Court Opinion

ID: 4480886
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:34.762526+00
Date Added: 2024-06-11T14:53:59.921251
License: Public Domain

Black, J., In considering an issue of the kind which we have to decide in the instant case, it seems to me that there are certain fundamentals which we might well take into account. Among these fundamentals, as I view them, are: We live in a free country where a man can do with his property as he pleases so long as it is done in pursuance of a lawful purpose — he can either give it away or he can keep it. If he decides to give away part of his property, he may lawfully give it to his wife and children, the most natural objects of his bounty. The majority opinion in the instant case is written around the premise that petitioners did not make completed gifts of part of their interests in Michner Plating Co. to their respective wives and children. It seems to me that, in the light of the undisputed facts which are in the record, this holding of the majority is altogether untenable. Whether a completed gift is made in a given case of course depends upon the facts which are present, just the same as most other tax cases depend upon their facts. But I wish to emphasize in this dissent that whether or not a gift has been made is not a pure question of fact, such as what is the value of a given piece of property, or whether a debt became worthless in a certain year, or whether salaries paid officers and employees by a corporation are reasonable. These latter are, as I view them, pure questions of fact. But whether a gift has been made involves questions of substantive law as well as of fact. A well known and leading case which discusses the elements necessary to a completed gift is Edson v. Lucas, 40 Fed. (2d) 398. In holding that there were no completed gifts in the instant case, I fear the majority opinion has given scant attention to the principles of law laid down by the court in Edson v. Lucas. What are the facts in the instant case which show that petitioners did make valid and completed gifts to their respective wives and children ? First of all, on January 2,1941, the four petitioners herein executed a formal written agreement in which they proposed to give their respective wives and children certain proportions of their interests in the Michner Plating Co., which was then being operated as a partnership by the four individuals who are petitioners here. This agreement is in the record and, while it is entirely too lengthy to incorporate in full in this dissenting opinion, I think it is correct to say that it is a well drawn and well considered legal document and, in connection with the written partnership agreement which was executed on the following day, fully accomplished the purposes for which it was intended. See Commissioner v. Tower, 148 Fed. (2d) 388. The partnership agreement which was entered into by petitioners and their wives and children on January 3, 1941, is in the record. It is a well integrated and well drawn partnership agreement, in my judgment. The first paragraph of the agreement states the nature of the partnership and gives the names of its members and provides in part as follows: Now, Therefore, all the aforesaid parties hereby enter into a co-partnership agreement for the purpose of carrying on a general metal plating business in the City of Jackson aforesaid under the style and firm name of Michner Plating Company, being a successor to the co-partnership heretofore carried on under that style and firm name by the parties of the first part herein named and the names of the members of this co-partnership and their undivided percentage interests are as follows: [Here are set out the names of the respective partners and their proportionate interests.] Paragraph 2 of the agreement provides for the term of the partnership and states: The partnership as herein formed shall commence on the 4ib day of January, A. D. 1941, and shall continue for a period of twenty (20) years or for such lesser or greater period as the parties hereto may specifically agree upon at some later date. Paragraph 5 of the agreement states the capital arrangement of the partnership as follows: As a contribution to the capital of said partnership, the parties hereto shall contribute their respective undivided percentage interests as hereinbefore set forth in the assets of the Michner Plating Company except as may hereinafter be specifically provided, including all of the machinery, tools, equipment and appliances of said business. Paragraph 9 of the agreement provides for the sharing of profits and losses, as follows: Each partner shall share proportionately to their respective interests in all of the profits and losses that may arise out of or be incurred in the transaction of said partnership operations, except that the salaries drawn and the bonuses received by the said Joseph Michner and the said Walter Michner in accordance with the agreement herein contained, shall not be charged up against their respective shares of said profits, but shall be considered os additional compensation for services rendered. Paragraph 16 of the agreement provides for the distribution of assets on the dissolution of the partnership, as follows: In case of a termination of this partnership from whatever cause except as-hereinbefore stated, the parties hereto agree that they will make a true and just