Haller v. Commissioner

MARY HALLER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Haller v. Commissioner Docket No. 39268. United States Board of Tax Appeals 26 B.T.A. 395; 1932 BTA LEXIS 1315; June 13, 1932, Promulgated *1315 1. The evidence failed to prove that in the taxable years an agreement of partnership existed between petitioner and her six children. 2. An earlier decision of the Board involving the same petitioner and the same general questions for previous tax years is conclusive as to the questions litigated for those years. The identical question having been involved, that decision is conclusive as to the construction of the will of petitioner's decedent. Joseph Getz, Esq., and Wm. J. Byrne, Esq., for the petitioner. J. F. Foley, Esq., and C. C. Maddox, Esq., for the respondent. VAN FOSSAN *395 This proceeding was brought for the redetermination of deficiencies in income taxes for the years 1924 and 1925 in the respective sums of $1,113.32 and $3,017.23. The questions presented for solution are: (1) Whether or not the will of Jacob Haller, deceased, who was the husband of petitioner, bequeathed solely to the petitioner the entire income to be derived from a certain grocery business to be carried on by the executors of the decedent's estate. (2) Whether or not a partnership in the profits of the grocery business existed during the*1316 taxable years between the petitioner, her children and stepchildren. *396 The respondent, by his amended answer, alleges in effect that the questions of law and fact involved in this proceeding were decided adversely to the same petitioner in ; that the issues in this proceeding are therefore res adjudicata and that the petitioner should not be heard to litigate these issues again. At the hearing herein the pleadings in those proceedings which involved the years 1917 to 1923, both inclusive, the Board's decision and the orders of redetermination were submitted and received in evidence. The testimony of the petitioner's witnesses in this proceeding was taken by deposition. FINDINGS OF FACT. The petitioner resides at Erie, Pennsylvania, and is the widow of Jacob Haller, deceased, who died in 1895. The petitioner had not been previously married when she married Jacob Haller, but the latter was a widower, having three sons by his first marriage, namely, Charles, Frank and Edward. Four children were born to Jacob Haller and the petitioner and at the time of his death the ages of the decedent's children were the following: *1317 Charles, 20; Frank, 18; Edward, 16; Cora, 13; Otto, 11; Leah, 7; and Alma, 5, the last four named being the children of the petitioner. The son, Otto, died long before the date of these proceedings, and before the taxable years in question. Upon his death Jacob Haller's last will and testament and a codicil thereto were duly admitted to probate in Erie County, Pennsylvania, and letters testamentary were issued to the executors therein named. The codicil, which was dated May 18, 1895, provided as follows: I, Jacob Haller the within named testator, do hereby make and publish this codicil to be added to may last will and testament, bearing date the thirteenth day of December A.D. 1893 in manner following: I hereby revoke that part of my will and testament marked "Secondly" disposing of my wholesale and retail grocery business and further revoke the nomination and appointment of Mary Haller and John M. Miller as executors and instead thereof, I order and direct my executors hereinafter named to continue my wholesale and retail grocery business for and during such period of time as the same shall be carried on at a reasonable profit. The net profits thereof to be paid to my wife*1318 for the support of herself and my children during her natural life but in case she should marry again, then said profits shall be paid by my executors to my children or their legal representatives for their maintenance and support. Whenever said business shall cease to be carried on at a profit, I order and direct my executors to dispose of said business and the "good will" thereof to the best advantage and invest the proceeds thereon in real estate first mortgage securities and pay the interest arising therefrom to my wife for the support of herself and my children remaining at home for and during her matural life or while she remains my widow. At the death of my wife I will, order and direct that said business be sold by my executors *397 if same has not been disposed of before and that the money received by my executors therefor be divided equally among my children. And I nominate, constitute and appoint my bookkeeper John M. Miller, my son Charles J. Haller and Albert M. Doll Executors of my last will and testament and of this codicil thereto attached. Parts of the will of Jacob Haller, deceased, are included in the findings of fact made by this Board in *1319 , and by reference we incorporate herein such parts of the will with the same force and effect as if here set out in full. Jacob Haller was a retail grocer when the petitioner married him and continued in that business up to the time of his death. He also conducted a small wholesale business in fruits and vegetables. At the date of his death he was worth approximately $25,000, part of which sum represented an investment in real estate. Prior to his death Jacob Haller had said that as each of his sons became of age they would be taken into partnership with his in the grocery business. For some time prior to his death he had been in failing health. In 1891 the oldest son, Charles, left school and entered the business. During his father's absences because of ill health Charles and one John M. Miller, who worked in the store and who later became one of the executors of Haller's will, took charge of the business. The sons, Frank and Edward, also worked in the store at times. None of the sons, however, received any salary until after they respectively arrived at their majority. After Jacob Haller's death the provisions of his will were*1320 discussed by the petitioner and her children and stepsons. They agreed to "stick together" and the sons agreed to