Opinion
Docket No. 4405.
1945-10-31
FRED W. EWING, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Walter H. Scott, Esq., for the petitioner. Cecil H. Haas, Esq., for the respondent.
The profits for 1940 of a business of buying and selling and renting road building and construction equipment which petitioner organized in 1932 and continued to manage and control up to and during 1940, held, taxable to him individually and not one-half to him and one-half to his wife, with whom he claims to have formed a business partnership in January 1940. Walter H. Scott, Esq., for the petitioner. Cecil H. Haas, Esq., for the respondent.
This proceeding involves a deficiency of $12,611.31 in petitioner's income tax for 1940. The questions in issue are (1) whether a valid business partnership for income tax purposes existed between petitioner and his wife in 1940 with respect to the purchase and sale and rental of road building and construction equipment; and (2) whether petitioner is entitled to a long term capital loss deduction on account of the worthlessness of stock of the Clifton Building Co., a corporation engaged in real estate development. A further issue relating to depreciation on machinery and equipment has been settled by stipulation.
The parties have further agreed that the issue as to the capital loss deduction is to be determined upon the evidence adduced in Baldwin Brothers Co., Docket No. 4404 (memorandum findings of fact and opinion entered July 30, 1945).
FINDINGS OF FACT.
Petitioner is a resident of Cuyahoga County, Ohio. He filed his income tax return for 1940 with the collector of internal revenue for the eighteenth district of Ohio, at Cleveland.
In 1940 petitioner was secretary and superintendent of Baldwin Brothers Co., a corporation engaged in the business of road building, paving, and general construction work. Petitioner had been an official of the company for many years. The company's principal office was located at Cleveland.
About 1932 Baldwin Brothers Co. obtained a road construction contract with the Commonwealth of Pennsylvania and Allegheny County, Pennsylvania. It sublet the grading job to a local contractor. The subcontractor ran into financial difficulties, and to enable him to meet his pay roll petitioner made him a loan of $3,000, taking a bill of sale on his equipment as security for the loan. Petitioner's wife lent petitioner the money with which to make the loan. Upon default of the subcontractor in 1932 or 1933, petitioner acquired title to the equipment and had it stored on premises leased by Baldwin Brothers Co. Petitioner sold all of such equipment at a substantial profit before the end of 1936. During 1935 and 1936 he purchased other equipment, consisting of two tractors, a roller, a pump, and a compressor. He also purchased in 1936 a ‘Koehring shovel,‘ for which he paid $2,500 cash and gave his personal promissory notes for $7,500, payable at the rate of $500 per month. From that time petitioner conducted a regular business of buying and selling and renting construction machinery and equipment.
During subsequent years petitioner purchased a large amount of additional equipment, for which he paid cash and gave his personal promissory notes. Most of the equipment was rented to Baldwin Brothers Co. in 1940. Petitioner's total rentals from the equipment amounted in 1940 to $57,750.39, of which approximately $50,600 was received from Baldwin Brothers Co. The rentals were small in 1936, 1937, and 1938 (there were no net rentals in 1938). In 1939, however, the amount of the rentals was substantial.
On January 2, 1940, petitioner and his wife executed an agreement reading in its entirety as follows:
AGREEMENT
THIS CONTRACT made and entered into this 2nd day of January, 1940, by and between Fred W. Ewing and Bessie B. Ewing, both of Cuyahoga County, Ohio,
WITNESSETH:
That the said parties have this day formed a co-partnership for the purpose of engaging in and conducting a business of purchasing, buying, otherwise acquiring, leasing and selling real, personal and chattel property and including the property now owned by said parties, as shown by the lists attached hereto and any and all property hereafter acquired under the following stipulations which are made a part of this contract:
(1) The said co-partnership is to continue for a term of three years from the date hereof.
(2) The business shall be conducted under the firm name of ‘Fred W. Ewing and Company.‘
(3) The investments are as follows: Real and personal property as shown by the attached lists.
(4) All profits or losses arising from said business are to be shares equally by the partners.
