Court Opinion

ID: 9446937
Source: CourtListenerOpinion
Date Created: 2023-08-03 22:22:09.717145+00
Date Added: 2024-06-11T17:30:50.846953
License: Public Domain

RIVES, Chief Judge
(concurring specially).
The documentary evidence coupled with the undisputed and admittedly credible testimony is clearly sufficient to control the disposition of this case. All of the income in question was derived from a truck lease agreement with Container Corporation of America entered into by O. P. Leonard, Trustee, pursuant to an agreement quoted in the margin.1 The *570taxpayer’s contribution to that venture consisted entirely of capital and credit: $5,000.00 in cash which he had borrowed from his father, his own agreement to pay “one half of the expenses and cost incurred in said joint adventure,” and, doubtless of more importance to Leonard, the letter from the taxpayer’s father guaranteeing performance of his obligations.
By January 1, 1949, the O. P. Leonard, Trustee, truck account was enormously prosperous with no unpaid liabilities and no reasonable prospect of becoming insolvent. From his profits the taxpayer had repaid to his father the $5,000.00 loan. As of that date, at the request of taxpayer and his father, an attorney prepared the agreement between the taxpayer and his two sisters which has been quoted in full in footnote 2 to Judge Hutcheson’s opinion.
But for the agreement of January 1, 1949, it may be that we could accept as not clearly erroneous the Tax Court’s finding that the taxpayer’s two sisters were not partners and owned no interest ,in the venture.2
That finding is, however, subject to serious factual criticism and, of more importance, it discloses that the Tax •Court was laboring under a mistaken conception of the law.
The original agreement of March 1946 was prepared by Jenkins Garrett, Esquire the general counsel for the Leonard interests, at Mr. Leonard’s directions without consulting the taxpayer. Mr. Garrett had no recollection of any conversation with the taxpayer’s father, and testified ;“***! have no independent recollection of dealing with anyone other than Mr. O. P. Leonard.” Mr. Garrett further testified:
“ * * * Mr. O. P. Leonard asked me if it was possible to work out ’ on (sic) arrangement whereby his children and Mr. Neil’s children could enter into a business of furnishing trucks to Container Corporation.
* * * * * *
*571“ * * * When he explained his concern or asked the question as to whether or not minors owning the trucks would make any difference, he told me that neither he nor Mr. J. R. Neil, who is the father of W. H. Neil, wanted this for themselves, but wanted it for their children. It was definitely my understanding at that time that the joint venture was for the children of Mr. O. P. Leonard and the children of Mr. J. R. Neil.”
Thus, the taxpayer’s testimony did not stand alone, as indicated by the Tax Court, but was strongly corroborated by the testimony of Mr. Garrett. True, even Mr. Garrett’s testimony is at variance with the agreement which he prepared, but it must be remembered that he was primarily protecting the interest of his own client, Mr. Leonard. Leonard was interested in seeing that the Neils paid $5,000.00 cash into the venture and that the credit of the taxpayer and of his father was pledged. The distribution of the Neils’ share of the profit was of no concern to Leonard.
Further, the Tax Court itself states: “We do not doubt that there was some intent and understanding that the petitioner’s two sisters were to derive some benefit from his enterprise, provided it turned out to be successful.” Thus, the Tax Court concedes that the two sisters were to derive some benefit from the enterprise. The only such benefit which the evidence tends to establish was that the sisters should share equally in the profits with their brother, the taxpayer.
The Tax Court declined to give effect to that understanding because it did not conform to the technical requirements of a common-law partnership, saying: “But this is not to say that they became partners'. The sisters were in no way mentioned in, the agreement with Leonard. There was quite apparently no obligation on their part to share in losses.”
The original agreement of March 1946, heretofore quoted in footnote 1, does not use words appropriate to articles of partnership but -repeatedly refers to the truck leasing arrangement as a “joint adventure.” Mr. Garrett, the attorney who drew that agreement and also the lease to Container Corporation made a part of the agreement, testified:
“Well, it is merely a lease arrangement akin to a joint ownership of a building which you lease to a tenant. The Container people furnish the drivers and do all the details of it; however, O. P. Leonard as Trustee does handle all the relationships with the representatives of Container Corporation.”
Certainly the original agreement was not a common-law partnership in the conduct of which each of the partners acts as the general agent of the others. To the contrary, no one had authority to bind Leonard who was “to have exclusive charge and control of all matters * No services whatsoever were required of the taxpayer or of anyone other than Leonard. The $5,000.00 cash having been paid and the credit obligations of the taxpayer and his father not being in default, neither Leonard nor the enterprise could call for more. The taxpayer, whether for himself alone, or for himself and his two sisters, was then entitled to receive one half of “any profit which might be realized from said operation.” The sisters, being minor children, could not agree to be responsible for any possible losses. Leonard did not look to them, but was content to rely upon the credit of the taxpayer and his father. The interest in the enterprise in the name of the taxpayer was as truly a property right subject to transfer and assignment, or .to being held in trust, as if the business had been incorporated and fifty per cent of its capital stock had been issued in the taxpayer’s name. The enterprise was a typical “joint adventure,” and was correctly so designated by the experienced counsel who drew- the agreement.
In Haley v. Commissioner of Internal Revenue, 5 Cir., 1953, 203 F.2d 815, 818, 819, this Court speaking through the writer said:
“A joint venture has b,een defined as a ‘special combination of two or more persons, where in some specific *572venture a profit is jointly sought without any actual partnership or corporate designation’. Tompkins v. Commissioner, 4 Cir., 97 F.2d 396, 398; Aiken Mills v. United States, 4 Cir., 144 F.2d 23; See also Mertens’ Law of Federal Income Taxation, Vol. 6, Sec. 35.05, p. 118. Section 3797(a) (2) of the Internal Revenue Code (beginning with Sec. 1111(a) (3) of the 1932 Act)2 has defined the term ‘Partnership’ so as to include a joint venture, as follows:
“ ‘Partnership and partner. The term “partnership” includes a syndicate, group, pool, joint venture, or other unincorporated ■ organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a trust or estate or a corporation; and the term “partner” includes a member in such a syndicate, group, pool, joint venture, or organization.’
