Kier v. Commissioner , 15 B.T.A. 1114 ( 1929 )

E. L. KIER, PETITIONER, v. COMMISSIONER OF INTERVAL REVENUE, RESPONDENT.

W. E. KIER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Kier v. Commissioner

Docket Nos. 15985, 15986.

United States Board of Tax Appeals

15 B.T.A. 1114; 1929 BTA LEXIS 2732;

March 26, 1929, Promulgated

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Held, that the wives of the petitioners were copartners with them in the W. E. Kier Construction Co. during 1921; and that the respondent erred in adding to income of the petitioners the shares of their respective wives in the profits of the company for that year.

Theodore B. Benson, Esq., for the petitioners.

Arthur Carnduff, Esq., for the respondent.

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LOVE

These are proceedings for the redetermination of deficiencies in income taxes for the year 1921, in the amounts as follows: E. L. Kier, $1,639.70; W. E. Kier, $3,280.65. The entire amounts are not in controversy.

The issue in each case is whether or not the wives of the petitioners were partners with them in the W. E. Kier Construction Co.

The proceedings were consolidated for hearing and decision.

FINDINGS OF FACT.

The petitioners are residents of San Diego, Calif.

In 1896 the petitioner, W. E. Kier, married Lina Boyd, of Eldora, Iowa. Shortly before her marriage Mrs. Kier had inherited from the estate of her father certain property including a farm situated at Point Pleasant, Iowa. Her husband had been for several years the chief support of his family and at the time of the marriage was practically without funds. Soon after the marriage Mrs. Lina B. Kier borrowed $2,500, using the farm mentioned as security, and turned this amount over to her husband who established a small general merchandise business at Germania, Iowa. It was agreed orally at that time between W. E. Kier and his wife that they should share equally in the business. This understanding continued through the successive business enterprises herein detailed.

W. E. Kier conducted the merchandise business at Germania for about two years. He then sold the store and for the next eight or nine years engaged in a general contracting business at Colorado Springs, Colo., using therein the proceeds of the sale mentioned. Subsequently he resided at Winfield and at Hutchinson, Kans., and at Hot Springs, Ark., while engaged on contracts at those places.

In the meantime Mrs. W. E. Kier disposed of certain other property and the proceeds were invested in her husband's business, just as her original investment therein had been made. During 1912 W. E. Kier settled in San Diego and engaged in business as a general contractor. Shortly thereafter his younger brother, E. L. Kier, commenced to work for him.

E. L. Kier's wife, Iva D. Kier, inherited some money soon after her marriage and invested it in real estate at Hutchinson, Kans. Sometime after E. L. Kier commenced to work for his brother, as above detailed, he suggested to the latter that he should be permitted to become a partner in the business. This suggestion was agreeable to W. E. Kier, who regarded his brother much as he might regard a son. Iva D. Kier therefore sold the Hutchinson real estate and invested the proceeds of approximately $3,000 in the partnership, now known as the W. E. Kier Construction Co., in which her husband became a partner having a 10 per cent interest. There has never been a written partnership agreement between the Kier brothers. E. L. Kier made no investment himself at this time. Iva D. Kier later supplied further funds to the partnership and in 1921 her husband held a 40 per cent interest in the firm.

In 1912 or 1913, when Iva D. Kier first invested her funds in the business and her husband became a partner, it was agreed orally between them that they would share equally in the husband's share of the proceeds from the business.

Until 1921 neither of the Kier brothers knew that the wife of the other shared her husband's income from the partnership. Each of the brothers had always shared such income with his wife in accordance with the agreements mentioned above. Neither of the wives was ever active in the business of the partnership, although their husbands did consult them about its affairs.

January 2, 1921, W. E. Kier and his wife, Lina B. Kier, and E. L. Kier and his wife, Iva D. Kier, entered into the following agreement:

SAN DIEGO, CALIFORNIA,

Jan. 2, 1921.

