Opinion
Docket No. 10920.
1948-03-11
SINNE B. FORSYTHE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Clarke W. McCants, Esq., and Clint T. Graydon, Esq., for the petitioner. Edward L. Potter, Esq., for the respondent.
Petitioner and one Ferguson, as partners, developed a large dairy business. Petitioner, unable to read and write, had charge of the farms and livestock, and Ferguson, of the office, finances, and accounting. Ferguson died in October 1942, and petitioner's wife bought his half interest in the dairy from his heirs, making payment with loans from petitioner and with a joint note of herself and petitioner, secured by a mortgage on all properties used in the business. Petitioner and she continued the business under a partnership agreement. The wife performed the duties formerly discharged by Ferguson, regularly devoting her time and attention to affairs of the business and applying her share of profits to payment of the note. On the evidence, held, that the wife, having rendered vital services to the operation of the business and having contributed to it capital which did not originate with petitioner, is recognizable as a partner for tax purposes. Clarke W. McCants, Esq., and Clint T. Graydon, Esq., for the petitioner. Edward L. Potter, Esq., for the respondent.
The Commissioner determined a deficiency of $85,854.30 in petitioner's income and victory tax for 1943 by adding to income reported one-half of the profits of a dairy business, operated by himself and wife under a partnership agreement, which half he contends was income of the wife and taxable to her.
FINDINGS OF FACT.
Petitioner, a resident of Columbia, South Carolina, filed a separate income tax return for 1943 with the collector of internal revenue for the district of South Carolina. For 1942 he filed a joint return with his wife, Ruth Parks Forsythe.
In 1929 petitioner and LeRoy H. Ferguson formed a partnership for the operation of a dairy and the sale of dairy products, each owning a half interest. The business prospered from a modest beginning, and the partners contributed or acquired in their joint names farms, an office and bottling plant at Columbia, town lots at Eau Clair and Ballentine, South Carolina and livestock, equipment, machinery, and fixtures used in the business. Petitioner can sign his name, but otherwise is unable to read and write, and hence of necessity the office, financial, and accounting functions of the business devolved exclusively upon Ferguson, while petitioner had charge of the livestock and the farm operation, several miles from Columbia. During the first two or three years, however, petitioner's wife, a high school graduate, worked with him and became familiar with some details of the business.
On October 28, 1942, Ferguson died. His heirs, a widow without business experience and two children living elsewhere, desired to sell the interest inherited from him as quickly as possible. The business, largest of its kind in the Columbia area, was operated from farms, including several thousand acres under lease; twelve hundred to three thousand cows were maintained; feed for them was raised; and milk and ice cream were produced and locally marketed from the plant in Columbia. Feeling that illiteracy would prevent his successful operation of the business, petitioner considered selling his interest, but his wife dissuaded him, saying that she could give it attention, and shortly after Ferguson's death she began to assist again in the operations. She took over the duties which Ferguson had formerly performed, although inexperienced at first, and carried on with the collaboration of experienced employees. Petitioner and she had several conferences with the estate's attorney regarding the purchase of the interest of Ferguson's heirs, and late in 1942 agreed upon a price equal to book value as of November 1, 1942. This value was computed to be $133,956.48.
On March 16, 1943, petitioner gave his check for $574.42 to the administratrix of the estate, and joined her in signing a ‘Contract of Sale,‘ which recited her receipt of the $574.42 from ‘Sinne B. Forsythe, purchaser‘ on account of ‘the purchase of the undivided interest‘ of the estate in the Columbia Dairies, formerly operated by the partnership. The contract contained a list of the assets, including realty; provided that petitioner assume outstanding obligations of the business and that the seller convey the assets to the purchaser upon his ‘securing the payment of the further sum‘ of $129,600 within 90 days from date, which amount was payable in equal monthly installments over a period of five years, with interest at 5 per cent. A larger amount could be paid at the purchaser's option. Learning for the first time that petitioner could not read and write, the attorney objected to the sale to him, but agreed that it could be made to his wife, who then had about $500 of her own. Petitioner's wife then gave petitioner her check for $574.42 on March 16, 1943, and petitioner assigned to her his rights in the contract.
