Parker v. Commissioner

HAROLD G. PARKER AND MAY J. PARKER, HUSBAND AND WIFE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Parker v. Commissioner Docket No. 90260. United States Board of Tax Appeals 39 B.T.A. 423; 1939 BTA LEXIS 1039; February 10, 1939, Promulgated *1039 JOINT VENTURE - DEDUCTION OF NONCAPITAL LOSS UNDER SECTION 23(r), REVENUE ACT OF 1932. - Petitioners, husband and wife, in 1933 established a so-called joint brokerage or trading account with funds supplied solely by the husband. The wife contributed neither capital nor services to the enterprise and took no part in its conduct. There was no agreement that she should share in the profits or losses. Held, such account did not constitute a joint venture, but was in fact the individual account and property of the husband, and he is entitled to deduct the noncapital loss sustained in that account from the noncapital gains realized by him in another individual account. W. A. Seifert, Esq., Floyd F. Toomey, Esq., A. G. Wallerstedt, Esq., and William H. Quealy, Esq., for the petitioners. Ralph E. Smith, Esq., and William G. Cullen, Esq., for the respondent. HILL *424 This proceeding involves a deficiency in income tax for the year 1933 in the amount of $8,407.13. As shown in the deficiency letter, respondent made a number of adjustments to the net income reported in the joint return filed by petitioners for the taxable year. All such*1040 adjustments, with the exception of an increase to income designated "profit sale of securities $25,825.83", were agreed to by petitioners, and the deficiency resulting therefrom in the amount of $107.03 was thereafter assessed. Thus, the deficiency of $8,407.13 here in controversy results solely from the adjustment increasing income in the amount above stated, and the issue submitted for decision in that connection is whether or not respondent erred in computing taxable gain from an individual trading account of petitioner Harold G. Parker by disallowing as a deduction the loss sustained in a trading account carried in the joint names of both petitioners. At the conclusion of the hearing, petitioners moved for a decision of no deficiency with respect to petitioner May J. Parker since it appeared that she had no income taxable for the year 1933. There being no objection by respondent, the motion was granted. Decision will be entered accordingly. FINDINGS OF FACT. The petitioners are individuals, husband and wife, residing at Flushing, Long Island, New York. Petitioners filed a joint Federal income tax return for the calendar year 1933 with the collector of internal revenue*1041 for the second district of New York, on which they reported a net taxable gain from the sale of securities held less than two years in the amount of $4,211.17, computed as follows: Account Broker Amount H. G. Parker Fuller, Rodney & Co (Profit) $30,037.00 "H. G. Parker and May J. Parker - Joint Account" do (Loss) 25,825.83 Net taxable gain reported on return 4,211.17 The above amounts correctly represent profit or loss realized in such accounts during the calendar year 1933. The account designated "H. G. Parker" was opened by petitioner Harold G. Parker prior to the year 1933, and the petitioner May J. Parker had no interest therein during that year. The account designated "H. G. Parker and May J. Parker - Joint Account" was opened on July 6, 1933. Harold G. Parker thereafter transferred all the funds used during the year 1933 for the purchase of securities in said account in the total amount of $59,000 from the account designated "H. G. Parker." *425 In connection with the account opened on July 6, 1933, above mentioned, both of the petitioners herein executed a written instrument dated July 20, 1933, entitled "JOINT ACCOUNT" reading*1042 as follows: In consideration of your carrying a joint account for the undersigned, we jointly and severally agree to be fully and completely responsible and liable for said account and to pay on demand any debit balance or losses at any time due in this account. Each of us has full power and authority to make purchases and sales, withdraw moneys and securities from it or do anything else with reference to said account, either individually or in our joint names, as either of us may elect, and you are authorized and directed to act upon instructions of any of us. Any and all notices of purchases or sales or any demand for margin sent to either of us shall be binding upon us both and upon our accounts. We jointly and severally agree that you shall have a lien on and may hold as collateral security for said account any and all securities and equities you may hold or have in any account at any time for us or any one of us, and that the assertion or enforcement of any such lien shall not effect or alter the liability of any of us or us all for any debit balance or loss on said account. This arrangement shall continue until the receipt by you from us of written cancellation thereof. *1043 On July 20, 1933, petitioner May J Parker executed an instrument reading in material part as follows: Fuller, Rodney &Co., New York, N.Y. In consideration of your services as Brokers in the Purchase and/or Sale of Securities and/or Commodities, and in the carrying of such for me in one or more Accounts (whether designated by name or number, or otherwise), I agree that I