Bettens v. Commissioner , 19 B.T.A. 1166 ( 1930 )

ALBERT BETTENS, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Bettens v. Commissioner

Docket Nos. 20356, 26148.

United States Board of Tax Appeals

19 B.T.A. 1166; 1930 BTA LEXIS 2252;

May 27, 1930, Promulgated

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J. W. S. Butler, Esq., for the petitioner.

Eugene Meacham, Esq., for the respondent.

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VAN FOSSAN

These proceedings are brought to redetermine the tax liability of the petitioner for the years 1919, 1920, 1921, 1922, and 1923. Docket No. 20356 relates to the years 1919, 1920, and 1921, while Docket No. 26148 involves the years 1922 and 1923. In 1919 and 1923 over-assessments in the sums of $703.42 and $127.67, respectively, were found by the respondent and for the years 1920, 1921, and 1922 he asserted deficiencies in the amounts of $3,782.35, $4,799.47, and $3,673.16, respectively. The cases were consolidated for hearing and decision. The petitioner abandoned the controversy with relation to the years 1919 and 1923. Hence there remain for consideration the deficiencies asserted for the years 1920, 1921, and 1922.

The sole question at issue is the allegation of the petitioner that the respondent erroneously included in the petitioner's taxable income certain amounts alleged to have been received by him as income from a partnership operating the Hotel Land in Sacramento, Calif. The petitioner alleges that he was not a partner in that business during the years 1919 to 1923, inclusive, and hence is not subject to the tax.

The evidence presented by petitioner at the hearing consisted solely of the ten documents hereinafter described. From the recitals contained in those instruments, the record of the case, and the admissions of counsel, we make the following findings of fact.

FINDINGS OF FACT.

On April 16, 1917, Volney L. Fox and Fred J. Johns were associated as partners in the operation of the Hotel Land at Sacramento, Calif. On that day they entered into a contract of lease with Nettie E. Evans, the owner of the building. That lease expired on April 15, 1927, and contained a provision prohibiting its assignment by the lessees, Fox and Johns, without the written consent of the lessor. On or before April 1, 1918, Fox desired to sell, and the petitioner to buy, Fox's interest in the business. An agreement was reached whereby the petitioner would take the place of Fox in the partnership of Fox & Johns. The three persons involved, Fox, Johns, and the petitioner, were entirely satisfied with the proposed arrangement, but were unable to secure from Nettie E. Evans her consent to the assignment to Bettens by Fox of the latter's interest in the lease. Consequently, the following ten separate documents were prepared and executed:

1. An agreement between Fox and Bettens dated May 10, 1918, setting forth the sale from Fox to Bettens of certain personal property situated in the Hotel Land and consisting of the equipment, furniture and fixtures, used in connection with the business of operating that hotel. Included in this sale were also book accounts, surplus, cash on hand and all other personal property and assets of every kind and character situated in the hotel and belonging to its business. The purchase price was $29,352 in cash. Fox sold to Bettens his interest in the above personal property, which would amount to 67 per cent thereof after the payment of certain indebtedness against the partnership and the personal property owned by it. Bettens agreed to assume all liability for that indebtedness. Included in the sale was a credit of $2,353 standing on the books of the company in favor of said Fox. The sale was made effective as of April 1, 1918, and was based on the condition of the books of the hotel on that date.

2. A notice dated May 10, 1918, and addressed to the Capital National Bank, Sacramento, Calif., directing that bank to hold in escrow five documents to be delivered to the petitioner and Fox under certain conditions. These documents are Nos. 3, 4, 5, 6, and 10 hereinafter described. The bank was authorized to deliver to the petitioner documents Nos. 10, 3, 4, and 5 upon the performance of the conditions set forth in document No. 10, together with the written consent of Nettie E. Evans if it should be required by the petitioner. If such consent should not be procured and the petitioner should elect to complete the transaction without it, the bank was authorized to deliver document No. 6 to the said Fox. Following the signatures to this notice appears this waiver and endorsement, the latter in the handwriting of Butler:

I do hereby waive the provisions of the foregoing escrow instructions relative to VOLNEY L. FOX delivering to you the written consent of NETTIE E. EVANS the assignment to undersigned of the Lease referred to in said instructions, and authorize you to fully complete the transaction herein referred to.

(Signed) ALBERT BETTENS.

NOTE: While the above waiver is undated it was executed and delivery made January 10, 1923 as per my pencil notation on the original.

(Signed) J. W. S. BUTLER.

3. An assignment from Fox to Bettens dated May 10, 1918, transferring to the petitioner the interest of Fox in the lease from Nettie E. Evans to Fox and Johns, under the terms of that lease.

4. An assignment from Fox to Bettens dated May 10, 1918, transferring certain barroom furniture and fixtures, together with a license for running a saloon known as the barroom in connection with the Hotel Land. This assignment was to expire on April 15, 1927.

5. An assignment from Fox to Bettens dated May 10, 1918, transferring to the petitioner all the right, title and interest of Fox in and to the business and property known as the Hotel Land, including its good will. The assignment was made effective as of April 1, 1918. It transferred also all of the rents and profits from the hotel business accruing from and after April 1, 1918.