final accounting of all matters relating to said business and in all cases duly adjust the same. After all of the affairs of the partnership are adjusted and its debts paid off and discharged, then all the stock as well as the gain or increase thereof which shall appear to be remaining either in money, goods, fixtures, debts or otherwise, shall be divided between the parties hereto in accordance with their proportionate interests. Paragraph 17 of the agreement refers to the distribution of profits and reads as follows: Semi-annually upon the first day of June and upon the first day of December during the continuance of this partnership, in the event that the books of said partnership disclose a balance of funds over and above the total of all outstanding claims and the amount of the original capital, then in such an event the amount of profits of said business as shown by the books shall be divided between the parties hereto in accordance with their proportionate interests and withdrawn from said business unless the parties mutually agree to leave such funds in such business for the good of the business. There are other provisions in the partnership agreement not quoted above for the reason that to do so would make this dissenting opinion too long. The provisions quoted will, I think, make it perfectly plain that the partnership agreement was a well integrated and well drawn document. After the formation of the new partnership as evidenced by the foregoing partnership agreement dated January 3, 1941, drawing accounts and investment accounts for each of the fourteen partners were set up on the books of the company. Division of profits was made by checks of the company payable to each of the fourteen partners in accordance with his proportionate interest. Public recognition was given to the partnership. Dun & Bradstreet was notified of the new partnership and its membership. The bank where the company did busiteess was told about it as well as several factories with which the company did business. In July of 1941 a suit was started in the Circuit Court for the County of Ottawa wherein the fourteen members were named as party plaintiffs. Yet in the face of all these undisputed facts the majority opinion says there were no completed gifts from petitioners to their respective wives and children. Therefore, says the majority opinion, the latter had nothing with which they could make a capital contribution to the business. Suppose we had here a gift tax case instead of an income tax case, does any one suppose that the Commissioner would be contending that the gift which petitioners made their wives and children was incomplete ? Certainly not. He would be taxing the gift in the year it was made, 1941, as would be his duty. See Robert P. Scherer, 3 T. C. 776. I do not think the gifts were rendered in the least invalid by that clause in the agreement executed January 2,1941, by the four petitioners here, who were then the four partners composing the firm of Mich-ner Plating Co., which provided for their continued management of the new partnership which was about to be organized. That clause reads in part as follows: It is further mutually understood and agreed that the parties hereto, having at the present time the control and management of said partnership, shall retain such control and management of said partnership regardless whether such afore-described transfers are made or not. * * * The partnership agreement of January 3, 1941, signed by all the fourteen partners, fully recognized this continued management and control of the four former partners provided for in the above quoted paragraph. This provision for management and control in no wise invalidated the new partnership. On this point see Commissioner v. Olds, 60 Fed. (2d) 252, and Robert P. Scherer, supra, at page 793. In arriving at its conclusion that what was done in the instant case by petitioners amounted to a mere assignment by them of a part of their partnership profits to their wives and children, the majority opinion cites only one Supreme Court case, Burnet v. Leininger, 285 U. S. 136. It seems to me that Burnet v. Leininger is altogether inapplicable to the facts in the instant case. In that case the Supreme Court affirmed a decision of the Board of Tax Appeals reported at 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. Leininger and M. T. Monaghan, each owning one-half. We note further that Mrs. Leininger contributed neither capital nor services to the partnership and that all 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 subpart-ner 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, among other things, in his opinion, 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 he assumed that Mrs. Leininger became the beneficial owner of one-half of the income which her husband received from the firm enterprise, it is still true that lie, and not she, was the member of tire firm and that she had only a derivative interest. [Italics supplied.) In the instant case we have no such situation as the Supreme Court pointed out was present in the Leininger case. Here we have the creation of a new partnership with recognition of the wives and children as full partners, entitled to share in the profits and liable for the losses. There was a transfer by the old partnership of its assets to the new partnership, a thing which Chief Justice Hughes pointed out