shall at all times margin said Accounts to your satisfaction, and remain fully responsible therefor. In the case of my failure to maintain with you at all times such margin as you may require, you may, at your discretion, Sell or Purchase such Securities and/or Commodities as you may consider necessary to place my account or Fuller, Rodney & Co., require it, you may apply and/or transfer any and all of my Equities interchangeably between any or all my said Accounts, if more than one, without notice to me. I further agree that all Securities bought, carried and/or deposited with you in any of my Accounts, may ve loaned to or by you, and may, without notice, be pledged by you in whole or in part, separately or with other Securities and/or property, irrespective of the sum due thereon, without obligation*1044 to retain in possession or control Securities of like character and amount. All orders for the purchase and/or sale of Securities and/or Commodities are given you with the distinct understanding that actual Delivery is intended, and all transactions are to be carried out subject to the Rules and Customs of the Exchange or Market (and its Clearing House if any), where my orders are executed. In case of sale by you for me of Securities, Commodities and/or Contracts, which you may be unable to deliver from any of those held by you for my account, or which I may be unable to deliver to you, I authorize you to borrow the same and I shall be responsible for any loss, and should you in your *426 judgment be unable to borrow the same, I shall be responsible for any loss by reason thereof. The provisions of this letter shall also apply to any account in which I may be interested with one or more others. Petitioners had a joint bank account, established shortly after their marriage. It was used principally for the payment of family or living expenses. Mrs. Parker paid such bills by drawing checks on this account, but occasionally Harold G. Parker would draw a check on the*1045 account for cash or in order to pay a bill promptly. All funds deposited in this account were derived from the income of Harold G. Parker. Mrs. Parker made no contribution of funds to it whatever. The joint trading account above referred to was established for the purpose of enabling Mrs. Parker to withdraw money from it in the same way she was able to draw from the joint bank account. Mrs. Parker had no separate property or income, and made no contribution in money or other property to such joint account. Petitioner Harold G. Parker gave all buying and selling orders in connection with the joint trading account. Mrs. Parker gave no orders to buy or sell, and never discussed the operation of the joint trading account either with her husband or the brokers. She never withdrew any money from the account; both she and her husband regarded it as his account. Her husband never gave her any interest in the money or securities in the account. There was no understanding or agreement between petitioners that Mrs. Parker should share in any profits or losses resulting from the operation of the joint account. The trading account carried in the name of "H. G. Parker" belonged to petitioner*1046 Harold G. Parker. No one else had any interest in it, and Mrs. Parker was not authorized to withdraw funds from it. The family residence in which petitioners lived during the taxable year was purchased with money furnished by Harold G. Parker, but the title to the property was taken in the name of Mrs. Parker. In 1929 or 1930 petitioner Harold G. Parker purchased a house at Northport, Long Island, New York, with funds from the joint bank account hereinbefore mentioned. The title to this property was taken in the name of Harold G. Parker. OPINION. HILL: In determining the deficiency here in controversy respondent taxed all of the gain derived from the individual securities trading account of the petitioner, Harold G. Parker, and disallowed the deduction of any part of the loss sustained in the so-called joint account *427 carried in the names of both petitioners. Respondent's action was based upon the theory that the joint account constituted a joint venture which, for tax purposes, must be treated as a partnership, 1 and that the deduction by an individual partner of his share of a partnership loss resulting from the sale of noncapital assets is prohibited by section*1047 23(r)(1) of the Revenue Act of 1932. 2 In Percy H. johnston,; affd., ; certiorari denied, , we held that a partner entitled as such to a share of the profits of the partnership upon its sale of noncapital assets could not, in computing his individual taxable income, reduce such share of profits by the amount*1048 of his loss upon the sale of other similar assets owned by himself individually. We held to the same effect in , and . In ; affirmed on this point, , the taxpayer, who was a member of a partnership engaged in the stock brokerage business, operated three securities trading accounts as an individual and four accounts jointly with others. We held that the joint accounts there involved constituted joint ventures, and that the taxpayer's gains from the joint accounts, as well as from the prartnership, could not be offset against the loss sustained on his individual accounts. All parties to this proceeding accept the principles enunciated in the