Opinion
Docket Nos. 109996 112248.
1944-07-20
M. M. ARGO, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Thomas H. Fox, Esq., and Victor H. Smith, Esq., for the petitioner. Charles P. Bagley, Esq., for the respondent.
1. The judgment of a Federal District Court in an action between petitioner and a collector of internal revenue for recovery of income tax paid by petitioner for 1937 involved the same question as is here involved for 1938 and 1939, but the parties to the two proceedings were not identical. Held, that the judgment of the Federal District Court does not preclude this Court from further considering that question as to 1938 and 1939.
2. The judgment of a Federal District Court in an action between petitioner and a collector of internal revenue for recovery of income tax paid by petitioner for 1937 involved the same question as that here involved for 1940. None of the facts upon which the adjudication of the District Court was based is shown in the record. Held, that this Court is not precluded by the District Court judgment from further considering that question as to the latter year.
3. On an issue of whether a business which is asserted by the taxpayer to be a partnership composed of himself, his wife, and minor children is to be recognized as a partnership for income tax purposes— where the evidence does not support a positive finding that the activities and services of the taxpayer were the main factors in the production of the income, but points strongly in that direction, the taxpayer must, in order to establish what he asserts, prove that his activities and services were not the main factors in the production of the income. Thomas H. Fox, Esq., and Victor H. Smith, Esq., for the petitioner. Charles P. Bagley, Esq., for the respondent.
Respondent determined deficiencies in income tax against petitioner as follows: For 1938, $680.24; for 1939, $460.05; and for 1940, $550.23.
These deficiencies are chiefly the result of respondent's determination that petitioner is taxable, as the sole owner thereof, on all the net income of an unincorporated business operated during the taxable years under the style of Birmingham Electric & Manufacturing Co. No other adjustment is in controversy. Petitioner contests this determination on the ground that the business was owned and operated as a partnership during the taxable years. He also pleads res judicata, based on a judgment of the United States District Court for the Southern Division of the Northern District of Alabama in an action by this petitioner against the collector of internal revenue for the district of Alabama to recover income taxes paid for the year 1937, wherein the issue was whether the Birmingham Electric & Manufacturing Co. was, during that year, a partnership among petitioner, his wife, and his three children. The proceedings have been consolidated.
Petitioner concedes on brief that an item of $4,600 earned by him as commissions in 1939 independently of the business activities of the Birmingham Electric & Manufacturing Co., which item was entered on the books of that company as received by it, embraced in its partnership returns for that year, and included by respondent in his computation of deficiencies against petitioner for that year, is taxable to him, irrespective of the finding of this Court as to whether or not a bona fide partnership existed during 1939.
It was stipulated at the hearing that if we should find there was a valid partnership during 1938 and 1939, for income tax purposes, the petitioner is not entitled to credit in those years for the dependency of Sarah Ellen Argo, as was allowed by respondent. Effect to the concession and stipulation will be given under Rule 50.
FINDINGS OF FACT.
Petitioner is a resident of Birmingham, Alabama. He filed his income tax returns with the office of the collector for the State of Alabama.
During 1936 petitioner owned all the capital stock of the Birmingham Electric & Manufacturing Co., a corporation organized under the laws of Alabama, and engaged in the business of repairing and rebuilding electrical machinery and equipment. The business, both while operated as a corporation and as an unincorporated concern, was of a type requiring technical knowledge. Petitioner is a graduate electrical engineer and he has been engaged in that profession since 1912. He was president of the corporation and received a salary for the year 1936 of $12,000.
During 1936 petitioner discussed with an attorney, an auditor, and a certified public accountant the question of dissolving the corporation and forming a partnership consisting of himself, his wife, and his three minor children. The possibility of a saving in income taxes was also discussed. Petitioner's attorney advised him to form the partnership and stated it could be accomplished legally without the execution of a written agreement. The proposed partnership was also discussed by petitioner during the latter part of 1936 with his wife, Esther B. Argo, and his children, Malcolm M. Argo, Jr., then of the age of 18, Ann. A., then of the age of 16, and Sarah Ellen, then of the age of 7. Malcolm M. Argo, Jr., became of age on July 9, 1939, and Ann A. Argo in January 1941. As a final result of these discussions petitioner told his wife and children that he was going to dissolve the corporation and was going to make an outright gift to each of them of a one-fifth interest in the partnership and that they would be partners with him and be responsible for any debts of the partnership. It was understood that petitioner was to receive $6,000 a year from the profits and would manage the business, with the right to operate it as he saw fit. The profits after deducting the petitioner's $6,000 per annum were to be distributed equally between the other four members of the family.
