Court Opinion

ID: 4598613
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:21:38.994399+00
Date Added: 2024-06-11T07:51:59.537425
License: Public Domain

William G. Harvey, Petitioner, v. Commissioner of Internal Revenue, RespondentHarvey v. CommissionerDocket No. 4893United States Tax Court6 T.C. 653; 1946 U.S. Tax Ct. LEXIS 240; April 8, 1946, Promulgated *240 Decision will be entered for the respondent.  Income of personal service business to which petitioner's wife and son made no appreciable contribution of services or new capital, held taxable in full to petitioner, notwithstanding purported family partnership arrangement.  Commissioner v. Tower, 327 U.S. 280">327 U.S. 280, and Lusthaus v. Commissioner, 327 U.S. 293">327 U.S. 293, followed.  Frederick W. Fuess, Jr., Esq., and Floyd R. Gilfoil, C. P. A., for the petitioner.Bernard J. Long, Esq., for the respondent.  Opper, Judge.  OPPER*654  Petitioner seeks a redetermination of a deficiency of $ 7,375.70 in his income tax for the year 1941.The only error assigned by the petition is respondent's inclusion in petitioner's income of the entire amount of net income attributable to an alleged family partnership.FINDINGS OF FACT.Petitioner is an individual, residing in Syracuse, New York.  The return for the period in question was filed with the collector of internal revenue for the twenty-first district at Syracuse, New York.During the taxable year 1941 petitioner resided with his wife, Irma H. Harvey, his two sons, *241  William G. Harvey, Jr., then 20 years of age, and Richard Harvey, then 10 years of age, and his daughter, Marjorie Harvey, then 16 years of age.  His wife maintained the home and took care of the children, all of whom were attending school.Petitioner was married in 1916, when he was employed as an engineer by the New York State Highway Department.  He is a graduate engineer. Between 1916 and 1924 he held at least two other positions, the last of which was sales manager of a company whose plant burned down in 1924.  The owners of this business decided not to continue.  Petitioner and his wife decided that petitioner should go into business for himself and endeavor to build up an activity in which he would not be dependent upon working for others.  In that year petitioner started in the new field of manufacturers' representative.  He sold the products of Summer & Adams Co. of Cleveland, Ohio, Onondaga Steel Co. of Syracuse, New York, and the Cleveland File Co. of Cleveland, Ohio.Petitioner traded under the name of Wm. G. Harvey Co., and for a number of years had his office at his residence.  His wife assisted as stenographer and secretary. In 1925 petitioner moved his office to the*242  First Trust & Deposit Building, Syracuse, New York, but because of poor business conditions in 1932, he returned the office to his residence.  His wife again acted as his secretary. In 1937 he established his office at its present location, 1813 South Avenue, Syracuse, New York, and engaged a secretary.In 1938 petitioner was sales representative for John Batt Co. (taps and thread gauges), Worcester, Massachusetts; Circular Tool Co. (circular saws), Providence, Rhode Island; Putnam Tool Co. (end mills), Detroit, Michigan; and the Gairing Tool Co. (counterbores and special tools), Detroit, Michigan.  In 1940 and 1941, in addition to the foregoing, petitioner also represented R. G. Haskins Co. of Chicago, Illinois.  Petitioner's territory included upstate New York and northern counties of Pennsylvania.*655  Petitioner reported net income from his business of $ 2,345 for 1938, $ 6,563.33 for 1939, and $ 26,851.89 for 1940.  For the first six months of 1941 he reported income of $ 4,883.06, which did not include the receipt of $ 15,488.25 during that period, reported as accrued income for 1940.On May 28, 1941, petitioner, his wife, and his son, William G. Harvey, Jr., executed *243  a document which provided in part that they should be partners in the conduct of the business of manufacturers' representatives for the sale of production tools under the name of Wm. G. Harvey Co.; that the partnership should continue at will; that its capital should be the sum of $ 2,000; that the "party of the first part [petitioner] shall contribute $ 1,000.00 thereof and the party of the second part [petitioner's wife] and the party of the third part [petitioner's son, William G. Harvey, Jr.] shall each contribute the sum of $ 500.00"; that the partnership capital and all other moneys and instruments for the payment of money to it should be deposited in the name of the partnership in the First Trust & Deposit Co., Syracuse, New York, or such other banks as there are agreed upon and "all moneys credited therein to the partnership shall be subject to withdrawal only by check made in the name of the partnership and signed by the party of the first part [petitioner]"; that petitioner