Opinion
Docket No. 17721.
1949-02-24
CLIFFORD R. ALLEN, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Clifford R. Allen, Jr., pro se. F. M. Thompson, Jr., Esq., for the respondent.
1. FAMILY PARTNERSHIP— HUSBAND NOT A PARTNER— INCOME TAXABLE TO WIFE.— The taxpayer was not a member of and had no interest in two partnerships formed by his wife and others and is not taxable on his wife's share of the income therefrom, even though she performed no vital services for the partnerships and the capital which she contributed to the one partnership was given to her by the taxpayer shortly before the formation of the partnership.
2. ASSIGNMENT OF INCOME— TAXABLE TO ASSIGNOR.— Where the taxpayer gave his wife the right to receive his share of the income from coin-operated machines which were owned by others and placed in his restaurant, such income is taxable to him. Clifford R. Allen, Jr., pro se. F. M. Thompson, Jr., Esq., for the respondent.
The Commissioner determined deficiencies of $5,785.24 for 1943 and $5,965.11 for 1944 in the petitioner's income tax. The only issues for decision are whether the Commissioner erred in adding to the petitioner's income for each year income received by the petitioner's wife from a partnership of which she was a member and income which she received from pinball machines and Victrolas located in a restaurant operated by the petitioner.
FINDINGS OF FACT.
The petitioner is an individual who resides in Nashville, Tennessee. His income tax returns for 1943 and 1944 were filed with the collector of internal revenue for the district of Tennessee.
The petitioner was engaged in several businesses in Nashville during the taxable years. He had had experience in the restaurant and cafeteria business.
He, together with several of his employees and associates in Nashville, investigated the possibilities of opening a cafeteria in Memphis.
The petitioner, J. B. Hunt, and Beulah M. Hunt organized a corporation known as Southland Cafeteria of Memphis, Inc., in November 1942, with capital stock of $5,000, divided into 50 shares. The petitioner subscribed and paid $3,300 for 33 shares of the stock. The Hunts, who were husband and wife, subscribed and paid $1,700 for 17 shares of the stock.
A property in Memphis equipped for the operation of a cafeteria was leased and operations were begun in 1942. The operation of that cafeteria was unsuccessful at first and about one-half of the original investment was lost during the first two months.
Beulah Hunt had to retire because of ill health in January 1943. She had originally refused to go into the Memphis enterprise if Maude Stark was to be interested also, but she consented in January 1943 to the sale by the petitioner of a part of his interest in the corporation to Maude Stark. The petitioner, on February 1, 1943, sold 7 shares to Maude Stark for $700 and gave 26 shares to his wife, Nancy Louise Allen, as a gift. He immediately resigned as an officer and director of the corporation and thereafter took no part in the operation of the cafeteria in Memphis.
Hunt, with the assistance of a man named Mulder, managed the cafeteria.
A partnership was formed on March 1, 1943, by J. B. and Beulah Hunt, Nancy Allen, and Maude Stark. The partnership took over the operation of the Memphis cafeteria and operated it during the last 10 months of 1943 and all of 1944. The petitioner was never a member of that partnership and never had any interest of any kind in it. He never received any financial benefit from the partnership or from the corporation after February 1, 1943. He made a few trips to Memphis during the taxable years and on those occasions visited the cafeteria for brief periods. He gave such advice on those occasions to those operating the Memphis cafeteria as they requested.
The income from the operation of the Memphis cafeteria amounted to $13,981.26 for the last 11 months of 1943 and $12,379.81 for 1944, of which Nancy Allen's share was $5,645.68 for 1943 and $4.876.93 for 1944.
J. B. and Beulah Hunt, Nancy Allen, and Maude Stark, as individuals, obtained a concession on June 18, 1943, from Sefton Fibre Can Co. of Memphis and the Ordnance Department of the United States Army to operate a cafeteria in the plant of Sefton Fibre Can Co. near Memphis. The Ordnance Department supplied the equipment and the Sefton Fibre Can Co. supplied the space. The four individuals agreed to operate the cafeteria for whatever profit or loss they might derive therefrom. They entered into an agreement among themselves on June 28, 1943, to operate that business as a partnership in which the Hunts would have a one-half interest, Nancy Allen a 39.4 per cent interest, and Maude Start a 10.6 per cent interest. Those interests were the same as their interests in the partnership operating the Southland Cafeteria of Memphis.
The income from the operation of the cafeteria at the Sefton Fibre Can Co. plant amounted to $11,662.16 for 1943 and to $14,495.70 for 1944, of which Nancy Allen's share was $4,594.15 for 1943 and $5,710.42 for 1944. The petitioner never had any interest in the operation of the Sefton cafeteria.
