Stephen R Dacen v. Minister of National Revenue, [1979] CTC 2868, 79 DTC 732

M J Bonner:—The appellant appeals from an assessment of income tax for the 1973 taxation year. The first branch of the appeal arises from the inclusion by the respondent in computing income for the year of the sum of $52,487. That amount was regarded by the respondent as that portion of the income of an accounting firm known as Laventhol Krekstein Horwath & Horwath (hereinafter called LKH & H) for the fiscal period from January 29, 1972, to January 5,1973, which was allocated to the appellant by agreement of the partners of the LKH & H firm. The appellant ceased to be a partner in the firm in November of 1972. It was the respondent’s position that the inclusion was required by subsection 96(1.1) of the Income Tax Act.

It was the appellant’s position that he did not enter into any agreement to allocate in 1973 with the result that subsection 96(1.1) has no application.

The appellant’s evidence was that when he left LKH & H he entered into an agreement with the firm, later reduced to writing (Exhibit A-1). That agreement was, he said, intended to be a full and final disposition of all rights as between himself and his former partners. It read in part as follows:

9. Your equity in Laventhol Krekstein Horwath and Horwath after accounting for the items mentioned in paragraphs 6, 7 and 8 and after taking into account your share of income and drawings from the undersigned as indicated in Schedule “C” attached amounts to $40,763 as at the adjustment date. The sum of $40,763 constitutes the final accounting between us as at the adjustment date.

In the calculation of the $40,763 figure in Schedule “C” there were included amounts for income for the periods from February 1, 1972, to August 11, 1972, and, August 12, 1972, to November 3, 1972. The amounts included totalled $38,652. Certain accounts receivable and rights to collect for work in progress (which I assume were connected with clients whose work the appellant was expected to take with him) were assigned to the appellant an agreed figure of $48,683. The appellant paid to the firm the amount by which the agreed price payable by him for the accounts receivable and work in progress exceeded $40,763.

In Januray of 1973 the appellant received financial statements from LKH & H for the fiscal period from January 29, 1972, to January 5, 1973, (Exhibit A-2). The statements included a sheet entitled “Allocation of Partnership Income for Income Tax Purposes”. The amount allocated to the appellant on that sheet was $52,487. The appellant stated that he did not have any input in the preparation of the last mentioned financial statements and indeed that he did not even expect to receive them.

The appellant’s submission were twofold. Firstly, he submitted that he did not enter into an agreement in 1973 to allocate income as a member of the partnership, it being impossible for him to agree because he was unaware of the intention of the ongoing partners. Secondly, he submitted that there was no allocation of partnership income, but rather that events could be reviewed as a Capital transaction involving a sale of a partnership interest.* [1]

The appellant’s first submission amounts to a suggestion that subsection 96(1.1) can have no application where the agreement referred to in paragraph (a) was not one to which the retiring partner was a party. The wording of the subsection is, to say the least, complex, but I can find nothing in it to support the restriction suggested. The body of members who, if the subsection is to apply, must have entered into an agreement to allocate cannot be regarded as necessarily including . . a taxpayer who, at any time, ceased to be a member of the partnership . .

The evidence does not support the second submission. It is clear from the computation in Exhibit A-1 of the appellant’s equity interest in LKH & H that the appellant and the representative of the remainder of the firm with whom he negotiated determined that the appellant was entitled to credit, inter alia, for a share of the profits of the firm from the commencement of the then current fiscal year, February 1, 1972, to the date of departure. There was no reference in the evidence to any events that were regarded by the parties, or could reasonably be regarded by anyone, as a sale of an interest in a partnership. In any event the appellant was entitled, while a partner, to a share of income. Even if Exhibit A-1 could be viewed as an agreement for the sale of a partnership interest, the disposition of the appellant’s right to a share of income in the course of such sale cannot, by reason of subsection 96(1.4) of the Act, be regarded as a disposition of a capital property.

The second branch of the appeal arises from the inclusion under subsection 23(3) of the Income Tax Application Rules (hereinafter called “ITAR”) in income of $11,333.92, computed as follows:

(a) the appellant must be regarded as having deducted no amount under paragraph 23(3)(a) of ITAR for the 1972 taxation year because, before the end of the year, he sold all of his accounts receivable to MacGillivray & Co, an accounting firm which he joined immediately following his departure from LKH & H, and

(b) alternatively, the appellant’s “investment interest” in the business at the end of 1973 was greater than the amount used by the respondent in the calculation set forth above. The respondent, it was submitted, wrongly failed to recognize goodwill in computing the adjusted cost base of the appellant’s partnership interest in the MacGillivray firm immediately after the end of its 1973 fiscal period.

The first contention fails. While the appellant’s 1972 return does not contain a specific claim for a deduction under subparagraph 23(3)(a)(i), it was common ground that the appellant was not taxed in 1972 on any part of his 1971 receivables.

The second contention must also fail. After the appellant joined the MacGillivray firm the balance sheet showed him as having introduced goodwill at a value of $40,000. There was no evidence which established that any goodwill was brought by the appellant to his new firm, save for any which might attach to the appellant presonally. No attempt was made to establish that the appellant had any sort of intangible property which a businessman might realistically view as being of value and as capable of transfer to the MacGillivray firm. The evidence of Mr Rahal, a member of the MacGillivray firm, that he calculated goodwill on the basis of “one hundred percent of the volume of each partner” falls far short of establishing that goodwill could reliably be valued on the basis of such a yardstick. I observe that upon the apellant’s entry and departure from the LKH & H partnership goodwill was not recognized. Whatever was the basis of the $40,000 entry in the MacGillivray accounts, I cannot find on the evidence that the entry accurately reflected the value of goodwill sold by the appellant to the new firm.

The appeal is therefore dismissed.

Appeal dismissed.