Court Opinion

ID: 4480945
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:36.585117+00
Date Added: 2024-06-11T14:53:59.942070
License: Public Domain

Black, J., dissenting: I dissent from that part of the majority opinion wherein it holds that no partnership was formed under the partnership agreement of March 1, 1941, between Jacob DeKorse, Louis Koppy, Ella Koppy, Helen DeKorse, and Arthur Koppy, acting through his mother as guardian. I think a valid partnership was formed by this agreement, at least as to Jacob DeKorse, Louis Koppy, Ella Koppy, and Helen DeKorse. They were all adults and fully able to contract as partners and did in fact do so. Whether the minor, Arthur Koppy, was competent to contract under the laws of Michigan through his mother acting as his guardian, although she had not yet been appointed his legal guardian by the court, I express no opinion. Cf. Justin Potter, 47 B. T. A. 607, in which the validity of a similar partnership was upheld. I have not investigated Michigan law on that subject and the majority opinion makes no point of it. The majority opinion simply holds that the partnership should not be recognized for the purpose of the income tax because what was done amounted to nothing more than an assignment by petitioners Jacob DeKorse and Louis Koppy to members of their families of a part of their income to be earned in the future. I think the undisputed facts are directly contrary to what the majority opinion holds. What are some of the undisputed facts in this case? First, there is the resolution adopted on February 28, 1941, which provided for the dissolution of the Koppy-DeKorse Tool & Die Co., a corporation, and the transfer of its assets to petitioners Jacob DeKorse and Louis Koppy in certain named proportions and to Ella Koppy, Arthur Marvin Koppy, and Helen DeKorse in certain other named proportions. Following the adoption of this resolution providing for the dissolution of the corporation and distribution of its assets to Louis Koppy, Ella Koppy, Arthur Marvin Koppy, Jacob DeKorse, and Helen DeKorse, these same five individuals entered into a partnership agreement to conduct as a partnership the business of the Koppy-DeKorse Tool & Die Co. previously conducted as a corporation. This partnership agreement which was entered into by petitioners and their wives and Arthur Koppy is incorporated in the findings of fact and seems to me to be a well integrated and well drawn legal document. It contains one of the clauses essential to partnership agreements, which is that the parties agree to share profits and to be obligated for any and all deficits and losses of the partnership business. The Board of Tax Appeals in prior cases quoted from Chancellor Kent the following definition of a partnership: “A contract of two or more competent persons to place their money, effects, labor and skill, or some or all of them, in lawful commerce or business, and to divide the profit and bear the loss in certain proportions.” See Mer-tens Law of Federal Income Taxation, sec. 35.03. It seems to me that the partnership agreement in the instant case clearly meets the tests provided in Chancellor Kent’s definition. The definition of partnership found in the Internal Revenue Code is even broader in scope than Chancellor Kent’s definition. See sec. 3797 (a) (2), I. R. C. It is, of course, the Federal law which is controlling here. Here are some of the facts in the record which show that the partnership of Koppy-DeKorse Tool & Die Co. was not only legally formed, but that it was thereafter lived up to: Under petitioners’ instructions their accountant made book entries to show a change of the business to a partnership. Capital accounts were set up for the five partners, in each of which was entered an amount of approximately $10,035.13 representing one-fifth of the appraised value of the assets as of February 28, 1941. Notice of the organization of the partnership was given to Federal and state authorities in connection with social security and unemployment compensation matters and also to insurance companies and other interested parties. A partnership return was filed by the partnership for the period March 1 to December 31,1941, which showed a net profit of $140,261.84. The partners’ shares of the earnings as shown on the return, each share including 20 percent of the profits plus his or her salary or wages, were as follows: Helen DeKorse $24,774. 00 Jacob DeKorse 29.773. 99 Arthur Koppy. 25,360.86 Ella Koppy-25, 579. 00 Louis Koppy— 34.773. 99 Total_ 140.261. 84 Each partner’s drawing' account on the company’s books was credited with $14,754.48 of profits, plus his or her salary or wages, and a credit of $10,000 was made to each of their capital accounts. Checks were issued to each of the partners for their distributable shares of the profits. Some of these funds were invested in war bonds and tax bonds. Neither of petitioners exercised any control over the funds that were distributed to their wives. Ella Koppy, as guardian for Arthur, received and retained control over his share of the profits. Yet in the face of the foregoing undisputed facts and other facts which are in the record, the majority opinion holds (I quote from the opinion) : Viewing the transactions here as a whole, we think that what the petitioners intended to do was not to make out and out gifts of the assets of the business to their wives and Arthur Koppy, but was to give them portions of the income from the business so as to avoid income tax liability thereon, a thing not countenanced by our income tax laws. Burnet v. Leininger, 285 U. S. 136; Helvering v. Horst, 311 U. S. 112; Helvering v. Eubank, 311 U. S. 122. * * * It seems to me that Burnet v. Leininger, supra, the first case cited in the majority opinion, is not applicable to the facts of the instant case. In that case the Supreme Court affirmed a decision of the Board of Tax Appeals reported in 19 B. T. A. 621. The partnership there involved was the Eagle Laundry Co., in which Charles P. Leininger owned a one-half interest and another partner owned the other one-half interest. Leininger undertook to make his wife a subpartner in his one-half interest without making her a full partner in the Eagle Laundry Co. This fact is shown in the following quotation taken from our opinion in that case: It is observed from the testimony in the case that the books and records of the Eagle Laundry Co., the partnership, contained no entry reflecting part ownership by the wife or any payments to her or for her account. Partnership returns for the taxable years 1921, 1922, and 1923 were sworn to by petitioner and state that the names of the partners are C. P. I.eininger and