Lusthaus v. Commissioner

Delivered the opinion of the Court-

The question in this case is the same as in Commissioner v. Tower, ante, p. 280. Here, too, the Commissioner made a deficiency assessment against the husband, petitioner, for purported partnership earnings reported in his wife’s return for 1940 and not reported by the petitioner. The Commissioner’s action was based on a determination, made after an investigation, that for income tax purposes no partnership existed between the petitioner and his wife. The following are the controlling facts: Petitioner has operated a furniture business since 1918 and since 1933 he has conducted a retail furniture business at two stores located in Uniontown, Pennsylvania. His wife helped out at the stores whenever she was needed without receiving compensation. In 1939 the petitioner found himself confronted.with the prospect of large profits and correspondingly large income taxes. This caused him concern and he called in his accountant and attorney. Together they worked out a plan for the supposed husband-wife partnership here involved. The wife had little to do with the whole transaction, and testified when asked about the details that “on the advice of counsel I did what he told me to do.” In accordance with the plan the petitioner executed a bill of sale to his wife by which he purported to sell her an undivided half interest in the business for $105,253.81. At the same time the wife executed a partnership agreement under which she undertook to share profits and losses with her husband. The wife paid for her undivided half interest in the following way. Petitioner borrowed $25,000 from a bank and gave his wife a check for $50,000 drawn against the amount borrowed and further funds which he had withdrawn from the business and deposited with'the bank for that purpose. The wife then gave petitioner her check for $50,253.81 and the petitioner repaid the $25,000 to the bank. Petitioner’s wifé also gave him eleven notes in the amount of $5,000 each, which according to an understanding were to be paid from the profits to be ascribed to the wife under the partnership agreement. Petitioner reported in a 1940 gift tax return that he had made a gift of $50,000 to his wife. Pennsylvania issued petitioner and his wife a certificate authorizing them to carry on the business as a partnership. When the partnership was formed petitioner’s wife owned her home, valued at twenty-five to thirty thousand dollars and securities worth up to twenty-five thousand dollars.

After the partnership was formed the wife continued to help out in the stores whenever she was needed just as she had always done. But petitioner retained full control of the' management of the business. His wife was not permitted to draw checks on the business bank account. During the taxable year here involved the husband filed social security tax returns as owner of the business. Neither partner could sell or assign the interest ascribed by the partnership agreement without the other’s written consent. Though, at the close of each year the profits of the business were credited on the books to petitioner and his wife equally, no withdrawals were to be made under the partnership agreement unless, both partners agreed. The husband drew no salary. During 1940, which is the tax year here involved, the business net profits were in excess of $80,000, from which the respondent withdrew about $4,500 and his wife withdrew only $59.61. The following year they withdrew approximately $16,000 and $19,900 respectively, the wife’s withdrawal being used largely to pay back some of the $5,000 notes given as part of her alleged contribution to the partnership capital. On this evidence the Tax Court found that the wife acquired no separate interest in the partnership by turning back to her husband the $50,000 which he had given her conditioned upon her turning it back to.him; and that the partnership arrangements were merely superficial, and did not result in changing the husband’s economic interest in the business. It concluded that while the partnership was “clothed in the outer garment of legal respectability” its existence could not be recognized for income tax purposes. 3 T. C. 540. The circuit court of appeals affirmed. 149 F. 2d 232. The petitioner challenges the Tax Court’s finding that the wife was not a genuine partner on the ground that the evidence did not support it. We hold that it did.

For the reasons set out in our opinion in Commissioner v. Tower, ante, p. 280, the decision of the circuit court of appeals is affirmed.

Affirmed.

Me. Justice Jackson took no part in the consideration or decision of this case.

The Tax Court found as follows on this phase:

“He [the husband] would make her a 'gift’ of a part of the purchase price and take her promissory notes for the balance. She could pay off the notes from her share of her profits of the business.”

A part of the testimony supporting this finding was given by the husband as'follows:

“Q. And what were the terms of that oral agreement?

“A. Just as I stated, that she [the wife] would pay me $50,000 in cash and the balance to be paid in notes.

“Q. Payable yearly?

“A. Payable yearly in notes.

“Q. In the amount of $5,000 each for 11 years?

“A. Yes..

“Q. Where was she to get the amount to be paid off yearly?

“A. From the profits of the business.”