Court Opinion

ID: 4634798
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:16:46.87214+00
Date Added: 2024-06-11T07:58:16.745866
License: Public Domain

JULIAN L. HAMERSLAG, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  J. P. HAMERSLAG, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.HAMERSLAG v. COMMISSIONERDocket Nos. 13596, 13597.United States Board of Tax Appeals15 B.T.A. 96; 1929 BTA LEXIS 2921; January 28, 1929, Promulgated 1929 BTA LEXIS 2921">*2921  1.  a business bequeathed to petitioners by their father subject only to the payment of $50 a month to their sister, was owned and operated by them as partners.  Pursuant to an understanding with their father that they would provide suitable maintenance and support for their mother and sister after his death, the annual amount to be provided being fixed by petitioners after their father's death, petitioners paid certain amounts to their mother and sister, respectively, in the taxable years and deducted or excluded such payments from partnership income distributable and taxable to them.  Held, that the payments so made are not deductible from the distributive shares of partnership income taxable to the petitioners, except to the extent of $50 a month paid to petitioners' sister.  2.  The mother and sister of petitioners are not special partners in the business, and acquired no legal interest therein and no legal right to profits therefrom.  The payments made or to be made were not a charge or obligation upon the business or its earnings.  3.  The annuity of $50 a month to the sister was a fixed charge upon the business and its revenues, and is deductible from partnership income1929 BTA LEXIS 2921">*2922  in determining the distributive shares taxable to petitioners.  W. W. Spalding, Esq., for the petitioners.  Paul Peyton, Esq., for the respondent.  VAN FOSSAN 15 B.T.A. 96">*96  These proceedings are for the redetermination of income taxes for the calendar years 1920 and 1921, and have been consolidated for 15 B.T.A. 96">*97  hearing and decision.  The Commissioner has determined deficiencies as follows: Docket No.Petitioner1920192113596Julian L. Hamerslag$ 457.31$ 521.9513597J. P. Hamerslag426.01520.30It is alleged that the Commissioner erred by including in the taxable income of each petitioner one-half the aggregate amount paid to petitioners' mother and sister in each taxable year out of the earnings of a partnership business bequeathed to petitioners by their father and owned and operated by them during the taxable years.  FINDINGS OF FACT.  Petitioners are individuals residing in San Francisco, Calif.  In the taxable years, and prior thereto, they were engaged as partners in the paper-box manufacturing business in the City of San Francisco under the firm name and style of The Enterprise Paper Box Co.  This business1929 BTA LEXIS 2921">*2923  was founded by petitioners' father, Mattes Hammerschlag, in 1894, which was subsequent to his marriage, and was owned and operated by him as sole proprietor until his death on July 3, 1918.  (After the death of their father, petitioners, their mother and sister, changed the spelling of the family name, under court decree.) Mattes Hammerschlag died testate in the City of San Francisco on July 3, 1918, leaving surviving him his widow, Carrie Hammerschlag, a daughter, Ruth Hammerschlag, and two sons, the petitioners herein, as his sole heirs, legatees and devisees.  The will was executed on June 4, 1907, was admitted to probate on July 22, 1918, and letters testamentary thereon were duly issued to the executrix therein named.  The material provisions of the will are: Third: I expressly omit to make any provision for my beloved wife, Carrie Hammerschlag, for the reason that I have already provided for her in my life-time and she has accepted such provision in lieu of her community interest in my estate, the whole of which estate is community property acquired since our marriage.  Fourth: I give and bequeath to my two sons, Julian and Jay, that certain going business controlled by1929 BTA LEXIS 2921">*2924  me in my lifetime and known as "The Enterprise Paper Box Company" of #264 Seventh Street, San Francisco, with all the appurtenances thereunto in any way belonging, share and share alike, subject however to the payment out of the revenue of said business, of the sum of Fifty ( $50) Dollars per month on gold coin of the United States to my daughter Ruth, such payments to be made on the first day of each and every month, commencing with the first day of the month next ensuing after my death, and continuing monthly thereafter so long as my said daughter Ruth remains unmarried and I 15 B.T.A. 96">*98  expressly make this monthly sum of Fifty ( $50) Dollars a first and fixed charge upon my said business and direct my said sons to make regular and prompt payment thereof.  Fifth: I hereby nominate and appoint my beloved wife Carrie Hammerschlag, executrix of this my last will and testament and I direct that no bonds be required of her as such executrix.  The estate, all of which was community property, consisted of the going business known as The Enterprise Paper Box Co., valued at $24,000, and certain Liberty bonds and oil stock valued at $2,898.  Thereafter, petitioners filed an application1929 BTA LEXIS 2921">*2925  or petition with the Superior Court of California for the City and County of San Francisco for the distribution of the going business to them in accordance with the terms of the will, and recited therein, among other things, that testator's widow had filed "in the papers of said estate her acceptance in writing of said provision in said will made in lieu of her community interest therein, and her renunciation of all claim against said estate, by reason thereof, or in any manner arising out of the fact that she is the widow of said decedent." On December 24, 1918, Ruth Hammerschlag, daughter of the testator and sister of petitioners, consented to and joined in the petition for distribution.  