Summary
In Skaar and in this case, the assessment was made on federal income tax principles under which an individual's gross income includes any "accessions to wealth" (Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 430-31 (1955)), "from whatever source derived" (26 U.S.C.A. sec. 61).
Summary of this case from McManus v. Department of RevenueOpinion
No. 293.
Argued October 2, 1973. —
Decided November 12, 1973.
APPEAL from a judgment of the circuit court for Dane county: GEORGE R. CURRIE, Reserve Circuit Judge, Presiding. Reversed.
For the appellant the cause was argued by E. Weston Wood, assistant attorney general, with whom on the brief was Robert W. Warren, attorney general.
For the respondents there was a brief and oral argument by Lloyd A. Schneider of McFarland.
This is a proceeding under ch. 227, Stats., to review a decision of the Wisconsin tax appeals commission (hereinafter, the "commission") dated March 30, 1972, which denied the petitioner Eugene H. Skaar's application for abatement of an additional assessment of state taxes made against him for the years 1966, 1967 and 1968.
Eugene and Ellen Skaar (hereinafter, the "taxpayers") had, for the years in question, been engaged in a farming enterprise. Claiming to be a husband and wife partnership, the taxpayers divided the farm income between themselves and filed for tax purposes accordingly. The Wisconsin Department of Revenue audited said returns and determined that no partnership existed. They ruled that Mr. Skaar operated the farms as a sole proprietorship. An additional assessment for the income allegedly earned by Mrs. Skaar was made against Eugene Skaar. The taxpayer applied to the department of taxation for an abatement of the additional income tax assessment and upon denial thereof appealed to the commission.
The commission took testimony and on March 30, 1972, determined that no partnership existed. The denial of the application for abatement of the additional assessment was affirmed.
On review pursuant to ch. 227, Stats., the circuit court reversed the decision of the commission. The Wisconsin Department of Revenue appeals from the judgment.
The facts material to a determination of the existence of a partnership are as follows: Eugene H. Skaar and his wife, Ellen, were married in 1942. Eugene returned from military service in 1945 and began farming with his brother. Prior to the death of his father in 1957, the taxpayer and his brother rented two farms on a share basis from his father. The taxpayer continued farming with his brother for several years thereafter, sharing with his father's estate. After the taxpayer and his brother discontinued their partnership, the taxpayer remained and, with the continuing help of his wife, cultivated the two farms: one of the farms being rented from his mother and the other farm from his father's estate. In 1966 the taxpayer and his wife executed a land contract for the purchase, as joint tenants, of the farm held by his father's estate. In 1967, the Skaars executed another land contract purchasing, as joint tenants, the farm he previously rented from his mother.
The taxpayers handled all financial dealings through one joint account. All farm receipts were deposited therein as was the salary earned by Mr. Skaar as town chairman and drainage district commissioner. Likewise, all farm expenses were paid therefrom as were all family expenses. The financial records of the taxpayers' farm and nonfarm operations were kept by Mrs. Skaar. Such records failed to reflect any division of profits resulting from such operations. Rather, income from the farm and nonfarm operations was reflected as a singular amount — net income.
The taxpayers never entered into a formal partnership arrangement. Rather, the Skaars testified as to an informal arrangement which existed between them. This understanding was stated in the commission's finding of fact as follows:
"The petitioner and his wife had an oral understanding as to the conduct of the farming operations; and that understanding was that they would work together, own everything together, make their decisions together, manage the farm together, and that they would hold everything together. It was their understanding that if one of them died, the other would have everything, to the exclusion of their children. It was their understanding that if either one of them were away from the farm, the other could do anything necessary to be done and transact business until the other returned."
No federal or state partnership tax returns were filed and self-employment social security taxes were paid only for Mr. Skaar. Mr. Skaar testified that such action was taken to secure better social security benefits. Additionally, claims for gasoline tax refunds were made by Mr. Skaar individually. The taxpayer testified that such action was taken only because the invoices for the sale of gasoline were made out in his name. The registered cattle on the farm were registered in the name of Mr. Skaar individually. He testified that this was done for convenience. Similarly, for the years involved, the automobiles and trucks were registered in the taxpayer's name only — this being done only for insurance purposes.
Contrawise, it was undisputed that Mrs. Skaar supplied numerous services in the successful operations of the farm. Similarly, the milk check the main farm income — was made payable to both taxpayers. Decision making in the farm management was done jointly and Mrs. Skaar had the authority to manage the farm affairs.
The sole issue is whether the Wisconsin tax appeals commission erred in affirming the Department of Revenue's denial of the taxpayers' application for abatement of the additional income tax assessment by concluding that, as a matter of law, no bona fide partnership existed.
While the Wisconsin income tax is modeled upon the federal system, the personal income tax treatment of married individuals under the federal and Wisconsin tax provisions is dissimilar. Under the federal system, married individuals are permitted to file a joint return and effectively split their income even though all income and deductions belong to only one spouse. Wisconsin, on the other hand, while permitting married individuals to file jointly, taxes each spouse individually on his income and deductions and income splitting is not allowed.
