Luce v. Commissioner

EDWARD J. LUCE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. WALTER A. KIPP, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Luce v. Commissioner Docket Nos. 25878, 25879. United States Board of Tax Appeals 18 B.T.A. 923; 1930 BTA LEXIS 2565; January 27, 1930, Promulgated *2565 Declarations of trust executed by the petitioners as to future income derived from certain sources, including the partnership of which they were the sole members, did not operate to relieve them of taxes on such income. Edward J. Luce, Esq., for the petitioner. L. A. Luce, Esq., for the respondent. ARUNDELL *924 These proceedings which were consolidated for hearing and decision, involve the redetermination of deficiencies for the year 1922 as follows: Edward J. Luce $590.99 Walter A. Kipp 294.23 The petitioners assign as error the respondent's inclusion in their gross income, certain sums which they claim belong to their wives. FINDINGS OF FACT. The petitioners have been engaged in the practice of law at Rutherford, N.J., under the partnership name of Luce & Kipp, since 1904. Under the terms of the partnership agreement, in 1922 and for more than five years prior thereto, Luce was entitled to 52 per cent of the partnership profits and Kipp the balance of 48 per cent. Since the formation of the partnership, its books have been closed and the net profits ascertained and credited at the end of each calendar year. If*2566 the amount of either partner's undrawn profits, plus his share of the capital of the firm exceeded the same items of the other at the close of the year, he was entitled at the close of the following year to one year's interest on such excess amount. The excess in favor of Luce on January 1, 1922, was $4,586.83, and the accrued interest thereon during 1922 was $275.21. On January 1, 1920, Luce executed an instrument reading as follows: I, the subscriber, do hereby declare that from and after January 1st 1920, and during the term of this trust, one half of all net profits, salary, or other compensation or income, which otherwise would accrue to me as a member of the partnership of E. J. Luce and W. A. Kipp, conducting a law practice in Rutherford, New Jersey, or elsewhere, shall accrue to me as trustee for the use and benefit of my wife, Marie E. Luce. The affairs of said partnership, and its accounting with me during each year and at the end thereof, are to be conducted as heretofore, and as though this trust had not been created; but at the end of each year, I am to account to my said wife, as trustee as aforesaid, for the said one half part of the total net profits, salary, *2567 or other compensation or income which on that date has accrued to me, according to the books of said firm; and as between me and my said wife, and for all other purposes except the accounting methods of the said firm, I am to be regarded as entitled to profits, salary, or other compensation or income, before and as the same accrue, as trustee for my said wife to the extent of the said one half part thereof. All payments made to me by said firm are to be regarded as discharging said firm from any and all liability to my said wife for any part or share thereof; and the authority of said firm to make, and of myself to receive, all and singular the same is to be plenary and irrevocable. The term of said trust is limited to the period of the joint lives of myself and my said wife. *925 On March 5, 1921, Luce executed an additional instrument respecting other income, reading as follows: In addition to provision made for my wife by trusts heretofore declared and created by me, I, the subscriber, hereby further declare that one half of all gains, profits, compensation or income that otherwise would, or may, accrue to me for any services rendered or performed by me otherwise*2568 than as a member of the firm of Luce and Kipp, shall accrue to me as a trustee for the use and benefit of my wife, Marie E. Luce, from and after January 1, 1921, and during the period of our joint lives. I am to account to my wife for all that shall accrue to her under this trust, at the end of each calendar year, and not otherwise. The trust by me created in the year 1920 in favor of my wife, and relating to income from the firm of Luce and Kipp which would otherwise have accrued solely to me is hereby confirmed. On January 1, 1921, Kipp executed an instrument in words identical with the one signed by Luce on January 1, 1920, except that it was in favor of his wife, Janet S. Kipp. For the year 1922 the partnership filed a return showing net income of $21,987.10, including dividends amounting to $30 on stock of domestic corporations, distributable as follows: Dividends Other income E. J. Luce $7.80 $5,757.77 E. J. Luce, trustee 7.80 5,757.78 W. A. Kipp 7.20 5,220.77 W. A. Kipp, trustee 7.20 5,220.78 The petitioners filed individual returns for the taxable year, and in addition, fiduciary returns as trustees under the declarations of trust*2569 set forth above. In their individual tax returns for 1922 the wives of the petitioners reported sums received by them from their husbands as trustees. The deficiency determined against E. J. Luce resulted from the addition to his income of the sum of $7,175.85 reported by his wife as income received by her under the declarations of trust executed by Luce on January 1, 1920, and March 5, 1921. The deficiency in the case of W. A. Kipp resulted in part from increasing his net income by the sum of $4,931.27 reported by his wife as income received by her under the declaration of trust signed by Kipp on January 1, 1921. OPINION. ARUNDELL: The substance of the argument being made by the petitioners is that the declarations of trust created in favor of their respective wives an equitable estate in one-half of the capital assets and profits of the partnership. Petitioner Luce also contends that the declaration of trust he executed on March 5, 1921, gave his wife *926 such an interest in his "earning capacity" other than as a member of the partnership. No consideration need be given to the question of whether or not the wives of the petitioners were members of the partnership*2570 in the taxable year. Neither petitioner now claims that their declarations of trust had the effect of introducing the wives into the firm as partners. The petitions allege, and the respondent's answers admit, that during 1922 and for more than five years prior thereto, they were entitled to the net profits of the partnership on the basis of 52 per cent to Luce and the balance to Kipp. The declarations of trust merely recite that from the date of their execution one-half of the net profits and other income which would otherwise accrue to the petitioners as members of the partnership "shall accrue to me as trustee for the use and benefit of my wife." The only change the instruments effected in the manner of distributing the firm's earnings was to make such profits as had accrued to each partner at the end of the year payable to them as trustees for their wives instead of to them individually, as theretofore. Upon the receipt of any partnership profits the petitioners were to account to their wives as trustees for such sums as were received. What the wives acquired under the declarations was a right to receive from their respective husbands one-half of the income they received*2571 as the sole partners of Luce and Kipp. The case as thus presented to us comes squarely within ; ; certiorari denied, ), wherein we said: Clearly, under the statute, the income derived by the partnership must be returned for taxation as the income of the respective partners in accordance with their distributive shares and can not be diverted to become the income of someone else by agreement or otherwise. * * * The income from taxpayer's interest in the partnership is first income to him, and no matter how he tries to dispose of it or does dispose of it, it is taxable to him as income from his interest therein. It does not alter the situation to say that as soon as income arises in the partnership at that instant it becomes the property of the grantee, as this is mere assertion. The fact that the trusts here are irrevocable and therefore not subject to cancellation such as was the case of the assignment in the Mitchel proceeding, does not affect the situation. *2572 , decided on the authority of the Mitchel case. The same conclusion must be reached as to the income under the declaration of trust executed by Luce on March 5, 1921. It merely gave Luce's wife the right to receive one-half of such income as accrued to him for services performed other than as a partner of *927 Kipp in the law firm. She acquired no property rights in the earning capacity of her husband. Until he received income her rights were "upon the contract and not in rem." . See also , and ; affd., . The petitioners cite and rely on a number of decisions, both by the courts and the Board, among which are ; ; ; ; and *2573 . Whatever may be said for the holdings in these cases and others cited by the petitioners, none go so far as to say that a man may relieve himself from paying a tax on his salary or earnings received for personal services rendered by him by reason of a contract with his wife that one-half of what he may earn is to be turned over to her, and the result is no different where the end sought to be accomplished is by way of a declaration of trust such as is present in the instant cases. Decision will be entered for the respondent.