(2d Cir.1945)
Williams, the taxpayer, and Reynolds had been partners in a hardware business in Corning, New York, since January 20, 1926, with Williams entitled to two-thirds of the profits and Reynolds one-third.1 Reynolds died on July 18, 1940.2
Williams settled with Reynolds' executrix on September 6, 1940, agreeing to pay her $12,187.90 and assume all liabilities of the business; he paid $2,187.98 in cash at once and $10,000 on October 10.3
On September 17, 1940, Williams sold the business as a whole to the Corning Building Company for $63,926.28, representing its agreed value as of February 1, 1940, plus an amount computed from gross sales between February 1 and September 28, 1940.4 The price reflected cash of about $8,100, receivables of about $7,000, fixtures of about $800, and a merchandise inventory of about $49,000, less about $1,000 for bills payable, with an additional $6,000 credited for profits.5
In his 1940 income tax return Williams treated the loss realized on his original two-thirds interest and the small gain realized on the one-third interest acquired from Reynolds' executrix as ordinary income.6 The Commissioner disallowed that treatment, recomputed the tax, and Williams paid the resulting deficiency before suing to recover it.7
Williams also sought to deduct $700 paid to attorneys to obtain refunds of taxes paid for 1936 and 1937.8 The district court dismissed the complaint in the action to recover the 1940 taxes, and Williams appealed to the Circuit Court of Appeals for the Second Circuit.9
Whether the $700 paid to attorneys to secure refunds of taxes paid for the years 1936 and 1937 was a proper deduction under § 23(a)(2) of the Internal Revenue Code?10
Expenses paid to attorneys to secure the refund of taxes are deductible under § 23(a)(2) of the Internal Revenue Code as amended by § 121 of the Act of 1942.11
Yes. The Supreme Court has decided that such expenses are deductible.12 The case concerned a trust but the Tax Court has held that this was not a controlling consideration.13 Even a casual reading of the Supreme Court's opinion shows that nothing turned upon the circumstance.14 The district court judgment dismissing the complaint must therefore be reversed on this point as well.15
The $700 paid to attorneys was a proper deduction under the statute.16
Whether the sale of an entire going hardware business is to be treated as the disposition of a single capital asset under § 117(a)(1) of the Internal Revenue Code or comminuted into its component parts?17
Section 117(a)(1) declares that all property is capital assets except stock in trade or other property includible in inventory, property held primarily for sale to customers, and property used in the trade or business subject to a depreciation allowance.18 Congress plainly did mean to comminute the elements of a business and did not regard the whole as capital assets.19
No. When Williams bought out Reynolds' interest he became the sole owner of the business and the firm had ended.20 Upon the sale to the Corning Building Company Williams transferred cash receivables fixtures and a merchandise inventory.21 Fixtures are not capital because they are subject to a depreciation allowance.22 The inventory is expressly excluded from capital asset treatment.23
There can be no gain or loss in the transfer of cash.24 Although Williams appears to have made a gain upon the receivables the point has not been argued that they are not subject to a depreciation allowance and that question is left open.25 The gain or loss upon every other item should be computed as an item in ordinary income.26 The method by which the parties agreed upon the price was irrelevant to the computation of Williams' income.27
The whole business is not to be treated as if it were a single piece of property.28
The sale of the business must be comminuted into its component parts for purposes of determining capital gain or loss under the statute.29
Related opinions on this issue
I agree that it is irrelevant that the business was once owned by a partnership.30 For when the sale to the Corning Company occurred the partnership was dead and had become merely a memory.31 But I do not agree that we should ignore what the parties to the sale actually did.32
They did not arrange for a transfer to the buyer as if in separate bundles of the several ingredients of the business.33 They contracted for the sale of the entire business as a going concern including cash on hand accounts receivable merchandise fixtures good will and all other assets.34 To carve up this transaction into distinct sales of cash receivables fixtures trucks merchandise and good will is to do violence to the realities.35
I do not think Congress intended any such artificial result.36 Where a business is sold as a unit the whole is greater than its parts.37 Businessmen so recognize so too I think did Congress.38
The practical aspects of the matter should guide our guess as to what Congress meant.39