6. An indemnity agreement between Bettens and Fox dated May 10, 1918, holding Fox harmless from any loss or damage which might result from the assignment of the Evans lease, as above referred to, without the consent of Nettie E. Evans to such assignment.

7. A lease from Bettens to Johns dated May 10, 1918, covering all the equipment, furniture and fixtures and other personal property set forth in document No. 1, except the book accounts, surplus and cash on hand. The lease was from month to month and extended no longer than April 15, 1927. A monthly rental of $10 was stipulated. The lease contained the usual provisions for payment of rent and quiet enjoyment of the property.

8. A mutual option executed by Bettens and Johns dated May 10, 1918, providing for the purchase by either of the interest of the other in the personal property set forth in document No. 7.

9. An agreement between Bettens and Johns dated May 10, 1918, to engage in business as copartners in the management and operation of the Hotel Land in accordance with the terms of a partnership agreement attached to the said instrument. The partnership agreement was executed but its delivery was contingent upon the assignment of the lease to the petitioner by Fox of the latter's interest in the Evans' lease. In the event the partnership agreement should become effective it was agreed "that the same shall be operative as of the first day of April, 1918, regardless of the time when the same shall be delivered and consummated, and regardless of the time when the assignment of said lease shall be made." It was further agreed that a full accounting of all transactions of the hotel business from and after April 1, 1918, should be made between Johns and the petitioner with proper adjustments of profits and losses. Such accounting included deductions for rent paid by Johns to Bettens for the use of the furniture and fixtures as provided in document No. 7.

The partnership agreement dated April 1, 1918, between Bettens and Johns and attached to the above document No. 9, provided:

THAT WHEREAS, the parties hereto, as of this day, have associated themselves in business together as co-partners for the purpose of conducting, operating and maintaining that certain hotel known as and called the "Hotel Land" * * *

IT IS AGREED, that the said parties to this agreement are now, and that since, from and after the 1st day of April, 1918, they have been and will hereafter be associated together as co-partners in business, in the conduct, operation and management of the Hotel Land. * * *

The agreement stipulated that the petitioner was the owner of an undivided two-thirds interest in such business and that the profits from its operation were to be divided in that proportion. Provision was made for the payment of a promissory note due to Nettie E. Evans. Johns was required to pay back to the hotel business his full share of dividends and profits arising therefrom, and likewise Fox was to repay an equal amount to the business, for the curtailment of the Evans note, and such payments were to commence April 1, 1918.

The agreement further provided that Johns should act as manager of the hotel at a stated salary and contained certain immaterial restrictions relating to the conduct of the business. The following provision is pertinent:

IT IS AGREED that the said parties hereto were on said 1st day of April, 1918, the owners in undivided interests of the said hotel and hotel business and the furniture, personal property, equipment, book accounts and good will thereof in the proportions hereinabove stated, to-wit: the said first party, two-thirds thereof, and the said second party, one-third thereof; that the said respective interests of said parties, and all book accounts and all assets of said hotel and business were on said 1st day of April, 1918, by said parties delivered into said co-partnership as the capital thereof.

The agreement further provided for a monthly settlement of the affairs of the partnership. In it was contained also an option to either partner to purchase the interest of the other in the event of a dissolution, and other unimportant details of management.

10. An option from Fox to Bettens dated April 1, 1918, granting to the petitioner the sole and exclusive option and privilege of purchasing the right, title, and interest of Fox in and to the Nettie E. Evans lease dated April 16, 1917, and also of purchasing the business, good will, saloon, saloon license, and saloon fixtures of the Hotel Land. The option was to be in full force so long as the petitioner should comply with its terms and conditions, but not later than April 15, 1927. As a consideration for the option the petitioner agreed to hold Fox harmless from the payment of any rentals under the lease and from the loss or damage arising out of the performance of or failure to perform any of the terms, conditions and covenants of that lease. The petitioner agreed to become responsible for any litigation that might arise in connection with the Evans lease, to pay all costs thereof and to hold the said Fox "safe and harmless from the payment of any costs or expenses including counsel fees that might be incurred in such litigation." The petitioner was required to pay the sum of $10 as the purchase price if he elected to acquire Fox's interest in the lease. Upon such payment Fox agreed to assign the lease and to procure the written consent of Nettie E. Evans thereto. The petitioner was granted the option to waive such written consent of the lessor.

On January 10, 1923, the escrow arrangement was terminated and on that date the several documents mentioned in the notice to the Capital National Bank (and document No. 2) were delivered to the petitioner.

Fox reported as his own income his share of the profits accruing from the operation of the Hotel Land during the years in question and paid the tax thereon. He turned over to the petitioner his net share of such profits each year. In 1923 the petitioner reported his share of the profits from the partnership on his income-tax return and showed it to have been received from Bettens & Johns, a partnership. On the petitioner's individual income-tax return for the year 1923 he gave his occupation as "hotel management." During 1920, 1921, and 1922 the petitioner received dividends from the Hotel Sacramento and in 1921 received a dividend from the Hotel Fresno.