At that time petitioner's wife owned no property except the family home, which was encumbered by a mortgage on which petitioner was liable. Her occupation was that of a housewife, and she was without any income other than a small amount derived from writing. The occupation of the children was that of attending school and they had no property or income.
During the time that the business was operated as a corporation petitioner's wife frequently helped with the office work, his son worked for the business during his school vacations, and his oldest daughter also worked for the business during her school vacations.
On December 31, 1936, the Birmingham Electric & Manufacturing Co., the corporation, was dissolved, and petitioner, as its sole stockholder, received all its assets and assumed its liabilities. These assets were immediately credited to an unincorporated business which thereafter conducted the same character of business as had the corporation and under the same name as that of the corporation. This unincorporated business will be sometimes referred to hereinafter as the company.
Petitioner instructed his bookkeeper to make entries on the company's books dividing interests in the company equally among the five members of the family, and he told her that he was making a gift to his wife and children of those interests. She was also told that petitioner was to be distributed $6,000 annually from the profits and the remaining profits were to be distributed four ways among the other members of the family. In January 1937 capital accounts were opened on the books crediting each member of the family with a total of $4,317.58.
Petitioner did not execute any deed, bill of sales, or other written form of conveyance transferring any interest in the business to his wife or children. After January 1937 the everyday operations of the company continued in the same manner and under the same name as during incorporation, except for capital accounts, and for accounts of withdrawals by each of the members of the family in the case of the company. Petitioner continued to handle and control the affairs of the company as he had in the case of the corporation.
The balance sheet of the company, as shown on its return made as a partnership, contained as of January 1, 1937, the same assets and liabilities as the balance sheets of the corporation of December 31, 1936, as shown on its return, and that balance sheet is as follows:
+----------------------------------------------------+ ¦ASSETS ¦ +----------------------------------------------------¦ ¦Cash ¦ ¦$2,586.49¦ +--------------------------------+---------+---------¦ ¦Accounts receivable ¦ ¦6,801.17 ¦ +--------------------------------+---------+---------¦ ¦Inventories ¦ ¦5,382.15 ¦ +--------------------------------+---------+---------¦ ¦Other assets: ¦ ¦ ¦ +--------------------------------+---------+---------¦ ¦Service deposits ¦ ¦55.00 ¦ +--------------------------------+---------+---------¦ ¦Capital assets: ¦ ¦ ¦ +--------------------------------+---------+---------¦ ¦Building ¦$4,500.00¦ ¦ +--------------------------------+---------+---------¦ ¦Machinery and equipment ¦5,500.00 ¦ ¦ +--------------------------------+---------+---------¦ ¦Furniture and fixtures ¦337.72 ¦ ¦ +--------------------------------+---------+---------¦ ¦Delivery equipment ¦3,458.93 ¦ ¦ +--------------------------------+---------+---------¦ ¦ ¦ ¦13,796.65¦ +--------------------------------+---------+---------¦ ¦Less: Allowance for depreciation¦1,337.50 ¦ ¦ +--------------------------------+---------+---------¦ ¦ ¦12,459.15¦ ¦ +--------------------------------+---------+---------¦ ¦Land ¦4,000.00 ¦ ¦ +--------------------------------+---------+---------¦ ¦ ¦ ¦16,459.15¦ +--------------------------------+---------+---------¦ ¦Deferred charges ¦ ¦440.65 ¦ +--------------------------------+---------+---------¦ ¦Total ¦ ¦31,724.61¦ +----------------------------------------------------+
LIABILITIES Notes payable Accounts payable 11,605.16 Accrued accounts: Interest $1,046.07 Taxes 206.13 1,252.20 Income taxes 341.70 Mortgages 2,900.00 Capital accounts 15,625.55 Total 31,724.61
During the taxable years petitioner's wife assisted in the business of the company when it was convenient for her to do so at night, as she was attending to her household affairs during the day, or on Saturday afternoons. She did clerical work, filing, and typing letters. She received no salary.
Petitioner's son Malcolm, Jr., attended college throughout 1937, except for the summer vacation period, during most of which period he assisted in the business of the company during afternoons in the shop and on night emergency calls when pumps or motors in coal mines were damaged by electrical storms. He also assisted his father during that year in managing the business. During the first half of 1938 he was away at college and during the remainder of the year, except while on a vacation in Cuba, he attended a local college during the morning and worked in the company warehouse in the afternoon, repairing and reconditioning motors. He attended college throughout 1939 and until graduating as an electrical engineer in June 1940, when he began working for the company on a full time basis, continuing to do so until he enlisted in the Army in October 1940. He received no salary.
