Opinion
Docket No. 107894.
1943-07-23
MAX GERMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
William H. Charles, Esq., Stanley S. Waite, Esq., and Earl Susman, Esq., for the petitioner. Gene W. Reardon, Esq., for the respondent.
From 1924 through 1939 the petitioner and his wife engaged variously in the operation of a fruit and vegetable store, acquired in 1924 with a joint loan of $500, the operation of a delicatessen stand and later a ham business. From 1924 to 1929 or 1930 the wife devoted a considerable part of her time to the store and the ham business and did much of the manual and other work in connection therewith. After 1930 the services rendered by her began to decrease, and by 1939 she rendered service only in emergencies. Funds for the repayment of the $500 loan and for the acquisition of the delicatessen stand and the establishment of the ham business were from earnings resulting the efforts of petitioner and his wife in the three businesses successively. Held, that the wife of the petitioner was a contributor to the capital of the ham business to the extent that her separate earnings from services rendered by her were retained and used in the business and to the extent that the 1939 profits were attributable to the capital contributed by her or to services rendered by her in that year the said profits did not constitute income to the petitioner. William H. Charles, Esq., Stanley S. Waite, Esq., and Earl Susman, Esq., for the petitioner. Gene W. Reardon, Esq., for the respondent.
The respondent determined a deficiency of $29.15 in the petitioner's income tax for 1939. The petitioner claims that there was an overpayment of $824.31. The issue presented is whether the respondent erred in determining that the petitioner and his wife were not carrying on a certain ham business as a partnership during the taxable year and that all of the income from the business was taxable to petitioner.
FINDINGS OF FACT.
The petitioner is a resident of University City, St. Louis, Missouri, and filed his income tax return for 1939 with the collector for the first district of Missouri.
The petitioner and his wife, Rose German, were married in 1922. Prior to 1924 the concern for which he traveled went out of business. He then went into the grocery business with his father, but they were unable to get along and the petitioner severed his connection with the business after three or four months. Thereafter, in 1924, the petitioner with his wife approached her father and mother for a loan to purchase a fruit and vegetable store on Kingshighway in St. Louis. A loan of $500 was procured and of that amount $250 was paid for the store and the remaining $250 for a used truck. When the store was first taken over the sales amounted to about $5 to $7 per day. From time to time, as the profits from the fruit and vegetable business increased and the living requirements of the petitioner and his wife permitted, the amount was repaid, repayment being completed about 1926. No note was given and no interest was asked or paid.
The petitioner and his wife lived in the back room of the store. In the early morning he would go to the wholesale market for produce, returning to the store about 7 o'clock. In the meantime, around 6:30 to 7 o'clock his wife would open the store. After his return from the market the petitioner would sleep for a few hours, during which time his wife would look after the store.
About October 1925, when the new Union Market opened in St. Louis stall was rented and with money taken from the Kingshighway store a delicatessen stand was opened. During the day Rose German looked after the store and the petitioner took care of the delicatessen. After going home at night the petitioner would work in the store. The petitioner purchased hams for the delicatessen from Bauer Food Products Co. which also operated a stand in Union Market. Shortly afterwards, in an arrangement to reduce expenses, the delicatessen and the Products Co. stand were combined into one stand, with petitioner in charge. Later the stand was closed and petitioner began working for the Bauer Co., an interest of some kind having been acquired in that company with the delicatessen profits and assets. The petitioner continued to work for the Bauer Food Products Co. until November 1926, but during all of such employment he continued to assist in the fruit and vegetable store operations.
