Opinion
Docket Nos. 39399 39421.
1956-09-28
GEORGE E. REYNOLDS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.ESTATE OF MILDRED D. REYNOLDS, DECEASED, GEORGE E. REYNOLDS, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Stanley Suydam, Esq., and H. Stewart McDonald, Esq., for the petitioners. George J. Rabil, Esq., for the respondent.
Stanley Suydam, Esq., and H. Stewart McDonald, Esq., for the petitioners. George J. Rabil, Esq., for the respondent.
1. The services rendered by petitioner in the sale of 240 tanks for use of the Chinese Government were only part of his services under his employment contract, and the compensation therefor not being 80 percent of his total compensation for the services rendered, it is held that the provisions of section 107(a) of the Internal Revenue Code of 1939 are not applicable.
2. Held, that a bona fide and valid partnership was formed by petitioner and his wife for the conduct of business which had formerly been that of petitioner alone, and that the business was thereafter conducted by the partnership.
3. Held, that the loss suffered in the operation of two citrus groves owned by petitioner and his wife as tenants by the entirety was their loss jointly, and not the individual loss of petitioner.
The respondent determined deficiencies in income tax against the petitioners as follows:
+----------------------------------------------------+ ¦Docket No. ¦Petitioner ¦Year ¦Deficiency ¦ +------------+-------------------+------+------------¦ ¦39399 ¦George E. Reynolds ¦( 1943¦$89,272.20 ¦ +------------+-------------------+------+------------¦ ¦ ¦ ¦( 1944¦9,865.04 ¦ +------------+-------------------+------+------------¦ ¦39421 ¦Mildred D. Reynolds¦( 1943¦1,007.86 ¦ +------------+-------------------+------+------------¦ ¦ ¦ ¦( 1944¦1,543.58 ¦ +----------------------------------------------------+
The questions for decision are (1) whether the provisions of section 107(a) of the Internal Revenue Code of 1939 are applicable to $55,536 received by petitioner George E. Reynolds in 1942,
from a company he had been serving as sales agent, (2) whether petitioner and his wife in 1942 were partners in the conduct of business which theretofore had been the business of petitioner, and (3) whether a loss from the operation of certain citrus lands in Florida, which were held by George and Mildred Reynolds as tenants by the entirety, was the loss of George Reynolds alone, or his and Mildred's jointly.
We have found no explanation of record for salary payments in 1940 and 1941 in excess of $200 per month.
The year 1942 is involved, due to the forgiveness feature of the Current Tax Payment Act of 1943. 2. After the trial herein, a motion for substitution was filed, showing the death of Mildred D. Reynolds and that her husband, George E. Reynolds, was the duly qualified executor of her estate, and by order duly entered the the Estate of Mildred D. Reynolds, Deceased, George E. Reynolds, Executor, was substituted in the place and stead of Mildred D. Reynolds, deceased.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found as stipulated. The petitioners were husband and wife, and during the years in question resided in Chevy Chase, Maryland. George E. Reynolds, sometimes referred to as petitioner, filed individual income tax returns for the calendar years 1942, 1943, and 1944 with the collector of internal revenue for the district of Maryland. Mildred D. Reynolds
filed individual income tax returns for the claendar years 1942 and 1943 with the collector for the same district. In making their returns, petitioners used the cash receipts and disbursement method of accounting.
Petitioner and Mildred Reynolds were married in 1920, and had two children, a son, born in 1921, and a daughter, born in 1929 or 1930. During all of the years involved petitioner was a sales agent in Washington, D.C., and the surrounding area for several manufacturing firms engaged in the manufacture of automotive and related products. He was a member of the Society of Automotive Engineers, and was chairman of the Washington chapter of that society in 1939.
One of the firms for which petitioner was sales agent was Marmon-Herrington Company, Inc., sometimes referred to herein as Marmon. Marmon was engaged in the manufacturing of various kinds of automotive equipment, tanks, tractors, trailers, trucks, scout cars, and the like. Petitioner's employment as sales agent by Marmon began at least as early as 1931, and was continuous thereafter until August 31, 1942, when he became vice president of Marmon. His employment for most, if not all, of the period was pursuant to written contracts. The first of such contracts was dated June 20, 1932, and was followed by other contracts dated January 4, 1934, January 4, 1937, January 28, 1938, and January 1, 1940. The terms and conditions of each contract were substantially the same as the contract it superseded, except for minor changes, in some instances, in salary, commissions, territory, or the addition of new products. Beginning with the contract of January 4, 1937, each contract was to continue until such time as either party notified the other of its discontinuance. Under the contracts, the petitioner was to serve as salesman of Marmon products, including all products sold to the United States under sales originating in Washington, D.C. Up to August 31, 1942, all sales made by petitioner for Marmon were made pursuant to the contract currently in force.
