Woodhouse, J.

16 October, 6 November 1972 - Auckland

Woodhouse, J    : This is a Case Stated pursuant to s 32 of the Land and Income Tax Act 1954.

   During the year 1968 the objector was practising as a barrister and solicitor in partnership with others in the City of Auckland. On 30 September 1968 he withdrew from the partnership. When he furnished returns of income for the year ended 31 March 1969 he returned his share of the partnership income for the period of six months ending on 30 September in the following way.

Share of partnership to 30 September 1968 $13,440.28
Less share of valuation of work in progress at 30 September 1968 3,156.34

   The Commissioner of Inland Revenue considered that the amount of $3156.34 shown by the objector as a deduction from his share of the partnership income in fact represented assessable income. Accordingly he added back the amount. The case has been stated for the purpose of determining whether the amount is or is not assessable income.

   All the relevant facts have been agreed by the parties and it is unnecessary to add much by way of elaboration. There were discussions between the retiring and the remaining partners concerning the basis upon which the former's interests in the partnership would be recognized. And inter alia it was agreed that he "was entitled to a proportionate share of fees on uncompleted and current files for work done to the date of dissolution in respect of transactions or files not completed at date of dissolution". So a calculation was made of the value of all work done to the date of dissolution in respect of matters not completed and therefore not costed out to clients as at the date of dissolution. The share of the retiring partner in the total value of such work in progress at the date of dissolution was agreed by all the partners to be $3156.34 and the remaining partners made payment to him of that sum. In the ordinary way the partnership accounts had been taken annually as at 31 March in each year and those annual accounts did not include provision for work in progress.

   The contention that the amount paid for work in progress was not assessable income rests upon a basic argument that because the professional work in progress of a partnership of solicitors could not be charged out against clients until completion it had no value as an asset of the partnership and certainly no value as income. In the present case, so it was said, the partnership had never attempted to bring to account uncompleted work. Thus the submission was advanced in terms that "the work in progress was not an asset of the firm but was an amalgam of inchoate rights against the clients whose work was in progress but incomplete"; and that the sum of $3156.34 was "the price which the continuing partners agreed to pay for the vesting in them" of the so-called inchoate rights.

   I am told from the Bar that this is the first time the Court in New Zealand has been asked to decide whether an amount paid to an outgoing partner as his share of the value of work in progress at the date of a dissolution of partnership is capital or income in his hands. But at least in the circumstances of this case I am left in no doubt that the payment to the objector was income derived by him during the relevant period. It was a payment which followed from the agreement of all the partners to vary the method they had used previously for the calculation and division of profits. They agreed that a calculated sum should be included in the accounts to represent the value of work in progress and that payment should then be made to the retiring partner of his appropriate share of profits including that sum. It amounted to a variation of the partnership agreement which affected the method of dividing the profits for the period. It was done for the purpose of dissolution and the inclusion of work in progress was intended to reflect and did reflect the final share of the retiring partner in the business activities of the partnership. It enabled him to be paid out for the period from the last annual accounts up to the date of dissolution. In my opinion the calculation thus made in his favour and the payment that followed it clearly has the quality and character of income in his hands.

   On his behalf I was referred to a number of authorities. In Rutherford v. Commissioners of Inland Revenue (1926), 10 TC 683 it was held that an amount payable to a retiring partner independently of what might turn out to be the actual profits of the partnership was to be regarded in the circumstances of the case as the consideration for which the retiring partner surrendered his right to profits. The Court decided on that ground that the payment could not be used by the remaining partner to reduce the profits of the partnership upon which he would otherwise be obliged to pay tax. The payment by the remaining partner was thus held to be, from his point of view, a capital payment. But that case is not this case. Here there was a variation in the partnership agreement which resulted in a division of profits as at the date of dissolution after bringing to account in favour of the retiring partner the calculated value of work done but uncompleted. Moreover the issue in the present case is not the calculation of the assessable income of the remaining partner or partners as in the Rutherford Case, but whether the $3156.34 was income in the hands of the partner who retired. It does not necessarily follow and I am not prepared to assume that merely because a payment by remaining partners might need to be regarded as a capital payment by them then automatically the amount becomes a capital receipt in the hands of the payee. There is some discussion of the possible variations on this theme in a South African case that was not cited in argument before me: see Sacks v. Commissioner of Inland Revenue (1946) 13 SATC 343; and see also Silke on South African Income Tax, 6th ed., at pp. 497-498.

