Opinion
Docket No. 44363.
1954-07-30
ELSIE KEIL MATHISEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Ralph B. Potts, Esq. , for the petitioner. Wilford H. Payne, Esq. , and Francis J. Butler, Esq. , for the respondent.
1. Partnership interest acquired with funds borrowed on petitioner's individual credit held, under Washington law, not to be community property but to give rise to income taxable to petitioner individually. E. C. Olson, 10 T. C. 458, followed.
2. Western Construction Co., 14 T. C. 453,affirmed per curiam(C. A. 9) 191 F. 2d 401, in which petitioner was not a party, held not to conclude petitioner's individual tax liability for the years there in issue. Ralph B. Potts, Esq., for the petitioner. Wilford H. Payne, Esq., and Francis J. Butler, Esq., for the respondent.
Deficiencies in income tax were determined against petitioner for 1943 and 1944 in the respective amounts of $9,075.02 and $281, arising by reason of respondent's conclusion that an interest in a limited partnership known as Western Construction Company was petitioner's separate property and taxable to her in full rather than as community income. Petitioner claims overpayments for both years.
Petitioner contends that the determination is incorrect on the merits, and also that the matter is no longer open by reason of our decision in Western Construction Co., 14 T. C. 453,affirmed per curiam(C. A. 9) 191 F. 2d 401. Some of the facts were stipulated.
FINDINGS OF FACT.
The stipulated facts are hereby found accordingly.
Elsie Keil and Elsie Keil Mathisen, hereinafter referred to as petitioner, are one and the same person. Petitioner is a citizen and resident of the United States, residing in Seaview, Washington. The returns for the periods here involved were filed with the collector of internal revenue for the district of Washington.
The notice of deficiency was mailed to petitioner on June 27, 1952. The taxes in controversy are income taxes for the taxable years 1943 and 1944.
Petitioner married Rudolph Keil (sometimes hereinafter referred to either as petitioner's former husband or as Rudolph) in 1935 and was married to Rudolph during the taxable years involved in this proceeding. Throughout those years they resided in Seattle, Washington.
Rudolph was a painter in 1942 and had been in that business continuously from 1927 until 1951. His salary from this work during the periods here involved was negligible.
In 1942, a limited partnership was formed under the partnership name of ‘Western Construction Company,’ hereinafter sometimes referred to as the partnership. Albin Johnson, sometimes hereinafter referred to as petitioner's father, was a general partner and two of his children, namely, petitioner and her brother Winston Johnson, sometimes hereinafter referred to as petitioner's brother, were listed as limited partners. Petitioner did not bring this partnership agreement home, nor did she remember signing it.
In April of 1942, petitioner executed a note in favor of her father in the amount of $10,000. This note was not signed by petitioner's former husband, Rudolph, nor was Rudolph asked to sign the note.
On or about May 7, 1942, petitioner's father drew a personal check in favor of petitioner in the amount of $10,000 which petitioner endorsed and immediately turned over to the partnership. This amount represented her partnership interest. The partnership deposited the check in the Seattle National Bank on May 7, 1942.
The partnership was modified by a certificate of formation of a limited partnership bearing the date of June 30, 1943. By reason of the modification of the limited partnership agreement, additional limited partners were taken into the partnership, among them being Vedola Johnson, daughter of Albin Johnson and sister of petitioner. Vedola Johnson, sometimes hereinafter referred to as petitioner's sister, executed a note made out to her father for $6,666.67, and petitioner and her brother had their former notes of $10,000 returned to them. They in turn each executed another note payable to their father in the amount of $6,666.67. This note was signed by petitioner and dated June 30, 1943. Petitioner's former husband did not sign this note.
Petitioner did not know who was present when this second note was signed, nor did she remember where it was signed. Petitioner's brother was not present when the second note was signed. Petitioner did not know if the second note had been paid, and only remembers paying interest on the note once, that being the $876.65 payment which she made by getting the money from her father.
