Opinion
Docket Nos. 17646 17647.
1949-03-22
H. A. ECKHARD AND MILDRED ECKHARD, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
J. E. Marshall, Esq., for the petitioners. S. B. Anderson, Esq., for the respondent.
1. A wife furnished capital to purchase approximately the first one-third of corporate stock purchased in husband's name, the remainder being purchased later from profits. She worked full time in the business. Later, after corporate dissolution, reports repeatedly showed business conducted in her husband's name. No records ever indicated the wife to be a partner and there was no written partnership agreement or any agreement as to sharing losses. Returns were filed on the community basis in Oklahoma prior to a holding that the community property law of that state was ineffective to divide income for tax purposes. Held, no partnership has been established.
2. Husband, on cash basis, left part of his remuneration with corporation as operating capital and did not report it as income. Later in the taxable year, it was distributed to him when the corporation was dissolved. Held, he did not constructively receive it in the earlier years, but received it as income in the taxable year. J. E. Marshall, Esq., for the petitioners. S. B. Anderson, Esq., for the respondent.
These cases, duly consolidated, involve income tax for the taxable year ended December 31, 1943. Deficiencies were determined in the amounts of $16,174.01 and $831.68 against petitioners H. A. Eckhard and Mildred Eckhard, respectively. Two issues are presented: (a) Whether the petitioners were partners, and (b) whether petitioner H. A. Eckhard is taxable in 1943 upon income which accrued to him during the period from July 1, 1941, to February 8, 1943.
FINDINGS OF FACT.
The petitioners are husband and wife and residents of Oklahoma. Their income tax returns for the taxable year were filed with the collector for the collection district of Oklahoma.
The petitioners were married in 1923, while students at the University of Nebraska. At marriage H. A. Eckhard had no funds. He graduated in 1924. Mildred, who had for three years been a student in the school of law, did not complete her course because of the birth of a daughter in 1924. H. a. Eckhard, after graduation, had earnings from several different positions between 1924 and 1941, the last one being territory manager for the General Tire & Rubber Co. from 1938 to 1941. He earned from $40 to $175 a month. Up to 1941 his earnings went to the support of his family and to discharge his obligations. He had no independent means.
Mildred, in 1926, started to work as secretary in a bank in Lincoln, Nebraska, where they resided for a salary of $85 a month. She later became secretary to the president of the bank. In that work she gained experience in business, such as analysis of financial statements, checking and rating commercial papers purchased by the bank for investment, and checking credit application security offered. Though occasionally, when her husband's earnings were not enough for the family living, she helped the family with her earnings, in general, she invested them. He had no control over her money. She purchased a residence in Lincoln, Nebraska, in her own name; also 70 shares of stock in an oil company for which her husband at one time worked. In these purchases she paid some cash down, the remainder from her salary. In buying the oil stock she borrowed some money.
Early in 1941 H. A. Eckhard learned of a chance to purchase the stock of a corporation named General Tires, Inc., located in Oklahoma City and engaged in selling tires, gasoline, and small accessories. The matter was discussed and investigated by the petitioners. They both went to Oklahoma City on May 29, 1941, looked over the property and the city, the future possibilities of the business, and prospects for a place to live, and decided to negotiate with General Tire & Rubber Co. (hereinafter sometimes referred to as the Ohio corporation) for the purchase of the stock which that corporation owned in General Tires, Inc. (sometimes hereinafter referred to as the Oklahoma corporation). The business was found to be in rather poor condition, but they thought that with their combined efforts they could make a success of it.
Mildred returned to Lincoln and H. A. went to Akron, Ohio, to see if a deal could be worked out with the Ohio corporation. Mildred had agreed that if he could purchase the stock she would invest her money.
On June 16, 1941, H. A. Eckhard entered into a contract with the Ohio corporation, and on July 14, 1941, into an agreement of amendment thereof. In pertinent part, the contract as amended provided that H. A. Eckhard should, and he did, purchase 50 shares of the stock in the Oklahoma corporation for $5,000, paying $2,500 cash and giving a note for $2,500. The contract also provided for later purchase of the remaining 97 shares of stock for $9,700. The stock was issued to H. A. Eckhard as a matter of convenience. The Ohio corporation did not wish to deal with a woman. Mildred furnished the $5,000 selling her home in Lincoln for about $3,500 and her oil stock for about $4,000 to $4,500. He did not have money to buy the stock.
