Beporter's Statement of the Case

his association with the members of Funch, Edye & Co. and its business. After considerable negotiations a proposition was made by it that the Cunard company purchase the business of Funch, Edye & Co. for the sum of $2,400,000. This amount was arrived at, as a fair valuation of the firm's business, by taking as a basis its profits in the preceding year and a ten years' average of them. Two of the directors of the Cunard company had before this requested Mr. Sparks to leave Funch, Edye & Co. and become their agent in America, but he declined the offer. Immediately on receipt of this offer of the Cunard company to purchase the business of Funch, Edye & Co. Mr. Sparks cabled to his partner, Mr. Walther, stating the Cunard proposition, and stipulating that if the business should be sold, Messrs. Robert H. Goodwin, Clement H. Betts, and George Rossen, who had long been trusted employees of the firm, should be protected by being taken into partnership, and also suggested that he should consult freely and frankly with these employees.

VI. Mr. Sparks returned to New York in September, 1916, bringing the offer with him. He and Mr. Walther then decided to take Messrs. Goodwin, Betts, and Rossen in as members of the firm of Funch, Edye & Co. on the basis of a one-tenth interest in the business, each to contribute $8,000 to the capital of the firm, and he and Mr. Walthers to contribute $28,000 each under the new partnership.

VII. During the negotiations between Mr. Sparks and the Cunard company, which resulted in their offer of $2,400,000, nothing had been said of the capital of $80,000. When Mr. Sparks presented the offer to him Mr. Walther insisted that the Cunard company should add this amount to their offer. Mr. Sparks on September 21, 1916, cabled the Cunard Steamship Co. that the firm would accept its offer if it added the $80,000 and would allow the "present interests to be in control as officers and directors at yearly salaries aggregating $150,000 until payments completed, purchasing interests to guarantee this, also protection against all copartnership obligations which also to be assumed by new corporation."

Reporter's Statement of the Case

On September 25 and 27, the Cunard company accepted all of the proposition of Funch, Edye & Co. of September 21, 1916, except the sum of $150,000 for salaries, and a counter proposal of $100,000 for salaries was suggested. On September 29, 1916, Funch, Edye & Co. accepted $100,000 for salaries, the other conditions of the cablegram of September 21, 1916, to stand. On September 30, 1916, the Cunard company sent a cablegram to Mr. Sparks, stating in part "very glad you can accept modification of salaries; we accept other conditions your telegram of twenty-first so far as understood, but you will make everything clear in agreements."

VIII. On September 29, 1916, a partnership agreement was entered into between William L. Walther, T. Ashley Sparks, George Rossen, Clement H. Betts, and Robert H. Goodwin, by which the said Rossen, Betts, and Goodwin were to each contribute, in cash, $8,000 to the copartnership capital of $80,000, and the contributions to said capital of the said Walther and Sparks were to be reduced to $28,000 each, and the said copartners were to share in the profits and losses of the said business in the proportions set out in the contract. The contract also provided for the sale and transfer of the entire business of Funch, Edye & Co. by the said Walther and Sparks and the payment to the new copartners of 10 per cent of the purchase price, and such settlement for the interest of the widow of Paul Gottheil, the deceased partner, as they might be able to effect.

Copy of the contract of September 29, 1916, is attached to these findings as Appendix A and is made part of this finding by reference thereto.

IX. On December 4, 1916, the Cunard Steamship Co., party of the first part, entered into an agreement with William L. Walther, T. Ashley Sparks, George Rossen, Clement H. Betts, and Robert H. Goodwin, constituting the firm of Funch, Edye & Co., parties of the second part, and Miriam H. Gottheil, widow, and Elsie Gottheil Culman and Eleanor Gottheil, children of Paul Gottheil, parties of the third part, by which the parties of the second part agreed to cause a new company, under the title of Funch, Edye & Co., in

Reporter's Statement of the Case

corporated, to be organized under the laws of the State of Delaware, with a total authorized capital stock of $600,000, for the purpose of the acquisition by it of all the good will, business, and assets of such firm of Funch, Edye & Co. as a going concern, and the continuation of such business; the sale, transfer, and delivery to the corporation of all contracts and assets and capital of said firm as the same existed on December 31, 1916, "together with all the good will appertaining to the business of said firm and the exclusive right of said corporation to the use in all parts of the world of said firm name of Funch, Edye & Co. as a corporate title or otherwise, and to continue said business of said firm as a going concern, as the successors thereto, as, of, and from said 1st day of January, 1917."

