3 T.C. 686">*686 These consolidated proceedings involve income tax deficiencies for 1940 as follows: Ralph G. Lindstrom, $ 347.89; Katherine Lindstrom, $ 325.52. The issue is whether petitioners are entitled to the benefits of section 107 of the Internal Revenue Code with respect to legal fees received by Ralph1944 U.S. Tax Ct. LEXIS 137">*138 G. Lindstrom in 1940 as compensation for services rendered over a period of years.

FINDINGS OF FACT.

Petitioners, husband and wife, reside in Beverly Hills, California. Their 1940 income tax returns were filed on the community property basis with the collector of internal revenue for the sixth district of California at Los Angeles.

On May 1, 1936, Arthur W. Eckman and Ralph G. Lindstrom consolidated their separate law practices, and, as equal partners, formed a partnership for the practice of law under the firm name and style of Eckman and Lindstrom. Eckman brought into this partnership, as clients, various members of the Joughin family, some of whom he had represented for many years. Eleanor Joughin Mattei was a member of this Joughin family. Her husband was Andrew Mattei, Sr. Andrew and Eleanor Mattei, sometimes hereinafter referred to as husband and/or wife, had three children, who still survive -- Andrew Mattei, Jr., Thea Mattei Gleason, and Anne Mattei Anderson.

Prior to the formation of the partnership and in 1931 the husband and wife consulted Eckman with reference to setting up a trust arrangement for their creditors, as they were in very serious financial difficulties. 1944 U.S. Tax Ct. LEXIS 137">*139 They requested Eckman to prepare certain deeds and 3 T.C. 686">*687 assignments in an effort to save something from their fortune. The deeds and assignments were made to Miss Minnie Joughin, a sister of the wife, whom they owed $ 30,000, and were signed and recorded. Shortly thereafter the largest creditor of the Matteis, the Farmers & Merchants Bank, in order to break the conveyances, which the Bank thought were in violation of the rights of creditors, "took steps to have a bankruptcy proceeding." For about two years thereafter Eckman, together with Alva E. Snow, an attorney in Fresno, California, negotiated with creditors of the husband and wife in an effort to avoid the bankruptcy proceedings and to secure a creditors' trust agreement. Their efforts were successful and two trust instruments were prepared -- one for the wife, who had separate property acquired by inheritance, and one for the husband. These trust instruments were executed on or before April 6, 1933.

Under the trust agreements all property belonging to the husband and wife was conveyed to three trustees for the benefit of creditors and it was provided that any after-discovered assets would also be impressed with the1944 U.S. Tax Ct. LEXIS 137">*140 trust. The husband and wife were allowed $ 200 per month and were permitted to live on the ranch property at Fresno. The trust corpus was to be handled by the Farmers & Merchants Bank.

With the execution of the trust instruments Eckman completed his legal services and he received a fee of $ 1,600 out of the trust property, less nominal expense items, in full payment for legal services rendered. At or about the same time Eckman received a $ 500 fee from Minnie Joughin, in payment for legal services rendered to her individually in connection with the creation of the creditors' trust for the Matteis.

In April 1933 Eleanor and Andrew Mattei employed Eckman to see that the trusts were properly administered by the trustees. He maintained contact with the Farmers & Merchants Bank, which called upon him in connection with decisions under the trust agreements or where the cooperation of the husband and wife was required. Minnie Joughin, as a creditor of the Matteis, was also interested in the administration of the creditors' trusts, and she and the Matteis indicated to Eckman that, if any equity were realized by working out a composition with creditors, Eckman would be compensated for1944 U.S. Tax Ct. LEXIS 137">*141 the services he was rendering. Debts amounting to approximately $ 850,000 had to be compromised in order for the Matteis to realize any equity. Continuously thereafter, and as occasion required, Eckman rendered services in supervising the trusts and in trying to work out an equity in each of the years 1933 to 1940, inclusive.

Eleanor Joughin Mattei died testate on February 14, 1934. No probate proceedings were started at her death with respect to her estate, as it appeared to be insolvent. Andrew Mattei died April 16, 1936, and the Bank of America filed petitions of letters testamentary and probated the will, which was admitted to probate on May 11, 1936. 3 T.C. 686">*688 A petition for probate of the wife's will was filed early in April 1937, and the will was admitted to probate April 23, 1937. Minnie Joughin was appointed administratrix c. t. a. of her sister's estate. The solvency of the estates of the decedents depended upon whether a successful composition of the debts and obligations of the trust estates could be secured. The heirs of the decedents were the three children aforementioned who participated practically the same in the two estates.

