Singletary v. Commissioner

Lewis Hall Singletary, Petitioner, v. Commissioner of Internal Revenue, Respondent Singletary v. Commissioner Docket No. 5090 United States Tax Court 5 T.C. 365; 1945 U.S. Tax Ct. LEXIS 130; June 30, 1945, Promulgated *130 Decision will be entered for the respondent. Petitioner, from 1936 to 1939, operated a chain of filling stations under a trade name. In 1939 he executed an instrument purporting to transfer to his wife, in consideration of love and affection, an undivided one-half interest in the personal property, personal assets, and good will of the business and agreeing that thenceforth they should engage in the business as partners. The wife brought in no new capital and contributed no services, and the business was thereafter carried on as it had been carried on previously. Bookkeeping entries were made crediting one-half of the profits to petitioner and one-half to his wife; but most of the amount credited to the wife remained in the business. Early in 1941 petitioner's father and mother delivered a note to petitioner and his wife for $ 20,000, in consideration of which the latter two executed an instrument purporting to convey to each of the former a one-quarter interest in the business. Thereafter articles of partnership were signed by the four. The father and mother contributed no additional capital and rendered no services, and the business was carried on as before. Bookkeeping*131 entries were made crediting one-fourth of the earnings to each of the four, but most of the earnings credited to the father and mother were left in the business and credited on the note. Petitioner had made an arrangement with his parents under which their interest in the property was to be left by will to petitioner to the exclusion of his brothers and sisters. Held, under the facts, showing has not been made that the several individuals were, in 1940 and 1941, engaged in carrying on business in partnership, and the Commissioner did not err in including the earnings of the business in petitioner's gross income. S. P. Cain, Esq., for the petitioner. Edward L. Potter, Esq., for the respondent. Mellott, Judge. Black and Tyson, JJ., dissent. Leech, J., dissenting. Arundell, Van Fossan, and Disney, JJ., agree with this dissent. MELLOTT *365 The Commissioner determined deficiencies in petitioner's income tax for the years 1940 and 1941 in the respective amounts of $ 2,879.86 and $ 13,737.43. The only adjustment in issue is the inclusion in gross income of all the net income from a business conducted under the name of Sing Oil Co. In the petition it*132 is alleged that there was a bona fide partnership between petitioner and his wife during the year 1940 and that they correctly divided the income, 50 percent to each. It is further alleged that there was a bona fide partnership in 1941 composed of petitioner, his wife, his father, and his mother, the income of which was includible in the gross income of each of the partners in the proportion of 25 percent to each. *366 FINDINGS OF FACT. Petitioner is a resident of Pelham, Mitchell County, Georgia, and filed his returns for the taxable years with the collector of internal revenue for the Georgia district. Petitioner and his wife were married in 1929. Before their marriage the wife had worked as a teacher and secretary. She continued to work a portion of the time after their marriage. They kept a joint bank account and the money earned by each was deposited therein and both drew checks against it. In May of 1936 they had between $ 350 and $ 400 in this account and in addition thereto owned their home, all of which was from their joint efforts. At that time they were the parents of one child. Petitioner was working on a salary and in 1936 decided to go into business for himself. *133 He opened up a retail filling station in Pelham. The funds used to acquire the business consisted of the $ 350 or $ 400 in the joint bank account and $ 1,000 borrowed on a note endorsed by his father. The business grew, other stations being added. Petitioner's wife assisted in the office work, looked after collections, and kept the records for something like three years. The expected arrival of a baby caused her to discontinue the work and since 1939 she has worked only intermittently. Petitioner had adopted Sing Oil Co. as a trade name, under which the business was being carried on. He was also interested in a corporation having the same name which was being operated in North Carolina. By January 1, 1939, he owned eleven filling stations and a wholesale business supplying them with gas, oil and lubricants. On January 1, 1939, he and his wife, in the presence of a notary public, executed a document reading as follows: I, L. H. Singletary, in consideration of love and affection hereby bargain, sell, grant, convey, transfer and deliver unto my wife, Mildred Singletary, her heirs and assigns an undivided one-half interest in and to all the personal property and personal assets, *134 including good will, of every nature and kind, wherever the same may be, and in whatsoever form or condition had and used by me individually trading as Sing Oil Company in connection with the buying and selling of gasoline, kerosene, lubricating