By this proceeding petitioners challenge respondent's determination of deficiencies in income and victory tax for the year 1943 as follows:
Petitioner Deficiency
William J. Morrison, Jr., individually and as Administrator of Estate of Mabel D. Morrison, Deceased .......................... $797.58 Estate of Frank A. Morrison, Deceased, Althea K. Morrison, Executrix ...................... 2,130.48 Francis V. D. Lloyd ........................... 1,459.69 Sydney V. Stoldt and Evelyn M. Stoldt ....... 283.67
The above deficiencies result in part from respondent's determination that compensation in the amount of $19,792.16 received in 1943 by petitioners through the law partnership of which they were members, as compensation for personal services, was not subject to the provisions of section 107, Internal Revenue Code. Also in issue is the question whether, if their compensation is subject to the provisions of section 107, it is subject to tax computation at the reduced amount provided by the Current Tax Payment Act of 1943.
FINDINGS OF FACT.
Some of the facts have been stipulated. They are hereby found accordingly.
Petitioners filed their individual Federal income and victory tax returns, and the law partnership, of which they were members, filed its partnership income tax return for the taxable year 1943 with the collector of internal revenue, district of New Jersey. All petitioners and the partnership were, for income tax purposes, on a cash basis.
During the taxable year William J. Morrison, Jr., Frank A. Morrison, Francis V. D. Lloyd, and Sydney V. Stoldt were members of the law partnership of Morrison, Lloyd Morrison, hereinafter called the partnership, with offices at Hackensack, New Jersey. The partnership's name was changed on March 1, 1946, to Morrison, Lloyd Griggs.
On April 20, 1936, William F. Burke, John N. Platoff, and James D. Moore were appointed by the Court of Chancery of New Jersey, hereinafter called the chancery court, as receivers and trustees of Fairview Cemetery Co., hereinafter called Fairview, a New Jersey corporation. The petition of James D. Moore is presented in a related proceeding in Docket No. 17007. By its order of June 2, 1936, the chancery court authorized the receivers to employ the partnership as their solicitors and counsel, and pursuant to that order the partnership entered employment the same day.
Periodic reports and accounts were filed with chancery court by the receivers. The periods of time covered by the first eight of those reports and accounts, the amounts of compensation received by the partnership following the chancery court's approval of each report and account, and the years in which the amounts were received, are as follows: Report Period First intermediate ........ Apr. 20, 1936, to Sept. 30, 1936 ..... Second intermediate ....... Apr. 30, 1936, to Dec. 31, 1936 ...... Third intermediate ........ Jan. 1, 1937, to Dec. 31, 1937 ....... Fourth intermediate ....... Jan. 1, 1938, to Dec. 31, 1938 ....... Fifth intermediate ........ Jan. 1, 1939, to Dec. 31, 1939 ....... Sixth intermediate ........ Jan. 1, 1940, to Dec. 31, 1940 ....... Seventh intermediate ...... Jan. 1, 1941, to July 9, 1942 ........ Eighth intermediate ....... July 9, 1942, to Dec. 31, 1943 ....... Report Compensation Year received First intermediate ........ None Second intermediate ....... $3,500 1937 Third intermediate ........ 3,000 1938 Fourth intermediate ....... 3,000 1939 Fifth intermediate ........ 3,000 1940 Sixth intermediate ........ None Seventh intermediate ...... 32,500 1943 Eighth intermediate ....... None Subsequent to those set out above, the receivers filed three intermediate reports and accounts. The periods of time covered and the amounts of compensation received by the partnership following the chancery court's approval of each are as follows: Period Compensation Year received Calendar year 1944 .......... $750.00 1945 Calendar year 1945 .......... 1,968.13 1946 Calendar year 1946 .......... 3,000.00 1947 The management of Fairview Cemetery had intermingled its funds with those of other companies in which they were interested, had conveyed cemetery lands to another corporation, and had issued bonds in excess of the land value. When the receivers were appointed, numerous claimants, including bondholders and stockholders, filed claims against Fairview.