After the death of the wife and1944 U.S. Tax Ct. LEXIS 137">*142 later after the death of the husband, Eckman continued to supervise the administration of the trusts and to work out a compromise agreement with the creditors of the deceased husband and wife. From and after May 1, 1936, Lindstrom participated in all matters handled by the partnership. Upon the probate of the deceased wife's will the partnership was employed as counsel by the administratrix appointed by the court. The Bank of America, as personal representative of the deceased husband's estate, employed other counsel. After the deaths of their mother and father the three children continued the arrangement with Eckman, and later with the partnership, on the same basis on which Eckman had been employed by their parents.

In 1938 and 1939 dispositions of trust assets and compromises effected with all the creditors established that there would be a substantial equity for the heirs. The compromise with creditors was entirely completed in the last month or two of 1939 and the first month of 1940, and the equity was realized for the heirs. When the compromise was concluded the heirs agreed that Eckman and Lindstrom were entitled to a $ 25,000 fee and each separately executed on December1944 U.S. Tax Ct. LEXIS 137">*143 29, 1939, or January 2, 1940, a letter addressed to the Bank of America as executor of the will of Andrew Mattei, deceased, reading in part as follows:

As an heir and beneficiary A. Mattei Estate, I approve payment of total fee to Eckman and Lindstrom $ 25,000.00 and request you pay when transaction is completed and funds available $ 18,000.00 from A. Mattei Estate $ 7,000.00 to be paid by Eleanor Mattei Estate.

On January 11, 1940, Minnie Joughin, as administratrix of her deceased sister's estate, filed a petition with the probate court (Superior Court of Fresno County), which reads in part as follows:

That your petitioner and Eckman and Lindstrom, her counsel, with the express approval of said three children of Andrew Mattei and Eleanor J. Mattei, and express direction of said Bank of America National Trust and Savings Association, as Executor of the Will of said Andrew Mattei, have conducted extensive negotiations looking to a possible compromise settlement with the creditors of said two trusts, and said Eckman and Lindstrom have performed varied and extensive legal services in connection with said trusts and deceased estates which have resulted in effecting a discount of principal1944 U.S. Tax Ct. LEXIS 137">*144 and interest on the debts and obligations of said trusts and estates of approximately $ 500,000.00, and such compromise and composition with creditors has 3 T.C. 686">*689 resulted in producing a net distributable estate to or for the benefit of said three children of a value of approximately $ 300,000.00.

* * * *

That your petitioner waives any right to special or extraordinary fees for the services having to do with the compromise with said creditors and respectfully represents to the Court that the reasonable value of the services rendered by Arthur W. Eckman and Eckman and Lindstrom in that connection is $ 25,000.00; and she particularly calls attention to the Court that the services of Arthur W. Eckman and Eckman and Lindstrom were rendered freely and without stint, particularly during the past two or three years, and any compensation whatever to be received by them was wholly dependent upon the successful completion of said compromise negotiations, since the debts and obligations against the property of said estates exceeded the value of the assets thereof.

During January 1940 the court found that the firm of Eckman and Lindstrom had "performed a great amount of extraordinary legal1944 U.S. Tax Ct. LEXIS 137">*145 services" for the deceased wife's estate "in initiating, planning, working out and consummating * * * a compromise settlement and discharge of all indebtedness" of Eleanor J. Mattei, deceased, secured by lien on the assets and property of her estate; that Eckman and Lindstrom were "entitled to reasonable compensation for the extraordinary services so rendered by them;" and that "the reasonable value of said services is largely in excess of" $ 7,000; and that such services rendered by them benefited decedent's estate and were rendered pursuant to an agreement with the children, who were entitled under the wills of their parents to receive the residue of the estates of both decedents, that they would pay a fair and reasonable fee for such special services. The court ordered the administratrix of the estate of Eleanor Mattei, deceased, "to pay to her attorneys, Eckman and Lindstrom, the further sum of $ 7,000.00, or such part thereof as can be paid out of the residue of said estate after the payment of all other fees, taxes and expenses as further extraordinary fees for services rendered by said Eckman and Lindstrom as hereinabove set forth."