The contract with the Ohio corporation provided for employment of H. A. Eckhard by the Oklahoma corporation, and such a contract with the Oklahoma corporation was executed on June 16, 1941. In material part it provided that he be paid a salary of not to exceed $350 a month and 100 per cent of the profits of the Oklahoma corporation after deduction of 6 per cent dividends to stockholders, ‘sound reserves, taxes, etc.‘ Between July 1, 1941, and February 28, 1943, H. A. Eckhard left with the corporation as working capital, and did not draw, a part of his remuneration under the contract, in the amount of $12,832.76.
After the purchase of the 50 shares of stock the petitioners moved to Oklahoma City. Both petitioners worked in the store. Mildred hired and discharged employees, bought merchandise, passed on credits, took inventories, and made adjustments, doing in general the same work as her husband except manual labor and changing tires. She had equal voice with him in conduct of the business. She was in charge when her husband was away, as he was frequently, on trips as long as three weeks, in one instance; others a week or ten days. The skill and industry of both went into the business. Her hours of work were from morning until late at night, six days a week, sometimes on Sunday. She started work in the early fall of 1941 and continued until after the taxable year here involved. She hired help to run the home. She did not draw a regular salary from the business, but took what was necessary for household expenses, for her to be away from home. Sometimes it was $18 a week.
The business prospered. With profits, the remaining 97 shares of stock in the Oklahoma corporation were purchased on January 29, 1943, payment being made in cash and a note for $2,500. H. A. Eckhard did not become controlling stockholder until that date. The total price was $10,657.50. The note was signed by both petitioners. It was paid from the earnings and profits of the business about June 1, 1943. On February 28, 1943, the corporation was dissolved. Thereafter, the business was conducted in the name of General Tires. Upon the dissolution of General Tires, Inc., the entire capital stock and surplus of the corporation was entered solely in the account of H. A. Eckhard on the books of the new business. At liquidation, he was credited with the full amount he had left with the corporation. There was nothing on the books of General Tires to evidence any partnership interest in Mildred. The assets of the corporation were used in the operation of General Tires. The business proceeds were deposited in the Liberty National Bank in Oklahoma City, with right in both petitioners to check thereon, subject to counter-signature by the bookkeeper. Both checked on the account. The profits of the business were invested in property, in the joint names of the petitioners, including several citrus groves in Texas and two residences in Oklahoma City. They had agreed that the profits from the business would be invested for the mutual benefit of both.
A written partnership agreement was never entered into between the petitioners. When the petitioners were in Oklahoma City about May 10, 1941, investigating the Oklahoma corporation, they decided they would go into it as a partnership deal. They never discussed the subject of whether they would have a written partnership agreement. They trusted each other; never had disputes. No partnership accounts were ever set up showing the interest of each petitioner in the business. No withdrawing accounts were set up. No partnership returns were ever filed. There were no accounts of written records of any kind showing the rights or interests of Mildred in the partnership. Treasury Department form W-3, ‘Reconciliation of Quarterly Returns of Income Tax Withheld on Wages with Statements of Income Tax Withheld on Wages,‘ filed for the business for the year 1943, are filed by ‘Eckhard, H. A., DBA General Tires‘ and the four quarterly returns of victory tax and income tax withheld for 1943 are signed ‘H. A. Eckhard‘ with the title ‘Owner.‘ The three quarterly returns for the period after March 31, 1943, bear the notation ‘Eckhard, H. A., DBA General Tires,‘ and the first quarterly return shows ‘General Tires, Inc., H. A. Eckhard,‘ with ‘President‘ marked out and ‘Owner‘ as H. A. Eckhard's title. Quarterly employer's tax returns under the Federal Insurance Contributions Act were filed for the business during 1943 with the Treasury Department. All are signed ‘H. A. Eckhard, Owner.‘ For the first quarter, ‘Inc.‘ is stricken from ‘General Tires, Inc.‘ and ‘Owner‘ is written instead of ‘President‘ as title of H. A. Eckhard. After the first quarter, each bears the typewritten statement ‘Eckhard, H. A., DBA General Tires.‘ All of the above income tax, victory tax, and employer's tax returns are executed under oath. H. A. Eckhard signed them after they were made up.
