Case Name: W. H. NEIL and Aileen W. Neil, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Court: United States Court of Appeals for the Fifth Circuit
Jurisdiction: United States
Decision Date: 1959-08-13
Citations: 269 F.2d 563
Docket Number: No. 17647
Parties: W. H. NEIL and Aileen W. Neil, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
Judges: 
Reporter: Federal Reporter 2d Series
Volume: 269
Pages: 563–578

Head Matter:
W. H. NEIL and Aileen W. Neil, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
No. 17647.
United States Court of Appeals Fifth Circuit.
Aug. 13, 1959.
Tuttle, Circuit Judge, dissented.
R. B. Cannon, Fort Worth, Tex., Weeks, Bird, Cannon & Appleman, Fort Worth, Tex., of counsel, for petitioner.
Morton K. Rothchild, Lee A. Jackson, Melva M. Graney, Attys., Dept, of Justice, Washington, D. C., Charles K. Rice, and Howard A. Heffron, Asst. Attys. Gen., Arch M. Cantrall, Chief Counsel, I.R.S., John M. Morawski, Atty., I.R.S., Washington, D. C., for respondent.
Before RIVES, Chief Judge, and HUTCHESON and TUTTLE, Circuit Judges.

Opinion:
HUTCHESON, Circuit Judge.
The appeal in these consolidated cases from decisions of the Tax Court entered on July 30, 1958, involves deficiencies in income taxes aggregating about $78,000 and penalties aggregating about $12,000 for the years 1949-1953, both inclusive.
The principal question presented for determination is whether there is includable in W. H. Neil's income all the income from the partnership interest standing in his name, or whether such income is taxable one-third to him and one-third to each of his two sisters. Subordinate questions, whose determination depends upon the answer to the first question are: whether petitioners are liable for penalties and the amount of such penalties for failing to file declarations of income tax; and whether the assessment against Neil of the deficiencies for 1949 are barred by limitation.
The Tax Court's lengthy and argumentative statement of the case, labelled, "Findings of Fact", is not published, and to endeavor to separate its findings of fact from its conclusions of law would be a difficult and unrewarding, if not impossible task. It will be necessary, therefore, for us to state from the record and set out in the margin the undisputed facts as taxpayer's allegations, the doc umentary evidence, and the brief but undisputed testimony of his three witnesses establish them to be.
On this record, which contains'not a single fact in contradiction of the testimony of petitioner and his witnesses or of the instrument signed by Neil and his sisters in 1949, petitioner contended below and contends here that in the tax years in question the one-half undivided interest in the Leonard partnership, which stood in W. H. Neil's name, was beneficially owned ,in equal shares by him and his two sisters, and the income therefrom was taxable to' each of the three equally.
The Tax Court recognizing that the evidence was all one way and that there was no question of veracity in the case but only, of the sufficiency, the legal effect, of the facts testified to, foreshadowed and keynoted the conclusion at which it did arrive by stating:
"We do not doubt that there was some intent and understanding that the petitioner's two sisters were to derive some benefit from this enterprise provided it turned out to be successful, but this is not to say that they became partners." (Emphasis supplied.)
Turning, then, to a discussion of the; instrument under which all of the income in.question here was received and returned for taxes, the court, in the face of the language of the instrument and of conclusive testimony to the contrary as to its purpose and effect, stated that it did not think that the execution of that instrument was effective to make the sisters' partners in the Leonard partnership or members of a sub-partnership with their brother. Continuing the same wishful thinking in the same vein, in express contradiction of the fact that the instrument was drawn as a result of Neil's discovery of the way the tax returns had been mishandled and for the purpose of assuring that this would not again occur, the Tax Court came up with this complete misinterpretation:
"As we read this instrument, it does not purport to make the sisters members of any partnership. It merely provides that 'all net sums' received by the petitioner shall be divided equally between the petitioner and his sisters. We incline to the belief that the language used was intended to mean that after Jan. 1, 1949, the sisters were to share in the petitioner's distributive share of the income of the Leonard Partnership. But even if it be construed as broad enough to cover any distribution after Jan. 1, 1949, the use of the term 'net' must be given effect, and we think it means that the sum in which the sisters would share is the net sum, after deduction of any capital invested by the petitioner and after payment of any liability he had incurred as a partner. Accordingly, we do not construe this contract as vesting in the sisters any interest in the capital invested in the partnership. Thus, even under this agreement, the sisters may not be considered as partners since they did not have any capital invested in the venture."