CO-PARTNERSHIP AGREEMENT

We the undersigned, hereby agree that all profits accruing from the W. E. Kier Construction Company shall be divided as follows:

W. E. Kier	30%
Lina B. Kier	30%
E. L. Kier	20%
Iva D. Kier	20%

In case of loss to the Company each will bear his respective proportion as his interest appears.

This agreement was signed by the persons named therein.

It was the policy of the Kier Brothers to leave the partnership profits in the business for working capital. Neither of the brothers drew a salary except during 1921. When either needed funds he withdrew them from the company and a charge was made to his personal account. The partnership books never carried accounts in the wives' names.

Each brother and his wife carried a joint bank account to which the withdrawals mentioned were transferred. These accounts were in different banks and the partnership carried an account in a third bank.

The written agreement of January 2, 1921, was made on suggestion of an income tax advisor.

The respondent has included in the income of the petitioners for 1921, sums representing the shares of their respective wives in the profits of the W. E. Kier Construction Co. Lina B. Kier and Iva D. Kier were copartners with their husbands in the W. E. Kier Construction Co. during 1921.

OPINION.

LOVE: The sole issue presented is whether or not Lina B. Kier and Iva D. Kier were copartners in the W. E. Kier Construction Co., or merely subpartners of their respective husbands, during the year 1921.

Under section 158 of the Civil Code of California, husband and wife may be partners. At section 2395 that Code defines a partnership as follows:

Partnership is the association of two or more persons, for the purpose of carrying on business together, and dividing its profits between them.

The respondent asserts that the agreement of January 2, 1921, resulted only in assignments of half of the profits of each brother to his respective wife after his receipt of such profit as income. We think, however, that if the wives were members of an "association of two or more persons, for the purpose of carrying on business together" they were copartners in the W. E. Kier Construction Co. The agreement of January 2, 1921, was not a mere assignment of one-half of each brother's income to his wife. It created in each wife a liability for future losses of the W. E. Kier Construction Co. proportionate to the share she was to receive in the profits. Section 2404 of the Code provides that when persons share profits, the sharing of losses is implied, even if unstated, unless a contrary intention is expressed.

The circumstances under which each of the Kier brothers started in business are singularly parallel. There is ample evidence for our findings respecting these points and no attempt at contradiction on behalf of the respondent. The wives in each instance supplied the capital; the petitioners supplied their services. Each wife, by oral agreement with her husband, retained her capital interest in the business.

Eventually, each of the brothers became aware that the other considered himself a partner with his wife and that the respective wives each retained a capital interest in her husband's share of the partnership. They were advised that, for income-tax purposes, some written statement of the situation was desirable. We consider, in view of all the facts, that it was the intention of the parties to the agreement of January 2, 1921, knowing what they then knew, to form a partnership and that a partnership between all four of them existed subsequent to that date.

The respondent argues that the absence of accounts in the wives' names on the company books, and the deposits of withdrawals in joint accounts, raise an implication that the wives had no interest in the company, but were merely subpartners of their husbands. Book entries either in the accounts of the company or in bank accounts are merely evidentiary. The rights of the parties can neither be established nor impaired by them, the facts must govern. . We have found that the wife of each of the petitioners herein supplied the capital enabling her husband to establish himself in business and that to each wife there was specifically reserved a capital interest in the husband's business.

In our opinion, upon the facts shown, the absence of accounts on the books of the company holds little significance. This was a family business. There existed between the brothers a harmony and affection that is refreshing to note and in the marital communities an admirable spirit of cooperation. The Kier brothers had conducted the business for almost 10 years without a written agreement of partnership. We believe no reasonable element of suspicion can be drawn from the informalities referred to by the respondent.

It is our conclusion that the respondent erred in adding to the incomes of the petitioners the shares of their respective wives in the profits of the W. E. Kier Construction Co. His action in so doing is therefore reversed.

Judgment will be entered in both cases under Rule 50.