Williams v. Mcgowan

152 F.2d 570 (2nd Cir. 1945)

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Nature of the Case

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Facts

Williams (P) and Reynolds were in the hardware business in Corning, New York. They formed a partnership with P getting 2/3rd and Reynolds getting 1/3rd. The capital invested had been $118,082.05 with Reynolds having a credit of $29,029.03 and P with the balance. Their agreement called for compensating balances with interest due from Reynolds to make up for his deficiency in the paid-in capital. The agreement allowed the other partner to purchase a withdrawing partner's share as the share appeared on the books. Reynolds died in 1940 and P made a deal with the executrix to purchase Reynolds' share for $12,187.90. Just a few months later, P sold the business to another for $63,926.28 plus further amounts that brought the total sales price to $70,000. Even with this sale P suffered a loss upon his original investment but he made a small gain on the 1/3rd interest that he purchased from the estate. He filed his tax return based on ordinary income and not as a transaction of capital assets. The IRS was not amused and disallowed this and recomputed his tax accordingly.