Of the petitioners' argument, that the instrument of January 1, 1949, was the reduction to writing of a previous existing express oral trust, that such trust when declared in writing was one for the benefit of the three signers and that under Sec. 167(a) (1) of the Code, 26 U.S. C.A. § 167(a) (1), a ratable share of the trust income was annually taxable to each of the three signers, the Tax Court, completely ignoring that for the tax years the trust was acknowledged in writing, said:
"The principal weakness of this argument is that there is no basis in the evidence for the view that there was an oral trust for the benefit of the petitioner's sisters when the truck leasing operation was started."
Stating that until 1949 the evidence indicated that petitioner treated the investment as his own, the court went on to say that neither in the original arrangement nor by the instrument of January 1, 1949, were the terms and circumstances sufficient to place Neil's Leonard partnership interest in trust for the benefit of himself and his sisters, and, following the same assumptive reasoning, the court thus arrived at this sweeping conclusion of law:
"Upon careful consideration of all the evidence, we find no basis, under either the partnership or trust provisions of the Code, for treating as income of the petitioner's sisters any part of the income derived by him from his investment in the truck leasing business. It is our opinion that insofar as the agreement of Jan. 1, 1949 deals with the income from the Leonard partnership, it was no more than an anticipatory assignment by the petitioner of his income from that venture."
Here taxpayers, urging upon us that the Tax Court, with its misconception of the undisputed facts and upon assumptions which were expressly rejected and condemned in Commissioner of Internal Revenue v. Culbertson, 337 U.S. 733, at pages 737-746, 69 S.Ct. 1210, at pages 1211-1216, 93 L.Ed. 1659, and with its gaze fore-shortened by its intense preoccupation with its erroneous views on the partnership question and its predetermined view that the case was one merely of anticipatory assignment of income, was unable to see and decide the case as it really is, attack the conclusions of the Tax Court as wholly erroneous and as resulting from such complete misapprehension of the nature and effect of the evidence, that they do not reflect or rep resent the truth and right of the case. Sanders v. Leech, 5 Cir., 158 F.2d 486, 487; United States v. United States Gypsum Co., 333 U.S. 364, at page 395, 68 S.Ct. 525, at page 541, 92 L.Ed. 746. We agree with the taxpayers that this is so.
Notwithstanding the fact that the opinion in the Culbertson case, supra, carefully pointed out the errors into which the Tax Court had fallen, that court, as appears in its action in the second appearance of the Culbertson case, Culbertson, v. C. I. R., 5 Cir., 194 F.2d 581, and in the wrecks of its other decisions on the shores of this and other appellate courts, has been reluctant to recognize and turn away from them. Some of the explanation is to be found in the unwillingness of the Tax Court to recognize and apply the tax law of partnership as it is established in the Culbertson decision and the multitude of cases, collected in Shepherd's Notes to that ease, citing and following it, and by Sec. 3797(a) (2) I.R.C.1939, 26 U.S.C.A. § 3797(a) (2) and § 340(a) of the Internal Revenue Act of 1951, which declares:
"A person shall be recognized as a partner for income tax purposes if he owns a capital interest in a partnership in which capital is a material income-producing factor, whether or not such interest was derived by gift or purchase from any other person."
There is no principle in tax law which requires or permits the trier of facts to set up a special concept of partnership for tax purposes or to treat the facts in a tax case differently from the way they should be treated in any other kind of litigation. Indeed, the decisions are to the contrary.
Another explanation is to be found in the use by the Tax Court of the brilliant figure of speech in Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731, not as a guide to a true determination of the question posed but as a shibboleth in all transactions between members of a family, whether through partnerships or by trusts, an approach which the Supreme Court in the Culbertson case, after having held that it is not essential that a member of a family partnership contribute either vital services or original capital, condemned in these words:
"The fact that transfers to members of the family group may be mere camouflage does not, however, mean that they invariably are." (Emphasis supplied.) [337 U.S. 733, 69 S.Ct. 1216.]