Upon leaving the employment of Bauer Food Products Co. the petitioner went into the ham business. He moved his family from the back of the store and installed an oven in that part of the building. Rose German baked the hams, answered the telephone, and kept the record of the sales, while petitioner went out and sold the hams. In September 1927 the Kingshighway store was sold and the petitioner and his wife purchased and moved to a bungalow on Lisette Avenue. Two ovens were placed in the basement and the ham baking and selling operations were carried on as before, but on a larger scale. About 1929 or 1930, the business having grown to the point where larger quarters were necessary, a place on Cote Brilliante Avenue was rented and the ham business was conducted from there. The petitioner continued to reside on Lisette Avenue until about 1933, when his present residence on Stanford Avenue was purchased. After the move to Cote Brilliante Avenue, the operation was expanded to include the boiling as well as the banking of hams. In 1932 ground was purchased on Aldine Avenue and a building was erected for occupancy by the ham business. Since then the operations of the ham business have been conducted at the Aldine Avenue location.
When the ham business was moved to the Cote Brilliante Avenue location the amount of services rendered by Rose German began to decrease. Outside help was employed, and the hams were processed by this help under her supervision. By 1939 she devoted very little time to the business. She worked only when something went wrong or when extra help was needed because of the absence of the bookkeeper or some other employee.
The petitioner and his wife have two children, one of whom was born about 1924 or 1925, and the other about 1929 or 1930.
The fruit and vegetable store, as well as the ham business, was conducted under the name of the petitioner. No sign of any kind was ever displayed which would indicate that in the conduct of these enterprises petitioner and his wife were partners. The hams were sold under the name ‘Max German Hams,‘ the petitioner considering that the word ‘German‘ had an appeal when applied to hams. Bills for hams were made out to the petitioner and checks issued in connection with that business bore the wording ‘MAX GERMAN— Quality Boiled and Baked Hams.‘
During the time the fruit and vegetable store was operated, a bank account was opened in the joint names of the petitioner and his wife. This account was used in connection with the business and is sometimes hereinafter designated as the business account to distinguish it from other bank accounts. The business account has been continued as a joint account and checks have been signed by either the petitioner or his wife, as the occasion warranted.
From the beginning of business in 1924, the petitioner has made weekly withdrawals from the business, which were used for living expenses for himself and his family. Predicated on the fact that he was the head of the family, that the business was getting larger, and that their standard of living was being raised, the amount of such withdrawals has been increased from time to time, going from $35 a week in 1924 to $40, then to $55, and then to $85, the latter being the amount of the withdrawals per week in 1939. Any of such amounts in excess of those required to pay current household and family bills have been deposited in a second joint bank account, referred to as their personal account. If by reason of sickness or other emergency the balance of the personal account has proved to be insufficient to meet the requirements, withdrawals have been made from the business account. The weekly withdrawals made by petitioner were treated as a part of the pay roll, were charged on the books as an expense of the business, and at the end of the year were restored to the profits. From time to time the wife took out of the business any sums of money that she needed, but she never drew any fixed amount regularly, and did not draw any amount in 1939.
The selling price of the fruit and vegetable business was $2,000, of which $1,500 was paid in cash and the balance was represented by a promissory note, secured by a chattel mortgage on the stock of merchandise and the fixtures and equipment. The chattel mortgage ran in favor of ‘Max German and Rose German his wife.‘ The proceeds from the sale were used as a down payment on the bungalow on Lisette Avenue, the deed to which was also to ‘Max German and Rose German, his wife.‘ The balance of the purchase price was financed by a loan for which thirty promissory notes, signed by petitioner and his wife as makers, were given, secured by a deed of trust on the property, also signed by petitioner and his wife. The notes were paid from the profits of the ham business.
The deed to the land purchased on Aldine Avenue also ran to ‘Max German and Rose German, his wife.‘ To finance the erection of the building thereon, a loan of $8,000 was obtained from a trust company. The loan was evidenced by eighteen notes signed by petitioner and his wife as makers and secured by a deed of trust on the land and the building, also signed by petitioner and his wife. The notes have been paid.
