Opinion
Docket No. 19959.
1950-06-14
WILLIAM S. BEIN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
J. E. Rappaport, Esq., for the petitioner. W. Herdman Schwatka, Esq., for the respondent.
In December, 1942, petitioner and his partner dissolved a partnership engaged in operating moving picture theatres, and each partner assigned his entire proprietary interest therein to his wife. The wives formed a new partnership in 1943, which operated the moving picture theatres during the taxable year. Held, the petitioner is not taxable upon his wife's distributive share of partnership income in 1944. J. E. Rappaport, Esq., for the petitioner. W. Herdman Schwatka, Esq., for the respondent.
This case involves an income tax deficiency for 1944 in the sum of $10,940.54. The issue is whether petitioner is taxable upon partnership income received by his wife. Other adjustments made by respondent in determining the deficiency are not in dispute.
The petitioner filed his income tax return for 1944 with the collector of internal revenue at Cincinnati, Ohio.
FINDINGS OF FACT.
Petitioner and his wife, Esther C. Bein, were married in 1923.
On or about August 1, 1938, petitioner and Willis H. Vance formed a partnership for the operation of moving picture theatres. The partnership, known as Ohio and State Theatre in Newport, Kentucky. The Ohio Theatre property was under lease to the Willis Vance Ohio Co., an Ohio corporation, and the State Theatre property was under lease to the Monmouth Co., a Kentucky corporation. The capital stock of the two companies was owned equally by the petitioner and Willis H. Vance. Petitioner entered into the partnership with Vance, with the understanding that Vance was to assume complete charge of the management, the booking and buying of films, and the operation of the theatres.
In 1940 petitioner became a division manager for the National Screen Service Corporation. His division, the midwest division, had offices in Chicago, Milwaukee, St. Louis, Indianapolis, and Cincinnati. Petitioner was in charge of sales and operations, which required him to do considerable traveling and to call on the large theater circuits in his division. The gross business of National Screen Service Corporation in the midwest division in 1942 exceeded $2,000,000, and petitioner devoted all his time to his employer's business in both 1942 and the taxable year. His salary was about $300 a week in 1942 and about $340 a week in 1944.
In 1942 petitioner had other theatre interests in addition to the two in which he was a partner with Willis Vance. He had the State Theatre at 15th and Central in Cincinnati and the Midwest Theatre Supply Co., and the Clinton Theatre in Blanchester, Ohio. He was interested in expanding his theatre interests into a chain of theatres. He proposed to finance the chain by borrowing from banks, insurance companies, and his friends. His wife urged him to provide for the financial security of his family, which included a son and a daughter, 13 and 18 years of age, respectively, before he became too involved financially. Petitioner also discussed the matter with his attorney, who is his counsel herein. As a result of these discussions petitioner decided to give his wife his entire interest in the Ohio and State theatres. Petitioner's annual income from each theatre was about $7,500.
The theatre ventures in which petitioner contemplated investing at or about this time included a theatre at Chillicothe, Ohio, which venture fell through because of a defective title; a large deluxe colored theatre, bowling alley, dance hall, and skating rink on Court Avenue in Cincinnati, which was abandoned when the architect's plans and financing indicated a cost of $600,000 to $700,000; remodeling and the eventual purchase of State Theatre in Oakley, which cost close to $300,000 and necessitated the sale of petitioner's interest in the Clinton Theatre in Blanchester and his interest in Midwest Theatre Supply Co., and the borrowing of over $80,000; the Beechwood Theatre in Walnut Hills, a colored theatre; and the Hippodrome Theatre at 9th and Bay Miller in Cincinnati. All of these investments were sole proprietorships.
On December 30, 1942, petitioner and Vance, as the sole stockholders of the Willis Vance Ohio Co., voted to dissolve the company, wind up its affairs, and distribute its assets to the stockholders, subject to its liabilities. On the same day, petitioner, in consideration of love and affection, assigned all his right, title, and interest in and to all the company's assets to his wife, Esther Bein.
On December 31, 1942, the Willis Vance Ohio Co., as lessee of the Ohio Theatre property, transferred to Mayme C. Vance and Esther C. Bein all of its right, title, and interest in and to the lease on such property.