Nancy Allen had formerly assisted her husband for about two years while he was operating a cafeteria in Nashville. She had received no compensation. She acquired some knowledge of the cafeteria business from that experience. She prepared some recipes and menus which she sent to the Memphis cafeteria. She made two trips to Memphis during the taxable years in connection with the operation of the Memphis cafeteria. She received reports from the Memphis cafeteria showing the daily menus.
The petitioner was engaged during the taxable years and for some time prior thereto in the operation of the Southland Cafeteria in Nashville. He was sole owner at the beginning of 1943. There were in that cafeteria at that time several pinball and record-playing machines which could be operated by the deposit of a coin. The machines were not owned by the petitioner. The arrangement between the owner of the machines and the petitioner was that the owner of the machines would take 50 per cent of the money deposited in the machines and the petitioner would take the other 50 per cent. The manager of the restaurant, employed by the petitioner, was always present when the owner of the machines came to take the money from the machines and this manager received the 50 per cent which was to go to the petitioner. The petitioner, told his wife in the latter part of 1942 that she could have the benefit of the pinball and record-playing machine concessions in the Southland Cafeteria in Nashville. Thereafter she agreed with the manager of the cafeteria that he could have 10 per cent of her share for being present when the money was taken from the machines and seeing that one-half came to her.
The petitioner sold a one-third interest in the Nashville cafeteria to the Starks on January 10, 1943, and entered into an agreement with them in which it was provided that Nancy Allen was to receive two-thirds of the net revenue from the coin machines after paying the manager's share of 10 per cent, and the remainder was to be paid to the Starks.
The petitioner and the Starks took in another partner on March 1, 1944, in the operation of the Southland Cafeteria of Nashville. The partnership agreement was in part as follows:
Mr. Allen * * * is to be manager of the business and is to receive $40.00 a week, plus 60 per cent of any cash gained by the business each month, including the revenue from the Victrola, pin-ball, vending and other machines in the grill room, the revenue from which is the property of and is to be divided between his wife, Mrs. Nancy Louise Allen, and Mr. and Mrs. Stark.
The money which Nancy Allen received from the operation of the Memphis cafeteria, the Sefton cafeteria, and the coin machines in the Southland Cafeteria of Nashville was deposited by her in her personal account in a bank in Nashville.
The Commissioner, in determining the deficiencies, included in the income of the petitioner $10,615.71 for 1943 and $10,451.05 for 1944 representing Nancy Allen's share of the income of the Memphis cafeteria and the Sefton cafeteria, and he also included in the income of the petitioner $991.38 for 1943 and $389.99 for 1944 representing income from pinball and record-playing machines received by Nancy Allen. Nancy Allen had reported all of those amounts on her separate income tax returns.
OPINION.
MURDOCK, Judge:
The Commissioner has taxes Nancy Allen's share of the income of the Memphis and Sefton cafeteria operations for 1943 and 1944 to the petitioner, but has failed to advance any legal justification for his action. The income in question was earned by partnerships of which the petitioner was not a member and from which he was not entitled to receive anything. This is not a family partnership case like the cases of Commissioner v. Tower, 327 U.S. 280, and Lusthaus v. Commissioner, 327 U.S. 293, in which a husband sought to escape tax on income which he earned. The petitioner in the present case did not earn the income in question. It does not appear that capital was a material income-producing factor or that the petitioner's wife contributed services vital to the two partnerships, but that is not determinative where, as here, the income can not be attributed either to capital contributed by the husband or to services performed by him. Simmons v. Commissioner, 164 Fed. (2d) 220. This is a stronger case for the taxpayer than Kent v. Commissioner, 170 Fed.(2d) 131.
The remaining question is whether the Commissioner erred in taxing to the petitioner income from the pinball and record-playing machines claimed by his wife to be her income. The petitioner testified that he gave his wife the pinball and Victrola ‘concession‘ in his restaurant. Actually he had already arranged for the owner of the machines to have the concession, and, so far as this record shows, there was never any dealing between the wife and the owner of the machines. The owner of the machines was required to pay for the privilege of having his machines stand in a restaurant owned by the petitioner. He agreed to pay one-half of the intake of the machines for that privilege. It does not appear that the petitioner gave to his wife any capital asset producing income or that he did anything more substantial than simply to allow her to take a part of what he was entitled to receive for permitting the machines to stand in his restaurant. Furthermore, shortly after he made this statement to his wife he took in partners and gave them a one-third interest in the restaurant. These people took a one-third interest in the one-half of the intake of the machines. In other words, the petitioner reduced the share which his wife was to take from the machines. A later partnership agreement is not entirely clear on this point, but these two agreements show that the petitioner dealt with the income from the machines as his own. Although his wife was made a party to the agreements, she received no consideration for giving up a part of the income from the machines. It has been held that one can not escape tax on income by giving the income away. Lucas v. Earl, 281 U.S. 111; Helvering v. Horst, 311 U.S. 112. The evidence on this point does not show any error in the determination of the Commissioner.
Reviewed by the Court.
Decision will be entered under Rule 50.