The other fees mentioned in the above court1944 U.S. Tax Ct. LEXIS 137">*146 order were statutory or fees for extraordinary services rendered by the partnership as counsel for the personal representative. Such fees, aggregating $ 3,772.45 from April 1933 to April 1943, related to legal services rendered in proceedings separate and distinct from the creditors' proceedings, except the $ 1,600 paid Arthur W. Eckman in April 1933. The amounts of these fees were statutory or were fixed by the court as compensation for services rendered to the personal representative of the deceased wife's estate.

Upon petition by the personal representative of the estate of Andrew Mattei, deceased, a like order was entered on or about June 21, 1940, wherein $ 18,000 was allowed by the court to Eckman and Lindstrom as a fee for extraordinary legal services rendered. Neither of the decedents' estates had been closed at the date of hearing. The 3 T.C. 686">*690 assets of both estates had been so intermingled that the closing of the estates awaited the sale of certain remaining assets.

During 1940 the partnership of Eckman and Lindstrom received $ 25,000 pursuant to the aforesaid court orders as compensation for extraordinary legal services rendered. This fee was divided equally between1944 U.S. Tax Ct. LEXIS 137">*147 the partners. Ralph G. Lindstrom reported one-half of the $ 12,500 fee in his income tax return for 1940, and his wife reported the other one-half thereof. In assessing the taxes shown on their 1940 returns each of the petitioners spread the tax on the fee over the entire period of services dating from 1933 until 1940, under section 107 (a) of the Internal Revenue Code.

In determining the deficiencies the respondent denied petitioners the benefits of section 107 of the Internal Revenue Code.

OPINION.

Section 107 was added to the Internal Revenue Code by section 220 of the Revenue Act of 1939, set forth in the margin. ¹ The amendment of section 107 by section 139 of the Revenue Act of 1942 does not apply as it relates only to taxable years beginning after December 31, 1940.

1944 U.S. Tax Ct. LEXIS 137">*148 Respondent contends that petitioners are not entitled to the benefits of section 107 because (a) the services have not yet terminated; (b) the $ 25,000 fee is less than 95 percent of the total of the amounts received ($ 25,000 plus $ 3,772.45); and (c) the services of Ralph G. Lindstrom were commenced less than five years prior to the receipt of the fee in question. Our interpretation of the statute makes it unnecessary to consider respondent's arguments (a) and (b), as it is our opinion that respondent must be sustained under (c), supra.

Petitioners concede that Ralph G. Lindstrom rendered no legal services in earning the fee prior to May 1, 1936. Our findings show that Lindstrom became a member of the partnership of Eckman and Lindstrom on the latter date. The findings further show that one of the cases brought into the partnership by Eckman was the supervision 3 T.C. 686">*691 of the creditors' trusts and the planning and working out of a compromise settlement with the creditors. Lindstrom and the partnership, therefore, had absolutely no part in earning the fee prior to May 1, 1936. The statute applies in cases of compensation received for personal services rendered "by an individual1944 U.S. Tax Ct. LEXIS 137">*149 in his individual capacity, or as a member of a partnership, and covering a period of five calendar years or more from the beginning to the completion of such services * * *." Lindstrom's services individually and as a member of a partnership did not cover a period of five years or more. The services of the partnership did not cover a period of five year or more.

The only way that Lindstrom could meet the requirements of section 107 would be to tack Eckman's individual services onto the services rendered by the partnership. We do not believe the relief afforded by section 107 covers a situation such as that presented here. The personal services rendered by the individual must cover a period of five years or more from beginning to completion of the services (1) in his individual capacity, or (2) as a member of a partnership. He can not add to his services as a partner the individual services of another partner rendered prior to the creation of the partnership and thereby procure the benefits of section 107. Cf. Frank M. Slough, 3 T.C. 565; Harry L. Additon, 3 T.C. 427; John Bell Keeble, Jr., 2 T.C. 1249;1944 U.S. Tax Ct. LEXIS 137">*150 and Estate of Edward W. Clark, III, 2 T.C. 676.

Decisions will be entered for the respondent.