Opinion
Docket Nos. 2118 2119.
1945-06-11
CLARENCE L. FOX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.R. C. GETSINGER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Edgar W. Pugh, Esq., for the petitioners. Paul A. Sebastian, Esq., for the respondent.
For many years the petitioners were engaged in business as equal partners until 1941, when their wives were made equal partners with them. The wives brought no new capital into the business and contributed no services. The partnership represented certain woolen mills which manufactured fabrics for the automobile industry and all of the income of the company from its inception consisted of commissions received upon sales made by the petitioners. Held, that the respondent did not err in taxing the entire income of the partnership for 1941 to petitioners equally. Edgar W. Pugh, Esq., for the petitioners. Paul A. Sebastian, Esq., for the respondent.
These proceedings, consolidated for hearing, involve income tax deficiencies for 1941 as follows:
+---------------------------------+ ¦ ¦Docket¦ ¦ +---------------+------+----------¦ ¦Petitioner ¦No. ¦Deficiency¦ +---------------+------+----------¦ ¦Clarence L. Fox¦2118 ¦$22,488.77¦ +---------------+------+----------¦ ¦R. C. Getsinger¦2119 ¦22,787.67 ¦ +---------------------------------+
The question in issue is whether the petitioners are each liable to income tax upon one-half of the profits of the business conducted under the name of Getsinger-Fox Co.
The facts were presented by stipulation of the parties, documentary exhibits, and oral testimony.
FINDINGS OF FACT.
The petitioners are residents of Wayne County, Michigan. They filed their income tax returns for 1941 with the collector of internal revenue for the district of Michigan, at Detroit.
Clarence L. Fox became identified with the automobile industry in 1915, in which year he was employed in the sales department of the Saxon Motor Car Co. Later on he became assistant sales manager and then sales manager of the company. His next position was with the Lincoln Motor Car Co., where he was assistant sales manager. In both of these positions Fox worked under the direct supervision of R. C. Getsinger.
Getsinger first became associated with the automobile industry in 1910, in which year he was employed by the Chalmers Motor Co. as secretary to one of the officials. Thereafter, he became sales manager of the Saxon Motor Car Co. In 1918 he accepted employment with the Lincoln Motor Car Co. as sales manager. Getsinger and Fox have been closely and constantly associated in business since 1915.
With the advent of closed automobile bodies, Getsinger and Fox entered into a partnership agreement on February 26, 1923, the purpose of which was to act as ‘MANUFACTURER'S REPRESENTATIVES.‘ This partnership was known as ‘Getsinger-Fox Company‘ and was located in Detroit.
After the manufacture of automobiles with closed bodies the need for leather and similar upholsteries disappeared and there grew instead a steady trend towards the more stylish and desirable upholstery made of cloth, and it was to this field that the business of Getsinger-Fox Co. devoted its efforts.
The petitioners, being well known in the automobile industry, with many contacts, became agents for woolen mills which undertook to supply the automobile industry with the desired patterns and quality of upholstery cloth.
The company obtained samples of various patterns and qualities of upholstery from the woolen mills. The automobile companies desiring such fabrics examined the samples in the possession of the company and placed orders with it. The services performed by the petitioners were paid for upon a strictly commission basis.
The William Wise Co., operating the Broad Brook Mill at Broad Brook, Connecticut, was the first woolen mill represented by the company.
As time passed the demand for cloth upholstery grew and the petitioners became representatives for other woolen mills that desired to receive orders for auto upholstery. One of such mills was the Chatham Manufacturing Co., at Elkton, North Carolina.
In each case where the petitioners became representative agents of the woolen mills the mills furnished them, without cost, samples of various qualities and designs of upholstery cloth they were prepared to manufacture in sufficient volume to supply the trade. All of such samples obtained by the petitioners from the various woolen mills were assembled in books, each sample bearing an identifying number, and by the end of 1935 they had, by saving the samples furnished them, accumulated 4,000 to 5,000 such samples.
The petitioners' place of business is located in the Stephenson Building in Detroit and consists of four rooms, one of which is a sort of entrance lobby which is occupied by a stenographer. This entrance lobby is joined by a hall which leads to an office occupied by Getsinger, to one occupied by Fox, and to the fourth room, a stock room where the samples are kept.
The automobile manufacturer's representative comes to the petitioners' place of business, inspects their samples, and makes such selections as the company desires. This occurs about once each year, when the different manufacturers are selecting upholstery for their new models. Some of such customers of petitioners were General Motors, Ford, Chrysler, Hudson, Packard, Nash, Dodge and DeSoto; in fact, the petitioners served all of the manufacturers of automobiles in Detroit.
