Opinion
Docket Nos. 24066 24067.
1950-08-30
ESTATE OF ARCHIE L. BLADES, DECEASED, INEZ H. BLADES, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
C. Everett Shults, Esq., for the petitioner. Thomas R. Charshee, Esq., for the respondent.
PARTNERSHIP— INCOME— PARTNER CARRYING ON ALLIED BUSINESS FOR BENEFIT OF PARTNERSHIP.— Where an agreement was made that one partner, during the absence in the military service of his two co-partners, could go into a business similar to that of the partnership, use personnel, office, equipment and credit of the partnership in conducting that business, conduct the business as a partnership with new partners and have his share of the profits transferred to the old partnership, that share of the profits never belonged to him and was not taxable to him but belonged to the old partnership. C. Everett Shults, Esq., for the petitioner. Thomas R. Charshee, Esq., for the respondent.
The Commissioner determined a deficiency in income tax of the decedent for 1943 in the amount of $21,478.17 (Dkt. No. 24066), and one of $688 against his estate for the period January 23 to December 31, 1944 (Dkt. No. 24067). The error assigned for 1943 is the action of the Commissioner in holding that 58 per cent of the income for 1942 and 1943 of Blades Construction Co., a partnership, was income of the decedent instead of income of A. L. Blades & Sons, another partnership, in which the decedent had a 50 per cent interest. The errors assigned for 1944 are the action of the Commissioner in adding to the income of the estate $6,000 received from the A. L. Blades & Sons partnership and in disallowing a deduction of $1,078 for cattle purchased.
FINDINGS OF FACT.
The decedent filed his individual return for 1943 and the estate filed its income tax return for 1944 with the collector of internal revenue for the twenty-eighth district of New York.
The decedent died on January 22, 1944.
The decedent and his two sons entered into a written partnership agreement dated December 30, 1936. It recited that he had been engaged since 1921 as a general contractor, including the operation of two black-top asphalt plants, building and oiling Macadam roads, and building highway bridges and other concrete structures. The business was to be carried on under the name of A. L. Blades & Sons. The agreement contained a provision that each party should devote his entire time and attention and best efforts to the business, with exceptions not here material. Another provision was that the decedent could draw as a salary for his services $500 per month and the two sons could each draw $200 per month which was to be ‘an expense of operation of the said partnership.‘ Other profits were to be left in the business. Interest at 6 per cent on funds left in the business could be drawn. The decedent was to have a one-half interest and the two sons a one-fourth interest each in the partnership.
The death of one partner was not to dissolve the partnership until the end of the calendar year in which the death occurred, at which time the remaining partners would have a right to purchase the interest of the deceased partner. The agreement also provided:
23. In case of the death of any member of said partnership during a calendar year, the drawing account hereinbefore provided shall continue to be paid by the said partnership to the estate of the partner so dying until the end of the calendar year, but said partner so dying and his estate shall have no right or interest in and to the profits made and shall not be liable for any of the losses incurred during said calendar year in which the said partner may die.
That partnership continued in the same line of business until terminated by the death of the decedent.
The two sons went into active service, as officers in the United States Navy, in the spring of 1941 and did not return to their civilian occupations until after 1944. They performed occasional services for and kept in touch with the partnership during the taxable years.
That partnership, prior to August 1942, had some contracts for war work at Sampson Naval Base and had performed some of the work on those contracts.
The decedent, in the summer of 1942, decided to form a new partnership with the six key employees of the old one. This partnership was to do work similar to the kind of work being done by the old partnership, except that all of the work of the new partnership was to be war work at Sampson Naval Base. The purpose of the decedent was to relieve himself of some of the responsibility for war work, to retain the services of the important employees, to give them greater authority, and to keep the war work separate from the work of the old partnership.
The new partnership was known as Blades Construction Co. The partnership agreement was dated August 1, 1942. The decedent's interest was 58 per cent and the interest of each of the other six parties was 7 per cent. The agreement recited that the decedent had been engaged in the construction business under the name of A. L. Blades & Sons; his two partners had recently entered the Navy and would not be able to participate actively in the business for the duration of the war, and that partnership had negotiated construction contracts and expected to negotiate others requiring trained personnel in the employ of that partnership who desired to participate in the operation of the contracts under the supervision of the decedent. The decedent contributed $16,571.18 of capital and the other participants contributed $2,000 each. The decedent also agreed to obtain additional capital, if needed, using his own credit and that of the old partnership. He also agreed to turn over to the new partnership the contracts for war work held by the old partnership, including any on which work had been commenced.
The agreement contained the following provision:
With the exception of such services as each of the parties hereto may render to the firm of A. L. BLADES & SONS under previous contracts with A. L. BLADES & SONS, each of the parties hereto agrees to devote his full time, attention, and best efforts to the operation of this partnership, and it is understood that only when they do so, are they to be entitled to the division of profits herein specified.
The decedent was given the right to change the duties, fix the salaries, remove partners, and make all final decisions. Paragraph 20 of the agreement was as follows:
The said ARCHIE L. BLADES also agrees on behalf of himself and the firm of A. L. BLADES & SONS to furnish to this partnership such road construction and other equipment as may be available to the firm of A. L. BLADES & SONS, on condition that this partnership shall pay the ceiling prices for said equipment fixed by the United States Government or the Office of Price Administration, or a lesser rental if the same is so agreed upon, it being understood that said ceiling prices and rentals are for bare equipment without maintenance, repairs, supplies, or operators, all of which shall be paid by this partnership, and this partnership shall operate said equipment with reasonable care and prudence, and return the same at the end of the operation to A. L. BLADES & SONS in as good condition as when received, reasonable wear and tear excepted. This paragraph shall not be binding upon A. L. BLADES & SONS in case said equipment or any part thereof is commandeered by any branch of the United States Government.