   The next case put forward on behalf of the objector is Henderson v. Federal Commissioner of Taxation (1970), 119 CLR 612; 1 ATR 596. Here the High Court of Australia was concerned with the manner in which the income of a partnership of accountants should be calculated. The issue was whether the partnership had been justified in changing from a cash receipts basis to an earnings basis; and in that context the Court gave some consideration to the character of professional "work in progress". At 119 CLR, p. 650; 1 ATR, p. 601, Barwick, CJ, distinguished between work already done - in respect of which a fee could be said to have been earned and income derived: and uncompleted work - in respect of which it could be said neither that a fee had been earned nor income derived. With relation to the uncompleted work he said: "There is in my opinion no basis when determining the income derived in a period for estimating the value of the services so far performed but for which payment cannot properly be demanded and treating that value as part of the earnings of the professional practice up to that time and as part of the income derived in that period". And then he added a qualifying sentence: "It may be that a different course can be taken if an estimation of profits is being made for some other purpose ...".

   It needs to be remembered when considering those observations that they were made in answer to a claim by the Federal Commissioner of Taxation that because the partners had altered their accounts from a cash receipts basis to earnings they were thereupon under an obligation to include the value of part performed work in the earnings. The High Court was not asked to consider the implications that would arise in a case where, on dissolution, the partners had themselves agreed to bring to account the value of part performed work in order to pay out a proper share of the amount involved to the retiring partner. And the qualification added by Barwick, CJ, to the first part of the foregoing extract from his judgment might seem to anticipate this very sort of issue. The Henderson Case is certainly authority for the proposition that in ordinary circumstances the Commissioner cannot require the inclusion of "work in progress" in the accounts of a professional partnership. I do not think, however, that it assists the present objector in a situation where he has joined with the other partners in agreeing to include it.

   Finally there is the basis argument put forward on behalf of the present objector (to which I referred at the outset) to the effect that work in progress had no value as an asset of the firm let alone any value as income. In this connexion I was referred to Robertson v. Brent and Haggitt, [1972] NZLR 406. That case was concerned with a dispute between solicitors following a dissolution of their partnership. The plaintiff was the retiring partner. Certain amounts had been agreed as due to him by the remaining partners but he claimed in addition to be entitled to payment for work in progress at the time of the dissolution. He was unsuccessful and the following passage from the judgment of Wilson, J., is strongly relied upon in the present case: "With regard to work uncompleted on 31 March 1970, no moneys were owing to the firm as at that date, and therefore no asset was then in existence. All that existed at that time in respect of the unfinished work was the probability of future income. It could not become income of the firm until the work was completed, at the earliest. As at 31 March 1970 it had no value as an asset, or as income ." (At p. 407 - my emphasis).

   The reason for the conclusion which has been given emphasis in the foregoing extract from Wilson, J.'s judgment is contained in the opening sentence. With respect to work uncompleted on 31 March 1970 he said, "no moneys were owing to the firm as at that date, and therefore no asset was then in existence". It is a statement that because the uncompleted work had not become income, it had not become an asset. Mr Chilwell now turns that statement round. He contends that because uncompleted work is not an asset it is not income. That is the real effect of what becomes a circular argument. He takes up the conclusion reached by Wilson, J., in order to prove the premise upon which the conclusion rests. In my opinion it takes the matter no further: and in any event I cannot accept it in the present context.

   The submission (as Mr Chilwell put it) is that "the work in progress was not an asset of the firm but an amalgam of inchoate rights". If the so-called "inchoate rights" are supposed to lack even a contingent value to a partnership the proposition appears to ignore the realities. Despite the absence of any present entitlement to be paid by the client for unfinished professional work a partnership would usually consider it had a very real value. The partners in the present case are an example. The Robertson Case itself provides another. Year by year the partners there had brought to account for income purposes their estimated value of uncompleted work and the problems in that case arose only because the arrangement had ceased a few years before the dissolution. Wilson, J., concluded, of course, that the uncompleted work had no value as an asset at the time of dissolution but although that conclusion might appear to stand without qualification it needs to be read, I think, subject to the subsequent statement at p. 409 of the judgment. He said: "... the plaintiff's action must fail ... because the work in progress was not an asset at the relevant date and because, unless the partners so agreed, it cannot be treated as such. It was therefore necessary for the plaintiff to prove an agreement between him and the defendants that the work in progress should be treated as something which it was not, that is an asset, and should be valued for the purposes of the partnership." With respect I would not be prepared to hold even in the absence of agreement that work in progress is something without value. But I certainly am of the opinion that once a value is assessed in partnership accounts by general agreement of all concerned (as in the present case) then it is an item that cannot be ignored.

   The real point of the case before me is not whether the uncompleted work had any present asset value but whether the share in it that was actually credited to the retiring partner was income in his hands. In my opinion it was a revenue or income sum computed to enable a fair and just distribution of the achievements of the partnership up to the date of dissolution.

   The formal answer to the question posed in para. 8 of the case stated is that the Commissioner acted correctly in making the relevant assessment.

   If required I will deal with the question of costs.

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