OPINION
The respondent does not question the separate identities of the petitioner and the corporation, nor does he contend that the execution of the “Assignment of Partnership Interest” by petitioner on January 2, 1961, was a sham. However, he contends that since the petitioner did not obtain the consent of his partner, Zeier, to the assignment, such assignment did not effect a transfer to the corporation of petitioner’s entire partnership interest, but effected no more than an assignment of the right to future income to which petitioner would be entitled as a partner; that the petitioner thus retained his partnership interest; and that he is taxable upon his distributive share of the partnership income under section 702(a) of the Internal Revenue Code of 1954.2 He relies principally upon Burnet v. Leininger, 285 U.S. 136.
The petitioner, on the other hand, contends that under Wisconsin law the assignment of January 2, 1961, was effective to transfer his capital interest in the partnership to the corporation. He therefore contends that the corporation, as owner of such capital interest, is taxable on the income from such interest, regardless of whether the corporation technically became a partner under State law. He argues that for Federal income tax purposes the transfer terminated the old partnership between him and Zeier by virtue of the provisions of section 708(b) (1) (B) of the Code and the regulations thereunder; that thereafter, for Federal income tax purposes, he was no longer taxable as a partner; that the corporation became a coowner with Zeier of the company; that as coowners the corporation and Zeier continued to carry on a business, petitioner acting as agent for the corporation; that under section 761(a) of the Code the relationship between Zeier and the corporation, for Federal income tax purposes, must be considered as that of a partnership; and further that section 704(e) (1) of the Code provides that a person shall be recognized as a partner if he owns a capital interest in a partnership in which capital is a material income-producing factor.
Both parties refer to the Uniform Partnership Act as enacted by the State of Wisconsin,3 the respondent contending that thereunder the assignment in question transferred to the corporation only a share of the future profits of the partnership and, as stated, the petitioner contending that thereunder the assignment effected a transfer of his capital interest in the partnership.
We tbiriTr it clear that the assignment in question was intended to, and did, transfer all the petitioner’s interest in the partnership to the corporation, and not merely the right to future income. Under Wisconsin law a partner’s interest in the partnership is his share of the profits and surplus. This interest is personal property and is assignable. An assignment of a partnership interest entitles the assignee to receive the profits to which the assigning partner would otherwise be entitled and, in the case of a dissolution of the partnership, entitles the assignee to receive the assignor’s interest. And it appears that there is no requirement that consent to the assignment be obtained from the other partners.
The Internal Revenue Code of 1954 recognizes that an interest in a partnership may be sold or exchanged and, with exceptions not here material, considers tbe gain, or loss as being from tbe sale or exchange of a capital asset. Sec. 741, I.R.C. 1954.4 In enacting section 141 Congress gave recognition to existing decisions which held that the sale of a partnership interest was generally considered to be a sale of a capital asset. H. Kept. No. 1337,83d Cong., 2d Sess., p. 70, and S. Kept. No. 1622,83d Cong., 2d Sess., p. 96. These cases also clearly established that a partner’s interest in the partnership is his share of the profits and surplus, and that he individually has no interest in the partnership assets except as they might figure in his share of the profits and surplus. See, e.g., H. R. Smith, 10 T.C. 398, affd. (C.A. 5) 173 F. 2d 470, certiorari denied 338 U.S. 818; Allan, S. Lehman, 7 T.C. 1088, affd. 165 F. 2d 383, certiorari denied 334 U.S. 819, and cases cited therein.5 We therefore think it reasonable to conclude that Congress, in enacting the 1954 Code, used the term “partnership interest” in that sense, namely, that a partnership interest is a partner’s interest in profits and surplus. Accordingly, within the meaning of the Code, the petitioner did transfer to the corporation his partnership interest. He transferred all the interest he owned.
While it is true that the transfer of petitioner’s partnership interest did not serve to terminate the partnership under State law, it is clear that, since the assignment did effect a transfer of 50 percent of the total interest in the partnership capital and profits, the assignment did effect a termination of the partnership for Federal tax purposes, pursuant to the provisions of section 708 of the Code and the regulations thereunder.6 The regulations under section 708 further indicate that upon such a termination the transferee of the partnership interest is to be treated as a partner in a new partnership.7 It follows that the petitioner was, after the assignment, no longer to be regarded as a partner for Federal income tax purposes, even though for State purposes he remained a partner.