The petitioners each filed individual income tax returns for 1943, on a community property basis. H. A. Eckhard's return shows his occupation to be ‘Tires, gas, and oil.‘ Mildred's return shows her occupation to be ‘Clerical.‘ H. A. Eckhard reported as income $400 from General Tires, Inc., with the notation ‘Salary February‘ and community income of $12,843.63, and Mildred reported $127.50 from General Tires, Akron, Ohio, with the notation ‘Salary February‘; also community income of $12,843.63. Neither return makes mention of partnership. No partnership return was filed. The community income reported was listed as from General Tires, salary (as above stated), interest, and sale of a house.
When the time came to file income tax returns for 1943, H. A. Eckhard visited an accountant, one Conliff. The returns were prepared on the cash basis. There was discussion as to the type of return which should be prepared. Mildred contended that it should be filed as a partnership return and there was discussion as to whether it was necessary, due to the community property law. They had filed certificates to come under the Oklahoma Community Property Law of 1939. In the discussion it was stated that if they filed under the community property law it would have the same effect as if filed under the partnership. Mildred was overruled by her husband and Conliff in her thought that a partnership return should be filed.
Petitioner H. A. Eckhard did not report in his Federal income tax returns for 1941, 1942, and 1943 that part of his remuneration or compensation from General Tires, Inc., which he earned under his employment contract and left in the business as operating capital. He merely turned the income tax reports over to Conliff. He had no way of knowing whether he should report those amounts or not. He did not show Conliff his employment contract with General Tires, Inc. He did not think it was necessary to do so. His returns were made on the cash basis. The amount which H. A. Eckhard left in the company from July 1, 1941, to dissolution of the corporation, $12,832.76, was credited to him when the liquidation of the corporation occurred. The corporate return for the year 1943 lists $5,053.07 as compensation paid to officers, of which $1,850 was paid to H. A. Eckhard from July 1, 1941, to the end of the year. H. A. Eckhard was president of the corporation at all times after July 1, 1941, and signed the corporate income tax returns as president. The return for 1942 lists $4,800 as deducted for compensation of officers, the entire amount being paid to H. A. Eckhard as president, and the corporate return for 1943 lists $1,200 as paid to officers, all of which was paid to H. A. Eckhard as president. The corporation's fiscal year ended November 30 of each year. The return for 1943 shows that the corporation was liquidated March 1, 1943. The corporate return for 1941 shows a net loss of $3,373.13, with no income tax payable; the corporate return for 1942 shows a net income of $2,145.25 (after deduction of net loss carry-over from 1941 of $3,373.13); and the corporate return for 1943 shows a net income of $7,093.79. The balance sheet attacked to the return for 1941 shows earned surplus and undivided profits of $1,826.75 (deficit) at the beginning of the year and $545.30 at the end of the year; also shows total assets of $22,716.33. The balance sheet attached to the corporate return for 1942 shows earned surplus and undivided profits at the end of the year in the amount of $6,652.96 and shows total assets as $30,775.82. The balance sheet attached to the corporate return for 1943 shows earned surplus and undivided profits at the end of the year to be $12,861.64 and shows total assets to be $39,157.60. The corporate returns do not disclose any payment or credit to H. A. Eckhard of the $12,832.76 or any other amount except the deductions for salaries as above set forth. The corporate returns are signed also by some person other than either petitioner, as treasurer. About January 1, 1947, H. A. Eckhard sold a half interest in the business and thereafter his wife did not work in the store.
The notice of deficiency issued to petitioner H. A. Eckhard contained a recitation that it had been determined that he was not entitled to report income on the community property basis and that no valid partnership for Federal tax purposes existed between him and his wife during the taxable year; also that the income of General Tires was taxable to him in its entirety. In the deficiency notice issued to Mildred it is recited that she and her husband had reported income from General Tires on the community property basis for 1943; that all of such income had been held taxable to him and his income increased; that, however, she and her husband had not accepted such determination and had contended that such income is taxable one-half to each on the grounds of equal partnership from March 1 to December 31, 1943; and that ‘therefore solely to protect the interest of the United States the portions of the adjusted income claimed by you is included in your taxable income as follows: * * *‘
OPINION.
DISNEY, Judge:
We shall first examine the question as to whether the petitioners are to be taxed in equal amounts as partners upon the profits of General Tires. The petitioners' argument is, in effect, that Mildred Eckhard furnished the original capital with which 50 shares of stock in the Ohio corporation were purchased in 1941, that she contributed services, in effect, as much as did her husband, and that, therefore, along the lines laid down in Commissioner v. Tower, 327 U.S. 280, she should be recognized as a partner in the business. The Commissioner, on the other hand, in substance, takes the view that, though contributions of capital and of services are proper elements for consideration in deciding whether there is a partnership, here the petitioners had no written agreement, that no books or records were ever set up or returns filed on the theory of partnership, that the wife never assumed the liabilities incident to the position of a partner, that the property at all times stood in the name of the husband, that he represented himself in returns filed as the owner, and that, therefore, a partnership should not be recognized.
