Monroe v. Commissioner

M. M. Monroe, Petitioner, v. Commissioner of Internal Revenue, Respondent Monroe v. Commissioner Docket No. 6380 United States Tax Court 7 T.C. 278; 1946 U.S. Tax Ct. LEXIS 135; June 28, 1946, Promulgated *135 Decision will be entered for the respondent. Petitioner and his son executed an agreement of partnership under which his minor son agreed to devote his entire time to the business. The son, a minor, returned to school shortly after the agreement was executed. The facts show that he did not contribute any capital to the business originating with himself. Held, that petitioner is taxable on the entire income of the business. Q. L. Garrett, Esq., for the petitioner. Edward L. Potter, Esq., for the respondent. Harron, Judge. HARRON *278 Respondent determined a deficiency in income tax for the fiscal year ended *136 June 30, 1941, in the amount of $ 1,218.36. Petitioner concedes that there is a deficiency in that amount. Respondent determined a deficiency in income tax for the fiscal year ended June 30, 1942, in the amount of $ 23,459.48. Petitioner concedes disallowance of a deduction of $ 5,400 for a contribution. Petitioner contests respondent's determination that he is taxable on all of the income of a business. Petitioner contends that a partnership existed, consisting of himself and his son, and that, therefore, the earnings of the business are taxable one-half to petitioner and one-half to his son. Petitioner filed his returns with the collector for the district of Georgia. FINDINGS OF FACT. Petitioner resides at Waycross, Georgia. He is married and has three children, one of whom is Moi M. Monroe, Jr., who was born in 1922 or 1923. *279 Petitioner conducts a general business of purchasing, processing and selling furs, hides and pecans at Waycross, Georgia, and at Savannah, Georgia. He started this business in 1920. The business at Waycross is operated under the name of Georgia Hide & Fur Co. The business at Savannah is operated under the names of Blue Ridge Hide & Fur Co. *137 and D. Kirkland Co. Petitioner personally conducts the business of the Georgia Hide & Fur Co. An employee, who is paid 50 per cent of the profits of the business at Savannah, manages the Blue Ridge Hide & Fur Co. and the D. Kirkland Co. Petitioner's business is seasonal. During the peak season, from the latter part of October to the early part of January, petitioner employs 30 to 40 men, and during the slack season, 10 or 12 men. The business which petitioner conducts is largely a trading business. Pecan nuts and hides are bought from producers around the countryside for cash. This produce is later sold by petitioner to customers, and from 20 to 50 per cent of the produce is sold through brokers who receive a commission. Petitioner has a line of credit for $ 200,000, unsecured, with a Florida bank. The income of petitioner's business is derived from the profits made upon the resale of the produce which is purchased from producers. The real estate where the Waycross, Georgia, business is located, with a building and sheds, has at all times stood in petitioner's name. Very little equipment is used in the business; only office equipment, scales, pecan graders, pecan crackers, *138 and trucks and tractors. The income of the business at Waycross is reported for a fiscal year. During the fiscal year ended June 30, 1941, petitioner's gross receipts from his business at Waycross amounted to $ 1,037,567.27; cost of goods sold was $ 950,640.58; gross profit was $ 86,926.69; expenses and business deductions were $ 52,808.99; and net profit was $ 34,117.70. The income from the business conducted at Savannah is reported separately from the income of Georgia Hide & Fur Co. A separate return is filed for Blue Ridge Hide & Fur Co. The income from that business was reported on a calendar year basis in 1941. During 1941 petitioner's son Moi, Jr., was a student at Culver Military Academy. While he was at home in the summer of 1941 three documents were executed by petitioner as follows: (1) June 27, 1941, consent of Moi M. Monroe and Mrs. Monroe for their son, Moi, Jr., a minor, to engage in business. (2) June 30, 1941, a bill of sale between Moi M. Monroe and Moi M. Monroe, Jr. (3) July 1, 1941, partnership agreement between Moi M. Monroe and Moi M. Monroe, Jr. The consent given to the minor son by the parents to engage in business gave him permission to engage in the hide, *139 fur, and pecan *280 business; to receive the proceeds of his labor; to become an active general partner with his father in the businesses then operated by the father; to assume the full responsibilities of an adult partner; and to receive and hold the profits of his share from such business as his sole and separate property and estate. The bill of sale provided that petitioner conveyed to his son Moi, Jr., "a one-half undivided interest in and to Georgia Hide and Fur Company, D. Kirkland Company, and Blue Ridge Hide