was not present in the Leininger case. The assignment of income doctrine of Burnet v. Leininger, supra, and Lucas v. Earl, 281 U. S. 111, upon which the Leininger case was decided, would be present in the instant case if, for example, Joseph Michner and Walter Michner, who were paid $250 and $200 a month, respectively, plus bonuses, as managing partners, had assigned part of their earnings to their wives. Such an assignment would have been ineffective under Burnet v. Leininger and Lucas v. Earl to relieve them from paying income tax on the part of their compensation thus assigned. But no such assignments were made by them. They returned as their individual income the salaries and bonuses which were paid them by the partnership for their services. The balance of the partnership profits, after the deduction of salaries and bonuses paid to Joseph and Walter Michner and other expenses of the firm, was divided among the respective partners, and each returned his share of the profits for taxation. Sections 181 and 182 of the Internal Revenue Code require each individual who is a member of a partnership to return for taxation his share of the net income of the partnership, whether it is distributed to him or not. These statutes have been complied with in the instant case, and I do not see where the law requires more. If it be said that to tax partnership income in this manner where there is a valid family partnership, as I earnestly believe there is here, loses revenue to the Federal Government, then the remedy lies with Congress and not the Tax Court. Congress could, of course, tax partnership income as a unit, as it does corporation income, but it has not done so. Therefore, I see no legal authority to tax all the income of a valid partnership such as we have here to only four of the partners as the majority opinion undertakes to do. Again I must emphasize that this is no mere assignment of income case. This is a case where the property which produced the income has been transferred. It is certainly the well recognized rule that the ownership of property determines the taxability of income. Poe v. Seaborn, 282 U. S. 101. In considering such a question as we have here, I think we would do well to consider what the Supreme Court said concerning this principle of ownership of property determining the taxability of income 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 cases are not in point. The tax here is not upon earnings which are taxed to the one who earns them. * * * In tiie instant case, the tax is upon income as to which, in the general application of the revenue acts, the tax liability attaches to ownership. See Poe v. Seaborn, supra ; Hooper v. Tax Commission, 284 U. S. 206. [Italics supplied.] The Supreme Court, in its later decisions in Helvering v. Horst, 311 U. S. 112, and Helvering v. Eubank, 311 U. S. 122, both of which were assignment of income cases, seems to make it plain that its decision in the Blair case is not overruled. Just about one year ago the Tax Court, after very considerable discussion and consideration, adopted Robert P. Scherer, supra; J. D. Johnston, Jr., 3 T. C. 799; Felix Zukaitis, 3 T. C. 814; and M. W. Smith, Jr., 3 T. C. 894. The Commissioner has published his acquiescence in all four of these decisions. All four of them were referred to by the Sixth Circuit in a footnote to its recent opinion in Tower v. Commissioner, supra. It was my thought that the adoption of these cases would set a pattern which would enable the Tax Court to reach a fair degree of uniformity in the decision of these family partnership cases where capital is a substantial income-producing factor, and where the partnership earnings were not due primarily to personal services as they were in one of the line of cases cited in Robert P. Scherer, supra. None of the four cases mentioned above, except that of Felix Zukaitis are even referred to in the majority opinion. The distinction which the majority opinion undertakes to make as to that case is, in my opinion, a very unsubstantial one. It is stated as follows: If the business of Miehner Plating Co. had been operated by Joseph Michner as a sole proprietorship and he had undertaken to make his wife an equal partner, claim for recognition of the partnership might be made on the reasoning of cases like Felix Zukaitis, 3 T. C. 814, blit that is not the situation. * * * It indeed seems to me a strange principle of law which would recognize the validity of a partnership between husband and wife where the husband was operating a business as a sole proprietorship, as was Zukaitis, and gave his wife a one-half interest and thereupon entered into a partnership agreement with her, and at the same time would refuse to recognize as valid a similar partnership where four partners did the same thing. In other words, one can do it and it is legal, but four can not. I must confess that I am unable to grasp the reasoning back of such a distinction. As I have already stated, the majority opinion makes no attempt to distinguish Robert P. Scherer, J. D. Johnston, Jr., and M. W. Smith, Jr., all supra. It is my opinion that the effect of the majority opinion is to overrule all three of those cases without even mentioning them. This, I think, can only make for much •confusion and is a most unfortunate situation. I, therefore, respectfully record my dissent. Tyson, J., agrees with this dissent.