Since the Culbertson case from this court was affirmed in principle in the Supreme Court, this and other courts have taken pains to consistently declare and apply these now settled principles of tax law. These are that in all cases, whether the claim to income of a member of a family is based upon a claim as a partner or as beneficiary of a trust, the controlling question for decision is not whether the claim is made by a member of a family but under general law, whose was the tree that produced the fruit, whose the services or property which produced the income. Cf. Blair v. Commissioner, 300 U.S. 5, 57 S.Ct. 330, 81 L.Ed. 465; Dyer v. Commissioner, 2 Cir., 211 F.2d 500.
We have recently carefully pointed this out in West v. Commissioner, 5 Cir., 214 F.2d 300, 302, where the Tax Court, by labelling the arrangement under which the income was owned by the beneficiaries of a trust a "spurious family partnership", sought erroneously, as here, to separate the income from its earners, the fruit from the tree.
It is certainly true that if in the tax years in question the sisters in this case had no title or interest with Neil in the venture, they would have no title to, or interest in, the fruits. It is as certainly true, under the Tax Court's own conclusion, that it was intended from the beginning that the sisters were to derive some benefit from the enterprise, "if if became profitable". Under the undisputed evidence that, as to the tax years in question, giving due weight to all the facts and circumstances, including particularly the 1949 written declaration of trust entered into between the brother and his sisters for the express purpose of correcting the errors of the earlier returns which had incorrectly credited all the income to him, it must be held as matter of law that they had such an interest and that the Tax Court's holding to the contrary was wholly unjustified. In case after ease this court and others have insisted on standing to and applying the principle first enunciated in Lucas v. Earl, supra, and clarified in the Culbertson and Blair cases, supra, and if this court remains consistent with the law as its former decisions have declared it, it must so declare here and reverse the judgment of the Tax Court.
The judgment is reversed and the cause is remanded to the Tax Court with directions to find the correct amount of the additions to the tax, if any, under Section 294 of the Internal Revenue Code of 1939, 26 U.S.C.A. § 294.
. Early in 1946, W. H. Neil, then 22 years of age, in his second year of medical school and like most college students possessed of neither capital nor independent income nor free time in which to engage in the carrying on of any business enterprise, was at home on vacation between semesters at the medical school. His father, J. R. Neil, Manager of the Port Worth plant of the Container Corporation of America and a personal friend of O. P. Leonard of Port Worth, Texas, who was planning to purchase certain automotive equipment and rolling stock and lease them to Container Corporation for operation by lessee through its own employees, offered to finance the purchase of one-half interest in such automotive equipment and rolling stock, W. H. Neil to take such one-half interest in his own name but hold it for himself and his two minor sisters (Maryanne, aged 20, and Nancy, aged 15) in equal undivided interests, viz., one-third of such one-half interest, or one-sixth of the whole, for each of them.
Thereafter the following things were done:
W. H. Neil and O. P. Leonard, Trustee, agreed that O. P. Leonard, Trustee, should purchase automotive equipment and rolling stock to be leased to Container Corporation; that one-half of the costs and expenses were to be charged to each of them; that any profit which might be realized was to be divided equally between them annually; that all property purchased was to be owned equally by them; and that Leonard, Trustee, was to have exclusive charge and control of all matters necessary and proper for carrying out the automotive equipment and rolling stock leasing agreement with Container Corporation. Testimony of Jenkins Garrett, Leonard's counsel.
The contemplated leasing agreement was entered into between Container Corporation and O. P. Leonard, Trustee, whereby the latter agreed to furnish for the use of Container Corporation and to maintain a truck, tractor and semi-trailer for a four-year period with option on the part of lessee to purchase the same and to provide other automotive equipment and rolling stock and subject the same to the lease when requested by the Container Corporation.
J. R. Neil, father of W. H. Neil, under his aforesaid agreement with W. H. Neil, advanced the sum of $5000 in cash towards the purchase of equipment and personally guaranteed without limitation all obligations assumed by W. H. Neil under the latter's agreement with O. P. Leonard, Trustee.
When his short between-semesters vacation during which the foregoing things had occurred ended, W. H. Neil returned to medical school and remained in medical school until he graduated in 1948. Following his graduation, his internship and a residency in a Dayton, Ohio hospital and naval service kept him almost constantly absent from Fort Worth until in November, 1952.
