Court Opinion

ID: 9651099
Source: CourtListenerOpinion
Date Created: 2023-08-23 16:05:47.237862+00
Date Added: 2024-06-11T13:26:22.934961
License: Public Domain

MANTON, Circuit Judge
(dissenting). The tax here considered was imposed under the Revenue Act of 1916, as amended by subdivision 1, § 1204, of the Revenue Act of 1917 and section 218 of the Act of 1918, which read as follows:
“(e) Persons carrying on business in partnership shall be liable for income tax only in their individual capacity, and the share of the profits of the partnership to which any taxable partner would be entitled if the same were divided, whether divided or otherwise, shall be returned for taxation and the tax paid under the provisions of this title. « * * V
“(d) That individuals carrying on business in partnership shall be liable for income tax only in their individual capacity. There shall be included in eomputmg the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year. * * * ”
The complaint, which was dismissed on motion below, alleges that the firm of Power, Son & Co. was a partnership, the interest of which was owned, 51 per cent, by the plaintiff in error, and 49 per cent, by one Knee-land, and that said' copartnership continued throughout the year 1917 and several years thereafter. It pleads that on January 1, 1916, the plaintiff in error and his wife en*290tered into an agreement which provided, among other tilings, that for a consideration she was entitled to one-half of the profits which would come to the plaintiff in error from said firm, and was likewise liable to pay to the plaintiff in error one-half of .the losses that might be sustained by reason of his partnership in said firm. Profits were defined in the agreement to include all interest and allowances to the plaintiff in error for capital invested and accumulations to his credit therein, including such capital and accumulations as might be represented by property which, as between the plaintiff in error and his wife, is the property of the wife; that, upon receiving the profits therein mentioned, the plaintiff in error agreed to hold them for and pay them to his wife, as she was entitled to them pursuant to this agreement. Upon sustaining losses, it was provided that the wife would pay to the husband her share according to her percentage interest. Settlements were to be made accordingly at the expiration of • the year. The agreement might be terminated at any time by either party.
Paragraph Y of the bill of complaint alleged :
“V. That upon the making of said agreement an original thereof was promptly filed by the parties thereto with said firm of Power, Son & Co., and thereupon the parties to said agreement did direct said firm to credit and pay over to said Elizabeth P. Mitchel, as they accrued, the profits to which, under the terms thereof, said Elizabeth P Mitchel became entitled, viz. twenty-five and one-half per cent. (25%%) of the profits of said firm, and said firm did undertake and promise and agree so to do, and since said time said firm did duly credit to the account of said Elizabeth P. Mitchel, as they accrued, the said twenty-five and one-half per cent. (25%%) of said profits, making the same forthwith, upon their accrual, subject- to her absolute disposition, and the said' Elizabeth P Mitchel has since said time duly exercised such power and disposition and did duly account for said twenty-five and one-half per cent. (25%%) of said profits in her income tax returns made and filed and rendered as required under the laws of the United States of America.”
The complaint further alleges that there were profits and losses, and divisions were made according to the terms of the agreement between the plaintiff in error with his wife. Husband and wife each made return in their income tax report for such profits and paid taxes upon them. Thereafter the government insisted that under the section of the income tax law referred to the plaintiff in error was obliged to pay up to the extent of 51 per cent, of the profits of the firm as he received them.
The contract between the plaintiff in error and his wife was for a sufficient consideration and was a legal and binding agreement. Earl v. Peck, 64 N. Y. 599; Nirdlinger et al. v. Bernheimer, 133 N. Y. 45, 30 N. E. 561. The parties were competent to make such contracts under the Domestic Relations Law of the state of New York. Laws 1909, c. 19 (Consol. Laws, c. 14) § 51. We should consider the contract as such for the purposes of this appeal. The taxpayer is free to enter into such an agreement, even though the result may be that his income tax burden is lessened. Such agreement is not an evasion of income tax payments, so as to invalidate its obligatory effectiveness. Bullen v. Wisconsin, 240 U. S. 630, 36 S. Ct. 473, 60 L. Ed. 830; Bowers v. N. Y. Trust Co. (C. C. A.) 9 F.(2d) 548.
Unquestionably, the effect of the agreement was to set aside for Mrs. Mitchel a one-half interest in the plaintiff in error’s interest in the partnership, and she obtained a lien thereon, which amounts, by operation of law, to an equitable assignment. The phrase of the agreement is that “the party of the second part shall be entitled to one-half of the proceeds which shall come to the party of the first part from said firm,” and “upon receiving the profits herein mentioned the party of the first part [plaintiff in error] agrees to hold for and pay to the party of the second part [wife] the share thereof to which she shall be entitled hereunder.” Paragraph Y as pleaded, and which is admitted for the purpose of this motion, is sufficient in its statement of knowledge and acquiescence on the part of Power, Son & Co. as to the agreement. That the circumstances amount to an equitable assignment of the profits is clear from the New York state decisions (Holmes et al. v. Evans, 129 N. Y. 140, 29 N. E. 233), as well as the federal decisions (U. S. v. Butterworth-Judson Corp., 267 U. S. 387, 45 S. Ct. 338, 69 L. Ed. 672; Barnes v. Alexander, 232 U. S. 117, 34 S. Ct. 276, 58 L. Ed. 530; Walker v. Brown, 165 U. S. 654, 17 S. Ct. 453, 41L. Ed. 865; Ketchum v. St. Louis, 101 U. S. 306, 25 L. Ed. 999).