In March 1931 the petitioner felt that the amount on deposit in the business account was excessive. At that time a property situated on the southeast corner of Chippewa Street and Gustine Avenue in St. Louis was purchased. This property, which was improved by a filling station, was purchased as an investment. The deed to the property, as in the case of the other properties, was to ‘Max German and Rose German, his wife.‘ Part of the purchase price was paid from money deposited in the business account and the balance was obtained through a loan. The loan was represented by twenty-four first mortgage serial notes signed by petitioner and his wife as makers. Payment of the notes was secured by a deed of trust on the property, including an assignment of the income therefrom under the lease existing thereon, executed by the petitioner and his wife. The notes, totaling $16,000, were renewed when they became due in 1934 and later were paid.
In addition to the business account and the personal account, the petitioner and his wife had another joint bank account designated realty account. In the realty account were deposited the rentals from real estate jointly owned by them and income from sources other than the ham business. About 1936 it was decided to charge the ham business with rent for the property on Aldine Avenue and thereafter two separate checks, one to petitioner and the other to his wife, were drawn on the business account each month for the monthly rental. The amount of the checks was charged as an expense on the books of the business and the checks were deposited in the realty account.
The petitioner attended to all matters relating to the filing of income tax returns for himself and his wife. For years prior to 1939 he filed returns for himself, in which he reported the income from the ham business as his individual income. No returns were filed by or for Rose German. In the latter part of 1939 the petitioner consulted an attorney and was advised by the attorney that in his opinion the business was and had been run as a partnership and that the income for prior years should have been so reported. The attorney prepared an agreement of partnership which was executed by petitioner and his wife on January 2, 1940. This agreement recited, among other things, that the petitioner and his wife had been partners for many years ‘in the business owned and operated by them under the name and style of MAX GERMAN‘; that originally they had ‘jointly contributed to the capital, and together organized, and for many years managed, the aforesaid business‘; and that they desired ‘to reduce to writing their partnership agreement.‘ No written agreement of partnership was executed by them prior to that time. With respect to the manner in which the petitioner and his wife should file returns for 1939, the attorney previously mentioned referred petitioner to other attorneys who advised that for the year 1939 the petitioner should file a return in the same manner as in the past and that later amended returns for 1938 and 1939 would be prepared and could be filed. Accordingly the petitioner's accountant prepared income tax returns for the petitioner and his wife for 1939, which were executed by them on March 4, 1940, and March 5, 1940, respectively, and filed with the collector on March 15, 1940. No partnership return for 1939 was filed at that time. In his return the petitioner stated that his principal occupation was that of ‘Packer.‘ He reported as his the entire income from the ham business. As thus reported, the total receipts from the business were shown as $143,479.55, and the net profits as $18,761.73. He also reported in his return one-half of the rental income shown as having been received by him and his wife from certain properties, including the amount charged against the ham business as rent for the property on which it was conducted. He also included one-half of the dividends and interest shown as having been received by him and his wife, together with one-half of capital loss shown to have been sustained on the sale of certain corporate stock. In her return the wife stated that her principal occupation was that of a housewife. She reported no income from the ham business, but reported the other one-half of the items of income from rents, dividends and interest and the capital losses from the sources above mentioned in connection with the petitioner's return. This was the first income tax return ever filed by Rose German. About the middle of 1940 partnership returns for 1938 and 1939 were filed with respect to the income of the ham business. At that time the petitioner filed unsigned amended returns for 1938 and 1939, and his wife filed an original return for 1938 and an amended return for 1939, the said returns being based on the partnership returns.
In determining the deficiency involved herein the respondent held that the petitioner and his wife were not partners in the conduct of the ham business during the taxable year and that the entire amount of the income from that business was taxable to the petitioner.
OPINION.
TURNER, Judge:
Petitioner contends that a partnership in which he and his wife were equal partners was created in 1924 for the purpose of acquiring and operating the fruit and vegetable business on Kingshighway; that this partnership also developed, built up, and has continuously operated the ham business; and that the respondent had erred in determining that the entire income from the ham business was his income instead of one-half of such income.