“2. For legislative history of this section see Report of Committee on Ways & Means on the Revenue Bill of 1932 contained in Seidman’s ‘Legislative History of Federal Income Tax Law,’ at p. 501.”
The written agreement between the taxpayer and his two sisters became effective January 1, 1949, and the tax years here involved, that is the calendar years 1949 to 1953, inclusive, are all subsequent to that agreement. The Tax Court’s construction of that agreement3 seems excessively technical and narrow. The intent of the agreement was obviously to place the two sisters in the same position as if the facts recited in that agreement had been true, that is, as if the $5,000.00 loan from the father (and, though not recited, the extension of the father’s credit) had been with the understanding that the taxpayer would treat the business operation as an equal partnership between himself and his two sisters. The instrument of January 1, 1949, was adequate to create a valid trust under the provisions of the Texas Trust Act.4
The Tax Court’s construction of the agreement of January 1, 1949 (footnote 3, supra), is contrary to the undisputed evidence showing the contemporaneous *573construction of the instrument by the parties thereto, as indeed recited in earlier findings by the Tax Court itself:
“Capital accounts for Maryanne and Nancy were first entered in the accounts of the petitioner by entries dated January 1949. At that time $14,427.44 was charged to the petitioner’s capital account and $7,213.72 was credited to each of his sisters. The entries were described as distribution of Joint Venture to W. H. Neil, Nancy Neil, & Mary Ann (sic) Neil.’ By other journal entries dated December of each of the years 1949, 1950, 1951, and 1952 charges were made on the petitioner’s records to ‘Investment a/c’ and credits were made to the petitioner and to each of his sisters of one-third of the amount charged to the investment account. The amounts so charged and credited are the same amounts.” 5
The Tax Court was of the opinion, however, that the agreement of January 1, 1949, could not be effective to shift the tax from the taxpayer on the income attributable to the interest standing in his name in the leasing venture under the holdings of Lucas v. Earl, 1930, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731, and Burnet v. Leininger, 1932, 285 U.S. 136, 52 S.Ct. 345, 76 L.Ed. 665.
Since the income was derived solely from a capital and credit investment in the joint venture, and since the taxpayer (with the consent of his guarantor) had validly agreed that each of his sisters was the beneficial owner of a one-third interest in that investment, this was more than a mere anticipatory assignment of income condemned in Lucas v. Earl, supra. To employ that case’s famous figure of speech, his sisters had a share not only in the fruits but also in the tree on which they grew.
On the surface the facts of the present case seems strikingly similar to those in Burnet v. Leininger, supra,6 but the resemblance is purely superficial. Leininger and one Monaghan (or Monaghan’s heirs) were active partners in a common-law partnership known as Eagle Laundry Company. Leininger undertook to make his wife “a full equal partner with him in his interest in the partnership.” [285 U.S. 136, 52 S.Ct. 345.] Of course, as the Supreme Court commented, Leininger’s wife could not be made a member of the partnership “without the consent of the other, partner or partners, and there is no finding of such consent.” In the case at bar, the situation is different. Leonard, taxpayer’s co-adventurer, had absolutely no concern with the disposition of the pure property interest in the business which stood in the taxpayer’s name. In Burnet v. Leininger the income was produced by “the capital of the firm and the labor and skill of its members employed in combination through the partnership relation in the conduct of the partnership business.” Here, the Neil interest in the joint venture consisted entirely of an investment of capital and of the credit of the taxpayer and his father, at whose instance the agreement of January 1, 1949, was prepared and executed. The present case is governed by Blair v. Commissioner, 1937, 300 U.S. 5, 11, 57 S.Ct. 330, 81 L.Ed. 465, et seq., rather than by Burnet v. Leininger, supra. In a somewhat similar situation, Judge Lindley speaking for the Seventh Circuit said: “Furthermore, we are dealing with an agreement which made the parties joint venturers and which, thus, amounted to much more than the equitable assignment involved in the Leininger *574case.” Rupple v. Kuhl, 7 Cir., 1949, 177 F.2d 823, 826. In United States v. Atkins, 5 Cir., 1951, 191 F.2d 146, 147, Judge Holmes speaking for this Circuit said:
“This is not a case of the taxpayer assigning fees, wages, salaries, or other income, to be earned by him in the future from work to be performed by him in the future. Atco’s income resulted from capital invested in operating partnerships, and from the services performed by managing partners. The taxpayer did not assign income from those operating partnerships: he assigned his share, his entire interest, in those partnerships to a separate partnership (Ateo Investment Company), the members of which firm were engaged in a joint venture. See Rup-ple v. Kuhl, 7 Cir., 177 F.2d 823, 825. Burnet v. Leininger, 285 U.S. 136, 52 S.Ct. 345, 76 L.Ed. 665, distinguished.”
•See also, West v. Commissioner of Internal Revenue, 5 Cir., 1954, 214 F.2d 300.
Sommers v. Commissioner, 2 Cir., 1952, 195 F.2d 680, 681, involved another “sub-venture” where the taxpayer’s wife had ■made a substantial contribution to capital. In a per curiam opinion, the Court (Swan, Chief Judge, and Learned Hand and Augustus Hand, Judges) ruled for the taxpayer and agreed with the doctrine laid down in Rupple and Atkins, supra.
Subsequent to January 1, 1949, it is ■clear that the taxpayer was the beneficial owner of only a one-sixth interest in the “O. P. Leonard, Trustee, Truck Account.”
The parties are in agreement that a holding to that effect will dispose of the subordinate issue as to whether the deficiency determined by the Commissioner for the year 1949 is barred by limitations tinder Section 275(a) of the 1939 Internal Revenue Code, 26 U.S.C.A. § 275(a). Another subordinate question is whether the Tax Court correctly sustained additions to the taxpayer’s tax for failure to file declarations of estimated tax under Sections 294(a) (?.) (A) and (2) of the 1939 Code. The petitioners ask this Court “to remand the proceedings to the Tax Court with directions to find the correct amount of the additions to the tax, if any, under Section 294 of the Internal Revenue Code of 1939.” The concluding sentence of Judge HUTCHE-SON’S opinion should be read to include such directions.
For the reasons stated, I specially concur.