Petitioner's daughter Ann was away at college during 1937, except for a summer vacation, during half of which she attended a local college in the mornings. In the afternoons when not in school she helped in the business with filing and stenographic work. She did no work in 1938, being away at school during both the regular and summer terms. She did no work in 1939. In 1940 she did no work until October, after graduation. The balance of that year she worked regularly in the office or in the plant, operating machines and helping make carbon brushes. She received no salary. Petitioner's daughter, Sarah Ellen, did no work for the company at any time.
The amount and character of the company's assets for various periods, as shown by the balance sheets attached to partnership returns filed by it, are as follows:
+-----------------------------------------------------------------------------+ ¦December 31, 1937 ¦ ¦December 31, ¦ ¦ ¦ ¦ ¦ ¦1938 ¦ ¦ ¦ +------------------------------+---------+----------------+---------+---------¦ ¦Cash ¦ ¦$3,374.61 ¦ ¦$3,731.48¦ +------------------------------+---------+----------------+---------+---------¦ ¦Accounts receivable ¦ ¦10,852.90 ¦ ¦14,878.63¦ +------------------------------+---------+----------------+---------+---------¦ ¦Inventories ¦ ¦10,932.10 ¦ ¦10,473.84¦ +------------------------------+---------+----------------+---------+---------¦ ¦Other assets: ¦ ¦ ¦ ¦ ¦ +------------------------------+---------+----------------+---------+---------¦ ¦Service deposits ¦ ¦55.00 ¦ ¦55.00 ¦ +------------------------------+---------+----------------+---------+---------¦ ¦Capital assets: ¦ ¦ ¦ ¦ ¦ +------------------------------+---------+----------------+---------+---------¦ ¦Building ¦$4,500.00¦ ¦$4,500.00¦ ¦ +------------------------------+---------+----------------+---------+---------¦ ¦Machinery and equipment ¦5,687.00 ¦ ¦5,687.00 ¦ ¦ +------------------------------+---------+----------------+---------+---------¦ ¦Furniture and fixtures ¦337.72 ¦ ¦337.72 ¦ ¦ +------------------------------+---------+----------------+---------+---------¦ ¦Delivery equipment ¦3,399.56 ¦ ¦3,441.69 ¦ ¦ +------------------------------+---------+----------------+---------+---------¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------------+---------+----------------+---------+---------¦ ¦ ¦13,924.28¦ ¦13,966.41¦ ¦ +------------------------------+---------+----------------+---------+---------¦ ¦Less: Allowance for ¦3,981.98 ¦ ¦5,829.49 ¦ ¦ ¦depreciation ¦ ¦ ¦ ¦ ¦ +------------------------------+---------+----------------+---------+---------¦ ¦ ¦ ¦ ¦ ¦ ¦ +------------------------------+---------+----------------+---------+---------¦ ¦ ¦9,942.30 ¦ ¦8,136.92 ¦ ¦ +------------------------------+---------+----------------+---------+---------¦ ¦Land ¦4,000.00 ¦13,942.30 ¦4,000.00 ¦12,136.92¦ +------------------------------+---------+----------------+---------+---------¦ ¦Deferred charges: ¦ ¦ ¦ ¦ ¦ +------------------------------+---------+----------------+---------+---------¦ ¦Insurance premiums ¦403.71 ¦ ¦512.71 ¦ ¦ +------------------------------+---------+----------------+---------+---------¦ ¦Other ¦44.00 ¦447.71 ¦ ¦512.71 ¦ +------------------------------+---------+----------------+---------+---------¦ ¦Total ¦ ¦39,604.62 ¦ ¦41,788.58¦ +-----------------------------------------------------------------------------+
December 31, 1939 December 31, 1940 Cash $6,342.85 $4,687.59 Accounts receivable 12,186.18 16,125.34 Inventories 8,944.00 9,889.47 Service deposits 55.00 55.00 Fixed: Land 4,000.00 4,000.00 Buildings $4,500.00 $4,500.00 Machinery and equipment 5,687.00 6,037.00 Furniture and fixtures 538.78 849.63 Delivery equipment 3,312.26 4,197.21 14,038.04 15,583.84 Less reserve for depreciation 8,164.59 5,873.45 10,632.23 4,951.61 Prepaid insurance premiums, etc 561.98 545.44 Total 37,963.46 40,254.45
For the years 1937, 1938, 1939, and 1940 the company books in the various capital accounts of petitioner, his wife, and his three children, the partnership returns of income filed by petitioner, and the individual income tax returns filed by the members of the family show net distributable profits as follows:
+------------------------------------------------------------+ ¦ ¦1937 ¦1938 ¦1939 ¦1940 ¦ +--------------------+---------+---------+---------+---------¦ ¦M. M. Argo ¦$6,000.00¦$6,000.00¦$6,000.00¦$6,000.00¦ +--------------------+---------+---------+---------+---------¦ ¦Esther B. Argo ¦2,496.72 ¦1,988.47 ¦1,164.21 ¦826.47 ¦ +--------------------+---------+---------+---------+---------¦ ¦Malcolm M. Argo, Jr.¦2,496.72 ¦1,988.48 ¦1,164.21 ¦826.47 ¦ +--------------------+---------+---------+---------+---------¦ ¦Ann. A. Argo ¦2,496.72 ¦1,988.48 ¦1,164.21 ¦826.47 ¦ +--------------------+---------+---------+---------+---------¦ ¦Sarah Ellen Argo ¦2,496.72 ¦1,988.48 ¦1,164.20 ¦826.47 ¦ +--------------------+---------+---------+---------+---------¦ ¦Total ¦15,986.88¦13,953.91¦10,656.83¦9,305.88 ¦ +------------------------------------------------------------+
The above listed profits of $10,656.83 in 1939 include $4,600 in personal commissions now conceded by petitioner to be hi individual income, taxable to him as such.
There were no drawing accounts on the books for petitioner's wife and children during 1937. All withdrawals by or for them during that year, totaling $7,650, were charged to petitioner on the books. Neither petitioner's wife nor his children had authority at any time to draw checks on the company's bank account.
Drawing accounts on the books of the company reflect withdrawals for the years 1938, 1939, and 1940 as follows:
+--------------------------------------------------+ ¦ ¦1938 ¦1939 ¦1940 ¦ +--------------------+---------+---------+---------¦ ¦M. M. Argo ¦$6,000.22¦$4,934.39¦$2,481.55¦ +--------------------+---------+---------+---------¦ ¦Esther B. Argo ¦1,240.10 ¦1,364.66 ¦2,983.67 ¦ +--------------------+---------+---------+---------¦ ¦Malcolm M. Argo, Jr.¦1,117.33 ¦1,432.62 ¦1,324.20 ¦ +--------------------+---------+---------+---------¦ ¦Ann A. Argo ¦688.97 ¦1,551.12 ¦1,219.17 ¦ +--------------------+---------+---------+---------¦ ¦Sarah Ellen Argo ¦65.10 ¦1,155.62 ¦1,243.67 ¦ +--------------------+---------+---------+---------¦ ¦Total ¦9,111.72 ¦10,438.41¦9,252.26 ¦ +--------------------------------------------------+
The withdrawals totaling $10,438.41 for 1939 include erroneous charges for withdrawals not in fact made, in the amount of $4,600 charged to the extent of $600 against petitioner's account and $1,000 against each of the remaining accounts. The foregoing drawing accounts of petitioner's wife and children, and the amount of withdrawals listed as above therein, also include a number of items based on checks drawn to the order of petitioner and deposited in his individual bank account, as follows:
+-----------------------------------------------------------------------------+ ¦ ¦1938 ¦1939 ¦1940 ¦ +--------------+---------------------+--------------------+-------------------¦ ¦ ¦Number of ¦Amount ¦Number of ¦Amount ¦Number of ¦Amount¦ ¦ ¦checks ¦ ¦checks ¦ ¦checks ¦ ¦ +--------------+------------+--------+------------+-------+------------+------¦ ¦Ester B. Argo ¦2 ¦$300.00 ¦ ¦ ¦ ¦ ¦ +--------------+------------+--------+------------+-------+------------+------¦ ¦Malcolm M. ¦6 ¦750.00 ¦2 ¦$125.00¦ ¦ ¦ ¦Argo, Jr. ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+------------+--------+------------+-------+------------+------¦ ¦Ann A. Argo ¦ ¦ ¦ ¦ ¦2 ¦247.40¦ +--------------+------------+--------+------------+-------+------------+------¦ ¦Sarah Ellen ¦ ¦ ¦ ¦ ¦1 ¦625.00¦ ¦Argo ¦ ¦ ¦ ¦ ¦ ¦ ¦ +--------------+------------+--------+------------+-------+------------+------¦ ¦Total ¦8 ¦1,050.00¦2 ¦125.00 ¦3 ¦872.40¦ +-----------------------------------------------------------------------------+
Petitioner's wife had an allowance for running the house and would obtain what money she needed from the bookkeeper for household and personal expenses. Her withdrawals represented these amounts, except those represented by the checks deposited as above shown to petitioner's individual bank account.
