With respect to the affirmative act contention, we can not see how petitioner's position is strengthened, for, exclusive of any further act by the company, it is apparent from the facts that some additional affirmative act was required of decedent's mother. This is indicated in the portion of the letter of June 8, 1939, quoted in our findings. So far as the record shows, nothing further was done by Agnes Tuohy after the writing of that letter to perfect the selection of option 1. As to the equity argument, it should be noted that the cases cited by petitioner involve situations where the insured had done all he could to effect a change of beneficiary in the policy, but died before the formal documents could be executed. In those cases death came within hours or a few days after the designation of change in the policy and the question was whether "the efforts of the insured prior to his death were effective to change the beneficiary under the policies so as to make the proceeds payable to the beneficiary." Estate of Burnett, supra. The California court there held that they were effective. Here, however, Agnes Tuohy apparently did not perform what was required of her, although there was ample time to do so. The letter in which she indicated a desire to select option 1 was written on June 8, 1939, and she died on November 16, 1939. We therefore must conclude that she never perfected an election of option 1. * Thus, having so decided, we must next determine whether the election of option 1 by decedent constituted a transfer of property within the meaning of section 811 (c), as respondent contends. We think, in view of Estate of Mabel E. Morton, 12 T. C. 380, that that question must be answered in the affirmative. In that case decedent was a beneficiary of proceeds of policies of insurance on the life of her husband. At the death of her husband she was entitled to a lump sum payment of those proceeds. However, instead of taking them as a lump sum, the decedent elected to have the insurer retain the principal amount, paying her interest and so much of the principal during her life as she determined. The remainder was to be paid to her children and grandchildren. During her life the decedent received monthly interest payments, but she did not withdraw any part of the principal. The respondent determined that the proceeds of the policies of insurance were includible in the gross estate of the decedent under sections 811 (c) and (d), Internal Revenue Code. We agreed with the respondent stating, among other things, the following: These funds were as much hers as if she had settled with the insurance company by receiving lump sum payments, and by her action she transferred them to those who upon her death were the recipients. Estate of William J. Higgs, 12 T. C. 280; cf. Chase National Bank v. United States, 278 U. S. 327. * * We do not believe the facts of this case are distinguishable from those of Estate of Mabel E. Morton, supra. Here, as there, the decedent was entitled to a lump sum payment of proceeds of the policies upon the death of his mother. However, instead of taking in that form, he elected to take under an optional method of settlement as above outlined. Under that mode of settlement, he retained the income until the age of 35, at which time the principal was to be paid to him in one sum. Under this optional method of settlement decedent also elected that, in the event of his death prior to attaining the age of 35, his share was to be paid either to his surviving children, or if he left no issue, that amount was to be added to the share of the survivor of the two beneficiaries. In view of the above facts, therefore, we conclude, on the basis of Estate of Mabel E. Morton, supra, page 384, that there was a transfer "to those who upon [his] death were the recipients." See Chase National Bank v. United States, 278 U. S. 327. We therefore conclude that there was a transfer of property of a character which makes it includible in decedent's gross estate under section 811 (c). Reviewed by the Court. LEECH, J., dissents. Decision will be entered under Rule 50. ESTATE OF HERBERT B. HATCH, DECEASED, JUANITA O. HATCH, EXECUTRIX, AND AMERICAN TRUST Co., EXECUTOR, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. JUANITA O. HATCH, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. HERBERT B. HATCH, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Docket Nos. 18482, 18483, 18485. Promulgated February 23, 1950. GAIN OR Loss-CAPITAL ASSET-SALE BY PARTNERS.-Where in- Frederic D. Dassori, Esq., for the petitioners. OPINION. MURDOCK, Judge: The Commissioner determined deficiencies in income tax as follows: The sole issue is whether the Commissioner erred in determining that a part of the gain realized by Herbert B. Hatch, Juanita O. Hatch, and Herbert B. Hatch, Jr., upon a sale involving their partnership business and assets in 1944 is taxable to them as ordinary income. The facts are stipulated. Herbert B. Hatch, Juanita O. Hatch, his wife, and Herbert B. Hatch, Jr., their son, were individuals engaged in the automobile business in Stockton, California, prior to 1944. Their individual returns for the taxable periods involved were filed with the collector of internal revenue for the first district of California. The Hatches formed a partnership on December 1, 1942, to engage for an indefinite term "in the business of selling, distributing, repairing, and servicing motor vehicles and motor vehicle parts both at wholesale and retail," under the name of Hatch Chevrolet Co. The business was operated under a franchise from the Chevrolet Motor Division of General Motors Corporation. The record does not show whether that franchise was either valuable or transferable. The Hatches "as co-partners transacting business under the firm name and style of HATCH CHEVROLET COMPANY," parties of the first part, executed an "Agreement of Sale" on February 16, 1944, with King M. Chase, party of the second part, providing in part: that first parties will sell to second party all of the business and assets of HATCH CHEVROLET COMPANY, a co-partnership, hereinafter listed, and the transaction shall be escrowed until a complete inventory and appraisement has been completed. However, * said party of the second part shall take on over possession of