Petitioner and his wife continued to operate the dairy, but there was considerable delay in consummation of the sale because one of the Ferguson heirs was serving in the United States Army in Italy, another was in Florida, and land titles required examination. On March 30, 1943, however, petitioner and his wife by formal instrument declared that a partnership existed between them for the conduct of a dairy business under the firm name of Columbia Dairies, ‘effective from the 1st day of November 1942‘; that they thereby transferred all right, title and interest in described properties then being used in the business which properties were either owned by them or subject to contract of purchase. They agreed to share equally in the profits and losses of the business, and to deposit all moneys and securities in a partnership account. Other provisions, here immaterial, related to termination by death of a partner. The agreement was publicly recorded on August 26, 1943.
Prior to formal consummation of the sale petitioner's wife made some payments on the purchase price by personal checks, and on August 1, 1943, petitioner and she gave to the sellers their joint note, bearing 5 per cent interest, in the amount of $120,960, payable over a five-year period in equal monthly installments, or more at their option. On the same day the Ferguson heirs by bill of sale and the deeds conveyed their interest in the real and personal assets of the business of Ruth Parks Forsythe, and she and petitioner executed a mortgage conveyance of their interests in such properties to the Ferguson heirs as security for payment of the note. At various times thereafter Ruth Parks Forsythe paid installments on the note by her personal checks in favor of the heirs' attorney. On September 16, 1944, the full amount of $129,600, due under the sale contract, had been paid, and on October 17, 1944, the properties were released from the lien of the mortgage.
On the partnership books a capital account was set up in the name of Ruth Parks Forsythe; it was credited with $133,956.48 in 1942 and with her share of the partnership's profits at the end of succeeding years. A drawing account, also set up for her, reflects withdrawals of $60,960.53 in 1943, $112,723.20 in 1944, $50,999.55 in 1945, and $27,860.17 in 1946. She also borrowed funds from petitioner, giving him her noninterest-bearing demand promissory note for $16,750 on September 22, 1943, for $28,989.80 on September 11, 1944, and for $3,550 on June 12, 1945. These notes have not yet been paid. The loans and the withdrawals were deposited to her personal account with the Citizens & Southern National Bank, Columbia, South Carolina, and were used for the payments made to the Ferguson heirs.
Prior to Ferguson's death petitioner had relied on his wife for reading and explaining business matters. Thereafter she always accompanied him at business interviews, reading aloud documents involved and participating in negotiations. In 1943 and subsequent years she contributed vital services to the dairy business, devoting her time and attention to its affairs and being at the plant three to six hours every day. Very often she returned at night for rush orders, and worked at home on records. She shared management with petitioner, receiving all calls and callers when petitioner was absent at the farms or elsewhere, as he usually was; she attended to legal matters and paper work, which she explained to petitioner; she took orders from, customers, advised them on purchases, and supervised deliveries; and she investigated accidents, adjusted complaints, settled disputed bills, signed checks in the partnership's name, kept records of inventory, checked accounts, attended to insurance, arranged contracts for large sales to the Army and others, and took care of correspondence. During the war years she sometimes took charge of the unloading of large shipments of livestock purchased, inspecting them for injuries, and she handled all matters connected with Government emergency regulations, many of which pertained to the distribution of milk, and with pure food inspection, conferring personally with the officials. She alternated with an employee as cashier in the office and conferred with the veterinary surgeon on the condition of livestock and with attorneys about damage claims, lawsuits, and other matters. She has regularly occupied the desk and office formerly occupied by Ferguson, she holds herself out to the public as having authority in the operation of the business, and she is regarded as a partner by customers, officials, and others. On November 18, 1943, petitioner and she purchased a tract of land from Susan Ames Taylor, being described ‘as copartners doing business under the firm name and style of Columbia Dairies‘ in the deed, note, and mortgage.
Petitioner's wife in 1943 was the owner of a one-half interest in the business conducted as a partnership by petitioner and her under the name of Columbia Dairies.
OPINION.