The sons were advised of the formation of the new partnership soon after it was organized. They knew that the decedent had a controlling interest in it and understood that his share of the profits was to go to the old partnership. They raised no objection to the arrangements made. The partners to the new agreement also understood that the decedent's share of the profits of their firm was to go to the old partnership.
The new partnership used the office and some of the personnel of the old partnership. It also rented equipment from the old partnership. The new partnership took over the war contracts of the old partnership and also obtained some new war contracts. All of the work performed by it was at Sampson Naval Base. Payment for work performed under contracts obtained in the name of the old partnership was made to the old partnership and the checks were then endorsed to the new partnership and the new partnership took into its income all payments for work performed at the Sampson Naval Base.
Fifty-eight per cent of the profits of the new partnership for 1942 and 1943 was transferred to the old partnership and taken into its income. The decedent and his sons reported their distributive shares of the net income of the old partnership, including that received from the new partnership.
The Commissioner, in determining the deficiency for 1943, added $8,411.56 to the decedent's income for 1942, and added $21,494.62 to the decedent's income for 1943, with the explanation that his distributive share of the net income of the partnership, Blades Construction Co., for 1942 and 1943, including the salary which he had reported, was taxable to him.
The Commissioner, in determining the deficiency for 1944, held that $6,000 received by the estate from the partnership of the A. L. Blades & Sons during that year was taxable income of the estate, and also that $1,078 expended for cattle during the year was a capital expenditure and not an expense deductible from income.
OPINION.
MURDOCK, Judge:
The Commissioner takes the view that the decedent was a partner in Blades Construction Co., the new partnership, his distributive share of the net income of that partnership was 58 per cent, plus whatever salary he drew, and section 182 requires that his net income shall include that share. The Commissioner fully recognizes the old partnership and does not deny that an understanding existed under which the 58 per cent share of the income of the new partnership was to be turned over to the old partnership. He relies upon cases holding that the one who earns income can not escape tax on it by assigning it to another, Burnet v. Leininger, 285 U.S. 136, Lucas v. Earl, 281 U.S. 111, Helvering v. Horst, 311 U.S. 112, and Helvering v. Eubank, 311 U.S. 122, and argues that this income is all taxable to the decedent and can not be regarded as income of the old partnership. The petitioner, on the other hand, goes into partnership law in an effort to show that the decedent was in a fiduciary relationship in regard to the business of the old partnership while his sons were away at war and could not have taken the income in question for his own had he so desired.
The decedent never tried to take the income as his own but had an understanding, both with his sons, his old partners, and with his new partners, that his share of the earnings of the new partnership would go to the old partnership rather than to him personally. The old partnership was recognized throughout the new partnership agreement. The new partnership was to take over all of the war work. That included contracts already entered into by the old partnership and perhaps a few under which the old partnership had performed some work. The partners in the new partnership were to work for it only in so far as their duties with the old partnership would permit. The new partnership was to use equipment of the old partnership, and the credit of the old partnership was to be available. Also some personnel of the old partnership was used and the new used the office of the old. In other words, the operations of the two partnerships were closely related. It would be unreal to tax 58 per cent of the income of the new partnership to the decedent under such circumstances. The cases relied upon by the Commissioner are not in point because the decedent did not earn all of the income in question or assign his earnings. He made an arrangement for the duration of the war under which the old partnership surrendered some of its rights and gave assistance to the new partnership with the understanding that a portion of the profits of the new partnership should belong, as earned, to the old partnership and that the decedent, for purposes of convenience only, should appear as the person to whom that share was distributable. The decedent reported his income for 1942 and his estate reported it for 1943 in accordance with the agreements and understandings among the partners of the two partnerships, and the Commissioner erred in taxing that income as if it all belonged to the decedent.
Two issues were raised at Docket No. 24067, which relates entirely to the year 1944, but no evidence was introduced to support the contention of the petitioner on those issues. The petitioner claims that the Commissioner erred in taxing $6,000 to the estate of the decedent. Apparently, the money was paid in accordance with paragraph 23 of the partnership agreement of December 30, 1936. That agreement provided that the death of one of the partners would not would not effect the dissolution of the partnership until the end of the calendar year in which the death occurred, and during that calendar year the drawing account provided for that partner was to be paid to the estate of the deceased partner until the end of the calendar year. The drawings were distributable income, despite the statement in the agreement that they were to be deducted as an expense. The drawing account was one of the means used by the partners for measuring the income to be paid to each partner during each year. The continuance of that drawing account was not a capital payment representing a part of the purchase price of the interest of the deceased partner. A purchase price for his interest was fixed by other provisions of the contract. Paragraph 23, when read in connection with the rest of the agreement, shows clearly that the $6,000 was income to the estate. The other error alleged is the action of the Commissioner in failing to allow a deduction of the cost of some cattle. The cost of cattle would be a capital item rather than a deduction from income. Certainly the evidence in this case does not show that the Commissioner erred in his treatment of either of these items.
Decision will be entered under Rule 50 at Docket No. 24066. Decision will be entered for the respondent at Docket No. 24067.