41 T.C. 535 (1964)
The petitioners are David A. and Dorothy A. Foxman, Horace W. and Judith Grenell, and Norman B. and Laura Jacobowitz, all husband and wife residing in New Jersey who filed joint 1958 income tax returns with the district director in Newark.1 Prior to 1954 Abbey Record Manufacturing Co. was a partnership composed of Jacobowitz and two associates named Zayde and Brody that manufactured phonograph records on contract.2 Grenell purchased the interests of Zayde and Brody on December 31, 1953, and became an equal partner with Jacobowitz on January 2, 1954.3 Through agreements dated February 1, 1955, and January 26, 1956, Foxman joined as a third equal partner.4 Abbey kept its accounts on an accrual basis with a fiscal year ending February 28.5 The three partners also owned equal interests in Sound Plastics, Inc., which manufactured vinyl forms used in record production.6
Abbey's net income rose from approximately $108,000 for the fiscal year ending February 29, 1956, to approximately $218,000 for the fiscal year ending February 28, 1957.7 Notwithstanding this success, disharmony existed among the partners.8 Discussions about Jacobowitz's withdrawal began in the spring of 1956 but produced no agreement.9 Early in 1957 Foxman and Grenell decided to continue the partnership without Jacobowitz, and negotiations resumed in March 1957.10 Foxman offered Jacobowitz $225,000 in cash plus an automobile owned by Abbey and Foxman's and Grenell's interests in Sound Plastics, Inc.11 The three partners reached a tentative agreement on those terms.12 On May 21, 1957, they executed a formal agreement providing for the sale of Jacobowitz's one-third interest in Abbey.13
The May 21, 1957, agreement required Foxman and Grenell to pay Jacobowitz a total of $242,550 according to a schedule that included an immediate $67,500 payment, another $67,500 due January 2, 1958, eighteen monthly installments of $5,000 beginning February 1, 1958, and $17,550 payable in weekly installments of $225.14 Foxman and Grenell also transferred their Sound Plastics stock and a 1956 Chrysler New Yorker to Jacobowitz.15 The agreement contained a handwritten insertion at Jacobowitz's request stating that he was not entitled to any further share of profits accruing after March 1, 1957, and could retain sums already received.16 Between March 1 and May 21, 1957, Jacobowitz received $16,790 from Abbey, which the books recorded partly as salaries-partners and partly as drawings.17
On May 29, 1958, Abbey transferred its fixed assets to Richard D. Gittlin for $300,022.98 in the form of three promissory notes, and Gittlin immediately transferred the same assets to Abbey Record Manufacturing Co., Inc., a previously dormant corporation.18 Abbey transferred its remaining assets subject to liabilities to the corporation in exchange for stock and debentures that were distributed to Foxman and Grenell.19 After the transfer Abbey retained two of the Gittlin notes, purchased a $5,000 mortgage in July 1958 and rental real estate in September 1958, and continued to receive interest and rent.20 Foxman sold his remaining interest in Abbey to Grenell on January 13, 1959.21 The Commissioner determined deficiencies in the petitioners' 1958 income taxes, and the three cases were consolidated for trial.22
Whether the agreement dated May 21, 1957, between Jacobowitz and Foxman and Grenell resulted in a sale of Jacobowitz's one-third partnership interest under section 741 or a liquidation of that interest under sections 736 and 761(d)?23
Section 736 and this section apply only to payments made by the partnership and not to transactions between the partners. Thus, a sale by partner A to partner B of his entire one-fourth interest in partnership ABCD would not come within the scope of section 736.24
Yes. The May 21, 1957 agreement explicitly recites that Jacobowitz is desirous of selling his one-third share in Abbey and that Foxman and Grenell are purchasing that interest, with Foxman and Grenell obligating themselves individually to make the payments and to transfer their personal Sound Plastics stock and automobile.25 The chattel mortgage executed in connection with the agreement describes the transaction as a sale of Jacobowitz's partnership interest to Foxman and Grenell individually.26 Although Abbey made some payments, the primary obligation remained that of Foxman and Grenell personally, and the use of partnership funds was merely a discretionary means of satisfying their individual liability.27
The negotiations consistently proceeded on the basis of a sale, and the agreement contains no undertaking by Abbey itself to liquidate Jacobowitz's interest.28
The May 21, 1957 agreement resulted in a sale of Jacobowitz's partnership interest under section 741 rather than a liquidation under sections 736 and 761(d).29
Whether the $16,790 received by Jacobowitz during the period March 1 to May 21, 1957, represented his share of distributive partnership income for that short period in accordance with the partnership agreement as modified?30
Section 704(a) provides that a partner's distributive share of income shall be determined by the partnership agreement.31 Under section 761(c) a partnership agreement includes any modifications of the partnership agreement made prior to, or at, the time prescribed by law for the filing of the partnership return for the taxable year (not including extensions) which are agreed to by all the partners. The effect of such modification is that it relates back to the beginning of the taxable year in which the modification occurs.32
Yes. The handwritten insertion in paragraph Fourth of the May 21, 1957 agreement, made at Jacobowitz's request, modified the prior equal-sharing arrangement by providing that Jacobowitz was not entitled to any further share of profits accruing after March 1, 1957, and could retain sums already received.33 That insertion constituted a valid modification under section 761(c) because it was agreed to by all partners and executed before the due date of the partnership return. The $16,790 that Jacobowitz received between March 1 and May 21, 1957, and that the partnership books recorded as salaries and drawings, therefore represented his distributive share of Abbey's earnings for the short period under the modified agreement.34
The $16,790 received by Jacobowitz represented his share of distributive partnership income for the period March 1 to May 21, 1957, in accordance with the partnership agreement as modified.35
Whether Abbey Record Manufacturing Co. terminated on June 2, 1958, under section 708 as a result of the transfer of its assets to Abbey Record Manufacturing Co., Inc.?36
A partnership terminates only if no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership.37
No. Although Abbey transferred its record-manufacturing assets on May 29 and June 2, 1958, it retained the two remaining $100,000 Gittlin notes, remained liable on the Jasie notes, and acquired a $5,000 mortgage in July 1958 and rental real estate in September 1958.38 Abbey thereafter received interest on the notes and mortgage as well as rents from the real estate.39 Foxman and Grenell had no intention of terminating the partnership and took affirmative steps to keep it in existence by purchasing income-producing property.40 These continuing activities demonstrate that Abbey did not cease all business, financial operations, or ventures on June 2, 1958.41
Abbey Record Manufacturing Co. did not terminate on June 2, 1958, under section 708.42