and Fur Company, consisting of the following property, to wit:" (Followed by a list of trucks and motor equipment, 2 scales, 1 pecan grader, 4 pecan crackers, office furniture and equipment, and a general reference to the stock of merchandise contracts, and money on hand and on deposit.) The bill of sale provided, further, as follows: This conveyance is expressly made subject to the payment by second party of one-half of all obligations of said businesses consisting of notes, open accounts, and other forms of indebtedness. The bill of sale was recorded on July 2, 1941, with the clerk for Ware County, Georgia. The partnership agreement purported to admit Moi, Jr., *140 into partnership with his father in the three firms, Georgia Hide & Fur Co., Blue Ridge Hide & Fur Co., and D. Kirkland Co., and to create a partnership as of July 1, 1941. The agreement recited that "as a preliminary step to the formation of the partnership, Moi M. Monroe has this day conveyed by bill of sale to Moi M. Monroe, Jr., a one-half undivided interest in and to the assets and property of said Georgia Hide and Fur Company, D. Kirkland Company, and Blue Ridge Hide and Fur Company." The agreement provided that petitioner would receive a salary of $ 5,000 per year for his services. It provided that "Moi M. Monroe, Jr., is to devote his entire time to the business and is to receive a salary of $ 50.00 per week." The agreement provided, further, as follows: It is contemplated that the partners will agree mutually to increase the salary of Moi M. Monroe, Jr., as he gains experience and knowledge of the businesses. The agreement provided, also, that after paying the salaries and expenses, the profits of the business would be divided equally between the two partners. At the time the three documents described above were executed, Moi, Jr., was 18 1/2 years of age. In September*141 of 1941 Moi, Jr., returned to Culver, where he continued a two-year course to completion in June of 1942, at which time he received a diploma. He started this course at Culver in 1940, after graduating from high school. During 1941 he was at home for three months during the summer vacation, and for three weeks during the Christmas vacation. *281 When he completed his course at Culver in June 1942 Moi, Jr., went direct to the city of Bowling Green, Kentucky, where he enrolled at the Bowling Green Business University to take a course in business administration. He remained there until December 1942, when he enlisted in the Army. He was married in November 1943, just before he went over seas. He served in the Army until September of 1945, when he received his discharge and returned to Waycross. Since his discharge from the Army Moi, Jr., has devoted his full time to the business at Waycross. As of June 30, 1941, the net worth of petitioner's business at Waycross, according to the books, was $ 80,000, exclusive of $ 19,480 owing to petitioner. The total amount of the assets and liabilities of both Georgia Hide & Fur and Blue Ridge Hide & Fur was $ 226,517.62. On July 1, 1941, *142 an account was set up on the books of the business entitled "partnership," with a credit of $ 80,000. No separate capital accounts were set up for petitioner and his son, so that there was no account on the books showing that Moi, Jr., had an interest in the business. A drawing account was opened for Moi, Jr. Petitioner already had a drawing account on the books. At the close of the fiscal year ended June 30, 1942, each drawing account was credited with one-half of the year's profits, but Moi, Jr., did not receive any distribution out of the profits. All that he received was the sums he withdrew against his drawing account, which had no original credit made in it, the total withdrawals being only $ 3,011.23. The credit to the son's drawing account at the end of the year more than offset the withdrawals during the year. Moi, Jr., was not paid or credited any sum as salary during the fiscal year ended June 30, 1942, nor during the period he was in the service. He drew against his drawing account the total amount of $ 3,011.23 during the year ended June 30, 1942. Some of the above total amount was used for the purchase of defense bonds. Petitioner paid the tuition and school *143 expenses of Moi, Jr., at Culver, which amounted to at least $ 1,100. The banks where petitioner had accounts for the businesses and where he obtained loans were not told a partnership had been formed. The son of petitioner signed seven checks for the Georgia Hide & Fur Co. in August 1941. These checks have the name of the firm printed on them. Petitioner knew the officers of the bank, and they understood that petitioner's son might sign some checks. Moi, Jr., did not sign any notes for the company, which were signed only by petitioner. A new letterhead of Georgia Hide & Fur Co. was printed after July 1, 1941, on which the name M. M. Monroe, Jr., appears. However, the firm name is printed