINGS OF FACT. Some of the facts have been stipulated and are so found. The petitioners are husband and wife, and filed individual income

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tax returns for the year 1947 with the collector of internal revenue for the sixth district of California.

Prior to and during 1946 the petitioners were members of a partnership doing business as the Boreva Sportswear Company in Chicago, Illinois, and Stoughton, Wisconsin, sometimes referred to hereafter as Boreva. The partners other than petitioners were Leon A. Smoler and his wife, Dorothy J. Smoler, and Allan A. Joseph and his wife, Margaret Joseph. Harold Wener, Leon A. Smoler, and Allan A. Joseph were general partners and their wives were limited partners.

In 1946, differences arose between the petitioners, on the one hand, and the four other partners, on the other. As a result of these differences, the partners, on September 6, 1946, executed an agreement, entitled "Dissolution Agreement of Limited Partnership," whereunder it was agreed that the petitioners should retire and withdraw from the partnership as of January 31, 1947, and that the other partners should purchase the interests of the petitioners. The sums to be paid for the interests were to be book value as of the severance date, and were to be computed "according to the Company's customary accounting procedure, it being agreed in such event that the value of the goodwill or of the firm name shall not be included as an asset for such purpose, plus the sum of 13,768.50." In arriving at book value, an actual inventory was to be taken at the lower of cost or market and any real estate that might be owned by the partnership was to be conformed to "the value as of the severance date."

It was provided in the above agreement that the payments for the interests of petitioners were to be made in installments. Fifty per cent of the purchase price, less fifty per cent of the withdrawals of the petitioners after August 31, 1946, was to be paid on or before 30 days from January 31, 1947; forty per cent of the balance on or before January 31, 1948; thirty per cent of such balance on or before April 15, 1948; and the remainder on or before April 15, 1950. Interest was to run at 4 per cent, except as to the initial payment.

Under date of February 1, 1947, the petitioners, by a writing entitled "Bill of Sale," and in consideration of the covenants and undertakings of the other four partners, assigned and conveyed to the latter their interests in Boreva as of the close of business on the preceding day.

An audit was made as theretofore specified, whereby the respective partners' interests were determined as of January 31, 1947, and as of that date, the balance in the capital account of Harold Wener was found to be 49,924.63, and that of Molly Wener 25,206.49. Against these balances, charges were made under an indemnity agreement theretoforemade, whereby the petitioners were obligated to indemnify

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the other four partners against certain contingent liabilities. The aggregate of the charges was in the amount of 1,177.58. ¹ The initial payments computed under the dissolution agreement and made to the petitioners pursuant thereto in April of 1947, were 10,428.28 to Harold Wener and 5,265.13 to Molly Wener, leaving the balances due them to be paid in installments on January 31, 1948, April 15, 1948, and April 15, 1950.

Subsequent to their agreement to withdraw from Boreva, the petitioners moved to California, where they established a sportswear manufacturing company in Westminster, California.

On or before August 25, 1947, and before any further payments were due from the sale of their interests in Boreva, petitioners entered into negotiations with the purchasers with respect to the balances which were thereafter to become due and payable. On August 25, 1947, and in consideration of immediate payment, as against later payment on the installment dates theretofore specified and agreed upon, the petitioners agreed to accept, and did accept, 35,000 in complete satisfaction of the aggregate amounts which would have become payable to them on the installment dates, and the 35,000 so agreed upon was currently paid to and received by them.

Harold Wener's share of the 35,000 was 23,257.50, as compared with 38,713.86, which represented the aggregate of the payments which would have become due and payable to him by installments. Molly Wener's share of the 35,000 was 11,742.50, as compared with 19,546.27, which would have become due and payable to her by installments.

A factor which prompted the petitioners in initiating the negotiations which resulted in the adjustment of the terms of the original sales agreement, as shown above, was that the petitioners had a present pressing need of funds for use in the business they had established in California.

The over-all result of the sale by petitioners of their interests in Boreva, including the adjustments of both payment dates and amounts, all of which occurred in the taxable year 1947, was a loss of 15,456.36 by Harold Wener and a loss of 7,803.77 by Molly Wener. In their returns for 1947, the petitioners treated the said losses as ordinary losses, deductible in full.

The respondent in his determination of the deficiencies determined that the losses were capital losses under the statute, and subject to the limitations provided therein.

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OPINION

It is the contention of the petitioners that they sold their interests in Boreva at February 1, 1947, at the basis therefor to them, and that the losses were sustained under the agreement of August 25, 1947, in a transaction separate and apart from the sale, and that the latter transaction was not a sale of a capital asset and the resulting loss not a capital loss, but an ordinary loss deductible in full. They cite and rely upon Hale v. Helvering, 85 F. 2d 819, as being controlling.

It is the position of the respondent that the various agreements, including the agreement of August 25, 1947, and the steps taken thereunder, were part and parcel of one transaction, namely, the sale by the petitioners of their partnership interests, and that the losses sustained were capital losses, as determined.

It is our opinion and we hold that the losses were sustained from the sale by petitioners of their capital interests in the partnership and that the respondent did not err in his determination with respect thereto. The mere fact that there would have been no losses if the terms of the sale as originally agreed upon had remained unchanged and the payments pursuant thereto had been made does not on the facts indicate or require the conclusion that the losses were sustained in a transaction separate and apart from the sale. After the initial payments, but later in the same year and before any of the installments had become due and payable, the petitioners, for reasons which were solely their own, saw fit to renegotiate the unexecuted portions of the sales agreement, namely, the deferred payment provisions, to the end that for a present cash payment in lieu of later payments in installments, as theretofore provided, the petitioners agreed upon and accepted reduced prices for their interests in Boreva. These renegotiated provisions superseded the provisions which had originally prescribed the terms, dates, and amounts of payment, and the transaction was closed pursuant thereto. See Borin Corporation, 39 B. T. A. 712, affd. 117 F. 2d 917; Pinkney Packing Co., 42 B. T. A. 823; and Des Moines Improvement Co., 7 B. T. A. 279. See also Hirsch v. Commissioner, 115 F. 2d 656, reversing 41 B. T. A. 890, which reversal was followed in A. L. Killian Co., 44 B. T. A. 169, which in turn was affirmed at 128 F. 2d 433.

Hale v. Helvering, on which the petitioners most strongly rely, is not this case. There the transaction was the compromise settlement of a past due obligation, and the question was whether there had been a sale of the obligation. In the instant case, and prior to the dates the remainder of the purchase price was to become due, there was a renegotiation, adjustment, or revamping of the sale itself both as to price and the terms of payment. We accordingly do not reach the question considered and decided in the Hale case. L. D. Coddon &

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Bros. Inc., 37 B. T. A. 393, also cited and relied on by the petitioners, is likewise distinguishable. The distinction made in the case of Des Moines Improvement Co., supra, applies with equal force to the instant case. Furthermore, as already pointed out, there was in fact in the instant case a renegotiation and revision of the unexecuted provisions of the sales contract itself and the substitution of new provisions therefor.

In passing, attention is called to the decision of the Supreme Court in Arrowsmith v. Commissioner, 344 U.S. 6. In that case, the original transaction had been regarded as finally closed some 4 years prior to the taxable year. But, due to judgments subsequently obtained by third parties, payments were required of the taxpayers, resulting in losses to them. It was the opinion of the Supreme Court that the character of the losses which so resulted as capital losses or ordinary losses was to be determined by reference to the original transaction. The original transaction having been a capital gain or loss transaction, the losses actually incurred in years after the transaction was regarded as closed were held to be capital losses. Decisions will be entered under Rule 50.