[973]*973opinion.
Littleton
: In his computation of the gain or loss realized by the partnership upon the sale of its assets and businesses, the Commissioner separated the transaction into two parts, computing the gain or loss on the tangibles and on the good will separately. He held that the selling price of the good will was at least equal to the March 1,1913, value thereof and in excess of cost, and that upon this part of the transaction the partnership realized no gain or loss. He determined that the partnership had realized a taxable gain of $260,712.35 upon the sale of the tangible assets and asserted a tax against the petitioners based upon their respective interests therein. The Commissioner believes his action in computing the gain or loss on the tangibles and the good will separately is justified by the fact that the sale contract provides for the payment of a specific sum for the good will and a further sum, to be determined later in accordance with the provisions of the contract, for the tangible assets. We think this action of the Commissioner, and the premise therefor, is in error. The first clause of the sale contract expresses a sale and purchase, and binds the contracting parties to a transfer and acceptance of the partnership’s entire business, including good will and firm name. It evidences an intent on the part of the vendor and vendee to sell and purchase, respectively, the entire businesses as a whole at one time and by the same transaction. All that follows thereafter in the contract are matters of mere computation and detail as to the manner in which the price to be paid by the vendee is to be determined and the time and manner of payment thereof. The contract expresses no intention to sell the tangibles and the good will as separate things, and is not susceptible of such a construction. We consider it of no importance, in this connection, that the contract provides for the payment of a specific amount for the good will and the payment of a further sum, to be determined in the manner therein set forth, specifically for the tangible assets, but regard this as a mere agreement of the parties as to the manner in which the purchase price to be paid for the entire businesses, including good will and firm name, is to be determined. The gain or loss realized by the partnership upon the sale of its assets and businesses should be determined by comparing the selling price with the cost and the March 1, 1913, value of the entire assets, tangible and intangible, taken as a whole.
The petitioners’ contention that the partnership sustained a loss of $1,500,000 upon the sale of the good will is based upon a claimed [974]*974value thereof at March 1, 1913, of $1,750,000, and upon the fact that the contract provided for the sale and purchase thereof for the sum of $250,000. From the evidence before us, we conclude that the March 1, 1913, value of the partnership good will was $930,000. There is no evidence to show that the good will was acquired at any cost to the partnership, hut, rather, the record indicates that it came into existence because of the character, industry, and ability of the partners, and the services they rendered in transacting the partnership business. Since the good will was not sold as a separate thing, but as a part of the entire assets and businesses, the gain or loss resulting from the sale thereof can not be determined separately. •As previously stated, the gain or loss realized by the partnership upon the sale must be determined by treating the sale of all the assets as one transaction. The total selling price should be compared with the cost and the March 1, 1913, value of the combined assets, tangible and intangible; and for the purpose of the conxpari-son the cost of the good will is to be regarded as nil, while the March 1,1913, value thereof, to be added to the value of the tangibles at the same date, is $930,000.
In the computation of the gain or loss resulting from the sale of the partnership assets, the Commissioner has resorted to book values, as representative of cost, and has disregarded the March 1, 1913, value of the assets, which was greater than cost. The parties have stipulated that the March 1, 1913, value of certain properties located in Brazil was $151,982.29 in excess of the cost of those properties, and by the stipulation the Commissioner admits that on the basis of the March 1, 1913, value the gain derived from the sale of those properties was less, by the said amount of $151,982.29, than the gain theretofore computed by him. The gain or loss derived from this transaction should be computed by comparison of the selling price with the cost and March 1, 1913, value (whichever the case may be), a fact now conceded by the Commissioner.
The parties have stipulated that the increase in partnership transactions for the four-month period from January 1 to April 30, 1919, amounted to $1,655,474.27, and that this amount was computed by the use of a closing inventory valued on the basis of market, though market exceeded cost by the sum of $258,218.18. The Commissioner has held that this increase in partnership transactions is taxable to the several petitioners according to their respective distributive shares therein. We understand the words “increase in partnership transactions,” as used in the stipulation, to mean the net earnings of the partnership during the period January 1 to April 30, 1919, including appreciation in the market value over cost of the inventory [975]*975on hand at the latter date, without taking into account the gain or loss, if any, resulting from the sale of the partnership assets and businesses. The petitioners contend that this increase in partnership transactions was neither distributed nor made available to them at any time, but, on the contrary, was merged in the sale and became the property of the purchaser; hence, the net income of the partnership for the year 1919, in respect of which they are liable for taxes according to their respective distributive shares, consists entirely of the gain, if any, realized by the partnership upon the sale of its assets and businesses.
