# Respondent Brief in Opposition — International Ass'n of Machinists v. Central Airlines, Inc.

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Respondent Brief in Opposition
- **Published:** January 1, 1962
- **Citation:** 369 U.S. 802

## Text

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INDEX

Opinions below__________- ite beet aha see gk
Jurisdiction. __._.- Os FEDER ee ae eas
Question presented ___- , ete eam
Statutes and regulations involv ed... Pe cane eee
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CITATIONS
Cases:
Berry v. United States, 267 ef Sn
Hulbert v. Commissioner, 227 F. 2d 399_____-
Leff v. Commissioner, 235 F. 2d 439___.____-
Meyer v. United States, 213 F. 2d 278_______-
Suwirin v. Commissioner, 183 F. 2d 656, cer-
tiorari denied, 340 U.S. 912-__-. Aas Sab ema
Tunnell v. United States, 259 F. 2d 916_____-
United States v. Donoho, 275 F. 2d 489__ ~~ _-
United States v. Shapiro, 178 F. 2d 459... _-
United States v. Snow, 223 F. 2d 103, cer-
tiorari denied, 350 U.S. 831_......---..--
Watson v. Commissioner, 345 U.S. 544______-
Statutes:
Internal Revenue Code of 1939 (26 U.S.C.
1952 ed.):
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a i cas awe
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Te wkcnwe
Internal Revenue Code of 1954 (26 U.S.C.):
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Sec. 1221. _- Laie Aa Son od nid To wi ati ee a hs Se a

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Miscellaneous:
H. Rep. No. 1337, 83d Cong., 2d Sess., pp. 65,
70-72 (3 U.S.C. Cong. & Adm. News (1954)
4017, 4091, 4096-4099) _..._.._.________.
Treasury Regulations 118:
Sec. 39.113(a)(13)-2...................
PE ans an wkdau na iweewdbaws ce

Ou the Supreme Court of the Hnited States

OcTOBER TERM, 1961

No. 602 4

LENORA SHERLUCK, INDIVIDUALLY AND AS EXECUTRIX
OF THE EstaTE OF CHRIS J. SHERLOCK, DECEASED,
PETITIONER

es
CoMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED
STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW .

The opinion of the Tax Court (R. 21-32) is re-
ported at 34 T.C. 522. The majority and dissenting
opinions of the court of appeals (Pet. Ex. A, pp.
1-11) are reported at 294 F. 2d 863.

JURISDICTION

The judgment of the court of appeals was entered
on September 27, 1961 (Pet. Ex. A, p. 12). Taxpay-
er's petition for rehearing was denied on October 30,
1961 (Pet. Ex. B). The petition for a writ of certio-
rari was filed on December 11, 1961. The jurisdic-
tior. of this Court is invoked under 28 U.S.C. 1254(1).

fl)

2
QUESTION PRESENTED

Whether the two courts below properly decided
that, where taxpayet’ had sold his interest in a paft-
nership for a lump sum, the amount of taxpayer’s
share of the undistributed profits of the partnership,
which profits had accrued prior to the effective date
of the sale, was taxable to him as ordinary income.

STATUTES AND REGULATIONS INVOLVED

The pertinent statutes and regulations involved are
set forth in the Appendix, tnfra.

STATEMENT .

On June 1, 1951, taxpayef and two others organized
a partnership which performed engineering and archi-
tectural services. The partnership agreement pro-
vided that the profits and losses should be borne
equally, that any partner could withdraw from the
firm upon prescribed notice, and that, in the event of
such a withdrawal, the remaihing partners would have
afi option to discontinue the business or to purchase
the interest of the withdrawing partner. The part-
nership kept its books and records on the basis of a
fiscal year ending April 30, ahd on the accrual method
of accounting. (R. 23; Pet. Ex. A, p. 2.)