During 1940 the petitioners had a sales meeting of their customers at the Book-Cadillac Hotel in Detroit, at which meeting they set up a display of automobile upholstery fabrics being used in the 1940 model cars. The principal manufacturer of such automobile fabrics in 1940 was the Chatham Manufacturing Co.
At all times since the inception of the business petitioners have acted as factory representatives of the various woolen mills represented by them on a strictly commission basis. When an order was placed by an automobile manufacturer the petitioners saw to it that the woolen mills promptly manufactured the material and made deliveries according to schedule. They have a good deal of servicing to do in connection with orders to make sure that the shipments come out on time and as required by the customer. They inspect defective shipments and decide on a proper adjustment. Fox has always kept a small set of books for the company.
The sole source of income of Getsinger-Fox Co. has at all times been the commissions received as aforesaid for the services of the partners as agents for the woolen mills.
In addition to Fox and Getsinger, the only other employees of the Getsinger-Fox Co. for the year here involved, as well as for prior and subsequent years, was a full time stenographer and a girl who worked part time.
Upon the entry of the United States into World War II the manufacture of passenger automobiles for civilian use practically ceased with the result that the demand for upholstery material likewise ceased. For the first year of the war, however, the Chatham Manufacturing Co. paid to Getsinger-Fox Co. $48,000 for the purpose of securing their services when the automobile industries should again start the manufacture of passenger cars.
The books of account and records of the partnership never at any time carried an account showing a value for good will, patterns, or upholstery designs prior to December 31, 1940. On that date there were set up on the books an asset account designated as ‘Upholstery Designs‘ in the amount of $85,000 and ‘Good Will‘ in the amount of $92,670.49. These two accounts have since been carried on the books in the stated amounts up to the present time.
On December 31, 1941, the cash account and the furniture and fixtures account appearing on the books were, respectively, $184.02 and $1,503.10. These two accounts on January 1, 1941, appeared on the books of the partnership in the respective amounts of $2,001.45 and $1,503.10. The furniture and fixtures account appearing on the books of account of the partnership had been fully depreciated in prior years.
The partnership return of Getsinger-Fox Co. for the year 1939 reflects gross receipts of $142,048.66 and a net profit of $119,890.53. The partnership return for 1940 reflects gross receipts of $170,721.51 and a net profit of $145,957.22. The partnership return for 1941 reflects gross receipts of $200,741.41 and a net profit of $170,239.03.
The expenses shown on the partnership return of Getsinger-Fox Co. for 1941, in the amount of $30,502.38, consist of the following items:
+----------------------------------+ ¦Telephone and telegraph ¦$2,187.19¦ +------------------------+---------¦ ¦Office supplies ¦269.49 ¦ +------------------------+---------¦ ¦Travel and entertainment¦21,520.49¦ +------------------------+---------¦ ¦Automobile expenses ¦3,054.26 ¦ +------------------------+---------¦ ¦Postage and express ¦550.51 ¦ +------------------------+---------¦ ¦Social security tax ¦54.68 ¦ +------------------------+---------¦ ¦Miscellaneous expenses ¦2,865.76 ¦ +------------------------+---------¦ ¦Total ¦30,502.38¦ +----------------------------------+
On December 23, 1940, the petitioners entered into an agreement the provisions of which are as follows:
WHEREAS, R. C. Getsinger and C. L. Fox have heretofore been associated as partners in the operation of Getsinger-Fox Co., Manufacturers Representatives, with Offices at 302 Stephenson Building, Detroit, Michigan, the said R. C. Getsinger having a one-half interest therein and the said C. L. Fox having the remaining one-half interest therein; and
WHEREAS, R. C. Getsinger and C. L. Fox mutually agree and recognize the property rights built up and owned by the said partnership. It is hereby desired to give effect to such property rights; and
WHEREAS, R. C. Getsinger in consideration of the sum of One Dollar ($1.00) and other good and valuable consideration, the receipt whereof is hereby acknowledged, has assigned to Edith L. Getsinger one-half of his one-half interest in the partnership operated under the name of Getsinger-Fox Co.; and
WHEREAS, C. L. Fox, in consideration of the sum of One Dollar ($1.00) and other good and valuable consideration, the receipt whereof is hereby acknowledged, has assigned to Vivian C. Fox one-half of his one-half interest in the partnership operated under the name of Getsinger-Fox Co.;
WHEREAS, all of the parties hereto are desirous of entering into a new partnership agreement giving effect to the respective interests of each of the four parties hereto in the said partnership business;
THEREFORE, each of the parties hereto agrees to associate himself and/or herself in a partnership known as Getsinger-Fox Co., with offices at 302 Stephenson Building, Detroit, Michigan. Each of the parties agrees that the interest of each in the said partnership, the right of each to participate in the profits thereof, and the liability resting upon each on account of any losses which might be incurred, are as follows:
+-------------------------------+ ¦R. C. Getsinger ¦One-Quarter¦ +-------------------+-----------¦ ¦Edith L. Getsinger ¦One-Quarter¦ +-------------------+-----------¦ ¦C. L. Fox ¦One-Quarter¦ +-------------------+-----------¦ ¦Vivian C. Fox ¦One-Quarter¦ +-------------------------------+
It is agreed that before any profits are divided, all expenses of any nature whatsoever in connection with the operation of said partnership business, including a salary of $10,000.00 per year to R. C. Getsinger and a salary of $10,000.00 per year to C. L. Fox are to be paid. Under no condition are the salaries to R. C. Getsinger and C. L. Fox to be paid or a charge on the partnership in an amount in excess of the net earnings for any year.