From the inception of the income tax there have been numerous cases in which husband and wife have claimed that the business from which the family sustenance was derived and on which the well-being of the family depended was a partnership business and the income therefrom divisible between them for income tax purposes. In most such cases, the claim of partnership has been preceded by and based upon formal written agreements of partnership, but in many of them the claim has fallen because there has been no actual participation or contribution on the part of the wife in services, capital, management, or otherwise, so as to give reality and substance to the partnership claimed. Thomas M. McIntyre, 37 B.T.A. 812; Robert S. Eaton, 27 B.T.A. 283; affd., 100 Fed.(2d) 1013; certiorari denied, 307 U.S. 636; Tinkoff v. Commissioner, 120 Fed.(2d) 564; Mead v. Commissioner, 131 Fed.(2d) 323; certiorari denied, 318 U.S. 777; Earp v. Jones, 131 Fed.(2d) 292; certiorari denied, 318 U.S. 764; Schroder v. Commissioner, 135 Fed.(2d) 346. The instant case, in some respects at least, presents a contrary picture. Here there was no formal written agreement of a partnership until after the taxable year, but the evidence does show that the ham business as it existed and was carried on during the taxable year was the result of the joint efforts of the petitioner and his wife in prior years. We would be unable to say on the record before us that the petitioner worked any harder or more effectively than his wife in the fruit and vegetable business, or in the ham business prior to the move of the latter business from their home on Lisette Avenue to the Cote Brilliante Avenue location in 1929 or 1930, and it is certainly from the fruits of those early efforts that the ham business as it existed thereafter and during the taxable year derived much of its substance.
While admitting that no written partnership agreement existed prior to January 2, 1940, the petitioner argues that execution of the writing did not mark the beginning of the partnership claimed, but was evidence of a partnership which had existed from the time of the purchase of the fruit and vegetable business in 1924, and under which that business, the delicatessen business, and the ham business were and have been conducted. We are not at all impressed, however, with any claim that petitioner or his wife had any thought or idea that they had established or were conducting a business partnership as distinguished from a marital or family enterprise, until they became tax conscious and sought and received advice from an attorney. It was then that the partnership agreement was formulated and drawn and petitioner and his wife, for the first time, began to think of the ham business in terms of separate and individual interests such as are present in the ordinary business partnership. It is true that in the course of their testimony both petitioner and his wife stated that they understood and considered that they were operating on a ‘fifty-fifty basis,‘ but on cross-examination, petitioner explained their understanding as follows:
Q: You referred to an oral agreement or understanding that you had with your wife. Just when was that reached?
A: It was reached, I guess, when we got married. We just understood that we were working together. We later bought this store and handled everything together and just kept moving up that way.
Q: What was the understanding?
A: The understanding was that she could buy, write checks, make contracts, or anything that was for the welfare of the both of us, and I would do the same thing.
Q: In other words, everything you had was hers, and vice versa?
A: Yes, sir.
Q: You didn't have any other understanding, other than this general understanding; is that correct?
A: That is right.
Max and Rose German were thinking of their relationship and interests as husband and wife, or as a family, and not as business partners would do. We think the same holds true of Rose German's father and mother when they made the $500 loan for the purchase of the fruit and vegetable business in 1924. Our question then is whether, on the facts here, the business producing the income having resulted from the joint efforts and labors of petitioner and his wife, it follows as a matter of law that the said income is divisible between them for Federal income tax purposes because of their individual rights in and to the business, whether the basis of those rights be that of partners or not.
The rationale of the respondent's argument is not too clear or definite and the factual basis for some of his conclusion not too apparent. In the main, however, the argument seems to be that the evidence fails to show ‘the amount of capital, if any, contributed by petitioner's wife to the business enterprise‘; that she contributed neither capital nor services of any substance to the enterprise as it existed in 1939; that petitioner was a absolute control of the business and ownership of the business assets was vested solely in him and the entire income was therefore taxable to him.
