Court Opinion

ID: 4482388
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:27.691481+00
Date Added: 2024-06-11T14:54:01.539794
License: Public Domain

Harron, J., dissenting: The majority view is founded upon a conception of the facts which, I am reluctant to observe, appears to be a misconception of the evidence. Many of the facts found are, to me, irrelevant to the question at issue, while the emphasis which I think should be given to some facts is not given. If the Circuit Courts are powerless to substitute their inferences for the ones we make from the evidence, no advantage would follow from any extended discussion by dissenting members of this Court of the reasons why the facts should have been found otherwise. If this were all there were to the instant case, it would be sufficient to note merely dissent. But a fundamental error of law permeates the whole of the majority opinion, which necessitates a somewhat detailed discussion. Ever since Lucas v. Earl, 281 U. S. 111, it has been the cardinal rule in our tax law that earned income is taxable solely to the person who earns the income. So firmly is the principle entrenched that, regardless of the methods available to taxpayers to deflect the tax on income other than earned income by anticipatory assignments, the taxpayer who earns his income in the form of commissions paid for personal services performed has no avenue of escape. Helvering v. Eubank, 311 U. S. 122. Until the present decision, we too have kept the doors closed. See, e. g., Clarence L. Fox, 5 T. C. 242, 245, 249; William G. Harvey, 6 T. C. 653. But just as this Court failed to appreciate the far reaching effect of Lucas v. Earl in the Harmon case (1 T. C. 40) as applied to an elective community property system, and was reversed for it (323 U. S. 44), so the present decision must surely be overturned on appeal. From the facts as found by the majority, we see that during the taxable years petitioner was the representative of four machine tool manufacturers, selling strictly on a commission basis. He traveled most of the time and the machines which he sold as the factory representative by contact with customers were billed and delivered direct to the purchaser by the manufacturer. Petitioner was then credited with commissions on the sales. The business of the alleged partnership is held to have been these sales of machines on commission by “the petitioner” (alone) and the sale of tools and machine parts out of inventory stock kept in a room in the home of petitioner and his wife. The majority opinion makes no specific finding of fact that of the gross income reported by petitioner on partnership forms, more than 92 percent in 1940 and 94 percent in 19411 represented commissions earned solely by petitioner on his sales of machines. Yet the record demands such finding of fact. Even under the findings as made, we see that the sales of tools and machine parts out of stock from the home amounted to only $10,000 or $11,000 in each of the taxable years, and that the value of the inventory kept on hand varied between $100 and $7,000. Yet the returns for 1940 and 1941 revealed ordinary net income in the respective amounts of $116,681.85 and $133,841.17. Hence, out of yearly net income of well over $100,000, less than 10 percent only can possibly be attributed to the sales out of the stock at the home. Although there is a most strong suggestion in the record that petitioner actually conducted two businesses, one consisting of his selling of the machines on commission and the other of the sale of tools and parts from the home, I appreciate that it is the function of this Court, in this case the majority, to determine whether separate transactions shall be integrated for tax purposes into one transaction or retain their separate identity. Dobson v. Commissioner, 320 U. S. 489. Nevertheless, I can not conceive that a traveling salesman, which is really what petitioner was, can reallocate for tax purposes to his wife the commissions earned as a result of his personal efforts, by the formation of a partnership which directs less than 10 percent of its activities into channels capable of being run as a husband-wife partnership. For it is patent on the face of the findings of the majority that the wife contributed no capital to the “selling on commission” phase of the business,, which required none, nor did she contribute to the control and management of petitioner’s personal contact with his customers or otherwise perform services vital in the production of the commissions earned by petitioner, to meet the tests laid down by the Tower and Lusthaus cases. Amplifying, but not changing the majority’s findings, we see that, as to the commission sales phase of the business, the wife, experienced in stenography, took dictation from petitioner over the week-ends when he was at home, typed the dictation during the week, typed and photostated the order forms which petitioner sent to the factories to place orders for machines which he sold, checked to see that War Production Board priority forms were attached to the orders, answered the telephone, and handled correspondence. The shipping of material from inventory at hand and the invoicing sales of materials and purchases of materials from manufacturers to replenish the inventory, obviously can refer only to the 10 percent “sales from the home” phase of the business, since the machine tools petitioner sold on commission were billed and delivered direct to the customer by the manufacturer. The findings do not specify whether the orders the wife secured from customers who telephoned in or who came to the store at the house related to the sales of tools and parts from the home, or to the machine tools which petitioner was selling on the road. So, too, with the “taking care of orders obtained by the other salesman.” But even if some of petitioner’s machine tool customers phoned in an order or came to the house to place an order, which is very unlikely, the fact that the wife was there to take it makes her no more a partner than the typical clerk or secretary. The services she rendered were rendered to petitioner and were not “vital” within the meaning of the Tower case to the earning of his commission income. At most, the value of the wife’s services were a business expense incurred in petitioner’s earning his commissions and we could no doubt estimate such “expense” and allow petitioner a deduction therefor. See Max German, 2 T. C. 474. I must admit also that I have grave doubts as to the answer given by the majority opinion to the respondent’s argument that no valid partnership could exist between petitioner and his wife under Massachusetts law. It is, of course, true that for purposes of taxation Congress is not limited by the conception of a partnership entertained under state law. See Burke-Waggoner Oil Association v. Hopkins, 269 U. S. 110. The mere fact, therefore, that the state recognizes the validity for local purposes of the husband-wife partnership does not mean, as shown by the Tower case, that the partnership must be recognized for tax purposes. But the converse is not necessarily true. If under state law a wife can not contract and be a partner with her husband, to the extent her “partnership” contribution consists of services performed, as here, she would not be entitled to the distributive share of the profits fixed in the partnership agreement, but only, if anything, to a quantum meruit for the reasonable value of her services. The revenue acts would be then guided by the property rights of the parties. See Morgan v. Commissioner, 309 U. S. 78. Under chapter 209, section 2, of the General Laws of Massachusetts a married woman is not authorized to enter into a partnership with her husband. In Edgerly v. Equitable Life Assurance Society, 191 N. E. 415, 417, the Supreme Judicial Court of Massachusetts pointed out that “There is nothing in the uniform partnership statute as adopted by this commonwealth * * * which changed the previously existing law with respect to the incapacity of a married woman to make a contract a partnership with her husband.” Respondent has not cited this case. In conclusion, the facts that no written partnership agreement was executed, the partnership was conducted in petitioner’s own name, and the inability under Massachusetts law for a husband and wife to enter into a valid enforceable partnership make the present arrangement questionable, to say the least. But if a partnership exists here which can be recognized for tax purposes, I can not see how the partnership income can include anything more than the $10,000 or $11,000 of gross income derived from the sales of tools and parts out of stock kept in the home. The 80-20 percent allocation procedure specified in the “agreement,” therefore, could only apply to this income, and petitioner would be taxed in full on all the commissions which he earned on his sales of machine tools as the representative of the four machine tool manufacturers. Oppek, /., agrees with this dissent.   On the returns filed for 1940 and 1941, gross receipts from the business In the respective years were reported as $135,406 and $193,242; and the ordinary net income was computed to be $116,681 and $133,841. Arithmetically, $11,000 is about 8 percent of the 1940 gross receipts from the business, and 6 percent of the 1941 gross receipts.