oils, and automobile accessories at wholesale and retail and the general operation of service stations, including leases, service station equipment and stock located at the following places, to-wit: Ft. Valley, Camilla, Cuthbert, Doerun, Edison, Meigs, Newton, Pelham, Poulan, and Sylvester, Georgia, as well as all trucks, vehicles and other equipment used in the operation of my business under the name and style of Sing Oil Company, only saving and excepting therefrom, however, my stock in Sing Oil Company of North Carolina, Incorporated, as well as my interest in any and all partnerships with other persons, trading as Sing Oil Company -- it being my intention to give my said wife an undivided one-half interest and to convey title hereby in all of my assets, good will, and other property of every name and nature wheresoever located, including all contracts, obligations and everything in any way pertaining to the business heretofore conducted*135 by me individually under the name and style of Sing Oil Company, except as above stated. *367 And I do for myself, my heirs, executors, administrators and assigns covenant to and with Mildred Singletary, her heirs, executors, administrators and assigns to warrant and defend the title to said property before mentioned, against the lawful claim or claims of any and all persons whomsoever. And the said L. H. Singletary and Mildred Singletary hereby agree that they will become and be partners under the firm name of Sing Oil Company to engage in the buying and selling of gasoline, kerosene, lubricating oils and automobile accessories at wholesale and retail and the general operation of service stations heretofore engaged in by said L. H. Singletary, individually, beginning on this date and lasting until in some way dissolved. Both partners hereto are to give their entire time to the business, except Mrs. Mildred Singletary, who will be financial and credit advisor for the firm and who will give such time to the business as she may see fit. The profits of said business shall from time to time be equally divided between said partners, share and share alike, and the loss shall likewise*136 be equally borne by said partners. In Witness Whereof, both of the partners hereto have hereunto signed their names on this the 3rd day of January, 1939. The filling stations had been purchased from the profits of the business. They were operated on a commission basis. Petitioner supplied the oil, gas, and lubricants and transported it to the various stations in trucks. A gift tax return was filed by petitioner and the gift tax shown to be due was paid. After January 1, 1939, petitioner and his wife kept separate bank accounts in which their individual funds were deposited. They filed returns for 1939 in which the income of each was shown. The returns were examined by representatives of the Treasury Department, but no deficiencies in tax were determined. The net income of the business for 1940 was shown by the information return (Form 1065) to be $ 22,386.38. One-half of this amount was included in the gross income of petitioner and a like amount was included in the income of his wife. Petitioner's wife withdrew no funds in 1940 and the actual withdrawals made by her in 1939, if any, have not been shown. An analysis of her account on the books of the business (Exhibit 9) is*137 as follows: Date Items Debit Credit [1940] Sept. 10 Check to Int. Rev. Com $ 287.59 Dec. 10 Check to Int. Rev. Com 173.32 Dec. 31 Cr. by distribution of profits, 1939-1940 $ 24,140.61 460.91 Credit balance 23,679.70 24,140.61 24,140.61 On January 1, 1941, petitioner and his wife executed an instrument reading as follows: In Consideration of the sum of $ 20,000.00 to us in hand paid, we, Lewis Hall Singletary and Mildred S. Singletary, hereby sell to B. E. Singletary and Lela *368 Pilcher Singletary a one-half interest in the business and physical assets of the Sing Oil Company as heretofore operated by us in the State of Georgia, consisting of one wholesale station at Pelham and thirteen retail service stations located respectively at Ashburn, Camilla, Cordele, Cuthbert, Doerun, Edison, Meigs, Nashville, Newton, Pelham, Poulan, Rochelle and Sylvester, leaving each of us and making each of them the owner of a one-fourth interest in the assets and future business of the said Company. Articles of partnership for the reorganization of said Company and for its continued operation shall be drawn up and executed by all four of the co-partners hereby created. *138 The prior partnership between the undersigned grantors with respect to the said property is hereby dissolved. Executed in quadruplicate, so that each party hereto may have an original hereof. This the 1st day of January, 1941. B. E. Singletary and Lela Pilcher Singletary, named in the above instrument, were the father and mother, respectively, of petitioner. A promissory note payable one year after date in the amount of $ 20,000 was executed by petitioner's father and mother on or about January 1, 1941. On the same date petitioner's father and mother executed a document entitled "Retention of Title with Bill of Sale as Security." Therein it was stated that they had given a note for $ 20,000 in