Under the said contracts, petitioner was to receive for his services a fixed salary of $200 per month, plus specified commissions where sales resulted. On some items, commissions were to be in fixed amounts, while on others they were to be in percentages of net billings. On sales of tanks to the United States Government, his commissions were to be 1 percent of the net billings. In addition to the commissions on sales which petitioner made, he was to receive commissions on all truck chassis sold by ‘Distributors or Dealers' in a specified territory, which, under the 1940 contract, extended from Virginia and West Virginia to and including New York City and Long Island, but covering only a designated portion of Pennsylvania. The contracts contained provisions whereby petitioner was to be reimbursed, at cost, for traveling expenses incurred in performance of his duties and was to receive $6 per day for living expenses actually incurred while away from Washington. Provision was also made in the last three contracts whereby Marmon was to pay actual costs of demonstrating its products. Under all of the contracts, the payment of any commission was to be limited to those transactions upon which Marmon had been paid in full.
During the years 1934 and 1936 petitioner had negotiated sales for Marmon with the Chinese Government. In the main, if not wholly, the sales were of tracklaying tractors. At about the same time, or shortly thereafter, he began making some sales to the United States Government for the Marine Corps. On some undisclosed date in the late 1930's, negotiations began for the sale of various items to the Netherlands for use in the Dutch East Indies. These negotiations resulted in substantial sales. The sales contracts, however, were made in New York, and petitioner was not allowed any commission on those sales. He made no claims therefor against Marmon. Petitioner also did much, if not most, of the effective work in procuring sales of armored cars and motor trucks to the Iranian Government. The sales amounted to approximately $2,500,000. Marmon took the position that these sales were outside petitioner's contract and allowed him no commissions thereon.
In 1939 petitioner learned that the Chinese Government was in need of tanks, and in August of that year, began working to secure an order for them. As a result of his effort, a ‘Letter of Contract’ for the production of 240 tanks and spare parts was received from the Ordnance Department of the War Department under date of October 20, 1941. A formal contract therefor between the United States and Marmon was executed under date of February 13, 1942, the price of the tanks exclusive of other costs being stated as $5,553,600. The contract was pursuant to the ‘lend-lease’ program which the United States had set up.
After procuring the formal contract for the production of the 240 tanks on February 13, 1942, Marmon ordered the materials therefor. It was then producing tanks for the Dutch Government, and by persuading the Chinese Government to agree to the use of the same tools that were being used for the Dutch tanks, the normal tooling period was eliminated; but the waiting period for the material ordered ‘was just about as long as the normal tooling period.’
Petitioner's commissions for 20 of the 240 tanks, amounting to $4,628, were accrued on Marmon's books in the month of March 1942. In April 1942, commissions in respect of 70 tanks, in the aggregate amount of $16,429.40, were likewise accrued. In May, commissions in respect of 75 tanks, amounting in the aggregate to $17,355.30, were similarly entered on Marmon's books. In June, entries of commissions in respect of 66 tanks, in the aggregate amount of $15,313.60, were made, and in July, commissions, in the aggregate amount of $2,107.33, in respect of the 9 remaining tanks were entered on the books, bringing the total amount so entered to $55,833.63.
On a contract price of $5,553,600, petitioner's commission at 1 percent would have amounted to $55,536, which is the amount claimed by him in this proceeding as his commissions on the sale. No explanation has been offered for the difference between the amount so claimed and the $55,833.63 entered on Marmon's books, as above indicated.
In the course of Marmon's production of the 240 tanks, numerous changes relating to the design and equipment were sought by representatives of the Chinese Government. As a result, petitioner was required, and continued to devote a great deal of time to the contract after it had been secured. It was the understanding of petitioner and Marmon, under their contract, that Marmon was to be obligated to pay commissions only on tanks actually delivered and paid for, and if, for any reason, the tank contract or any part thereof should be canceled, no commissions were to be paid, or payable, on the canceled portion. The tanks were delivered in quantities and on dates not shown of record, but the last of the tanks were not delivered until sometime in 1944.
Under date of May 12, 1942, petitioner received a check from Marmon for $9,969.08. This check included the commissions which had been entered on Marmon's books in his favor in March 1942, in respect of the first 20 of the 240 tanks described above. Most of the remainder of the check represented commissions on tanks sold to the United States for the Marine Corps. No further commissions on the sale of the said 240 tanks were ever thereafter paid to petitioner as such.
On August 31, 1942, petitioner and Marmon entered into an agreement, signed and sealed by both parties, which agreement reads as follows:
THIS INDENTURE, made the 31st day of August, 1942, between MARMON-HERRINGTON COMPANY, INC., an Indiana corporation, with offices at 1511 West Washington Street, Indianapolis, Indiana, and GEORGE E. REYNOLDS, an individual, with offices in the Transportation Building, Washington, D.C.
