Purse v. Commissioner ( 1933 )

JAMES N. PURSE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Purse v. Commissioner

Docket No. 54124.

United States Board of Tax Appeals

27 B.T.A. 725; 1933 BTA LEXIS 1314;

February 11, 1933, Promulgated

---

">*1314 Wm. P. Smith, Esq., for the petitioner.

Nathan Gammon, Esq., for the respondent.

---

MATTHEWS

">*725 This is a proceeding for the redetermination of a deficiency in income tax for the year 1928 in the sum of $1,795.13. The only question presented is whether the respondent erred in including in petitioner's taxable income for 1928 the full amount of the profits of the Detroit branch of Purse Brothers, a partnership, in the sum of $15,160.22.

The parties entered into a stipulation of agreed facts, which we adopt as a part of our findings of fact, setting forth here only those facts necessary to an understanding of the issue presented. In addition to the stipulation, oral testimony was introduced and certain documentary evidence was filed at the hearing.

FINDINGS OF FACT.

Petitioner is an individual residing in Detroit, Michigan, and is engaged in the wholesale fruit and produce business. This business was started by him as an individual and in 1912 he formed a partnership ">*726 with two of his brothers. Since that time the business has been operated under the name of Purse Brothers. Four of petitioner's brothers and petitioner's son have">*1315 been associated with him at various times, but none of them made any financial investment in the business at the time he was brought into the partnership, the share of the partnership profits which each was to receive being entirely contingent on the earnings of the business. No written partnership agreement was ever executed.

The partnership operated at Detroit and at Toledo and also had a shipping branch at Seaford, Delaware. In the fall of 1927 it was agreed between petitioner and his brother, Artie Purse, that Artie should take over the Toledo business and keep all the profits therefrom and that Artie Purse should have no further interest in the Detroit business. They were to continue to share the income received from real estate which had been purchased with the partnership profits.

A certificate under the Michigan assumed name statute filed with the county clerk of Wayne County, Michigan, on October 13, 1914, shows James Purse and Artie Purse engaged in business as copartners under the name of Purse Brothers; and a similar certificate, filed February 2, 1928, shows the same two partners engaged in business as copartners under the name of Purse Brothers, with the address">*1316 of James Purse given as Detroit, Michigan, and that of Artie Purse as Toledo, Ohio.

The books of account of the partnership were kept and the partnership returns were filed on the basis of fiscal years ended September 30. Prior to the fiscal year ended September 30, 1928, the partnership returns showed that the profits were divided between the petitioner and Artie Purse, certain amounts being allocated to D. E. Purse as a special partner. A partnership return of income for the fiscal year ended September 30, 1928, was filed by Purse Brothers on December 15, 1928, which showed a net income of $22,212.46 and which gave the names of the partners as James N. Purse (the petitioner herein), Artie Purse and D. Edward Purse. This return did not include the profit or loss of the Toledo business and a letter from the petitioner which accompanied the return stated that his brother, Artie Purse, was operating the Toledo branch on his own responsibility and would file a separate return. D. E. Purse's share was reported to be $6,827.03 and petitioner's share was reported to be $15,385.43. Artie Purse was stated to have no interest in the partnership income.

During the fiscal year ended">*1317 September 30, 1928, petitioner's son was taken into the partnership and shared equally with the petitioner in the profits of the Detroit business. An amended partnership ">*727 return was filed on April 12, 1930, which included the operation of the Toledo business and which set out the partners' shares of income as follows:

James N. Purse	$7,750.86
Artie Purse	5,394.97
G. Roe Purse	7,580.11
D. E. Purse	6,827.03

No question has been raised with respect to the amounts of the distributive shares of D. E. Purse of Seaford, Delaware, and Artie Purse of Toledo, Ohio, respectively, or the basis of their allocation.

For the fiscal years ended September 30, 1926 and 1927, distribution of the partnership profits was made direct from the profit and loss account to the individual partners' accounts, but beginning with the year ended September 30, 1928, new accounts were opened as at the first of each fiscal year. On October 1, 1928, profit and loss for the year ended September 30, 1928 was closed and the credit balance of $15,160.22 was transferred to an account entitled "Surplus or Uncredited Profit."

Petitioner's income tax return for 1928 was duly filed">*1318 on the calendar year basis and he reported as income from the partnership for 1928 the sum of $7,580.11, which sum is one-half of the above-mentioned credit balance of $15,160.22. The other one-half of this amount was reported by petitioner's son, G. Roe Purse "for services rendered Purse Brothers." An additional sum of $3,020 was shown on the income tax return of G. Roe Purse for 1928 to be "salary from Purse Brothers." No written agreements as to the division of the 1928 partnership income between petitioner and his son, G. Roe Purse, has ever been executed.

