Brown v. Commissioner

CHARLES BROWN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

JOSEPH ISRAEL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Brown v. Commissioner

Docket Nos. 13932, 27779, 27780, 31427, 31428.

United States Board of Tax Appeals

13 B.T.A. 981; 1928 BTA LEXIS 3135;

October 12, 1928, Promulgated

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HUSBAND AND WIFE - PARTNERSHIP - California. - Where the two petitioners and their respective wives entered into a contract to carry on a mercantile business as a partnership and each contributed capital and services to the business and the profits and losses were divided equally, the income derived therefrom by the wives was their separate property and was properly returned and tax paid by them, and it was error to include same in the income of petitioners on the theory that it was community property.

Clark J. Milliron, Esq., and E. S. Brashears, Esq., for the petitioners.

Clark T. Brown, Esq., for the respondent.

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MILLIKEN

The above styled proceedings were consolidated and heard together. Deficiencies were determined against Charles Brown, as follows: In Docket No. 13932, for the year 1921, $1,503.20; in Docket No. 27779, for the year 1922, $3,540.77; and in Docket No. 31427, for the year 1923, $6,187.14. Against Joseph Israel, deficiencies were determined in Docket No. 27780, for the year 1922, $3,389.92; and in Docket Noo. 31428, for the year 1923, $5,856.

The deficiencies resulted from the respondent's action in taxing to the petitioners, on the theory that it was community property, the entire income and salaries received by them and their respective wives from the Brown-Israel Outfitting Co., an alleged partnership, one-half of which had been returned by and tax paid thereon by petitioner's wives. Redetermination of these deficiencies is requested on the ground that the one-half of the profits and salaries of the Brown-Israel Outfitting Co. added to petitioner's income belonged to their respective wives. In his audit and readjustment of the returns of the Brown-Israel Outfitting Co. certain deductions claimed by it on account of bad debts, alterations, stationery and printing for 1922 and 1923, were disallowed and these amounts added to income, and one-half thereof charged to each of the petitioners for each year. The amount of this addition to income of the partnership is admitted as correct by petitioners but they claim only one-fourth thereof should be charged to each of them, and that the remaining one-half is properly chargeable to their respective wives, one-fourth each.

FINDINGS OF FACT.

Petitioners and their respective wives, Bessie Brown and Frances Israel, are now and were at all the times herein mentioned, residents of Los Angeles, Calif. For several months prior to August, 1919, they contemplated and discussed the advisability of going into business together, and in July, 1919, the four of them entered into an oral agreement by which they agreed to go into business together, and after the payment of a so-called salary to each which was to be considered as expense, the profits and losses were to be divided equally between them.

The business was not incorporated, was conducted under the name of Brown-Israel Outfitting Co. and was that of men's and women's clothing sold on the installment plan. The business started in August, 1919, and continued through the taxable years, and each of the parties to the agreement devoted his or her entire time to it.

Originally each of the parties contributed $2,500 to the capital of the business, that of the petitioners being from the sale of corporate stock owned by them, that of Frances Israel was obtained from her mother, and that of Bessie Brown resulted from outside employment prior to the organization of the Brown-Israel Outfitting Co.

On March 13, 1920, in order to comply with section 2466, Civil Code of California, a certificate of ownership of firm doing business under a fictitious name was filed in the County Clerk's office of Los Angeles County, Calif., as follows:

CERTIFICATE OF BUSINESS FICTITIOUS FIRM NAME.

THE UNDERSIGNED do hereby certify that they are conducting a men's and women's furnishing business at 824 South Broadway in the City of Los Angeles, County of Los Angeles, State of California, under the fictitious firm name of BROWN-ISRAEL OUTFITTING COMPANY and that said firm is composed of the following persons, whose names and addresses are as follows, to-wit:

Names	Residence Address
Joseph Israel	805 1/2 South Berendo Street, Los Angeles, Calif.
Frances Israel	805 1/2 South Berendo Street, Los Angeles, Calif.
Charles Brown	3288 West Eighth Street, Los Angeles, Calif.
Bessie Brown	3288 West Eighth Street, Los Angeles, Calif.

Witness our hands this 13th day of March, 1920.

JOSEPH ISRAEL.

FRANCES ISRAEL.

CHARLES BROWN.

BESSIE BROWN.

Filed March 13, 1920.

L. E. LAMPTON, County Clerk.

By W. C. WALTON, Deputy.

STATE OF CALIFORNIA,

County of Los Angeles, ss:

On this 13th day of March in the year nineteen hundred and twenty, before me Marvin Lewis, a Notary Public in and for said County, residing therein, duly commissioned and sworn, personally appeared Joseph Israel, Frances Israel, Charles Brown and Bessie Brown known to me to be the persons whose names are subscribed to the within instrument and acknowledged to me that they executed the same.

Witness my hand and official seal.

(SEAL)

MARVIN LEWIS,

Notary Public in and for said County and State.

11175.

229/26

Accompanying this was an affidavit showing publication of the aforesaid certificate in a weekly newspaper for five weeks as required by law.

For the purpose of securing credit there was filed with the Union Bank & Trust Co., of Los Angeles, Calif., from time to time during the taxable years statements of the financial condition of the Brown-Israel Outfitting Co., in each of which the names of petitioners and their wives, Bessie Brown and Frances Israel, were given as general partners. In addition they filed with the bank two certificates of partnership signed by both petitioners and their wives.

One of them is as follows:

UNION BANK & TRUST CO. OF LOS ANGELES

CERTIFICATE OF PARTNERSHIP.