should devote all of his time and attention to the business; that his wife and son were not required to devote their entire time, but only so much as was required for the best interests of the partnership*244  as determined solely by petitioner; that each of them should be entitled to a drawing account, the amount to be determined with due consideration for the financial condition of the partnership; that the withdrawals of the wife and son should be equal and the withdrawals of petitioner should equal the combined withdrawals of the wife and son; that the net profits or net losses should be divided 50 percent to petitioner and 25 percent each to the wife and son; that their respective accounts should be credited or debited with their proportionate shares; that on the termination of the partnership, after a settlement of liabilities, all remaining assets should be divided in kind among the parties in the above named percentages.The partnership books on June 1, 1941, record opening capital of cash, $ 9,651.87; automobile, $ 1,901.88; and office equipment, $ 1,618.57.  These assets had been acquired by petitioner prior to June 1, 1941.  The cash was earned by him as an individual prior to that time.  The books reflect petitioner's contribution of capital in the sum of $ 1,000 and money which was credited to his individual account of $ 3,377.26; they also reflect his wife's contribution of*245  $ 500 and a credit to her personal account of $ 1,070.02.  The capital contribution indicated *656  for the son was $ 500, of which petitioner's wife is indicated as having contributed a third.  Petitioner contributed the other two-thirds.In 1938 and 1939 petitioner needed money and his wife transferred to him a total of $ 1,736.69.  These advances were not evidenced by notes.After the execution of the agreement on May 28, 1941, the business was conducted under the name of Wm. G. Harvey Co. as in prior years, and no new agreements were entered into with the companies which the petitioner then represented.  The companies were advised that such an agreement had been executed.In the course of business during the year 1941 from one to fourteen months elapsed between the time an order was entered with the producing company and the receipt of the commission check.  The commissions due to petitioner when acting as an individual and through the partnership were due and payable a month following the date the customer paid in full for the product.  In addition to selling the goods, it was necessary to check and see that the correct tools were delivered and were put to correct use and*246  to straighten out engineering and technical difficulties.The funds of the business were not deposited in the name of Wm. G. Harvey Co.  They were kept in a joint savings and checking account of petitioner and his wife, as had been the case prior to the execution of the May 28, 1941, agreement.Beginning in the year 1924, when petitioner first entered business for himself, he had always counseled with his wife on business matters, and she had assisted him in the composition of business correspondence.  While the office was maintained in the home, she acted as his secretary. After 1937 a secretary was employed and petitioner's wife did no office work.  She entertained customers and petitioner's business connections and counseled with him.  Petitioner's wife conducted the business from the home while petitioner was sick for a period of five months in 1932.  She did not make business calls.Prior to their marriage petitioner's wife had taken a business course at Syracuse Business Institute and she was a graduate of Syracuse Central High School.  She had been employed for about five years as a stenographer and bookkeeper.Petitioner advised his son William during the last year of the*247  latter's junior high school period that if he wanted to join petitioner in the business later on, it would be necessary for him to start preparing for it.  It was then decided that William would take a scientific course in preparation for engineering studies in college.  William completed his preparatory work and entered Syracuse University, where he studied mechanical engineering.*657  In May 1941 William had completed his first two years at the university.  He worked with his father at the office during the summer vacation of 1941, and at other times, and also went out with him visiting plants and meeting people.  He drew $ 50 a week during the summer months and $ 25 a week while attending school.  These sums were entered as salary on the partnership books and were used by William for his personal expenses.William continued at the University during 1941 and 1942, and until his graduation on May 10, 1943.  He then became employed as assistant product engineer with the Sperry Gyroscope Co. on Long Island, New York, as it was felt that this experience would be beneficial to him when he joined petitioner in business.  