. “This agreement made as of.......... day of March, 1946, by and between O. P. Leonard as Guardian of Obie Paul Leonard, Robert Wooldridge Leonard, Margery Ann Leonard and Martha Jane Leonard, minors, and William H. Neil.
“Whereas, Container Corporation is desirous of leasing certain rolling stock for use in its business and the undersigned wish to furnish said equipment to said corporation.
“Now therefore, in consideration of the agreements herein recited, the undersigned in the capacity stated, agree:
“1. O. P. Leonard, Trustee is hereby authorized and empowered to execute on behalf of the undersigned, the lease attached hereto and which is made a part of this instrument for all purposes.
“2. The said O. P. Leonard, Trustee is to purchase all equipment, to fill and execute all applications, agreements and instruments, and to have exclusive charge and control of all matters necessary and proper for the carrying out of said attached lease contract.
“3. Complete and accurate records of said joint adventure are to be kept by the said O. P. Leonard, Trustee, and a written accounting is to be made by Mm each three months. One half of all *570the expenses and costs incurred in said joint adventure shall be charged to each of the undersigned. Any profit which might be realized from said operation is likewise to be divided equally between the said parties and is to be distributed annually.
“4. All property purchased pursuant to this agreement by O. P. Leonard, Trustee is to be owned equally by the undersigned.
“5. No obligations, indebtedness or expenses can be created by either of the undersigned parties of this joint adventure except as provided for herein.
“Executed this........day of March, 1946.
“(Signed) O. P. Leonard
“O. P. Leonard, Guardian of Obie Paul Leonard, Robert Wooldridge Leonard, Margery Ann Leonard ■ and Martha Jane Leonard
“(Signed) William H. Neil “William H. Neil”

