7 T.C. 519">*519 This proceeding involves a deficiency in income tax for the taxable year 1941 in the amount of $ 914.65. The petitioner denies the deficiency and claims an overpayment of $ 15.14.

The sole issue is whether the respondent erred in including in the taxable income of the petitioner, on the ground that it was a capital expenditure, his proportionate share of partnership income which had been paid by the partnership to the estate of a deceased partner.

7 T.C. 519">*520 FINDINGS OF FACT.

The petitioner is Raymond S. Wilkins, 1946 U.S. Tax Ct. LEXIS 106">*108 an individual, who resides at Winchester, Massachusetts, and who filed his income tax return with the collector for the district of Massachusetts.

In 1941 the petitioner was a member of the law firm of Palmer, Dodge, Barstow, Wilkins & Davis, in Boston. He had been a partner in that firm or in predecessor firms since 1922, and had been connected with it since 1915. The petitioner resigned from the firm in January 1944, at which time he was appointed a justice of the Massachusetts Supreme Judicial Court. The partnership agreement in effect at January 1, 1941, had been operative since January 1, 1934.

On March 3, 1941, one of the partners, Francis V. Barstow, died. A new partnership made up of the surviving partners was formed April 1, 1941.

Paragraph 5 of the agreement in effect at the date of Barstow's death provided as follows:

5. In case of the death of any partner, the partnership shall not be deemed to be dissolved and the value of such partner's interest in the assets and business of the firm shall be taken to be a sum equivalent to his percentage of one quarter of the amount distributed by this firm and its predecessors as net profits during a period of two years next preceding1946 U.S. Tax Ct. LEXIS 106">*109 the death, the term "his percentage" meaning the percentage of the profits to which he was entitled at the time of his death. The sum thus determined to represent the value of such partner's interest in the assets and business of the firm shall be paid to his estate in such installments as the surviving partners shall find convenient, provided that at least one half of the sum shall be paid within six months and the whole within a year. The partnership shall not be deemed to possess any good will, and if upon the death of any partner the surviving partners or a majority in interest of them shall continue the practice of law as a firm they shall have the right to use the name of the deceased partner as a part of the firm name if they so desire.

Pursuant to the provisions above set out, and in line with a provision in the new agreement entered into on April 1, 1941, to the effect that the interest of the estate of Francis V. Barstow in the profits of the firm should be satisfied by a payment of $ 1,537.46 on April 15, 1941, and further payments of $ 1,050 on the 15th day of each of the succeeding 10 months, the partnership distributed the aggregate sum of $ 10,587.46 ¹ to Barstow's1946 U.S. Tax Ct. LEXIS 106">*110 estate.

The return filed by the partnership was a return for the full calendar year 1941 and it included the income of the firm in existence at Barstow's death as well as the income of the firm in existence thereafter. The return set forth the amounts that had been distributed to each of the partners, including the amount distributed to Barstow 7 T.C. 519">*521 during the period of that year while he was alive, and it reflected the sum in question as a distribution to his estate after his death.

The law firm, which had originated in 1887, had no real capital. Its income was derived from personal services and the few assets it had, such as books, typewriters, office supplies and fittings, and a life insurance policy on the life of Robert G. Dodge, one of the senior partners, were not regarded by the members as items of a capital nature in which they would have an interest upon retirement or death. The firm did not have a lease1946 U.S. Tax Ct. LEXIS 106">*111 on its office space. Upon admission into the firm none of the partners had ever made a capital contribution, nor had any member ever paid anything when his percentage of interest in the firm was increased. It has long been the custom of the firm, and the understanding of all partners, that upon the death or retirement of a member the surviving partners would account to him or his estate for his share of the firm's earnings for services rendered, whether billed or not, down to the date of his death. That was understood to be the only interest of a deceased or retiring member. The furniture and equipment were to belong to a majority in interest of the partners if they desired to continue the practice of law.

The petitioner herein retired from the firm in 1944 and upon his retirement the firm settled with him in the same manner as it did with the Barstow estate. Within the past 25 years the firm has settled with estates of at least three deceased members, including Barstow. One partner died in 1920. At the time of his death the agreement provided that, "In case of the death of any of us during the partnership his representatives shall be entitled to the like share of the net profits1946 U.S. Tax Ct. LEXIS 106">*112 on any business previously transacted."

Following that partner's death, the firm apportioned every bill sent out as between services rendered prior to and subsequent to his death. The process dragged on from 1920 to 1927, when the final payment was made to the estate.

By an agreement executed October 25, 1920, to which Francis V. Barstow was a party, it was provided that in the event of the death or retirement of a member the partnership should not be deemed to be dissolved and that such partner's interest should be ascertained by the surviving partners or, in case of disagreement, by a majority in interest of them. In 1930, to avoid a repetition of that cumbersome process and unsatisfactory method and, at the same time, to account to a deceased partner's estate for his share of profits earned on services rendered prior to his death, the firm adopted the rule-of-thumb measurement hereinbefore set forth. Under the new arrangement the sum fixed was to represent the decedent's share of the earnings. The formula was based upon their prior experience and it was thought by all the partners that the amount to be received by any one of them 7 T.C. 519">*522 or their estate through its application1946 U.S. Tax Ct. LEXIS 106">*113 would be substantially the same amount as would be obtained if each item were separately accounted for, as had been the case under their prior agreement.

In his deficiency notice the respondent held that the payment to the estate of Barstow was a purchase of his interest in the old partnership by the individual members of the new one, and he accordingly increased the petitioner's share of the partnership income by the sum of $ 1,861.84, which was his proportionate share of the total payment.

OPINION.

