Summary
In Beck Chem. Equip. Corp. v. Commissioner, 27 T.C. 840, 848-849 (1957), we gave extensive consideration to the issue of whether the taxpayer had associated with another party in a joint venture during the year in controversy.
Summary of this case from Sierra Club, Inc. v. Comm'r of Internal RevenueOpinion
Docket No. 53289.
1957-02-26
BECK CHEMICAL EQUIPMENT CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Harry L. Brown, Esq., for the petitioner. Maurice S. Bush, Esq., for the respondent.
Harry L. Brown, Esq., for the petitioner. Maurice S. Bush, Esq., for the respondent.
In January 1942, petitioner corporation entered into an oral agreement with Beattie Manufacturing Company for the manufacture and sale of flame throwers, a war device, to the United States Government under the terms of which petitioner agreed to and did make available to the common enterprise an invention (for which application for patent was pending) for fabricating such flame throwers, and also the engineering services of Beck, the inventor, its principal shareholder. Beattie agreed to and did furnish all production facilities, financing, and sales functions to exploit the flame thrower. The parties agreed to share the net profits equally. After a dispute developed between them concerning the time when said profits were to be distributed, petitioner filed an action for an accounting. This lawsuit was finally settled in 1950, petitioner receiving a compromise settlement from Beattie in the sum of $250,000. Petitioner did not report its distributive share of net profits from the flame thrower enterprise in its Federal income and declared value excess-profits tax returns for 1944 and 1945. No excess profits tax returns were filed by petitioners for such years. Respondent, in his statutory notice, determined that one-half of the enterprise's net profits in 1944 and 1945 was taxable to petitioner as co-proprietor of a joint venture, and also imposed additions to tax for failure to file excess profits tax returns in such years. Held: (1) The parties intended to and did form a joint venture within the meaning of section 3797, I.R.C. 1939. (2) Petitioner is taxable as a partner under section 182 on its distributive share of the joint venture's net profits during the years 1944 and 1945 in the respective amounts of $78,789.78 and $91,019.45. (3) Respondent did not sustain his burden of proof with respect to increased deficiencies asserted in his amended answer. (4) The 25 per cent addition to tax for failure to file any excess profits tax returns is properly imposed in the absence of reasonable cause, pursuant to section 291(a).
Respondent, in his statutory notice, determined deficiences in the petitioner's income tax, excess profits tax, and additions thereto as follows:
+----------------+ ¦¦Deficiencies ¦¦ ++--------------+¦ ¦¦ ¦ ¦ ¦¦ +----------------+
_ additions to tax under Year Declared Excess profits sec. 291 (a) Income tax value excess- tax profits tax 1944 $3,010.40 $10,147.46 $52,640.41 $13,160.10 1945 4,487.30 11,409.43 58,194.68 14,548.67
The foregoing deficiencies in tax and additions thereto arise from respondent's determination that petitioner realized unreported shares of profits for the years 1944 and 1945 in the respective amounts of $78,789.78 and $91,019.45 from its common business enterprise with Beattie Manufacturing Company, and from petitioner's failure to file excess profits tax returns for said years.
At the trial respondent, by amended answer to petitioner's amended petition, alleged that the petitioner's unreported share of profits for the taxable years in question from its business undertaking with Beattie were, in fact, greater than those determined in the notice of deficiency. Accordingly, respondent, under the provisions of section 272(e), Internal Revenue Code of 1939, claimed increased deficiencies in income tax and additions thereto for the taxable years as follows:
+-----------------------------------------------------------------------+ ¦ ¦Claimed ¦Claimed ¦Total ¦Total additions¦ +-------------------+-----------+------------+----------+---------------¦ ¦ ¦increase in¦increase in ¦deficiency¦to tax ¦ +-------------------+-----------+------------+----------+---------------¦ ¦ ¦deficiency ¦additions to¦in tax ¦presently ¦ +-------------------+-----------+------------+----------+---------------¦ ¦ ¦in tax ¦tax under ¦presently ¦claimed ¦ +-------------------+-----------+------------+----------+---------------¦ ¦Tax and year ¦under sec. ¦sec. 291(a) ¦claimed ¦under sec. ¦ +-------------------+-----------+------------+----------+---------------¦ ¦ ¦272(e) ¦ ¦ ¦291(a) ¦ +-------------------+-----------+------------+----------+---------------¦ ¦Income tax: ¦ ¦ ¦ ¦ ¦ +-------------------+-----------+------------+----------+---------------¦ ¦1944 ¦ ¦ ¦$3,010.40 ¦ ¦ +-------------------+-----------+------------+----------+---------------¦ ¦1945 ¦$639.69 ¦ ¦5,126.99 ¦ ¦ +-------------------------------------------------------+---------------¦ ¦Declared value excess-profits tax: ¦ ¦ +-------------------------------------------------------+---------------¦ ¦1944 ¦3,909.22 ¦ ¦14,056.68 ¦ ¦ +-------------------+-----------+------------+----------+---------------¦ ¦1945 ¦4,256.27 ¦ ¦15,665.70 ¦ ¦ +-------------------+-----------+------------+----------+---------------¦ ¦Excess profits tax:¦ ¦ ¦ ¦ ¦ +-------------------+-----------+------------+----------+---------------¦ ¦1944 ¦21,323.05 ¦$5,330.77 ¦73,963.46 ¦$18,490.87 ¦ +-------------------+-----------+------------+----------+---------------¦ ¦1945 ¦22,640.29 ¦5,660.07 ¦80,834.97 ¦20,208.74 ¦ +-----------------------------------------------------------------------+
Petitioner filed a motion to strike that part of respondent's amended answer relating to the claim for increased deficiences. After a hearing on said motion held on February 8, 1956, we denied the motion.
All of the aforementioned deficiencies and claimed additions thereto remain in dispute. Respondent conceded that the common business enterprise sustained a net operating loss during 1946 in the amount of $19,372.16, which is properly allowable as a loss carryback to the year 1944 and will be reflected in the Rule 50 computation.
The issues presented for our consideration are: (1) Whether petitioner was a member of a ‘joint venture’ within the meaning of section 3797, Internal Revenue Code of 1939, during the years 1944 and 1945; (2) and if so, whether petitioner's distributive share of the profits of the joint venture constituted taxable income to petitioner in those years under sections 182 and 183; (3) whether respondent affirmatively established that petitioner received a larger amount of profit from the joint venture during 1944 and 1945 than determined in the statutory notice; and (4) whether petitioner's failure to file excess profits tax returns for the years in issue was due to reasonable cause within the purview of section 291(a).
