Court Opinion

ID: 4599173
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:22:48.683879+00
Date Added: 2024-06-11T07:52:04.811658
License: Public Domain

JOSEPH L. SELLING, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Selling v. CommissionerDocket No. 31384.United States Board of Tax Appeals22 B.T.A. 920; 1931 BTA LEXIS 2044; March 25, 1931, Promulgated 1931 BTA LEXIS 2044">*2044 Held, that a certain contract was a contract of employment and did not create a partnership or relation of coownership of an enterprise.  A. R. Foss, Esq., for the petitioner.  Hartford Allen, Esq., for the respondent.  VAN FOSSAN 22 B.T.A. 920">*920  This proceeding is for the redetermination of a deficiency in income tax for the year 1922 amounting to $6,161.59.  The issue is whether or not certain income received by petitioner under the terms of a contract entered into by him and the Straus Land Corporation, Limited, is taxable as income for the year 1922.  FINDINGS OF FACT.  The petitioner lived in Detroit, Mich.  Prior to 1916 he was engaged in the real estate business on his own account and was familiar with operations in city real estate.  Early in 1916 the Straus Land Corporation, Limited, which was incorporated under the laws of the State of Indiana, wishing to associate the petitioner with it in operations in city real estate, began negotiations with him to that end.  Two of the three owners of the corporation were relatives of the petitioner and the third was an intimate friend.  In the course of the negotiations the petitioner, under date1931 BTA LEXIS 2044">*2045  of February 4, 1916, wrote a letter to the vice president of the Straus Land Corporation, Limited, in which, referring to a proposed contract which had been submitted to the petitioner, he said among other things: The other changes that I have suggested are most of them in line with what I told you when we first broached the proposition, that I would expect to be an executive and not a subordinate.  I prefer to have an understanding on this point now rather than later.  If I am to share the losses as well as the profits, I must be treated as a partner, and not otherwise.  The negotiations between the Straus Land Corporation, Limited, and the petitioner resulted in a written agreement which was duly executed on February 7, 1916.  The articles of agreement numbered 1, 2 and 3 are as follows: 1.  Said first party hereby organizes a special department to be known for the purposes of this contract, as its "City Real Estate Department" for the purchase, improvement and sale of and for the purpose of leasing and subleasing of real estate for business and residential purposes in the cities in the 22 B.T.A. 920">*921 State of Michigan only, but said department shall not engage in the purchase1931 BTA LEXIS 2044">*2046  or sale of farm lands, and said first party agrees to furnish and advance as capital for the use of said department the sum of One Hundred Thousand Dollars ($100,000.00), without interest, on or before the 1st day of March, 1916, and to furnish and advance further sums of money as may be needed for the business of said Department from time to time after the first day of January, 1917, up to one hundred thousand dollars ($100,000.00), the necessity for and the time at which such additional capital shall be advanced shall be determined by and between the second party hereto and Jerome Ackerman, of Detroit, Michigan, but in any case such additional One Hundred Thousand Dollars ($100,000.00) shall be advanced before December 31st, 1917.  These further sums so advanced shall draw interest at the rate of six percent (6%) per annum, and which advancements shall be known and designated on the books to be kept by said Department as "STRAUS LAND CITY REAL ESTATE ADVANCEMENTS" and the interest thereon shall be considered and treated as a part of the expenses of said Department in computing the net profits thereof as hereinafter referred to.  Within the limits referred to as to the extent of1931 BTA LEXIS 2044">*2047  such Straus Land City Real Estate Advancements for the use of said City Real Estate Department by the first party, it is mutually agreed and understood by and between the parties hereto that the City Real Estate Department shall continuously obtain such money or repay such money as the exigencies and best interests of said City Real Estate Department shall demand interest to be charged on average monthly balances.  For the purpose of mutually defining the scope and nature of the business to be undertaken and conducted by the said City Real Estate Department, it is distinctly understood and agreed by and between the parties hereto that said Department is not organized for the purpose of making loans for commission or buying mortgages or notes or land contracts, nor is any such other business contemplated as would be considered as coming within the scope of an investment business.  2.  That for and during the term commencing on the first day of January, 1916, and ending on the first day of January, 1921, the first party agrees to and does hereby employ the said second party and the second party agrees to and does hereby engage his services to the first party in the management and1931 BTA LEXIS 2044">*2048  conduct of said City Real Estate Department and agrees to devote his entire time and energies to the conduct of the business of said Department (except such time as may be necessary for the oversight and management of the real estate at the present time owned or controlled by him or in which he may be financially interested.  