It is further understood and agreed by and between all the parties hereto that the said partnership agreement shall not be dissolved upon the death of any partner. In the event of the death of either R. C. Getsinger or C. L. Fox, the survivor shall immediately start to receive a salary of $12,000.00 per year for a period of five years. This salary of $12,000.00 shall not be paid or a charge on the partnership in excess of the net earnings for any year. At the end of the five year period, the partnership shall cease and the survivor being either R. C. Getsinger or C. L. Fox shall be entitled to use the partnership name doing business as he may elect.
It is mutually agreed that in the event of the death of any partner, the deceased partner has agreed and by this instrument does affirm the agreement to sell his or her partnership interest as follows:
+----------------------------------------+ ¦R. C. Getsinger ¦to¦Edith L. Getsinger¦ +------------------+--+------------------¦ ¦Edith L. Getsinger¦to¦R. C. Getsinger ¦ +------------------+--+------------------¦ ¦C. L. Fox ¦to¦Vivian C. Fox ¦ +------------------+--+------------------¦ ¦Vivian C. Fox ¦to¦C. L. Fox ¦ +----------------------------------------+
The sale price shall be fixed by the unanimous agreement of the remaining partners.
It is further mutually agreed that in filing Co-Partnership registration, the members shall be shown as follows:
R. C. Getsinger
Norman W. Getsinger
C. L. Fox
Janet Fox
The said Norman W. Getsinger is the nominee for Edith L. Getsinger and agrees that any partnership distributions shall be for the benefit of Edith L. Getsinger. Edith L. Getsinger holds an assignment of any interest in the partnership which may be owned by Norman W. Getsinger.
The said Janet Fox is the nominee for Vivian C. Fox and agrees that any partnership distributions shall be for the benefit of Vivian C. Fox. Vivian C. Fox holds and assignment of any interest in the partnership which may be owned by Janet Fox.
On December 31, 1940, Janet Fox made an assignment of her purported interest in the Getsinger-Fox Co. to her mother, Vivian C. Fox, and on the same day Norman W. Getsinger made a similar assignment of his alleged interest in the Getsinger-Fox Co. to his mother, Edith L. Getsinger.
On March 15, 1941, the petitioners each filed a gift tax return (form 709) wherein it is recited in schedule A, under the heading ‘Description of Gift, Motive, and Donee's Name and Address‘:
One-Quarter (Sic) of 1/2 interest in partnership known as Getsinger-Fox Company. Gift made for purpose of recognizing proprietary interest in partnership per Agreement.
The value of the gift in each return is shown as $45,293.76 and Fox names his wife, Vivian C. Fox, as donee, while Getsinger names his wife, Edith L. Getsinger, as donee.
The purpose in bringing the nominees, Norman W. Getsinger and Janet Fox, into the arrangement was to comply with the provisions of the Michigan statutes, which expressly deny the right of contract between a husband and his wife.
After this so-called new partnership agreement was entered into there was no change whatsoever in the method of conduct of the business of Getsinger-Fox Co. except as it related to the keeping of the books of account. Petitioners continued in complete control during 1940 the same as in prior years. Neither of the wives of petitioners ever performed any services for the company, either before or after the execution of the partnership agreement on December 23, 1940.
