Opinion
Docket No. 21199.
1949-11-14
ZYGMUNT MATUSZEWSKI, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Carleton H. McIntyre, Esq., and Albert L. Lieberman, Esq., for the petitioner. Norment Custis, Esq., for the respondent.
Held, a bona fide partnership between petitioner and his wife existed during the year previous to the execution of a formal written agreement. Carleton H. McIntyre, Esq., and Albert L. Lieberman, Esq., for the petitioner. Norment Custis, Esq., for the respondent.
The respondent determined deficiencies in income tax of the petitioner of $16,371.94 and $9,208.66 for the years 1944 and 1945, respectively. The sole issue arises from the holding by respondent that the income of the business operated under the name of Paradise Foods Co. did not constitute partnership income and was, therefore, all taxable to petitioner.
The respondent on brief concedes that:
Adequate testimony was presented at the trial from which the Court may make a finding of fact that the services of petitioner's wife to the Paradise Food Company were vital and necessary throughout the tax years involved in this proceeding. Also, adequate testimony was presented as to the contribution (by the wife) of original capital and additional contribution of capital to the business in certain taxable years.
The respondent also concedes that a partnership agreement was entered into between the husband and wife under date of December 28, 1944, and that
* * * there was adequate testimony that thereafter petitioner and his wife conducted the business of the Paradise Food Company as partners. Therefore, respondent also concedes that petitioner and his wife were partners for the taxable year ended December 31, 1945.
Respondent also states that ‘The issue raised by petitioner and not conceded by respondent may be summarized as set forth below under the heading 'Question Presented.’‘ Respondent thereafter states the issue as follows:
Did respondent err in determining that the Paradise Food Company was not a bona fide partnership between petitioner and his wife during the taxable year ended December 31, 1944, and, therefore, petitioner is taxable upon all of its net income for that year?
By the above concessions respondent has narrowed the issue to the single question of whether there was, in the taxable year 1944, an intention on the part of petitioner and his wife that the business be operated as a partnership.
FINDINGS OF FACT.
The business of the Paradise Food Co. was begun in the year 1938 in Dearborn, Michigan, and it was engaged in the manufacture, repackaging, sale, and distribution of potato chips, pickles, mustard, pretzels, and related merchandise. Previous to the organization of the company, petitioner had been engaged as a truck driver and local distributor for similar products of another company, in which capacity he derived his income from commissions paid on the sale of the several products. At that time his wife Sally was also employed by the same company.
Because of a difference of opinion with his company, petitioner in 1938 discussed with his wife the possibility of severing his connection and starting a similar enterprise for themselves. After the discussion, petitioner said to his wife Sally, ‘We are starting in business.‘ At this time Sally agreed that she would do the inside work if petitioner could get the merchandise and sell it. During the same afternoon they rented a store room where their operations could be carried on, procured the necessary potato chips from another manufacturer, bags in which to pack the chips, and labels for the same, and, with no interruption in petitioner's business of distributing such products, launched their business.
In the beginning Sally had entire charge of all inside operations, without help. She did everything except sell and deliver the merchandise. She kept the records, paid the bills, ordered and packaged the merchandise, etc. As the business grew, petitioner and Sally decided to employ a driver-salesman to carry on the established route in order that petitioner might build up another route. They hired a new driver and purchased another truck. Business continued to grow and larger quarters and more personnel were needed. The division of labor continued between them at all times and Sally continued to have charge of all inside activity and petitioner continued to work on a truck. When they added equipment to manufacture their own potato chips (their principal product), Sally supervised the entire process of manufacture and physically took the place of any employee who might be absent, sometimes for weeks at a time.
On January 20, 1941, while petitioner was on his route, an explosion occurred in the basement of the building occupied by them on Michigan Avenue, which explosion destroyed their entire stock of merchandise and apparently put them out of business. With funds obtained partly by personal solicitation by Sally from members of her family, and from other sources, they rented a building on Vernor Highway and again began operations.
At Sally's suggestion and urging, in 1942 they purchased an automatic potato chip manufacturing machine which transformed, by successive steps, the raw potato into packaged chips ready for distribution to customers. To procure the down payment on the machine, they sold their home, which was jointly held. The use of this machine decreased operating costs, increased production, and resulted in substantial increases in income and profits.