A memorandum of such interests, marked "Exhibit A" is attached hereto and made a part of this contract and which for purposes of further identification is signed by the second party hereto) in a competent and efficient manner and to the best interests of the party of the first part, and the second party agrees that he will not himself or through any agent or representative engage in the business of buying or selling farm lands or city property or leaseholds, either for himself or as agent for another, either directly or indirectly, during the period covered by this contract, and that he will not purchase any parcels of real estate for said Department at a cost exceeding Ten Thousand Dollars ($10,000.00) each, without the consent of two Directors of the first party, and that no purchases shall be made of realty leaseholds without the consent of one Director of1931 BTA LEXIS 2044">*2049  the party of the first part.  22 B.T.A. 920">*922  The minimum selling prices on all properties and leaseholds shall be fixed by agreement between both parties hereto and no reduction in such minimum selling prices shall be made without the consent of one Director of the first party and said second party.  The said party of the second part shall be elected Vice President and Assistant Secretary of the Straus Land Corporation, Limited, which office he will hold for the period of this contract.  All deeds and instruments of conveyance must be signed by either the President or a Vice President and attested by the Secretary or an Assistant Secretary of the said first party.  The offices of said Department shall be maintained in the said City of Detroit.  3.  The second party shall receive and hereby agrees to accept in full as a salary for all his services and the first party hereby agrees to pay him from the net profits of said Department as a salary, a sum equivalent to fifty per cent. of the first ten thousand dollars, forty percent. of the second ten thousand dollars, twenty-five percent. of the third ten thousand and fifteen percent. of all over thirty thousand dollars of the annual1931 BTA LEXIS 2044">*2050  net profits earned by the said City Real Estate Department during the said period of five years of this contract and the said second party shall be responsible for and pay for any loss during any of said years on the same basis and in the same proportions as herein provided for his share of the net profits.  Such earnings and losses, if any, shall be adjusted, set up and debited or credited to him on the books of said Department at the end of each year of the period of said contract, but the final settlement and payment thereof to be made only at the termination of this contract.  The fourth article of the agreement provides, among other things, that all notes, mortgages, contracts and real estate acquired in the conduct of the business of the City Real Estate Department should be taken in the name of the Straus Land Corporation, Limited.  Article 6 provides, among other things, that: No part of the net earnings of said City Department shall be withdrawn by either party hereto, but the same shall be left in the business of said department without interest until the termination of this contract.  Article 7 provides as follows: 7.  At the termination of this contract, or any1931 BTA LEXIS 2044">*2051  extended term thereof by mutual agreement, within 60 days thereafter, the assets of said Department shall be distributed as follows: 1.  All liabilities to any party incurred by said first party on behalf of said City Real Estate Department shall be first paid, except such liabilities on notes secured by mortgages on real estate acquired or sold or carried on the books of the said City Real Estate Department and contracts for the purchase or sale of Real Estate made on behalf of said corporation by said City Real Estate Department.  2.  The first party shall have its choice of the assets of said Department and withdraw the same up to one hundred thousand dollars ($100,000.00) in full for the repayment of said first one hundred thousand dollars ($100,000.00) advanced to said Department as working capital, without interest, and also up to the amount of any and all additional advancements made by first party to or for the use of said Department, and credited to the account hereinbefore referred to as "Straus Land City Real Estate Advancements" with interest 22 B.T.A. 920">*923  as hereinbefore provided, thereon, at the rate of six per cent. per annum on such additional advancements, also any1931 BTA LEXIS 2044">*2052  other liabilities incurred for or on behalf of said City Real Estate Department not hereinbefore referred to.  3.  The balance of the assets then remaining shall be considered as representing the net profits of said Department and shall be divided pro rata as follows: - The second party shall receive a portion of such residue of the then remaining assets equivalent in value to his share of the net profits, (less his share of the losses, if any) of the business of said Department and set up on the books of said Department as hereinbefore provided, and the balance of such assets shall be and remain the property of said first party.  The agreement further provides that all of the expenses of the City Real Estate Department, created under the terms of the contract, should be borne by it and that a prorated part of the salary of any employee of the Straus Land Corporation, Limited, who may have furnished part of his services to the City Real Estate Department should be charged against that department.  The agreement also contains the following provision: A separate set of books of account and records shall be kept for the purpose of recording the transactions and results of business1931 BTA LEXIS 2044">*2053  of said Department as distinct from those of said first party not connected with said Department.  