WHEREAS, Marmon-Herrington Company, Inc., has entered into contracts with George E. Reynolds dated on or around June 20, 1932, January 4, 1934, January 4, 1937, January 20, 1938, and January 1, 1940, under which such individual has performed certain services for such company, partly on a salary and partly on a commission basis, and
WHEREAS, a difference of opinion has arisen between the parties as to the amount of commissions which are and will be due and payable under the contract between the parties dated on or around January 1, 1940, and
WHEREAS, Marmon-Herrington Company, Inc., and George E. Reynolds have agreed that said contract of or around January 1, 1940, shall be, and it hereby is, cancelled by mutual agreement of the parties, and
WHEREAS, Marmon-Herrington Company, Inc., and George E. Reynolds have agreed to settle all differences of opinion as to the amount of commissions and compensation due or hereafter to become due under said contract of or around January 1, 1940, by a lump payment of $75,000.00, the receipt whereof is hereby acknowledged by George E. Reynolds, and
WHEREAS, the parties have agreed that contemporaneously with the execution of this agreement, George E. Reynolds is to release the Company from all claims he may have against it arising under any former contracts and is to enter into the employ of Marmon-Herrington Company, Inc., as a Vice President in Charge of the Eastern District, at an annual salary of $15,000.00, payable in monthly installments as near equally as possible.
NOW THEREFORE, THIS INDENTURE WITNESSETH, that in consideration of the premises and of other good and valuable consideration, the said parties have agreed as follows:
(1) George E. Reynolds hereby releases Marmon-Herrington Company, Inc., its stockholders, officers, and directors from all sums of money, accounts, actions, claims and demands accrued or hereafter to accrue on any contract which he has entered into with Marmon-Herrington Company, Inc.;
(2) The contract of or around January 1, 1940, and all other contracts heretofore made between Marmon-Herrington Company, Inc., and George E. Reynolds are cancelled by mutual agreement, free from all claims accrued or accruable thereunder for money, accounts, actions and demands by said George E. Reynolds;
(3) Contemporaneously with the execution of this agreement, George E. Reynolds shall enter into the employ of Marmon-Herrington Company, Inc., as a Vice President in Charge of the Eastern District at the annual salary of $15,000.00, per year, payable in equal monthly installments, such employment to continue so long as the services of said George E. Reynolds are satisfactory to and needed by the Company in the discretion of its directors.
On August 31, 1942, Marmon paid petitioner the $75,000 called for in the above agreement, and entered the amount as a disbursement in its Receipts and Disbursements account, under the description ‘Geo. R. Reynolds— Settlement in Full.’ Of the said $75,000 so paid to petitioner, $52,265.63 was carried as a debit to an account on Marmon's books which was headed ‘Salesmen Commission Control.’ The amounts which had been credited as commissions in respect of the 240 tanks, as above set forth, had previously been entered as credits in the same account. The remaining $22,734.37 of the $75,000 was entered as a debit in a further account of Marmon's books entitled ‘Selling Expense Commissions.’ All entries relating to the $75,000 were under date of August 31, 1942.
The salaries and commissions paid to petitioner for his services by Marmon during the years 1931 to 1941, inclusive, were as follows:
+--------------------------------------+ ¦Year¦Salary ¦Commission¦Total ¦ +----+------------+----------+---------¦ ¦1931¦$1,050.00 ¦ ¦$1,050.00¦ +----+------------+----------+---------¦ ¦1932¦900.00 ¦ ¦900.00 ¦ +----+------------+----------+---------¦ ¦1933¦ ¦$6,211.87 ¦6,211.87 ¦ +----+------------+----------+---------¦ ¦1934¦2,400.00 ¦1,826.58 ¦4,226.58 ¦ +----+------------+----------+---------¦ ¦1935¦2,400.00 ¦4,702.01 ¦7,102.01 ¦ +----+------------+----------+---------¦ ¦1936¦2,400.00 ¦853.82 ¦3,253.82 ¦ +----+------------+----------+---------¦ ¦1937¦2,400.00 ¦3,824.16 ¦6,224.16 ¦ +----+------------+----------+---------¦ ¦1938¦2,400.00 ¦2,018.65 ¦4,418.65 ¦ +----+------------+----------+---------¦ ¦1939¦2,400.00 ¦2,560.85 ¦4,960.85 ¦ +----+------------+----------+---------¦ ¦1940¦1 2,660.00¦5,134.36 ¦7,794.36 ¦ +----+------------+----------+---------¦ ¦1941¦1 4,036.15¦4,426.25 ¦8,462.40 ¦ +--------------------------------------+
On his individual income tax return for the year 1942, petitioner reported $55,536 of the compensation received from Marmon in 1942 as being for services covering a period of 36 months or more, within the meaning of section 107(a) of the Internal Revenue Code of 1939, and claimed the benefit of that section in computing the tax thereon.
The respondent in his determination of deficiency has determined that section 107 is not applicable to any part of the income received by petitioner in 1942 from Marmon.
In addition to his employment by Marmon, petitioner was a sales agent for other manufacturing firms. The principal ones were the Curtis Manufacturing Company, which was engaged in the manufacture of air compressors, hydraulic car washers, hydraulic lifts, and refrigerator equipment; the Lisle Corporation, which produced magnetic drain plugs; Seaman Motors, which produced a piece of machinery used in building roads and for agricultural purposes, called a ‘pulvi-mixer’; the Visco-Meter Corporation, which manufactured an instrument used for measuring the viscosity of lubricating oils in an engine; the Vacuum Can Company, the Black Gold Corporation, and the Miller Flexible Screw Driver Company. Petitioner maintained an office in the Transportation Building, in Washington, D.C., for the conduct of his business as sales agent.