On February 26, 1954, taxpayer executed a bill of
sale to his partners conveying to them his ote-third
interest in the partnership for $70,000 (R. 23-24;

* Lenora Sherlock is a party to this action as executrix aad
individually as a co-signet of a joint return. Consequently, as
used in this brief, the term “taxpayer” refers to Chris J.
Sherlock.

3

Pet. Ex. A, p. 2). The bill of sale stated (R. 24; Pet.
Ex. A, pp. 2-3):

3. The books of the firm will be closed as of
February 28, 1954, and seller withdraws as
member of the firm and buyers will prepare,
as soon as possible thereafter, returns of the
income reflecting the profit and loss of the part-
nership for the peried beginning June 1, 1953,
and ending February 28, 1954. The profit
between Chris J. Sherlock, Moreland Smith
and Riehard Adams; said returns shall be filed
with the respective Governments and each of
the parties will report their respective income
from the partnership as shown by such returns.
It is agreed that the profit and loss shown by
such partnership to be the profit and loss of
Sherlock has been received by him either
through previous withdrawals or in the pur-
chase price paid or to be paid by buvers.

Pursuant to provision 3 of the bill of sale, the
partnership closed its books of account on February
28, 1954, and filed a return for the period May 1, 1953,
to February 28, 1954. The return reported that the
partnership income for the period was $249,827.38,
that taxpayer's share of the ineome was %X3,275.79,
that the amount of his capital account in the partner-
ship at the beginning of the period was a deficit bal-
ance of $9,641.59 (reflecting overdrafts), and that at
the end of the period he had a credit balance of
$49,303.80. (R. 24-25: Pet. Ex. A, p. 3.)

On the joint return filed by taxpayer and his wife
for 1954, taxpayer reported the entire amount of the
$70,000 paid te him for his partnership interest as a
long-term capital gain computed with a zero basis,

4

but failed to report any amount of his distributive
share of the partnership income for the period May 1,
1953, to February 28, 1954, as ordinary income. (R.
25; Pet. Ex. A, p. 3.) The Commissioner, in his
notice of deficiency, determined that taxpayer should
have included as ordinary income $83,275.78—his
distributive share of the reported partnership profits
for that period. The Commissioner also determined
that the balance of taxpayer’s capital account at
the end of the period (v1z., $49,303.80) constituted
taxpayer’s basis in his partnership interest and should
have been deducted from the $70,000 received by him
for the sale of that interest, thereby reducing the
amount of his reported capital gains (R. 14-17).

Subsequently, at the hearing, the parties stipulated
that the correct amount of the partnership's income
for the period May 1, 1953, to February 28, 1954,
was $147,827.38; that taxpayer withdrew $14,233.95
during that period; and that his capital account at the
beginning of the period had been overdrawn in the
amount of $9,641.59 (R. 25-26; Pet. Ex A, pp. 3-4).
Since the amount of taxpayer's deficiency had been
computed on the basis of the income originally re-
ported by the partnership, taxpayer's liability had to
be recomputed (R. 27-28).

The Tax Court sustained the Commissioner's deter-
mination after making due allowance for the smaller
partnership income stipulated by the parties (R. 21-
32). Accordingly, the court included in taxpayer’s
ordinary gross income $49,275.79—the amount of tax-
payer’s distributive share of the partnership's profits

5

for the period in question, computed on the basis of
the stipulated amount of partnership profit (R. 29).
This resulted in a deficiency for the year 1954 of
$19,372.54 (R. 33). The court of appeals affirmed
(Pet. Ex. A, p. 9).

ARGUMENT

The decisions uf the two courts below are correct;
there is no existing conflict; and the issue here in-
volved is of no future importance. Further review
is unwarranted. |

1. The effective date of the termination of tax-
payer's interest in the partnership was February 28,
1954. Taxpayer was therefore entitled to share in
the partnership’s profits until that date. (R. 24.) —
The parties stipulated that the ordinary income for
the partnership for the fiscal year beginning May 1,
1953, and ending February 28, 1954,° was $147,827.38
(R. 34). Taxpayer was entitled to receive one-third
of that amount—#49,275.79 CR. 23, 28).