Section 218(a) of the Revenue Act of 1918 provides:
That individuals carrying on business in partnership shall be liable for income tax only in their individual capacity. There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year * *
Section 224 of the Revenue Act of 1918 provides:
That every partnership shall make a return for each taxable year, stating specifically the items of its gross income affd the deductions allowed by this title, and shall include in the return the names and addresses of the individuals who would be entitled to share in the net income if distributed * * *.
The deductions referred to are those specified by section 214 of the statute. Thus, we find that the net income of the partnership, in respect of which the petitioners are liable for income tax according to their respective distributive shares, is the gross income from all sources, including the gain, if any, from the sale of its capital assets, less the statutory deductions, the latter including the loss, if any, sustained upon the sale of the partnership assets.
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[973]*973opinion.
Littleton
: In his computation of the gain or loss realized by the partnership upon the sale of its assets and businesses, the Commissioner separated the transaction into two parts, computing the gain or loss on the tangibles and on the good will separately. He held that the selling price of the good will was at least equal to the March 1,1913, value thereof and in excess of cost, and that upon this part of the transaction the partnership realized no gain or loss. He determined that the partnership had realized a taxable gain of $260,712.35 upon the sale of the tangible assets and asserted a tax against the petitioners based upon their respective interests therein. The Commissioner believes his action in computing the gain or loss on the tangibles and the good will separately is justified by the fact that the sale contract provides for the payment of a specific sum for the good will and a further sum, to be determined later in accordance with the provisions of the contract, for the tangible assets. We think this action of the Commissioner, and the premise therefor, is in error. The first clause of the sale contract expresses a sale and purchase, and binds the contracting parties to a transfer and acceptance of the partnership’s entire business, including good will and firm name. It evidences an intent on the part of the vendor and vendee to sell and purchase, respectively, the entire businesses as a whole at one time and by the same transaction. All that follows thereafter in the contract are matters of mere computation and detail as to the manner in which the price to be paid by the vendee is to be determined and the time and manner of payment thereof. The contract expresses no intention to sell the tangibles and the good will as separate things, and is not susceptible of such a construction. We consider it of no importance, in this connection, that the contract provides for the payment of a specific amount for the good will and the payment of a further sum, to be determined in the manner therein set forth, specifically for the tangible assets, but regard this as a mere agreement of the parties as to the manner in which the purchase price to be paid for the entire businesses, including good will and firm name, is to be determined. The gain or loss realized by the partnership upon the sale of its assets and businesses should be determined by comparing the selling price with the cost and the March 1, 1913, value of the entire assets, tangible and intangible, taken as a whole.
The petitioners’ contention that the partnership sustained a loss of $1,500,000 upon the sale of the good will is based upon a claimed [974]*974value thereof at March 1, 1913, of $1,750,000, and upon the fact that the contract provided for the sale and purchase thereof for the sum of $250,000. From the evidence before us, we conclude that the March 1, 1913, value of the partnership good will was $930,000. There is no evidence to show that the good will was acquired at any cost to the partnership, hut, rather, the record indicates that it came into existence because of the character, industry, and ability of the partners, and the services they rendered in transacting the partnership business. Since the good will was not sold as a separate thing, but as a part of the entire assets and businesses, the gain or loss resulting from the sale thereof can not be determined separately. •As previously stated, the gain or loss realized by the partnership upon the sale must be determined by treating the sale of all the assets as one transaction. The total selling price should be compared with the cost and the March 1, 1913, value of the combined assets, tangible and intangible; and for the purpose of the conxpari-son the cost of the good will is to be regarded as nil, while the March 1,1913, value thereof, to be added to the value of the tangibles at the same date, is $930,000.
In the computation of the gain or loss resulting from the sale of the partnership assets, the Commissioner has resorted to book values, as representative of cost, and has disregarded the March 1, 1913, value of the assets, which was greater than cost. The parties have stipulated that the March 1, 1913, value of certain properties located in Brazil was $151,982.29 in excess of the cost of those properties, and by the stipulation the Commissioner admits that on the basis of the March 1, 1913, value the gain derived from the sale of those properties was less, by the said amount of $151,982.29, than the gain theretofore computed by him. The gain or loss derived from this transaction should be computed by comparison of the selling price with the cost and March 1, 1913, value (whichever the case may be), a fact now conceded by the Commissioner.