The contract between the Straus Land Corporation, Limited, and the petitioner was prepared by the vice president of the corporation and was not drafted by a lawyer.  At the date of the execution of the contract petitioner owned property of the net value of approximately $100,000.  Upon the execution of the contract petitioner proceeded to organize the business of the City Real Estate Department and carried it on as if it were his own business.  The department kept separate books and maintained a bank account separate from that of the Straus Land Corporation, Limited.  In connection with the business of the City Real Estate Department the petitioner, as vice president and assistant secretary of the Straus Land Corporation, Limited, executed deeds and other necessary instruments and signed checks on the department's separate bank account.  At the end of each year the profits of the business were determined and the petitioner's share therein was credited to him on the books of the City Real Estate Department.  The contract between the petitioner and the Straus Land Corporation, Limited, 1931 BTA LEXIS 2044">*2054  was extended for one year after January 1, 1921, the date fixed by the terms of the contract for its termination.  No profits were made during 1922.  In 1921 petitioner received as part of his share of the profit under the contract an interest in a leasehold, such interest being valued at $9,000.  In his income tax return for 1921 petitioner reported the said amount of $9,000 as income received by him during that year from a partnership.  In 1922 petitioner received in cash, notes and 22 B.T.A. 920">*924  a mortgage the sum of $50,420.76, together with interest on the same from January 1, 1921, which latter date was the date named in the contract for its termination.  This sum represented the total balance of petitioner's share in the profits of the City Real Estate Department pursuant to the terms of the contract.  In his income tax return for 1922 petitioner reported the said sum of $50,420.76 as income from salaries, wages, commissions, etc., received during that year from the Straus Land Corporation, Limited.  In the same return petitioner took a credit in the sum of $6,161.59 on account of taxes paid to the Canadian Government.  The respondent disallowed this credit on the ground that1931 BTA LEXIS 2044">*2055  although such taxes accrued for 1922 they were not paid until 1923.  By reason of such disallowance the respondent determined a deficiency in tax in the sum of $6,161.59.  The petitioner kept his books on the cash receipts and disbursements basis.  OPINION.  VAN FOSSAN: Petitioner kept his books and made his returns on a cash basis.  In 1922 he received as his share of the final liquidation and distribution of profits of the City Real Estate Department of Straus Land Corporation, Limited, under the terms of the contract referred to in our findings of fact, the sum of $50,420.76.  Petitioner reported the said sum as income from "salaries, wages, commissions, etc.," but now contends this was error.  He alleges, in effect, that the contract of February 7, 1916, created a partnership between Straus Land Corporation, Limited, and petitioner and that since the profits of the alleged partnership were determined each year, they were returnable as income in the year in which earned, whether distributed or not.  The determination of the issue thus presented turns largely on the interpretation of the contract.  If it was a contract of partnership under the law petitioner's contention1931 BTA LEXIS 2044">*2056  is well made; if a contract of employment, respondent must prevail.  It will scarcely be gainsaid that the contract in question contains provisions lending color to both interpretations.  It provided for a sharing of profits and losses.  In this it suggests a partnership.  But it expressly provides that Straus Land Corporation, Limited, "agrees to and does hereby employ" petitioner, who in turn "agrees to and does engage his services" to the Land Corporation.  It further provides that petitioner "shall receive and hereby agrees to accept in full as a salary for all his services," a fixed proportion of the profits.  This language strongly suggests a contract of employment.  Counsel for petitioner frankly conceded at the hearing that under the laws of Indiana and Michigan a corporation may not be a member 22 B.T.A. 920">*925  of a partnership.  That the same thought underlies section 218(a) of the Revenue Act of 1921 seems clear from its terms.  It provides: "That individuals carrying on business in partnership shall be liable for income tax only in their individual capacity." In 1931 BTA LEXIS 2044">*2057 ; , the Supreme Court said: "the term 'partnership' as used in these sections obviously refers only to ordinary partnerships." Surely this was not an "ordinary partnership." Thus, it would seem that to hold the relationship between petitioner and Straus Land Corporation to be that of a partnership would require the recognition of a relation forbidden by the State law and not contemplated by the revenue act.  It would require, moreover, a disregarding of the express terms of the contract which characterized petitioner as an employee and his compensation as salary.  If it be said that this was a special type of partnership, it may well be replied that it was a special type of employment contract.  We are of the opinion that the respondent did not err in interpreting the contract as one of employment and that petitioner properly reported as income for 1922 the sum of $50,420.76 received by him in that year.  The disallowance by respondent of the credit claimed by petitioner on account of Canadian taxes is not contested in this proceeding.  Reviewed by the Board.  Decision will be1931 BTA LEXIS 2044">*2058  entered for the respondent.