Court Opinion

ID: 4605615
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:36:44.644909+00
Date Added: 2024-06-11T08:02:09.615793
License: Public Domain

Oscar Bromberg, Petitioner, v. Commissioner of Internal Revenue, RespondentBromberg v. CommissionerDocket No. 29801United States Tax Court17 T.C. 1539; 1952 U.S. Tax Ct. LEXIS 244; March 20, 1952, Promulgated *244 Decision will be entered under Rule 50.  1. Family Partnership -- Distributive Share of Brother Not Attributable to Taxpayer.  -- Taxpayer and his brother received equal distributions from partnership in which they and two others not members of the family group were partners. Taxpayer's father furnished capital and services for partnership on behalf of his sons, though not himself a partner. Held, the brother's share was not taxable to petitioner.2. Deductions.  -- Taxpayer claimed deduction in 1943 resulting from adjustment of capital accounts based on transactions in 1941 and 1942.  Held, deduction disallowed.  George Surosky, Esq., for the petitioner.John A. Clark, Esq., for the respondent.  Tietjens, Judge.  TIETJENS*1539  Respondent determined a deficiency of $ 7,660.92 in income tax against petitioner for the year 1943.Two issues are for decision: (1) Whether the share of the profits of a partnership distributed to petitioner's brother are properly taxable to petitioner; and (2) Is petitioner entitled to a deduction of $ 3,155 in the taxable year 1943?FINDINGS OF FACT.Certain of the facts are stipulated and are so found.Petitioner is a resident*245  of Paterson, New Jersey.  He filed his return for 1943 on the cash basis with the collector of internal revenue for the fifth district of New Jersey.Petitioner's father, Charles Bromberg, owned and operated Sun-Ray Textiles, Inc., during the years in question.  Its business was buying and selling yarn.The father wished to see petitioner set up in business for himself and to that end arranged with Jacques Cipoth to form a partnership with petitioner for carrying on the business of textile converting. *1540  Such a partnership, consisting of Jacques Cipoth and petitioner, was formed on January 2, 1941, under the name of Principal Fabrics Co.  (hereinafter called Principal).Petitioner's investment in Principal was $ 10,721.29 loaned to him by his father.  Jacques Cipoth made no capital investment in the partnership, his contribution being his ability and his experience in the field of textile converting.Oscar's duties with Principal were those of bookkeeper and he was in charge of all the records of the partnership.Charles Bromberg was naturally interested in seeing the enterprise succeed and rendered valuable services to Principal prior to 1943 in order to help Oscar by virtue*246  of his larger experience in textiles. Charles received no compensation from Principal.From the start of the business Jacques Cipoth drew $ 50 per week from Principal.  These amounts were charged against his capital account and resulted in a debit in that account.In October 1942, Principal was losing money and the need of further capital was apparent.  Charles seriously considered withdrawing his loan from petitioner and liquidating the business.  At the same time he was interested in establishing a business in which his son Milton also would have a share.At the insistence of Charles, petitioner and Jacques Cipoth agreed in October 1942 that Milton would be made a partner in the business as of January 1943.  It was also agreed that Eva Cipoth, wife of Jacques Cipoth, should be taken in as a partner at that time.  As a part of the bargaining leading up to this arrangement petitioner agreed to assume one-half of a debit balance of $ 6,710 in Jacques Cipoth's capital account existing by reason of personal withdrawals from Principal by Jacques during 1941 and 1942.Because additional capital was immediately necessary in the business Charles invested an additional $ 3,500 which was *247  placed to the capital account of petitioner in October 1942 and Jacques Cipoth also put in $ 3,500 which was credited to his capital account.On January 2, 1943, a partnership agreement was drawn up purporting to make petitioner, Milton Bromberg, Jacques Cipoth, and Eva Cipoth equal partners in Principal.  The agreement was signed by petitioner and by petitioner's mother as attorney in fact for Milton.  The agreement was turned over to Jacques Cipoth who held it until later in 1943, possibly after July, before signing because of disagreement over details.  