There were no ‘dollars and cents‘ restrictions on Malcolm Jr.'s withdrawals. When he needed money he would ask the bookkeeper for it and she would let him have it. Ann made her withdrawals by asking her father or the office for them. She did not have to consult her father, but she was not allowed to make promiscuous withdrawals in large amounts. The moneys received by each of the children through their withdrawals were used for school allowances, clothing, doctors and hospital bills, and for the other needs of each, except for those withdrawals represented by checks deposited in the petitioner's individual bank account as above shown.
The 1936 income and excess profits tax return of the corporation, Birmingham Electric & Manufacturing Co., was subscribed and sworn to by petitioner as president on March 12, 1937, and filed with the collector of internal revenue for the district of Alabama on March 14, 1937. On a schedule attached thereto appears the following statement:
COMMENT RELATIVE TO DISSOLUTION
This corporation was dissolved on December 31, 1936, and the net assets were distributed to the stockholder in complete liquidation and cancellation of the capital stock as of that date. The business will be conducted henceforth without interruption by M. M. Argo, as a proprietorship.
Under date of February 23, 1937, petitioner addressed the following letter to the ‘Secretary of Treasury, Att: Commissioner of Internal Revenue‘:
As provided in Article 308 of Regulation 90 relating to excise tax on employers under Title 9 of Social Security Act, I am hereby giving notice that the Corporation known as Birmingham Electric & Mfg. Company was dissolved December 31, 1936 and that henceforth the business will be conducted under the same name by M. M. Argo as proprietor.
Annual returns of excise tax under Title IX of the Social Security Act for the years 1937 and 1938 were filed with the same collector on behalf of the company by petitioner, who executed the affidavit thereto as ‘M. M. Argo, Owner.‘
Employer's summary information returns under Title VIII of the Social Security Act for the periods January 1 through June 30, 1937, and July 1 through December 31, 1937, were filed with the same collector on behalf of the company by petitioner, who executed the affidavit thereto as ‘M. M. Argo, Owner.‘
Seven employer's tax returns under the same title and act were filed with the same collector quarterly on behalf of the company for the period ended March 31, 1938, through the period ended September 30, 1939, by petitioner, who executed the affidavit to each as ‘M. M. Argo, Owner.‘
Petitioner filed personal property tax list returns with the tax assessor of Jefferson County, Alabama, covering the personal property of the company, and executed affidavits thereto on December 8, 1937, and October 6, 1938, respectively, wherein he stated that he was the ‘owner‘ of such property.
Petitioner, on or about June 10, 1937, filed a financial statement and balance sheet of the company with the First National Bank of Birmingham for credit purposes. The heading, ‘Corporation,‘ on the printed form was stricken out and the word, ‘Individual,‘ substituted. The statement showed ‘Condition at close of business April 30th 1937.‘ The statement was signed in the name of the company, ‘By M. M. Argo, Title of Officer, Owner.‘ On or about March 24, 1939, a balance sheet of the business as of February 28, 1939, was filed by petitioner with the same bank. It was signed, ‘M. M. Argo, Owner.‘
On December 16, 1940, petitioner filed a complaint against Henry J. Willingham, the collector of internal revenue for the district of Alabama, in the District Court of the United States for the Southern Division of the Northern District of Alabama, for the recovery of income taxes for the year 1937 alleged to have been paid April 19, 1940, in the amount of $876.14, plus interest, in response to a notice of deficiency determined on the ground that, ‘there was no bona fide partnership (referring to the Birmingham Electric & Manufacturing Company) and that the net income reported on form 1065 actually represented net income to Mr. M. M. Argo from his individually conducted business under the name of Birmingham Electric & Manufacturing Company.‘ The complaint further alleged that the business was a partnership during 1937 and that the Commissioner erred in taxing petitioner with all the income of the business. A general denial to this complaint was filed.
On February 24, 1941, the judge of the District Court entered an ‘Order on Pre-Trial Hearing‘ wherein it was stated that:
It was agreed by all of the parties that the following are all of the issues in controversy in this cause:
Plaintiff claims refund of income taxes for the year 1937, under the revenue laws of the United States because The Birmingham Electric and Manufacturing Company was a partnership throughout the entire calendar year 1937 and the plaintiff was taxable only on partnership income accruing to him.
