Opinion
Docket No. 22555.
1950-08-17
LOIS REYNOLDS ATKINS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
James P. Haffner, Esq., for the petitioner. H. H. Hart, Esq., and P. Levin, Esq., for the respondent.
1. PARTNERSHIP— HUSBAND'S DOMINATION.— The petitioner has not shown that she was so dominated by husband as to render nontaxable to her her full distributive share of a partnership in which she took a prominent part.
2. GAIN— REALIZATION— CASH BASIS.— One on a cash basis does not realize gain from an alleged sale until cash or equivalent is received. James P. Haffner, Esq., for the petitioner. H. H. Hart, Esq., and P. Levin, Esq., for the respondent.
The Commissioner determined a deficiency of $1,827.74 for 1942 and one of $2,647.65 for 1944 in the income and victory tax of the petitioner. The issues for decision are whether the Commissioner erred in holding that (1) the petitioner was a partner in Arcadia Roller Rink and taxable upon income of that partnership for the years 1942, 1943 and 1944 which she did not receive, and (2) the petitioner realized income from a property settlement pursuant to a decree of divorce.
FINDINGS OF FACT.
The petitioner filed her individual cash basis returns for the taxable years with the collector of internal revenue for the first district of Illinois.
The petitioner was employed as manager of Arcadia Roller Rink in September 1937 at a salary of $30 a week. The Roller Rink was operated by Arcadia Garden Corporation, a corporation dominated by Leo A. Seltzer.
Seltzer advised the petitioner prior to 1940 that 1,273 shares of the stock of the corporation had been placed in her name. She never paid anything for those shares and never received any certificate for the shares. She received checks for dividends on the shares and endorsed those checks to Leo A. Seltzer whom she regarded as the real owner of the shares. There were 2,500 shares outstanding. The petitioner was an officer and a director of the corporation.
The petitioner continued as manager of the rink until some time in 1942. Her salary had been increased to $75 a week. She was partly responsible for the increased earnings of the rink.
The petitioner and Leo A. Seltzer were married on April 19, 1942, and about that time she ceased to be the manager of the rink.
The corporation was dissolved in May 1942 and the operation of the rink was continued in the name of Arcadia Roller Rink, a partnership in which the petitioner and Fred Morelli were equal partners. The partnership agreement was oral.
Phil Hayes, once related by marriage to the petitioner, was manager of the roller rink and Seltzer continued to supervise its operations in a general way. Morelli gave little or no time to the operation of the rink. The record does not show how much time the petitioner devoted to the partnership business. The bank account of the partnership was in the joint names of the petitioner, Hayes, and Jean Scott, a cousin of the petitioner, any one of whom could sign checks.
The petitioner had a concession at the rink entitling her to sell shoe and skate combinations. The income from that concession belonged to her.
Seltzer, shortly after his marriage to the petitioner, opened a joint checking account for himself and the petitioner. The petitioner continued to receive $75 a week from the rink and she deposited those funds, along with other moneys which she received from the rink and from Seltzer, in the joint bank account. The household and living expenses of the petitioner and Seltzer, installments on a mortgage on a home which they purchased, and the income taxes of the petitioner were paid from that account. That arrangement continued through the remainder of 1942, through all of 1943, and until the petitioner filed a suit for divorce on March 20, 1944.
Seltzer, in the latter part of 1943, asked the petitioner to transfer to him her one-half interest in the partnership. She refused. Seltzer then went to Hayes, obtained from him a check for $3,000 on the partnership account, cashed the check, overdrawing the account, and thus left the partnership with only its operating assets.
A written partnership agreement for the operation of the rink was entered into on January 13, 1944, by the petitioner, Seltzer, Fred Morelli, and Sol Morelli, each having a one-fourth interest. Simultaneously, and as a condition to the partnership agreement, Seltzer required the petitioner to enter into a written agreement that their income from the partnership would be deposited in their joint account for the payment of living expenses. Seltzer deposited the $3,000 to the account of the new partnership. Thereafter, the petitioner received $50 a week from the rink. That payment continued until she was granted a divorce from Seltzer on December 11, 1944.
The petitioner had her sister report $1,800 of income which came to her from her skate concession for 1942. The partnership, in 1942, paid to Hayes, under the guise of a bonus, $2,000 which he then turned back in equal shares to the partners— the petitioner and Fred Morelli. Those things were done at the direction of Seltzer to evade income taxes. The petitioner gave this information to the deputy collector in Chicago in March 1944.
The decree divorcing the petitioner from Seltzer dated December 11, 1944, incorporated a property settlement agreement entered into by the parties dated November 29, 1944. The agreement gave the petitioner the custody of her minor son who had been adopted by Seltzer; required Seltzer to pay her $15 a week for his support; gave the husband the household furniture and the right to live in the house which they had bought; gave the petitioner her personal property; required the husband to pay her $6,000 in cash, $1,000 of which was for her legal fees; provided that both should give quitclaim deeds for their home to a trustee who would then give each a certificate of beneficial interest for one-half, both certificates to be held by the wife as security for the full performance of the agreement; provided that the wife would ‘sell, assign and set over to the husband‘ her 25 per cent interest in the partnership, and, in consideration of that transfer, the husband to pay the petitioner $15,000 in semiannual installments of $2,500; required the husband to give to the petitioner his collateral installment promissory note for $20,000 at 4 per cent to cover the $20,000 to be paid to her, as above described; and required the wife to deliver the certificates of beneficial interest in the residence to the husband when he had paid the note.
Seltzer's note for $20,000 was not executed or delivered to the petitioner until some time in January 1945, and no part of the $20,000 was paid to her during 1944.
