Biggs v. Commissioner

J. E. BIGGS, SR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Biggs v. Commissioner Docket No. 15255. United States Board of Tax Appeals 15 B.T.A. 1092; 1929 BTA LEXIS 2728; March 26, 1929, Promulgated *2728 Petitioner, his wife and two sons, with four others, formed a partnership which operated a coal mine during the taxable years. Held, that there should be included as income taxable to petitioner only the share of partnership net earnings that did not belong to others. E. L. Greever, Esq., for the petitioner. Paul L. Peyton, Esq., for the respondent. LANSDON *1092 The respondent has determined and assessed additional income and profits taxes for the years 1920 and 1921 in the respective amounts of $6,074.48 and $76.90. In due course petitioner filed a bond to stay collection, and instituted this proceeding for a redetermination of his liability for such taxes, alleging that respondent has erroneously included in his gross income certain amounts which were distributed to his wife and two sons by a partnership engaged in the coal mining business. FINDINGS OF FACT. The petitioner is an individual residing at Bramwell, W. Va. For many years prior to the taxable years he had been a successful operator of outcrop coal mines in West Virginia. In January, 1920, at the suggestion of one Jairus Collins, petitioner entered into negotiations*2729 with the Buckeye Coal & Coke Co. for a sublease of certain outcrop coal property. An oral lease was obtained on a royalty basis and through Collins, who was manager of the Louisville Coal & Coke Co., which owned the property adjoining that of the Buckeye Co., an arrangement was made to load and ship the coal over a track owned by the former concern. Soon after the above arrangements had been completed petitioner and Collins determined to take in their respective families, since coal prices were high and the enterprise promised to be highly profitable, and in January, 1920, the Norwest Fuel Co. was organized as a copartnership, the parties to the oral agreement being petitioner, Mary J. Biggs, Frank C. Biggs, Edwin Biggs, Jairus Collins, Jairus Collins, Jr., E. E. Hartsook, and H. J. Hartsook. The money needed for the business was borrowed from the Commercial Bank of Bluefield, W. Va., in which Collins was a stockholder, *1093 on the partnership note indorsed by petitioner, Jairus Collins, Sr., and E. E. Hartsook, dated January 16, 1920, in the amount of $2,500. This note was paid on May 15, 1920, and a second note given in the amount of $1,500, which was paid on July 3, 1920. *2730 On June 12, 1920, the previous oral partnership agreement was reduced to writing, as follows: ARTICLES OF AGREEMENT, made the 12th day of June, 1920, between J. E. Biggs, Mary E. Biggs, Frank C. Biggs, Edwin Biggs, Jairus Collins, Jairus Collins, Jr., E. E. Hartsook and H. J. Hartsook, all of Bramwell, mercer County, West Virginia, as follows: The parties above named have agreed to become partners in business for the purpose of conducting and operating the business of coal mining, and, by these presents, do agree to be partners together under the firm name of Norwest Fuel Company, in the business of mining shipping and marketing coal at and from the village of Goodwill, in Mercer County and State of West Virginia, and doing all other acts pertaining thereto, their partnership to be retroactive to and to be in effect and to continue for the period of five years from that date or until all of the coal under lease from the Buckeye Coal & Coke Company, a West Virginia corporation, to the said partnership may have been mined, be that sooner or later than the expiration of five years. And it is agreed and understood by and between the parties hereto that J. E. Biggs, one of the partners*2731 herein, shall have active charge of the production of coal and that he shall be paid a salary commensurate with his services, which amount shall be considered as a part of the expense of doing business; and it is agreed and understood that E. E. Hartsook, another of the partners herein, shall have charge of and be responsible for the sale of the coal mined and sold under this contract of partnership and that he shall handle and be responsible for all money received and disbursed in the conduct of the business and that he shall render proper accounting to the other partners named herein at stated intervals or whenever required so to do by any or all of them of all funds received and disbursed, and it is agreed by the said partners that there shall be had and kept at all times during the continuance of this partnership just and accurate books of account, wherein shall be kept an accurate record of all business transactions conducted by the partnership or any of the partners, which said books of account shall be accessible to any or all of the partners at any and all times. And it is also agreed and understood that any and all profits accruing to this partnership as well as any and all*2732 losses and expenses sustained by this partnership shall be divided among the partners in the following proportion: J. E. Biggs 23 per cent. Mary J. Biggs 23 per cent. F. C. Biggs 2 per cent. Edwin Biggs 2 per cent. Jairus Collins 12 1/2 per cent. Jairus Collins, Jr 12 1/2 per cent. E. E. Hartsook 12 1/2 per cent. H. J. Hartsook 12 1/2 per cent. And the said partners hereby mutually agree to and with each other that during the said partnership neither of them shall or will endorse any note or otherwise become surety for any person or persons whomsoever without the consent of the others of said partnership. In witness whereof the undersigned have affixed their signatures and seals, this 12th day of June, 1920. Eight copies executed. *1094 Mary J. Biggs is the wife of petitioner. F. C. and Edwin Biggs are his sons. Edwin Biggs became nineteen years of age on February 12, 1920. Petitioner acted as manager of the Norwest Fuel Co.; E. E. Hartsook, who was Collins' secretary, kept the accounts and sold the coal; F. C. Biggs, except for a period of about two months when he was in a mining school