Mauldin v. Commissioner of Internal Revenue , 155 F.2d 666 ( 1946 )

DOBIE, Circuit Judge.

W. M. Mauldin, sometimes hereinafter referred to as petitioner, petitioned the Tax Court of the United States for a rede-termination of the deficiency in his 1940 income tax liability found by the Commissioner in the amount of $5,520. This deficiency was determined by allocating to petitioner three-fourths of the income of a partnership, the Rock Hill Coca Cola Bottling Company, rather than the one-half share reported by him. The additional one-fourth share added by the Commissioner represented the profits accruing to petitioner’s wife under the terms of the partnership agreement and was duly reported for taxation by her. The Commissioner determined that she “was not, in fact, a member of the partnership for profit purposes” and hence the share of profits reported by her was properly taxable to petitioner. The Tax Court of the United States with five judges dissenting, upheld this determination and the matter has been brought here on petition to review that decision.

Reduced to essentials, the record disclosed the following facts. In December, 1936, Mr. Mauldin, admittedly with the purpose of reducing his tax liability, executed a deed of gift, transferring an undivided one-fourth interest in the Rock Hill Coca Cola Bottling Company, until then operated as a sole proprietorship, to his wife. Shortly thereafter she entered into a partnership agreement with her husband, providing for the continuation of the business as a partnership under petitioner’s management, with profits and losses to be divided in accordance with the capital contributed (three-fourths and one-fourth) and with a definite provision that she was under no obligation to devote time or services to the business. The company’s books of account seem to have been somewhat rudimentary, without formal capital accounts or a complete record of assets. Accordingly, no entry to record this transfer of ownership was made on the books, but a so-called “Investment” account was set up for Mrs. Mauldin and it was regularly credited with her distributive share of the profits and charged with her withdrawals.

It is not disputed that she had complete independence of action with respect to these profits, was entitled to withdraw them at will and spend her withdrawals as she pleased. Further, she maintained her own investments and handled them herself. During the four years, 1937 through 1940, she withdrew approximately three-fourths of the profits credited to her account. Although there is some evidence in the record that she devoted a limited amount of time to the business, petitioner’s counsel stated that no claim was made that she rendered any service to the business and that her participation in the partnership was only that of a contributor of capital.

These arrangements continued through 1939 and apparently their validity was not challenged by the Internal Revenue authorities. In October, 1939, Mr. Mauldin executed another deed of gift, transferring another one-fourth interest to his son, who had been an employee of the business for several years prior thereto. A new partnership was then formed, taking the son in, and the company’s franchise was formally reconveyed to this new organization. In these proceedings, the Commissioner did not challenge the validity of this new partnership with respect to the son but contended that, since Mrs. Mauldin had provided neither new capital nor services, she did not become a partner for tax purposes.

In this state of the facts, the law is clear and unequivocal. The function of this Court is limited to determining that the findings of fact by the Tax Court are supported by evidence and have warrant in the record. Dobson v. Commissioner, 320 U.S. 489, 64 S.Ct. 239, 88 L.Ed. 248. As stated by Mr. Justice Black in a very recent case involving quite similar facts: “We are of the opinion that the foregoing facts were sufficient to support the Tax Court’s finding that the wife was not a partner in the business. [3 T.C. 596.] A partnership is generally said to be created when persons join together their money, goods, labor, or skill for the purpose of carrying on a trade, profession, or business and when there is community of interest in the profits and losses. When the existence of an alleged partnership arrangement is challenged by outsiders, the question arises whether the partners really and truly intended to join together for the purpose of carrying on business and sharing in the profits or losses or both. And their intention in this respect is a question of fact, to be determined from testimony disclosed by their 'agreement, considered as a whole, and by their conduct in execution of its provisions.’ Drennen v. London Assurance Company, 113 U.S. 51, 56, 5 S.Ct. 341, 344, 28 L.Ed. 919; Cox v. Hickman, 8 H.L.Cas. 268. We see no reason why this general rule should not apply in tax cases where the government challenges the existence of a partnership for tax purposes. Here the Tax Court, acting pursuant to its authority in connection with the enforcement of federal laws, has found from testimony before it that respondent and his wife did not intend to carry on business as a partnership. This finding of fact, since supported by evidence, is final.” Commissioner of Internal Revenue v. Tower, February 25, 1946, 66 S.Ct. 532, 535. See, also, Lusthaus v. Commissioner, 66 S.Ct. 539, decided the same day.

From the same opinion in the Tower case, we adopt the concluding paragraph as an entirely apposite statement of the governing law by which the Tax Court was guided. It is applicable, without change, to the instant case, excepting only the single phrase with reference to, the restricted use of the wife’s income. This we hold not to constitute a significant distinguishing feature of the present case: “Judged by the actual result achieved, the Tax Court was justified in finding that the partnership here brought about no real change in the economic relation of the husband and his wife to the income in question. Before the partnership the husband managed, controlled, and did a good deal of the work involved in running the business, and he had funds at his disposal which he either used in the business or expended for family purposes. The wife did not contribute her services to the business and received money from her husband for her own and family expenses. After the partnership was' formed the husband continued to control and manage the business exactly as he had before. The wife again took no part in the management or operation of the business; If it be said that as a limited partner she could not share in the management without becoming a general partner the result is the same. No capital not available for use in the business before was brought into the business as a result of the formation of the partnership. And the wife drew on income which the partnership books attributed to her only for purposes of buying and paying for the type of things she had bought for herself, home .and family before the partnership was formed. Consequently the result of the partnership was a mere paper reallocation of income among the family members. The actualities of their relation to the income did not change. There was, thus, more than ample evidence to support the Tax Court’s finding that no genuine union for partnership business purposes was ever intended and that the husband earned the income. Whether the evidence would have supported a different finding by the Tax Court is a question not here presented.” Commissioner v. Tower, supra, 66 S.Ct. at page 538.

In summary, this case merely represents another in the stream of cases now coming before the courts wherein taxpayers have sought by various types of reallocation of income within the family group to retain the enjoyment of a large income without the normally incident tax consequences. This Court recently passed upon another such device which we found to be equally unavailing. Hash v. Commissioner, 4 Cir., 152 F.2d 722. We do not mean that all real-locations of income within a family group are to be set áside for tax purposes. But such arrangements, to be recognized, must have a reality arid substance which is not found in the instant case. The decision of the Tax Court of the United States is accordingly affirmed.

Affirmed.