The main provisions of the partnership agreement were nevertheless followed in the conduct of the business throughout the year.On July 1, 1943, entries were made on the books of Principal transferring $ 1,309.94 from the capital account of petitioner to a new capital account set up in the name of Milton and transferring a like amount *1541  from the capital account of Jacques Cipoth to an account in the name of Eva Cipoth.An entry also was made on that date transferring $ 3,155 from petitioner's capital account to that of Jacques Cipoth.Charles never was considered a partner in Principal.  After January 2, 1943, he continued*248  to render vital services to Principal and increased the amount of time which he devoted to the business.  He also extended substantial credit from his own business to Principal.  This was because he wished the partnership to succeed for his sons and because of the capital which he had advanced to the business.On December 31, 1943, entries were made on the books of Principal distributing the profit of $ 54,871.70 earned by it during 1943 by crediting the amount of $ 13,717.93 each to the capital accounts of petitioner and Jacques Cipoth and the amount of $ 13,717.92 each to the accounts of Milton Bromberg and Eva Cipoth.On August 16, 1944, Principal was dissolved.Milton was in the armed forces of the United States and was stationed overseas during the entire calendar year 1943 and at least until August 15, 1944.  At no time did he render any services to Principal.  Neither did he contribute any capital to the business other than the $ 1,309.94 transferred to him from the capital account of petitioner.  He did not know the Cipoths, never saw the purported partnership agreement, and knew of its provisions only in the most general way.  He did not know the extent of his purported capital*249  interest in the firm.Petitioner had no control over or any interest in the share of the partnership profits distributed to Milton.OPINION.We are not here concerned with the usual family partnership problem which could be solved by applying the principles of . The problem in this case is not primarily the validity or bona fides of the partnership. Rather, it is whether respondent, in determining the taxable income of petitioner, properly attributed to him the share of the partnership profits distributed to petitioner's brother Milton.That question is not answered, as respondent apparently contends, by determining whether or not Milton was a bona fide partner in Principal during the taxable year. If that were the crucial issue, we might agree with respondent, that Milton was not such a partner. But, as we view the case, that would not necessarily mean that petitioner should be taxed with Milton's distributive share of the partnership profits.How much Milton was to get from the partnership did not depend on petitioner.  He had no real control over the business at all.  At *1542  most, he was merely*250  a bookkeeper. His capital contribution was furnished by his father who, although not a named partner, was in fact the vital force in the partnership so far as the Bromberg family was concerned.  From their standpoint it was really the father, through his capital, his business connections, his services, all placed at the disposal of Principal because of his desire to see his sons succeed, who produced the partnership income. It was at the father's insistence that Milton shared in the business.  He virtually dictated the share Milton was to have.  Petitioner acquiesced.  Had he not done so, the father would have withdrawn his capital from the business and the partnership would have been liquidated.  We can not see how either petitioner's capital or his inconsequential services produced the partnership income distributed to his brother Milton.  He had no control over that income and we hold it was error for respondent to tax petitioner with it.  Cf. ; .On the issue of the claimed deduction of $ 3,155 in 1943, neither the facts nor petitioner's theory is clear. *251  It appears that in 1941 and 1942 Jacques Cipoth had drawn $ 6,310 from Principal which had not been considered an operating expense.  As part of the new partnership arrangement in 1943 petitioner agreed to assume half the amount and in July of that year an adjustment on the books was made by debiting $ 3,155 from the capital account of petitioner and crediting it to the capital account of Cipoth.  We are unable to see how these transactions resulted in a deduction for petitioner in 1943.  They might have been treated as business expenses of the partnership in the previous years, cf. , but even that conclusion would be difficult to reach on the meagre facts we have before us.  We hold petitioner has not shown that he is entitled to a deduction of $ 3,155 in 1943.Decision will be entered under Rule 50.