purchase of a half interest in the physical assets and future business of the Sing Oil Co. and that in order to secure the payment of the debt it was expressly agreed that the title to the property should remain in the vendor until the debt should be fully paid. The note bears a notation indicating it was paid in full September 30, 1944. In addition to the documents referred to above petitioner was given a security deed by his father to lands owned by him having an approximate value of $ *139 8,000. At an undisclosed time, but as of January 1, 1941, articles of partnership were signed by petitioner, his wife, his father, and his mother. Therein it was stated that each of the parties owned a one-fourth interest in the property heretofore set out. Articles 2, 3, 4 and 5 of this document are as follows: Article 2. This partnership agreement shall continue of force as long as it is found to be mutually satisfactory. Dissolution shall not result from the death of any party hereto; but in the event of the death of any of the parties hereto, or in the event of their voluntary withdrawal from this partnership, then the surviving or remaining partners shall have the right to take over the interest of such deceased or withdrawn partners, and shall thereupon become liable to such withdrawn partner or to the legal representative of such deceased partner for only one-fourth of the book value of the Company's physical assets (which represents the cost thereof, less deductions for depreciation) as shown by the Company's books, no allowance being made for good will. The surviving or remaining partners shall continue to carry on the same business in the same name as long as they find*140 it mutually satisfactory, subject to the same provisions as to the death or withdrawal of a partner. *369 Article 3. Until otherwise directed by this Company, the said Lewis Hall Singletary shall be its General Manager, and shall have full power and authority to enter into any contract for and in the name of this Company which the Company itself has the power and right to make. For his services as such General Manager, he shall be paid the salary of $ 125.00 per month or $ 1,500.00 per annum, until and unless a different rate of compensation is hereafter mutually agreed upon. Article 4. The net income of this Company shall be divided equally between the four parties hereto, one-fourth to each. But there shall be no division until all expenses of every kind and character, including taxes and the necessary traveling expenses of said General Manager, are fully paid or a cash reserve ascertained to be amply sufficient to meet the same is set apart and retained for that purpose. Should the income be insufficient to pay such taxes and expenses as the same become payable from time to time, then each party hereto shall contribute his or her pro rata part to the payment of the same*141 or pay one-fourth of the ascertained amount to this Company for that use and purpose. Article 5. The General Manager shall employ the other members of this firm to perform all such needed services as may from time to time be deemed necessary or proper and within their respective capabilities, in preference to any outsider, the amount of their compensation to be agreed upon at the time of the employment or after the service is rendered. The business continued to be operated under the trade name "Sing Oil Co." The information return (Form 1065) for the calendar year 1941 disclosed a net income of $ 36,988.49, one-fourth of which, or $ 9,247.12, was indicated to be distributable to each of the four -- i. e., petitioner, his wife, his father, and his mother. An analysis of the accounts of the parties other than petitioner is shown in the following schedules: Wife -- Mildred S. Singletary Date Items Dr. Cr. [1941] Jan. 1 Balance $ 23,679.70 Mar. 15 Check Int. Rev. Com. Ga $ 121.33 Mar. 15 Check Int. Rev. Com 234.60 June 15 Check Int. Rev. Com. Ga 121.33 June 15 Check Int. Rev. Com 234.60 Sept. 15 Check Int. Rev. Com 234.61 Sept. 1 Check Int. Rev. Com 39.69 Dec. 10 Check Int. Rev. Com 234.60 Dec. 28 Check to Mildred S. Singletary 2,400.00 Dec. 30 Cr. by adjusting J. E. 240.98 Dec. 31 Cr. 1/2 int. pd. by Mr. and Mrs. B. E. Singletary 400.00 Cr. by distribution 1941 profits 9,020.62 Adjustments P/L Nashville 45.22 * 3,787.31 Credit balance 29,553.99 33,341.30 33,341.30 *142 *370 Father -- B. E. Singletary [1941] Nov. 7 By check $ 200.00 Dec. 28 By check 825.00 Dec. 31 Dr. 1/2 int. on $ 20,000 note for one year 400.00 Cr. by 1941 profit distribution $ 9,020.62 1,425.00 Credit balance 7,595.62 9,020.62 9,020.62 Mother -- Mrs. B. E. Singletary [1941] Dec. 28 By check $ 700.00 Dec. 31 By 1/2 int. on $ 20,000 note to date 400.00 Cr. by 1941 profit dist $ 9,020.58 1,100.00 Credit balance 7,920.58 9,020.58 9,020.58 The note for $ 20,000 which had been given by petitioner's father and mother was paid from the shares of the net profits of the business credited to their accounts. They used funds from no other source for this purpose. At the time the transactions among petitioner, his wife, and his parents occurred in January 1941 the mother also owned a one-half interest in a partnership business at Vienna, Georgia, which she had