remain in the business. In accordance with his father's expressed desire and with the assent of the petitioner and of his coexecutors, Charles Haller took charge of the business as managing executor. Although he discussed major problems and policies with the petitioner and his coexecutors, they did not interfere with his management, but allowed him to adopt such methods and pursue such policies in the grocery business as he saw fit. The executors also specifically authorized him to borrow money in amounts necessary for the purposes of the business. About two years after Jacob Haller's death the business was changed to a wholesale grocery business, the retail business being discontinued. The business was carried on in the name of Jacob Haller or the estate of Jacob Haller. In its books were included all of the affairs of the estate of Jacob Haller. The business increased greatly in amount after the senior Haller's death and at the end of 1923 the total capital and accumulated profits amounted to about $335,000. During the years subsequent to Jacob Haller's death, *1321 including the years 1924 and 1925, the taxable years in question, the petitioner received from the business such sums as she needed for *398 her support. Certain amounts were also drawn by the children and charged against them respectively in the books. The total annual amounts drawn by the petitioner were not large and the balance of the annual profits remained in the business with the assent of the petitioner. She considered that the business was "for the children" and that she and they were to share in its profit in equal amounts. In 1910 or 1911 the petitioner built a house which was paid for our of the business. By 1912 all of the children had become of age. In 1914, with the consent of the petitioner, there was a distribution of $4,000 to each of the children of Jacob Haller, and in 1920, again with the petitioner's consent, there was a distribution from the business of $5,000 to each of the brothers and sisters. During all of the years subsequent to the death of Jacob Haller, Charles Haller was the dominating figure in the grocery business carried on in the name of the estate of Jacob Haller. At the end of each year for several years prior thereto and including*1322 the taxable years Charles Haller prepared, or caused to be prepared, a balance sheet showing the condition of the business and he discussed this balance sheet with the petitioner, his brothers, half-sisters and his coexecutors. During some of such discussions Charles told his brothers and half-sisters that they were to share equally in any losses of the business as well as in the profits, their mother, the petitioner, having told them that they were to share equally with her in the profits. As of December 31, 1923, capital accounts were opened in the books of the grocery business for petitioner and the six living children of Jacob Haller. Both the original capital and the accumulated surplus were included in these accounts. These accounts were set up by crediting to each of the daughters and stepsons of the petitioner the sum of $49,470.83 and to the petitioner the sum of $38,925.33. The profits for the respective years 1924 and 1925 were divided equally in the books of the grocery business between the petitioner and her three daughters and three stepsons and they each reported their respective amounts so credited for the taxable years in their respective income-tax returns. *1323 No partnership returns for those years were filed. The estate of Jacob Haller, however, filed returns reporting the income of the grocery business for the taxable years in question. In 1925 the petitioner and her three daughters and three stepsons decided to separate certain real estate from the grocery business and that the petitioner should take such real estate and the daughters and stepsons should take the grocery business. A formal agreement of partnership having been considered for some time prior to July 1, 1926, on that date Charles J. Haller, Frank A. Haller, Edward W. Haller, Cora H. Gaehr, Leah H. Schubert *399 and Alma H. Way, constituting all of the petitioner's living children and stepchildren, entered into a written agreement of partnership with respect to the wholesale grocery business theretofore carried on under the name of Jacob Haller or the estate of Jacob Haller. In this partnership contract it is recited, among other things, that by agreement between the petitioner and the parties to the contract certain described real estate had been separated from the wholesale grocery business and that petitioner had received such real estate and had transferred*1324 and conveyed all her interest in the wholesale grocery business to the parties in the partnership, including in such conveyance the real estate occupied by the grocery business. The executors of the estate filed no accounting prior to July 26, 1926. On July 26, 1926, the executors filed an account. This account showed a final distribution of the assets of the estate on January 1, 1926, to the petitioner, her three daughters and three stepsons in the total sum of $346,902.28. This amount was made up of sums standing to the credit of the petitioner and her daughters and stepsons in the general ledger of the business of Jacob Haller as follows: Alma, $51,730.78; Cora, $51,734.67; Leah, $51,780.97; Frank, $51,714.90; Edward, $51,677.41; Charles, $51,383.74; and petitioner, $36,879.81. In the deficiency notice addressed to the petitioner the respondent held that the total of the net profits of the wholesale grocery business for the respective years 1924 and 1925 was taxable to the petitioner. OPINION. VAN FOSSAN: In , deficiencies in the income taxes of the present petitioner for the years 1917 to 1923, inclusive, were in controversy. *1325 In opposing those deficiencies the petitioner contended, among other things, that "under the will of Jacob Haller construed in the light of surrounding circumstances at the time of his death one-seventh of the income is distributable to her and one-seventh to each of the six children who were living during the taxable years." Substantially