On or about April 20, 1945, petitioner instituted an action for divorce against Rudolph in the Superior Court of the State of Washington for King County. The complaint stated that the parties had accumulated as community property household furniture for a 5-room house of the approximate value of $1,000, a 1931 Hupmobile sedan of the approximate value of $200, some war bonds of undisclosed amounts, and 3 life insurance policies. No mention was made in this complaint filed by petitioner of the partnership interest.
On June 30, 1945, petitioner and her former husband entered into a property settlement which provided in part that petitioner would have the care and custody of the couple's minor daughter and that Rudolph would pay as support money for the child $35 a month. There was, in addition, a disposition made of the property set out by petitioner in her complaint and the property settlement then provided in part as follows:
That the plaintiff has a certain Limited Partnership interest in Western Construction Company a copartnership consisting of her father, Albin Johnson, J. A. Johnson and George Johnson, and other limited partners. It is hereby specifically agreed by and between the parties hereto that the said limited partnership interest of plaintiff in said Western Construction Company shall be set over to the plaintiff as her sole and separate property, and she agrees to save the defendant harmless from any claim or claims of any kind arising out of said partnership, and particularly to save the defendant harmless from any demand or claim made upon a certain $10,000.00 note given to her father, Albin Johnson, as security for a loan, the proceeds of which were used by the plaintiff to buy her interest in said copartnership. And the plaintiff further agrees to save the defendant harmless from any claim on income tax arising out of her interest in said copartnership. No mention was made in this property settlement of the note in the face amount of $6,666.67 which petitioner had given to her father.
On August 28, 1945, petitioner was granted an interlocutory decree of divorce by an order entered in the Superior Court of the State of Washington for King County. Petitioner's former husband did not appear and had been, before this, adjudged in default for lack of appearance. On March 19, 1946, a final decree of divorce was granted to petitioner.
There were no profits credited to the accounts of the limited partners and no withdrawals by them until after the close of the taxable year ending December 31, 1942. Rudolph Keil did not withdraw any amounts from the partnership during the years in controversy or at any other time, nor did he ever try to get any money from the partnership. Rudolph only knew of two times that petitioner got money from the partnership. One time he knew she had received money to go to Canada with two girl friends and another time she had received money to get her teeth fixed.
Rudolph Keil and petitioner filed separate returns of income for the years 1943 and 1944, in which the income from the limited partnership was divided and one-half reported by each of said Keils.
Petitioner withdrew numerous amounts from the partnership during the taxable years in controversy.
Rudolph learned of petitioner's interest in the partnership from her when she got her interest. She had told him that she received shares from the company and that she might get a little money out of it. He was not, however, consulted, nor did he see either the first partnership agreement or any of the publications in the newspaper concerning said partnership. It was Rudolph's understanding that petitioner's father gave her the shares. He neither resisted nor assisted petitioner in getting her interest in the partnership.
Although petitioner's former husband knew about her interest in the partnership he did not know that she had signed a note for $10,000, nor did he have any discussions with her at the time of the signing of either the first or the second notes. Rudolph did not know that the second note for $6,666.67 existed.
Rudolph first found out about a note in 1945 by accident. This was the first that Rudolph knew about a note being signed since he them mentioned it to petitioner and was informed by her that she had signed a note and had received $876.65 from her father to pay the interest thereon. Rudolph never knew about the second note until being so informed at the hearing of this case.
Respondent, some time prior to March 22, 1950, made deficiency determinations against the three general partners, J. A. Johnson, George Johnson and their wives, and Albin Johnson, and also Lloyd Johnson and Roberta M. Johnson, his wife, which proceedings were consolidated for hearing and heard before the Tax Court of the United States which promulgated a decision on March 22, 1950. Said decision and Findings of Fact are reported in volume 14 of the Tax Court Reports, beginning on page 453.
Petitioner's partnership interest was her separate property.
OPINION.
OPPER, Judge:
It cannot be questioned that petitioner was not, in terms, a party to the Western Construction Co. case
upon which she relies for her plea of res judicata or estoppel by judgment. Identity of parties is a prerequisite to the success of that contention. American Range Lines Inc., 17 T. C. 764, affirmed on this issue (C. A. 2) 200 F. 2d 844. Nor can she have been in privity with her father or any other individual party to the litigation, since her interest was not derived from him or anyone else on her own version of the facts. The remaining ground urged is that this was class litigation and, her interests being affected, she was in substance a party. 30 Am. Jur. 957, 962, 963. But there were two issues in the Western Construction Co. proceeding.