Prior to 1942, petitioner had no employees and all the work done in the office was done either by himself or his wife. During the period 1938 to 1942 Mildred worked at the office 3 or 4 hours a day, 4 or 5 days a week, attending to the filing, answering the telephone, taking care of the office when petitioner was out, and doing business errands for him when he was otherwise engaged. She also became acquainted with the people for whom petitioner worked and the people from whom he was acquiring sales contracts. In 1942 petitioner had a stenographer in ‘at times' to handle some of his stenographic work and filing. Petitioner did not pay Mildred for the services rendered by her prior to March 1, 1942. On that date petitioner and Mildred entered into a partnership agreement, and articles of co-partnership, dated March 1, 1942, were signed by them. The articles of co-partnership set forth the reasons for the establishment of the partnership as follows:
WHEREAS, the said George E. Reynolds has for a number of years been engaged in the business of representing manufacturers in obtaining contracts for the sale and for the manufacture and sales of their products to the United States government, governments of foreign countries, and others; and
WHEREAS, for sometime it has been the mutual desire of both the parties hereto that the said Mildred D. Reynolds should become familiar with the said business heretofore conducted by the said George E. Reynolds in order that she not only may become of material assistance to him on conducting such business but to become capable of substantially conducting the same independently with the view among other things that in the event of the total incapacity or death of the said George E. Reynolds she, the said Mildred D. Reynolds, will be thoroughly equipped to, and be capable of, conducting and carrying on such business in her own right and thus be enabled to earn a livelihood; and whereas the said Mildred D. Reynolds has, during the past two years, been actively engaged in assisting the said George E. Reynolds in his aforesaid business and in learning the details and requirements thereof, and has actually for his account, transacted such business and effected sales of manufacturers' goods without having received any compensation whatever for her services, and has been of particular assistance to the said George E. Reynolds on many occasions when, through illness or absence, he was unable to personally attend to same and had to rely upon the said Mildred D. Reynolds to carry on the same for him; NOW, THEREFORE, the parties hereto, upon the terms, conditions and provisions hereinafter set forth, do hereby agree to form a co-partnership and to become partners in the business hereinafter described and to be conducted by them as such partners.
The agreement provided that petitioner was to have a two-thirds interest in the partnership and Mildred a one-third interest. They were to share in the profits and losses in proportion to their interests. The partnership was to be known as George E. Reynolds & Company.
After the formation of the partnership and until August 1942, Mildred continued to work at the office in the Transportation Building. When the settlement agreement of August 31, 1942, was entered into between petitioner and Marmon, Mildred moved to the Hibbs Building and opened an office there for the conduct of the business of the partnership. Petitioner, who under the settlement agreement with Marmon, became vice president of Marmon, retained the office in the Transportation Building exclusively for the business of that firm.
How long the office in the Hibbs Building was retained is not clear from the record. It may be that the business of the partnership was returned to the Transportation Building sometime in 1943. The partnership returns for 1943 and 1944 list the Transportation Building as the partnership address and no deduction was taken in either of those years for rent.
On September 1, 1942, petitioner and Mildred entered into a ‘supplementary agreement’ amending the original partnership agreement. This agreement provided that because the business of Marmon was going to be lost to the partnership and because more of petitioner's time was going to be required by Marmon, the benefits of which would not inure to the partnership, the partnership agreement should be amended by reducing petitioner's two-thirds interest in the partnership to one-half and by increasing Mildred's one-third interest to one-half. In all other respects the partnership was to remain the same.
From the time the partnership was formed in March 1942, Mildred devoted full time each working day to the office. In addition to answering the telephone, handling the correspondence, and taking care of the general work of the office, Mildred took care of questions that arose with respect to the contracts they had, made calls on various Government departments, and handled all of the priority and certificate of necessity work, attended bid openings and reported the bids, and obtained export licenses for their various clients. Mildred was personally familiar with their clients' products and personally acquainted with the clients and with officials of the Government departments and agencies which were interested in their products.
On May 28, 1942, petitioner sent the following letter to John Lodwick, sales manager of the Curtis Manufacturing Company, and to A. A. Cambre, treasurer of the Lisle Corporation:
In order to handle the work of this office more expeditiously, I have formed a partnership to be known as George E. Reynolds and Company.
It is requested that all commission checks in the future be issued to George E. Reynolds and Company rather than being made up to me personally.
Trusting that this action will meet with your approval, I am
Very truly yours,
GEORGE E. REYNOLDS
Similar letters were sent to all the other companies petitioner represented.
No separate bank account was opened for the partnership and all partnership receipts were deposited in an account carried in the name of petitioner only. Mildred had a power of attorney to draw on the account but all withdrawals, both before and after March 1, 1942, were made by checks signed by petitioner.
Beginning March 2, 1942, an account book was opened for George E. Reynolds & Company, wherein its income and expenses and the division of its profits were recorded. For 1942 the partners' distributive shares of the profits were credited at the end of each month. Petitioner's share of the profits for 1942, according to the book, was $54,884.82 and Mildred's share was $42,976.66. The profits as recorded were reported by petitioners in their respective individual income tax returns for 1942.