The parties have stipulated that the increase in partnership transactions for the four-month period from January 1 to April 30, 1919, amounted to $1,655,474.27, and that this amount was computed by the use of a closing inventory valued on the basis of market, though market exceeded cost by the sum of $258,218.18. The Commissioner has held that this increase in partnership transactions is taxable to the several petitioners according to their respective distributive shares therein. We understand the words “increase in partnership transactions,” as used in the stipulation, to mean the net earnings of the partnership during the period January 1 to April 30, 1919, including appreciation in the market value over cost of the inventory [975]*975on hand at the latter date, without taking into account the gain or loss, if any, resulting from the sale of the partnership assets and businesses. The petitioners contend that this increase in partnership transactions was neither distributed nor made available to them at any time, but, on the contrary, was merged in the sale and became the property of the purchaser; hence, the net income of the partnership for the year 1919, in respect of which they are liable for taxes according to their respective distributive shares, consists entirely of the gain, if any, realized by the partnership upon the sale of its assets and businesses.
Section 218(a) of the Revenue Act of 1918 provides:
That individuals carrying on business in partnership shall be liable for income tax only in their individual capacity. There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year * *
Section 224 of the Revenue Act of 1918 provides:
That every partnership shall make a return for each taxable year, stating specifically the items of its gross income affd the deductions allowed by this title, and shall include in the return the names and addresses of the individuals who would be entitled to share in the net income if distributed * * *.
The deductions referred to are those specified by section 214 of the statute. Thus, we find that the net income of the partnership, in respect of which the petitioners are liable for income tax according to their respective distributive shares, is the gross income from all sources, including the gain, if any, from the sale of its capital assets, less the statutory deductions, the latter including the loss, if any, sustained upon the sale of the partnership assets.
Whether, for the purpose of computing the partnership net income, we adopt the method advocated by the Commissioner which first ascertains the profits from operations to the date of the sale, then adds the amount of those profits to the cost of the assets at December 31, 1918, to arrive at the cost of the assets at the date of the sale, then, by comparison of the selling price-with the cost thus ascertained and the March 1, 1913, value of the assets, determines the statutory gain or loss, if any, resulting from the sale of the assets, and then arrives at the partnership net income by adding to or deducting from the profits of operations the gain or loss, as the case may be, resulting from the sale of the assets; or whether the method advocated by the petitioners, which treats the profits of operations to' the date of the sale as having been passed on to the purchaser of the assets and, therefore, not accrued to the partnership, and which computed the partnership net income by a comparison of the selling-price with the cost of the assets at December 31, 1918, and the value [976]*976thereof at March 1, 1913-, as a matter of cold figures, we reach the same result. This is demonstrated by the following illustrations:
Commissioner’s method.
Profits from operations to date of sale_$1,397,2S6.09
Add: Gain from sale of business and assets:
Selling price-$6,093, 284.34
Book value of assets at
12/31/18_$4, 428,192.10
Capital additions disallowed as expense by Commissioner- 83, 730.26
Assets acquired detween January 1 and April SO, 1919_ 1, 397, 256.09
5, 909,178. 45
Assets reserved from sale_ 584, 824. 64
- 5,324,353.81
-- 768, 930. 53
Net income of partnership_ 2,166,186. 62
Petitioners’ method.
Selling price of assets and business_$6,093,284. 34
Deduct: Cost of assets sold:
Book value of assets at 12/31/18_$4, 428,192.10
Capital additions disallowed as expense by Commissioner_ 83, 730.26
4, 511, 922. 36
Assets reserved from sale_ 584, 824. 64
——-—-— 3, 927,097. 72
Net income of partnership_ 2,166,186. 62
The computation of the gain or loss on the sale of the assets and businesses, in the foregoing illustrations, is based upon cost. If the computations were based upon the March 1, 1913, value of the assets, plus the cost of subsequent additions, the illustrations would be as follows:
Commissioner’s method.