thereon simply as Georgia Hide & Fur Co., and *282 there is no reference to the nature of the organization, i. e., whether it is a corporation or a partnership, or otherwise. From the time Moi, Jr., was a lad of about 12 years he had done a boy's work at his father's place of business at Waycross. While he was in school he did jobs there in the afternoons and during his vacations. The work done by Moi, Jr., after July 1, 1941, until the middle of September, when he returned to Culver, and*144 the work he did during his Christmas vacation in December, was about the same as the work he did at different times when he was not in school, prior to July 1, 1941. He was sufficiently experienced in the summer of 1941 to grade and ship hides, and he could buy hides. He made some minor suggestions about handling and weighing pecans. When he returned to Culver in September 1941 such work as Moi, Jr., had done was carried on by the regular or usual employees. After the middle of September 1941 (except for three weeks in December 1941), until September 1945, when he was discharged from the Army -- a period of 4 years -- Moi, Jr., did not perform any services in the business of Georgia Hide & Fur Co. or Blue Ridge Hide & Fur Co. On July 1, 1941, Moi, Jr., had a small amount of cash of his own, $ 250, or a little more. Whatever else he had, he had received from his father. Although petitioner purportedly sold an undivided one-half interest in his businesses to his son under the bill of sale dated June 30, 1941, the son paid to petitioner no more than the nominal amount of $ 250 out of his own funds in 1941. Moi M. Monroe, Jr., did not contribute any capital from any source, or from*145 any source originating with himself to the Georgia Hide & Fur Co., or the Blue Ridge Hide & Fur Co., or the D. Kirkland Co. in 1941 or 1942. Moi M. Monroe, Jr., did not substantially contribute to the control and management of the businesses in which petitioner was interested in 1942, or perform any vital services. Petitioner did not intend or attempt to make a gift of an undivided one-half interest in his businesses to his son Moi, Jr., in 1941. Petitioner's son Moi, Jr., was not a bona fide partner in any business of petitioner in 1942 or during the fiscal year ended June 30, 1942. The Georgia Hide & Fur Co. had gross receipts of $ 1,311,700.13 during its fiscal year ended June 30, 1942, out of which it realized a gross profit of $ 96,810.65, and it had ordinary net income (after deductions) of $ 50,755.55. Blue Ridge Hide & Fur Co. filed a return for the six-month period July 1 to December 31, 1941, in which it reported gross receipts of $ 144,017.79, out of which it realized gross profits of $ 30,371.68, and reported ordinary net income of $ 12,497.86, after deductions. *283 Respondent added to petitioner's taxable income for the fiscal year ended June 30, 1942, the total*146 amount of $ 34,705.71, which included $ 22,877.77 which was reported on the partnership return filed for Georgia Hide & Fur Co. for the period ended June 30, 1942, as distributable to Moi M. Monroe, Jr., plus some other amount which represents unreported income from Blue Ridge Hide & Fur Co. Respondent has held petitioner taxable on $ 34,705.71 under section 22 (a) of the Internal Revenue Code. He has held that the entire income of the businesses conducted under the firm names of Georgia Hide & Fur Co. and Blue Ridge Hide & Fur Co. is taxable to petitioner. OPINION. The question is, briefly, whether petitioner is taxable on all of the income of his business enterprises, as respondent has determined, or on only one-half of such income, as petitioner contends. The question arises under section 22 (a) of the Internal Revenue Code. Under section 22 (a) the question is: Was the income attributed to petitioner's son Moi, Jr., as a partner income from a partnership for which he alone is liable in his "individual capacity," as provided by sections 181 and 182 of the code, or did petitioner, his father, despite the claimed partnership, actually create the right to receive and enjoy the benefit*147 of the income, so as to make it taxable to him under sections 11 and 22 (a)? See Commissioner v. Tower, 327 U.S. 280. In considering this question the facts must be examined to ascertain whether the alleged partner, in this case a minor son, has done the following: (a) Invested capital originating with him in the businesses. (b) Substantially contributed to the control and management of the business. (c) Performed vital additional services. Petitioner undertook to sell an undivided one-half interest in three business enterprises, the chief one being located at Waycross, Georgia, to his son for $ 10 and other valuable consideration. Petitioner has testified that the consideration was $ 40,000. He has testified, also, that the following was done by which his son is alleged to have acquired an interest in his businesses. Three days before the "bill of sale" was