In 1948, the O. P. Leonard, Trustee, Trucking Account, having acquired and paid for all of the physical equipment needed by Container Corporation out of the initial fund of $10,000 paid into the venture ($5000 by the Leonard interests and the $5000 advanced by J. R. Neil) and out of subsequent profits, made cash distributions to W. H. Neil totaling $9000. Out of these distributions, the $5000 cash advance of J. R. Neil was repaid to him and the remaining $4000 was invested by W. H. Neil for the benefit of himself and his sisters by lending the same to J. R. Neil at five percent interest under a continuing agreement whereby all distributions from the O. P. Leonard, Trustee, Trucking Account with respect to the interest in such truck ownership and leasing venture appearing in the name of W. H. Neil were similarly invested.
Por the calendar year 1946 through 1951, A. S. Hedley, an accountant at Port Worth, Texas, kept records for W. H. Neil and prepared ail of Neil's income tax returns from the record which ho, Iled-ley, kept. In the income tax returns so prepared by Hedley for the years 1946, 1947, and 1948, Hedley included a full fifty percent of the taxable income of the O. P. Leonard, Trustee, Trucking Account in the individual income tax return of W. H. Neil. The returns so prepared were accepted by W. H. Neil without question. When, however, W. H. Neil had graduated from medical school and had an opportunity to pay some attention to his own affairs, he discovered this and took his accountant to task, but Hedley explained that it was necessary to report the income from the leasing of trucks in this manner because there was no instrument in writing evidencing Neil's sisters' interests in the automotive equipment and rolling stock leasing venture, whereupon Neil promptly took the matter up with an attorney in general practice in the City of Port Worth, Texas, and instructed him to draw such instruments as might be necessary to evidence the ownership of Maryanne and Nancy Neil in the joint venture carried under the name of O. P. Leonard, Trustee, Trucking Account. An instrument aimed at accomplishing this was prepared by such attorney and executed by W. H. Neil and his two sisters on Jan. 1, 1949.
See Neil's testimony on pages 98 and and 99 of the Record, where he testified:
"I got to looking these returns over in 1948 and I began to wonder why I was paying all of the tax when actually this thing was set up and it was understood that it was set up for me and my sisters and they had not been paying the tax. At or about that time I consulted Mr. John Scott, an Attorney of Port Worth, told him what the arrangements were, and asked him to draw whatever instruments were necessary to make that agreement of record. Joint Exhibit 4-D which has been handed me is the document Mr. Scott prepared for me following my consultation with him in 1948."
See also the testimony of Mr. Scott, pages 101-102-103 of the Record. He testified on Page 102 that W. H. Neil and J. R. Neil stated to him that W. H. Neil was in a partnership or joint venture arrangement with O. P. Leonard, Trustee, and that W. H. Neil in such capacity was in effect a trustee for his two sisters, that he asked them if they desired that he write an amendment to the partnership arrangements that they had with Leonard to which they stated that was not necessary, that Leonard had understood it and that what they wanted was something evidencing the transaction between Neil and his two sisters and pursuant to the conversation, he drafted the document in evidence, and he also told them that the earnings of the partnership attributable to the net interest would be taxable, whether paid to them or not, and they should take care to see that the earnings of that partnership were carefully reported in tax to the three individuals. One page 103, he testified that he advised Neil and his two sisters that under the arrangement existing, each of them owned a one-third interest in the one-half interest of the Leonard Trustee Truck Account and that he thought his advice was correct.
By entries dated January, 1949, W. H. Neil's capital account in the books and records kept for him by A. S. Hedley was charged with $14,227.44 and $7,213.72 was credited to each of his sisters. When these entries had been made, W. H. Neil's books showed one-sixth of the capital of the O. P. Leonard, Trustee, Trucking Account to be owned by him and a like interest to be owned by each of his sisters. Prom and after January 1, 1949, ono-third of the total income of the O. P. Leonard, Trustee, Trucking Account was credited to the capital account of W. H. Neil and one-third to the capital account of each of his two sisters and, in all income tax returns filed by the three for the year 1949 and subsequent taxable years, each reported one-sixth of the taxable income of the automotive equipment and rolling stock leasing venture.
Neither W. H. Neil nor either of his sisters advanced any capital to the O. P. Leonard, Trustee, Trucking Account nor did any one of them at any time take part in the operations of the truck rental business. All of the affairs of that business were handled by O. P. Leonard. A. S. Hedley never at any time informed W. H. Neil that he was required to file declarations of estimated tax and no such declarations of estimated tax were filed by or for W. H. Neil for any of the years 1949, 1950 or 1951. Discovering late in 1952 that such declarations of estimated tax were required, W. H. Neil terminated his employment of Hedley because he considered him incompetent and engaged the accounting firm of Ernst and Ernst to handle his income tax matters from that time forward.
