Tolmach v. Commissioner

Milton Tolmach (plaintiff) was the oldest partner in the law firm of Hayt, Hayt, Tolmach & Landau. The partners met without Tolmach and voted to dissolve the firm, reforming as Hayt, Hayt & Landau. Tolmach brought an action for damages. Judgment was rendered in Tolmach’s favor. A referee valued the former partnership at $11,410,000, of which $8,750,000 represented goodwill. The referee further determined that Tolmach’s share of the total was $2,681,350. Landau and his partners appealed, but the parties reached a settlement, which ended the proceedings. The firm of Hayt, Hayt & Landau agreed to pay Tolmach $1.7 million in monthly guaranteed payments for his interest in the previous firm, plus a lump-sum payment of $155,000 for goodwill. Payments were made to Tolmach in 1983 and 1984 and reported by Tolmach as payments resulting from the sale of the previous firm, taxable as long-term capital gains. However, the Commissioner of Internal Revenue (the commissioner) (defendant) viewed the payments as guaranteed payments in liquidation of Tolmach’s interest in the previous firm, taxable as ordinary income. Tolmach challenged this assessment in the United States Tax Court. Tolmach also asserted that, in accordance with the referee’s determination in the earlier case, 77 percent of the payments to him should be considered goodwill, in which case capital-gain tax would apply to this 77 percent.