executed, petitioner gave his son $ 14,750, which the son deposited in his bank account. Thereafter, on June 30 or July 1, 1941, the son gave petitioner a check for $ 15,000 which represented the $ 14,750 just received from petitioner, plus $ 250 of the son's own funds. The son is said *148 to have given petitioner five notes for $ 5,000 each, or a total face amount of $ 25,000, to be paid serially, one in each year. 1 In 1942 petitioner is said to have credited his son with payment of the *284 first note of $ 5,000. He testified that, in connection with this note, he gave his son $ 4,000, and that he received $ 1,000 from his son out of his own cash. 2 There is no evidence that any other notes of the son have been paid or canceled as paid. The son did not give testimony in this proceeding, trial of which was in the year of 1946. Upon this evidence it has been found as a fact that the son of petitioner did not contribute any capital to the businesses in question from any source originating with himself. See Lusthaus v. Commissioner, 327 U.S. 293. During the fiscal year ended June 30, *149 1942, the son received from the Georgia Hide & Fur Co. various sums totaling $ 3,011.23. It has not been shown that part of these withdrawals was not used to make payments to petitioner on the notes or in consideration of the purported sale by petitioner of a one-half interest in his businesses. The record contains a statement that at the end of June 1941 Moi, Jr., had about $ 250 cash, and that petitioner's purpose in giving him $ 14,750 was to enable him to make the purchase described in the "bill of sale." Under these circumstances and all of the facts, it would be improper to find as a fact that Moi, Jr., invested capital in the businesses originating with him. Petitioner's son did not render any services in the businesses during the fiscal year July 1, 1941, to June 30, 1942, except for about six weeks after July 1, 1941, and three weeks in December 1941. Such services as he did render during those vacation periods are not shown to have been substantial contributions to the control and management of the businesses, nor vital additional services. Whatever petitioner's son did was of such nature that the regular employees did the same type of work when he returned to school. *150 Perhaps some indication of the capacities of petitioner's minor son to perform services of importance in the businesses is found in the partnership agreement of July 1, 1941, which provided that the parties would agree mutually to increase the salary of Moi, Jr. "as he gains experience and knowledge of the businesses." Petitioner's son did not receive a salary during the fiscal year involved here. The arrangements for taking Moi M. Monroe, Jr., into partnership consisted only of the three documents described in the findings of fact. It may be that, as petitioner testified, there was an intention for a short time on the part of the parents and the minor son that the son would not return to school after July 1, 1941. Such momentary intention, if it existed, weighs little in determining the question. The minor son had not participated in the business as a full time employee at any time prior to July 1, 1941, but had only spent time, intermittently, at his father's place of business when his school duties left him with spare *285 time. Rather, it is the actual results which weigh heavily, and the facts show that the execution of the three papers did not bring about any real *151 change in the economic relation of petitioner to the income in question, which was derived chiefly from a business which petitioner had developed by his own personal efforts during a period of twenty years. After the arrangements were made, as before, petitioner managed, controlled, and did the same amount of work in running his businesses, and he controlled the earnings of his businesses. At the end of the fiscal year one-half of the net profits was credited to a drawing account in the name of the son, but the son made no withdrawal thereof and exercised no control over such income. Since the control which a taxpayer can exercise over income is of the greatest importance in determining the liability for tax on income, Helvering v. Horst, 311 U.S. 112, it is noted that under the statutes of Georgia petitioner could have revoked at any time the consent he gave with respect to his minor son's engaging in business under the document of June 27, 1941. 