It is perfectly clear that the capital of the ham business came from and represented profits derived from the fruit and vegetable business, probably the delicatessen, and from prior operation of the ham business itself. If therefore it may be said that Rose German, as part earner of those profits, was the owner of a share of the profits which remained in and provided substance for the business as it existed in the taxable year, then certainly Rose German was a contributor to the capital vested and risked in the enterprise. See and compare Berkowitz v. Commissioner, 108 Fed.(2d) 319, and Richardson v. Helvering, 80 Fed.(2d) 548. And, being a contributor with her husband to the enterprise wherein they stood to win or lose together, it would appear, under Champlin v. Commissioner, 71 Fed.(2d) 23, that she would be entitled to a proportionate share of the profits.
Under the Missouri statutes a married woman may carry on and transact business and contract and be contracted with as a femme sole. Sec. 2998, p. 5055, vol. 7, Missouri Statutes, Ann. And it is well settled that she can contract with her husband with the same freedom as with others. Rice, Stix & Co. v. Sally, 176 Mo. 107; 75 S.W. 398; O'Day v. Meadows, 194 Mo. 588; 92 S.W. 637; Crenshaw v. Crenshaw, 276 Mo. 471; 208 S.W. 249. It is also provided that all real estate and personal property which may have come to a married woman during coverture ‘by gift, bequest or inheritance, or by purchase with her separate money or means, or be due as the wages of her separate labor, or has grown out of any violation of her personal rights, shall, together with all income, increase and profits thereof, be and remain her separate property and under her sole control, and shall not be liable to be taken by any process of law for the debts of her husband.‘ It is further provided, however, that the provision just quoted shall not affect the title of the husband to any personal property reduced to his possession with the express assent of his wife. This latter provision is subject to a proviso that the personal property shall not be deemed to have been reduced to the possession of the husband unless the assent of the wife, ‘in writing,‘ shall give full authority ‘to the husband to sell, encumber or otherwise dispose of the same for his own use and benefit.‘ Sec. 3003, p. 5064, vol. 7, Missouri Statutes, Ann.
While under the Missouri statutes the husband, not the wife, may recover damage due to injuries sustained through negligence of a third party to the extent that such damages are based on her inability to perform her domestic duties, Twedell v. City of St. Joseph, 167 Mo.App. 547; 152 S.W. 432, the wife, not the husband, is entitled to damages due to her inability to render services outside of her household or family duties, even though the services by which the damages are measured may have been rendered in the husband's business and without compensation. Kirkpatrick v. Metropolitan Street Railway Co., 129 Mo.App. 524; 107 S.W. 1025. For other cases in which the wife prevailed, see Hendricks v. Transit Co., 124 Mo.App. 157; 101 S.W. 675; Otto F. Stifel's Union Brewing Co. v. Carroll, 223 S.W. 732; Malone v. Harlin, 220 Mo.App. 102; 278 S.W. 806; Perrigo v. St. Louis, 185 Mo. 274; 84 S.W. 30; Rogles v. United Railways Co., 232 S.W. 93; Crump v. Walkup, 246 Mo. 266; 151 S.W. 709; and Dollins v. Robinson, 236 S.W. 1063. In Plummer v. Trost, 81 Mo. 425, where recovery was denied to the wife for services rendered by her in conjunction with her husband to a third party, it was pointed out that there was ‘nothing in the terms or circumstances of the contract to indicate an intention or purpose to concede to her the fruit of the given labor‘ and that the statute did not apply. In Farmers & Traders Bank v. Kendrick, 108 S.W.(2d) 62, another case in which the wife did not prevail, the suit was brought by a creditor of the husband to set aside, as having been without consideration and in fraud of creditors, the conveyance of the farm formerly standing in the name of the husband to himself and wife as tenants by the entirety. The wife defended on the ground that certain amounts deposited in the husband's bank account and used by him were her separate earnings and to that extent she had received only what was rightfully hers. The services upon which her claim was based were described as ‘raising chickens, raising a family, milking cows and all such as that.‘ It was shown that some $13,000 had been realized over a period of years from the sale of poultry and eggs. In denying the claim of the wife, the court said there was no testimony indicating ‘a single independent act on the part of the defendant (the indicating ‘a single independent act on the part of the defendant (the wife) indicating any intention to separate‘ the proceeds from the sale of poultry and eggs as her own.