Defendant pleads:
(1) The general issue; and
(2) In the taxable year, plaintiff was the individual owner of the said business and was taxable on the entire income therefrom and there was no partnership.
On October 16, 1942, an order of the court was entered as follows:
This cause coming on to be heard, prior to the submission of the cause to the jury, the parties stipulated by their respective counsel, in open Court, that if the jury found from the evidence that there was a partnership between the plaintiff and his wife, and three children during the calendar year 1937 that judgment should be rendered upon such verdict in favor of the plaintiff for the sum of $985.31, plus interest thereon at six per cent per annum from and after April 19, 1940, until paid as provided by law, and that on the other hand, if the jury found from the evidence that no such partnership existed during the calendar year 1937, then judgment should be rendered upon such verdict in favor of the defendant, and the case thereupon being submitted to the jury, the jury reported a verdict as follows:
‘We, the jury, find that there was a partnership during the year 1937.
‘C. L. COLLINS, ‘Foreman‘
it is accordingly by the Court
ORDERED, ADJUDGED AND DECREED that the plaintiff herein have and recover of and from the defendant herein the sum of Nine Hundred Eighty-five and 31/100 ($985.31) Dollars * * * .
An appeal from this judgment of the district court was taken by Henry J. Willingham, collector, defendant in the suit, to the United States Court of Appeals for the Fifth Circuit, and on motion filed by the appellant the appeal was dismissed. It is that judgment which petitioner pleads here a res judicata.
The petition in Docket No. 109996, covering the years 1938 and 1939, was filed February 21, 1942. The petition in Docket No. 112248, covering the year 1940, was filed on August 24, 1942.
OPINION.
TYSON, Judge:
The main issue in both dockets is whether, for Federal income tax purposes, there was a valid partnership existing in the taxable years, with petitioner, his wife, and his children as partners therein. Incidental to that issue there is the further issue of whether the judgment of the United States District Court constitutes res judicata, or, as more properly stated with reference to the situation here, estoppel by judgment as to the main issue.
We shall consider first the incidental issue.
That the principle of estoppel by judgment does not apply with respect to the disposition of the issue we have here as to the years 1938 and 1939 is clear, because the suit in the United States District Court involving the year 1937, although brought by petitioner, as is the proceeding here, was against the collector of internal revenue, whereas, the proceeding in Docket No. 109996 herein, involving 1938 and 1939, is against the Commissioner of Internal Revenue. The parties to the two suits were not identical and that prime requisite for the application of the doctrine of estoppel by judgment is lacking as to the proceeding in Docket No. 109996. We are therefore not precluded by the judgment of the District Court from considering the question presented in that docket on its merits. Sage v. United States, 250 U.S. 33; Bankers Pocahontas Coal Co. v. Burnet, 287 U.S. 308; and United States v. Nunnally Investment Co., 316 U.S. 258. Cf. Tait v. Western Md. Ry. Co. 289 U.S. 620; and Sunshine Coal Col v. Adkins, 310 U.S. 381. The proceeding in Docket No. 109996 having been instituted prior to June 15, 1942, section 3772(d) of the Internal Revenue Code, as added by section 503 of the Revenue Act of 1942,
SEC. 503. SUIT AGAINST COLLECTOR BAR IN OTHER SUITS.Section 3772 (relating to suits) is amended by inserting at the end thereof the following new subsection:‘(d) SUITS AGAINST COLLECTOR A BAR.— A suit against a collector (or former collector) or his personal representative for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected shall be treated as if the United States had been a party to such suit in applying the doctrine of res judicata in all suits instituted after June 15, 1942, in respect of any internal revenue tax, and in all proceedings in the Board and on review of decisions of the Board where the petition to the Board was filed after such date.‘
The proceeding in Docket No. 112248 herein, involving the year 1940, was, however, instituted after June 15, 1942; so that the fact that petitioner's suit in the District Court was against the collector, while here his proceeding is against the Commissioner, does not of itself operate to prevent the application of the principle of estoppel by judgment as to 1940. Respondent, on brief, concedes this. Does the judgment of the District Court nevertheless constitute estoppel by judgment as to the issue presented in Docket No. 112248?
