Fletcher v. Commissioner , 7 T.C. 1186 ( 1946 )

Edward P. Fletcher, Petitioner, v. Commissioner of Internal Revenue, Respondent

Fletcher v. Commissioner

Docket No. 8040

United States Tax Court

7 T.C. 1186; 1946 U.S. Tax Ct. LEXIS 30;

November 25, 1946, Promulgated

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Decision will be entered for the respondent.

Family Partnership. -- Petitioner's unmarried sister was not a partner with him, within the meaning of the Internal Revenue Code, in conducting the business and earning the income of the Fletcher Oil Co.

Laurence Sovik, Esq., for the petitioner.

J. Frost Walker, Jr., Esq., for the respondent.

Murdock, Judge.

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MURDOCK

The Commissioner determined a deficiency of $ 8,091.09 in the petitioner's income tax for the calendar year 1941. The petitioner claims error on the part of the Commissioner in holding that all, instead of only two-thirds, of the income of the Fletcher Oil Co. was taxable to the petitioner.

FINDINGS OF FACT.

The petitioner is an individual. He filed his return for 1941 with the collector of internal revenue for the twenty-first district of New York.

He was about 41 years of age in 1941. He resided in Utica, New York, with his wife and 12-year-old adopted daughter. He had two sisters and two brothers. One brother was unable to work regularly due to an injury. He receives a pension. The other brother, Vincent, is regularly employed by the Fletcher Oil Co. One sister is married and lives in Danemora, New York. The other sister, Helen, is unmarried and lives in Utica with the petitioner's mother. None of the others mentioned lived with Helen and their mother at any time material hereto. The mother was about 71 years of age in 1941. Helen had full time employment as a secretary for a newspaper at an annual salary of $ 1,500 at all times material hereto. Helen took care of her mother, but her income was not sufficient to support their mother in the way in which the petitioner desired. The petitioner had contributed to the support of his mother.

The petitioner began to do business in 1925 as a sole proprietor under the name of Fletcher Oil Co. The business was originally the wholesale distribution of gasoline, motor oil, tires, batteries, and related products. He built up the business from one station until it included six retail stations and had a number of dealers as customers. The assets at the close of 1940 were carried upon the books at $ 338,466.44, less a reserve of $ 61,667.40 for depreciation and a reserve of $ 20,989.59 for bad debts. The total capital was carried at $ 201,323.35. The remaining item was liabilities of $ 54,486.10.

The petitioner had a talk with his mother and Helen in the latter part of 1940 in which he stated that he intended to give Helen $ 50,000 and one-third of the income of his business.

The petitioner never actually gave Helen $ 50,000, but he entered into a written agreement with her at some undisclosed date in July 1941. The agreement contained, inter alia, the following:

A recital that the petitioner owned the assets of the Oil Company, they were needed in the business, and the petitioner, desiring to give Helen $ 50,000, has transferred to her $ 50,000 of the capital account of the Oil Company and has set upon the books of that company a capital account in that amount in her name.

"1. The undersigned Edward P. Fletcher does hereby confirm the transfer, assignment and setting over unto Helen Fletcher of Fifty Thousand Dollars ($ 50,000.00), of the capital account of the Fletcher Oil Company so that Helen Fletcher is the unqualified owner of the above amount of the capital account of the said oil company and such gift or transfer is represented and evidenced by the transfer upon the books of the Fletcher Oil Company of Fifty Thousand Dollars ($ 50,000.00), of the capital account of said company. Such transferred account is to be carried in the name of Helen Fletcher and such capital account in the amount of Fifty Thousand Dollars ($ 50,000.00), shall remain unchanged, neither increased or diminished by the subsequent profits or losses of the Fletcher Oil Company.

"2. That the parties hereto shall as partners by virtue of their joint ownership of the capital account of said Fletcher Oil Company engage in and conduct the business of dealing in gasoline, oil and petroleum products and all appurtenant business in the manner that the said business has heretofore been conducted.

"3. That the name of the partnership is and shall be Fletcher Oil Company.

"4. The term of the partnership shall be indefinite.

"5. The place of business of the partnership shall be located at Utica, New York.

"6. The capital of the partnership herein created shall consist of the assets shown in the capital account of the Fletcher Oil Company as of January 1, 1941, to wit, $ 181,323.35 from which has been transferred to Helen Fletcher the sum of $ 50,000.00 as above set forth. Such capital account is thus divided and owned as follows: Edward P. Fletcher $ 131,323.35; Helen Fletcher $ 50,000.00; making a total capital account owned by both parties of $ 181,323.35.

"7. That Edward P. Fletcher shall continue as the General Manager of the partnership. That the compensation of the undersigned parties for the services rendered shall be fixed by agreement among the parties.

"8. That the net profits from operations of the company shall be divided between the parties as follows: 66 2/3% to Edward P. Fletcher and 33 1/3% to Helen Fletcher, such profits or losses to be determined by audit at the close of each fiscal year and shall be credited or debited upon the basis above mentioned upon the books of the Fletcher Oil Company to an Undivided Profit's Account and thereafter transferred to the personal account of each party. The amount of credit as shown in each such personal account will be subject to withdrawal in cash at such time as the cash position of the company warrants the same and the opinion of Edward P. Fletcher as to the availability of cash for withdrawal purposes will be final.