at Morgantown, was in charge of the actual*2733 mining operations. Preparations for mining coal were started in January or February, 1920. The first coal was shipped in April or May, 1920. Profits were first distributed on July 3, 1920, such distribution being in accordance with the percentages set out in the written partnership agreement. The net income of the Norwest Fuel Co. for 1920 and 1921 was $92,812.64 and $10,861.33, respectively. Each of the parties received and has returned and paid taxes on his distributive share of the partnership earnings. The respondent has determined that 50 per cent of the net earnings of the Norwest Fuel Co. for each of the years, which amount includes the distributive shares under the partnership agreement of petitioner's wife and his two sons, constituted income taxable to the petitioner. OPINION. LANSDON: We are concerned here with the single issue whether certain income from an alleged partnership is taxable to the petitioner alone, or to him, his wife and his two sons. The respondent net income of the Norwest Fuel Co. for 1920 and 1921, contending as the basis for such action that Mary J. Biggs, F. C. Biggs and Edwin Biggs were not in fact and in law partners in the Norwest*2734 Fuel Co. and that the agreement of partnership, in so far as it relates to petitioner and his family, amounted to nothing more than a gift of income by petitioner to his wife and two sons. We are convinced from the evidence that a bona fide partnership was entered into in January, 1920, between petitioner, Mary J. Biggs, Frank C. Biggs, Edwin Biggs, Jairus Collins, Jarius Collins, Jr., E. E. Hartsook, and H. J. Hartsook. The parties intended and agreed to form a partnership and agreed to share the profits and losses. As the respondent points out, petitioner's wife and two sons contributed no property to the partnership and of the three only Frank contributed services. None of the partners, however, contributed property to the partnership. The capital needed in the conduct of the business was borrowed on the partnership note which was, in effect, a contribution by each party to the agreement of partnership. Edwin Biggs was 19 years of age when the partnership agreement was executed. His infancy was a factor which enabled him *1095 to disaffirm his obligations and agreements. It was a personal privilege, however, and, having elected to abide by the partnership contract, *2735 his position is that of any responsible person. ; . The respondent alleges that in West Virginia a partnership between husband and wife is void. In a recent comprehensive and much cited opinion, ; ; L.R.A., 1917 D, 440, the supreme court of that State has clearly defined the status of a partnership between husband and wife. In its opinion the court states: On more than one occasion, it has been declared that the husband and wife cannot contract with one another, and that the statute has not altered the common law in this respect. ; ; ; ; ; *2736 . * * * The legislative action thus disclosed indicates intention not to disturb the common-law rule as to contracts between husband and wife. * * * The disability of the husband and wife to contract with one another, though absolute in the legal forum, is purely technical. Their contracts are enforceable in equity, if just and fair. They are denied a legal status to the end and purpose that they may be always within the power of the chancellor for enforcement, annulment, or modification, as the equities of the situation require. The ban under which such contracts fall is only partial. They are not wholly bad, nor are they prohibited by positive law. They are merely unenforceable in courts of law, or by strict legal process. In the broad sense of the law, including the equity jurisprudence as well as the legal, they are valid. * * * Cf. ; ; *2737 ; ; ; Schouler on Marrriage, Divorce and Domestic Relations (6th Ed.), p. 549. In the instant proceeding the respondent has included as income taxable to petitioner the shares of the partnership net earnings distributed to his wife and two sons, under the terms of the agreement. In the Bolyard case, supra, the court points out that the husband is under disability as to his wife's property. At page 530 it is stated: * * * The common-law rule places the husband as well as the wife under disability as to contracts made directly between them. He could no more bind himself to her by his contract than she could bind herself to him in such manner. Nothing in the statute discloses intention to emancipate him from this disability. On the contrary, the effect of the statute is to diminish his power respecting his wife's property and enlarge hers. * * * The purpose of the Married Woman's Act in West Virginia is to protect her property. Mary J. Biggs has actually participated in conducting a partnership business which resulted in large profits*2738 *1096 and she will be protected in her share thereof even against creditors of her husband. ; ; . In 13 R.C.L. 1370, this question is discussed as follows: On the other hand, the rule denying the right to form such a partnership is intended for the protection of the wife's separate property, to prevent her from entering into such engagements with her husband that her separate property may be taken from her in satisfaction of his debts; the purpose of the rule is, not to work a loss to the wife, but to prevent it, and therefore, where a husband and wife have conducted a partnership business which has resulted in large profits, she will be protected in her share thereof even as against creditors of her husband. In an action against the partnership the petitioner could not have recovered the share of his wife and children in the partnership earnings. His wife received the profits accruing to her as a partner, made income-tax reports accordingly, and paid the tax. We are of the opinion that the respondent erred in including as petitioner's*2739 income that part of the partnership net earnings which belonged to others. Cf. ; ; ; ; ; . Reviewed by the Board. Decision will be entered under Rule 50.