In determining the deficiencies herein, the respondent determined that George E. Reynolds & Company was not a bona fide partnership and that the George E. Reynolds & Company income was the income of petitioner George E. Reynolds.
Under the name George E. Reynolds & Company, petitioner and Mildred in good faith and acting with a business purpose intended to join together in the conduct of the business carried on under the said company name, and beginning March 1, 1942, they did so conduct the business.
Petitioner and Mildred were anxious to get a place established in Florida to which they might eventually retire. In 1942 Mildred made a trip to Florida and found a ‘little’ citrus grove which she thought would be a nice property to buy and to which, in due course, they might move. After consulting with petitioner by telephone, she took the initial steps looking to the purchase of the grove.
At Mildred's instigation and after her return to Washington, they consulted their attorney about the formation of a second partnership to own and operate the grove Mildred had found and any other grove they might acquire. The attorney saw no objection to such a partnership, and articles of co-partnership were drawn up by him for a partnership to be known as Magnolia Groves Company. This partnership agreement, which was signed under date of June 15, 1942, provided that each of the partners would contribute to the partnership in equal proportions.
After some discussion between them, in the course of the evening of the same day, petitioner and Mildred drew up and on June 16, 1942, executed a ‘Supplemental Agreement’ which, in pertinent part, was as follows:
Whereas at the time the said co-partnership agreement was entered into it was anticipated that both parties would contribute substantially equal sums of money to the partnership and
Whereas, it now appears that Mildred D. Reynolds will not be able to contribute her share until the expiration of a period of approximately six months from this date and
Whereas, George E. Reynolds will be required to contribute all funds required during the remaining part of the year 1942,
Now, therefore, it is hereby mutually agreed between the parties hereto and to the said co-partnership agreement that paragraph numbered 6 of the said co-partnership agreement be and hereby is amended to the extent that the agreement shall begin on the date of January 1st, 1943. In all other respects the said co-partnership agreement and all the terms and provisions thereof is hereby confirmed and shall continue in full force except only as the SAME IS AMENDED BY THIS SUPPLEMENTARY AGREEMENT.
By deed dated July 1, 1942, and as tenants by the entirety, petitioners acquired the first of their Florida citrus properties. Known as Magnolia Groves, the property was located in Pinellas County and consisted of 37 acres. The purchase price was $23,400, of which $12,500 was paid in cash and the balance was secured by a mortgage. Also as tenants by the entirety, and by deed dated July 8, 1942, petitioners acquired the property known as the Mixon Grove. This property, consisting of 10 acres, was also located in Pinellas County and approximately one-half mile from the Magnolia Groves. The purchase price of the Mixon Grove was $8,000, of which $5,138.34 was paid in cash and the balance was covered by a mortgage on the property.
At or about the time the groves were purchased, petitioner and Mildred hired a manager to operate them. The manager continued to operate the groves until the latter part of 1943. Mildred kept and maintained the records covering the disbursements made by them in the purchase of the groves, for interest under the mortgages, and in respect of operations. Funds needed by the manager from time to time were transmitted to him by both petitioner and Mildred.
For the period ended December 31, 1942, the operation of the Magnolia Groves Company properties was not an income operation, there being no gross income. And, insofar as appears, the entire operation for the said period was limited to the cultivation, care, and maintenance of the groves and other properties making up the enterprise and the making of the expenditures required therefor. As reported by petitioner in his individual return for 1942, the total of the expenditures so made, plus the $3,480.93 claimed to cover depreciation, amounted to $15,153.28, all of which was claimed by him as an operating loss deduction in his said return.
In his determination of the deficiencies herein, respondent determined the total allowable deductible loss on the Magnolia Groves operation for 1942 as $11,150.10, one-half of which was deductible by petitioner and one-half thereof by Mildred.
The loss on the operations of Magnolia and Mixon Groves for the period ended December 31, 1942, was the joint loss of both petitioners.
OPINION.
TURNER, Judge:
It is the position of the petitioner that of the payments received by him in 1942 from Marmon-Herrington Company, Inc., $55,536 was his compensation for services rendered in the sale of the 240 tanks; that the services for which the said amount was received covered a period of at least 37 months, from August 1939 through August 1942, and that his tax thereon is to be computed under section 107(a) of the Internal Revenue Code of 1939.
He concedes that $55,536 did not constitute 80 percent of his total compensation received from Marmon for personal services rendered during the required period under his contract of employment with that company, but takes the position that, for the purposes of section 107(a), the services rendered in making the sale of the said tanks and his commissions in respect thereof are to be treated separately from all other services rendered to Marmon and all other compensation received from Marmon for the same period. In short, his position would appear to be that each individual and separate sale, or at least the sales to a single customer, must be regarded as a separate service or employment, for the purposes of section 107(a), even though they constituted only a part of the services he was obligated to perform and did perform under the contract and even though all sales to all customers during the same period, plus all of his work looking to sales where sales did not in fact materialize, were actually services performed under one and the same employment.