Previous to 1942 a husband and wife could not be partners in business under the Michigan law. Petitioner and his wife were both aware of this disability, which was removed in 1942. Thereafter, at various times between 1942 and 1944 the matter of a written partnership agreement was discussed with petitioner's counsel. The agreement was finally signed on December 28, 1944. After the execution of the written partnership agreement, the parties continued to operate the business precisely as they had done theretofore, each giving full time to the enterprise and both participating in the control and management of the business. They had a housekeeper, who looked after their children and performed the household tasks.
As money was necessary at various times, both parties participated in the procuring of the same. Sally borrowed various sums from her brothers, giving her own personal note without the participation of petitioner, whereas in other transactions, both joined in executing the notes and giving a mortgage on their home, which was, as above stated, later sold in order to raise the initial payment on the automatic potato chip machine. All obligations were paid off by money earned in the business.
Neither petitioner nor Sally at any time drew down profits, as such, from the business, all the profits being used to expand the business. They paid, by drawing on the business as necessary, all household and living expenses. All real estate was held in their joint names. From the beginning of their married life everything had been on the basis of equal sharing between them.
In the beginning a bank account was opened in petitioner's name, but Sally had a power of attorney to draw on the same. At the time the written agreement was made, a joint account was opened for the business. Previous to this time they also had a joint savings account.
For the years 1939, 1940, and 1941 the business showed income of $3,004.14, $4,100.20, and $2,454.24, respectively. For the year 1942 it showed a loss of $418.33. For all of these years the income was reported by petitioner. In 1943 the business showed an income of $13,860.77, and was returned by petitioner and his wife. For 1944 the business showed a profit of $50,192.25 and a partnership return was filed showing petitioner and Sally Matuszewski as the partners. The profits for 1945 were also reported by the partnership. In 1946, on the advice of petitioner's attorney and accountant, the business was incorporated.
During the taxable year 1942 and prior to the formal signing of the partnership agreement, there was between petitioner and his wife, Sally, an implicit agreement of partnership in the business.
OPINION.
VAN FOSSAN, Judge:
In Commissioner v. Culbertson, 337 U.S. 733, the Chief Justice stated:
If, upon a consideration of all the facts, it is found that the partners joined together in good faith to conduct a business, having agreed that the services or capital to be contributed presently by each is of such value to the partnership that the contributor should participate in the distribution of profits, that is sufficient.
The Chief Justice also quoted from the Tower case, 327 U.S. 280, and stated that the question whether the family partnership is real for income tax purposes depends upon:
* * * whether the partners really and truly intended to join together for the purpose of carrying on the business and sharing in the profits and losses or both. And their intention in this respect is a question of fact, to be determined from testimony disclosed by their ‘agreement, considered as a whole, and by their conduct in execution of its provisions.‘
In the course of the cross-examination of the petitioner by Government counsel, the following colloquy occurred:
Q. What effect did the partnership agreement have, in your mind; did you honestly and sincerely believe that you were partners before you signed the agreement?
A. Yes.
Q. Why did you sign the agreement?
A. To show, according to the law, what the law required us to do.
Q. Who told you the law required you to have an agreement?
A. Our attorney.
Q. When did he tell you that?
A. It started way back in 1942, sometime.
Q. But you didn't decide to fulfill that requirement until the year 1944, when your profit was in excess of $50,000?
A. No. We started that before our profit was $50,000, and our profit came from the machine that we purchased and from the home that we have sold to purchase that machine. That is where our profit had come from.
On the basis of the facts, which inadequately portray the picture, we entertain no doubt that petitioner and his wife Sally were engaged in a joint enterprise from the very beginning of the operation of Paradise Food Co. We use the word ‘inadequately‘ because it is impossible to recreate the impressions gleaned in hearing the evidence. The testimony of the petitioner and Sally was frank, convincing, and profoundly moving. We entertain not the slightest doubt about the sincerity of their belief that they were partners in fact. Nor have we a doubt that from the first they ‘really and truly intended to join together for the purpose of carrying on the business and sharing in the profits and losses or both.‘ This was just as true in 1943 and 1944 as it was after the written agreement was entered into. This was not merely a ‘domestic partnership.‘ It was a valid business partnership.
To quote again the phraseology employed by the Supreme Court in the Culbertson case, supra, we conclude ‘upon a consideration of all the facts, * * * that the partners joined together in good faith to conduct a business, having agreed that the services or capital to be contributed presently by each (was) of such value to the partnership that the contributor should participate in the distribution of profits * * * .‘
Under the principles enunciated by the Supreme Court and on the well proven facts, we find for the petitioner on the only issue submitted. This case is readily distinguishable on the facts from H. V. Funai, 13 T.C. 696.
Reviewed by the Court.
Decision will be entered under Rule 50.