The parties of the second part were to ascertain in their usual way and distribute the profits for the current year among themselves. The contract further provided in detail how the purchase price of $2,400,000 should be paid, 8 per cent to Mrs. Gottheil, 10 per cent each to Messrs. Goodwin, Betts, and Rossen, 32 85/100 per cent to Mr. Sparks, and 29 15/100 per cent to Mr. Walther, in six annual installments of $400,000 each, the first installment on January 1, 1917, and the other five on January 1 of each succeeding year, the parties of the second part to hold the capital stock in proportion to their interest until payment in full of the purchase price of $2,400,000, when the entire capital stock of 12,000 shares was to be surrendered to the party of the first part. At the same time as the payment of the first installment of the purchase price, the party of the first part was to pay the $80,000 capital to the parties of the second part, according to their contributions thereto at the date of sale. The firm of Funch, Edye & Co. was to continue business in the usual way, T. Ashley Sparks to be president at $29,000 a year, William L. Walther as first vice president at $29,000 a year, Clement H. Betts, second vice president at $14,000 a year, Robert H. Goodwin, treasurer at $14,000 a year, and George Rossen, secretary at $14,000 a year.

A copy of the contract of December 4, 1916, is attached to these findings as Appendix B and is made part hereof by reference thereto.

20684-27-C C—VOL. 62- -6

Opinion of the Court

X. About June 15, 1917, the plaintiff filed with the United States collector of internal revenue for the year 1916 an income tax return stating his net income as $123,966.24 and a tax thereon in the sum of $5,559.36, which was duly paid by plaintiff. Subsequently an additional tax for the year 1916 was assessed and demanded by the collector and this also was paid by plaintiff.

XI. A dispute having arisen between the Commissioner of Internal Revenue and plaintiff as to the amount of income tax due from plaintiff for the years 1916 to 1919, inclusive, the plaintiff signed a waiver of the limitation of five years as provided by section 250 (d) of the revenue act of 1921, 42 Stat. 264, which was duly accepted by the Commissioner of Internal Revenue.

XII. Thereafter, in February, 1924, the Commissioner of Internal Revenue notified plaintiff that his net income for the year 1916 had been increased by $240,000, claiming that amount represented the profits realized by him on the sale of a one-tenth interest in the stock of Funch, Edye & Co., and on June 2, 1924, the collector of internal revenue demanded an additional tax of $22,462.11, by reason of such increase to his net income. This tax was paid by plaintiff on the same day under a written protest, stating as the grounds thereof that the addition of $240,000 to his net income for 1916 made by the commissioner was illegal as that was not profits on the sale of the business of Funch, Edye & Co., but represented 10 per cent of the good will of the business of the firm and was transferred to him as a gift. The court decided that plaintiff was not entitled to recover. CAMPBELL, Chief Justice, delivered the opinion of the

court:

The plaintiff became a partner in the firm of Funch, Edye & Co. in September, 1916, at which time articles of copartnership between parties in interest were executed. The firm was an old one and had conducted a profitable business for many years. Its business was that of representing foreign ship owners who had business in New York, looking after their ships' interests, discharging the cargoes, and obtaining for them outward cargoes. It was very largely a

Opinion of the Court

personal business that required a comparatively small capital, usually invested in seats in one or more of the exchanges, in furniture and some stock in steamship and other companies. The amount of this capital was $80,000. Two of the partners owned or controlled the business of the firm in the summer of 1916. It appears that the heirs or legal representatives of a deceased partner had some interest in the business, but just what it was does not definitely appear.

For the purposes of this case the business may be treated as belonging to the two surviving partners. In September, 1916, the plaintiff and two other persons, all of whom had been for a long time employees of the firm, were admitted into the firm as copartners under articles of copartnership which defined the interests of each. Plaintiff agreed to contribute, as did each of the new partners, $8,000 in cash to the copartnership capital. The articles provided that at the option of the two original partners the business and assets of the partnership could be transferred to a corporation in consideration of its entire capital stock, of which plaintiff would be entitled to one-tenth. These two partners were also authorized to enter into an agreement for the sale of the capital stock of the corporation proposed to be organized for not less than $2,400,000. Subsequent to the making of this copartnership agreement another agreement was entered into between the Cunard Steamship Co. (Ltd.) and all the members constituting the firm of Funch, Edye & Co., and to which the widow and children of a former member of the firm were "parties of the third part," whereby the Cunard company agreed to purchase all of the capital stock of the corporation which the partners agreed to organize for the object and purpose of the acquisition by it of all the good will, business, and assets of the firm of Funch, Edye & Co., as a going concern and the continuation of its business.

The partners agreed to sell and deliver to the proposed corporation on or about January 1, 1917, the contracts and assets of the firm, representing capital invested and the good will pertaining to its business, the exclusive right of the corporation to use the firm's name as a corporate title, and