acquired from petitioner, and real estate of the value of $ 6,000. Petitioner's wife, at the date of the trial, owned a one-half interest in an oil business in Quincy, Florida, with a brother-in-law, and a *143 one-half interest in a farm owned jointly with her husband, which is located in Thomas County, Georgia, both having been purchased by her with part of her profits from the partnership business in 1940 and 1941. The details of the purchase and payments have not been shown. The analysis of the wife's account, received in evidence as petitioner's Exhibit 9, indicates that an adjusting entry was made upon the books of the business in January 1943 charging her with one-half of the purchase price of the farm and crediting an equal amount to petitioner's account. At the time that petitioner's father signed the various documents referred to above he promised to leave his interest in the partnership business by will to petitioner -- the father had seven other children -- and petitioner agreed to take out life insurance on himself, payable to his father and mother. After the articles of partnership were signed by petitioner, his wife, his father, and his mother each of the partners had the right to draw checks on the partnership funds, but did not do so, as all checks were drawn by the office force. *371 The Commissioner added to the net income shown by petitioner's returns for 1940 and*144 1941 amounts equivalent to the difference between the portion of the income from Sing Oil Co. reported by him and the total income from the business. Other adjustments made by him are not questioned. OPINION. The facts are not seriously in dispute. Do they show that petitioner and his wife were "carrying on business in partnership" (sec. 181, I. R. C.) during 1940 and that he, his wife, and his parents were doing so in 1941? That is the sole question. Many cases have been decided recently involving claimed family partnerships. (See, e. g., the majority, concurring, and dissenting opinions in Camiel Thorrez, 5 T. C. 60; Jacob DeKorse, 5 T. C. 94; Hodgson v. Willingham, Fed. Supp. (May 17, 1945). Cf. Lusthaus v. Commissioner, 149 Fed. (2d) 232; M. M. Argo, 3 T. C. 1120; affd., 150 Fed. (2d) 67 (C. C. A., 5th Cir.); and Tower v. Commissioner, 148 Fed. (2d) 388. Petitioner cites some earlier cases which support his contention that the income was correctly reported by him and his *145 relatives. Walter W. Moyer, 35 B. T. A. 1155; Richard H. Oakley, 24 B. T. A. 1082; B. M. Phelps, 13 B. T. A. 1248; Robert B. Scherer, 3 T. C. 776; J. D. Johnston, 3 T. C. 799; M. W. Smith, Jr., 3 T. C. 894, and others. Respondent cites Burnet v. Leininger, 285 U.S. 136; Corliss v. Bowers, 281 U.S. 376; Lucas v. Earl, 281 U.S. 111; Gregory v. Helvering, 293 U.S. 465; Griffiths v. Helvering, 308 U.S. 355; Helvering v. Clifford, 309 U.S. 331; Helvering v. Horst, 311 U.S. 112; Higgins v. Smith, 308 U.S. 473, and others, some of which dealt with pure shams, some with an unrealistic approach to the practical problems of taxation, attributing the fruits to a tree other than that on which grown, and some so lacking in substance that*146 the act causing the difficulty was ignored. In the present state of the development of the law on the subject we must analyze the facts, apply the usual presumption of correctness to the respondent's determination, and ascertain whether the petitioner's evidence has been sufficient to establish that it was erroneous. Petitioner and his wife both testified that tax saving had not animated him -- and them -- in the making of the gifts. We accept the evidence as true; but motive is neutral. Testimony was also adduced indicating that petitioner felt impelled to make each gift by fairness to the respective recipients -- in the case of the wife in recognition of the fact that she had aided, financially and otherwise, in the establishment of the business, and in the case of the father because he had signed a note, thereby aiding petitioner in securing essential credit. We would not discount a laudable show of gratitude; but, as we view *372 it, the essential determination is more fundamental -- was there a real carrying on of business in partnership? First, the alleged partnership with the wife. The document shown in our findings, executed by petitioner "in consideration of love*147 and affection" and also signed by his wife, together with the treatment of the income as reflected in the transcripts of account introduced in evidence, the returns and some brief testimony to the effect that the parties had used some of the income for the purchase of a farm, constitute substantially all of the evidence adduced. The document purports to be both a deed of gift and a partnership agreement. Borrowing the language of Justice Douglas in the Clifford case, supra, it is difficult to believe that petitioner felt himself to be any the poorer after it was executed or, if he did, that it had any rational foundation in fact. The earnings -- exclusive of a nominal amount used to pay the wife's income tax -- remained in the business throughout the two years presently in issue, with the sole exception of $ 2,400 withdrawn by the wife at the end of the second year. After these withdrawals there