FINDINGS OF FACT.
The facts are partly stipulated and, to the extent so stipulated, are incorporated herein by reference.
Beck Chemical Equipment Corporation, hereinafter sometimes called petitioner, is a corporation organized under the laws of the State of New York, with its business offices located in New Orleans, Louisiana. Petitioner, a cash basis taxpayer, on March 15, 1945, and March 15, 1946, respectively, filed corporation income and declared value excess-profits tax returns (Form 1120) for the calendar years 1944 and 1945 with the then collector of internal revenue for the third district of New York, but reported no taxable income therein. Petitioner did not file any excess profits tax returns (Form 1121) for the taxable years 1944 and 1945.
Lawrence J. Beck invented a portable war device known as a flame thrower on which he held application for letters patent during the year 1941. Beck Chemical Equipment Corporation was organized on December 22, 1941, under the laws of the State of New York by Sigmund Pines, a certified public accountant, for the purpose of exploiting Beck's invention through its manufacture and sale to the Chemical Warfare Service of the United States Government. Under the articles of incorporation, Beck became the owner of 45 per cent of petitioner's stock; Pines received 35 per cent of the stock; and Herman A. Levine, a New York attorney, received 20 per cent. Pines was elected president and Levine was made secretary of petitioner.
During the period in which petitioner was incorporated, Beattie Manufacturing Company (hereinafter sometimes referred to as Beattie) was an established manufacturer of rugs and carpets, with its plant located at Little Falls, New Jersey. At the outbreak of World War II, Beattie was desirous of converting to the production of war devices, and upon learning of Beck's invention communicated with the corporate officers of petitioner. In January 1942, petitioner and Beattie, acting through their respective corporate officers, Sigmund Pines and Michael Brennan, entered into an oral agreement with respect to the manufacture and sale of the portable flame thrower.
Under the terms of their verbal agreement, the pending application for letters patent on the portable flame thrower filed by petitioner was to be made available to Beattie for its use in manufacturing and selling the device to the Federal Government. Also, petitioner agreed to make available the engineering services of Lawrence J. Beck to assist Beattie in setting up the manufacturing process of the flame thrower.
In consideration of petitioner's contribution to the joint undertaking, Beattie was to make available so much of its manufacturing and storage facilities at its Little Falls plant as would from time to time be required for the completion of all contracts obtained for the flame thrower enterprise. In addition, Beattie was to furnish all the financing required for the manufacture of the war device, including as an expense of such project, reimbursement of petitioner's expenses already incurred and to be incurred in connection with obtaining the first of the aforesaid contracts with the Government. Management and control of the manufacturing project was to be handled by Beattie. It was further agreed that the net profits thereon were to be shared equally between petitioner and Beattie at the completion of the war with the Axis powers. Any loss sustained in any one year in the common operation was to be offset against any profit derived in a future year in determining the net profit in which petitioner was to participate. No written agreement was ever entered into with respect to the enterprise.
Beattie, in substantial compliance with the terms of the oral agreement, commenced manufacturing operations on March 1, 1942. Virtually exclusive supervision and control over the manufacture and sale of the war device were exercised by Beattie. However, Lawrence J. Beck, inventor of the flame thrower and principal stockholder of petitioner, was headquartered in the Beattie plant as technical adviser to the managerial staff and production employees of the joint project.
In order to satisfy the policy of the Government that contracts for war commodities be entered into only with contractors of sound financial standing, all of the flame throwers manufactured during the operative years were sold to the United States Government solely in the name of Beattie as contractor. Corporate Officers of Beck did not believe petitioner would have qualified as a contractor because it had neither factory, equipment, or the requisite capital to finance the aforesaid manufacturing project. Beattie, however, qualified as an acceptable contractor because it was an established manufacturing concern of reliable financial background. Beattie did not hold petitioner out to Government contractors, its sole customer, as its partner or ‘joint venturer.’ Orders for the sale of the portable flame throwers were obtained only by Beattie. No orders for materials used in the production of flame throwers were ever placed in any name which included that of petitioner and petitioner did not collect any sales proceeds.
Beattie handled all receipts and disbursements of funds of the common enterprise. Petitioner did not receive any of the profits derived from the flame thrower operation until 1950 or 1951. Beattie kept accounting records of the flame thrower project in the books of its own corporation. No separate books of account or records of the enterprise were maintained jointly by the co-adventurers. Beck kept no books or records of its own relating to the flame thrower project other than a check book.
The aforementioned verbal agreement was performed by the parties at a substantial profit to each. However, in the first year of operation of their common project, a dispute arose between the parties as to the terms of the agreement, particularly with respect to the time Beattie was obliged to make an accounting and distribution to Beck of the latter's share of the profits. Unable to resolve their differences, petitioner, on or about November 16, 1943, instituted an action in equity before the Supreme Court of the State of New York, County of New York, against Beattie for an accounting under the terms of their verbal arrangement. In its complaint, petitioner alleged, inter alia, that the oral contract between Beck Chemical Equipment Corporation and Beattie constituted a ‘joint venture’ for the manufacture and sale of flame throwers for the duration of World War II; that the agreement called for an equal division of the net profits of the ‘joint venture’ between the parties; and that under the terms of the agreement the net profits of the joint venture ‘would from time to time’ be distributed between them.
Beattie, in its answer, admitted the existence of the ‘joint venture’ agreement between itself and petitioner, but denied that the agreement between the parties required it to make an accounting to petitioner at that time; and alleged that it was not required to account to petitioner until after the completion of the ‘joint venture’ at the termination of World War II.