Mrs. Mitchel could have insisted upon payment óf the 25% per cent, of the profits whenever they were determined to be such profits by the partnership. She was likewise obligated to meet the losses to the same ex» tent. The benefit of the income and the ob» ligation to pay the losses arises out of th« same agreement. Each is a consideration for *291the other. They fall or stand together. Plaintiff in error could not deduct from his income 51 per cent, of the losses of the firm, any more than he was obliged to add to his income 51 per cent, of the profits. The parties treated the contract as having this binding effect. During the course of the years, the payments were made in the letter and spirit of the contract. If the plaintiff in error by any means obtained and retained possession of these funds, Mrs. Mitehel could have compelled him to pay her the amount. Indeed, the firm of Power, Son & Co., with knowledge of the contract, was obligated to see that 25% per cent, reached Mrs. Mitehel, or otherwise they were responsible.
The plaintiff in error, as a taxpayer, never received the 25% per cent, as his income. It was never net income to him. Indeed, he did not have the right to retain his wife’s share. Is it possible that for merely receiving the fund, in turn to be transmitted to his wife, the government exacts against him an income tax for moneys which were never his individual income? In every sense in which the term “income” is used, it has been considered something which the taxpayer is entitled to, not which passes on to some one else, who actually receives it. To agree with the construction below is to hold that the plaintiff in error shall be deemed to have received the money, and Mrs. Mitehel deemed not to have received it. Such a tax rule would be bad in economics and is unsound in principle. Congress never intended that any one should pay an income tax except the real recipient of benefits by income, and he must pay his share of the government’s burdens.
Subdivision 1, § 1204, of the Revenue Act of 1917, and section 218 (a) of the Revenue Act of 1918, do not by any construction intend that partnerships as such should be taxed as entities. On the contrary, they provide that individuals engaged in partnership shall be taxpayers, and as such individuals they account for their partnership income, to which they become entitled, whether or not distributed. They are not permitted to have their share of the profits remain undistributed and accumulated among the firm assets and thus escape taxation. This in substance was the provision of the Income Tax Act of 1913, § 2 (38 Stat. 114). The argument “that the profits had to come to the wife before his wife became entitled to one-half of the same” is not sound. The instant they came or accrued to the plaintiff in error, his wife became entitled to one-half thereof. She had a previous assignment which gave her such rights to the profits. Her agreement provided for future profits at all times during its life. The moment the plaintiff in error’s rights to profits accrued, the 51 per cent, was burdened with the legal right of the wife to one-half of the same under her agreement. The 51 per cent, was never free from such burden, and the wife was at liberty at all times to proceed against it for her share.
And the claim “that the partnership profits became specifically taxable before the interest of the wife arose” is equally unsound. To so hold would be to say that the tax is an excise tax rather than an income tax. It was never the intention of Congress to impose an excise tax in the manner referred to in the section. To do so is to make it depend upon the rise and fall of the business. The revenue law of the years in question provides a long list of excise taxes upon business firms or companies carrying on certain lines of business, such as brokers, pawnbrokers, ship-brokers, custom house brokers, theaters, etc. If a tax upon the partnership was intended to be an excise tax, it would be found in title TV under the head of “Miscellaneous Taxes.”
The structure of the act in question provides in “Title 1. Income Tax. Part 1. On individuals,” and the sections with which we have to do, by the methodical arrangement and structure of the statute, show that the text relied upon is an integral part of the income tax law on individuals, and is not an excise tax. If it is an excise tax, the burdens of taxation would be almost confiscatory to an individual partner as to his share of the firm’s profits. He would have to pay an income tax, and, in addition, would be liable to pay on such share of the profits an excise tax. Congress never had such confiscatory intent. It never intended to levy an excise tax for earrying on a business in partnership at any such rate' of percentages as is called for by the income tax. To regard it as an income tax payable by the individual is to impose the tax upon the person receiving it, and it is to give expression to the intention of Congress, which seems clear and unambiguous. Such construction should be selected. Eidman v. Martinez, 184 U. S. 578, 22 S. Ct. 515, 46 L. Ed. 697. There is no provision which requires, as a condition of an arrangement to reduce his income tax, that the taxpayer surrender part of his principal. Nor did Congress ever intend to tax the partnership, and later tax the individuals who received part of the profits, as Mrs. Mitehel did.
In the case of U. S. v. Robbins, 269 U. S. 315, 46 S. Ct. 148, 70 L. Ed. 285, the Supreme Court ruled that the wife, having an interest *292in community property, had merely an expectancy in such property while her husband lived, as decided by the state court, and therefore the whole income tax under the Revenue Act of 1918 is assessable against the husband, where he alone had the disposition of the community fund and may spend it substantially as he chooses. Such property, it was held, could not be taken for the wife’s debts. In the ease under consideration, the facts are quite the reverse in obligation to pay debts and ownership of property.
The judgment should be reversed.