OPINION.

VAN FOSSAN: The sole question at issue in this case is whether or not the petitioner, Albert Bettens, was a member of the partnership of Bettens & Johns during 1920, 1921, and 1922 and as such shared in the profits which accrued from the operation of the Hotel Land. In arriving at a solution of this question we must scrutinize carefully the various documents purporting to establish the relationship between Bettens and Johns and the acts of the parties thereto, including those of Fox, the former partner of Johns, and we also must consider the intent of all parties involved in the transaction.

On April 1, 1918, it was the patent purpose of the petitioner, Fox, and Johns that the petitioner should purchase from Fox his interest in the partnership of Fox & Johns, then operating the Hotel Land, and should establish a new partnership consisting of the petitioner and Johns, to step into the shoes of the old partnership. One obstacle and only one prevented the immediate sale and transfer of Fox's interest in the partnership to the petitioner. That was the unwillingness and refusal of Nettie E. Evans to consent to the assignment of the lease executed by herself and the partnership of Fox & Johns covering the use of the Hotel Land building. A convenant in the lease provided that the lessee should not assign it or any interest therein nor sublet the premises without the written consent of the lessor. For some reason unrevealed in the record Nettie E. Evans was unwilling to accept the petitioner as a colessee in the place of Fox. In order to circumvent the failure of Mrs. Evans to consent to the assignment an elaborate scheme of contracts, options and assignments was evolved. On the face of some of the documents it appeared that no assignment of the lease had actually been made. This careful and obvious recital of the alleged status of the old partnership evidently was made to reassure Mrs. Evans that no assignment had actually been made and thus prevent any action on her part seeking the cancellation of the lease.

However, the possession and assignment of the lease covering the Hotel Land premises were only factors in the partnership relation between the petitioner and Johns. We must look to the other instruments which formed a part of the screen behind which the transfer of Fox's partnership interest to the petitioner and the establishment of the partnership relation between the petitioner and Johns were constructively accomplished. The first document in the series is an agreement of sale by which Fox transferred his interest in the personal property in the Hotel Land to the petitioner for the sum of $29,352. The property transferred consisted of all tangible assets of the Hotel Land and also its book accounts, surplus and cash on hand. The consideration mentioned was the real sale price of the interest of Fox in the partnership of Fox & Johns. All other considerations involved in the various assignments, options, and rental agreements are merely nominal. The agreement recites that it shall be effective as of April 1, 1918, and that "all of the assets of said business as shown upon the books of said hotel and hotel business as of said date shall be and are hereby transferred to and become the property of said party of the second part as of said first day of April, 1918." It is evident that by this transaction Fox divested himself of his working interest in the partnership.

The agreement between the petitioner and Johns "to form a partnership" was dated May 10, 1918, but had attached to it the agreement of partnership dated April 1, 1918, and signed by Albert Bettens and Fred Johns. The latter agreement recites the fact that the parties thereto "are now and since, from and after the first day of April, 1918, they have been and will hereafter be associated together as co-partners in business." On the face of the record, therefore, are the agreement and admission of the petitioner and Johns that a partnership existed between them on April 1, 1918.

The various leases, options, and agreements entered into between and among Fox, Johns, and the petitioner may have purported to retain in Fox the bare legal title to certain property of the old partnership, such as the lease of the hotel premises, the barroom equipment and license, etc., pending Mrs. Evans' consent or the petitioner's waiver thereof. "But," as said by the Supreme Court in , "taxation is not so much concerned with the refinements of title as it is with the actual command over the property taxed - the actual benefit for which the tax is paid." The lease from the petitioner to Johns (document No. 7) did not include the accounts, surplus and cash on hand, belonging to the hotel business. The petitioner acquired these assets from Fox on April 1, 1918. He continued to use them for the benefit of the hotel with the knowledge and consent of both Fox and Johns. We are of the opinion that the petitioner and Johns actually established a partnership as of April 1, 1918, for the conduct and operation of the Hotel Land.

The facts relating to the operation of the hotel for the period from April 1, 1918, to January 10, 1923, are quite meager. We do not know, however, that Fox paid over to the petitioner his share of the net proceeds during each year of this period. Fox returned and paid the income tax on that share, but it does not appear what adjustment, if any, was thereafter made between him and the petitioner. Johns remained as manager of the hotel from April 1, 1918, to January 10, 1923, exactly as provided in the partnership agreement between the petitioner and Johns.

Upon the so-called termination of the escrow on January 10, 1923, all the agreements held by the Capital National Bank were presumed to become actively operative and binding. Nothing remained to be done under them except the arithmetical labor of accounting. The method and manner of conducting the Hotel Land continued just the same as they had been during the period of almost five years immediately preceding. As between the parties, the partnership of the petitioner and Johns likewise continued to function as it had from April 1, 1918. We are of the opinion that it was clearly the intent of all concerned to discontinue the partnership between Fox and Johns on April 1, 1918, and to substitute therefor the partnership of Bettens & Johns and that such purpose was actually accomplished.

Judgment will be entered under Rule 50.