This court ruled in Amerpohl v. Tax Comm. (1937), 225 Wis. 62, 272 N.W. 472, that Wisconsin's income tax provisions as per joint returns — sec. 71.09 (4), Stats. 1937 — were unconstitutional as written. The legislature has since failed to enact a provision for filing joint returns similar to the federal system.
As a result of such treatment under the Wisconsin income tax, taxpayers attempted through numerous devices to achieve an income tax splitting similar to that allowed under the federal system. One of these devices was the family or husband-wife partnership. By availing himself of this device, the taxpayer who at that time was a sole proprietor of a business would form a partnership with his wife. Since partnership income is taxed to the partners and not the partnership itself, a taxpayer could, by making his wife or another family member his partner, effectively split his income and realize a result similar to that of the federal joint tax return.
The family partnership was, prior to a statutory definition thereof in 1950, an often litigated tax saving device. Such litigation arose primarily because of suspicion generated as to the bona fideness of such inter-family transactions. As a result, the federal courts closely scrutinized each individual transaction.
". . . transactions between husband and wife calculated to reduce family taxes should always be subjected to special scrutiny." Commissioner v. Tower (1946), 327 U.S. 280, 291, 66 Sup.Ct. 532, 90 L.Ed. 670.
We concur with this rationale and shall closely scrutinize the alleged partnership here present so as to determine whether or not for Wisconsin income tax purposes a bona fide partnership exists.
Since Wisconsin has adopted the Uniform Partnership Act, we must initially look there for guidance. Sec. 178.03 (1), Stats., defines a partnership as an "association of 2 or more persons to carry on as co-owners a business for profit." More specifically, it is recognized that four elements need be met so as to qualify as a partnership. Initially, the contracting parties must intend to form a bona fide partnership and accept the legal requirements and duties emanating therefrom. Secondly, there must exist a community of interest in the capital employed. Thirdly, there must be an equal voice in the management of the partnership. Finally, there must be a sharing and distribution of profits and losses. Applying these elements to the case at bar, we hold that a bona fide partnership was not created. While the taxpayers may have desired to create a marital financial relationship similar to a partnership, it is clear they did not intend to create a bona fide partnership.
Ch. 178, Stats.
Anderson v. Anderson (1972), 54 Wis.2d 666, 196 N.W.2d 727.
Thomas v. Department of Taxation (1947), 250 Wis. 8, 26 N.W.2d 310.
Sec. 178.15(5), Stats.
Thomas v. Department of Taxation, supra.
Initially, the parties to a partnership must intend to contractually form the legal relationship of a partnership. Such an intent is not shown here. While the W.T.A.C. found that the parties had reached an oral understanding, such oral understanding does not show the necessary intent. The oral understanding is more consistent with their marital relationship than with the existence of a bona fide partnership.
There do exist many indications that the taxpayers did not intend to create a bona fide partnership. They did not file partnership tax returns as required both federally and in Wisconsin. We think that if the taxpayers had intended to form a bona fide partnership they would not have violated the federal and Wisconsin legal requirement of filing. Likewise, the taxpayers failed to pay the federal self-employment tax for Mrs. Skaar which would have been required had said business arrangement been a partnership. Such tax surely would have been paid had the taxpayers intended to form a partnership and fulfill the legal requirements. The record discloses they were familiar with such requirements.
Sec. 71.10 (3), Stats. Such a return is also required of a joint venture. Sec. 71.02 (2) (i), and 26 USCA, sec. 761 (a).
26 USCA, secs. 702 (a) and 1402 (a).
There are other indications the taxpayers did not intend to form a partnership. There was no automobile liability insurance coverage for Mrs. Skaar even though had a bona fide partnership been created, Mrs. Skaar would be liable for the tortious acts of her partner. Similarly, the books of the farm operation were not kept in a manner consistent with a bona fide partnership in that there was no division of the farming operation profits between the taxpayers. In fact, the lower court found that the taxpayers did not consider themselves partners in a legal sense.
Sec. 178.10, Stats.
The taxpayers argue that their desire to own everything together — their holding both farms in joint tenancy and their expressed desire to hold whatever personalty they own similarly — established the fact that they intended a partnership. Such is not the case. A partnership is not implied merely from a common ownership of property. The facts that the community recognized Mrs. Skaar as possessing the authority to bind the farming enterprise and that Mrs. Skaar helped manage and operate the farm are not in themselves controlling. Such facts are as common to a marital relationship as they are to a partnership. Further, whatever testimony that is adduced as to the agreement itself is necessarily self-serving.
Sec. 178.04 (2), Stats.; Anderson v. Anderson, supra.
Proof as to the fourth element of the partnership — the division of profits — is also insufficient to show the existence of a bona fide partnership. In fact, there was no proof whatsoever that the taxpayers agreed to divide and did in fact distribute the profits of the farming enterprise. The fact that the account books fail to show any division of profits between the taxpayers creates an inference that the taxpayers never intended to so distribute said profits. Similarly, the joint account into which all receipts, farm and other income were deposited is consistent with the relationship the taxpayers intend — that of marriage and not of partnership.