Pursuant to this petition and the proceedings had thereon the court entered the following order or decree: NOW THEREFORE, IT IS ORDERED, ADJUDGED AND DECREED that the executrix of said estate is hereby authorized and empowered to turn over to the said petitioners the said going business, the "Enterprise Paper Box Company" together with the appurtenances thereunto in any way belonging share and share alike to the said petitioners, Julian Hammerschlag and Jay Hammerschlag, subject however, to the1929 BTA LEXIS 2921">*2926  payment by them monthly to Ruth Hammerschlag, their sister, daughter of the decedent, of the sum of Fifty ( $50) Dollars on the first day of each and every month out of the revenue of said business, so long as she shall remain unmarried; and save and except only that it is hereby ordered that in lieu of a bond being given to Carrie Hammerschlag the executrix under the will of said estate, as required by Section 1663 of the Code of Civil Procedure, (relating to partial distribution of decedents' estates) there shall remain on deposit with said executrix until final distribution of said estate all of said Liberty Bonds and said Oil stock.  DONE IN OPEN COURT, this 6th day of January, 1919.  THOS. F. GRAHAM Judge, Superior Court, Probate.At the time of making his will, and at various times thereafter, the testator discussed with petitioners the disposition to be made of the business and the question of maintenance and support for his widow and daughter after his death.  He instructed petitioners to provide their mother and sister with sufficient funds to maintain them in the same style of living to which they had been accustomed during his lifetime, and promised to leave1929 BTA LEXIS 2921">*2927  the going business to them exclusively.  Pursuant to these discussions and instructions it was 15 B.T.A. 96">*99  understood between petitioners and their father that they would receive the business, the Enterprise Paper Box Co., in its entirety and that they would provide for their mother and sister after his death.  Shortly after the death of their father, and at about the time of distribution of the estate, the petitioners, after some discussion with their mother and sister as to the amount to be provided for their maintenance and support, concluded that $3,600 per year for their mother and $1,500 per year for their sister would be equitable, and agreed to pay these respective amounts.  Petitioners undertook to make these payments whether or not the business suffered a loss or earned sufficient profits from which to make them, employing income from any other source that they might have in the event the business did not return sufficient profits for the purpose.  Pursuant to the court decree and in accordance with the terms of the will, the business was distributed and transferred to the petitioners, share and share alike, subject only to the payment of $50 per month to their sister1929 BTA LEXIS 2921">*2928  as long as she remained unmarried.  Since the distribution the Enterprise Paper Box Co. has been owned in equal shares and operated by petitioners as partners.  The mother and sister of petitioners have not devoted any of their time to the partnership and have not been active in the business in any manner during the taxable years or at any other time, and have derived no salary therefrom.  They were never held out to the public as partners, had no authority to contract or enter into any transaction for or on behalf of the partnership, and were not liable for any loss or obligation, or any portion thereof, that might be sustained or incurred by the partnership.  Petitioners have made, and are still making, payments to their mother and sister for their maintenance and support.  In the taxable years the following amounts were paid: 19201921Carrie Hamerslag (mother)$ 3,740$ 5,690Ruth Hamerslag (sister)1,8001,500Total5,5407,190In making returns for income-tax purposes of the partnership income distributable and taxable to them for the taxable years, petitioners deducted or omitted therefrom the payments made in such years to their mother and1929 BTA LEXIS 2921">*2929  sister.  The respondent has included in the distributive share of each petitioner for each taxable year one-half of the total payment made in each year to Carrie Hamerslag and Ruth Hamerslag, and has determined the deficiencies.  15 B.T.A. 96">*100  OPINION.  VAN FOSSAN: The only question before us is whether or not the payments made by petitioners to their mother and sister in the taxable years may be deducted in determining the partnership income distributable and taxable to petitioners for those years.  It is contended that these payments are a distribution of profits to the mother and sister as special partners in the business, and that the amounts so paid are not partnership income distributable and taxable to petitioners.  It is also contended that petitioners acquired the Enterprise Paper Box Co. subject to the payment of the agreed amounts to their mother and sister, which had to be paid before petitioners were entitled to share in the partnership profits.  The Enterprise Paper Box Co. was bequeathed to and became the property of the petitioners under the will of their father.  