Opinion
No. 43916.
January 8, 1940.
Ferdinand Tannenbaum, of New York City (Olvany, Eisner Donnelly and Mark Eisner, all of New York City, on the brief), for plaintiff.
J.W. Hussey, of Washington, D.C., and Samuel O. Clark, Jr., Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, Sp. Assts. to Atty. Gen., on the brief), for defendant.
Before WHALEY, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHITAKER, Judges.
Action by Emil Mosbacher against the United States of America on a claim for refund of income taxes.
Petition dismissed.
This case involves the plaintiff's right to offset certain losses sustained in trading on the New York Curb Exchange by an association in which plaintiff was interested against profits plaintiff realized individually.
The issue in the case is whether or not his associates were employees, on the one hand, or partners or associates in a joint venture on the other.
This case having been heard by the Court of Claims, the Court, upon the evidence and report of a commissioner, makes the following special findings of fact:
1. Plaintiff is, and at all times material to this proceeding was, a citizen of the United States and a resident of the State of New York, with his place of business at 19 Rector Street, New York City. He is engaged in the business of buying and selling securities principally on the New York Curb Exchange.
2. March 15, 1933, plaintiff filed his individual income-tax return for the calendar year 1932 showing gross income of $91,563.18 and net income of $63,263.59. In returning that gross income plaintiff reported a loss from what he termed "personal" business in the amount of $130,349.89, which was deducted from other items of income on his individual return. Under the item on that return for "Income from Partnerships, Syndicates, Pools, etc. (State name and address)," plaintiff reported income of $177,119.72, which he described as coming from "Emil Mosbacher et al." He also showed dividends in the amount of $5,578.98 from "Mosbacher et al." and dividends "Personal" of $28,161.70. Plaintiff paid the tax shown due on that return, $10,968.35, as follows: March 15, 1933, $2,742.09; June 15, 1933, $2,742.09; September 12, 1933, $2,241.90; December 14, 1933, $2,241.90; and August 2, 1934, $1,000.37 plus interest of $45.63.
3. On the same day on which plaintiff filed his individual income-tax return for 1932, a return signed by him was filed on a partnership return form 1065, but headed "Return of Income from Joint Venture." In that return in the section provided for "Partners' Shares of Income and Credits" the following appear:
--------------------------------------------------------- | | Balance Name and address of each | | of net partner | Dividends | income | | ------------------------------|------------|------------- Emil Mosbacher, Rosedale | | Ave., White Plains, N. Y. .. | $5,578.98 | $177,119.72 Leonard C. Greenstein, 101 | | Central Park West, N. Y. .. | 306.54 | 9,731.85 Milton Stern, 1021 Pelhamdale | | Ave., Pelham Manor, N.Y. | 122.62 | 3,892.74 Cecil Schwartz, 50 Riverside | | Dr., N.Y. ................. | 122.61 | 3,892.74 |____________|_____________ Total .................. | 6,130.75 | 194,637.05 ---------------------------------------------------------
Expenses reported in that return on account of business done were in the amount of $53,288.33, which included salaries paid of $34,272. No part of the salaries so paid was to any of the individuals referred to above as "partners." That return and plaintiff's individual income tax return were prepared by plaintiff's office manager without consultation with attorneys, and he used the term "Joint Venture" in the former return without making any detailed check as to the relationship which existed among the parties and on his personal assumption that where two or more people participated in profits it was a joint venture. Both returns, however, were signed and sworn to by plaintiff. Each of the individuals named reported in his individual income tax return the amount shown above in the return described as "Return of Income from Joint Venture" as his share of the profits of a business carried on by the four individuals under an arrangement hereinafter shown.
4. February 8, 1935, plaintiff filed a claim for refund of $9,800 for 1932 on the ground that — "The taxpayer reported his income on the basis of a dealer in securities and inventoried such securities at the beginning and end of the taxable year on the basis of cost or market whichever is lower. The Revenue Agent disallowed the taxpayer the status of a dealer in securities and computed his gain or loss upon cost of securities with the result that the income of the taxpayer is reduced this year by the sum of $48,643.55."
In a letter dated May 8, 1935, the Commissioner of Internal Revenue advised plaintiff in connection with his proposed disallowance of the above claim that "although your distributive share of partnership income was reduced by $48,643.55, as stated above, other adjustments were made to the income resulting in an additional tax liability of $49,564.22," and by letter dated May 24, 1935, advised plaintiff that that claim for refund was rejected. At or about the same time the Commissioner made an additional assessment against plaintiff on his May 1935 assessment list in the amount of $49,564.22, together with interest of $6,293.30, which plaintiff paid June 17, 1935.
