Smith v. Commissioner
United States Court of Appeals for the Tenth Circuit
313 F.2d 16 (1962)
Geologist and U.S. Navy photo-intelligence officer V. Zay Smith (plaintiff) developed an idea to use aerial photography of geologic formations to find oil and petroleum. Smith and three others entered a partnership called Geophoto Services under a five-year partnership agreement. When the partners extended for another five-year period, they revised the articles to provide a way to expel a partner and specifically stated that no value would be assigned goodwill in valuing a partner’s interest. In 1957, the partners voted to expel Smith. In accordance with the revised articles, Smith received $77,000, over the $53,264 book value of Smith’s interest. The extra $23,735 represented a $2,045 salary payment and a $21,689 “premium.” Smith and his wife filed a return reporting the $23,735 as capital gain. The tax commissioner determined the entire excess payment was ordinary income and assessed a deficiency. The Smiths petitioned the tax court for review. The commissioner argued that the $2,045 salary payment was a guaranteed payment and that the remainder liquidated Smith’s distributive share of partnership income. The Smiths countered that the entire payment was for goodwill and thus capital gain. The tax court found the excess payment taxable as ordinary income. The Smiths appealed.
Rule of Law
Holding and Reasoning (Hill, J.)
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