On December 30, 1942, petitioner and Willis Vance, in consideration of love and affection, jointly assigned and transferred to their respective wives all of their right, title, and interest in and to the stock owned by them in the Monmouth Co., intending thereby to vest each assignee with one-half of all the outstanding stock of the corporation. Petitioner and Vance conveyed their stock interests in the Monmouth Co. by an assignment for the reason that the stock certificates and the stock record books had been lost. The assignment was prepared and witnessed by the attorneys for the assignors.
The Monmouth Co. was dissolved in September and October, 1944. The legal formalities to be complied with in dissolving a Kentucky corporation required a period of months, and it was impossible on December 30, 1942, to immediately dissolve the Monmouth Co. Petitioner's counsel though that Vance's attorneys were dissolving the Monmouth Co., as they were the Willis Vance Ohio Co., and some time elapsed before it was discovered that no steps had been taken to dissolve the Kentucky corporation. The lease on the State Theatre property was formally assigned to Mayme C. Vance and Esther C. Bein by the Monmouth Co. on September 20, 1944, and the dissolution of the Monmouth Co. was completed shortly thereafter.
On or about January 1, 1943, Mayme C. Vance and Esther C. Bein executed a partnership agreement for the operation of the Ohio Theatre on the basis of sharing the profits and losses equally. Each of the parties contributed her undivided 50 per cent interest in the business and property as capital of the partnership. Article VI thereof recites that the parties contemplated the employment of Willis H. Vance as general manager of the partnership's business operations.
On or about January 1, 1943, Mayme C. Vance and Esther C. Bein, as partners, entered into a contract of employment with Willis H. Vance to be general manager of the Ohio Theatre for the term of one year, and thereafter from year to year unless previously terminated as therein provided. Vance was to receive a salary of $40 a week. His duties were listed and he was prohibited from making policy changes, entering into leases or commitments for stores or rental space, or incurring expenses in excess of $200 without the written consent of the partners. The employment contract recites that Willis H. Vance ‘does not undertake to devote his entire time to the employment hereby contracted with First Party.‘
On or about January 4, 1943, an account was opened with the Newport National Bank of Newport, Kentucky, in the name of ‘State Theatre (Partnership).‘ The signature card shows that ‘Willis Vance, Gen. Mgr.‘ was authorized to draw on the account.
On or about January 4, 1943, an account was opened with the Norwood Hyde Park Bank & Trust Co. of Cincinnati, Ohio, in the name of ‘Ohio Theatre (Partnership).‘ The signature card shows that ‘Willis Vance, Gen. Mgr.‘ or ‘Mayme C. Vance— Partner‘ was authorized to draw on the account.
The signature card gave the firm name as ‘Ohio and State Theatres.‘
Article III of the partnership agreement provided that withdrawals from partnership bank accounts ‘shall be made only upon the joint signatures of both parties or their duly authorized agent‘.
On or about April 12, 1943, petitioner filed a gift tax return for 1942 with the collector of internal revenue at Cincinnati, in which he reported the gift to his wife of one-half the shares of the Monmouth Co. and one-half of the ‘assets of The Willis Vance Ohio Company (Dissolved December 31, 1942).‘ On or about June 12, 1943, petitioner filed an amended gift tax return for 1943 which increased the total gifts for 1942 by $435.24.
On or about April 12, 1943, Esther Bein filed a donee's information return for 1942 in which she reported the gift from her husband. On or about June 12, 1943, she filed an amended donee's information return.
On or about September 20, 1944, Esther C. Bein and Mayme C. Vance executed a partnership agreement with respect to the State Theatre in Newport, Kentucky. Each partner contributed her undivided 50 per cent interest in the property and business, as capital of the partnership, and agreed to share equally in the gains and losses resulting from the operation. The provisions of the partnership agreement with respect to State Theatre are the same as the provisions of the partnership agreement with respect to Ohio Theatre.
During the taxable year Esther C. Bein and Mayme C. Vance intended to and did operate the State and Ohio theatres as partners within the meaning of section 3797(a)(2), Internal Revenue Code, although no formal agreement as to State was executed until September 20, 1944. Willis H. Vance was employed by the partners as general manager to buy and book film for the two theatres and to consult with and advise them about their operations. In addition to Vance each theatre employed a house manager, who opened and closed the theatre each day, hired and fired the help, and banked the daily receipts. The partners employed an accountant who specialized in theatre accounts to take care of everything in connection with the office routine of their partnership. The accountant kept the bank books and the check books, balanced the box office receipts weekly, verified the bank balances and prepared weekly reports for the partners covering each week's operations. Bank statements and invoices were mailed to the accountant. After the invoices were approved he prepared the checks which Willis H. Vance signed as general manager. Checks for the weekly and monthly distribution of profits to the partners were prepared for the general manager's signature by the accountant, who also prepared the partnership returns for 1943 and 1944 and the individual income tax returns of the petitioner and Esther C. Bein for 1944.