Section 182 of the Internal Revenue Code of 1939,
App., infra, provides that a partner must_ in-
clude in the computation of his gross income his
cictributive share of the ordinary et income of the

?The court also imposed penalties totalling $1,513.16 for the
substantial underestimation of estimated tax and for failure to
make timely payment of the amount of tax that was estimated.
Taxpayer does not contest the imposition of those penalties in
his petition.

* Because of taxpayers retirement, the partnership filed a
short-year return (R. 24-25). The income reflected accounts
receivable entered on the partnership's books, which amounts
had accrued to the partnership (which reported its income on
the accrual basis) (R. 23).

6

partnership “whether or not distribution is made to
him.”’ See Treasury Regulations 118, Sec. 39.182-1,
App., infra. Consequently, taxpayer was charged with
his share of the partnership’s profits up to the date of
his withdrawal ($49,275.79), and he could not escape
the tax liability that he had already incurred merely
by selling his partnership interest. See Treasury
Regulations 118, Sec. 39.113(a)(13)-2, App. infra;
Watson v. Commissioner, 345 U.S. 544; United States
v. Snow, 223 F. 2d 103 (C.A. 9th), certivrari denied,
350 U.S. 831; Tunnell v. United States, 259 F. 2d 916
(C.A. 3d); Leff v. Commissioner, 235 F. 2d 439 (C.A.
2d).

2. Contrary to taxpayer’s contention (Pet. 4-5),
there is no conflict among the courts of appeals on
the question here involved. Taxpayer attempts to
characterize the question as whether a lump sum pay-
ment received in consideration for the sale of a partner-
ship interest must be treated as gain from the sale of a
capital asset or whether such amounts of that sum
which are attributable to the assignment of future in-
come of the partnership may be treated as ordinary in-
come. But that is not the issue in this case; the Cu.n-
missioner has never disputed that the sale by taxpayer
of his partnership interest (exclusive of his distributive
share of the partnership income) was a sale of a capi-
tal asset (R. 30-31, 45-46). The Commissioner’s con-
tention, which was sustained by the courts below, is
that the taxpayer’s distributive share of the partner-
ship income for the taxable period May 1, 1953, to
February 28, 1954, was includible in his income for

7

that year under Section 182 of the 1039 Cede, and
the subsequent sale of his interest did aot relieve him
of that liability. See eg. United States v. Snow,
supra; Watedn v. Commissioner, supra. Conse-
quently, with the exception of Meyer v. United States,
213 ¥. 2d 278 (C.A. 7th), the cases cited by taxpayer
(Pet. 4) are inapposite.’ The Meyer case, in turn, is
inconsistent with, and was therefore implicitly over-
ruled by the more recent decision of the Seventh Cireuit
in Hulbert v. Commissioner, 227 F. 2d 399.°

3. In any event, the question here involved is of no
continuing importahce since it has been definitively re-

‘None of the other cases cited by taxpayer involved « situa-
tion where the income had been accrued by the partnership
prior to the sale and was, therefore, distributable to the ere
For example, i tn Siirfn vy. Commissioner, 183 F. 2d 656 (C.A
7th), cettioraHi deed, 840 U.S. 912, and United States v.
Donoho, 2% ¥. 2d 480 (C.A. 6th), the partnerships reported
on the cash basis. The contention of the government in those
cases was that part of the selling price of the partnership in-
terest represénted an assignment of future income which was
already earned.

Similarly in Berry v. United States, 67 ¥. BA 298 (C.A.
6th), the partnership reported on the completed contract basis,
and the sale was made before the contract was completed. In-
deed, the court distinguished the Snow, Leff and Tunnel cases
on that ground (267 F. 2d at 301).