Respondent contends that the case of W. Frank Carter, 36 B. T. A. 60, is controlling of decision here. That case, like this one, involved a law partnership and the effect upon the tax liability of surviving partners of payments made to the estate of a deceased partner. In that case the partnership agreement provided for the payment to the deceased partner's estate of a sum equal to one-half the amount actually received by the deceased partner during the two years immediately preceding his death, in lieu of all interest of his representatives in uncollected fees and in the library and office equipment of the firm, and in full payment for his "interest in1946 U.S. Tax Ct. LEXIS 106">*114 the firm and its assets." Here the partnership agreement provided for a payment equal to the deceased partner's percentage of one-fourth of the net profits distributed by the firm during the two years preceding death, such sum representing his "interest in the assets and business of the firm." There, as here, the payment was of a definitely ascertainable sum, not payable out of fees subsequently collected by the firm; and in case no fees had been collected within the time fixed for payment, the estate would still have been entitled to receive the amount agreed upon.

It is thus apparent that there are many points of similarity between the two cases. The decision in the Carter case, however, was rested on the conclusion that the surviving partners "purchased all of the interest of the deceased [partner] in the firm and its assets." While the written agreement in the instant case speaks of the payment as representing the deceased partner's "interest in the assets and business of the firm," thus indicating that it was, at least in part, in consideration for an interest in partnership assets, the evidence is overwhelmingly to the effect that such a literal reading does not reflect1946 U.S. Tax Ct. LEXIS 106">*115 the true agreement and understanding of the partners. Each partner had long understood that upon his death or retirement the only right he or his estate had was to his share of earned but uncollected fees. All the members had interpreted the agreement as providing a convenient rule of thumb for ascertaining or approximating the amount thereof 7 T.C. 519">*523 and a means of avoiding an administration of the partnership or a long accounting drawn out over a period of several years.

No incoming partner had ever paid in any capital upon his admission to the firm. The nature of the firm's business activity was such that capital was not a factor of any real significance. The books, typewriters, office supplies, etc., were merely incidental. The firm had no lease on its office space. In the partnership agreement it was expressly provided that the firm should not be deemed to possess any good will. In these circumstances, we can not agree with respondent that the Carter case is a complete answer to the problem presented here. In no true sense can the transaction before us be characterized as the purchase and sale of a partnership interest.

On the other hand, it does not follow that 1946 U.S. Tax Ct. LEXIS 106">*116 the surviving partners are entitled, as they did in the partnership return for 1941, to treat Barstow's estate as a partner in a continuing or successor firm and the payment made to the estate as a distributive share of partnership income. The agreement neither provided nor contemplated that his estate should be a partner in the firm, or that it should have a share in or percentage of partnership profits, as such, for a period of years or other fixed time following his death. The payment to which the estate was entitled was of a sum certain, payable at all events, having no aspects of a distributive share of partnership income. In this respect the instant case is unlike Bull v. United States, 295 U.S. 247">295 U.S. 247, and Walter T. Gudeon, 32 B. T. A. 100, upon which petitioner relies. For the same reason, our recent decision in Charles F. Coates, 7 T.C. 125, is also distinguishable.

Nor does it follow that the surviving partners, in computing partnership income, are entitled as a matter of course to deduct the payment to Barstow's estate in its entirety in the year the payment was made. Although1946 U.S. Tax Ct. LEXIS 106">*117 the partners considered that the formula agreed upon provided for a payment equivalent to a deceased partner's share of earned but uncollected fees, it is not suggested that all such fees in which the deceased had an interest were collected in the period in which payment was made to his estate. According to their own past experience in the death of one former partner, a period of almost seven years was required to complete the collections. If none, or only a small part thereof, were collected in the year before us, to permit a deduction of the entire payment to the estate in that year would distort, and not clearly reflect, the partnership income for the period.

In substance, under the partnership agreement and by virtue of the payment made, the surviving partners acquired from the decedent or his estate the right to collect in future years when due, and keep as their own, fees in which the decedent had an interest. For practical 7 T.C. 519">*524 purposes it was equivalent to the acquisition of a receivable for a cash consideration. If an individual, for example, should purchase an account receivable to be collected in a future period, clearly there would be no warrant under the revenue1946 U.S. Tax Ct. LEXIS 106">*118 laws for deducting, against his current income from other sources, his capital outlay in the year he made it. We think the same is true of a partnership. Both the statute and the regulations provide that, in general, the net income of a partnership is to be computed in the same manner and on the same basis as in the case of an individual. Sec. 183, Internal Revenue Code; sec. 19.183-1, Regulations 103.

It follows, however, that in future periods as the fees are collected they will not be income in toto to the partnership, but only to the extent that they exceed the pro rata part of the capital outlay allocable thereto; and, if they do not exceed, but are less, a loss will result. If this record afforded any evidence as to what amounts, if any, of the fees in which Barstow had an interest were collected in the taxable year, we could perhaps make an appropriate downward adjustment of the partnership income for the year before us. But there is no evidence at all in this connection. It would be an assumption of fact, without any foundation in the record, and doubtless even a perversion of fact, to say that all such fees were collected within the year.

It is apparent that, as1946 U.S. Tax Ct. LEXIS 106">*119 a result, a detailed and possibly intricate accounting process will be required on the part of the firm; and, to that extent, the purpose for which the particular provision of the partnership agreement here under consideration was adopted will not be accomplished. Doubtless, under the circumstances of such a case as we have before us, that result is a regrettable one; but we know of no other way under the law as it now exists in which the matter may be handled properly. We may observe, however, that the Bull, Gudeon, and Coates cases, supra, point to a method under which the purpose might be accomplished with the desired result.

For the reasons stated, the respondent's determination is approved.

Decision will be entered for the respondent.