The rule of estoppel by judgment, so far as it relates to the requirement that the question in the two cases must be the same, is stated in Southern Pacific Railroad v. United States, 168 U.S. 1, 48, as follows:
The general principle announced in numerous cases is that a right, question or fact distinctly put in issue and directly determined by a court of competent jurisdiction, as a ground of recovery, cannot be disputed in a subsequent suit between the same parties or their privies; and even if the second suit is for a different cause of action, the right, question or fact once so determined must, as between the same parties or their privies, be taken as conclusively established * * * . See also Cromwell v. County of Sac, 94 U.S. 351, 353; New Orleans v. Citizens' Bank, 167 U.S. 371, 397; United States v. Moser, 266 U.S. 236; and Tait v. Western Md. Ry. Co., supra. This rule applies to tax cases, and if the conditions for its operation exist, it governs where, as here, taxes for different years are involved and the action in the later case is upon a different claim or demand from that involved in the earlier one and the parties are the same in both cases. Tait v. Western Md. Ry. Co., supra; Leininger v. Commissioner, 86 Fed.(2d) 791; The Evergreens, 47 B.T.A. 815; affd., 141 Fed.(2d) 927; and Alice G. K. Kleberg, 2 T.C. 1024, 1032.
The pleadings and judgment in the suit in the District Court show that the point in controversy and the thing adjudged was whether the petitioner here (plaintiff there) and his wife and children were partners during 1937 in the business operated under the name of Birmingham Electric & Manufacturing Co., or whether that business was owned by the petitioner as an individual proprietor. As that suit was one to recover income taxes paid by the petitioner in response to a determination by the Commissioner that there was not a bona fide partnership and that the business was owned by, and the net income was taxable to, the petitioner, and as the parties stipulated therein that, if the jury found there was a partnership during 1937, judgment should be rendered on such verdict in favor of the petitioner for the taxes paid, it is obvious that the verdict of the jury and the judgment entered thereon involved a determination that there was a partnership for Federal income tax purposes in 1937. The question presented here in Docket No. 112248 is the same, except for different years, such question requiring a determination of whether there was a partnership for Federal income tax purposes between the same persons in the same business during the year 1940.
In New Orleans v. Citizens' Bank, supra, at pp. 396, 398, the Supreme Court said:
* * * The estoppel resulting from the thing adjudged does not depend upon whether there is the same demand in both cases, but exists, even although there be different demands, when the question upon which the recovery of the second demand depends has under identical circumstances and conditions been previously concluded by a judgment between the parties or their privies. This is the elemental rule, stated in the text books and enforced by many decisions of this court. * * *
It follows, then, that the mere fact that the demand in this case is for a tax for one year and the demands in the adjudged cases were for taxes for other years, does not prevent the operation of the thing adjudged, if, in the prior cases, the question of exemption was necessarily presented and determined upon identically the same facts upon which the right of exemption is now claimed.
See also Tait v. Western Md. Ry. Co., supra, p. 626.
The record herein does not show what evidence was presented to the jury in the District Court suit. All that we know is that the question of whether a partnership existed in 1937 among the petitioner and his wife and children was presented in that suit for determination. Whether that question was solved by evidence of the same facts and circumstances as are shown in the present case or by evidence of a different set of facts and circumstances does not appear, and hence it is impossible to determine that the question presented here has, ‘under identical circumstances and conditions,‘ been previously concluded by the judgment of the District Court. In order to work an estoppel by judgment the facts, as well as the question, in both cases must be the same, and if it is now known what the facts in both cases are the rule does not apply. Campana Corporation v. Harrison, 135 Fed.(2d) 334, 336.
In cases where the rule of estoppel by judgment has been invoked the facts in the former proceedings were clearly determinable from the record before the court. See Tait v. Western Md. Ry. Co., supra; United Shoe Mach. Co. v. United States, 258 U.S. 451, 459; Oklahoma v. Texas, 256 U.S. 70, 86; Vicksburg, v. Henson, 231 U.S. 259; New Orleans v. Citizens' Bank, supra; Washington Gas Co. v. District of Columbia, 161 U.S. 316; The Evergreens v. Nunan, 141 Fed.(2d) 927; Leininger v. Commissioner, supra; Paine & Williams Co. v. Baldwin Rubber Co., 113 Fed.(2d) 840; Libbie Rice Farish, 2 T.C. 949; Pryor & Lockhart Development Co., 34 B.T.A. 687; Arthur Curtiss James, 31 B.T.A. 712.