No interest in the business was given to Carrie Hamerslag and none was given to Ruth Hamerslag, except1929 BTA LEXIS 2921">*2930  the right to receive $50 a month out of the revenues as long as she remained unmarried.  Both the mother and sister accepted the provisions of the will and consented to the distribution of this business to the petitioners.  Any right that they otherwise may have had to share in the business as a part of the estate was relinquished and the provisions made for them by the testator accepted in lieu thereof.  The nature of the provision made by the testator in his lifetime for his wife, referred to in paragraph third of the will, does not appear and is not material here.  The understanding or agreement between the testator and petitioners that they would provide for their mother and sister after the testator's death, and the decision of petitioners fixing the amount to be contributed to their support, did not give to the mother and sister an interest in the Enterprise Paper Box, Co.  The sums to be paid pursuant to this understanding and decision were not made a charge upon, or a liability of the business.  No legal interest in the business or legal right to any portion of the profits was thereby created or vested in the mother and sister.  Payments made by petitioners from any source1929 BTA LEXIS 2921">*2931  whatever would be a full compliance with the understanding or agreement.  Whether or not this alleged agreement imposed a valid enforceable legal obligation upon petitioners may be questioned.  It appears to be nothing more than a mutual understanding that petitioners would discharge the moral duty resting upon sons and brothers to make any necessary contribution to the support and maintenance of their mother and sister.  Had it been intended by this understanding to impose a legal obligation upon petitioners to pay a portion of the profits from the business to their mother and sister for support, it is not clear why the testator excluded it from his will and expressly provided that the payment of $50 a month out of the revenues to 15 B.T.A. 96">*101  Ruth Hamerslag should be a first and fixed charge against the business.  But a decision of that question is not necessary or material to this case.  It is clear from this record that Carrie Hamerslag and Ruth Hamerslag acquired and owned no interest whatever in the Enterprise Paper Box Co. under that understanding or agreement and the petitioners' decision as to the amounts of such payments.  Manifestly the mother and sister of petitioners1929 BTA LEXIS 2921">*2932  were not partners, special or otherwise, in the Enterprise Paper Box Co.  They possessed none of the rights, powers or attributes and owed none of the duties or liabilities usual or incident to partners.  They were not held out as partners, they had no authority to contract for or otherwise bind the partnership, they were not responsible for or chargeable with any losses or debts of the partnership or any part thereof, and they contributed neither services nor capital to the business.  Nothing in this record supports the contention that petitioners' mother and sister were special partners in this business.  See , and . It is equally clear that, except as to the $50 payable monthly to the sister, the payments made by petitioners to their mother and sister during the taxable years were not paid by reason of any legal interest in the partnership property or business or in satisfaction of any enforceable legal right to partnership profits.  Petitioners owned the entire business, were the only partners therein and, subject only to the sister's annuity of $50 a month, were entitled to all profits. 1929 BTA LEXIS 2921">*2933  Accordingly, the distributive share of each partner in the net income of the partnership is taxable to him and must be included in his individual return for income-tax purposes (section 218(a) of the Revenue Acts of 1918 and 1921).  The payments made by petitioners to their mother and sister in the taxable years are not deductible from the partnership income distributable to them (except as hereinafter indicated as to the monthly payment of $50 to the sister), and were improperly excluded by petitioners from their distributive shares of partnership income for the taxable years.  Cf. ; ; ; ; ;; and . Petitioners acquired the business, however, subject to the payment of $50 a month to their sister as long as she remained unmarried, and the testator expressly made this payment a first and fixed charge against the business.  Although petitioners were the owners of the entire business and the profits1929 BTA LEXIS 2921">*2934  therefrom, this annuity to their sister imposed a charge upon the revenues which had to be paid before there 15 B.T.A. 96">*102  could be any profit distributable to petitioners as partners.  The payment of this annuity from the earnings of the business was obligatory and to that extent reduced the income or profits otherwise distributable and taxable to the petitioners.  The amount of this annuity should be deducted in computing petitioners' distributive shares of partnership income for the taxable years.  See . We hold, therefore, that, except to the extent that the payments to the sister represented the annuity of $50 per month provided for her by the testator's will, the payments made by petitioners to their mother and sister in the taxable years were erroneously excluded or deducted by them in computing their distributive shares of partnership income.  Saving the indicated exception, the action of the respondent was correct Judgment will be entered under Rule 50.