SEC. 107. COMPENSATION FOR SERVICES RENDERED FOR A PERIOD OF THIRTY-SIX MONTHS OR MORE AND BACK PAY.(a) PERSONAL SERVICES.— If at least 80 per centum of the total compensation for personal services covering a period of thirty-six calendar months or more (from the beginning to the completion of such services) is received or accrued in one taxable year by an individual or a partnership, the tax attributable to any part thereof which is included in the gross income of any individual shall not be greater than the aggregate of the taxes attributable to such part had it been included in the gross income of such individual ratably over that part of the period which precedes the date of such receipt or accrual.
Our first difficulty is one of fact, since we have been unable to find any adequate basis in the proof for the conclusion that petitioner ever received $55,536, or any amount approaching that sum, for the services rendered by him in the sale of the 240 tanks. In fact, the only compensation ever paid with direct, separate, or specific reference to the sale of the said tanks was the $4,628 received on May 12, 1942, and, so far as appears, that may have been the entire amount which did or could have become payable to petitioner in 1942 under the current contract of employment.
Under the contract, and according to its interpretation by the parties thereto, commissions on sales were earned and payable when the items sold had been delivered and Marmon had been paid in full. Until then there was no liability on the part of Marmon for commissions, and it was Marmon's practice to pay commissions at the end of the month in which the stated conditions had become satisfied. The $4,628 paid on May 12, 1942, is shown on Marmon's books as relating to 20 tanks, and in light of the above, we may presume that by May 12, 1942, 20 of the tanks had been delivered and Marmon had been paid in full therefor. As to the remaining tanks, however, we only know that the last of them were not delivered until 1944. We are not advised as to when Marmon was paid in full for these tanks. There is accordingly no basis for concluding that Marmon ever did become liable under its contract with petitioner for commissions, as such, on the 240 tanks over and beyond the payment of $4,628 on May 12, since no other payments were ever made with separate and specific reference to the said tanks.
It is of course true that by entries in March, April, May, June, and July 1942, Marmon did accrue on its books the entire $55,536, but, even so, we are unable to conclude that the entries were indicative of anything more than potential or prospective liability, it being the testimony of one of Marmon's officials that it regularly made payment of all commissions owing by the end of the month in which the goods had been delivered and it had been paid in full. It is also noted that the official having charge of Marmon's books and records, when questioned about the matter, was unable to explain the accruals on the books in excess of the $4,628. He was not in charge of the books at the time the entries were made, and the individual who had been in charge was not available to testify.
It is undoubtedly true that the services which had been rendered by petitioner and his claims, prospective or otherwise, for commissions on the remaining 220 tanks were taken into account in arriving at the $75,000 paid by Marmon to petitioner on August 31, 1942, in satisfaction of all ‘commissions and compensation,‘ due or thereafter to become due under the contract of January 1, 1940. By the agreement, however, all claims both present and prospective were lumped together and without any evaluation of any of the claims separately but only with reference to the whole, the lump-sum settlement of $75,000 was agreed upon and payment thereof was made. It could be that the other claims weighed as strong or stronger than petitioner's claims for the balance of the commissions on the 240 tanks. It could be that they did not.
Neither do we regard the entries made on Marmon's books indicating that a sufficient portion of the $75,000 lump-sum settlement was entered to balance the entries which had previously been made in the guise of accruals of commissions on the 240 tanks as proof that petitioner had earned and Marmon was paying for his services in connection with the sale of the 240 tanks the full $55,536. For whatever purpose the entries had been made, and since petitioner's rights to further commissions, potential or otherwise, on the tanks had now been covered and satisfied by the lump-sum settlement and payment, the clearing of the prior entries by the application of a portion of the $75,000 was a matter-of-course bookkeeping operation.
Assuming, therefore, that petitioner's interpretation of section 107(a) is sound, we would be left without adequate proof as to the amount, if any, to which the provisions of that section are to be applied, over and above the $4,628 paid on May 12, 1942.
At this point, it may be observed that the lump-sum settlement made by the parties as of August 31, 1942, would tend to refute rather than support petitioner's contention that his services rendered in connection with the sale of the 240 tanks should be regarded as separate and apart from all other services for which he was employed under his various contracts.
But even if it be assumed that petitioner did in fact receive $55,536 in 1942 as compensation for his services in connection with the sale of the 240 tanks, section 107(a) is not, in our opinion, susceptible of the interpretation and application contended for. The facts show that petitioner was employed generally as Marmon's Washington sales representative and that his employment with respect to the sale of the said tanks and the services rendered with reference to the sale were not separate or separable from his general employment as Marmon's Washington sales representative. He was to receive for his services as such salesman a fixed salary of $200 per month, plus specified commissions where his efforts in performance of those services resulted in actual sales. The fact that such added compensation was to be realized only where the sales efforts did result in a sale and his compensation in part was to be computed with specific reference to individual sales, does not make or cause the employment contract to be a series of individual or separable contracts, or the services to be rendered on the sale of one item or group of items divisible, for the purposes of section 107, from the sales services for which he was generally employed.