After trial of the case, on August 4, 1944, the Supreme Court of the State of New York, County of New York, decreed that petitioner's complaint in its accounting action be dismissed on the merits and entered the following judgment:
FURTHER ORDERED, ADJUDGED AND DECREED
(a) that there exists between plaintiff, Beck Chemical Equipment Corporation, and defendant, Beattie Manufacturing Company, a joint venture in connection with the manufacture and sale to the United States Government of flame throwers invented by the impleaded defendant, Lawrence J. Beck;
(b) that said joint venture is to continue for the duration of the war;
(c) that under the terms of the agreement of joint venture, there is to be no accounting between the parties until the end of the war between the United States and any of the Axis powers and until the completion of the contracts with the United States Government and the receipt of all moneys due thereon;
(d) that at such time the profits on the joint venture are to be divided fifty per cent. to the plaintiff, Beck Chemical Equipment Corporation, and fifty per cent. to the defendant, Beattie Manufacturing Company;
No Federal partnership income tax return was at any time filed on behalf of the common enterprise. Petitioner, however, characterized itself as a joint venturer with Beattie in its Federal income tax returns for 1944 and 1945, and attached to each of said returns the following statement:
This corporation taxpayer is one of a joint venture with the Beattie Manufacturing Company of Little Falls, New Jersey, both corporations being engaged in the manufacture of war products sharing profits 50-50. A certain portion of the expenses on this venture is applicable against such income after giving effect to officers' salaries of taxpayer company as agreed between taxpayer corporation and its officers in agreement of December 31st, 1941. Taxpayer corporation made request of venturer, Beattie Manufacturing Company for figures representing its share of the profits, but due to litigation between the two venturers, such figures were not submitted by Beattie Manufacturing Company to taxpayer corporation.
During the year 1948, petitioner received a letter from Beattie, dated September 20, 1948 (purporting to be in reply to a letter of September 3, 1948, wherein petitioner suggested a meeting to discuss obtaining orders for war devices in connection with the Government's rearmament program), in which Beattie stated, inter alia:
1. We have no joint plant and never jointly manufactured anything with you.
4. You have no right to have placed upon your letterhead ‘Division of Beattie Manufacturing Company, Little Falls, N.J.’ It is a misstatement; your company has never been a division of ours and we ask you promptly to discontinue the use of such letterhead.
Beck did not receive its 50 per cent share of the net profits earned by the common enterprise at the end of World War II, despite the aforementioned decree of the Supreme Court of New York. Consequently, some time after the termination of the war with the Axis powers, petitioner and its three shareholders instituted another accounting proceeding in the Supreme Court of the State of New York. On December 13, 1950, an official referee of said court filed an interlocutory judgment determining, inter alia, (1) that a ‘joint venture’ relationship existed between petitioner and Beattie for the manufacture of flame throwers for the United States Government during World War II; (2) that Beattie Manufacturing Company shall account for 50 per cent of the profits therefrom to petitioner; (3) that upon such accounting ‘all claims of any of the plaintiffs * * * relating to or resulting from the acts or failure to act, or conduct or misconduct, on the part of the defendant or any of its agents * * * arising from or in connection with the joint venture, be heard and determined’; (4) that Beattie make all of its books and records relating to the flame thrower operation available to petitioner for inspection; (5) that there be paid to petitioner by way of intermediate payment the amount of $130,000, ‘which shall be applied on account of moneys due and owing to the plaintiff, Beck Equipment Corporation from the profits of the joint venture’; (6) that after service of the verified account and the objections to the said account ‘all claims and issues raised herein shall be heard and determined by this Court who will take and state the account of the defendant and will hear and determine and compute all of the moneys due to the plaintiffs'; and (7) that petitioner and its three shareholders shall recover from Beattie ‘such sum of money as may be found due them, or any of them * * * ‘ and ‘costs, interest and disbursements may be applied for in the final judgment to be entered herein.’
Pursuant to said interlocutory judgment, Beattie submitted an accounting of the completed flame thrower operation showing the net profit of the joint undertaking to have been $323,746, of which 50 per cent, or $161,882, represented petitioner's distributive share, which amount is slightly higher than that shown by the books of account of Beattie, as stipulated at the instant hearing and set forth hereinafter. Petitioner refused to accept the sum of $161,882 as its full share of the net profits because it believed that the total net earnings of the enterprise clearly exceeded that amount.
The difference between the parties as to the petitioner's proper share of the earnings from the venture was finally compromised by a ‘settlement’ agreed on during 1951 between the petitioner and Beattie, in which Beattie agreed to pay the total sum of $250,000 (which included the amount of $130,000 decreed by the referee in his order of December 13, 1950, as an intermediate payment) in full payment of all money found to be due petitioner on the accounting, including ‘all rights and claims.’
Beattie paid the $250,000 compromise settlement to petitioner in two payments, the first being in the amount of $130,000 which was reported in petitioner's 1951 corporate income tax return, and the balance, or $120,000, which was reported in petitioner's income tax return for 1952.
It is stipulated herein that the books of Beattie for the year 1942 show no profit or loss from the flame thrower operation and that none could be determined because no inventory was taken, and further, that there were no profits or losses from the venture prior to March 1, 1942. All of the profits received from the flame thrower enterprise were earned in the period between March 1, 1942, and December 31, 1945.
The net sales of flame throwers manufactured by Beattie as shown by its books and records during the years in question are as follows:
+-------------------------------------------------+ ¦Year ¦Amount ¦ +-----------------------------------+-------------¦ ¦March 1, 1942, to December 31, 1943¦$618,446.30 ¦ +-----------------------------------+-------------¦ ¦1944 ¦1,624,742.19 ¦ +-----------------------------------+-------------¦ ¦1945 ¦1,483,295.52 ¦ +-----------------------------------+-------------¦ ¦ ¦$3,726,484.01¦ +-------------------------------------------------+
The amounts (‘cash receipts') received by Beattie Manufacturing Company, as shown by its books and records, from the Federal Government in payment for flame throwers delivered to the Government are as follows:
+-------------------+ ¦Year¦Amount ¦ +----+--------------¦ ¦1942¦$78,941.46 ¦ +----+--------------¦ ¦1943¦433,660.90 ¦ +----+--------------¦ ¦1944¦1,564,920.77 ¦ +----+--------------¦ ¦1945¦1,316,563.88 ¦ +----+--------------¦ ¦1946¦68,999.14 ¦ +----+--------------¦ ¦ ¦_ ¦ +----+--------------¦ ¦ ¦$3,463,086.15 ¦ +-------------------+
At least some of the foregoing receipts were affected by contract renegotiation.
