Opinion
Docket No. 5719.
Promulgated December 29, 1945.
Pursuant to agreements entered into by the petitioner and certain of his brothers and sisters with their brother Charles, involving the income from property left by their mother, Charles became entitled to receive annually 4/24 of the net income from the property for life and the balance was to be equally divided among the other children. For 1941 petitioner was entitled to receive 5/24 of the net income and another brother and two sisters each a like fraction and Charles 4/24. Each received his pro rata share of the net income from the property for 1941 and reported the same as taxable income in his or her individual return. The respondent has determined that no part of the net income was taxable to Charles, but that each of the others is taxable upon 6/24 of the net income, and has accordingly increased the petitioner's share from 5/24 to 6/24. Held that the petitioner is taxable upon only 5/24 of the net income for 1941.
Walter W. McVay, Esq., for the petitioner.
Brooks Fullerton, Esq., for the respondent.
Petitioner contests the determination of a deficiency in his income tax for 1941 in the amount of $792.91. The only question in issue is whether the petitioner is taxable upon 5/24 of the net income of a business carried on under the name of S. Delp's Sons or upon 6/24, as determined by the respondent.
FINDINGS OF FACT.
The petitioner is an attorney at law and resident of Pittsburgh, Pennsylvania. He filed his income tax return for 1941 with the collector of internal revenue at Pittsburgh. In such return he included in gross income 5/24 of the net income of a business carried on under the name of S. Delp's Sons. A partnership return was filed by petitioner for that organization for 1941 which showed the petitioner's distributive share as 5/24 of the total. It also showed a like fractional part of the net income as taxable to petitioner's brother Edward and to each of his two sisters, and 4/24 as taxable to his brother Charles. Each of those persons filed an individual income tax return for 1941, including in gross income his or her distributive share. Upon audit of the petitioner's return the respondent determined that he is taxable upon 6/24 of the income rather than upon 5/24.
The petitioner's mother, Anna E. Delp, died testate on June 3, 1931. In her will she provided in the third paragraph thereof as follows:
I have made no provision in this, my last will and testament for my son Charles Delp. It is my desire and intention that he shall not participate in my estate as I have provided for him during my lifetime.
Shortly after the death of Anna E. Delp and on July 31, 1931, the following agreement was entered into:
AGREEMENT
Made and entered into this 31st day of July, 1931, by and between WILLIAM DELP, EDWARD DELP, FRANK S. DELP, LOUISE C. MEARKLE and EFFIE M. FALK, parties of the first part, and CHARLES DELP, party of the second part.
WITNESSETH:
WHEREAS, Charles Delp is one of the six living children of Anna E. Delp; and
WHEREAS, Charles Delp was indebted to the Estate of Anna E. Delp during her lifetime in the sum of $32,582.39, together with interest from January 1st, 1925, as evidenced by a book account and partly by judgment notes given by Charles Delp to Anna E. Delp; and
WHEREAS, Charles Delp is likewise indebted to the partnership of S. Delp's Sons (at and previous to June 3rd, 1931, consisting of Anna E. Delp, Edward Delp, William Delp, Frank S. Delp, Louise C. Mearkle and Effie M. Falk) in the sum of $17,324.41, together with interest to June 3rd, 1931 amounting to $7,563.66, as evidenced by a book account; and
WHEREAS, Charles Delp had a number of years ago released and transferred his one-seventh interest in the firm of S. Delp's Sons and at the present time has no interest in the same; and
WHEREAS, Anna E. Delp made no provision in her will for the said Charles Delp; and
WHEREAS, it is the desire of all the parties hereto, all being brothers and sisters, that an arrangement be made whereby Charles Delp will not be called upon to pay either of the indebtednesses aforesaid and at the same time provision be made for him:
NOW, THEREFORE, It is mutually understood and agreed by and between the parties hereto as follows:
FIRST: That parties of the first part do hereby release Charles Delp from any and all indebtedness owing by him to the firm of S. Delp's Sons or to the Estate of Anna E. Delp.
SECOND: The said Charles Delp, party of the second part hereto, for and in consideration of the aforesaid release, hereby agrees that Anna E. Delp, his mother, was of sound mind and disposing memory and that she was not unduly influenced in the execution of her will and he hereby confirms and ratifies the previous transfer and release of his interest in the firm of S. Delp's Sons.
THIRD: The parties of the first part hereto hereby agree that there shall be paid to Charles Delp the income, only of a one-seventh interest in the firm of S. Delp's Sons pending such time as the Estate of Anna E. Delp shall have been delivered its one-seventh interest in said firm and thereafter he shall receive the income, only, on a one-sixth interest in said partnership or firm of S. Delp's Sons but only for so long as he shall live, it being the intention that at no time shall he be entitled to the principal or corpus of said one-sixth interest, or any part thereof and it being further understood and agreed that at his death the corpus shall be distributed to the parties of the first part hereto, or the issue of their bodies.
