16 T.C. 105">*105 The Commissioner has determined a deficiency in petitioners' income tax for the year 1945 of $ 275. The deficiency is due to two adjustments made to the net income shown on the joint return filed by petitioners. Only one of these adjustments is contested. It is explained in the deficiency notice, as follows:

It has been determined that the entire amount of $ 31,500.00 received by the partnership, Taliaferro, Graves, Hutcheson and Fahey, from the executors of the Estate of Clyde A. Barbour, Sr., as provided in the agreement of compromise entered into with the said executors under date of September 6, 1945, constitutes ordinary income from fees for services. Accordingly, your distributive1951 U.S. Tax Ct. LEXIS 307">*309 share of income from the said partnership consists entirely of ordinary partnership income and no portion thereof may be treated as long-term capital gain derived from the sale or exchange of a capital asset.

Petitioners by appropriate assignments of error contest the foregoing adjustment.

16 T.C. 105">*106 FINDINGS OF FACT.

Petitioners are husband and wife who reside in Houston, Texas. Their joint return for the year 1945 was filed with the collector for the first district of Texas at Austin, Texas. Pat N. Fahey will sometimes hereafter be referred to as petitioner.

On or about April 15, 1942, petitioner joined the law firm of Taliaferro, Graves & Hutcheson, and thereafter the firm was known as Taliaferro, Graves, Hutcheson & Fahey. The offices of the firm were in Houston, Texas. The profits of the firm were to be shared equally between Taliaferro, Graves, and Fahey; Palmer Hutcheson, Jr., was not to share in the profits as he had joined the Navy.

At the time petitioner joined the firm, Taliaferro and Graves were representing Mrs. C. A. Barbour and her children in a suit in the United States District Court in which they were plaintiffs, and in which C. A. Barbour, Jr., as executor of1951 U.S. Tax Ct. LEXIS 307">*310 the estate of Clyde A. Barbour, Sr., deceased, and F. M. Law, as executor of said estate, and the First National Bank of Houston, Texas, were defendants. Due to petitioner's business relationship with the bank, he did not desire to participate in the suit against the defendants; therefore, it was agreed between petitioner and the other members of the partnership that he was not to share in any of the fees earned in the Barbour suit.

On June 30, 1941, James R. Parkerson was retained as counsel on a contingent fee basis by Jennie Hobbs Barbour, Jessie Collins Barbour, and William Alsworth Barbour to represent them in the suit against the estate of Clyde A. Barbour, Sr., deceased. A separate contract containing identical provisions to the above-mentioned contract was entered into by James R. Parkerson with Lucille Barbour Holmes and Thomas J. Holmes, Jr., under date of June 8, 1941. A separate contract containing identical provisions to the above-mentioned contract was entered into by James R. Parkerson with Lena Barbour Lewis under date of July 8, 1941.

On August 9, 1941, James R. Parkerson assigned to T. S. Taliaferro, L. W. Graves, Jr., and Palmer Hutcheson, Jr., a one-half undivided1951 U.S. Tax Ct. LEXIS 307">*311 interest in and to the interest which he had in the agreements mentioned above. During the latter part of 1942, due to illness, Parkerson desired to assign one-half of the interest which he had previously retained, or one-fourth of the total interest, for the sum of $ 800. After talking it over with Taliaferro and Graves, petitioner agreed to join them in the purchase of one-half of the interest previously retained by Parkerson in the fees to be earned by Parkerson. Taliaferro, Graves and petitioner borrowed $ 800 from the First National Bank of Houston, Texas, and bought one-half of the interest previously retained by Parkerson in the fees earned and to be earned by him. 16 T.C. 105">*107 A note was given to the bank for $ 800 -- the firm's name was not on the note. Petitioner's name was not mentioned in this assignment by Parkerson, but it was understood that he was to share in whatever was realized for that part of the fee.

The work in connection with the Barbour suit was handled mainly by Graves. Taliaferro also did some work on the case. Petitioner did no work on the case; it was agreed that he would not do so at the time he became a member of the firm. The Barbour suit was compromised1951 U.S. Tax Ct. LEXIS 307">*312 and settled in 1945, and total fees were paid in the amount of $ 42,000. By virtue of the assignment dated August 9, 1941, the firm of Taliaferro, Graves & Hutcheson was entitled to $ 21,000 of the $ 42,000 fee received for their services in the case. By virtue of the assignment dated December 7, 1942, from Parkerson of one-half of his interest in the contingent fee, Taliaferro, Graves and petitioner were entitled to $ 10,500 of the $ 42,000 received.

When time came for distribution, petitioner received a check of Taliaferro, Graves, Hutcheson & Fahey in the amount of $ 2,625, it being stated that this was his share of the $ 10,500. Petitioner contended that he was entitled to $ 3,500 but was advised that the other members of the firm had an agreement with Palmer Hutcheson, Jr., a former partner, which required them to pay a part of the Parkerson fee to Hutcheson. As a result of a settlement, petitioner received a check from Hutcheson in the amount of $ 292.50.

In the partnership return of Taliaferro, Graves, Hutcheson & Fahey for the taxable year 1945, a gain resulting from the one-half interest in Parkerson's part of the fee purchased from him for $ 800 was reported in the amount1951 U.S. Tax Ct. LEXIS 307">*313 of $ 9,700 ($ 10,500 minus $ 800), taxable at 50 per cent, or $ 4,850. In the partnership return, the gain of $ 4,850 was shown as distributable to Taliaferro, Graves, Hutcheson, and Fahey in the amount of $ 1,212.50 each. The balance of the fee received, namely, $ 21,000 was reported as ordinary income on the partnership return and all of this was reported as distributable to T. S. Taliaferro and L. W. Graves, Jr.

