Court Opinion

ID: 4608528
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:42:54.520883+00
Date Added: 2024-06-11T07:53:43.389544
License: Public Domain

ELMER KLISE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Klise v. CommissionerDocket No. 11318.United States Board of Tax Appeals10 B.T.A. 1234; 1928 BTA LEXIS 3923; March 8, 1928, Promulgated *3923  1.  Wife's Separate Income.  The petitioner and his wife were each owners of shares of stock in a Michigan corporation.  In January, 1923, this corporation was, by consent, dissolved, and all its assets transferred to a partnership.  Petitioner and his wife received and retained the same proportionate property interest in the partnership which their stock ownership in the corporation had represented.  Held, that the distributable portion of the partnership gains attributable to the wife's property interest were her separate income and can not be included in the petitioner's gross income where both husband and wife have made separate income-tax returns.  2.  Fraud Penalties.  The evidence in this case held to disprove any purpose or intent to deceive or conceal taxable income.  Charles F. Hutchins, Esq., for the petitioner.  A. H. Fast, Esq., for the respondent.  F. E. Seidman, C.P.A., as amicus curiae.TRUSSELL *1235  This proceeding results from the determination by respondent of deficiencies in income tax and penalties amounting as follows: For 1921, deficiency $107.30, penalty $53,65; for 1922, deficiency $18.73, penalty*3924  $9.37; for 1923, deficiency $5,251.93, penalty $2,625.97.  The petitioner alleges that the Commissioner erred (1) in adding to petitioner's income for the year 1923 that portion of partnership gains attributable to the property interest of his wife in an enterprise in which both husband and wife were partners, and (2) in adding fraud penalties for each of the years 1921 to 1923, inclusive.  FINDINGS OF FACT.  During the year 1923 and for some years prior thereto, petitioner and his wife were residents of the State of Michigan.  They now reside at Altadena, Calif.  Prior to January, 1923, petitioner and his wife each owned as their separate property shares of stock of the Blackmer Rotary Pump Co., a Michigan corporation, the wife owning such a number of shares as represented approximately 23 1/2 per cent of all the outstanding stock of such company and the petitioner owning such number of shares as represented less than one per cent of such outstanding stock.  Early in 1923, a proposition was formulated to transfer all of the assets of the corporation to a partnership and three options were offered petitioner and his wife; (1) to enter the partnership with respective interests*3925  therein, proportionate to the interests they held in the corporation; (2) to accept $12 per share cash for their stock; (3) to await the outcome of the sale and accept their pro rata shares of the distribution by the corporation of the proceeds of the sale.  Petitioner and his wife chose to and did enter the partnership, whereupon the interest of petitioner was less than one per cent and the interest of his wife was approximately 23 1/2 per cent.  In this reorganization all the assets of the corporation were acquired by eight members of the Klise family, each taking as their interest in the partnership the same proportionate part they had held by reason of the ownership of shares of stock in the corporation.  In November, 1923, petitioner and his wife sold their interests in the partnership to the petitioner's father for a consideration of $100,000, less commission and expenses of sale.  The proceeds were deposited in the bank to the credit of a joint account which was subject to check by either petitioner or his wife.  About the last of November, 1923, petitioner terminated his employment as general manager of the business of the partnership and he and his wife moved to California. *3926  The following spring petitioner filed an income-tax return for himself and they were advised by a professional tax adviser that the wife *1236  of petitioner had suffered a loss in connection with the disposal of her interests in the partnership, and since she had no net income she was not required to file an income-tax return.  In the fall of that year, however, she learned that she should have filed a return, whereupon she employed an accountant and tax adviser who drew up a return for her and she filed same and paid the tax reported therein amounting to about $2,400.  Later, she was assessed and she paid a penalty thereon of 25 per cent for delinquency.  The returns filed by petitioner and his wife were separate returns and they reported separtely according to their interests the amount of their shares of the distributive earnings of the partnership to the date of disposing of their interests in the partnerships.  OPINION.  TRUSSELL: The record in this action establishes facts that for each of the years here under consideration the petitioner made income-tax returns substantially in accord with the requirements of the law and of department regulations.  The fact that*3927  slight deficiencies have been found and admitted for the years 1921 and 1922 falls far short of showing that petitioner's returns for those years were either false or fraudulent, and as to the year 1923, so far as the record shows, the only question as to the truthfulness of petitioner's return was whether he should have included in his income certain partnership profits attributable to and earned by the separate property of his wife.  We are of the opinion and so find that the fraud penalties asserted by the respondent for each of the three years under consideration must be disallowed.  Concerning the question of the liability to income tax upon distributive shares of the gains and profits of the Blackmer Rotary Pump Co., a partnership, during the year 1923, it is established that substantially 23 1/2 per cent of the property interest in said partnership was the separate property of the petitioner's wife, and without regard to whether under the laws of the State of Michigan she was or could have been in all respects treated as a partner in that enterprise.  There is no question as to the fact of her separate property being entitled to share in the gains and profits of the enterprise, *3928  and that, therefore, such distributive share of gains and profits were her separate income.  In , the Board discussed this situation fully, and the reasoning and decision in that case is here followed. The item of gains and profits here under consideration having become the separate property of petitioner's wife as a resident of the State of Michigan, the ownership and control of said gains and profits could in no way have been changed by the removal of *1237  the petitioner and his wife from Michigan to California between the dates of the acquirement of the gains and profits and the date the income-tax return was required to have been made.  We are of the opinion and so hold that the $27,620.22 gains and profits produced by the Blackmer Rotary Pump Co., during that part of the year 1923 in which said company was a partnership, were properly returned for income tax by petitioner's wife and may not be added to the gross income of the petitioner.  The deficiencies should be recomputed in accord with the foregoing findings of fact and opinion.  Judgment will be entered upon 15 days' notice, pursuant to Rule 50.