* * *

, a Partnership.

We hereby certify that the assets and liabilities enumerated in the financial statement of BROWN-ISRAEL OUTFITTING COMPANY, a partnership, dated Dec. 31, 1922, is a true statement of all the assets and liabilities of the individual members of said partnership and all persons interested therein. We further certify that the signatures of all of the members of said partnership and all persons interested therein are affixed to this instrument and that said partnership is a general, trading partnership, and not a limited one.

We further certify that we, the undersigned, constituting all of the members and persons interested in said partnership, are jointly and severally liable for all indebtedness incurred in the name of BROWN-ISRAEL OUTFITTING COMPANY, a partnership.

FRANCES ISRAEL.

JOSEPH ISRAEL.

BESSIE BROWN.

CHARLES BROWN.

The other is practically the same. Statements were made from time to time to R. G. Dun & Co., as a basis for commercial credit showing that the Brown-Israel Outfitting Co. was a partnership composed of Charles Brown and Joseph Israel and their wives, Bessie Brown and Frances Israel.

In the beginning the business was small, but it has grown rapidly, and the profits have become large. As the books were opened originally they did not reflect the interests of petitioners' wives therein. When this was discovered by Israel in March, 1920, the ledger was corrected to show the interests of Bessie Brown and Frances Israel at $5,000 each. The cash journal for January, 1921, contains the following statement:

To record the Assets, Liabilities and Capital Investment of Charles Brown, Joseph Israel, Bessie Brown and Frances Israel, doing business as a partnership under the name of Brown-Israel Outfitting Company. Capital Investments of respective partners to be maintained in equal amounts and all withdrawals or additions to Capital Investment to be made in equal amounts and all losses or profits to be shared equally by respective partners. Salaries paid to partners to be considered as expense and not as withdrawal of capital or profits. Respective Asset, Liability and Capital accounts being set up as they existed at the close of business December 31, 1920.

This was preceded by the following entry:

Capital Investment Accounts:

Charles Brown	$15,021.22
Joseph Israel	15,021.22
Bessie Brown	15,021.21
Frances Brown	15,021.21

Capital accounts for each of the above named were set up in accordance with the above statement and show that during the taxable years the profits were divided equally, one-fourth to each, after the deduction of the so-called salaries. The salaries paid to the petitioners were to each $3,600 for 1921, $4,200 for 1922, and $6,000 for 1923. Their wives received $1,200 each in 1921 and 1922 and $1,800 in 1923.

The salary and income or profits derived from the Brown-Israel Outfitting Co. by the wives was reported by them separately and the tax thereon paid. The deficiencies asserted are arrived at by adding the wives' incomes derived from the Brown-Israel Outfitting Co. to that of petitioners, on the theory that they were community property.

OPINION.

MILLIKEN: The questions presented in these five proceedings are, (1) Where the petitioners' wives, Bessie Brown and Frances Israel. partners in the firm of Brown-Israel Outfitting Co., and (2) if so, should their income therefrom be reported as their own separate income, or should it be included in that of their husbands as community property?

Under the decisions of the courts of California and of this Board, it has been held that husband and wife may freely contract with each other.

We think that the evidence in this case, which is uncontradicted, shows that the petitioners and their wives entered into an oral contract of partnership in July, 1919, and they conducted business in accordance therewith through the taxable years. Their actions in filing and publishing the certificate of ownership and in making the various statements to the bank and R. G. Dun & Co. are corroborative thereof. These statements were made in the usual course of business long before these questions arose and can not be considered as mere self-serving declarations. They were acts of the parties and therefore competent, as were also the accounts and books of the firm.

In the recent cases of ; ; and , the Board reviewed the statutes and decisions of California and held that in that State husband and wife could enter into a contract of partnership and carry on business as such and that the interests of each was that one's separate property and the income therefrom was returnable by and taxable to each individual according to his or her interest. It followed that the income of the wives could not be added to that of the husbands on the theory of community property. In none of the above cases did it appear that the wife had contributed any capital from her separate estate, and in the Busche case alone did she appear to have rendered any services.

In the instant cases the facts are much stronger, for the wives contributed both capital andservices.

We do not deem the cases of ; ; and , applicable to the facts of the cases under consideration. In the Robbins case there was no contract of partnseship between husband and wife and there was no investment of her separate property nor services rendered by her. The income sought to be divided between husband and wife resulted from earnings of the husband and community property, and it was held that the income was clearly community property and taxable to the husband.

The Roth and Belcher cases are likewise not in point for in neither was there a partnership agreement for the conduct of business and the earning of income, there was no investment of separate property by the wife, and there was no agreement that her earnings should be her separate property. The agreements were that the earnings of both husband and wife were to be pooled and that they were to be joint owners of the common fund. In those cases there was no partnership and the parties were working for others. The decisions were merely to the effect that the earnings of both husband and wife were community property and were taxed as such. The earnings were not the result of the contract, but merely became subject to it after receipt.

In the instant cases the earnings, salaries and profits were all the result of the contract and the investment by each of his or her separate property.

We are of opinion that the contract of partnership was entered into, that it was valid, and that the salaries and all other income derived therefrom by Bessie Brown and Frances Israel was their separate property and that it was error for respondent to have included them in the incomes of petitioners.

In the recomputation of the deficiencies, if any, under Rule 50, adjustments of disallowed deductions to the partnership should conform to the decision here made concerning the income of petitioners.

Judgment will be entered under Rule 50.