A written stipulation was filed at the commencement of the hearing herein in which the total profits and losses from the flame thrower operation as reflected by the books of Beattie for the period in question were stated to be as follows:
+------------------------------------------------+ ¦Year ¦Total amount¦ +-----------------------------------+------------¦ ¦March 1, 1942, to December 31, 1943¦$23,370.46 ¦ +-----------------------------------+------------¦ ¦1944 ¦157,579.55 ¦ +-----------------------------------+------------¦ ¦1945 ¦157,151.08 ¦ +-----------------------------------+------------¦ ¦1946 ¦(19,372.16) ¦ +------------------------------------------------+
One-half of the profits and losses from the aforesaid operation as reflected by the books of Beattie for the period in question, are as follows:
+----------------------------------------------+ ¦Year ¦Amount ¦ +-----------------------------------+----------¦ ¦March 1, 1942, to December 31, 1943¦$11,685.23¦ +-----------------------------------+----------¦ ¦1944 ¦78,789.77 ¦ +-----------------------------------+----------¦ ¦1945 ¦78,575.54 ¦ +-----------------------------------+----------¦ ¦1946 ¦(9,686.08)¦ +----------------------------------------------+
At the trial, counsel for petitioner conceded that according to the books of Beattie Manufacturing Company there was a net income from the common enterprise for the years 1944 and 1945 subject to Federal income tax in the respective amounts of $157,579.54 and $182,038.90.
At respondent's request, we find as a fact that the total profits of the flame thrower operation for the year 1944, as reflected on the books of Beattie or as otherwise determined, are subject for tax purposes to a carryback of an operating loss in the amount of $19,372.16 from the year 1946, of which each co-venturer is entitled to one-half, or $9,686.08, in the computation of its tax liability for 1944.
Petitioner and Beattie intended to and in fact did enter into a valid joint venture (for the manufacture and sale of flame throwers to the United States Government), taxable as a partnership during the years 1944 and 1945.
On petitioner's Federal income and declared value excess-profits tax return (Form 1120) for the year 1944, the question ‘(a) Is an excess profits tax return on Form 1121 being filed for the taxable period covered by this return?’ was left unanswered, and in its return for the year 1945, petitioner, to the same question, answered ‘no.’ Petitioner's failure to file excess profits tax returns for each of the taxable years in question was not due to reasonable cause.
OPINION.
FISHER, Judge:
I.
Respondent determined that petitioner was a member of a joint venture, a taxable as a partnership for Federal income tax purposes during the years 1944 and 1945, and, therefore, that its distributive share of the net profits thereof were taxable to petitioner in said years under section 182 and 183 of the Internal Revenue Code of 1939. Petitioner contends that Beck and Beattie Manufacturing Company did not enter into a joint venture, and that regardless of whether such business relationship existed, petitioner had not taxable income for either year in issue since it did not receive actual distribution of its allocate share of the net profits of the flame thrower enterprise until some time between 1950 and 1952, after protracted litigation.
The primary question to be decided in these proceedings is whether a joint venture existed between petitioner and Beattie during the years 1944 and 1945 within the meaning of the Federal statutes. We think the question must be answered in the affirmative for the reasons stated below.
The legal relationship known as a joint venture has been defined as a ‘special combination of two or more persons, where in some specific venture a profit is jointly sought without any actual partnership or corporate designation,‘ and also as ‘an association of persons to carry out a single business enterprise for profit.’ 48 C.J.S., Joint Adventures, secs. 1 and 2. Estate of L. O. Koen, 14 T.C. 1406 (1950); Chase S. Osborn, 22 B.T.A. 935, 945 (1931) and cases cited therein. The terms of such relationship may be informal and need not be reduced to writing. Morris Cohen, 15 T.C. 261, 272 (1950).
Under section 3797,
Internal Revenue Code of 1939, a joint venture is one of the various unincorporated associations included within the broad definition of a partnership ‘through or by means of which any business, financial operation, or venture is carried on * * * .’ The Code thus makes its own classification and prescribes its own standards for qualification as a ‘partnership,‘ and to the extent thereof, it supersedes local law for Federal income tax purposes. Regs. 111, sec. 29.3797-1; Commissioner v. Tower, 327 U.S. 280 (1946).
SEC. 3797. Definitions.(a) when used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof—(2) PARTNERSHIP AND PARTNER.— The term ‘partnership’ includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a trust or estate or a corporation; and the term ‘partner’ includes a member in such a syndicate, group, pool, joint venture, or organization.
In Commissioner v. Culbertson, 337 U.S. 733 (1949), where the bona fide existence of a family partnership was in issue, the Supreme Court announced the general test for determining the validity of partnerships for income tax purposes as follows:
The question is * * * whether, considering all the facts— the agreement, the conduct of the parties in execution of its provisions, their statements, the testimony of dis-interested persons, the relationship of the parties, their respective abilities and capital contributions, the actual control of income and the purposes for which it is used, and any other facts throwing light on their true intent— the parties in good faith and acting with a business purposes intended to join together in the present conduct of the enterprise. * * *
These principles and commentary, we believe are equally applicable here where the kind of partnership is an alleged joint venture within the purview of section 3797. Lucia Chase Ewing, 20 T.C. 216, 230 (1953), affirmed on another issue 213 F.2d 438 (C.A. 2, 1954); Chase S. Osborn, supra; Hutchinson v. Birdsong, 207 N.Y.S. 273, 275 (1925).
Upon the facts fully detailed in our Findings of Fact herein, and guided by the test enunciated in the Culbertson case, we are convinced that the parties from the very inception of their common business undertaking intended to and in fact did enter into a joint venture within the broad definition of that term in section 3797 of the Code.
In essence, the undisputed facts of record show that petitioner and Beattie entered into a common business arrangement in the early part of 1942 for the purpose of making a profit through the manufacture and sale of flame throwers to the United States Government. Under their agreement said enterprise was to last for the duration of World War II and the net profits thereof were to be divided equally between petitioner and Beattie.
Respondent's determination that a joint venture existed between the parties is, of course, prima facie correct, and the burden of proof of error is on petitioner. Petitioner, in denying the existence of a joint venture relation with Beattie, suggests on brief that the oral agreement with Beattie possibly created a master-servant relationship, in which petitioner was to receive one-half of the net profits (derived from sales of the war device) as wages for its contribution of the unpatented invention to the enterprise. Petitioner has pointed to no facts in the record to sustain its view, and we have found none. In our opinion the unequivocal facts show that the parties to the verbal agreement did not contemplated a ‘compensation status,‘ as suggested by petitioner, but to the contrary, Beck Chemical Equipment Corporation was to have a mutual proprietary interest in the venture's profits. The circumstances of the instant case differ widely from those in Arthur N. Blum, 11 T.C. 101 (1948), affd. 183 F.2d 287 (C.A. 3, 1949), in which there was an express employment agreement.