FOURTH: It is understood and agreed between the parties hereto that the written release of indebtedness as aforesaid, given by them to Charles Delp by written agreement separate and apart from this written agreement, is given simultaneously with the execution of this agreement and is part of the same.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals the day and year first above written.
[Signed by the six parties named.]
Prior to the death of Anna E. Delp the business conducted under the name of S. Delp's Sons consisted of the management of an estate left by petitioner's father, who died April 19, 1892, and after acquired property. The mother, with the assistance of her children, carried on the business. It included during the early years the operation of two furniture stores. The mother owned some real estate other than those parcels managed by S. Delp's Sons. There was never any written agreement between the mother and her children, although for many years the profits of the business were divided equally among them. Long prior to 1931 Charles relinquished his right to any ownership of the business assets and in lieu thereof received as salary the same percentage of the profits of the business as was received by the mother and each of the other children.
By 1941 the business of S. Delp's Sons had become principally an investment business. The investments were in real estate and mortgages and stocks, including United States Government securities. The real estate consisted of 60 or 70 parcels on which there were about 200 dwelling houses or other buildings, some of the buildings being apartments. A large part of the work connected with the management of these properties devolved upon the petitioner, who was an attorney. The properties were kept rented and in repair.
The agreement executed on July 31, 1931, was supplemented by another agreement entered into on December 20, 1939, reading as follows:
Supplemental Agreement
MADE and entered into this 20th day of December A.D. 1939, by and between EDWARD DELP, FRANK S. DELP, LOUISE C. MEARKLE AND EFFIE M. FALK, parties of the first part and CHARLES DELP, party of the second part.
WITNESSETH:
WHEREAS, by the terms of a certain agreement entered into the 31st day of July 1931 by and between Edward Delp, Frank S. Delp, Louise C. Mearkle and Effie M. Falk and Charles Delp, the said Charles Delp is receiving a share in the income from the partnership conducted by S. Delp's Sons; and
WHEREAS, it was contemplated at the time said agreement was entered into that Charles Delp should also share the losses in said partnership if there should be any; and
WHEREAS, it was likewise contemplated at the time said agreement was entered into that Charles Delp should render certain services to said partnership in the appraising of properties, giving advice on the placing of mortgages and the purchasing and sale of properties;
NOW, THEREFORE, it is agreed and understood by Charles Delp that he will pay a one-sixth share in the losses of the partnership conducted under the name of S. Delp's Sons, should there be such losses;
(2) He will make appraisals on all properties on which the said partnership desires to place mortgages, when requested to do so;
(3) He will, when requested, make appraisals upon any properties belonging to the partnership, or any property which the partnership should contemplate selling;
(4) He will give his advice and counsel on all matters that affect the income of the said partnership, when requested to do so.
It is understood that this agreement in no wise affects or alters the terms of the original agreement, other than in the manner hereinbefore set forth.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and seals the day and year first above written.
Prior to the execution of this agreement William Delp, one of the sons, had ceased to have any interest in the business. The supplemental agreement therefore was signed by only Louise C. Mearkle, Effie M. Falk, Edward Delp, Frank S. Delp, and Charles Delp, all being children of Anna E. Delp. During 1941 Charles Delp rendered such services as he was called upon to render and received 4/24 of the net income of S. Delp's Sons. The balance of the net income was distributed equally among the other brothers and sisters, or 5/24 to each.
OPINION.
In this proceeding the petitioner contends that the respondent erred in including in his gross income any part of the net income of the business conducted under the name of S. Delp's Sons which belonged, pursuant to the agreements of July 31, 1931, and December 20, 1939, to Charles Delp; that Charles Delp was entitled to his share of the profits "by reason of his being a member of the partnership [S. Delp's Sons] or as having a life interest in the corpus of the partnership from which the earnings were derived."
Section 3797 of the Internal Revenue Code defines a "partnership" as including:
* * * a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a trust or estate or a corporation; and the term "partner" includes a member in such a syndicate, group, pool, joint venture, or organization.
Ordinarily a partnership exists where two or more persons contribute property or services or both for the carrying on of a business under a contract which provides that the profits shall be divided among them. A mutual sharing of the profits or losses is a common characteristic of a partnership. Such an agreement existed between the petitioner and his brothers and sisters in carrying on the business of S. Delp's Sons for 1941. Charles Delp was a party to the agreement and under it was entitled to receive and did receive 4/24 of the net income. We think that he was taxable upon that income and that the petitioner is not taxable upon any portion of it. In our opinion the respondent erred in his determination that the petitioner was taxable upon more than 5/24 of the net income of S. Delp's Sons for 1941.
Decision will be entered under Rule 50.