the same contention is made in the present proceeding. In our former decision we held in substance that the will of Jacob Haller and the codicil thereto created for the petitioner a life estate in the net profits of the grocery business, referred to in the findings of fact herein, and that there was nothing in the proof indicating that at the time Jacob Haller executed the codicil and at the time of his death he intended the petitioner and his children to share equally in the profits of the business. We said: "There is no basis on which we can say that it was the intention of the testator that his widow should be under the duty *400 to pay over to the children any part of the income which, under the will, was payable to her. Nor is there any evidence sufficiently definite to permit us to determine that the operation of the business was*1326 continued under any agreement which superseded the provisions of the will." The petitioner contends in this proceeding that there was such an agreement between her and the six living children of Jacob Haller, and that an equal partnership in the profits of the business for the years 1924 and 1925 was created thereby. The respondent urges, however, that our decision in the former case is conclusive with respect to the question of whether or not under the will of Jacob Haller the entire net income of the grocery business was taxable to the petitioner, and is also conclusive upon the question of whether or not the petitioner, her daughters and stepsons had entered into any agreement prior to December 31, 1923, whereby the provisions of the will were superseded. It is well settled that, in the absence of fraud or collusion, a judgment of a competent tribunal is conclusive upon the parties thereto and upon those in privity with them as to all questions involved in the controversy. ; *1327 ; . In , we applied this principle, holding in effect that when a corporate taxpayer's liability for a deficiency in tax has been determined by the Board a transferee who was a stockholder of the taxpayer would not be heard to contest the taxpayer's liability for the determined deficiency. The petitioner asserts, however, that the question of whether or not a partnership in the profits of the grocery business was created by agreement between the petitioner and the six living children of Jacob Haller was not litigated or decided in It may be said, however, that, even if that exact question was not decided, we held, as hereinbefore stated, that there was no evidence sufficiently definite to permit us to determine that the operation of the business was continued under any agreement with superseded the provisions of Jacob Haller's will. It was said by the Supreme Court of the United States in *1328 : The language, therefore, which is so often used, that a judgment estops not only as to every ground of recovery or defense actually presented in the action, but also as to every ground which might have been presented, is strictly accurate, when applied to the demand or claim in controversy. Such demand or claim, having passed into the judgment, can not again be brought into litigation between the parties in proceedings at law upon any ground whatever. Applying the principles enunciated by the Supreme Court in the foregoing quotation from Crmwell v. County of Sac, it follows that *401 our former decision concludes the petitioner from asserting that a partnership in the profits of the grocery business existed at any time during the years in controversy in the former proceedings, i.e., prior to January 1, 1924. In accordance with the same principles our former decision is conclusive as to the construction of the will of Jacob Haller and the codicil thereto to the effect that under the will the children of Jacob Haller had no legal interest in the net profits of the grocery business. But, even if that*1329 decision were not conclusive in the respects set forth, we find nothing in the will of Jacob Haller or in the codicil thereto or in the facts in evidence in the present proceeding which alters the views concerning the construction of the codicil to the will expressed in our former decision. In accordance with the decisions of the Pennsylvania courts cited in that decision, it is clear that under the terms of the will and codicil the petitioner had a life estate in the net profits of the grocery business founded by Jacob Haller and to be carried on by his executors. Under the terms of the will and codicil the petitioner was not accountable to any of the children for any part of the net profits. Nor is there convincing evidence in the instant proceeding that she assigned or gave to the children or any of them any part of her beneficial property right in the net profits of the grocery business or in an other way divested herself of any part in that right prior to January 1, 1924. In , the Supreme Court stated further as follows: It is not believed that there are any cases going to the extent that because in the prior action*1330 a different question from that actually determined might have arisen and been litigated, therefore, such possible question is to be considered as excluded from consideration in a second action between the same parties on a different demand, although loose remarks looking in that direction may be found in some opinions. On principle, a point not in litigation in one action can not be received as conclusively settled in any subsequent action upon a different cause, because it might have been determined in the first action. The demand in the present proceeding is for a redetermination of the deficiencies in income taxes for the years 1924 and 1925. These deficiencies were not in controversy in the former proceedings. It may, therefore, be determined whether or not, during the years now in question, a partnership in the profits of the grocery business existed between the petitioner and the six living children of Jacob Haller, deceased. In solving this problem it should be borne in mind that the executors of the will of Jacob Haller had not accounted prior to those years and did not account during either of those years. During