The fact that petitioner was required to make available the engineering services of Lawrence J. Beck, the inventor of the flame thrower (and petitioner's principal stockholder), for work on the project at Beattie's plant does not in any manner militate against the manifest intention of the parties to operate as a joint venture. We do not question the fact that his skill and know-how were essential to the success of the business undertaking. The fact that petitioner was required to make such services available, however, appears to us to add color to the reality of the joint venture.
Petitioner likewise relies upon Roland P. Lace, 17 T.C. 199 (1951), affd. 199 F.2d 373 (C.A. 6, 1952), and Carl G. Dreymann, 11 T.C. 153 (1948), suggesting that the plan for mutual participation in the venture's profits may have merely represented the ‘payment for the use of property’ or the ‘proceeds from the sale of property.’ Again, petitioner fails to call our attention to any facts in the record to sustain its position, and we do not find any. Moreover, we think these cases are clearly distinguishable on their facts from the case at bar and are not controlling here.
That petitioner here was entitled to enjoy the fruits of the common enterprise is strongly indicative of the reality of its participation as a principal; and in the absence of any cogent evidence that their agreement contemplated, or had been transformed into, an essentially master-servant relationship or some other legal status, we are of the view that the parties intended to be and, in fact, were co-proprietors in the profits to be derived from their venture.
In much the same vein, petitioner, relying on Bowe-Burke Mining Co. v. Willcuts, 45 F.2d 394, (D. Minn., 1930), contends that although Beck admittedly participated in losses of the venture for the purpose of adjusting the net profit in which it was ultimately to share, such participation did not necessarily serve to constitute the two corporation as joint adventurers, and was consistent with a compensation status. Granting the theory, as far as it does, it is obvious, by the same token, that sharing of losses is consistent with a partnership or joint venture arrangement, and is one of the factors to be considered in resolving the issue. It should be added, for completeness, that Bowe-Burke Mining Co. is distinguishable from the instant case on the facts. There, the taxpayer mining company, a corporation, entered into a contract with another corporation, Picklands, Mather & Co., whereby the latter agreed to finance the operation of a mine, upon which the taxpayer held a lease, and to market the ore produced therefrom, in consideration of 50 per cent of the net profits. Holding that no joint venture existed between the taxpayer and Picklands, Mather & Co., even though losses in the operation of the mine were borne equally by the two parties, the court emphasized that the ‘title to the mining lease remained in the mining company. The title to the ore when delivered to Picklands, Mather Co. passed to that company.’ The court concluded that each corporation thus ‘retained its identity with respect to its dealings with the other.’ Here, although the verbal agreement in question also obligated Beattie to advance the requisite financing for the venture, we think it is clear that petitioner and Beattie intended to become co-proprietors of the enterprise, and that while Beattie was considered the managing partner of the joint enterprise, title to the manufactured goods did not vest solely in Beattie. In all events, we think petitioner has failed to meet the burden of proving the contrary.
The fact that for practical business reasons, as reflected in our Findings of Fact, the over-all operations of the common enterprise were conducted solely in the name of Beattie or that petitioner's association with the venture was not known to its only customer, the United States Government, does not defeat the legal relationship. See R. A. Bartley, 4 B.T.A. 874, 879 (1926). See also John T. Newell, 17 B.T.A. 93, 95, 97 (1929). Nor is it determinative of the question before us that no separate books of account and records relating to their enterprise were maintained by the joint adventurers. See E. L. Kier, 15 B.T.A. 1114, 118 (1929).
The further argument advanced by petitioner that the parties did not intend to create a joint venture relation since it did not share ‘mutual control and responsibility’— i.e., it did not actively participate in the management of the flame thrower enterprise— must likewise be rejected. It is true that active management of the enterprise and the manufacture and sale of the flame thrower were handled entirely by Beattie, which was in accordance with petitioner's arrangement with Beattie (although petitioner, through Beck, made engineering services available). But is is likewise recognized under the law that partners may be inactive. Under the statutes of the State of New York, where the contract in question was entered into, a joint adventure may exist without a contribution of services or active participation in its concerns. N.Y. Partnership Law sec. 96. Thus, the reservation, as here, to one partner of the function of managing the common enterprise and financing its affairs does not, of itself, vitiate the existence of an otherwise valid joint venture. J. A. Riggs Tractor Co., 6 T.C. 889, 897 (1946); Elihu Clement Wilson, 11 B.T.A. 963, 971 (1928). Concededly, absence of any voice in the management and control of the business is an evidentiary circumstance to be considered. However, it is not necessarily a controlling consideration and was, in the instant case, a natural circumstance since Beattie, under the agreement, furnished the necessary finances, plant facilities, sales activities, and all management functions of the common undertaking. This was a natural arrangement, because Beattie was in a position to furnish such facilities, just as petitioner was in a position to furnish the process by means of which the flame thrower was made, and without which there would have been no business. Conceding that the facilities furnished by Beattie were necessary, the point is that both parties to the common enterprise furnished elements necessary to the business, which could not have been operated without the contributions of both parties. See Clarence B. Ford, 19 T.C. 200, 207 (1952).
In urging that mutual control of the activities of the common enterprise is essential to the existence of a valid joint venture, petitioner cites Joe Balestrieri & Co. v. Commissioner, 177 F.2d 867, 871 (C.A. 9, 1949), affirming a Memorandum Opinion of this Court. We have carefully reviewed the appellate court's opinion and find that it is based upon the law of California relating to joint ventures in a factual setting quite different from that in the instant case. In Balestrieri, the taxpayer, a corporation, had entered into a contract with a partnership (consisting of two persons who owned all stock in taxpayer corporation, and a third person) to pay a prospective creditor any deficits which might occur on money borrowed to conduct ore milling operations of the partnership, in return for one-half of any profits which the partnership might earn. The taxpayer's liability was secondary to that of the partnership, and was in the nature of a guarantee.
