Court Opinion

ID: 4483603
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:11.864968+00
Date Added: 2024-06-11T08:49:14.296242
License: Public Domain

Van Fossan,./., dissenting: The majority view purports to be based on two well accepted rules of law that “income is taxable to the person who earns the income,” and that “he who enjoys the economic benefits of income is taxable thereon.” With these premises no one can quarrel, but, when these rules are applied to the facts in this case, I find myself in wide disagreement with the majority. The genesis of the Tri-State enterprise was Mrs. Werner’s desire to create an independent industrial activity. The fact is that from first to last Werner meticulously abstained from interference with the new organization. It is undoubtedly true that Mrs. Werner lacked the technical experience and training personally to operate the new business. The same can probably be said of thousands of corporate executives. The genius of executive capacity lies in the ability to select qualified technical assistants to whom to delegate authority and responsibility. Thus, in the case of Tri-State the practical operating head of the business was Gibson, but Gibson was picked out by Mrs. Werner, employed by her, and was solely responsible to her. Management of a business by an agent or employee does not divest the true owner of a'business of his rights to the profits. Thus it is that it can not be said that petitioner “earned the income” in question. Likewise, I am unable to see any basis for saying that the petitioner enjoyed the economic benefits of the Tri-State operation. After Mrs. Werner had paid back the advances by Equipment out of profits, she drew down the profits and used them as she deemed desirable, without dictation by her husband. The petitioner received none of them, nor did he enjoy any indirect benefit, unless it be the pleasure of seeing his wife succeed in her own right. Surely this is not taxable. The majority also says that “the income in question was derived from the use of the Tri-State assets rather than from the bare legal title or ownership thereof,” and thereon in part rests its conclusion of taxability. As to the quoted observation there can be no disagreement, but the use of Tri-State’s assets was in no sense directed or dictated by the petitioner. It was solely controlled by Mrs. Werner, through her manager, Gibson. It is doubtless true that the two companies, Tri-State and Equipment, worked in complete harmony. I see nothing sinister in that fact. The initial capital funds required by Tri-State were advanced by Equipment and carried on its books as an account receivable. Likewise, Equipment purchased materials needed by Tri-State and charged their cost against the Tri-State account. However, Equipment in turn purchased the entire output of Tri-State and offset the selling price thereof against the cost of equipment and materials furnished to TriState. During 1941 the entire amounts so advanced were repaid by such offsets and at the end of the year the Tri-State account showed a net balance of more than $4,000 in its favor. Thus, the entire cost of the Tri-State plant was paid for out of profits. If the conclusion which the majority announces is correct, then any company which loans an operating company needed capital and accepts manufactured goods in payment is chargeable with the tax on the income earned by the debtor company. The evidence presented at the hearing shows clearly that Mrs. Werner chose, and entered into, the tool business as her own free and independent enterprise. After investigation, she chose the site of the factory. She, herself, selected Gibson as her manager and, relying on his knowledge and skill, gave him complete charge of the plant. The petitioner had nothing whatsoever to do with the final decisions thus involved. The war in Europe was in progress and there was a great demand for metal-cutting tools. Gibson proved to be a “splendid” manager and the venture was successful. The record establishes beyond cavil that the petitioner had no voice in the management of the new enterprise. In order to support its conclusion in the case, the majority discredits the frank, uncontradicted testimony of witnesses who spoke freely, even if the facts appeared against their own interests, and substituted its own view as to “what must have happened.” Having presided at the hearing and had ample opportunity to observe the witnesses, their demeanor, and the obvious truth of their testimony, I believe them. It is my conviction that the conclusion of the majority is justified neither in law nor in fact. I therefore dissent. ARUndell, /., agrees with this dissent.