. Thus expressed in the opinion of the Tax Court:
“It is true that the petitioner testified that when his father loaned him the money his father stated, and it was agreed, that he and his sisters were to share jointly in the venture. However, the character of the transaction and the intention of the parties must be determined not only from the testimony of the petitioner, but from all the evidence, including the conduct of the parties. The statement of an interested party is not necessarily conclusive. Helvering v. National Grocery Co., 304 U.S. 282, 58 S.Ct. 932, 82 L.Ed. 1346, affirming 35 B.T.A. 163. As we stated in R. L. Blaf-fer & Co., 37 B.T.A. 851, affirmed 5 Cir., 103 F.2d 487, certiorari denied 308 U.S. 576, 60 S.Ct. 91, 84 L.Ed. 483, ‘To be skeptical of the weight to be accorded an interested witness’ statement in view of other evidence is not the same as wholly to reject the statement as if it were dishonest.’ We do not doubt that there was some intent and understanding that the petitioner’s two sisters were to derive some benefit from this enterprise, provided it turned out to be successful. But this is not to say that they became partners. The sisters were in no way mentioned in the agreement with Leonard. There was quite apparently no obligation on their part to share in losses. Furthermore, the distribution of some $16,000 of income for the yean 1948 was treated by the petitioner as his own income in his return, and $5,000 thereof was used to pay his personal debt to his father.”

. In part, the Tax Court said:
“Nor do we think that the execution of the January 1, 1949, instrument was effective to make the sisters partners in the Leonard partnership or members of a subpartnership with their brother. That agreement recites that the original funds were made available as a loan to the petitioner with the understanding that the petitioner ‘would treat said business operation as an equal partnership between himself and the other signatories to this agreement so that from and after January 1, 1949, all net sums received by William Henry Neil should be divided into three equal parts and paid to the three signatories to this agreement.’ As we read this instrument, it does not purport to make the sisters members of any partnership. It merely provides that ‘all net sums’ received by the petitioner shall be divided equally between the petitioner and his sisters. We incline to the belief that the language used was intended to mean that after January 1, 1949, the sisters were to share in the petitioner’s distributive share of the income of the Leonard Partnership. But even if it be construed as broad enough to cover any distribution after January 1, 1949, the use of the term ‘net’ must be given effect, and we think it means that the sum in which the sisters would share is the net sum, after deduction of any capital invested by the petitioner and after payment of any liability he had incurred as a partner. Accordingly, we do not construe this contract as vesting in the sisters any interest in the capital invested in the partnership. Thus, even under this agreement, the sisters may not be considered as partners since they did not have any capital invested in the venture.”

. Article 7425b-7, Vernon’s Civil Statutes of the State of Texas reads in part:
“Art. 7425b-7. Requisites of a trust. —An express trust may be created by one of the following means or methods:
“A. A declaration in writing by the owner of the property that he holds it as trustee for another person, or persons, or for himself and another person or persons; * * See also, Mills v. Gray, 1948, 147 Tex. 33, 210 S.W.2d 985; Fitz-Gerald v. Hull, 1951, 150 Tex. 39, 237 S.W.2d 256.

. A recapitulation of the returns filed by the taxpayer for the years 1946, 1947, and 1948 shows that the interest in his name in the “O. P. Leonard, Trustee, Truck Account” was valued at $21,614.-16.

. Burnet v. Leininger was decided on March 14, 1932, shortly prior to the Act of Juno 6, 1932, c. 209, § 1111(a) (3), 47 Stat. 289, which first defined the term “partnership” for income tax purposes so as to include a joint venture. See the legislative history referred to in Haley v. Commissioner of Internal Revenue, supra.

. This, however, is doubtful under the so-called “Clifford” doctrine if the donor becomes trustee and reserves substantial dominion over the trust income as was done here. See Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788, and its numerous progeny.