(5) A systematic record of all transactions is to be kept which records are to be open for the inspection of each partner. On December 31st hereafter the books are to be closed, a statement of the business made and each partner credited with the amount of gain. A statement may be made at such other time as the partners agree upon.
(6) It is further agreed that Fred W. Ewing will give the business his personal attention; that he will conduct and manage said business and shall have authority to make purchases, sales and leases and shall have authority when purchasing real or personal property, to take the title to same in his name individually, this being for the purpose of simplifying the business transactions of the partnership. It is further agreed that title to certain real estate located in the City of Corry, Pennsylvania, being identified as the ‘Climax property,‘ and title to a parcel of approximately thirty acres of land located in Spring Creek Township, Warren County, Pennsylvania, remain in Fred W. Ewing, said Fred W. Ewing, however, to account to the partnership for all proceeds arising from the sale or lease of said property.
(7) Neither partner is to become surety or bondsman for anyone without the written consent of the other.
IN WITNESS WHEREOF the parties aforesaid have hereunto set their hands and affixed their seals on the day above written.
(Signed) FRED W. EWING (Signed) BESSIE B. EWING
The ‘attached lists‘ referred to above show the following machinery, equipment, and real estate:
PROPERTY OF PARTNERSHIP OF FRED W. EWING AND BESSIE B. EWING
MACHINERY AND EQUIPMENT
Bulldozers and Rollers
Galion Roller— 10 Ton
2 Koehring Dumpers
1 Koehring Shovel, Model 701, Caterpillar, Diesel Engine
2 LeTournear Model ‘P‘ Carryall Scrapers
1 Caterpillar Tandem Drive Diesel Motor Grader
2 Caterpillar Diesel D-8 Tractors
Property subject to balance due under lease, sale, contract for purchase.
REAL ESTATE
Old Locomotive Company property, Corry, Pennsylvania, also known as the Climax property.
Thirty acres located in Warren County, Spring Creek Township, Pennsylvania.
The machinery and equipment had an undepreciated cost at January 1, 1940, of $63,925.94.
On December 31, 1942, the agreement of January 2, 1940, which was to continue for three years, was extended for 10 years.
After execution of the agreement of January 2, 1940, petitioner continued to operate the business in substantially the same manner as before, buying and selling the same types of equipment and renting most of it to Baldwin Brothers Co. He purchased over $138,000 of additional equipment in 1940. All purchases and sales and all contracts pertaining to the business were made in petitioner's name. His wife was not a party to any of the contracts. The purchase money notes were all signed by petitioner alone.
On April 20, 1940, petitioner sold two pieces of equipment at a net profit of $887.49. On December 6, 1940, he sold a portion of the ‘Old Locomotive Company property‘ at Corry, Pennsylvania, at a profit of $4,469.87. Petitioner deposited the proceeds from those sales and also the rentals and most of the salary which he received from Baldwin Brothers Co. in 1940 in a checking account which he carried in his individual name at the National Bank of Corry, Corry, Pennsylvania. His wife never made any deposits in that account or wrote any checks on the account. Petitioner opened a joint savings account in his and his wife's names in 1938, but in 1939 he withdrew most of the funds. His wife never made any deposits in or withdrawals from the savings account.
During 1940 petitioner endorsed some of his salary checks from Baldwin Brothers Co. to his wife for household expenses and also during that year drew four checks totaling $525 in her favor on the National Bank account.
Petitioner spent most of his time during 1940 in Pennsylvania near the construction jobs on which Baldwin Brothers Co. was engaged. His wife maintained their home in Cleveland, Ohio, but made frequent trips to Pennsylvania to visit him.
At all times petitioner was solely in charge of all of the affairs of the business. His wife sometimes took part in business discussions and in petitioner's absence took telephone calls and performed other minor services.
The alleged partnership was dissolved by agreement entered into by petitioner and his wife in January 1943, and the assets of the business, said to amount to $131,841.20 net, were divided equally between them.
Original and amended partnership returns were filed for 1940 in the name of Fred W. Ewing & Co. The amended return showed $13,936.40 of ordinary income and $2,678.68 of short term capital gains distributable to petitioner and like amounts distributable to his wife. Petitioner reported his alleged one-half share of the partnership in an amended individual return for 1940. The respondent has determined that all of the income of the business is taxable to the petitioner individually.