On or about December 20, 1939, upon instructions from the receivers, the partnership began plans to reorganize Fairview by preparing for chancery court a report of recommendations from information supplied by the receivers. The partnership represented the receivers in a suit captioned Burke v. Gunther, brought by them in chancery court against about 50 separate defendants, to determine the rights of claimants and to carry out the reorganization plan. In its decree, the chancery court declared the bonds invalid and ordered the lands reconveyed to Fairview. Upon denial of a rehearing, an appeal was taken. Pending the appeal, on July 9, 1942, the chancery court modified its earlier decree to permit the parties to reach a compromise, on condition that the modification would become effective only if the parties succeeded in securing the necessary consents to the compromise.
After July 9, 1942, the partnership proceeded to complete the reorganization, which was substantially accomplished by January 1, 1943. Thereafter Fairview continued to operate as a cemetery, and the duties of the receivers became largely ministerial.
The seventh intermediate report and account was filed in chancery court on December 11, 1942. Although that report contained a record of receipts and expenses covering only the period of January 1, 1941, to July 9, 1942, it contained a report of activities of the receivers to December 11, 1942. In requesting compensation for services, the report prayed "That an allowance may be made to petitioners on account of their services as receivers and trustees, and to petitioners' solicitors for their services in the administration of this trust." On December 11, 1942, chancery court issued an order requiring Fairview and its creditors to show cause on December 21, 1942, why the seventh intermediate report and account should not be approved and an allowance made to the receivers and their counsel.
In its order of January 4, 1943, chancery court stated:
And the matter having been heard on the return day of said order to show cause:
It is, on this 4th day of January, Nineteen Hundred and Forty-three ORDERED that the Seventh Intermediate Report and Account of the aforesaid Receivers and Trustees is hereby approved and allowed; and a further allowance of $12,500.00 each be and is hereby made to William F. Burke and James D. Moore as Receivers and Trustees as aforesaid; and a further allowance of $32,500.00 be and is hereby made to Morrison, Lloyd and Morrison, Esqs. solicitors for the said Receivers and Trustees for their services in the administration of this Trust.
On June 14, 1944, the receivers filed their eighth intermediate report and account, in which they stated:
On December 11th, 1942, petitioners filed with this Court their Seventh Intermediate Report and Account covering the period from January 1, 1941, to July 9, 1942, and by an Order of this Court made on January 4, 1943, upon the return of an Order to Show Cause, said Report and Account was in all things approved and confirmed * * *
The eighth intermediate report and account made no request for compensation, and none was allowed in the chancery court's order of September 18, 1944, approving that report and account.
The receivership of Fairview is still in force and effect, with Burke and Moore acting as receivers and trustees. The partnership has at all times handled whatever legal work was required in the receivership as it went along. The successor partnership is still acting as solicitors and counsel for the receivers.
Of the $32,500 allowed by chancery court in its order approving the seventh intermediate report and account, $19,792.16, being $32,500 less "disbursements" of $12,707.84, was reported on the partnership return for the calendar year 1943, and is the amount in issue in these proceedings. Of the above $19,792.16, the partners received their respective shares in 1943 as follows:
William J. Morrison, Jr. ..................... $4,948.05 Frank A. Morrison ............................ 6,729.33 Francis V. D. Lloyd .......................... 6,729.33 Sydney V. Stoldt ............................. 1,385.46
In its return for the taxable year, the partnership reported the above $19,792.16 as distributed ratably to the partners over the years 1940, 1941, and 1942, $6,597.39 in each year.
Joint returns for the taxable year were filed by petitioners Sydney V. Stoldt and Evelyn M. Stoldt, husband and wife; and by petitioner William J. Morrison and his deceased wife, Mabel D. Morrison, whose estate is a petitioner. The estate of Frank A. Morrison, deceased, is also a petitioner. In schedules attached to their returns for the taxable year entitled "Adjustment of Prior Year Tax Returns for Section 107 (a) Income," the partners apportioned their shares of the $19,792.16, received in the taxable year, over the years 1940, 1941, and 1942, as follows: Partner 1940 1941 1942 Total William J. Morrison ..... $1,649.35 $1,649.35 $1,649.35 $4,948.05 Frank A. Morrison ....... 2,243.11 2,243.11 2,243.11 6,729.33 Francis V. D. Lloyd ..... 2,243.11 2,243.11 2,243.11 6,729.33 Sydney V. Stoldt ........ 461.82 461.82 461.82 1,385.46 Respondent has determined "that such income is not subject to allocation under section 107 of the Internal Revenue Code."
OPINION.