M. T. Monaghan, each owning one-half. We note further that Mrs. Leininger contributed neither capital nor services to the partnership and that ail checks covering profits were made to the husband and by him deposited in a joint account. * * * On these facts we held that Mrs. Leininger was at most a subpartner in her husband’s one-half interest in the Eagle Laundry and that this ■amounted only to an assignment of income and that such an assignment was ineffective to relieve the assignor, Leininger, from payment of tax on the income thus assigned. This view was upheld by the Supreme Court, Chief Justice Hughes saying in his opinion, among other things, as follows: * * * There was no transfer of the corpus of the partnership property to a new firm with a consequent readjustment of rights in that property and management. If it be assumed that Mrs. Leininger became the beneficial owner of one-half of the income which her husband received from fho firm enterprise, it is still true that he. and not she, was tlip member of the firm and that she had only a derivative interest. [Italics supplied. | In the instant case we have no such situation as the Supremo Court pointed out was present in the Leininger case. Here we have the creation of a new partnership to succeed the dissolved corporation, witli recognition of the wives and Arthur Koppy as full partners, entitled to share in the profits and liable for the losses. Those facts, I think, make the instant case clearly distinguishable from the Leininger case. The other two cases cited by the majority opinion, Helvering v. Horst., supra, and Helvering v. Eubank, supra, are equally as inapplicable as Burnet v. Leininger. They are both clearly assignment of income cases and fall within the ambit of Lucas v. Earl, 281 U. S. 111. Instead of citing the Horst and Eubank cases, I think it would have been much more appropriate to the facts of the instant case if the majority opinion had given consideration to what the Supreme Court said in Blair v. Commissioner, 300 U. S. 5. In that case, among other things, the Court, speaking through Chief Justice Hughes, said: Our decisions in Lucas v. Earl * * * and Burnet v. Leininger * * * are cited. * * * These eases are not in point. The tax here is not upon earnings which are taxed to the one who earns them. * * * In the instant case, the tax is upon income as to which, in the general application of the revenue acts, the tax liability attaches to otonership. See Poe v. Seaborn, supra; Hoeper v. Tax Commission, 284 U. S. 200. [Italics supplied.] If Ella Koppy, Arthur Koppy, and Helen DeKorse did not own their proportionate share of the assets in the partnership of Koppy-DeKorse Tool & Die Co., which was earning the income in question, then it would be difficult for me to understand what it takes to constitute ownership. If they did own their proportionate share of the assets, as I think they surely did, then how can it be said in view of the Supreme Court’s decisions in such cases as Poe v. Seaborn, supra, and Blair v. Commissioner, supra, that their shares of the income should be taxed to Jacob DeKorse and Louis Koppy? I think to say so is altogether wrong and is in direct conflict with the two Supreme Court cases which I have just cited. In considering the instant case we should bear in mind that this is not a case where the earnings of the partnership are the personal service earnings of Jacob DeKorse and Louis Koppy, the husbands. These two were the managing partners and each was paid a salary for his services. That salary each returned as his own individual income and, so far as I can see, each entirely complied with the law. In a manufacturing or commercial partnership where capital is a substantial income-producing factor and where the partners have agreed among themselves upon salaries to managing partners, which are regarded as adequate compensation for their personal services, and they return that as their own individual income, there is no reason why we should question their judgment in that respect, especially where the Commissioner has made no point of it. Inasmuch as the partnership here was not one where the earnings of the business were purely personal service earnings of Jacob DeKorse and Louis Koppy, I regard such cases as Doll v. Commissioner, 149 Fed. (2d) 239, affirming 2 T. C. 276, as altogether inapplicable. It is clear, from both the Tax Court’s opinion and that of the Circuit Court of Appeals, that the earnings in that case were strictly personal service earnings and, therefore, controlled by Lucas v. Earl, supra. That fact, it seems to me, is made perfectly plain in the following quotation from the Circuit Court’s opinion: As to the “circumstances attendant on * * * its * * * operation” * * * of the business during this contract, the evidence is as follows: The business was -purely one of personal services for the earnings of commissions in selling or causing the sale of shoes of St. Louis manufacturers to dealers in Cuba and Puerto Rico, petitioner bearing his own selling expenses. It was conducted in one of two ways dependent on whether the buyer came to St. Louis or was contacted in Cuba or Puerto Rico by petitioner or the local representative. [Italics supplied.) Further, I think the majority opinion is in direct conflict with Davis B. Thornton, 5 T. C. 116. In that case there was, as here, the dissolution and liquidation of a corporation, followed by the formation of a partnership between a husband and his wife to carry on the same business hitherto carried on by the corporation. We upheld the validity of the partnership. True, in that case the wife was a stockholder in the corporation which was dissolved, she having received her stock as a gift from her husband, most of it just a short time before the formation of the partnership, while here the husbands made gifts to their wives of a proportionate part of their assets in the corporation at the time it was liquidated. This, of course, is a difference in detail, but it seems to me that the difference is unimportant and can not make any possible difference in principle upon which a well grounded distinction can be based. It is, therefore, my judgment that the majority opinion is in direct conflict with Davis B. Thornton, supra, adopted by this Court today, as well as contra to such other cases as Robert P. Scherer, 3 T. C. 776; J. D. Johnston, Jr., 3 T. C. 799; Felix Zuhaitis, 3 T. C. 814; and M. W. Smith, Jr., 3 T. C. 894. The effect of the majority opinion, in my judgment, is to overrule the last four cases referred to without even mentioning them. I, therefore, respectfully record my dissent. Leech, Tyson, and Disney, JJ., agree with this dissent.