The facts being as they are, the instant case, in our opinion, is not distinguishable in principle from Harry Boverman, 10 T.C. 476, and J. Mackay Spears, 7 T.C. 1271, affd. 164 F.2d 486. The construction and application of section 107(a) for which petitioner contends is accordingly rejected. See also W. Harold Warren, 20 T.C. 379; Rosalyne A. Lesser, 17 T.C. 1479; and Harry Civiletti, 3 T.C. 1274.
In addition to representing Marmon, petitioner, from the middle 1930's, had represented several other manufacturing firms in Washington. Mildred assisted petitioner in the conduct of his business as sales representative practically from the start. On March 1, 1942, petitioner and Mildred entered into a partnership agreement, whereby Mildred was to have a proprietary interest in one-third of the profits and losses of the business and petitioner was to have a two-thirds interest. On September 1, 1942, this partnership agreement was amended to provide that petitioner and Mildred should each share in the partnership business equally, one-half interest to each.
It is the respondent's contention that Mildred's assistance to petitioner in the running of the purported partnership was only superficial and no more than any wife would do to help her husband in a like situation; he further contends that other evidence of record militates against a holding that there was a valid partnership between petitioner and Mildred. The evidence, we think, refutes the contention so made and, to the contrary, the record as a whole indicates that the partnership was entered into in good faith and with a business purpose and the services contributed by each were of such value to the partnership as to warrant participation in the profits. Commissioner v. Culbertson, 337 U.S. 733.
Mildred had worked periodically at petitioner's office for several years prior to the 1942 agreement. She was acquainted with petitioner's employers, and was familiar with the products they produced, as well as being acquainted with his customers and business contacts in the Washington area. The business in which petitioner was engaged prior to the partnership and in which the partnership continued, while essentially concerned with the sale of products, was at the same time required to undertake a great many collateral services specifically connected with the particular contracts of sale. The commission on each sale was the only compensation received therefor and, thus, necessarily covered remuneration for all these collateral services rendered by petitioner, as well as the actual closing of the sale itself. It appears that such services were in many instances more onerous than the making of the sale. In part, the collateral services consisted of such tasks as procuring priorities on components necessary to manufacture and complete contracts, acquiring certificates of necessity for plant expansion, to handle the increased wartime production, and other work with the various Federal Government agencies. Such work required not only a great deal of time and patience in the city that was gearing the nation as a whole for total war, but required, as well, a know-how not only of the governmental processes but of the products with which the partnership was dealing. For petitioner to have attempted to handle these collateral services himself would obviously have curtailed the amount of time he had to devote to the actual procuring of sales. It was under such conditions that petitioner agreed to join in a partnership with Mildred. With Mildred to run the office and handle those collateral but necessary services required by the sales contracts, as well as to assist with actual sales, petitioner was free to devote a great deal more time to the actual selling, thus greatly increasing their income. We think the record is convincing with respect to Mildred's capabilities for her duties to the partnership, as well as her actual performance of those duties.
It is true, as respondent points out, that the record contains evidence, that natural inference of which could, were the over-all circumstances otherwise, cast doubt on the bona fides of the partnership; namely, the failure to open a separate bank account, the commingling of the partnership funds with petitioner's personal funds in his personal account, the erroneous listing by Mildred of her share of the partnership profits on her individual income tax return for 1942 as compensation for services rather than partnership income, and the business of the partnership not being listed under the partnership name in the telephone directory, but rather, retaining the listings under petitioner's name and the names of the various companies he represented. We think, that taken with the other evidence of record, such evidence may indicate carelessness, but it does not, in our opinion, negative or overcome the evidence that a partnership as claimed was created and did exist. See Estate of Frederick A. Depue, 12 T.C. 463. Petitioner's contention with respect to this issue is sustained.
Our final question is whether the loss on the operations of the citrus groves for the period ended December 31, 1942, was the deductible loss of George alone, or that of both George and Mildred.
After Mildred had found the first of the two groves, presumably in early June 1942, and the initial steps for its purchase had been taken, she proposed that they own and operate it as partners. They sought the advice of their lawyer and he drew up a partnership agreement which, under date of June 15, 1942, they executed. The business of the partnership was to consist of the ‘owning and operating of citrus groves in the State of Florida or elsewhere,‘ and it was provided that the ‘aforesaid citrus groves * * * owned by the parties' were thereby made partnership property, ‘each of the partners contributing the same in equal proportions.’ At home that night, according to the testimony of petitioner, they had some discussion and concluded that Mildred would not be in a position to contribute her share of the purchase price of the groves until the year-end closing of the George E. Reynolds & Company books, and until that occurred, they figured that the partnership could or would not be effective.
Without consulting counsel further, they themselves drew up a second agreement which they executed under date of June 16, 1942, to the effect that the beginning date of the partnership should not be until January 1, 1943.
At June 30, 1942, $6,564.22 had been credited to Mildred on the books of the George E. Reynolds & Company as her distributive share of the profits for March, April, May, and June. Similar credits of $1,062.23, $4,281.70, $5,554.42, $13,473.36, $3,505.92, and $8,536.97 were made at the end of the months July, August, September, October, November, and December respectively, bringing the total amount credited as Mildred's share of the profits for 1942 to $42,976.66. The funds of the George E. Reynolds & Company were carried in petitioner's individual bank account.