Analysis of the facts before us, in the light of the question involved, has not been without difficulty. It is clear that the wife contributed $5,000 to the business. This purchased the original 50 shares of stock. It is not contended that she furnished any other money and the evidence is that the other 97 shares of stock later purchased were purchased from the profits of the business. She did perform much service for the benefit of the business. We do not understand the Tower case, however, to lay down any rule that the mere contribution of capital and services necessarily establishes a partnership—though elements properly to be considered on the question. Here our problem, in essence, is whether the wife made such contributions of capital and services by way of entering into a partnership, or merely to assist her husband in his business as a wife might do. The question is: Did the husband and wife transact business as a partnership? After close study of all of the facts involved, we have come to the conclusion that they did not. A number of considerations compel this result and cause us to believe that the petitioner has failed to demonstrate business done as a partnership.
Though the lack of a written agreement is, of course, not conclusive, it may not be reasonably be altogether disregarded. The evidence, even an oral agreement, is not altogether unequivocal. The husband testified that after the liquidation of the corporation he and his wife continued to operate the business as a partnership, as a joint project, share and share alike; that they had agreed that the profits would be invested for their mutual benefit; that in 1941 when they were in Oklahoma City to investigate the General Tires, Inc., proposition they discussed it and decided they would go into it as a partnership deal. The wife, on her part, stated that they liquidated the corporation and decided to operate as a partnership; that they had no written partnership agreement; that ‘We never discussed the subject (whether they should have a written agreement). At any time I need a written agreement with my husband I will not be living with him‘; that when they had an oral agreement they considered that adequate; that she felt that the return should have been a partnership return. There is no positive statement by either husband or wife that there is no positive statement by either husband or wife that there was ever an oral agreement or partnership. The nearest thereto that the record indicates is the answer ‘It was.‘ to a leading question on cross-examination to the husband: ‘Your agreement was oral?‘. We can not believe that there ever was even an oral partnership, and we have concluded that here the wife was merely contributing in a commendable way to the success of the business conducted by her husband. There is not even a contention that she ever assumed liability for any debts of any partnership and no fact indicates that she was ever so bound. There were no partnership records, no capital accounts, withdrawing accounts, returns, or any other current records to bear out the partnership theory. On the contrary, the stock of the corporation, at least the first 50 shares, was in the name of the husband. Though it is testified that this was for convenience and that the Ohio corporation would not trade with her because she was a woman, the evidence impressed us as conclusion rather than fact. No positive showing is made as to who was the purchaser of the 97 shares purchased in January 1943, but he testified that he did not become controlling stockholder until that time. In this connection, however, we note that the evidence by the husband is that about January 1, 1947, ‘I sold a half interest in the business.‘
Of interest, also, is the fact that throughout the year 1943 the husband was held out to the United States in income tax returns and employer's tax returns under the Federal Insurance Contributions Act as the owner of the business and that the maker of the return was ‘Eckhard, H. A., DBA General Tires.‘ We take judicial notice of the fact that DBA is an old and well known commercial expression meaning ‘doing business as.‘ State v. Dowling, 202 S.W.(2d) 580. In short, the business was repeatedly, in fact seven times throughout the year 1943, reported to the United States as being one conducted by H. A. Eckhard and eight times he signed the returns as owner. The wife's name never appears in any of the returns or in any other record to indicate that she was a partner; and, finally, neither her return nor that of her husband for the taxable year in any was indicates her to be a partner. In the face of such a record we have not found it reasonable to sustain the petitioners' contention that a partnership was being conducted.