Profits from operations to date of sale_$1, 397, 256.09
Deduct: Loss from sale of business and assets:
Stipulated value of assets at March 1, 1913,
plus additions to December 31, 1918_$4, 079,080.01
March 1, 1913, value of good will_ 930,000.00
Assets acquired between January 1 and April 30, 1919_ 1, 397, 256. 09
6,406,336.10
Selling price of assets and business_ 6, 093,284. 34
- 313, 051. 76
Net income of partnership. 1, 084,204.33
[977]*977Petitioners’ method.
Selling price of assets and business-$6,093,284.34'
Deduct: March 1, 1913, value of assets plus cost of subsequent additions to 12/31/18:
Stipulated value of assets at March 1, 1913,
plus additions to December 31, 1918-$4,079,080.01
March 1, 1913, value of good will- 930, 000.00
- 6,009,080.01
Net income of partnership_ 1, 084, 204.33
The difference in the net income of the partnership as computed under the second illustration of the Commissioner’s and the petitioners’ methods and that computed under the first illustration of their methods is accounted for as follows:
Net income of partnership under second illustration-'_$1, 084, 204. 33
Add: March 1, 1913, value of good will- 930,000.00
March 1, 1913, value of tangibles in excess of booh value_ 151, 982.29
Net income of partnership under first illustration_ 2,166,186.62
The statute prescribes the basis for the determination of the gain or loss resulting from the sale or exchange of property. The selling price must be compared with the cost and the March 1, 1913, value of the assets sold. If the selling price exceeds both the cost and the March 1, 1913, value of the assets, to the extent that the selling price exceeds the higher of these factors, the partnership has realized a taxable gain; or if the selling price is less than the cost and the March 1, 1913, value of the assets, then, to the extent that the lower of these two factors exceeds the selling price, the partnership has sustained a deductible loss; but if the selling price is greater than the cost and less than the March 1, 1913, value of the assets, then the partnership has realized neither a gain nor a loss. Therefore, a proper computation of the partnership net income will involve either a combination of the Commissioner’s method in the first and second illustration or a combination of the petitioners’ method in the same illustration. The following shows the results obtained by the use of both methods:
Commissioner’s method. Petitioners’ method.
Cost_ $6, 324,363. 81 $3, 927, 097/72
March 1, 1913, value. 6,406, 336.10 5, 009, 080. 01
Selling price_ 6, 093,284. 34 6, 093, 284. 34
Gain_ None. 1, 084, 204. 33
Earnings_ 1, 397,266. 09 None.
Net income_ 1, 397, 256. 09 1, 084, 204. 33
The difference in the partnership net income as computed under the two methods is $313,051.76; and it will be noted from the second [978]*978illustration of the Commissioner’s method that this amount represents the difference between the March 1, 1913, value of the assets, as computed by the Commissioner, and the selling price, which does not represent a deductible loss because the selling price falls between the cost and the March 1, 1913, value of the assets. It is precisely this situation that the petitioners are attempting to circumvent through the use of the method which they advocate, but it is quite clear that in this they can not succeed for the following reasons:
First: The comparison which the petitioners make under their method is the selling price with the cost of the assets at December 31, 1918, and the March 1, 1913, value of the assets plus subsequent costs to December 31, 1918, while the comparison which the statute contemplates is the Selling price with the actual cost and the March 1. 1913, value plus actual subsequent costs, which, in each instance, must include the cost to the date of the sale, to wit, April 30, 1919.
Second: The cost of the assets to the date of the sale and the cost of additions subsequent to March 1,1913, must necessarily include the profits of the four-month period ended April 30, 1919, just the same as they include the profits of any other prior accounting period; and since the increase in the cost of the assets between December 31, 1918, and April 30, 1919, is attributable, not to appreciation, but to actual earnings, the increase is taxable to the partnership as earnings for the period in which earned.
The fallacy of the petitioners’ method lies in their failure to take account of the fact that the partnership contracted to sell, and did sell, the earnings, which were contained in its asset accounts, for the four-month period ended April 30, 1919, which must have belonged to it before they could become the property of anyone else. The fact is that before the earnings became the property of the purchaser they were income to the seller, within the meaning of the law, and as such nmst be included in the partnership net income in respect of which the petitioners are liable for income tax according to their respective distributive shares therein.