The respondent has determined that all of the profits of the Detroit branch of the partnership are taxable to the petitioner.

OPINION.

MATTHEWS: It is the petitioner's contention that the respondent erred in refusing to allow the profits of the Detroit branch of Purse Brothers, a partnership, to be divided equally between the petitioner and his son, G. Roe Purse. Petitioner claims in the alternative that, if it be determined that petitioner's son was not a member of the partnership in 1928 and therefore was not entitled to share in the profits of the business, the amount of $7,580.11 paid over to the son for the fiscal">*1319 year ended September 30, 1928, represented compensation for services actually rendered by the son and such amount should be treated as an ordinary and necessary expense of the business instead of being added to the one-half of the partnership profits of Purse Brothers which was reported by the petitioner.

">*728 We have found that in his individual income tax return for 1928 G. Roe Purse reported salary from Purse Brothers in the sum of $3,020 and further reported under the heading of "Income from Partnerships" the sum of $7,580.11 "for services rendered Purse Brothers." This amount of $7,580.11 was not set up on the books of the partnership as an expense item, which would be the usual procedure if it represented compensation for services. A credit balance of $15,160.22 was transferred on October 1, 1928, to a new account entitled "Surplus or Uncredited Profit" and entries subsequently made indicate that one-half of this amount, or $7,580.11, was ultimately credited to G. Roe Purse. If it be determined that G. Roe Purse was entitled to receive this amount as a member of the partnership, it will be unnecessary to consider the petitioner's alternative claim.

Petitioner's">*1320 son began working for his father when he was a boy attending school and was "brought up in the business." He had been devoting his entire time and energies to the business for six or seven years prior to the taxable period involved herein and had rendered valuable services to the partnership. He went on buying trips and handled about one-half of the purchases of vegetables. He looked after the shipping end of the business, the operations of the trucks and the sales and deliveries from cars on the track. Petitioner's son had drawn $40 a week from the partnership in 1924 and his salary had been increased several times until by 1927 he was receiving $60 a week. In order to keep his son interested in the business petitioner promised to make him a partner. Accordingly, when it was decided that Artie Purse should go to Toledo to manage the Toledo branch of the business, petitioner's son was taken into the partnership and thereafter received one-half of the profits of the Detroit branch.

An examination of the record discloses that, after Artie Purse gave up his interest in the Detroit business and took over the Toledo branch, the petitioner intended that G. Roe Purse should receive">*1321 one-half of the profits of the Detroit business in lieu of the straight salary which he had been getting. However, the son continued to use his drawing account of $60 a week and reported the sum of $3,020 as salary from Purse Brothers in addition to reporting one-half of the uncredited profits of the partnership. Petitioner testified at the hearing that this amount of $3,020 should have been deducted from the son's one-half of the profits. This is in accordance with a statement appearing in a written protest filed on behalf of petitioner under date of November 11, 1930, as follows:

In comparing the return, however, an error was made, in that an item of $3,020 was used as a deduction in arriving at the profits from the Detroit branch of the business. This $3,020 represents the amount of partnership profits actually drawn by G. Roe Purse. ">*729 We do not have before us the question of the son's tax liability, so we need not consider whether he reported more income than he was entitled to receive. It suffices to say that the son did report the amount of $7,580.11 as his distributive shares of the income of the partnership.

The partnership known as Purse Brothers had been">*1322 operating since 1912 as a kind of "family affair." Its business was handled in a very informal manner with respect to making agreements and keeping records. Petitioner was the only person to put any money into the business and each partner contributed personal services. Although various changes were made from time to time in the members of the partnership and the terms upon which each individual partner agreed to devote his services to the business, no agreement in writing was ever executed with regard to a division of the partnership income.

After Artie Purse went to Toledo in the fall of 1927, petitioner was left entirely in control of the Detroit branch of the business. His son was a valued employee of the partnership, upon whom the petitioner greatly relied. Petitioner testified that his son was worth more than an individual outside the family rendering the same services and it is natural to suppose that the son took a special interest in building up the business which he might some day inherit. The record contains ample evidence upon which to base the opinion that the son was taken into partnership by the petitioner with the understanding that the son should share equally">*1323 with the petitioner in the profits of the Detroit business. We accordingly hold that the respondent erred in including in petitioner's taxable income for 1928 all of the profits of the Detroit branch of the business.

Judgment will be entered for the petitioner.