14 T. C. 453, affirmed per curiam (C. A. 9) 191 F. 2d 401.
The first, a claim by respondent that it was an association taxable as a corporation did, indeed, indirectly affect her, though the decision in any event was conclusive as to her interests only by derivation, as a stockholder's fortunes are identified with those of his corporation. See American Range Lines, Inc., supra. But the second issue bound her not at all. Only the general partners who were there charged with the entire income of the venture, could have lost—or won—as a consequence of the litigation. The tax liabilities there in question, did not include that of petitioner for any year, even indirectly.
‘Petitioner Western Construction Co. was created as a limited partnership under the laws of the State of Washington in 1942 and again in 1943. The certificate of formation of the partnership included petitioners J. A., George, and Albin Johnson as the general partners and their several adult sons and daughters as the limited partners. Held, on the evidence, petitioner Western Construction Co. does not resemble an association in corporate form and is, therefore, not taxable as such ( Glensder Textile Co., 46 B. T. A. 176, followed); held, further, the Western Construction Co. is a bona fide partnership composed of the three Johnson brothers and their several children as set out in the certificate of formation of the partnership and is recognized as such for tax purposes ( John A. Morris, 13 T. C. 1020, folowed).’ (Headnote, Western Construction Co., supra.)
We cannot dee how she was a member of a ‘class' involved in the proceeding, and thus a party herself. Even her property rights, as distinguished from her tax liability, were not affected, so much as indirectly. Her father could have been held taxable in spite of her legal right to the income. Commissioner v. Tower, 327 U. S. 280; Lusthaus v. Commissioner, 327 U. S. 293.
Petitioner's claims of overpayment are in essence a recognition that petitioner's individual tax liability was not determined in the prior proceeding but is in issue here.
We agree with petitioner that if any principle of repose applies, it would presumably be that of res judicata, rather than mere collateral estoppel. Unlike most cases in this field, see, e. g., Tait v. Western Maryland Ry. Co., 289 U. S. 620, and Commissioner v. Sunnen, 333 U. S. 591, the years involved in the prior litigation, and those presently in controversy are the same. But the issues were, nevertheless, different because, as we have said, petitioner's individual tax liability was not there litigated, nor could it have been. No deficiency determined against her was being contested. Secs. 271, 272, I. R. C.
This is more like a restatement of the conclusion previously arrived at that petitioner was not a party directly or by privity. In the tax field this would ordinarily require privity by title or estate, or, as in the case of a transferee, by identity of taxable status. See, e. g., First National Bank of Chicago v. Commissioner, (C. A. 7) 112 F. 2d 260, certiorari denied 311 U. S. 691. And it is unfortunate that respondent chooses not to argue the point but only to preserve it. He says merely:
Because it has been shown by the respondent that the doctrines of res judicata or collateral estoppel do not apply to this proceeding—since the issues here involved are so obviously different—no time has been devoted in this brief to the question of whether petitioner was a party or in privy to the first proceeding, but the respondent here submits that this question is not without doubt and for that reason it is by no means conceded. See, American Range Lines, Inc. (1951) 17 T. C. 764, modified (C. A. 2d, 1952) 200 F. 2d 844, * * * [Respondent's brief, p. 30.]
Nevertheless, it was in connection with the second, or partnership, issue that the findings were made upon which petitioner seeks to invoke the plea of res judicata. And they are too general to be helpful, especially if it is merely an estoppel by judgment upon which she relies. The statements as quoted in petitioner's brief are:
While none of the husbands of the Johnson daughters signed any of these notes given to the general partners, generally speaking the notes were signed by the wives with the knowledge and consent of their husbands.
Though the sons-in-law did not sign the notes, they treated these obligations as resting on their community property.
* * * * * * *
The partnership profits were regarded by all of the limited partners and their spouses as community property and in the filing of their returns for the years 1942 to 1945, inclusive, such profits were divided in the returns of the spouses on a community property basis the same as other income.