Prior to December 30, 1942, petitioner received one-half of the profits of each theatre; thereafter he received none of the profits. Prior to December 30, 1942, petitioner took no part in the management, control, or operation of the theatres except to occasionally consult with Vance; thereafter he took no part whatsoever in the control, operation, or management of the theatres. Prior to December 30, 1942, Willis H. Vance devoted 90 per cent of his time operating the two theatres; after December 30, 1942, Vance, as an employee of the new owners, devoted about an hour a day to the business.
After petitioner's wife acquired her theatre interests, she opened an independent bank account in which she deposited her distributive share of the partnership earnings. She was the only person authorized to draw on the account. She used the amounts deposited therein to buy personal things, gifts for the children, and government bonds and to pay her income tax. She did not use her funds for household or living expenses. Such expenses were paid by petitioner before and after December 30, 1942.
Neither petitioner nor his wife was related by blood or marriage to either Willis H. Vance or his wife.
The ‘Ohio & State Theatre‘ partnership return for 1944 reported Esther C. Bein's distributive share of partnership income as $14,241.96. Esther C. Bein reported this amount as her distributive share of the partnership income in her individual income tax return for 1944. Petitioner did not include this amount in his individual income tax return for 1944. No part of the partnership earnings for 1944 is attributable or taxable to the petitioner. The partnership earnings received by Esther C. Bein were derived from the capital she contributed at the formation of the partnership.
In determining the deficiency herein the respondent included in petitioner's taxable income for 1944 the $14,241.96 of partnership earnings received by Esther C. Bein in that year.
OPINION.
ARNOLD, Judge:
This is a companion case to Willis H. Vance, 14 T.C. 1168. Counsel stipulated at the hearing that the two cases should be heard together and the evidence therein considered applicable to the respective petitioners to the extent that the Court decides, subject to objections to competency and materiality.
Respondent contends that petitioner's participation in the conduct of the business of the Ohio and State theatres partnership was the same during 1944, the only year before us, as in the taxable years 1938 to 1944, inclusive, and the distributive share of its income in 1944, viz., $14,241.96, is attributable to him. Respondent says that the purported transfer (of petitioner's interest in the business of the two theatres to his wife) was ineffective for income tax purposes; that this case does not present the usual pattern of family partnerships, but that the difference in pattern does not change the legal effect; that the evidence herein fails to convincingly establish a bona fide family partnership as specified in the Tower
Commissioner v. Tower, 327 U.S. 280.
cases; that the evidence demonstrates conclusively that the instant case is ‘on all fours‘ with the J. M. Henson
Lusthaus v. Commissioner, 327 U.S. 293.
case; that the business in 1944 was conducted precisely as it had been since August 1, 1938; that petitioner at no time contributed other than capital to the enterprise; and that the income from the theatres was produced by the assets of the partnership and the experience and specialized knowledge of Willis H. Vance.
J. M. Henson, 10 T.C. 491.
The first question is whether petitioner made a bona fide gift to his wife in December, 1942, of his entire proprietary interest in the two theatres which was effective for income tax purposes. The question must be answered in the affirmative. The assignments executed on December 30, 1942, are clear and unequivocal. Petitioner attached no strings or conditions to his gift whereby he could defeat the transfer or recapture the property transferred. The assignments transferred all his legal title, right, interest, and control over the assets of the dissolved Willis Vance Ohio Co. and the capital stock of the Monmouth Co. All of the requisites of a valid gift, as prescribed in Edson v. Lucas, 40 Fed.(2d) 398, were present. We hold that by his assignments petitioner made a valid and unconditional gift, complete and effectual for all purposes. Henson v. Commissioner (CA-5), 174 Fed.(2d) 846, reversing 10 T.C. 491.