Thereafter, on July 1, 1942, they acquired Magnolia Groves, consisting of 37 acres, and on July 8, Mixon Grove, approximately one-half mile distant and consisting of 10 acres. In each instance, they became owners of the property as tenants by the entirety, part of the purchase price being paid in cash, with payment of the balance secured by a mortgage. They employed a manager to supervise and conduct the operations of the groves and from time to time both George and Mildred transmitted money to him to cover the cost of operations. Such records of their disbursements in the purchase of the groves, of the interest payments under the mortgages, and of their transmittals for expenses of operations as were kept, were kept by Mildred.
From the Schedule of Farm Income and Expense, Form 1040F, attached to petitioner's income tax return for 1942, it appears that the entire operation through December 1942 was limited to the cultivation, care, and maintenance of the groves and the care and maintenance of equipment. There were no sales and no gross income and there is no indication that any sales for the said period had been anticipated. They did have substantial fruit sales for the following year, gross sales of fruit being reported in their 1943 partnership return as $16,673.24.
The position of the petitioners, as we understand it, is that George alone put up the cash for the downpayments on the groves, that it was thought that he would be required to supply the operating funds through December,
and since, for those reasons, they had by the agreement dated June 16, 1942, postponed the beginning of the partnership until January 1, 1943, the operation up to January 1 was that of George alone and the loss sustained his loss.
There is no proposed finding by petitioners and in their briefs we have been unable to find any definite claim or contention that George from his separate and individual funds did in fact supply all of the money expended in the operation of the citrus groves through December 31, 1942. S360250A 25 T.C. (C.D.P. - 5/9/77)
Assuming that an effective arrangement could be made whereby one spouse could grant to the second spouse, free of charge, the use of property belonging to the first, to the end that the operation would be that of the second and the gains or losses those of such second spouse, we do not have that situation here. At the most, there was nothing more than an abortive partnership prior to January 1, 1943. The date on which the partnership was to come into being had already been postponed to January 1, some 2 to 3 weeks before the properties which were to have been owned and operated by the partnership were actually acquired, and when the properties were acquired they were acquired by and became the property of the petitioners not as partners but as tenants by the entirety. Our question accordingly is as to the deductibility of a loss from the operation of the properties owned by a husband and wife as tenants by the entirety.
Under Florida law, it appears well settled that the income from the operation or the proceeds of sale of real estate held by a husband the wife as tenants by the entirety is equally the property of the husband and wife. Dodson v. National Title Insurance Co., 159 Fla. 371, 31 So.2d 402; Ohio Butterine Co. v. Hargrave, 79 Fla. 458, 84 So. 376; and English v. English, 66 Fla. 427, 63 So. 822. And this is so, even though the purchase of the property was made with funds of the husband alone. Kollar v. Kollar, 155 Fla. 705, 21 So.2d 356, and Strauss v. Strauss, 148 Fla. 23, 3 So.2d 727.
It is also settled, we think, that where the State law with respect to property owned by a husband and wife as tenants by the entirety is as stated, that the income therefrom is, for Federal income tax purposes, that of the spouses equally. Commissioner v. Hart, 76 F.2d 864; Paul G. Greene, 7 T.C. 142; and Herman Gessner, 32 B.T.A. 1258. And correspondingly, an operating loss on property similarly held by a husband and wife as tenants by the entirety is likewise the loss of the spouses equally, deductible one-half by the husband and one-half by the wife in their Federal income tax returns. Oren C. White, 18 T.C. 385. In the White case the property in question was a farm which had been purchased with the separate funds of the husband who, as in this case, was claiming the right to deduct the entire loss, and it is also to be noted that in that case he had paid all of the expenses of operation.
The petitioners at no place have taken issue with the soundness of the decisions cited. In fact, the only reference thereto was in their reply brief, to the effect that the respondent had cited ‘certain Florida cases on the subject of tenancies by the entirety.’ Furthermore, the established facts here are not nearly as indicative of an individual operation by the husband, as in the White case above. George did testify that he alone had furnished the case for the downpayments on the two groves, and the supplemental agreement did suggest that he would be required to contribute all of the funds needed during the remaining part of 1942. The record indicates, however, that at the time the downpayments on the purchase prices were made a fairly substantial amount of money belonging to Mildred was in George's individual bank account. It also appears that the balances of the purchase price payments were secured by mortgages on the properties themselves, in which case Mildred, as well as George, was obligated therefor. With respect to the actual operation of the properties, Mildred, if anything, was more active than George. They both transmitted expense money to the manager, and we have been unable to find any definite proof that George did in fact supply the money from his separate funds. It also appears that Mildred's share of the George E. Reynolds & Company profits, carried in George's bank account, grew substantially month by month and long before the end of 1942 much more than her share of the purchase money was actually subject to George's command, regardless of the date of any formal settlement between them.
On the record before us, it may not properly be said that the respondent erred in his determination that the loss on the operations of the Florida citrus groves for the period ended December 31, 1942, was the loss of the petitioners jointly. The contention that the loss was that of George alone is accordingly rejected.
Decisions will be entered under Rule 50.