In petitioner's income tax return for 1945, he reported as capital gain his gain resulting from the purchase and subsequent collection of an interest in the Parkerson fee. He took into income $ 1,324.92 which was 50 per cent of his net gain from this purchase and collection and he explained it in his return, as follows:

I purchased for $ 266.66 1/3 a 1/6 interest in the contingent fee of James R. Parkerson of Franklin, Louisiana in the case of Barbour vs. Barbour then pending in the U. S. District Court for the Southern District of Texas. When the case was finally settled, I received as 1/6 of the fee, $ 2,916.50 leaving a net of $ 2,649.84.

16 T.C. 105">*108 OPINION.

We have but one issue in this proceeding and that is whether the net amount which petitioner received by virtue1951 U.S. Tax Ct. LEXIS 307">*314 of his purchasing a one-third interest in one-half of James R. Parkerson's interest in a contingent fee contracted for in the litigation of Barbour v. Barbour pending in the United States District Court for the Southern District of Texas was all taxable as ordinary income, as the Commissioner has determined, or was taxable as capital gain and only 50 per cent thereof to be taken into income, as petitioners have treated it in their income tax return and still contend in the brief which they have filed.

The applicable statute is printed in the margin. ¹

1951 U.S. Tax Ct. LEXIS 307">*315 For the purpose of deciding the only issue which we have here to decide we will assume, without deciding, that the interest which petitioner purchased in 1942 in the Parkerson contingent fee was a capital asset within the meaning of section 117 (a) (1), I. R. C. However, even assuming that fact, petitioner cannot prevail. What he received in 1945 by reason of his ownership of part of the Parkerson fee was not received as a result of a sale or exchange of his interest in the fee; it was merely a collection of his interest in the fee. Petitioner seems to be under the impression that because he purchased his interest in the Parkerson fee, then anything which he collected in excess of the purchase price would be capital gain. This erroneous impression of petitioner is clearly indicated from the following quotation from his brief, wherein he says: "Now since the rights or benefits under Parkerson's sale or assignment of December 1942 was a capital asset and was sold to him and his associates, the gain which accrued to petitioner Fahey was a capital gain."

Petitioner seems to overlook that provision in section 117 (a) (4) which says: "The term 'long-term capital gain' means gain from1951 U.S. Tax Ct. LEXIS 307">*316 the sale or exchange of a capital asset held for more than 6 months." It is true, of course, that petitioner had owned and held his interest in the Parkerson fee for a period of more than 6 months, but in collecting it he did not sell or exchange anything. If, prior to the 16 T.C. 105">*109 compromise in 1945 of the Barbour litigation, petitioner had sold or exchanged his interest in the Parkerson fee, then there might have been some force in his contention that his gain from the sale or exchange of his interest in such contingent fee would be taxable as capital gain. But what happened was this: In 1945, the Barbour litigation was brought to an end by a compromise between the parties and as a result of the compromise, the lawyers received $ 42,000 as contingent fees. Of this amount, $ 21,000 was paid to Taliaferro and Graves for their legal services in the litigation. Petitioner received no part of that $ 21,000 because he had rendered no services in the litigation and it had been agreed beforehand that he would not take part in the suit and would not receive any part of his firm's fees for legal services rendered in the litigation. Of the remaining $ 21,000, $ 10,500 was paid to Parkerson1951 U.S. Tax Ct. LEXIS 307">*317 as the original lawyer in the case and the other $ 10,500 was paid over to Taliaferro, Graves and Fahey, not because of any legal services which they had rendered in the litigation, but because of a purchase for $ 800 which they had made in 1942 of one-half of Parkerson's interest in the contingent fee. Of this latter $ 10,500, petitioner received the amount which is here in question.

As we have already pointed out, he received his part of this $ 10,500, not as a result of any sale or exchange of his interest in the Parkerson fee but as a collection or settlement of it. That sort of a situation does not bring the gain which he realized as a result of the collection which he made within the capital gains provision of section 117, I. R. C. See Hale v. Helvering, 85 Fed. (2d) 819, affirming 32 B. T. A. 356. In the Hale case there was a compromise of notes for less than face value and the taxpayer claimed there was a sale or exchange of the notes within the meaning of the capital gains provision of the statute. In deciding the issue against the taxpayer, we said:

* * * The petitioners did not sell or exchange the mortgage1951 U.S. Tax Ct. LEXIS 307">*318 notes, and consequently an essential condition expressly required by the statute has not been met and no capital loss has been suffered. Cf. Mont S. Echols, 24 B. T. A. 1127; aff'd., 61 Fed. (2d) 191; John H. Watson, Jr., 27 B. T. A. 463. * * *

The Court in affirming our decision held that there was no sale or exchange of the notes and in so holding, the Court said:

* * * There was no acquisition of property by the debtor, no transfer of property to him. Neither business men nor lawyers call the compromise of a note a sale to the maker. In point of law and in legal parlance property in the notes as capital assets was extinguished, not sold. In business parlance the transaction was a settlement and the notes were turned over to the maker, not sold to him. * * *

We think the rationale of Hale v. Helvering, supra, is controlling here and on this issue we hold against petitioners. Cf. Fairbanks v. United States, 306 U.S. 436">306 U.S. 436.

Decision will be entered for the respondent.