JOHNSON, Judge:
Respondent defends the determination that petitioner is taxable on the entire income of the business operated under the name of Columbia Dairies, invoking Commissioner v. Tower, 327 U.S. 280, which, with the related opinion in Lusthaus v. Commissioner, 327 U.S. 293, has been expounded in numerous opinions involving the recognition of family partnerships for income tax purposes. See Simmons v. Commissioner (C.C.A., 5th Cir.), 164 Fed.(2d) 220. Under the doctrine so established the Commissioner is warranted in ignoring a partnership between husband and wife, although valid under state law, if the wife has not contributed either capital or vital services to the business and the husband's economic interest has not been changed, the arrangement being in effect no more than ‘a mere paper reallocation of income among the family members.‘ Commissioner v. Tower, supra. But in approving this view the Supreme Court referred only to a partnership which the evidence showed to be superficial or pretended, and expressly observed that a wife may be recognized as a taxable partner:
* * * If she either invests capital originating with her or substantially contributes to the control and management of the business, or otherwise performs additional services * * *
The question, it made plain, is one of fact, and:
* * * To decide who worked for, otherwise created or controlled the income, all steps in the process of earning the profits must be taken into consideration. See Commissioner v. Court Holding Co., 324 U.S. 331, 334. Of course, the question of legal ownership of the capital purportedly contributed by a wife will frequently throw light on the broader question of whether an alleged partnership is real or pretended. * * *
To bring his determination here within the ambit of that doctrine, respondent minimizes the wife's contribution to the business and denies that she made major decisions, and, stressing services of the dairy's staff of employees, qualifies the duties performed by her as clerical in nature, such as ‘taking orders over the telephone for dairy products, making retail sales at the office, checking on drivers, delivering milk, investigating accidents and other routine matters.‘
We are unable to agree that the duties listed were routine or that the list given is complete. The evidence indicates and we have found that the wife discharged the duties which had of necessity devolved on Ferguson. Inexperienced at first, she increased in competence and during the taxable year was acting effectively as office manager. She not only attended customers, adjusted complaints, and supervised deliveries, but also negotiated Army contracts, dealt directly with officials administering Government emergency regulations and with the public health officers, handled claims and legal controversies arising from accidents and disputed bills, conferred with attorneys, and, in general, took care of matters with which the director of an enterprise is normally concerned. Petitioner himself continued, as before, in charge of the farms and livestock. He testified, and we can well believe, that because of the misfortune of illiteracy he was incompetent to direct many vital phases of the business, which his wife assumed, and that without her collaboration he would have sold his interest in the dairy rather than attempt it. The attorney for the Ferguson heirs was also of opinion that petitioner could not have carried on alone, and testified that he had insisted on making the sale to the wife when he learned that petitioner could not read and write.
Two employees, two attorneys, the public health officer, the veterinary surgeon, and the son-in-law of Susan Ames Taylor, all of whom were in business contact with the Columbia Dairies, agree in testimony indicating that Ruth Parks Forsythe gave her time and attention to the business constantly and zealously; that she assumed responsibility and exercised authority; and that petitioner was entirely dependent on her in matters involving documents, accounting, legal requirements, and controversies. Petitioner's own testimony is eloquent to this effect:
I would not run (the business) one week. I wouldn't even try it if I didn't have her in there. * * * I couldn't trust nobody but Ruth. I'll trust her, nobody else. I know they fool you if you can't read.
The picture emerging from the evidence adduced is that of a wife who supported her husband with loyalty, zeal, and courage beyond the ordinary in confronting and mastering an emergency in his business, which the handicap of illiteracy rendered him incapable of overcoming. Her services were vital to that business in the very literal sense that, without them, he could not have continued it, and, as this test in circumstances such as we have here is sufficient to warrant the recognition of her partnership interest for tax purposes, Francis A. Parker, 6 T.C. 974; Leo Marks, 6 T.C. 659, we hold that the Commissioner erred including any part of the wife's share of partnership profits in petitioner's income. Cf. Wilson v. Commissioner (C.C.A., 7th Cir.), 161 Fed.(2d) 661; Singletary v. Commissioner (C.C.A., 5th Cir.), 155 Fed.(2d) 207; Samuel Goodman, 6 T.C. 987.
We are also of opinion that the wife contributed capital. There could be no mere reallocation of income between the members of a family here, for petitioner was never the owner of the half interest transferred to the wife and, hence, was never in a position to make a reallocation. While true that the wife had only $500 at the time of her purchase of the interest and payments of the price were made by her with loans from petitioner, and that his half interest in partnership assets provided part of the security for payment and the credit extended her, such arrangements do not necessarily indicate a sham. As said by this Court in S. Kenneth Alexander, 6 T.C. 804:
* * * We see nothing here that a husband might not reasonably do in assisting his wife, and not himself, to acquire another's partnership interest. * * * The petitioner is not shown to have received, or to have had the right to receive the profits from the purchased partnership interest.
The same observations are valid here. In both cases the husband assisted the wife in procuring and securing loans had not been repaid at the time of hearing; and the wife's partnership interest was derived from one other than the husband to keep the business in the family.
Decision will be entered under Rule 50.