those years the legal title to the assets of the grocery*1331 business founded by Jacob Haller and to be carried on by his executors under the terms of the will was still vested in the executors. Under the *402 will the petitioner had no title to the assets of the business. She had only an interest in the business during her lifetime. The petitioner contends, however, that at some time prior to 1924 or at the beginning of that year she permanently and absolutely divested herself of her property right in six-sevenths of the profits of the grocery business, giving one-seventh of this property right to each of the children of Jacob Haller and keeping one-seventh interest for herself. She also contends that she and the six living children allowed the larger portion of the profits accruing to each to accumulate in the business; that there was an understanding that each of the seven would share equally in both the profits and losses of the business; that the setting up of capital accounts as of December 31, 1923, as stated in the findings of fact that the equal distribution of the net profits of the business in 1924 and 1925 were in accordance with such understanding and that, by reason of all these facts, a partnership existed between them*1332 during the taxable years now in question. If the petitioner divested herself of any part of her property right she did so by making a gift of a part of that right to each of the living children of Jacob Haller, deceased. This Board has recently said, in : * * * To constitute a gift in contemplation of law, there must be (1) an intention on the part of the donor to give - that is, to surrender complete control and dominion over the property to the donee; (2) there must be an acceptance of the gift by the donee; and (3) there must be transfer of title accompanied by delivery of the property. , ; ; . See also ; . It is our opinion that it is not to be concluded from the evidence in this proceeding that there was an intention on the part of the petitioner to surrender to the six children of Jacob*1333 Haller complete control and dominion over all of her beneficial property right in the grocery business excepting only one-seventh thereof. There is some evidence in the record that it was the "understanding" of the petitioner and Jacob Haller's living children that they were all to share equally in the profits of the business. It seems fairly inferable, however, that this understanding grew out of their own interpretation of the provisions of Jacob Haller's will and codicil. In other words, the petitioner and the six living children understood that the will and codicil of Jacob Haller provided, in effect, that the petitioner and the decedent's children should share equally in the profits of the business. Such an understanding would not supersede the proper interpretation of the codicil under the law nor control its legal incidences. This erroneous understanding of the legal *403 effect of the testament does, however, negative the existence of an intention to make a gift. Petitioner could not intend to give the daughters and sons that which she understood was already theirs. Likewise, the evidence does not satisfactorily show that any agreement existed between the petitioner*1334 and the children in 1924 and 1925 which created a partnership in the profits of the grocery business. Though, with the assent of the petitioner, there had been equal distributions of sums of money in 1914 and 1920, we are not convinced by the mere fact of these distributions that the petitioner had divested herself of her property right in the grocery business. The evidence as to the existence of a partnership prior to 1926 leaves too much to inference and conjecture. If a partnership had existed prior to 1926, it would have been normal to dissolve the same when the new partnership among the children and excluding the petitioner was formed. The partnership agreement entered into in July, 1926, however, makes no reference to a preexisting partnership nor does it purport to be a confirmation of any previous understanding. The language of the contract is that the parties "do hereby form a partnership" and "the date upon which the partnership shall commence shall be January 1, 1926." It is but reasonable to assume that language of different tenor would have been used had the partnership existed in fact prior thereto. It is likewise significant that no partnership returns were filed*1335 for the taxable years. The fact that in 1923 capital accounts in the name of each of the children were set up on the books is not controlling. This is but one of many facts to be weighed. In 1926, however, the petitioner appears to have divested herself of all rights in the grocery business and to have received in exchange therefor certain real estate situated in the city of Erie. This arrangement seems to have been entered into with the assent of the executors, who filed their final accounting immediately after the partnership agreement was entered into on July 1, 1926, by the daughters and stepsons of Mary Haller. This partnership agreement and the distribution of the estate set forth in the final accounting of the executors disclose that in 1926 the petitioner transferred her interest in the grocery business to her daughters and stepsons and that the daughters and stepsons formed a partnership. These facts are not proof of the contention that the petitioner and the six children of Jacob Haller had, by agreement, created a partnership in the grocery business prior to or during 1924 and 1925. We can not hold on the evidence that the petitioner ever divested herself of*1336 her sole right to the net profits of the business or that any of the children ever acquired an enforceable interest in the business prior to the execution of the written partnership instrument in 1926 and the contemporaneous distribution of the estate of Jacob Haller. *404 From the foregoing it follows that the respondent did not err in holding that the whole of the net profits of the grocery business for the years 1924 and 1925 is taxable to the petitioner. Decision will be entered for the respondent.