3 Petitioner continued to support his minor son and to pay his school expenses, and he apparently consented to his son's returning to school. *152 The agreement of July 1, 1941, provided that Moi M. Monroe, Jr. would "devote his entire time to the business." Moi, Jr., did not fulfill his obligation and agreement under the partnership agreement. Taking into consideration that Moi, Jr., did not contribute capital originating with himself, that he did not substantially contribute to the control and management of the businesses, that he did not otherwise perform vital additional services, and, finally, that he did not fulfill his agreement to devote his entire time to the businesses, it must be concluded that the partnership died at birth. Consequently there was a mere paper reallocation of the income of the businesses between two members of the family, and under such facts petitioner is held to be taxable upon the entire income of his business enterprises for the period in question. Commissioner v. Tower, supra;Lusthaus v. Commissioner, supra; Ed Dubinsky Durwood; 6 T. C. 682; William G. Harvey, 6 T. C. 653; D. H. McEachern, 5 T. C. 23; Estate of Frank G. Ennis, Sr., 5 T. C. 1096, 1103;*153 P. A. Keenan, Sr., 5 T. C. 1371; Jacob DeKorse, 5 T. C. 94; M. M. Argo, 3 T. C. 1120; affd., 150 Fed. (2d) 67; certiorari denied, 326 U.S. 762; Supornick v. Commissioner, 150 Fed. (2d) 110. *286 The businesses in question have been conducted as a sole proprietorship by petitioner. The income results from buying and selling raw goods, which are graded and then resold. A certain amount of cash is borrowed each year to finance the buying operations. Physical assets, such as motor trucks, are required to bring in the produce which is purchased from growers, but, otherwise, physical assets have a minor place in the production of income. It appears that petitioner's personal managerial and other services and personal credit are largely responsible for the business done and the earnings realized, although, upon the record made, we can not find precisely upon the point, since on this phase of the case there is scant evidence on the performances by petitioner in his businesses. The indication is, however, *154 that petitioner manages the business and that his employees are trained by him in whatever buying is done by them rather than by petitioner. Also, it appears that the selling operations are done by petitioner or are subject to his approval. If petitioner would escape tax upon the earnings of his businesses, part of his burden of proof requires him to show that his activities and services were not the main factors in the production of income. M. M. Argo, supra.This, he has not done. Petitioner cites very little by way of authority to support his contention. 4 The authority which he has cited has been considered, but we find that it is not controlling of the question. For example, in William F. Fischer, 5 T. C. 507, it was held that a partnership of which a father and two sons were members was a valid, bona fide partnership for tax purposes. The facts in that case were that two sons, when they had become 34 and 30 years of age, were taken into partnership. They had graduated from a university several years prior to the execution of a partnership agreement; they had been educated with a view to their going into the*155 father's business; and they had been employed in the business on a full time basis for several years. Both sons had accumulated capital and each contributed capital under the partnership agreement. After the agreement was made, both sons continued to work in the business. And, further, the sons "lived up to" their contract. (See page 517 of the report in the Fischer case.) Here, the facts are substantially different. It is noted that the facts here do not present the situation of an individual*156 who went directly from business activities into the armed service. In this case, petitioner's son only returned to school; he completed *287 a course of studies and then proceeded to another school to commence a further course of studies. It was not until over one year after July 1, 1941, that he enlisted in the Army. It is held that the arrangements set forth did not have the effect of making petitioner's son a bona fide member of a partnership. Respondent's determination is sustained. Decision will be entered for the respondent. Footnotes 1. The notes were not offered in evidence.↩ 2. Petitioner did not show any canceled check of his son, or other evidence to show payment to him in 1942 of $ 5,000 or $ 1,000.↩ 3. Georgia Code, 74-108, provides: Parental Power -- Until majority, the child shall remain under the control of the father, who is entitled to his services and the proceeds of his labor. This parental power shall be lost by * * * * 4. Consent of the father to the child's receiving the proceeds of his own labor, which consent shall be revocable at any time.↩ 4. Petitioner cites only one case to support his contention, a memorandum opinion of the Tax Court, Harry P. Samuels↩, Docket No. 4038, which was entered (not promulgated under printed report) on August 27, 1945. (It must be observed here that it is contrary to the custom of the Tax Court to cite memorandum opinions, and when such opinions are cited in briefs, they are not ordinarily referred to in a printed opinion of the Court because such opinions represent only a decision on facts upon rules of law already established.)