While there is no showing in the instant case that petitioner's wife had any intention of separating her earnings in the fruit and vegetable business and later the ham business from those of her husband, it does appear that at all times she retained control equal in every respect to that of her husband over the earnings resulting from their joint efforts. From the beginning the only bank account or accounts have been joint, and while it might be argued that the primary purpose for the establishing of a joint bank account was to facilitate the conduct of the business and not to indicate ownership of the deposits therein, the joint bank accounts have been continued over the years and even after Rose German ceased to participate regularly and actively in the conduct of the business. All of the money drawn down, with the exception of the weekly allowances to the petitioner and other amounts which may have been drawn from time to time for family uses, have been drawn jointly or in equal amounts. Some of such withdrawals have been made for the purpose of buying investment property, and in each and every instance the record shows that title to the property so purchased has been taken in the joint names of the petitioner and his wife. It is apparent therefore that at no time was there any reduction to the possession of the petitioner of any part of the earnings of Rose German from the services rendered by her in the ham and predecessor businesses, such as would be required under section 3003, supra, of the Missouri Statutes, Annotated, in order to defeat her separate rights therein.
From the above, we think it follows that to the extent the earlier profits, which made up or constituted the capital of the ham business, represented the separate earnings of Rose German she was a contributor to the capital of the enterprise and to the extent the 1939 profits are attributable to the capital so contributed by her they are her profits and not those of the petitioner. It does not follow, however, that she and the petitioner were contributors to the capital of the ham business as it existed in 1939 in equal shares. From the beginning of the fruit and vegetable business until the move of the ham business to Cote Brilliante Avenue in 1929 or 1930, we think it clear that the services rendered by Rose German were equal to those of the petitioner and to the extent that the capital of the ham business as it existed in 1939 was drawn from profits realized prior to that move she was an equal contributor. After the move, however, her work in the business gradually decreased, until in 1939 she worked only in case of emergency. It does not appear that her services during the later period were on a parity with those of the petitioner, and, to the extent that the capital of the business as it existed in 1939 was drawn from those profits, she was not an equal contributor. Furthermore, the record amply shows that the profits of the ham business and its predecessor businesses were attributable not to the use of capital alone, but to a very substantial degree to the personal services rendered in connection with the management and operation of those businesses. In 1939 the bulk of such services were rendered by the petitioner, the activities of Rose German being limited to emergencies. The record does not contain the facts or figures from which the capital contributed by Rose German or the profits allocable to her may be computed or determined with an exactness, but, having concluded that she did contribute capital to the enterprise and that by reason of such contribution such services as she may have rendered some of the profits for 1939 were hers and not those of the petitioner, it is incumbent upon us to determine the extent thereof as best we may on such facts as we do have. Cohan v. Commissioner, 39 Fed.(2d) 540. Making due allowance for the fact that in 1939 Rose German devoted very little time to the business and that its management and operation in that year were almost, if not wholly, due to the services rendered by the petitioner, and bearing in mind the facts relating to the contributions to capital, it is our conclusion that an allocation of 75 percent of such profits to the petitioner and the remaining 25 percent to Rose German is reasonable and proper. We accordingly hold that the respondent erred in determining that the entire amount of income from the ham business during the year 1939, instead of 75 percent of such income, was the income of the petitioner.
Decision will be entered under Rule 50.