"8. That full and accurate accounts of the transactions of the partnership shall be kept in proper books, same to be kept at the place of business of the partnership and each party shall at all times have access to and may inspect and copy any part or the whole of them.

"9. Neither partner shall either directly or indirectly during the term of this partnership engage in any competing busines or occupation.

"10. It is further agreed that in the event that Helen Fletcher should have an opportunity to sell or dispose of her interest in the capital account of Fletcher Oil Company transferred to her under terms of this instrument, or any part thereof, she shall give notice in writing to said Edward P. Fletcher of her intention, whereupon said Edward P. Fletcher shall then have a period of six (6) months from the date of the receipt of said notice within which he may purchase the interest of said Helen Fletcher at the price of $ 50,000.00 together with the amount as shown to her credit in her personal account and any amount to which she is entitled which has not been transferred from the Undivided Profits account to her personal account."

A provision for the purchase of full ownership by the other if either died.

The agreement has never been changed or terminated.

The petitioner discussed with his attorney and his auditor the question of the necessary book entries to carry out the above agreement and left the matter to them.

The petitioner filed a gift tax return for 1941, reporting a gift of $ 50,000 to Helen on January 1, 1941, with tax due in the amount of $ 99.

On his income tax return for 1941 the petitioner reported income of $ 29,952.68 representing income from Fletcher Oil Co. which he stated thereon was a partnership. The Commissioner, in determining the deficiency, added to the income of the petitioner $ 15,600.80, with the explanation that the profits from Fletcher Oil Co. constituted income of the petitioner.

The record does not disclose what amounts, if any, were withdrawn by Helen from the oil company during 1941, except that $ 6,500 of United States Government bonds were purchased in Helen's name in December 1941 with funds of the oil company. It does not show anything in regard to Helen's 1941 return.

Helen did no work for the oil company at any time material hereto.

The petitioner did not need or desire new capital for his business. He would not have sold a one-third interest in the net profits of his business to an outsider for a contribution of $ 50,000 to its capital. One of his purposes in entering into the agreement was to reduce his income taxes. Another was to provide his sister with additional income and estate in order to help support their mother.

The petitioner's brother, Vincent, was given increased responsibility by the petitioner and had practically full charge of the retail branch of the business either shortly before or shortly after the agreement of July 1941.

OPINION.

The petitioner contends that he had a bona fide partnership with his sister which must be recognized for Federal income tax purposes. He attempts to distinguish (Feb. 25, 1946), and (Feb. 25, 1946), on the ground that the arrangement in those cases was between a husband and wife, whereas here it was between a married brother, who lived with his own immediate family, and an adult sister who was not a member of the brother's intimate family group.

There is no other important factual difference between the present case and the two decided cases upon which the petitioner could rely. Here, as there, no new capital was needed and none was contributed. The sister had little to do with the whole arrangement. The "contribution" of the sister came from a contemporaneous "gift" of a part of the existing capital by its owner, the brother, accomplished by a debit to one account and a credit to another. The sister contributed no services. It does not appear that she had any separate estate. Her participation added nothing to the business. The petitioner continued to manage the business despite the fact that Vincent was taking on greater responsibilities. This was the only business activity of the petitioner, so far as this record shows. No business purpose was intended or accomplished.

This is a stronger case for the Commissioner in some respects than either the Tower or Lusthaus case. Here the sister's interest was not to be reduced by losses. She was not to share in losses. Neither was her capital to be increased. Incidentally, $ 50,000 was substantially less than one-third of the capital. The provisions for termination and for withdrawals retained a measure of control in the petitioner.

One obvious result of the arrangement, if effective for tax purposes, would be to enable the petitioner to help support his aged mother and his unmarried sister without being taxable upon the income from his business used for that purpose. This was a family affair which otherwise would never have been considered. The petitioner actually created the right to receive and enjoy the benefit of the income even though the entire earnings of the business would not represent compensation for his personal services. The evidence does not show a real intention of the petitioner and his sister to join together for the purpose of operating the business as partners. The fact that in the Tower and Lusthaus cases the operator and owner of the business sought to make his wife the partner for Federal income tax purposes, while here the petitioner sought to make his sister a partner for the same purposes, does not serve to distinguish the cases.

There is another reason why the petitioner can not succeed here. He seeks to divide the income of the business for the full year 1941 between himself and his sister for tax purposes upon the basis of a 2/3-1/3 partnership. The agreement is dated July 1941. There would be no justification for allowing him to escape tax on what were clearly his own earnings from his own business for the period from January 1, 1941, to the date of the agreement. The record does not show any agreement for sharing earnings on any basis prior to the written agreement of July 1941. The record does not show when the profits in question were earned. We would not be justified in making any allocation of earnings of the business between the first and last portions of the year, even if convinced that a part of the profits are not taxable to the petitioner.

Decision will be entered for the respondent.