We think it is obvious that a joint venture did not exist in Balestrieri, and that the case is in no sense here controlling. We think the applicable principles are brought into better perspective by the following statement made in Levin v. Commissioner, 199 F.2d 692 (C.A. 2, 1952), in which the Court of Appeals said (p. 694):
But the Culbertson case does not require active participation to make a person a partner for tax purposes. On the contrary, it made it clear that no one element is essential. The Supreme Court decided against the taxpayer because the only evidence of an intent to form a partnership was the expectation that the taxpayer's sons would, in the future, contribute their time and services to the partnership. That decision was reached not because an indispensable element was lacking, but because the one element present was not enough to justify a finding of intent to carry on a present partnership. The mere fact that Richard did not actively participate in the business does not preclude the possibility of a bona fide intent to form a partnership. * * *
See also First Mechanics Bank v. Commissioner, 91 F.2d 275, 279 (C.A. 2, 1937).
Petitioner also cites Lucia Chase Ewing, supra, but we need not prolong our discussion of this phase of the case beyond saying that it is distinguishable from the instant case on the facts, and that a recitation of elements which may be considered is not equivalent to holding that any one of them is controlling or conclusive.
While not of itself determinative of the question of whether or not petitioner was a joint venturer in the common enterprise, we think it is of some significance, in considering petitioner's intent, that its present contention that it was not a party to a joint venture is clearly an afterthought. As reflected in our Findings of Fact, petitioner, on several occasions up to the filing of its amended petition herein, in official documents, including its 1944 and 1945 income tax returns, has maintained that it was a joint venturer with Beattie.
In considering the evidence bearing on the intention of the parties, we have not based our conclusions or ultimate findings upon any single factor, but have considered all of the facts and circumstances. Commissioner v. Culbertson, supra. Upon such consideration, we hold that petitioner and Beattie had formed, and did maintain, a joint venture during the years here material.
II.
Having held that a valid joint venture existed between petitioner and Beattie during the years 1942 through 1946, we must now determine the time when petitioner's 50 per cent distributive share of the profits therefrom should be properly included in its gross income for tax purposes. Respondent contends that petitioner's allocate share of the net income earned by the joint venture in 1944 and 1945 is taxable to petitioner under the provisions of section 182(c) of the Internal Revenue Code of 1939, notwithstanding the fact that petitioner did not receive actual distribution of said income until some time between 1950 and 1952. Petitioner, on the other hand, argues that it should not be required to include its distributive share in its gross income prior to actual receipt since its share was the result of a ‘compromise settlement’ made with Beattie in 1950 after protracted litigation, and that until the settlement it had no immediate or undisputed right to the earnings. We disagree with petitioner's position.
With respect to taxation of members of a partnership, section 182 of the Internal Revenue Code of 1939 provides, in pertinent part, as follows:
In computing the net income of each partner, he shall include, whether or not distribution is made to him
(c) His distributive share of the ordinary net income or the ordinary net loss of the partnership computed as provided in section 183(b).
The foregoing provision of the statute is free from ambiguity and makes it clear that the income of the joint venture (which we have indicated above is a form of partnership under the Code), is taxable in the year in which the income is earned, and not the year in which actual distribution thereof is made to the partners. Since the record shows that the income of the flame thrower enterprise was actually earned during the period between March 1, 1942, and December 31, 1945, we are convinced that under section 182(c), one-half share of said income is taxable to petitioner in such years.
The statute, by the phrase, ‘whether or not distribution is made to him (the partner)‘ expressly renders immaterial the fact that petitioner did not receive its share of the venture's 1944 and 1945 earnings until some years later. The immateriality of the year of distribution on the question of when partnership income is taxable was recognized by us many years ago in Robert A. Faesy, 1 B.T.A. 350 (1925)
in circumstances similar to the case before us. There, following the rule announced in Fred Truempy, 1 B.T.A. 349 (1925), we held the taxpayer partner taxable upon his distributive share of the partnership profits in the year his proportionate share was earned, even though subsequent disagreement with his partner and litigation precluded him from ever receiving any of his money. The fact that each partner's distributive share in the net income of the common venture may not be currently distributed due to a dispute, United States v. Baker, 233 F.2d 195 (1956), affirming 133 F.Supp. 666; or as the result of operation of State law, Heiner v. Mellon, 304 U.S. 271 (1938); or until the contractual obligations of the joint venture are fully performed, renegotiated, and its debts paid in accordance with the terms of the agreement of the parties, does not relieve them from reporting as income their proportionate shares of the net profit in the year it is earned. See First Mechanics Bank v. Commissioner, 91 F.2d 275 (C.A. 3, 1937). It is well established that the Federal income tax system is based on an annual accounting. Under the law the question whether taxable profits have been made is determined annually by the results of the operations of the year and not by any of the aforesaid circumstances which may postpone distribution of such profits. The policy and effect of the law cannot be circumvented by agreement of the joint venturers postponing the actual accounting with each other.
The case cited, as well as some of the other authorities mentioned herein, arose under section 218(a), Internal Revenue Act of 1918, which was thereafter changed to section 182 in the Revenue Act of 1928. The language of the section before us is found in substantially the same form in all of the revenue Acts.
Here the crux of petitioner's argument is that the existence of a real controversy between it and Beattie during the years in question rendered the amount of its distributable share indefinite and impossible of ascertainment, and that such amounts were not specifically established until the settlement agreement in 1950. However, in accordance with the established principles already discussed, we find no merit in this contention. In Stoumen v. Commissioner, 208 F.2d 903 (C.A. 3, 1953), affirming a Memorandum Opinion of this Court, where the taxpayer disclaimed knowledge of having earned any partnership income because of the alleged embezzlement of partnership property by the deceased partner, the court, in imposing tax liability on the surviving partner's distributive share in the year such income was actually earned, said (p. 908):
By virtue of that section (sec. 182(c)) one half of the partnership's ordinary net income automatically became his income even though he actually received none of it knowingly and was ignorant of its existence at the time.
It is thus evident that the principles of scienter and actual receipt have no application to the issue of whether or not partners are to be charged with their distributive shares of partnership profits under section 182(c), and this is so even though a partner is on the cash basis.