At March 7, 1955, unless W. H. Neil .was required to include a full one-half rather than one-sixth of the 1949 taxable income of O. P. Leonard, Trustee, Truck Account in his own taxable income, the assessment of any deficiency in tax or penalties or additions thereto for the calendar year 1949 was barred by limitation.
. "This agreement is made by and between William Henry Neil, Mary Anne Neil and Nancy Claire Neil.
"William Henry Neil is interested in a certain motor truck rental business with O. P. Leonard, which business is conducted under the general name and style of O. P. Leonard, Trustee. William Henry Neil's original investment and association with O. P. Leonard arose from funds supplied to William Henry Neil by J. R. Neil of Port Worth, Texas, father of the three signatories to this agreement, and which said funds were made available as a loan to William Henry Neil with the understanding by and between William Henry Neil and J. R. Neil that William Henry Neil would treat said business operation as an equal partnership between himself and the other signatories" to this agreement so that from and after January 1, 1949, all net sums received by William Henry Neil should be divided into three equal parts and paid to the three signatories to this agreement. Provided, however, that it is expressly understood and agreed that William Henry Neil is authorized to make investments for and in behalf of the other signatories to this agreement, so long as proper books and records are kept showing the interests and amounts due the respective signatories to this agreement, and each of said signatories shall have the right to demand and receive from William Henry Neil a partition of such invested funds at any time that the signatory so demands, after attaining the age of 21 years. In connection with such investments the parties agree that William Henry Neil shall not be liable for errors or losses arising from such investments, but is fully authorized to make any character of investments, prudent or otherwise, as he deems advisable, subject only to his obligations and duty to fully account to the other signatories to the agreement for their interests therein.
"In Testimony Whereof we have hereunto set our hands this first day of January, 1949.
"(Signed) W. H. Neil
"(Signed) Nancy Neil
"(Signed) Maryanne Neil"
. Compare what is said in the concurring opinion of Mr. Justice Frankfurter, in Commissioner of Internal Revenue, v. Culbertson, 337 U.S. at pages 753-754, 69 S.Ct. at page 1220:
" It is not for this Court, by redefinition or the erection of presumptions, to amend the Internal Revenue Code so as virtually to ban partnerships composed of the members of an intimate family group.
"The present case, nevertheless, is not the first manifestation of an impression that the Tower opinion [Commissioner of Internal Revenue v. Tower, 327 U.S. 280, 66 S.Ct. 532, 90 L.Ed. 670], had precisely such an effect. It seems to me important, therefore, to make crystal clear that there is no special concept of 'partnership' for tax purposes, while at the same time recognizing that in view of the temptations to assume a virtue that they have not for the sake of tax savings, men and women may appear in a guise which the gimlet eye of' the Tax Court is entitled to pierce. We-should leave no doubt in the minds of' the Tax Court, of the Courts of Appeals, of the Treasury and of the bar-that the essential holding of the Tower-case is that there is 'no reason' why the 'general rule' by which the existence of a partnership is determined 'should: not apply in tax eases where the Government challenges the existence of a,, partnership for tax purposes.' " Cf. Turner v. Commissioner, 5 Cir., 199 F. 2d 913.
. Henslee v. Whitson, 6 Cir., 200 F.2d 538; Alexander v. Commissioner, 5 Cir., 190 F.2d 753; Ardolina v. Commissioner, 3 Cir., 186 F.2d 176; Ginsburg v. Arnold, 5 Cir., 185 F.2d 913; Marcus v. Commissioner, 5 Cir., 201 F.2d 850; Miller v. Commissioner, 6 Cir., 203 F.2d 350; Nicholas v. Davis, 10 Cir., 204 F.2d 200; Seabrook v. Commissioner, 5 Cir., 196 F.2d 322; Tomlinson v. Commissioner, 5 Cir., 199 F.2d 674; Visintainer v. Commissioner, 10 Cir., 187 F.2d 519; Wofford v. Commissioner, 5 Cir., 207 F.2d 749. Cf. Commissioner of Internal Revenue v. Reece, 1 Cir., 233 F.2d 30.