This view finds support in the provisions of section 704(e) of the Code. Although directed primarily toward “family partnerships,” that section is broad in its scope and covers a situation such as the instant case which does not involve a “family partnership” (there being involved no members of a family as defined in section 704(e) (3) of the Code). That section provides that a person shall be recognized as a partner if he owns a capital interest in a partnership in which capital is a material income-producing factor. In enacting the predecessor of section 704(e), Congress made it clear that, although “family partnership” situations offer great potential for abuse, recognition must be given the general principle of income taxation that income produced by capital is taxed to the owner of such capital.8
The regulations under section 704(6)9 define “capital interest in a partnership” as an interest in the assets of the partnership which is distributable to the owner of the capital interest upon his withdrawal from the partnership or upon liquidation of the partnership, but states that the mere right to participate in the earnings and profits is not a capital interest in the partnership. As stated above, the assignment in question, under section 178.23 of the Wisconsin statutes, entitled the corporation to not only the earnings and profits, but also, upon dissolution, to the petitioner’s share of surplus, that is, his share of the partnership assets after payment of partnership liabilities. There can be no doubt that capital was a material income-producing factor in the business.10 Therefore, section 704(e) requires the recognition of the corporation, rather than the petitioner, as a partner for Federal income tax purposes.
In view of the above provisions of the Internal Eevenue Code of 1954, we are of the opinion that Burnet v. Leininger, supra, which arose under prior tax statutes, is not governing in the instant case.
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OPINION
The respondent does not question the separate identities of the petitioner and the corporation, nor does he contend that the execution of the “Assignment of Partnership Interest” by petitioner on January 2, 1961, was a sham. However, he contends that since the petitioner did not obtain the consent of his partner, Zeier, to the assignment, such assignment did not effect a transfer to the corporation of petitioner’s entire partnership interest, but effected no more than an assignment of the right to future income to which petitioner would be entitled as a partner; that the petitioner thus retained his partnership interest; and that he is taxable upon his distributive share of the partnership income under section 702(a) of the Internal Revenue Code of 1954.2 He relies principally upon Burnet v. Leininger, 285 U.S. 136.
The petitioner, on the other hand, contends that under Wisconsin law the assignment of January 2, 1961, was effective to transfer his capital interest in the partnership to the corporation. He therefore contends that the corporation, as owner of such capital interest, is taxable on the income from such interest, regardless of whether the corporation technically became a partner under State law. He argues that for Federal income tax purposes the transfer terminated the old partnership between him and Zeier by virtue of the provisions of section 708(b) (1) (B) of the Code and the regulations thereunder; that thereafter, for Federal income tax purposes, he was no longer taxable as a partner; that the corporation became a coowner with Zeier of the company; that as coowners the corporation and Zeier continued to carry on a business, petitioner acting as agent for the corporation; that under section 761(a) of the Code the relationship between Zeier and the corporation, for Federal income tax purposes, must be considered as that of a partnership; and further that section 704(e) (1) of the Code provides that a person shall be recognized as a partner if he owns a capital interest in a partnership in which capital is a material income-producing factor.
Both parties refer to the Uniform Partnership Act as enacted by the State of Wisconsin,3 the respondent contending that thereunder the assignment in question transferred to the corporation only a share of the future profits of the partnership and, as stated, the petitioner contending that thereunder the assignment effected a transfer of his capital interest in the partnership.
We tbiriTr it clear that the assignment in question was intended to, and did, transfer all the petitioner’s interest in the partnership to the corporation, and not merely the right to future income. Under Wisconsin law a partner’s interest in the partnership is his share of the profits and surplus. This interest is personal property and is assignable. An assignment of a partnership interest entitles the assignee to receive the profits to which the assigning partner would otherwise be entitled and, in the case of a dissolution of the partnership, entitles the assignee to receive the assignor’s interest. And it appears that there is no requirement that consent to the assignment be obtained from the other partners.
The Internal Revenue Code of 1954 recognizes that an interest in a partnership may be sold or exchanged and, with exceptions not here material, considers tbe gain, or loss as being from tbe sale or exchange of a capital asset. Sec. 741, I.R.C. 1954.4 In enacting section 141 Congress gave recognition to existing decisions which held that the sale of a partnership interest was generally considered to be a sale of a capital asset. H. Kept. No. 1337,83d Cong., 2d Sess., p. 70, and S. Kept. No. 1622,83d Cong., 2d Sess., p. 96. These cases also clearly established that a partner’s interest in the partnership is his share of the profits and surplus, and that he individually has no interest in the partnership assets except as they might figure in his share of the profits and surplus. See, e.g., H. R. Smith, 10 T.C. 398, affd. (C.A. 5) 173 F. 2d 470, certiorari denied 338 U.S. 818; Allan, S. Lehman, 7 T.C. 1088, affd. 165 F. 2d 383, certiorari denied 334 U.S. 819, and cases cited therein.5 We therefore think it reasonable to conclude that Congress, in enacting the 1954 Code, used the term “partnership interest” in that sense, namely, that a partnership interest is a partner’s interest in profits and surplus. Accordingly, within the meaning of the Code, the petitioner did transfer to the corporation his partnership interest. He transferred all the interest he owned.