In support of its position, petitioner relies upon Adele Trounstine, 18 T.C. 1233 (1952), reversed sub nom. Estate of Norman S. Goldberger v. Commissioner, 213 F.2d 78 (C.A. 3, 1954), where we held that joint venture profits wrongfully withheld by the managing partner, but later received by taxpayer as a result of a court decree were taxable only in the year of actual receipt on the ground that until the decree issued the taxpayer had ‘no established or uncontroverted right to the funds.’ After careful consideration, we follow the rule established in Goldberger, supra, and Stoumen, supra. We have followed a like approach in our recent Opinion in Frederick S. Klein, 25 T.C. 1045 (1956), involving a situation where partners entered a compromise settlement after threatened litigation. We said (p. 1051): The distributive share of each partner mentioned in said statute (sec. 182(c)) is to be determined in accordance with the provisions of the partnership agreement. Schwerin v. Commissioner, (C.A., D.C.) 139 F.2d 843, affirming a Memorandum Opinion of this Court; Hellman v. United States, (Ct. Cl.) 44 F.2d 83. Also, as provided by the statute, these distributive shares are taxable to the partners, whether or not actual distribution is made to them; and the fact that distribution may have been delayed because if a dispute between the partners is immaterial for income tax purposes. Kurt H. deCousser, 16 T.C. 65; Bell v. Commissioner, (C.A. 5) 219 F.2d 442, affirming a Memorandum Opinion of this Court.
III.
We turn next to the question of deficiencies. It is well settled that respondent's determination of deficiencies is presumptively correct, and except as to new matter pleaded by him, the burden of proof here is on the petitioner. Rule 32, Tax Court Rules of Practice. The record shows that respondent, in his statutory notice, determined that one-half of the earnings of the joint venture for 1944 and 1945 (as reflected on the books of Beattie) was taxable to petitioner as its distributive share of the venture's net income. At the trial herein counsel for petitioner stipulated orally that it would ‘in no way attack’ the correctness of the amounts of alleged ‘income subject to Federal income tax,‘ as reflected on the books and records of Beattie and has offered no evidence to the contrary. We, therefore, sustain respondent to the extent of his determination in his statutory notice of deficiencies in income taxes, declared value excess-profits taxes, and excess-profits taxes (and also as to additions to tax so determined and discussed infra under issue IV).
With respect to respondent's claim for increased deficiencies and increased additions to tax, however, the burden of proof is on respondent to sustain the affirmative allegations in his amended answer. In this connection, the evidence reveals that at the trial petitioner admitted receiving the sum of $250,000 as a ‘compromise settlement’ during the years 1950-1952, and respondent, thereupon, alleged that petitioner actually received as its one-half distributive share of the venture's profits during the taxable years 1944 and 1945 the respective amounts of $108,405.12 and $123,263.90, in lieu of the lesser amounts set forth in his notice of deficiency.
Respondent computed these revised amounts of taxable income, upon which he based his claim for increased deficiencies, by prorating the full amount of the compromise settlement among all of the operative years of the venture— viz, 1942 through 1946. In making said apportionment, respondent calculated the aliquot portion for each year by determining the relationship of the stipulated profits for each period to the profits of all of the operative years as stipulated, and then applied the resultant percentage ratios to the $250,000 settlement. Obviously, respondent's technique was based on the assumption that all of the settlement money represented petitioner's one-half distributive share of the venture's profits for its operative years and that such profits should be annualized in proportion to the annual profits determined in the statutory notice.
In our opinion there is not a sufficient basis in the record to support respondent's contention, and that, to the extent of his affirmative claim for increased deficiencies and additions to tax, he has failed to meet the burden of proof resting upon him.
There is no evidence in the record on the basis of which we can hold that some specified part of the excess of the $250,000 settlement figure over petitioner's share of the profits of the joint venture, as shown on the books, was earmarked as income attributable to 1944 or 1945, or both of them.
The settlement figure was precisely that— i.e., a settlement figure— and no part of the excess over the book figures was attributed to any one source or to any particular year or years. We cannot supply the missing evidence by speculative inference. The excess over the book figures, for example, may have contemplated, in part, the factor of interest. If so, the factor might have been substantial, and might have been more than half of such excess. Beattie may have made a bad bargain (or a good one). The excess may have represented an estimate of petitioner's share of earnings without determining the period or periods for which it was estimated.
The record supplies none of the information essential to an attribution of particular parts of such excess to either 1944 or 1945. Likewise, the lack of facts is not supplied by respondent's theoretical approach. On the other hand, petitioner included such excess in its return for the year in which it was actually received, and there is nothing before us to suggest that it was wrong in doing so.
Respondent's claim for increased deficiencies and increased additions to tax is, therefore, denied.
IV.
The final issue is whether respondent properly imposed the 25 per cent addition to tax for petitioner's failure to file excess profits tax returns for the years 1944 and 1945. According to respondent's determination of deficiencies, sustained by us hereinabove, petitioner had excess profits net income of more than $10,000 in each of said taxable years, and therefore was obliged to file profits tax returns under section 729.
Petitioner filed its regular corporation returns (Form 1120) for 1944 and 1945, in which it reported no income from its joint venture with Beattie but failed altogether to make and file excess profits tax returns (Form 1121) for such years.
The provisions of section 729 of the Code, applicable to the year 1945, are, in part, as follows:(a) GENERAL RULE.— All provisions of law (including penalties) applicable in respect of the taxes imposed by Chapter 1, shall, in so far as not inconsistent with this subchapter, be applicable in respect of the tax imposed by this subchapter.(b) RETURNS.—(2) NO RETURNS REQUIRED.— Notwithstanding subsection (a), no returns under section 52(a) shall be required to be filed by any taxpayer under this subchapter for any taxable year for which its excess profits net income, computed with the adjustments provided in section 711(a)(2) and placed on an annual basis as provided in section 711(a)(3), is not greater than the specific exemption provided in section 710(b)(1).(The language of section 729 applicable to 1944 differs in some respects from the foregoing, but not in any way here material.)
Section 729, Internal Revenue Code of 1939, makes the provisions of sections 52 and 291 and the pertinent regulations thereunder with reference to the filing of income tax returns applicable to excess profits tax returns, except in cases where a taxpayer's excess profits net income is less than the specific exemption in the amount of $10,000 provided in section 710(b). Thus, under sections 729, 710(b), and 52, every corporation with excess profits net income of more than the $10,000 exemption in each of the taxable years 1944 and 1945 was required to file excess profits tax returns in said years.
