Court Opinion

ID: 4480882
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:34.734788+00
Date Added: 2024-06-11T15:03:35.927909
License: Public Domain

OPINION. Smith, Judge: Petitioners’ contentions are that after the effective date of the execution of the partnership agreement of January 3, 1941, the business of Michner Plating Co. was conducted as a partnership consisting of the 14 members, including themselves, their wives, and minor children. They contend that their wives and children are entitled to full membership in the partnership because of their contributions of undivided interests in the assets of the business which petitioners allegedly transferred to them as bona fide gifts in anticipation of the organization of the partnership. The respondent has determined that petitioners themselves were the only partners in the business and that they are taxable individually on their proportionate share of the profits. We think that the respondent’s determination must be sustained, evidence shows plainly that the purpose of petitioners was not to make completed gifts of severable interests in the assets of the business to the wives and children for their own use. The gifts, if such they could be called, were so restricted in their use and enjoyment that in effect all that the wives and children could ever receive was shares of the distributable profits of the business. They could not dispose of .their alleged interests in the assets without first offering them to the other partners at their appraised value and they could not dispose of them to any outsider except upon approval of the partners Thus the partners were in a position to prevent any disposition of such interests by refusing to purchase them themselves and refusing to approve a sale to any outsider. It is not clear just what was to become of the interest of any deceased partner, since their executors were to be under the same restraint in disposing of the interests as were the partners themselves. Although the assets of the business consisted of real estate of considerable value, there was no conveyance by title of any interest in the real estate to any of the wives and children. Under the terms of the so-called partnership agreement of January 3, 1941, petitioners were to continue in complete control of the business. The wives and children were to have no voice in its management or policies and could not bind the partnership by any of their acts. Their sole function was to receive whatever profits of the business might be determined by petitioners to be distributable to them. In order to have a valid business partnership there must be a contribution by all the members of either services or capital. Meehan v. Valentine, 145 Fed. (2d) 611; Karrick v. Hannaman, 168 U. S. 328. Except for one of the wives, Lottie Michner, none of the wives or children performed any services of note. She had worked at the business regularly from its beginning in 1936. She also furnished one-half of the $2,000 capital originally contributed by her husband, Joseph Michner. It is not clear whether she gave this money to her husband, or loaned it to him, or paid it in to the company on her own behalf. On being asked if she loaned him the money, Joseph Michner testified: “She didn’t loan me the thousand dollars; she just gave it to me. * * * she had idea that some day she was going to be partner.” The evidence is that Lottie Michner was paid regular compensation for all of her services on behalf of the partnership, and no claim is made that her pay was not commensurate with the value of such services. She had no part in the management of the business. The evidence shows further that the admission of Lottie’s son, Walter Michner, as a partner, for a consideration much less than the value of his one-fourth interest, was at her insistence and, for all that is shown, may have exhausted whatever claim she had to a proprietary interest in the business. It is significant that later the other partners refused to consent to her coming in as an equal partner with them. Joseph Michner testified “they let me take my wife in if I let them take their wives in, and family.” If the business of Michner 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, but that is not the situation. Lottie Michnei’s claim to membership has the same basis as that of the other wives and children; that is, the alleged gift to her of an undivided interest in the partnership assets and the partnership agreement itself. There was never any recognition by the partners, and in fact there was a denial by them, that she had any other proprietary rights or interest in the business. We do not think it can be said that the wives and children contributed any capital of their own. The alleged gifts to them by petitioners of undivided interests in the assets fail for lack of intention on the part of petitioners to make completed gifts to them of such interests. The real intention of the petitioners was to create a partnership through which the profits of the business might be divided among themselves and their wives and children so as to reduce taxes. We think that they failed both in creating a bona fide business partnership and in making the completed gifts upon which the partnership was dependent. See Burnet v. Leininger, 285 U. S. 186; Schroder v. Commissioner, 134 Fed. (2d) 346; Mead v. Commissioner, 131 Fed. (2d) 325; certiorari denied, 318 U. S. 777; Earp v. Jones, 131 Fed. (2d) 292; certiorari denied, 318 U. S. 764; Tinkoff v. Commissioner, 120 Fed. (2d) 564; certiorari denied, 314 U. S. 581; A. L. Lusthaus, 3 T. C. 540; affd. (C. C. A., 3d Cir.), 149 Fed. (2d) 232; Frank J. Lorenz, 3 T. C. 746; affd. (C. C. A., 6th Cir.), 148 Fed. (2d) 527; Francis Doll, 2 T. C. 276; affd. (C. C. A., 8th Cir.), 149 Fed. (2d) 239. We think that the respondent has correctly determined that petitioners are the real partners in Michner Plating Co. and that they are taxable on all of its earnings for the year involved. Reviewed by the Court. Decisions will be entered for the respondent. Arundell and Leech, JJ., dissent.