The second question is whether the income is taxable to petitioner even though he made a valid gift. Respondent concedes that this case does not present the usual family partnership pattern. We agree. The usual family partnership pattern is to bring some member or members of the immediate family into the partnership in order to dilute the transferor's interest, but without diminishing his authority, dominion, or control over the business or assets. See Tower and Lusthaus cases, supra. There was no mere dilution of petitioner's interest here; he completely divested himself of all proprietary interests and rights in the partnership and its assets. Nor is there any resemblance here to the family partnership pattern in the retention of authority, dominion, or control over the partnership or its income-producing assets. Respondent requested, and we have found as a fact, that this petitioner devoted no time to the management, control, or operation of two theatres before or after December 30, 1942.
It is suggested, however, that the difference in the family partnership pattern does not change the legal effect, and that petitioner's evidence does not convincingly establish that he had met the requirements of a bona fide family partnership as specified in the Tower and Lusthaus cases, supra. This suggestion we can not accept. In our opinion it is this very difference in the pattern that removes this case from the family partnership line of authorities. Petitioner and Willis H. Vance were partners until the end of 1942. Neither petitioner nor Willis H. Vance was a partner in the economic business unit that operated from and after January 1, 1943. The new partnership was composed of parties who had no proprietary right or interest in the business or its operation prior to December 30, 1942.
The facts show that Esther C. Bein and Mayme C. Vance acquired equal interests in the two theatres prior to January 1, 1943, and thereafter operated the theatres as partners within the meaning of section 3797(a)(2), Internal Revenue Code.
Esther Bein exercised dominion and control over her interest by risking it in a business venture with Mayme C. Vance, the owner of the other half interest in the income-producing assets. The partners employed an accountant who specialized in theatre accounts to manage their office affairs. The partners employed a house manager for each theatre, who was responsible for the day to day operation of the theatre. They employed a general manager, Willis H. Vance, who bought and booked the film for the theatres. Our findings show the services rendered by Willis H. Vance when he was a partner, and the services rendered by him as an employee of the new enterprise. Our findings also show that petitioner devoted no time to the conduct of the business before or after the assignments. It can not be said therefore, that he earned the partnership income or any part thereof, or is taxable thereon by reason thereof.
(a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof—(2) PARTNERSHIP AND PARTNER.— The term ‘partnership‘ includes a syndicate, group, pool, joint venture, or other incorporated 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 title, a trust or estate or a corporation; and the term ‘partner‘ includes a member in such a syndicate, group, pool, joint venture, or organization.
Respondent contends that this case is ‘on all fours‘ with our decision in J. M. Henson, supra. He urges us to follow our own decision therein and to refuse to follow the reversal thereof by the Circuit Court. We can not agree that this case is ‘on all fours‘ with our Henson case. There, we affirmed respondent's contention that, notwithstanding the gift, the taxpayer therein retained such dominion and control over the subject matter of the gift as to make him taxable on the profits of the business. Here the petitioner, as the undisputed testimony of several witnesses shows, had absolutely nothing to do with the operation of the business after December 30, 1942. When he and Vance disposed of their entire proprietary interests their partnership terminated. During 1943 and 1944 a new partnership operated the business. Bein had no vestige of right or control in this new partnership ‘and it is undisputed that he in fact exercised none.‘ Simmons v. Commissioner (CCA-5), 164 Fed.(2d) 220,224.
In the Vance case, decided this day, we have discussed and cited decisions by the Supreme Court, by the Courts of Appeal for the Fifth, Sixth, Seventh, Eighth, and Ninth Circuits, and by this Court. The decisions there cited
are even more applicable here, for this petitioner, as we have pointed out, never exercised any dominion, control, or management over the partnership business or income during the taxable year. We hold, therefore, that the partnership income received by Esther C. Bein is not taxable to petitioner. Since other adjustments were made in determining the deficiency,
In addition to cases cited herein the Vance case cites and discusses inter alia: Commissioner v. Culbertson, 337 U.S. 733; Kent v. Commissioner (CA-6), 170 Fed.(2d) 131; Greenberger v. Commissioner (CA-7), 177 Fed.(2d) 990; Durwood v. Commissioner (CCA-8), 159 Fed.(2d) 400; Harris v. Commissioner (CA-9), 175 Fed.(2d) 444; Clifford R. Allen, Jr., 12 T.C. 227; Arthur A. Byerlein, 13 T.C. 1085.
Decision will be entered under Rule 50.
Reviewed by the Court.