It was not until June 1944 that he returned to Syracuse and*248  engaged in business with petitioner.In 1942 petitioner purchased an apartment building in Syracuse at a total cost of approximately $ 53,000.  At the time of the purchase there was a $ 40,000 mortgage on the property, which has now been reduced to about $ 18,000.  He also purchased another property, known as the bank building, at a cost of between $ 9,000 and $ 10,000, for which he paid cash.  Title to both of these properties was taken in the individual name of petitioner, and the funds used for their purchase and for the subsequent reduction of the mortgage on the apartment house were taken from the funds of Wm. G. Harvey Co.  Petitioner, his wife, and William G. Harvey, Jr., together reached the decision to buy the apartment house and the bank building.  It was known that they were purchased with partnership funds and they were considered partnership property.Petitioner's wife received no funds from Wm. G. Harvey Co. during the year 1941 and made no withdrawals therefrom, except that $ 65 a week was given to her by petitioner and used by her for personal expenditures for herself and children, including expenditures for charities, club fees, cosmetics, household items, and garden*249  equipment.Under date of April 13, 1942, there was filed with the clerk of Onondaga County, New York, a "Certificate Relative to the Use of Assumed Names in Business," dated March 10, 1942, in which it was recited that petitioner, his wife, and William G. Harvey, Jr., were the sole owners and proprietors of and conducted the business known as Wm. G. Harvey Co., located at 1813 South Avenue, Syracuse, New York.A partnership return of income totaling $ 40,044.61 for the period June 1 to December 31, 1941, was filed and the profits reported in the individual income tax returns of William G. Harvey, Irma H. Harvey, and William G. Harvey, Jr.A distributive share of the income of Wm. G. Harvey Co. to petitioner was reported in his individual income tax return as $ 17,474.63.  *658  The books show withdrawals by him from the Wm. G. Harvey Co. during the period June 1 to December 31, 1941, of $ 34,614.20.  As a result of an audit made in 1943, this figure was changed to $ 22,875.48.Respondent determined that the total income of Wm. G. Harvey Co. is taxable to the petitioner, William G. Harvey.The May 28, 1941, agreement did not create a partnership within the meaning of the Internal*250  Revenue laws.OPINION.Factually this case follows the now familiar pattern of family partnerships, and is in many respects similar to , and , recently decided by the Supreme Court in favor of respondent's position.  Petitioner's case is even more vulnerable than some by reason of the peculiar personal factor in the earning of the income in question.  ; certiorari denied, ; ; affd. (C. C. A., 5th Cir.), ; certiorari denied, , and see . The professional qualifications, and the personal service and contacts, attributable entirely to petitioner individually, were apparently responsible for the production of substantially all of the income.  The value of the actual services of the son, if any, is not shown.  The interest of*251  the partnership business in having him attend school and work for Sperry, as distinguished from the satisfaction of petitioner as father in the preparation of his son for a business career, is not persuasive.  It would be a departure from reality to regard either as having justified his participation in partnership profits.  No value has been, or perhaps could be, established for the contribution of services by the wife.Capital was no major factor in the production of income in this personal service business.  Patently as to the son, there was no reality in at least two-thirds of his meager capital contribution, which was furnished for this purpose by petitioner, and the wife had already made it clear that her financial resources were available to the business.  As was said in , "No capital not available for use in the business before was brought into the business as a result of the formation of the partnership." Such of the income as found its way into the hands of the wife and son from the partnership was used for expenses usually borne from the husband's income.  The conduct of the business before and after the May*252  28, 1941, agreement is without substantial difference.  No other changes of a material nature were wrought by the agreement.  .*659  We think that on the present record it can not be said that "the partners really and truly intended to join together for the purpose of carrying on business and sharing in the profits and losses or both." 1 The circumstances surrounding the formation and operation of this partnership require that its income be taxed to petitioner.  ;Decision will be entered for the respondent.  Footnotes1. .↩