5. March 12, 1937, the Commissioner and plaintiff entered into an agreement under section 608(b)(2) of the Revenue Act of 1928, 26 U.S.C.A. § 1674(b)(2), to suspend the running of the statute of limitations provided in section 3226 of the Revised Statutes as amended and reenacted without change by section 1113(a) of the Revenue Act of 1926, 44 Stat. 116, 26 U.S.C.A. §§ 1672-1673, on the bringing of suit by plaintiff for the recovery of taxes alleged to have been overpaid for 1932, on the ground that there was then pending the case of Edward Klauber v. Commissioner, on appeal from a decision of the Board of Tax Appeals to the United States Circuit Court of Appeals for the Second Circuit, a decision which might affect plaintiff's right of recovery of income tax paid for 1932.
That case was affirmed in 2 Cir., 92 F.2d 1007, and the mandate thereon issued November 17, 1937.
6. October 9, 1936, plaintiff filed a second claim for refund for 1932 of $55,857.52 on the following ground: "A loss of $130,434.27 from the sale of securities held for less than two years has not been allowed as a deduction against income in a greater amount realized from the sale of capital assets. The grounds for disallowance are that the taxpayer was a member of a partnership from which the income was derived. The taxpayer was not a member of a partnership but merely compensated certain individuals who were associated with him by giving to them a certain percentage of profits and commissions from the operation of the business for which they were in part responsible. Such individuals were not liable for losses which the taxpayer's business might incur, nor did they have any capital invested in the taxpayer's business. They were not to contribute to the expenses of the business. Even though a partnership existed, the loss of the taxpayer is deductible from his distributable income from such partnership when such income represents gains realized from the sale of capital assets."
April 9, 1937, the Commissioner advised plaintiff of his proposed rejection of the above claim, stating as his principal ground for such action that the Bureau held that a partnership existed in 1932 on account of the part of the business carried on by plaintiff and his associates, and that plaintiff's individual losses could not be offset against the profit which was derived by him from the partnership.
7. Prior to and while some of the actions heretofore referred to were being taken, plaintiff filed protests and briefs in connection with his tax liability for 1930 and 1932, as follows:
(a) Protest filed with the Bureau of Internal Revenue, May 5, 1933, in which, among other things, plaintiff stated that "On April 15, 1930, a new partnership was formed, composed of Emil Mosbacher and Cecil Schwartz, Leonard C. Greenstein, and Milton Stern. This partnership acquired the interest of the prior partnership in the short sale." The association therein referred to is the one involved in this proceeding, and conditions existing with respect to the relationship between the parties were the same in 1930 as in 1932.
(b) September 13, 1933, plaintiff filed a claim for refund for 1930 in which the allegations with respect to the existence of a partnership were similar to those set out in the protest of May 5, 1933, referred to above.
(c) September 29, 1934, plaintiff submitted a protest with respect to 1932, in which he stated that "The partnership of Emil Mosbacher et al., of which the taxpayer was a partner in 1932, had a net income of $200,767.80. This total net income was derived from the sale of securities held by the partnership for less than two years."
(d) October 10, 1934, plaintiff submitted an affidavit relative to his tax liability for the year 1930, in which the following appeared:
"From January 1, 1930, to April 14, 1930, I was a member of a partnership composed of the following individuals with the following interests:
Emil Mosbacher .................... 75% Herman Schwartz ................... 15% Harold Hirschberg ................. 10%
"This partnership sold securities short at a sales price of $2,529,326.91.
"On April 14, 1930, a new partnership was organized composed of the following individuals with the following interests:
Emil Mosbacher ....................... 91% Leonard C. Greenstein ................ 5% Milton Stern ......................... 2% Cecil Schwartz ....................... 2%
"This new partnership took over the short position of the old partnership company, paying the retiring partners for their respective interests therein at the time taken over. At such time there was a profit in the short account of $464,326.91, representing the difference between the price at which the securities had been sold short and the cost of covering the short sale.
"The Revenue Agent, in his audit of the income of the new partnership for the period from April 15, 1930, to December 31, 1930, discloses a net income of $1,600,689.73 and dividends of $14,438.24. Included in this net income is the difference between the sum received from the short sales made by the old partnership and the amount of moneys expended to cover the short accounts. He, therefore, has included in the profit of the new partnership $464,326.91, none of which belonged to or was received by the members of the new partnership, who were not members of the old partnership, namely, Leonard C. Greenstein, Milton Stern, and Cecil Schwartz. It is therefore clear that none of this sum should be included in the income of these new partners."
The documents referred to above under (a), (c), and (d) were prepared by an attorney for plaintiff who at that time had under consideration before the Bureau of Internal Revenue certain questions other than whether there was or was not a partnership existing between plaintiff and the associates herein referred to for the years 1930 and 1932.
