Case Name: COMMISSIONER OF INTERNAL REVENUE v. OLDS
Court: United States Court of Appeals for the Sixth Circuit
Jurisdiction: United States
Decision Date: 1932-06-29
Citations: 60 F.2d 252
Docket Number: No. 5853
Parties: COMMISSIONER OF INTERNAL REVENUE v. OLDS.
Judges: 
Reporter: Federal Reporter 2d Series
Volume: 60
Pages: 252–256

Head Matter:
COMMISSIONER OF INTERNAL REVENUE v. OLDS.
No. 5853.
Circuit Court of Appeals, Sixth Circuit.
June 29, 1932.
HICKS, Circuit Judge, dissenting.
Morton K. Rothschild, of Washington, D. C. (Gr. A. Youngquist, Asst. Atty. Gen., and Sewall Key, C. M. Charest, and Frank M. Thompson, all of Washington, D. 0., on the brief), for petitioner.
Maxwell W. Benjamin and C. F. Stanton, both of Detroit, Mich. (Raymond H. Berry, of Detroit, Mich., and E. Barrett Prettyman and Fred Gibbs, botli of Washington, D. C., on the brief), for respondent.
Before MOORMAN, HICKS, and SI-MONS, Circuit Judges.

Opinion:
MOORMAN, Circuit Judge.
The question for decision in this case is whether an agreement which respondent made with his three daughters constituted a partnership within the meaning of section 218 (a) of the Revenue Acts of 1918 and 1921 (40 Stat. 1070, 42 Stat. 245).
The respondent conducted a dock and timber business in Cheboygan, Mich, lie had three daughters, one married and two unmarried. Desiring to train his daughters in the handling of large sums of money, and wishing to divide Ms property during Ms lifetime so as to avoid any family disputes after his death, in December of 1918 he entered into a written agreement to sell to each of them a one-fourth interest in everything he owned. Upon the execution of the agreement each of the daughters executed to the respondent her promissory note for $400,-000, payable on demand without interest. It was stipulated in the agreement that the business should be conducted by the respondent "in his name" or in any other name that ho might choose; that the daughters should draw out of the profits of the business only such amounts as he saw fit to pay them and as they might "need for their living and comfort during his lifetime"; that they should have "the privilege of looking over the books of the company" and "everything pertaining to the business" at all times; and that, if at any time any one of them should become dissatisfied with the way the business was being conducted or should think her interest was being impaired, he would return to her her* note and take over her interest.
Upon the completion of the .agreement, entries were made on the hooks of the business debiting the respondent and crediting the daughters with the amounts represented by the notes. During the year 1919 further entries were made showing that a fourth interest in the business had been transferred to each of the daughters. In that year and the succeeding years withdrawals of profits were debited to the parties receiving them, with the result that at the close of each of these business years the books showed net balances in favor of the parties in different amounts. Upon these facts, found more in detail than herein stated, the Board concluded that a bona fide partnership was entered into, and determined the taxable income of the respondent for the years here involved — 1919, 19-20, and 19-21 — -in accordance with the provisions of section 218(a) of the Revenue Acts of 1918 and 1921.
The Commissioner contends that the agreement did not constitute a partnership within the meaning of the section of the Revenue Act referred to, and, subsidiarily, that the Board of Tax Appeals erred in receiving evidence of the purposes of the respondent in making the agreement, the negotiations with his daughters with reference thereto, and the entries on the books and accounts of the business after the agreement was made.
There is nothing in the evidence complained of which violates the rule that parol evidence is not admissible to vary the terms of a written contract. The agreement is not one which is to be interpreted as though there were a suit against the parties thereto by a third party, but is to be considered as an agreement inter'',se, which agreement the Commissioner contends was not entered into for the purpose of forming a bona fide partnership. Where the good faith of such an agreement is assailed, it is obviously permissible to show the reasons actuating the parties in making it; indeed, one of the tests of a partnership relation, as between the parties, is the intention that a partnership be formed. London Assurance Corp'n v. Drennen, 116 U. S. 461, 6 S. Ct. 442, 29 L. Ed. 688. The agreement here involved, though made in Ohio, was to be performed in all of its details in Michigan, where the business was located. In that state the question of partnership, as between the parties, is one of intention to be gathered from all the facts and circumstances. Bird v. Hamilton, Walk. Ch. 361; Beecher v. Bush, 45 Mich. 188, 200, 7 N. W. 785, 40 Am. St. Rep. 465; Canton Bridge Co. v. Eaton Rapids, 107 Mich. 613, 65 N. W. 761; Morrison v. Meister, 212 Mich. 516, 519, 180 N. W. 395; Klein v. Kirschbaum, 240 Mich. 368, 371, 215 N. W. 289. Whatever may be the rule elsewhere as to the reception of evidence touching this question, we cannot doubt that the Board of Tax Appeals, in seeking the true purpose of the agreement here in question, had the right to receive evidence that would be admissible in the courts of the state where the contract was to be performed. See Pritchard v. Norton, 106 U. S. 124, 136, 1 S. Ct. 102, 27 L. Ed. 104; Supreme Lodge, Knights of Pythias v. Meyer, 198 U. S. 508, 517, 25 S. Ct. 754, 49 L. Ed. 1146. Under the rules of evidence in Michigan, the conversations between the parties leading up. to the signing of the agreement, including their orally expressed purposes in that connection, were admissible in evidence as tending to show that the agreement was a partnership agreement.