The applicable statute for failure to file such returns is section 291(a) which provides for the imposition of additions to tax ranging from 5 to 25 per cent ‘(i)n case of any failure to make and file returns * * * unless it is shown that such failure is due to reasonable cause and not due to wilful neglect.’
Respondent does not claim that petitioner was willfully negligent in failing to file its excess profits tax returns, but contends that its failure in this regard was not due to reasonable cause. Under section 291(a) of the Code, reasonable cause has been defined to mean the exercise by taxpayer of ordinary business care and prudence. Regs. 111, sec. 29.291-1; Southeastern Finance Co. v. Commissioner, 153 F.2d 205 (C.A. 5, 1946). The issue presented is one of fact and the burden of establishing reasonable cause is on the petitioner. Wm. J. Lemp Brewing Co., 18 T.C. 586, 597 (1952).
In explanation and as exculpatory circumstances of its failure to file the returns here in question, petitioner's president and principal witness, Sigmund Pines, offered several reasons for its failure to file the required returns. One of the reasons he gave was ‘oversight.’ Another was that petitioner's officers did not know and could not ascertain its distributive share of the venture's profits for the taxable years involved herein until 1951, and, therefore, did not know whether or not excess profits returns were required.
With respect to the first excuse, we believe that failure to file a return because of oversight is tantamount to failure to file a return due to ‘forgetting.’ In Rogers Hornsby, 26 B.T.A. 591 (1932), we held that merely forgetting to file a return does not constitute reasonable cause. It is thus clear that petitioner's oversight, if such was the case, does not relieve it of additions to tax under section 291(a).
Likewise, we do not believe the second reason given for petitioner's complete failure to file excess profits tax returns— i.e., ‘We did not know what we earned’— constituted reasonable cause under the circumstances before us. We note, in passing, that precisely the same situation existed with respect to the filing of Federal income tax returns (Form 1120), yet this lack of knowledge and the pending litigation did not prevent petitioner from filing said returns for the taxable years in question.
As aforementioned, petitioner was required by section 52 to file excess profits tax returns even though it did not know exactly what its income from the joint venture was, unless it came within the $10,000 specific exemption provided in section 710(b). There is no evidence in the record that petitioner believed that its share of the joint venture's income for each of the years in question was less than $10,000 in excess profits net income. Contrariwise, there is every indication that petitioner believed the flame thrower enterprise was earning substantial profits and that its distributive share thereof would greatly exceed $10,000 in each of the taxable years. Thus, in its action for accounting against Beattie commenced in 1943 in the Supreme Court of New York, in a complaint filed under oath by its vice president, petitioner alleged upon ‘information and belief’ that ‘large profits have been and are being derived’ by the joint venture.
If petitioner's officers had any doubt that the enterprise did not have sufficient earnings or that the amount thereof was unascertainable, it could have been relieved of the necessity of filing an excess profits tax return upon presentation of all the facts alleged as a reasonable cause for such noncompliance in an affidavit to the collector as prescribed by Regulations 111, section 29.291-1. But in the absence of a proper showing, it was required to make a return. T. H. Symington & Sons, 35 B.T.A. 711, 740 (1937). See Jockey Club, 30 B.T.A. 670 (1934), affd. 76 F.2d 597 (C.A. 2, 1935).
As shown by our findings, the joint venture had substantial sales (as well as substantial earnings) during the years 1944 and 1945. Moreover, its income tax returns for those years show that it then considered itself a party to a joint venture. We think that petitioner was or should have been cognizant of the fact that its distributive share of the venture's profits for 1944 and 1945 might greatly exceed its $10,000 specific exemption. Even if it was unaware of the fact that sales and income for 1944 and 1945 were substantial, its failure to file a return cannot be excused on the ground of reasonable cause unless it had reliable and affirmative information that its share of the earnings for the years in question were in fact less than the amount of the exemption. In O'Sullivan Rubber Co. v. Commissioner, 120 F.2d 845, 848, (C.A. 2, 1941), affirming 42 B.T.A. 721, which involved the imposition of additions to tax under section 291(a) for failure to file a personal holding company tax return, the court said: ‘The fact that petitioner had no fraudulent intent and that its status was in substantial doubt do not excuse its non-compliance.’ The personal good faith belief that the taxpayer is not required to file an excess profits tax return is insufficient alone to discharge the addition to tax under section 291(a). Fides v. Commissioner, 137 F.2d 731 (C.A. 4, 1943); Nirosta Corporation, 8 T.C. 987, 990 (1947); West Side Tennis Club, 39 B.T.A. 149 (1939). Taxpayers deliberately omitting to file returns must use reasonable care to ascertain that no returns were necessary. We think the petitioner did not use such care. Here there is no evidence that petitioner's officers had reliable information (or, in fact, any information) that its share of the joint venture earnings was less than the statutory exemption and that the filing of a return was, therefore, not required. Likewise, there is no evidence that petitioner, in reliance upon competent advice of an individual qualified to assist on tax matters, came to the conclusion that excess profits tax returns were not required. See Estate of Michael Collino, 25 T.C. 1026, 1036 (1956). In the absence of such evidence, mistaken belief on the part of petitioner that no return was required under the statute does not constitute reasonable cause for noncompliance. P. Dougherty Co., 5 T.C. 791, affd. 159 F.2d 269 (C.A. 4, 1946), certiorari denied 331 U.S. 838; Heatbath Corporation, 14 T.C. 332, 348 (1950).
Petitioner argues on reply brief that every effort was made to obtain income figures from Beattie, but without success, and it ‘fully advised respondent of the situation.’ The fact that petitioner informed the respondent on its regular corporate returns (Form 1120) filed for 1944 and 1945 that it was involved in litigation with a co-venturer and therefore could not ascertain its distributive share of profits is clearly inadequate to apprise the respondent that excess profits were also due. A separate return (Form 1121) was explicitly required by Congress. It is well settled that disclosure of the facts in the wrong return is not sufficient to place the respondent on notice that the tax is due and does not relieve the putative taxpayer from additions to tax under section 291(a). Commissioner v. Lane-Wells, 321 U.S. 219(1944).
In the light of the foregoing and the record as a whole, we are convinced that the petitioner has not shown a reasonable cause for failure to file excess profits tax returns for 1944 and 1945.
Decision will be entered under Rule 50.