remained in the business a credit balance of almost $ 30,000 representing her alleged share of the earnings. The wife brought in no new capital and contributed no services. The agreement to the effect that "both * * * are to give their entire time to the business" is rendered*148 innocuous by the exception immediately following. The business was carried on precisely the same after the document was executed as it had been carried on before. Moreover it is not at all clear that the business was not largely personal in its nature, where capital was only incidental. Cf. Doll v. Commissioner, 149 Fed. (2d) 239. In any event the evidence falls far short of convincing us that the respondent erred in determining that the 1940 income from the business conducted under the firm name of Sing Oil Co. was taxable in its entirety to petitioner. The evidence involving the creation of the alleged partnership for 1941, in which petitioner's father and mother were included, is equally tenuous. The father and mother both testified. It was obvious, however, that neither seriously considered himself to be carrying on a business in partnership with petitioner. Being the parents of eight children, they resided on what the father characterized as a "six or seven horse farm," 7 1/2 or 8 miles from petitioner's home. He had "talked generally [with his son] about running the business." When asked how many stations were closed during 1941 he replied: *149 "I don't recall exactly. I didn't have so much to do with running the business, I was farming, and I trusted it, myself, you know, to him. There could have been one or something like that that was closed." When asked whether the son discussed with him the policies of the business or any changes that were made, he responded: "Well, not every time, I don't reckon he did. He had experience in the oil business. It *373 looked like it was making pretty good, I wanted to get in and started in it, I really did. I wanted to get in something to beat farming that I thought would, but I didn't know how it was coming out." The mother stated that she understood enough about partnership business to know that if losses were sustained the farm might be lost. Petitioner testified that he and his wife had "sold half of these stations to * * * [his] father and mother." Whether any profit was reported in income as a result of the "sale" was not shown. The transaction was couched in the form of a sale, the consideration being a $ 20,000 note, which, it was understood, would be paid out of the profits of the business. The transcripts of account indicate that the note was ultimately paid, the*150 payments in the meantime to the father and mother being comparatively nominal and probably -- although this is mere surmise -- being used largely in paying tax on the income. One circumstance having real significance in weighing the evidence for the purpose of ascertaining whether a bona fide gift had been made to the father, however, is petitioner's admission under cross-examination that he had made "an arrangement" with his father that in case of death he is to leave his part of the business to him by will. Thus the net effect of the whole arrangement seems to be that the father put nothing into the business in the way of capital or labor and, at least during the taxable year, took nothing out except sufficient to pay the tax on the share of the income shown on the information returns to be due him. Most of the income was left in the partnership for distribution to petitioner and his wife for the ostensible purpose of acquiring a limited interest, which will cease -- i. e., be returned to petitioner -- upon the father's death. Whether a similar arrangement was made with the mother is not definitely indicated by the record. Apparently it was; for, after petitioner had stated*151 that he had such an arrangement with his father and that he had made some insurance "to them," he was asked: "You mean your father and mother?", to which he replied, "Yes Sir. If I precede them in death, why --," at which juncture he was interrupted. Further discussion of the facts and applicable authorities would only unnecessarily extend this opinion. Our best judgment is that petitioner has failed to prove that the income from the business carried on during the taxable years under the name of Sing Oil Co. did not belong in toto to him, as the respondent determined. Accordingly, Decision will be entered for the respondent. LEECH Leech, J., dissenting: The majority apparently holds that no partnership between the petitioner and his wife existed for tax purposes. *374 This conclusion, I think, is clearly wrong. See Felix Zukaitis, 3 T. C. 814; H. D. Webster, 4 T. C. 1169. The similar conclusion of the majority as to the alleged partnership consisting of the petitioner, his wife, and his father and mother is less doubtful. I would not be disposed to disagree on that point, both because of a failure*152 of proof and on the ground that some of the evidence tends to contradict the completeness of the gift by petitioner to his father and mother, upon which their status as partners rests. See Carl P. Munter, 5 T. C. 39. Footnotes *. Error in addition. Sum of figures shown is $ 3,665.98↩