8. In his determination of plaintiff's tax liability for 1932 the Commissioner determined that plaintiff's tax for that year should be computed without the use of inventories, thereby reversing the action taken by plaintiff in including in income amounts determined by the use of inventories of securities on the basis of cost or market, whichever was lower. In that determination the Commissioner determined that plaintiff's income for the calendar year 1932 should be reduced in the sum of $45,077.17, and in addition made other adjustments which resulted in a total reduction in income of $48,643.35. In that determination the Commissioner refused to allow the loss of $130,349.89, claimed by plaintiff on the sale of securities held by him for a period of less than two years, as a deduction under section 23(r) of the Revenue Act of 1932, 26 U.S.C.A. § 23 note, on the ground that plaintiff was a member of a partnership in such year, and his distributive share of the partnership income of $128,476.17, although due to profits on sales of securities, could not be reduced by that loss.
9. During the past ten years plaintiff has been a dealer in securities, operating principally on the New York Curb Exchange, and during the years 1930, 1931, and 1932 a part of his business was carried on in his individual capacity without any of the profits being shared in by others, and a part in which others participated in the profits. For convenience and not for the purpose of giving a legal description of the two classes of business, the former will hereinafter sometimes be referred to as his "individual business" and the latter as the "firm business."
10. The arrangement under which the firm business was conducted and its profits divided arose in the following manner: April 14, 1930, at which time plaintiff terminated a similar arrangement with certain other individuals, plaintiff entered into an agreement with three individuals, Leonard C. Greenstein, Cecil Schwartz, and Milton Stern, under which they would buy and sell securities and otherwise engage in business and each would receive a stated percentage of the profits derived therefrom. Greenstein is a brother-in-law of plaintiff's wife, and Schwartz and Stern are brothers-in-law of plaintiff.
The agreement was made orally and continued only until the end of the year when a similar arrangement was made for 1931. Likewise, in December 1931, another similar arrangement was made for 1932, the year with which we are concerned. Under the arrangement made for 1932, it was agreed that net profits from the business of the firm would be distributed as follows: Plaintiff, 91%; Greenstein, 5%; and Stern and Schwartz, each 2%. In making that arrangement no mention was made by plaintiff or any of the parties of losses or whether any loss which might be incurred would be shared in by Greenstein, Stern, and Schwartz, and the situation did not arise either in that year or in any other year when a similar arrangement was in effect where there was a loss from the operation of the business.
11. Plaintiff, Greenstein, Stern, and Schwartz were each members of the New York Curb Exchange, and each carried on the business of the firm on that exchange. All business transacted for the firm was done in the name of plaintiff, and all brokerage accounts were maintained in the name of plaintiff. Greenstein, Stern, and Schwartz had no dealings in their individual names. Each member of the firm had individual authority to transact business and to exercise his own discretion in the purchase and sale of securities for the account of plaintiff.
12. Plaintiff contributed all of the capital for the operation of both the individual and the firm business. On his books he maintained only one capital account, in which appeared not only the capital and surplus used in the transactions in securities in which Greenstein, Stern, and Schwartz participated with him, but also the capital used by him in other transactions in which he was individually concerned.
13. All expense items in connection with the individual business of plaintiff as well as the firm business were paid through an account maintained by plaintiff with William P. Hoffman Co., such expenses being paid by Hoffman Co., on instructions from plaintiff's office manager.
14. At the beginning of each year the amount of the drawing account for each of plaintiff's associates was fixed on the basis of an estimate of their net worth to the firm, the amounts for 1932 being approximately $20,000 for Greenstein, $7,000 for Schwartz, and $5,000 for Stern. For the purpose of drawing on the amounts fixed, each of the three individuals opened a personal account with Hoffman Co., and these accounts were guaranteed by plaintiff. From time to time during the year each of the three individuals made withdrawals through Hoffman Co. against their drawing accounts, and when such withdrawals were made, appropriate charges were made in those accounts. No credits were made to the drawing accounts until the end of the year, when the profits of the firm were determined, at which time Hoffman Co. credited each of the three individuals with his share of the profits and debited plaintiff's account with a corresponding amount. All expenses of the firm were deducted in determining the net profits of the business, and before any division of the profits was made among the plaintiff and his three associates. The withdrawals made by plaintiff's three associates did not appear in the expense account maintained by plaintiff with Hoffman Co., nor did they appear in plaintiff's profit and loss account. Salaries of plaintiff's office manager and other individuals employed by him were paid through Hoffman Co., and considered as one of the expense deductions insofar as they related to firm business in arriving at the profits of the firm for 1932. However, no deduction was taken for salaries for plaintiff's three associates in arriving at the net profits of the firm. After the net profits were determined they were divided on the percentage basis heretofore shown.