United States v. Shapiro, 178 F. 2d 459 (C.A. 8th), in-
volved the question whether the part of the selling price
of « partnership interest which was attributable to the sale of
noncapital assets should be treated as ordinary income.
Although part of the selling price also reflected accumulated
profits of the business, that amount was not involved in the
litigation. ,

*See the dissenting opinion of Judge Lindley in Hulbert
(227 F. 2d at 402) in which he states that the majority deci-
sion is irreconcilable with the Meyer case.

solved by Section 751 of the Internal Revenue Code
of 1954, which provides that the amount of the selling
price of a partnership interest that is attributable to
either (1) unrealized receivables of the partnership
or (2) inventory items which have appreciated sub-
. Stantially in value is treated as ordinary income.
See also Section 1221(4) of the 1954 Code; H. Rep.
No: 1337, 83d Cong., 2d Sess., pp. 65, 70-72 (3 U.S.C.
Cong. & Adm. News (1954) 4017, 4091, 4096-4099).

CONCLUSION

For the foregoing reasons, it is respectfully sub-
mitted that the petition for a writ of certiorari should
be denied.

ARCHIBALD Cox,

Solicitor General.
Louis F. OBERDORFER,
Assi vs Attorney General.
Harry Baum,
Dovucias A. Kaun,

Attorneys.
FEBRUARY 1962.

APPENDIX

Internal Revenue Code of 1939 (26 U.S.C. 1952 ed.)
Sec. 181. Partnersuip Nor TAXABLE.

Individuals carrying on: business in partner-

ship shall be liable for income tax only in their
_ individual capacity. ;
Spc. 182. Tax oF PARTNERS.

In computing the net invome of each partner,
he shall inelude, whether dr not distribution is
made to him— ;

* ue * 4 * 7

(e) His distributive share of the ordinary net
income ot the ordinary nét;loss of the partner-
ship, computed as provided in section 183(b).
Src. 183. ComPUTATION OF PARTNERSHIP INCOME.

(a) [as amended by Sectiva 9(c)(1) of the
Individual Ineome Tax Act of 1944, c. 210, 58
Stat. 231] General Rule—Thbe net income of
the partnership shall be coznputed in the same
manner afd on the same basis as in the case of
an individual, except as provided in subsections
(b), (e), and (4).

See. 1987. PAktNensnre Rervurns.

Every pattnérship shall make a return for
each taxable year, stating spetifically the items
of its gross income and the de ‘uetions allowed
by this ree ge and snch a Siete tos

e purpose.of catrying the provisions 0
this chanted as ‘te Oontisientonet with the ap-

proval of the Reeteatiy salt by regulations pre-

scribe, and shall includé itt the teturn the names

and addresses of the indifiduals who would be

entitled to share in the net income if distributed

and the amount of the distributive share of each
(9)

10

individual. The return shall be sworn to by
any one of the partners.

Treasury Regulations 118:

See. .39.113(a) (13)-2. Readjustment of part-
nership interests —(a) When a partner retires
from a partnership, or the partnership is dis-
solved, the partner realizes a gain or loss meas-
ured ‘by the difference between the price
received for his interest and the sum of the
adjusted cost or other basis to him of his in-
terest in the partnership plus the amount of his
share in any undistributed partnership net in-
come earned since he became a partner on
which the income tax has been paid. * * *

* _ * * *

Sec. 39.182-1. Distributive shares of part-
ners.—(a) Each partner is required to include
in his return for his taxable year within whieh
or with which the taxable year of the partner-
ship ends, whether or not distributed :

(1) As part of his gains and losses from
sales or exchanges of capital assets held for
not more than six months, his distributive
share of the gains and losses of the part-
nership from sales or exchanges of capital
assets held for not more than six months.

(2) As part cf his gains and losses from
sales or exchanges of capital assets held for
more than six months, his distributive share
of the gains and losses of the partnership
from sales or exchanges of capital assets
held for more than six months.

(3) His distributive share of the ordi-
nary net income or the ordinary net loss of
the partnership, computed as provided in
section 183(b).

2 * * * *

6.8. COVERRWERT PRINTING OFFICE: (ee

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385601_0101%3A3. Public record. Not legal advice.