WILLIAMS V. MCGOWAN 152 F.2d 570 (2nd Cir. 1945) CASE BRIEF

WILLIAMS V. MCGOWAN

152 F.2d 570 (2nd Cir. 1945)

NATURE OF THE CASE: This was a dispute over the character of monies received for the sale of a business. Williams (P) appealed the lower court's dismissal of his complaint to recover income taxes pursuant to 26 U.S.C.S. 23(a)(2) and 26 U.S.C.S. 117(a)(1).

FACTS: Williams (P) and Reynolds were in the hardware business in Corning, New York. They formed a partnership with P getting 2/3rd and Reynolds getting 1/3rd. The capital invested had been $118,082.05 with Reynolds having a credit of $29,029.03 and P with the balance. Their agreement called for compensating balances with interest due from Reynolds to make up for his deficiency in the paid in capital. The agreement allowed the other partner to purchase a withdrawing partner's share as the share appeared on the books. Reynolds died in 1940 and P made a deal with the executrix to purchase Reynolds' share for $12,187.90. Just a few months later, P sold the business to another for $63,926.28 plus further amounts that brought the total sales price to $70,000. Even with this sale P suffered a loss upon his original investment but he made a small gain on the 1/3rd interest that he purchased from the estate. He filed his tax return based on ordinary income and not as a transaction of capital assets. The IRS was not amused and disallowed this and recomputed his tax accordingly.

ISSUE:

RULE OF LAW:

HOLDING AND DECISION:

LEGAL ANALYSIS:

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