It is true that there is evidence that, when the returns for 1943 were being prepared, apparently early in 1944 (since although neither return is dated both bear a stamp dated April 15, 1944), the wife thought a partnership return should be filed. This evidence is not very convincing, for, though she may have felt herself to be equally interested with her husband, it does not demonstrate that the business was carried on as a partnership or that she was doing more than a helpful wife would do to forward the family fortunes; and it is in logical largely neutralized by the fact that she was overruled by her husband and an accountant, which may have been due to the view that there was no partnership. We also take judicial notice of the fact that the Oklahoma statute requires parties conducting business under a fictitious name to file public record of their names with the court clerk. Title 54, secs. 81, 83, Oklahoma Stat. 1941. The name used after dissolution of the corporation was ‘General Tires,‘ which plainly was a fictitious name in that it did not disclose the names of the owners or parties conducting business, as required by the statute. No showing is made in this record of any compliance with such statute, though it involves, as a penalty for failure to so file, inability to collect debts until such filing. It is difficult to believe that both husband and wife were actually conducting this business during the year 1943 without filing as required, instead of doing business as H. A. Eckhard as owner, as he repeatedly reported to the Federal Government. The facts indicate to us current recognition by the parties that only H. A. Eckhard was doing business as General Tires, most particularly since it has been held in Oklahoma that the statute does not require the filing if only one person is doing business under a fictitious name. Katterhenry v. Williamson, 190 Pac. 404.
The record suggests a contention that it was regarded as immaterial whether the returns were filed on the partnership basis or on the community property basis. At the time petitioners filed their income tax returns for 1943 this Court had, in the case of C. C. Harmon, 1 T.C. 40, given effect to the Oklahoma community property law enacted in 1939. The Supreme Court later, in Commissioner v. Harmon, 323 U.S. 44, reversed this Court and the Circuit Court. It then became apparent for the first time that division of the family income of the petitioners depended upon the existence of a partnership. The parties are, of course, highly interested witnesses. We think that their views as reflected in the testimony can not stand against the facts above found and discussed, in effect showing that nothing was done prior to or within the taxable year or even in the income tax returns prior to or within the taxable year or even in the income tax returns filed later for such year to indicate that any theory of partnership was entertained. On the contrary, every record made was consistent only with ownership in the husband. The fact that the entire capital stock and surplus of General Tires, Inc., was, upon dissolution, entered solely in H. A. Eckhard's account on the books of the new business is contrary to any theory that he was not owner, both of the corporation and later of the proprietorship, but in a partnership with his wife. Finally, in the income tax returns his occupation is listed as that of ‘Tires, gas and oil,‘ while hers is merely ‘Clerical,‘ an incident consistent with the assistance she rendered in the store, but inconsistent with a claim of participation in the business of tires, gas and oil. Had she been then considered a half owner, her return would reasonably be the same as his in this respect. From all the facts, we can not but conclude that during the taxable year the petitioners did not transact business as a partnership and that the partnership profits are not divisible between the husband and wife for Federal income tax purposes.
There remains for consideration the question as to whether the $12,832.76, the agreed amount of the earnings of petitioner H. A. Eckhard from July 1, 1941, to the dissolution of the corporation, is taxable to him in 1943. It is agreed that when the liquidation occurred in 1943 he was credited with that amount. His theory is that in the earlier years he had had constructive receipt of the money, though he had never taken it down from the corporation as he had a right to do under his contract. The doctrine, under many cases, is to be sparingly applied. William A. Hines, 38 B.T.A. 1061. He was at all times on the cash basis. He did not receive the money in the earlier years and did receive it in the taxable year. Nothing of record before us indicates in any degree that the amount was ever credited to him upon the corporate records. Indeed, it is not so contended. Though H. A. Eckhard was president of the corporation, he was never majority stockholder thereof until January 1943, when the 97 shares were purchased; and the corporate returns are signed by another person as treasurer. We may not rationally conclude, therefore, that petitioner H. A. Eckhard had such control over the corporation as to have any basis for constructive receipt. In the absence of any showing of credit or setting apart of the amounts to him upon the corporate books so that he would have a clear right to draw the money, he is not in the position of having constructively received the amounts involved. Many cases require crediting, without restriction, to the alleged recipient. Van W. Peabody, 5 T.C. 426. Cf. Commissioner v. Arnold, 147 Fed.(2d) 23; Burns v. Commissioner, 31 Fed. (2d) 399. He never returned the income as received in 1941 and 1942 and his testimony as to his failure to make the return is not convincing. Asked to explain why he did not, he stated that ‘I turned the income tax reports over to Mr. Conliff, the accountant. * * * I had no way of knowing whether I should have or should not.‘ He did not show Conliff his employment contract with General Tires, Inc.; he did not think it was necessary to do so. It is difficult to formulate a reason for failure to return this income if petitioner H. A. Eckhard at that time considered that he was receiving it. We conclude that on a cash basis he did not receive it until 1943 and, therefore, should be taxed upon it in that year.
Decisions will be entered for the respondent.