Rucker v. Commissioner , 9 B.T.A. 921 ( 1927 )

B. J. RUCKER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

W. J. RUCKER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Rucker v. Commissioner

Docket Nos. 2928, 2929.

United States Board of Tax Appeals

9 B.T.A. 921; 1927 BTA LEXIS 2495;

December 27, 1927, Promulgated

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1. The respondent erred in adding to the income of the partnership, of which the petitioners were members, the gross proceeds from the sale of certain timber by the Tulalip Company to the Everett Logging Co. in 1915.

2. Petitioner B. J. Rucker's distributive share of partnership income held to be separate property under the laws of the State of Washington, and therefore taxable to him.

J. B. Fogarty, Esq., William P. Bell, Esq., and Herbert E. Smith, C.P.A., for the petitioners.

Granville S. Borden, Esq., for the respondent.

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MORRIS

This is a proceeding for the redetermination of deficiencies in income taxes in the amounts of $3,463.21 and $3,463.20 asserted by the respondent against B. J. Rucker and W. J. Rucker, respectively, for the year 1918.

On motion of the parties it was ordered that the cases of B. J. Rucker, Docket No. 2928, and W. J. Rucker, Docket No. 2929, be consolidated and heard jointly.

There are two issues raised by the pleadings, the first of which is identical in both cases, and the second is raised only by the petition of B. J. Rucker. The issues are:

1. Whether the respondent has erred in adding to the income of the partnership for the year in question the sum of $24,231.97, representing timber sold to Everett Logging Co.

2. Whether the respondent was in error in computing the tax of B. J. Rucker, a married man, on the entire distributive share of the partnership of which he was a member.

FINDINGS OF FACT.

The petitioners herein comprise the copartnership known as Rucker Brothers, of Lake Stevens, Wash., each owning one-half interest in said copartnership.

C. W. Miley, who was president of the Tulalip Company, a corporation, during the year 1912 and succeeding years, purchased a quantity of timber in that year in his own name, for which he paid the sum of $9,100. He in turn deeded it to the Tulalip Company for stock in that company, and that company thereupon sold it to the Everett Logging Co. in September, 1916, at a total sale price of $24,231.77, receiving as an initial payment therefor in 1916 the sum of $5,000 and in 1917 it received $18,675.37 in monthly payments, and in February, 1918, it received as a final payment the sum of $556.40. The timber in question was sold by the Tulalip Company to be paid for by the Everett Logging Co., as it was scaled and sold, and all of it was scaled and sold prior to December 31, 1917, with the exception of that represented by the payment of $556.40 in 1918. The initial payment of $5,000 was paid by the Everett Logging Co. to the Tulalip Company in 1916 and the remaining balance was paid by checks which were sent to Miley, made payable to the company, and he in turn endorsed them and cashed them, using the proceeds to pay off a debt that he had incurred in the company. The partnership of Rucker Brothers held 50 per cent of the stock of the Tulalip Company and Miley held 50 per cent.

B. J. Rucker was married in December, 1904, and he has lived continuously with his wife since that time. At the time of his marriage, Rucker owned a one-half interest in the copartnership of Rucker Brothers, the assets of which consisted of lands and town lots and some shares of stock in the Rucker Bank. Rucker Brothers were engaged in the real estate business at the time of Rucker's marriage, but in 1907 or 1908 the firm entered into the logging and sawmill business. The lands and town lots owned by the partnership at the time of Rucker's marriage were nonproductive properties from which there has been on income from the time of his marriage to the present time. In fact they have paid in taxes several times what the properties would sell for to-day.

The profits earned by the partnership of Rucker Brothers have come from enterprises they have engaged in, such as timber and sawmill and logging operations for which the firm borrowed money and started. They have bought most of their timber on the installment plan, making only a small initial payment therefor.

Rucker has kept no record of the property he had at the time he was married, nor of what he has accumulated subsequently to marriage.

Rucker Brothers purchased a quantity of timber from the Puget Mill Co. in 1917 at a total purchase price of $625,000 for which they paid $5,000 in cash and the balance of $620,000 in promissory notes extending over a period of several years, all of which notes were signed by W.J. and B. J. Rucker for the partnership. A portion of that timber was later sold at a profit of upward of $80,000. The portion of that timber that was not sold, was cut and sawed at their own mill and paid for as it was cut and removed.

During the period 1907 to 1916 the firm of Rucker Brothers borrowed several sums of money for use in the partnership.

All of Rucker's property at the time of his marriage was his equity in the partnership and all of his income has been from the partnership distributions.

Rucker Brothers filed an amended partnership return for the year 1918, showing therein $95,699.27 as the total distributive income of the partnership for that year, divided $47,849.64 and $47,849.63 for W.J. and B. J. Rucker, respectively.

The individual (amended) return of B. J. Rucker for 1918 shows total net income from the partnership of Rucker Brothers to be $47,849.63, from which a contribution of $268.73 and $19,957.58 were deducted, the latter amount being explained on the return as "net loss on dissolving corporation entirely owned by Rucker Brothers Partnership. Tulalip Company $20,059.82; Rucker $1,875.17; total $21,915.17, individual claim one-half under section 214(1) Div. (4)," leaving a net taxable income of $36,623.32.

The individual (amended) return of W. J. Rucker for the year 1918 shows a total net income from the partnership of Rucker Brothers of $47,849.64, from which the same deductions were taken as in B. J. Rucker's return with the same explanation, leaving a net taxable income for that year of $36,623.32.

The respondent determined the net income of each to be $47,599.90.

OPINION.

MORRIS: The first allegation of error is that the respondent added to the income of the partnership the sum of $24,231.97 "timber sold Everett Logging Co." and the respondent has admitted the fact of such addition.

Certain timber was oringinally purchased by Miley in the spring of 1912, which he sold to the Tulalip Company, and that company in turn sold it to the Everett Logging Co. in 1916 for the total sum of $24,231.77. The purchase price to the Everett Logging Co. was paid $5,000 in 1916, $18,675.35 in 1917, and $556.40 in 1918. All of the foregoing amounts were paid to Tulalip Company and Miley endorsed the checks received subsequently to the initial cash payment of $5,000 in 1916 and made use of the proceeds to liquidate an indebtedness that he had incurred in the company.

While Rucker Brothers owned 50 per cent of the stock of the Tulalip Company and possibly there was some intermingling of accounts, the testimony is perfectly clear that the timber in question was owned by the Tulalip Company, sold by it, and, further, that the sale price was paid to it. We can see no justification for holding that the sum in question is taxable directly to the members of the firm of Rucker Brothers. Furthermore, even if we were to assume that the income was in fact taxable to the members of the firm of Rucker Brothers, we do not understand upon what theory in law it would be taxable to them in 1918, because it is clear that the transaction was consummated in 1916, and that all but a very small portion of the total sale price was received prior to December 31, 1917. We are of the opinion that the respondent erred in adding the sum in question to the income of the partnership of Rucker Brothers in 1918, and we therefore sustain the contention of the petitioner.

The second allegation of error is urged by the petitioner B. J. Rucker, only, and it relates to the question of whether his distributive share of the profits of the partnership of which he is a member, constitutes community income or whether it constitutes separate income and hence taxable to himself. The facts and circumstances with respect to this issue are the same as those existing in , wherein we held that the income in question was derived from his separate property and was taxable to him, and we are therefore bound by our decision in that case with respect to the issue in the instant case.

Reviewed by the BOARD.

Judgment will be entered on 15 days' notice, under Rule 50.