Consistent with our finding that the relationship in question was not a bona fide partnership, we likewise hold that their relationship failed to qualify as a joint venture because of the scope and period of time which such relationship encompasses.
Cf. Insurance Co. of North America v. ILHR Department (1970), 45 Wis.2d 361, 173 N.W.2d 192; Estate of Starer (1963), 20 Wis.2d 268, 121 N.W.2d 872; Bowers v. Treuthardt (1958), 5 Wis.2d 271, 92 N.W.2d 878.
The taxpayer was assessed additional taxes by the Department of Revenue because it believed that the farm-related income split by the taxpayers on their Wisconsin return was attributable solely to Mr. Skaar. This was because the department determined the business relationship not to be that of partnership, but of a sole proprietorship. In Woller v. Department of Taxation (1967), 35 Wis.2d 227, 151 N.W.2d 170, we held that the burden of proof was upon the taxpayer to show the additional assessment to be erroneous. Based upon the evidence adduced at the administrative hearing, the W.T.A.C. concluded that a partnership did not exist and that the taxpayers had not met their burden of proof. We think the facts upon which the commission's conclusion of law was based are clearly supported by substantial evidence in view of the record submitted.
The respondents raised multiple issues in their brief of which an answer was not required so as to decide the controlling question involved. We have not deemed such questions inappropriate. We likewise do not subscribe to the wisdom of income tax treatment of married persons in Wisconsin. We would prefer the federal system as it applies to married individuals. However, that is a matter for the legislature.
We conclude that on the facts of this case the taxpayers have failed to establish that they have in fact formed a bona fide partnership.
By the Court. — Judgment is reversed and cause remanded with directions to affirm the decision of the Wisconsin tax appeals commission.
I respectfully dissent and believe the judgment of the circuit court should be affirmed.
Mr. and Mrs. Skaar, just like any other taxpayer, have a right to report their income for tax purposes in a manner most advantageous to them, provided, of course, their report is consistent with the truth.
I fully agree with the majority that:
". . . transactions between husband and wife calculated to reduce family taxes should always be subjected to special scrutiny." Commissioner v. Tower (1946), 327 U.S. 280, 291, 66 Sup.Ct. 532, 90 L.Ed. 670.
As I review the record, the facts do not lead to the conclusion that Mr. and Mrs. Skaar were attempting by design or artifice to create records or impressions for the purpose of avoiding the tax laws. Their everyday activities demonstrate their intention as clearly, if not more so, than a formal lawyer-like agreement.
As observed by the circuit court:
"Mrs. Skaar does a very substantial amount of farm labor each day. Twice a day she participates in the milking and feeding of the herd; takes, care of the chickens; bales hay, drives the baler, and unloads hay; prepares the tobacco seed bed, planting the plants, helps with the tobacco harvest and with the stripping; and drives tractors. She estimated that probably she puts in 12 hours per day doing farm labor. Mr. Skaar is town chairman and chairman of the county drainage board which duties take him away from the farms considerably so she probably puts in more farm labor than he does. The commission, by its Finding of Fact No. 8, found that Mrs. Skaar `spent as much time or more than did the petitioner in the conduct of the farming operations.'
"Decision making in the management of the farms is done jointly by the Skaars after talking things over, such as buying new machinery, or when to sell the tobacco crop.
"The sale of milk constituted by far the greater portion of the gross farm income of the Skaars for each of the three years in question as shown by the income tax returns. In 1966 it accounted for $24,666.07 of a total of $33,884.95; in 1967, $28,551.83 of a total of $35,417.38; and in 1968, $32,733.22 of a total of $40,606.23. During these three years, and for some time prior thereto, the milk checks received have been payable to both Mr. and Mrs. Skaar with an `or' between their names. These as well as all other farm income are deposited in the one joint checking account. On the other hand, the checks for sale of cattle are made out to him. Bills for farm expenses most generally came made out to Mr. Skaar alone but Mrs. Skaar pays them."
The circuit court then concluded in its memorandum opinion.
"If the arrangement between Mr. and Mrs. Skaar was not technically a partnership, then no partnership information return probably was required because sec. 71.10(3)(a), Stats., does not appear to cover joint ventures. In any event, the Skaars employed an attorney to prepare their income tax returns for the three years in question and it was his judgment, not theirs, which resulted in not filing partnership returns. It would be wholly unreasonable for the Commission to infer from such failure that the Skaars were not engaged in a joint venture whereby they were equal co-owners of all income derived from such venture.
"The Court finds that no rational basis exists for the Commission's legal conclusion that the Skaars did not conduct their farming operations either as a partnership or a joint venture."
I agree and would affirm.
I am authorized to state that Mr. Justice ROBERT W. HANSEN joins in this opinion.