the physical assets of the business February 21, 1944, and thenceforward shall operate said business to all intents and purposes as though this transaction had been completed and title thereto passed to the party of the second part. Second party shall, upon taking possession, have permission to operate the business under the name of HATCH CHEVROlet Company for a limited period of time to enable him to make the necessary arrangements for the future title or trade name of said business. The tentative sales price of said business and assets is the sum of ($175,229.51). This figure or amount may be appreciated or depreciated according to the results of the inventory to be taken. * * * * * The Hatches executed a "Bill of Sale" on March 3, 1944, providing that they, "as co-partners transacting business under the firm name and style of HATCH CHEVROLET COMPANY, the Parties of the First Part, in consideration of the sum of ($161,807.77) to them in hand paid by KING M. CHASE, the Party of the Second Part, the receipt whereof is hereby acknowledged, do by these presents sell unto the Party of the Second Part, his executors, administrators and assigns, the following described personal property [listed in a schedule] * * *" Chase paid $5,000 of the purchase price at the time of the agreement of February 16, and he paid the remainder of the purchase price by means of a check dated March 3, 1944, and payable to the order of the Hatches, "Co-Partners." The property transferred to Chase included all of the assets of the partnership except the General Motors franchise, two automobiles, cash in a substantial amount, and the partnership name. Chase assumed a part, but not all, of the liabilities of the partnership. The assets of the partnership which were sold to Chase were not distributed in kind to the Hatches prior to the sale thereof. His check dated March 3 was credited to the bank account of the Hatches, "CoPartners," on March 6, 1944. Partial distributions were made to them by checks drawn on that account beginning in June, 1944. Herbert B. Hatch died a resident of Stockton, California, on April 9, 1944. Juanita O. Hatch and American Trust Co. are the executrix and executor, respectively, under the last will and testament of Herbert B. Hatch. The partnership reported on its amended return for the fiscal year ended June 30, 1944, filed on September 19, 1944, a long term capital gain from the sale to Chase in the amount of $36,669.07, $18,334.54 of which was taken into account and divided as follows: Herbert B. Hatch----. Juanita O. Hatch__ Herbert B. Hatch, Jr-- $9,778. 42 7,089. 35 1, 466. 77 The Hatches separately reported those amounts on their respective individual returns for the taxable periods involved as "Gain or loss to be taken into account." The Commissioner allowed the partnership a long term capital gain from the sale to Chase in the amount of $22,486.36 (recognized to the extent of $11,243.18), determined that the gain from the sale in the amount of $14,182.71 was ordinary income to the partnership from the sale of property other than capital assets, and made corresponding proportionate adjustments in the individual income of Herbert B. Hatch, Juanita O. Hatch, and Herbert B. Hatch, Jr., for the taxable periods involved, on the ground that "the transaction constituted a sale by the partnership of assets held pursuant to its business; that the * [accounts receivable and inventories] transferred in the sale were not capital assets under section 117, Internal Revenue Code, and gain realized thereon was not long-term capital gain.” The parties stipulate that the cost of "the interests of the partners or the assets of the partnership (as the Court may determine) which were sold to Chase" was $125,138.70 and the gain was $36,669.07. The only difference between the parties in this case is whether the sale to Chase was a sale by the individual partners of their partnership interests, or was a sale by the partnership of some of the partnership assets subject to some of the liabilities. The petitioners contend that the Hatches sold their individual interests in the partnership, those interests were capital assets, and the entire gain was a capital gain only one-half of which would have to be reported as taxable income. The respondent has determined that the partnership sold some of its assets subject to some of its liabilities, some of the assets sold were capital assets, and some were not capital assets, with the result that the profit on those assets sold which were not capital assets is taxable in its entirety to the partners as a part of their distributive share of the net income of the partnership. Each partner's interest in the partnership would have a basis for gain to the partner, and if it was sold, the gain would be the difference between the amount realized and that basis, which gain would be income of the partner, not of the partnership, and would be a capital gain if the interest had been held long enough. H. R. Smith, 10 T. C. 398; affd., 173 Fed. (2d) 470; certiorari denied, 338 U. S. 818. Cf. Joseph L. Merrill, 9 T. C. 291; affd., 173 Fed. (2d) 310. Likewise, each asset of the partnership would have a basis for computing gain or loss to the partnership, and upon the sale of any of those assets by the partnership the gain would be income to the partnership and would be the difference between the amount realized and the basis to the partnership. The gain on any of the assets which were capital assets held for a long enough period by the partnership would be a capital gain, whereas the gain from the sale of any of the assets which were not capital assets would not be a capital gain, but would be ordinary income, taxable in its entirety to the partnership. The total of the basis of the partnership assets to a partnership does not necessarily equal the total of the bases to the partners of their interests in that partnership at any given moment. See Regulations 111, sec. 29.113 (a) (13)-2. Here the stipulation would indicate that the cost basis was the same whether the sale was a sale of partnership assets or a sale of partners' interests in the partnership. However, the gain was computed on a partnership return as a gain from a sale by the partnership of some of its assets, and the Commissioner has so regarded it. |