decisions above cited as settled law, but petitioners contend that the so-called joint account hereinabove referred to was in fact not a joint venture but the property of petitioner Harold G. Parker, and that hence he is entitled under the quoted statute to apply the loss sustained in that account against the gains derived in his other individual trading account. Thus, the*1049 issue submitted is narrowed to the question of whether or not such joint account constituted a joint venture; if so, the deficiency determined by respondent must be approved; if not, there is no deficiency due. The question presented involves substantially a state rule of property and, since petitioners reside in the State of New York, in resolving the question we are bound by the decisions of the courts of that state. ; . However, the rule recognized in New *428 York does not appear to differ materially from that generally recognized in most jurisdictions. In Rowley's Modern Law of Partnership, vol. 1, P160, it is said: A joint adventure is a commercial enterprise undertaken by several persons jointly. It is of a nature analogous to partnership and governed, in most respects by the same rules of law (citing inter alia ; ). In *1050 , the Supreme Court of New York said: A joint adventure is a limited partnership; not limited in a statutory sense as to liability, but as to its scope and duration, and under our law joint adventures and partnerships are governed by the same rules. . The principal distinction between a partnership and a joint venture is that a joint venture relates to a single transaction and a partnership to a general business of some particular kind. . There is no real distinction between a joint venture and what is termed a partnership for a single transaction. . See also 33 C.J. 841. It would seem that the authorities cited clearly establish the principle that the elements generally recognized as essential to constitute a partnership must also be present to create a joint venture, which is said to be nothing more than a partnership limited in scope and duration. What factors, then, are necessary to constitute a partnership? This question we considered at some length in *1051 , and there reached the conclusion that notwithstanding the petitioner and his wife had executed a written instrument purporting to form a partnership for the conduct of an accounting business, no bona fide partnership was created by such instrument where the wife made no contribution of capital to the enterprise and did not render any services to it, and no accounting was made to the wife for any distributive share of the net earnings. We pointed out that: One of the essential elements of a partnership is the contribution by each member of either property or services. See , and authorities cited. Petitioner's wife contributed neither. What are the facts in the instant case? The so-called joint trading account was established and operated with funds contributed entirely by petitioner Harold G. Parker. His wife contributed neither capital nor services to the enterprise; she did not participate in the conduct of the account; there was no understanding that she should share in the profits or losses, and no accounting was made to her therefor. *1052 No interest in the cash or securities contained in the account was *429 given to her. She was merely accorded the right to withdraw money from the account, if occasion required, for the same purposes she was permitted to check on the joint bank account, namely, to pay household expenses. In addition, she acquired only the right of survivorship in case her husband should predecease her prior to termination of the account. ; ; ; ; ; . In support of his argument that the joint account constituted a joint venture, respondent points to the language used in the two instruments executed by petitioners, which are set out in our findings of fact above. Those instruments obviously were for the protection and benefit of the brokers, and we think are not controlling here. Even if petitioners had entered into a formal contract of partnership, under the facts disclosed in this case it would not have created a bona fide partnership*1053 of joint venture, and, if gains instead of a loss had resulted from the account, such income would have been taxable to petitioner Harold G. Parker. For the reasons indicated, we hold that the so-called joint account was not a joint venture but in fact the individual trading account of petitioner Harold G. Parker, and that he is entitled to deduct the loss sustained in such account from the gains realized in his other account. Respondent's action is reversed. Decision will be entered for the petitioners. Footnotes 1. SEC. 1111. (a) (3) The term "partnership" includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this Act, a trust or estate or a corporation; and the term "partner" includes a member in such a syndicate, group, pool, joint venture or organization. ↩ 2. SEC. 23. (r) LIMITATION ON STOCK LOSSES. - (1) Losses from sales or exchanges of stocks and bonds (as defined in subsection (t) of this section) which are not capital assets (as defined in section 101) shall be allowed only to the extent of the gains from such sales or exchanges (including gains which may be derived by a taxpayer from the retirement of his own obligations). ↩