Since none of the facts upon which the adjudication of the District Court was based is shown in this record, we are unable to say that they were the same, or substantially the same, as those presented here upon the same question, and, consequently, we hold that the judgment of that court does not operate as an estoppel by judgment in this proceeding for the year 1940, and that we are not precluded from considering the question presented as to that year on its merits.
Having decided that the principle of estoppel by judgment does not apply to the proceeding in either of the two dockets here involved, we shall now consider the main issue presented in both of those proceedings.
As to this main issue, respondent contends that there was no bona fide partnership, for Federal income tax purposes, among petitioner, his wife, and his children and that consequently petitioner is taxable with their alleged distributable shares in the profits of the company's business as determined by the respondent; while petitioner contends that there was such a bona fide partnership and that he is not so taxable.
Although the partnership between the petitioner and his wife and children may be a valid partnership under the law of Alabama, and although it be assumed that the facts found herein support the conclusion that the petitioner made a bona fide gift to his wife and children of an interest in the business, we are nevertheless of the opinion that the arrangement between the petitioner and his wife and children should not be recognized as a partnership during either of the taxable years, for the purposes of the income tax law, and that the respondent correctly taxed the petitioner on the whole of the income of the business for those years.
The business was that of repairing and rebuilding electrical machinery and equipment. The services rendered by the petitioner's wife and his daughter, Ann, and his son, Malcolm, were obviously of negligible importance as an income producing factor. We are not informed as to whether other persons were employed and as to the nature and extent of their services, if any. The business required the application of technical knowledge and the petitioner, in managing the business, supplied that knowledge. He is a graduate electrical engineer. The company owned physical assets, such as land, building, machinery, and equipment, furniture and fixtures, delivery equipment, and inventories. Those assets were carried in the balance sheets attached to its returns at the following values:
+-------------------------+ ¦Jan. 1, 1937 ¦$21,841.30¦ +--------------+----------¦ ¦Dec. 31, 1937 ¦24,874.40 ¦ +--------------+----------¦ ¦Dec. 31, 1938 ¦22,610.76 ¦ +--------------+----------¦ ¦Dec. 31, 1939 ¦18,817.45 ¦ +--------------+----------¦ ¦Dec. 31, 1940 ¦18,841.08 ¦ +-------------------------+
If the earnings of the business were due mainly, though not entirely, to the personal activites and abilities of the petitioner as an electrical engineer, under the principle applied in Earp v. Jones, 131 Fed.(2d) 292; certiorari denied, 318 U.S. 764; Mead v. Commissioner, 131 Fed.(2d) 323; certiorari denied, 318 U.S. 777; and Schroder v. Commissioner, 134 Fed.(2d) 346, we would be required to disregard the arrangement between the petitioner and the members of his family and to tax the income to him as the real earner thereof, Lucas v. Earl, 281 U.S. 111. On the other hand, if the earnings of the business were not due mainly to the personal services rendered by petitioner, but mainly flowed from the capital interests of the several partners, the rule of the Earp, Mead, and Schroder cases would not apply and the petitioner would be taxable only on his distributive share of the income. J. D. Johnston, Jr., 3 T.C. 799, and M. W. Smith, Jr., 3 T.C. 894.
As we have indicated above, the evidence shows that the personal activities and abilities of the petitioner contributed in a large measure to the production of the income and that, in the operation of the business, the company used physical assets of the value of approximately $20,000 during five years. The books and partnership returns show that during the years 1937 to 1940, inclusive, the annual net earnings ranged from $15,986.88 in 1937 to $9,305.88 in 1940. Such annual earnings are 50 percent and more in excess of the capital investment in physical assets. The personal services of the petitioner were worth $12,000 per year, if measured by the amount of salary paid him for identical services by the predecessor corporation in 1936. It would seem, therefore, that the physical assets, or capital interests, were not responsible for the production of the income to such a degree as would place the present case without the rule of the Earp, Mead, and Schroder cases and bring it within the rule of the Johnston and Smith cases. While the evidence affords no basis for a positive finding that the activities and services of the petitioner were the main factors in the production of the income, it points quite strongly in that direction. In this situation, if the petitioner would escape the tax on the distributive shares of his partners, we think that he should have shown that his activities and services were not the main factors in the production of the income of the company. This he has not done, and we consequently are unable to say that the respondent erred in taxing to petitioner the whole of the income of the company for the taxable years involved. The determination of the respondent is therefore approved.
Reviewed by the Court.
Decision will be entered under Rule 50.
MURDOCK, STERNHAGEN, VAN FOSSAN, LEECH, MELLOTT, and DISNEY, JJ., concur only in the result.