15. On his individual books plaintiff maintained separate profit and loss accounts for his individual business and for the firm business, two such accounts being maintained for his individual business and two for the firm business. One of his individual profit and loss accounts was maintained for the purpose of showing his individual profits or losses on the sale of securities, and in that account appears the loss of $130,349.89 which the Commissioner refused to allow plaintiff to deduct from profits realized as his share of the firm's business. The other individual profit and loss account showed dividends, interest, and rent received by plaintiff in his individual capacity.
Two profit and loss accounts were also maintained for the firm business, one showing the commissions, dividends, and interest received on the business done at the post on the exchange, with the expenses charged against such income, and the other showing the profit or loss on the sales of stock by the firm at the post on the exchange.
16. The regulations of the New York Curb Exchange with respect to partnerships are in evidence as Plaintiff's Exhibit 13, and it is incorporated herein by reference.
No partnership agreement was filed with the New York Curb Exchange on account of the relationship existing between plaintiff and his associates, and hereinbefore referred to, for the period from January 1, 1932, to December 31, 1932, nor was a certificate of partnership filed with the Clerk of the County of New York under the partnership or general business laws.
In this case plaintiff seeks to offset certain losses which he claims he sustained in trading on the New York Curb Exchange against his profits therefrom. The issue is whether the losses were sustained by him individually or by an alleged partnerhip or joint venture of which plaintiff was a member. The answer depends on whether or not the association between plaintiff and certain men named Greenstein, Stern, and Schwartz was a partnership or joint venture or whether these men were employees of the plaintiff in the carrying out of the enterprise. If employees, the plaintiff is entitled to the deduction; if partners or associates in a joint venture, he is not. Joseph Klingenstein v. United States, 18 F. Supp. 1015, 85 Ct. Cls. 164, 165; Percy H. Johnston v. Commissioner, 2 Cir., 86 F.2d 732.
The evidence as to the agreement between the parties is meager and unsatisfactory. The agreement was oral. It shows that on a certain date plaintiff dissolved his association with certain men named Herman Schwartz and Hirschberg for the selling of securities short and on that date formed such an association with Greenstein, Stern, and Cecil Schwartz, those interested in the old association being paid for their respective interests therein.
With his new associates plaintiff made an arrangement to pay them 5 percent, 2 percent, and 2 percent of the profits, respectively. No mention was made as to whether any losses would be shared in by Greenstein, Stern and Schwartz.
All the associates were members of the New York Curb Exchange, but all business was transacted in plaintiff's name. Each of the associates had authority to exercise his own discretion in the purchase and sale of securities.
Plaintiff contributed all the capital for the operation of the business, and paid all expenses, but it does not appear definitely whether anyone other than the plaintiff was entitled to a share in the assets on dissolution. Possibly it may be inferred that others were so entitled since the plaintiff stated in an affidavit filed with the Bureau of Internal Revenue [Finding 7(d)] that upon the dissolution of the old association and its being succeeded by the new, the retiring partners were paid for their respective interests.
The facts that plaintiff's associates were paid a percentage of the profits, that they transacted business in plaintiff's name, and were authorized to use their own discretion in the purchase and sale of the securities are consistent with either relationship, that of partners or that of employees. But if the parties had an interest in the assets on dissolution, this, plus the agreement to divide the profits, and the presumption from this agreement that they also were to share the losses, would require us to hold them not to have been employees, but partners. The evidence, however, is unsatisfactory.
In such a situation we must give more than usual weight to the characterization of the arrangement by the parties themselves. They, better than anyone else, knew the true nature of the association. If Greenstein, Stern, and Schwartz had been considered as employees, as contended, their salaries would have been deducted in reporting income from the enterprise. If they had been only employees, the profits from the venture would not have been described as profits from a joint venture in plaintiff's income tax return, nor would a separate partnership return have been filed. Also in two protests filed with the Bureau of Internal Revenue, on May 5, 1933, and September 29, 1934, plaintiff referred to the association as a partnership, and also in a claim for refund filed on September 13, 1933. In an affidavit filed on October 10, 1934, to which reference has been made before, plaintiff went more into detail and said a previous partnership had been dissolved and the present one organized.
The plaintiff's explanation that these papers were filed by employees ignorant of, or careless about, the true nature of the enterprise is not convincing. He signed some of these documents himself, and must be presumed to have understood and to have vouched for the statements made therein.
In view of his reiterated designation of the arrangement as a partnership and of the unconvincing nature of the other proof, we conclude the association was a partnership and, accordingly, that plaintiff is not entitled to the deduction.
It results that plaintiff's petition must be dismissed. It is so ordered.