While it is true that the transfer of petitioner’s partnership interest did not serve to terminate the partnership under State law, it is clear that, since the assignment did effect a transfer of 50 percent of the total interest in the partnership capital and profits, the assignment did effect a termination of the partnership for Federal tax purposes, pursuant to the provisions of section 708 of the Code and the regulations thereunder.6 The regulations under section 708 further indicate that upon such a termination the transferee of the partnership interest is to be treated as a partner in a new partnership.7 It follows that the petitioner was, after the assignment, no longer to be regarded as a partner for Federal income tax purposes, even though for State purposes he remained a partner.
This view finds support in the provisions of section 704(e) of the Code. Although directed primarily toward “family partnerships,” that section is broad in its scope and covers a situation such as the instant case which does not involve a “family partnership” (there being involved no members of a family as defined in section 704(e) (3) of the Code). That section provides that a person shall be recognized as a partner if he owns a capital interest in a partnership in which capital is a material income-producing factor. In enacting the predecessor of section 704(e), Congress made it clear that, although “family partnership” situations offer great potential for abuse, recognition must be given the general principle of income taxation that income produced by capital is taxed to the owner of such capital.8
The regulations under section 704(6)9 define “capital interest in a partnership” as an interest in the assets of the partnership which is distributable to the owner of the capital interest upon his withdrawal from the partnership or upon liquidation of the partnership, but states that the mere right to participate in the earnings and profits is not a capital interest in the partnership. As stated above, the assignment in question, under section 178.23 of the Wisconsin statutes, entitled the corporation to not only the earnings and profits, but also, upon dissolution, to the petitioner’s share of surplus, that is, his share of the partnership assets after payment of partnership liabilities. There can be no doubt that capital was a material income-producing factor in the business.10 Therefore, section 704(e) requires the recognition of the corporation, rather than the petitioner, as a partner for Federal income tax purposes.
In view of the above provisions of the Internal Eevenue Code of 1954, we are of the opinion that Burnet v. Leininger, supra, which arose under prior tax statutes, is not governing in the instant case. Furthermore, it appears that in the Leimmger case there was not an assignment by the taxpayer of a capital interest in the partnership in which he was a member, as was true here. In Leinmger it was found only that a written agreement confirmatory of a preexisting-oral agreement was entered into between taxpayer and his wife wherein it was acknowledged that taxpayer’s wife had been and was a full equal partner with him in his interest in the partnership, entitled to share equally in the profits and obligated to bear equally any losses. The court stated that upon the facts found the agreement amounted to no more than an equitable assignment of one-half of what the taxpayer should receive from the partnership.
Tbe fact that tbe petitioner continued to be tbe nominal partner is not sufficient to subject bim to tax on tbe income from tbe distributive share beld in bis name since, as stated above, be had assigned to the corporation bis full beneficial interest. See United States v. Atkins, (C.A. 5) 191 F. 2d 146, rehearing denied 191 F. 2d 951, certiorari denied 343 U.S. 941, in which it was beld that, where tbe taxpayer assigned capital interest in partnerships of which he was a member to a partnership consisting of himself and his son, the taxpayer was not liable for tax upon the income attributable to the interest which he transferred, even though the assignee did not become a member of the original partnerships. In that case the court stated in part:
This is not a case of the taxpayer assigning fees, wages, salaries, or other income, to be earned by him in the future from work to be performed by him in the future. Ateo’s income resulted from capital invested in operating partnerships, and from the services performed by managing partners. The taxpayer did not assign income from those operating partnerships: he assigned his share, his entire interest in those partnerships to a separate partnership (Ateo 'Investment Company), the members of which firm were engaged in a joint venture. * * *
*******
Appellee was required to make such individual return as to each partnership of which he was a member whether or not distribution was made to him, but not if he retained no beneficial interest in the operating partnerships and was a partner in name only. * * * Though not a member of the operating partnerships, the Atco Investment Company was equitably entitled to receive the entire net income from the appelleee’s share in said operating partnerships, because Ateo was the beneficial owner thereof, since appellee had not simply assigned income but had assigned his entire equitable interest therein. After this assignment was made, appellee retained only a naked legal title to said share. * * * An equitable interest in a partnership is a vendible asset, the income from which is computable in the same manner and on the same basis as any other property, the legal title to which is in a naked trustee. The partnership return may state the nominal partners only, but the individual return of any such member may disclose additional facts, and if the income from a share in the partnership is ultimately received by the equitable owner thereof, and all income taxes paid thereon by the ¡real beneficiary thereof, the nominal partner is not also liable. * * *
See also Rupple v. Kuhl, (C.A. 7) 177 F. 2d 823, Harry Klein, 18 T.C. 804, and Wilson v. United States, (N.D.Cal.) 246 F. Supp. 613.
In view of tbe foregoing, we bold that the respondent erred in bolding that tbe petitioner was taxable npon one-half of tbe partnership earnings for each of the taxable years 1961 through 1965, and in holding that the petitioner is taxable upon the gain realized upon the sale of the partnership interest in 1965.
Decisions will he entered umder Rule 50.