Also in his amended individual return for 1940 petitioner claimed a capital loss deduction of $3,000 on account of the worthlessness of stock of the Clifton Building Co. which had a cost to him of $6,000. The respondent disallowed the deduction on the ground that the stock in question became worthless prior to the taxable year 1940.
The capital stock of the Clifton Building Co. became worthless prior to the beginning of the taxable year 1940. (See Baldwin Brothers Co., Docket No. 4404, memorandum findings of fact and opinion entered July 30, 1945).
OPINION.
SMITH, Judge:
Our principal question in this proceeding is whether petitioner and his wife were engaged in 1940 in conducting a bona fide partnership business, within the meaning of the Internal Revenue Code, of buying and selling and renting road building and construction equipment under the name of Fred W. Ewing & Co. The respondent has determined that there was never any bona fide business partnership between petitioner and his wife and that all of the income of the business is taxable to petitioner individually.
We agree with the respondent's determination. The business in question was started by petitioner in 1932 and was always under his direct management. His wife never took any important part in it and it is not claimed that she ever did any more than take telephone calls occasionally, help with the books, go on trips with petitioner to look at new and used equipment, and advise petitioner ‘on matters pertaining to any large amount of money, especially where it involved going into debt.‘ It is not shown that the wife had any knowledge whatever of the business or of any business, or any experience which might have qualified her to advise the petitioner in any business matters.
An attempt was made by petitioner to show that the original capital for the business was furnished by his wife. The evidence is that she furnished the $3,000 cash which petitioner lent to the subcontractor of Baldwin Brothers Co., who later defaulted, leaving petitioner in ownership of the equipment which had been put up as security for the loan. However, no partnership business, and in fact no business of any kind, was contemplated at that time. It was the fortuitous circumstance of the subcontractor's default that put the petitioner in business. The wife did not intend to invest her funds in any business, but, according to petitioner's testimony, lent him the $3,000. His testimony was: ‘I loaned the money to Burke (the subcontractor). Mrs. Ewing loaned the money to me to loan to Burke.‘ Petitioner further testified that his wife in 1939 paid premiums of between $600 and $700 on his insurance policy and that he never did repay the money to her. Petitioner claims to have given his wife a one-half partnership interest in the business in consideration for these loans or advances. The business was worth many times the sum of those amounts, plus interest, at the time the alleged partnership was formed. Petitioner does not contend that he was not able at all times to repay his wife's loans.
The evidence is that petitioner managed and controlled the business from the beginning, performed most of the services, contributed all of the knowledge and skill required, and was solely responsible for the earnings. We think that the profits of the business were his earnings and must be taxed to him individually. We do not think that for income tax purposes his wife was engaged with him as a bona fide partner in the business. See Burnet v. Leininger, 285 U.S. 136; Earp v. Jones, 131 Fed.(2d) 292; certiorari denied, 318 U.S. 764; A. L. Lusthaus, 3 T.C. 540; affd. (C.C.A., 3d Cir.), 149 Fed.(2d) 232; Miller v. Commissioner (C.C.A., 2d Cir.), 150 Fed. (2d) 823; Leonard W. Greenberg, 5 T.C. 732; W. M. Mauldin, 5 T.C. 743.
As to the long term capital loss deduction claimed on the stock of the Clifton Building Co., the parties have stipulated in this proceeding that the question should be decided on the evidence adduced in Baldwin Brothers Co., Docket No. 4404 (memorandum findings of fact and opinion entered July 30, 1945). We found on the evidence adduced in that case that the stock of the Clifton Building Co. became worthless long prior to 1940 and that no loss deduction for its taxable year ended February 28, 1941, was allowable to the Baldwin Brothers Co. as owner of the stock.
It would serve no useful purpose here to repeat the facts found in that case or further to discuss those facts. Accordingly we have made the finding above that the $6,000 of such stock which petitioner had previously acquired became worthless prior to 1940. Petitioner is not entitled to any deduction on account of the worthlessness of the stock in 1940.
Decision will be entered under Rule 50.