The agreement was executory in form. In order to transform it into an executed one, and thus call the partnership into being, it was necessary that the parties do the things that they agreed to do, that the daughters execute and deliver to the respondent their respective notes, and that he transfer to them the property interest he had agreed to sell. Beckford v. Hill, 124 Mass. 588, 589; Baldwin v. Burrows, 47 N. Y. 199, 208; Irwin v. Bidwell, 72 Pa. 244, 251. The daughters evidenced their performance by executing the notes. The respondent signalized his by causing entries to be made on the books of the business showing that each of the daughters owned a fourth interest. This act, as well as subsequent acts of a like nature, were plainly admissible to show that' the agreement was executed.
It is contended that the agreement is invalid because it does not permit the daughters to withdraw their share of the profits without restraint. In our opinion, it is not essential to the validity of a partnership agreement that the rights of the partners as to the control of the business or the disposition of profits be equal. It is within the power of the parties entering into a partnership agreement to restrict the rights of the several partners to the extent of making one of them the sole agent of the othex'S for conducting the business. Beecher v. Bush, supra. They may also agree that profits shall not be distributed but put back ixx the business, or shall be distributed only upon the happening of a specified event or as authorized by the partner in charge of the business. Compare Haller v. Willamowicz, 23 Ark. 566; Richard v. Mouton, 109 La. 465, 33 So. 563; Greend v. Kummel, 41 La. Ann. 65, 5 So. 555; Gill v. Crosby, 63 Ill. 190; Chapin v. Streeter, 124 U. S. 360, 8 S. Ct. 529, 31 L. Ed. 475.
Nor in our opinion was the agreement rendered invalid by the undertaking of the respondent to repurchase upon the dissatisfaction of the daughters. Partnership agreements can be created only by contract, either express or implied. Dunham v. Loverock, 158 Pa. 197, 27 A. 990, 38 Am. St. Rep. 838. In the absence of statutory inhibitions, they are governed, as between .the parties, by the principles applicable to other contracts. There are many eases holding that contracts making fulfillment depend upon the satisfaction of one of the parties are valid. Where the fulfillment; is denied in such eases, the test of its sufficiency is the good faith of the dissatisfaction. Williston on Contracts, vol. 1, p. 74; Goltra v. Weeks, 271 U. S. 536, 548, 46 S. Ct. 613, 70 L. Ed. 1074. See, also, Mills-Morris Co. v. Champion Spark Plug Co., 7 F.(2d) 38, 39 (6 C. C. A.); Morrissey v. Broomal, 37 Neb. 766, 780, 56 N. W. 383; Over v. Byram Foundry Co., 37 Ind. App. 452, 77 N. E. 302, 117 Am. St. Rep. 327. The contract here under consideration is an executed contract of sale. It carries, it is true, an obligation to repurchase for a named consideration if the buyers shall become dissatisfied, not with the contract, but with the way the business is ran. Whether the buyers could defeat a suit on the notes or could compel a repurchase would depend, under the authorities cited, upon the good faith of their dissatisfaction. We know of no reason why an executed contract of sale which provides for- a repurchase or the return of the purchase consideration upon the occurrence of a designated determinable event is not valid and binding' as between the parties, nor why it should not be binding as to third parties. Indeed, we have no- doubt that, if this business should fail while the contract is in existence, the separate estates of the daughters, if they have any, could be reached by creditors.
It is not important that the respondent did not intend to require payment of the notes. They were executed and were collectible in his hands except upon a good-faith showing of dissatisfaction. Besides, he had the-right to g-ivo an interest in his business to Ms daughters. There is no creditor attacking the transaction, and, if the gift was made in good faith, the taxing- authorities cannot complain. Marshall v. Commissioner, 57 F.(2d) 633 (6 C. C. A.). The ease is unlike Lucas v. Earl, 281 U. S. 111, 50 S. Ct. 241, 74 L. Ed. 731, or Burnet v. Leininger, 285 U. S. 136, 52 S. Ct. 345, 76 L. Ed. 665. Here the respondent did not undertake to establish a joint lena.ney in salaries or fees to be earned or to create a subcontract and convey a part of his earnings from the business to his daughters. He sold or gave to each of them a one-fourth interest in his business, and later, when a part of it was sold for a large amount, they received their partnership share of the proceeds. In such circumstances the Boa; d of Tax Appeals was justified in holding that a partnership existed.
The order of the Board is affirmed.