* * * * * * *
Partnership checks representing distribution of profits were sometimes made out to the limited partners and sometimes to the spouses of the limited partners, depending upon which one requested the money. It was regarded as a family business and no distinction was made as between limited partners or his or her spouse when it came to distributing the profits. [Petitioner's brief, pp. 9, 10.]
It seems manifest that if these findings were material at all, it could only be connection with the second issue—that of the liability of the general partners for tax on all the partnership income. As to this issue, we have already noted that petitioner—and hence respondent here—was not bound even indirectly. It matters not therefore whether we conclude that res judicata is not applicable because petitioner was not a party to the prior litigation, or that collateral estoppel cannot be invoked because, the claim being different, no facts pertinent here were actually litigated and decided. See The Evergreens v. Nunan, (C. A. 2) 141 F. 2d 927, certiorari denied 323 U. S. 720. In either event, the present question is still open, in our opinion, for decision now.
On the merits, the law of the State of Washington, in which the marital community existed, prohibits the wife from obligating the credit of the community under such circumstances as this. Wilbeck v. Conway, 141 Wash. 250, 251 Pac. 282. When she alone signed and delivered to her father the original $10,000 note which furnished her with the funds to buy her partnership interest it could purchase only her separate property. Unless, as she contends, the note became a community obligation by reason of the acquiescence, acknowledgment, or ratification of her husband, the situation would accordingly appear to be governed by E. C. Olson, 10 T. C. 458.
There, ‘The respondent contends * * * that the funds used to purchase the * * * [partnership interest] were borrowed on the separate credit of petitioner and were his separate funds; and that petitioner's share of the profit * * * was his separate income.’ In spite of the fact that ‘The courts of the State of Washington have uniformly held that money borrowed by a husband is presumed to be community property and that the property acquired with such borrowed money is presumed to be community property’ (emphasis added) we there held that respondent's determination ‘that the borrowed money and the property acquired were the separate property of petitioner * * * ‘effectually overcomes the ordinary presumptions of law and the petitioners continue to have the duty of going forward with their proof. * * *’'
That it was the wife who borrowed the money in this proceeding makes the present case even stronger. And if her inability to pledge the community credit without her husband's consent does not overcome the presumption of Washington law that property acquired during marriage is ordinarily community property, see Stephens v. Nelson, 37 Wash. 2d 31, 221 P. 2d 520, clearly respondent's determination must do so.
This brings us to the controverted factual issue as to whether petitioner's husband, now divorced, did in fact consent to or ratify the borrowing. Our findings dispose of that question.
They are based on an effort to reconcile the testimony of all witnesses on both sides, who, we assume, were each attempting to give his best recollection of his version of the occurrences. The conflict seems to arise primarily because of a failure to distinguish between petitioner's acquisition of an interest in the partnership on the one hand and her liability on the notes on the other. Of the first, we think the husband was made aware at some time near the actual event. As to the second, we accept his statement that he learned of the first note only by accident and of the subsequent one not at all; and that he was accordingly never asked, nor given occasion, to agree to or ratify any pledging of the credit of the community. That there was some failure even to keep him informed of the transactions is conclusively apparent from the reference in the property settlement of June 1945 to ‘a certain $10,000 note given to * * * Albin Johnson’ which, at the time, no longer existed and had been extinguished exactly 2 years earlier; whereas it is stipulated that no reference was made to the note for $6,666.67 which was the only one then in effect.
We have accordingly found that petitioner's ex-husband did not know of either note at the time each existed and that the partnership interest was consequently petitioner's separate property. The income was not community income. ‘On the contrary * * * [the evidence] indicates that petitioner borrowed the * * * [money], that any notes given were * * * [her] personal notes * * * Under the circumstances, our conclusion is that the petitioner invested * * * [her] separate funds * * *; that it [the property] became * * * [her] separate property and that of * * * [her] partners; and that * * * [her] distributable share of the profit * * * is * * * [her] separate income and taxable as such.’ E. C. Olson, supra, 464, 465.
Decision will be entered for the respondent.