The Commissioner, in determining the deficiency for 1942, added to income as reported on the return $4,066.36 described as ‘increase in partnership income‘ and $2,880.12 described as ‘other income.‘ He explained that her share of the net income of the partnership, Arcadia Roller Rink, for the calendar year 1942 had been understated on her return in the amount of $4,066.36. He explained further that she had received but had not reported business income of $1,880.12 and a bonus of $1,000.
The Commissioner, in determining the deficiency for 1943, added to income as reported on the return $2,047.45 described as ‘increase in partnership income.‘ He explained that the petitioner's distributive share of the net income of the partnership, Arcadia Roller Rink, had been understated in the amount of $2,047.45.
The Commissioner, in determining the deficiency for 1944, added to the income as shown on the return $2,554.33 described as ‘increase in partnership income‘ and $5,972.84 described as ‘long-term capital gain.‘ He explained that the petitioner's share of the distributive net income of the partnership, Arcadia Roller Rink, for the calendar year 1944 had been understated in the amount of $2,554.33, and he further explained that the petitioner realized taxable income in the amount of $5,972.84 from the exchange during 1944 of her 25 per cent interest in Arcadia Roller Rink for 6 per cent notes of Leo A. Seltzer having a face value and a fair market value of $15,000, and since she had reported no profit from the transaction, the profit of $5,972.84 had been added. He computed the profit as follows:
+-----------------------------------------------------------------------------+ ¦Sales Price ¦ ¦$15,000.00¦ +--------------------------------------------------------+---------+----------¦ ¦Basis: ¦Fair market value of assets received on January¦ ¦ ¦ ¦ ¦10, 1942, for fifty percent of stock ¦ ¦ ¦ +--------+-----------------------------------------------+---------+----------¦ ¦ ¦in Arcadia Roller Rink Company ¦$1,000.00¦ ¦ +--------+-----------------------------------------------+---------+----------¦ ¦ ¦Less: One-half given to Leo O. Seltzer on ¦500.00 ¦500.00 ¦ ¦ ¦January 15, 1944 ¦ ¦ ¦ +--------+-----------------------------------------------+---------+----------¦ ¦ ¦You received your share of partnership profits ¦ ¦ ¦ ¦ ¦in cash for the years 1942 and ¦ ¦ ¦ +--------+-----------------------------------------------+---------+----------¦ ¦ ¦1943. Your share of 1944 partnership income has¦5,454.33 ¦ ¦ ¦ ¦been determined as ¦ ¦ ¦ +--------+-----------------------------------------------+---------+----------¦ ¦ ¦Less: Total 1944 distribution of partnership ¦2,900.00 ¦2,554.33 ¦ ¦ ¦income to you ¦ ¦ ¦ +--------+-----------------------------------------------+---------+----------¦ ¦ ¦Total basis ¦ ¦$3,054.33 ¦ +--------------------------------------------------------+---------+----------¦ ¦Profit (Sales Price minus Basis) ¦ ¦$11,945.67¦ +--------------------------------------------------------+---------+----------¦ ¦Taken into account—50%, Section 117 (b) of the Internal ¦ ¦5,972.84 ¦ ¦Revenue Code ¦ ¦ ¦ +-----------------------------------------------------------------------------+
OPINION.
MURDOCK, Judge:
The petitioner testified that she was an equal partner with Fred Morelli from April 1942 until the new partnership was formed in January 1944, and thereafter she was a partner entitled to a one-fourth interest in the partnership until the property settlement agreement became effective under the decree of divorce. Those partnerships operated the rink. The record does not show how active the petitioner was in the operation of the rink, but she testified that Morelli was seldom there and the inference is that she was frequently there. Certainly the record does not justify a conclusion that she did not contribute valuable services to the operation of the rink after her marriage, although she was no longer manager. The record does not show that the petitioner's distributive share of the net income of the rink for any period was less than the amount determined by the Commissioner. Section 182 provides that the net income of each partner shall include, whether or not distribution is made to him, his distributive share of the income of the partnership.
Agreements made after a partnership interest has been earned do not relieve a partner of income tax on his share of the income already earned. Cf. Helvering v. Horst, 311 U.S. 112. The petitioner has made some effort to show that she did not receive her full distributive share of the net income of these partnerships. No finding has been made in that connection because it would be immaterial. Furthermore, the evidence is not clear and convincing. Her counsel argues that she should not be taxed as a partner. His reasoning seems to be that she was dominated by her husband and used as a tool by him to evade income tax on income which belonged to him. The petitioner testified that she was required to sign an agreement under which her share of the partnership income would be deposited in the joint account before her husband would permit the partnership agreement dated January 13, 1944, to become effective. However, the evidence does not show that she was forced into the earlier partnership or that the agreement relieved her from income tax on her 25 per cent of the income of the new partnership. She drew the checks on the joint bank account and did not lack control over that account. Her husband was not a member of the first partnership. She may have been dominated by him to some extent. She acted dishonestly in a number of particulars in so far as income tax liability was concerned during the time that she was married to Seltzer. The evidence, carefully considered, does not justify disturbing the determination of the Commissioner that the petitioner was taxable on the full amount of her distributive share of the net income of the two partnerships during the periods here involved.
The remaining question is whether she received income in 1944 from the sale of her one-fourth interest in the partnership created by the agreement dated January 13, 1944. The theory of the Commissioner is that she received $15,000 for that interest. The record does not show what she ultimately received from her husband in payment of the note of $20,000, and no decision is made herein as to the tax consequences of payments during any year not involved herein. However, the evidence shows that she did not receive the note, the $15,000 or any part of it during 1944, and since she was on a cash basis she would not, on any theory, be required to report any gain in 1944 based upon her husband's promise or obligation to pay her $15,000 at some future time. The Commissioner points to no contrary authority.
Decision will be entered under Rule 50.