Court Opinion

ID: 4478145
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:12:54.295031+00
Date Added: 2024-06-11T14:53:55.530517
License: Public Domain

Harron, J., dissenting: We have recognized a wife as a person carrying on a business under a partnership with her husband where she has contributed capital or property and services, or where she has acquired the ownership of property in the business. Albert G. Dickinson, 23 B. T. A. 1212; Clara B. Parker, Executrix, 30 B. T. A. 1231; Walter W. Mayer, 35 B. T. A. 1155. The decision of the question in each case is largely dependent upon the particular facts. In this case, there is room for difference of opinion upon the real situation which the facts present, and I do not agree with the views of the majority on what the facts here show. The fact question is, I believe, whether or not the wife of petitioner acquired complete title to a one-quarter interest in the business, including its assets. By complete title, for income tax purposes, is meant complete dominion and control, or, the entire economic interest in property which produces income. Corliss v. Bowers, 281 U. S. 376; Burnet v. Wells, 289 U. S. 670; Helvering v. Clifford, 309 U. S. 331; Douglas v. Willcuts, 296 U. S. 1. A taxpayer-member of a partnership may not escape liability for tax upon partnership business earnings through a mere assignment of the future earnings. Burnet v. Leininger, 285 U. S. 136; Helvering v. Horst, 311 U. S. 112; Mead v. Commissioner, 131 Fed. (2d) 323; certiorari denied, 318 U. S. 777; Earp v. Jones, 131 Fed. (2d) 292; certiorari denied, 318 U. S. 764. In considering the facts in this case, the situation as it existed before the agents of the Bureau of Internal Revenue investigated the arrangement should control, and little weight should be given to the situation as it was modified after the investigation pursuant to corrective steps. The situation for this Court to examine is the one which the parties created in the first instance. It is reasonable to presume that they would have continued everything in status quo but for the investigation of revenue agents. The tax years are 1938 and 1939. During the taxable period the wife had a separate drawing account, as petitioner had, but there was also a joint drawing account in the names of petitioner and his wife. The wife’s share of firm profits alone was credited to her separate drawing account. But a withdrawal of $2,500 was charged to the joint drawing account, which was drawn and used by petitioner in 1939 to purchase some Government bonds for the wife. Also, during the taxable period the wife withdrew by checks signed by her various amounts for household expenses and for her income tax but, originally, these withdrawals were charged either to petitioner’s separate drawing account or to the joint drawing account. Apparently, this was done because there were no balances of credits to the wife’s separate drawing account, all credits to the wife’s account having been transferred to credit the petitioner’s drawing account. The facts as set forth in the findings of fact do not show how the credits were made to the joint drawing account, or the source of such credits, or how the joint drawing account was made to balance or offset the separate drawing accounts of petitioner and of his wife, even though bookkeeping rules necessitate some debit and credit entries from the separate accounts to the joint accounts. The portion of the firm’s profits which were at first credited to the wife’s separate drawing account passed over to petitioner under the theory that the wife was making payment to the husband for the purchase of one-half of his one-half interest in the business. Unless there was a bona fide sale to the wife, it would have to be held that the wife did not receive and had no control over the earnings at first credited to her. All withdrawals by the wife to pay household expenses would be in fact the use of income to discharge the husband’s obligation of family support. The withdrawal by the husband of a sum to purchase bonds for his wife would be more in the class of a gift of income of petitioner to his wife. The facts, such as they are, indicate that petitioner had complete control of the share of the partnership income attributed to the wife; and such interpretation would surely be necessary if there was no bona fide sale of an interest to the wife. The facts relating to control over and use of income dovetail with the facts relating to the purported transfer of an interest in the business to the wife. The facts relating thereto are not clear-cut. There was an alleged sale of a one-quarter interest for about $20,300. Petitioner had the burden of clearly proving that ho transferred part of his interest to his wife by a sale, by a gift, or by a hybrid sale and gift. Petitioner apparently failed to meet this burden of proof, as far as the findings of fact show. Revenue agents questioned whether the alleged-sale was for an adequate consideration. Petitioner, to settle the matter, filed a gift tax return, but did not admit that a gift of any portion of the one-quarter interest was made. Petitioner appears to have rested his case in this Court upon the theory that he sold part of his interest to bis wile. The majority opinion docs not make this clear. But the record leaves a strong doubt in the matter of whether there was a bona fide sale. There was no evidence of a sale other than oral testimony. There was no bill of sale of any documentary evidence upon which the wife could establish her title. There is no clear evidence that there was a sale for adequate consideration. It appears that the conclusion reached above that there was a sale is based entirely upon self-serving statements, which are not satisfactory proof. See W. M. Buchanan, 20 B. T. A. 210. The evidence on the point is much weaker in this case than in Kell v. Commissioner, supra, one of the authorities upon which the majority view relies. In the Kell case, there was the combined evidence of a bona fide transfer of an interest found in a written document, a letter from the donor-husband, and the use of income for the benefit of the donees, separate and apart from the donor, showing that the donees in reality received the income produced by the interest given to them. Such facts are not present here. The record here seems to support the conclusion that there was no bona -fide sale of an interest in the business by petitioner to his wife. If such finding of fact were made, and I believe the record requires such finding of fact, then the evidence that petitioner received substantially all of the earnings attributed to the wife’s alleged interest destroys every vestige of petitioner’s contentions. Or, if the theory of a sale of an interest is abandoned, what evidence is there of a gift of an interest? Absolutely none, for there was no donative intent and the wife did not receive dominion and control over the fruits of a property interest, to wit, the income produced. In conclusion, giving consideration to the question within the scope of the considerations in the majority report, I would hold that the facts did not show that there was a transfer of an interest to the wife making income allocable to such interest taxable to her rather than to petitioner. But I would examine closely the evidence in other respects. Has petitioner proved that the income in question was produced by property, assuming, arguendo, that an interest in property had been transferred to the wife ? Even though the business employs some physical assets, if the earnings of the business are due primarily to the personal efforts of petitioner and the others, excepting the wife, who rendered no services, then I would question that the wife was carrying on a business with her husband within the purview of section 181 of the Internal Revenue Code. The income of the business here very largely depends upon the skill in buying the product which is processed or manufactured. Capital in the form of money is required. Did the wife in reality contribute to such capital? The majority report does not show any of the facts within this realm of inquiry. Whether or not the Mead and Earp cases would control l(ere, in principle, depends upon the facts relating to the manner in which the income is produced. In cases involving marital partnerships, I believe the burden of proof upon the petitioner extends to proving that the income in question is produced by property and not by personal efforts, where the wife is not contributing any services and the husband’s contentions are based upon the theory that the wife has contributed capital to the business. If the “interest” of the wife amounts to no more than the husband’s assignment of future earnings, there should not be allowed a shifting of tax liability, because of the established rule that earnings are taxable only to the person who earns. It appears that petitioner has not produced evidence to show conclusively that the arrangement was not a mere assignment of future earnings to the wife. Smith and Ofper, JJ., agree with this dissent.