We agree, in principle, with the Commissioner’s action in holding that the earnings from operations to the time of the sale of the partnership assets and businesses must be included in the partnership net income, and taxed to the partners in accordance with their respective distributive shares. It is clear, however, that the Commisisoner’s determination that said earnings amounted to $1,655,474.27 is in error, since this amount-was computed through the use of a closing inventory valued on the basis of market when cost afforded a lower basis of valuation. In his brief filed subsequent to the hearing, the Commissioner admits error in this respect. If the difference between cost and market, to wit, $258,218.18, i's deducted from the above amount, [979]*979the remainder is $1,397,256.09, which is the correct amount of earnings for the period ended April 30, 1919.
The parties have stipulated that the book value of the partnership assets, exclusive of good will, was at December 31, 1918, the sum of $4,428,192.10; that the book value of the assets specifically reserved from the sale was $584,824.64; that the cost of capital additions previously charged to expense on the books, but disallowed by the Commissioner as deductions for income tax purposes, amounted to $83,-730.26, and that the March 1, 1913, value of the assets sold and transferred, exclusive of good will, plus the cost of subsequent additions to December 31, 1918, amounted to $4,079,080.01. From these facts we draw the conclusion that the cost of the assets sold and transferred was $5,324,353.81, computed as follows:
Book value of assets at December 81, 1918_$4, 428,192.10,
Acid: Capital additions charged to expense on books but disallowed as expense deductions for income tax purposes_ 83,730.26
Profits from operations to date of sale_!_ 1, 397,256. 09
5, 909,178.45
Deduct.: Assets reserved from sale_ 584,824. 64
Cost of assets sold and transferred_ 5, 324,353. 81
We also conclude that the March 1, 1913, value of the assets sold and transferred, plus the cost of subsequent additions to the date of the sale, was $6,406,336.10, computed as follows:
Book value of assets at December 31, 1918_$4,428,192.10
Add: Capital additions charged to expense on books but disallowed as expense deductions for income tax purposes_ 83,730.26
Profits from operations to date of sale_ 1,397,256.09
March 1, 1913, value of Brazilian properties in excess of book
value_ 151,982.29
March 1, 1913, value of good will- 930, 000.00
6, 991,160.74
Deduct: Assets reserved from sale_ 584,824.64
March 1, 1913, value of assets sold and transferred- 6,406,336.10
Since the selling price is greater than the cost but less than the March 1, 1913, value, as said cost and value are above computed, we conclude that the partnership realized no taxable gain or deductible loss from the sale of its assets and businesses; and that the partnership net income, in respect of which the several petitioners are taxable according to their respective distributive shares, is the amount of the earnings for the four-month period ended April 30, 1919, to wit, $1,397,256.09.
The last issue to be considered concerns the Commissioner’s action in holding that the sale of the partnership’s assets and businesses constituted a completed transaction for the year 1919, and that any gain or loss realized therefrom should be reflected in the partnership net [980]*980income for that year. The petitioners contend that since there was no determination within the year 1919 of the actual amount to be paid by the purchaser for the partnership assets and businesses, and that final payment was not made by the purchaser until December, 1921, the sale was not completed until the year 1921, and any gain or loss resulting therefrom should be reflected in the partnership net income for the latteu year. The books of the partnership were maintained upon the accrual basis. According to the terms of the sale contract, the purchaser, on May 1, 1919, took possession of the business and of all offices, and thereafter the partners conducted the businesses for the account of the purchaser. The transaction was completed so far as the partnership was concerned and, in the event of the purchaser’s failure to make payment according to the terms of the contract, the partnership could not have repossessed the properties, but would have been limited to an action to enforce payment under the contract to pay. It appears that it was not until some time later than the year 1919 that the specific amount to be paid by the purchaser for the partnership assets and businesses was determined. But, all circumstances considered, we do not think this fact sufficient to justify the postponement until a. later year of the accounting for the gain or loss realized from the sale. The sale was consummated in the year 1919; the liability of the purchaser to pay the purchase price arose in that year; and, in our opinion, whatever gain or loss resulted from the sale accrued to the partnership in the same year. If the purchase price had not been accurately determined at. the close of the partnership accounting period for 1919, the partnership net income should have been determined on the basis of the best possible estimate of what the purchase price would be; and if subsequent developments demonstrated the original estimate to be in error, the situation might have been remedied by proper adjustments within the statutory period of limitations, based upon the correct partnership net income.
Order of redetermination will Toe entered on ■ 15 days' notice, under Rule 50.
Smith dissents.