During 1941 a total of $168,000 of the profits of the business was distributed to the petitioners and their wives, $47,000 to each of the petitioners and $37,000 to each of the wives. The wives used the money distributed to them as they saw fit. None of it was used to defray the household expenses of the two petitioners.
The wife of R. C. Getsinger never filed an individual income tax return for the years prior to 1941.
In their income tax returns for 1941 the petitioners' wives included in their gross income their one-fourth share of the net income of the partnership and the petitioners reported the same amount, plus $10,000 each paid to them as compensation for services.
In his determination of the deficiencies the respondent has included in the gross income of each of the petitioners one-half of the net profits of the partnership for 1941.
OPINION.
SMITH, Judge:
The petitioners here contend that, by reason of gifts inter vivos to their respective wives in December 1940 and the simultaneous execution of a certain agreement, they created a valid bona fide partnership in which they and their respective wives each owned a one-fourth interest in the business known as Getsinger-Fox Co., with the result that the earnings of the business for the year 1941, except for a salary of $10,000 paid to each of the petitioners for services rendered, are distributable in four equal portions for income tax purposes.
The contention of the respondent is, in short, that the petitioners earned all of the income of the business and that the wives are not members of the partnership for income tax purposes.
We think that the respondent's determination must be sustained. The manifest purpose of the petitioners in bringing their wives into the partnership set-up was that of reducing income taxes. The wives brought no capital into the business and contributed no services. The very definition of a partnership requires a contribution of capital or services, or both, by persons for the conduct of a business for the mutual benefit of the contributors. Plainly, that requirement of a partnership relationship does not exist here.
Is the contention of the petitioners that by entering into the agreement of December 23, 1940, they made inter vivos gifts to their wives of valuable property interests in the business. They contend that the samples of fabrics which they had accumulated over a period of many years had a great value and that likewise the good will of the concern had a value, and that by making their wives partners they gave them valuable interests.
The petitioners also point to the fact that they filed gift tax returns for 1941 and paid gift taxes upon their gifts.
It is not clear, however, that the wives received proprietary interests in the business of value as a result of purported gifts made by the petitioners in 1940. The partnership agreement provided that on the death of one of the partners the other partners could buy his or her interest at a value that was mutually agreeable to the surviving partners. If one of the wives died it is conceivable that her husband could buy her interest for as little as one dollar if this was agreeable to the other partners.
In Helvering v. Horst, 311 U.S. 112, it was said:
The dominant purpose of the revenue laws is the taxation of income to those who earn or otherwise create the right to receive it and enjoy the benefit of it when paid. * * *
The rule thus enunciated was followed in the cases of Schroder v. Commissioner (C.C.A., 5th Cir.), 134 Fed.(2d) 346; Earp v. Jones (C.C.A., 10th Cir.), 131 Fed.(2d) 292; certiorari denied, 318 U.S. 764; and Mead v. Commissioner (C.C.A., 5th Cir.), 131 Fed.(2d) 323; certiorari denied, 318 U.S. 777.
In Earp v. Jones, supra, it was stated:
The apparent purpose of the partnership was not the creation and carrying on of a new joint enterprise or uniting their joint efforts or substance in a new undertaking. The real purpose of the partnership was to minimize income taxes. It is well settled that it is not unlawful to avoid the attachment of taxes. When a new tax comes into existence one is free to arrange or change his method or mode of operation to avoid the attachment of the tax or minimize the effect thereof. The change must, however, be real and substantial. One may not merely change the form but do business in substantially the same way. An essentially new and different economic unit must be formed. * * *
Clearly there was no essentially new and different economic unit formed by the agreement signed by the petitioners and their wives on December 23, 1940.
The facts in the instant proceedings are closely parallel to those which obtained in Earp v. Jones. Here, as there, the earnings of the company were attributable to the services performed by the petitioners. It does not appear that the profits would have been any less had the agreement of December 23, 1940, never been executed. See also Francis Doll, 2 T.C. 276; affd. (C.C.A., 8th Cir.), 149 Fed.(2d) 239; Frank J. Lorenz, 3 T.C. 746; affd. (C.C.A., 6th Cir.), 148 Fed.(2d) 527. We sustain the respondent's determination.
Reviewed by the Court.
Decisions will be entered under Rule 50.
ARUNDELL, LEECH, TYSON, DISNEY, and KERN, JJ., concur only in the result.