Comm'r of Internal Revenue

Tax Court of the United States.Jul 25, 1952
18 T.C. 804 (U.S.T.C. 1952)
18 T.C. 804T.C.

Docket No. 24895.



Llewellyn A. Luce, Esq., for the petitioner. William W. Oliver, Esq., for the respondent.

Petitioner owned a one-half interest in a partnership known as ‘Allen's.‘ His brother owned the other one-half. Petitioner's wife performed valuable services for the partnership in a managerial, buying, and selling capacity but she was not a partner and did not receive a salary. Petitioner agreed with his wife that in consideration for her valuable contribution of services she would receive 25 per cent of his 50 per cent share in the profits of Allen's. Held, that petitioner and his wife were joint venturers and petitioner's interest in the joint venture was 75 per cent of his 50 per cent share in the net profits of Allen's and the interest of his wife was 25 per cent of such profits. Held, further, that petitioner is taxable on 75 per cent of the partnership profits of Allen's and is not taxable on the 25 per cent of the profits which under the joint venture agreement was the property of his wife. Rupple v. Kuhl, 177 F.2d 823, followed. Llewellyn A. Luce, Esq., for the petitioner. William W. Oliver, Esq., for the respondent.

Respondent determined a deficiency in petitioner's income tax of $6,107.87 for 1943. In his deficiency notice respondent explained the principal adjustment as follows:

(b) In your return, there was included in taxable income $24,429.07, representing only 75 per cent of your distributive income from the partnership, Allen's, in the total amount of $32,257.10[sic]. Accordingly, the amount of $8,143.03 has been included in income in accordance with Section 182 of the Internal Revenue Code.

Petitioner assigned error to the above adjustment. Other adjustments were made by the Commissioner but these are not contested. The year 1942 is involved because of the forgiveness feature of the Current Tax Payment Act of 1943.


Petitioner Harry Klein is a resident of Nashville, Tennessee. Petitioner filed his 1943 income tax return with the collector for the district of Tennessee. Petitioner filed his returns on a calendar year and cash basis.

Allen's is a women's retail specialty shop selling women's ready-to-wear clothes— coats, suits, dresses, accessories, hosiery, bags, gloves, underwear, and shoes. Allen's opened September 9, 1938, operating as an equal partnership composed of Harry Klein and his brother Maurice Klein. From January 1, 1944 the year following the taxable year here involved, Allen's has been operated under a written partnership agreement with petitioner Harry Klein, his brother Maurice Klein, and their respective wives, Esther Klein and Helen Klein, as partners, each with a one-quarter partnership interest.

Esther Klein, wife of petitioner Harry Klein, commenced working at Allen's at its inception and has worked there ever since. She managed the ready-to-wear department and the hosiery, bag, and glove department; supervised the underwear, sportswear, and millinery departments; acted as buyer for the store, making four or five buying trips to New York City each year; took care of reorders; supervised the display of merchandise, and checked markup of merchandise. These were her store activities in the year 1943. Her services were managerial, valuable, and essential.

Petitioner and his wife managed the business of Allen's from its opening in 1938 through 1943, except that petitioner's brother Maurice Klein ran the shoe department. Harry Klein handled the financial end of the business of Allen's. He took care of billings, inventories, and inventory checks and analyses.

From 1929 through 1943, petitioner and his wife worked together full time as a team in the merchandising business. From 1929 to 1938, they worked at a store known as Klein's in Nashville, a partnership composed of petitioner, his brother Maurice Klein, and their father. They received a joint drawing account for their services.

In 1943, petitioner also owned a one-third partnership interest in the store known as Klein's. The three equal partners in Klein's were Maurice Klein, Harry Klein, and Dave Barton. From the opening of Allen's in September 1938, neither nor his wife did any work or supervision as to Klein's.

From August 7, 1929, petitioner and his wife had a joint bank account in the Commerce Union Bank in Nashville, Tennessee. All of Allen's profits (50 per cent) attributable to the joint efforts of petitioner and his wife were deposited in this joint bank account. Both petitioner and his wife owned these monies and used them as they wished. This was the situation throughout 1943.

Petitioner and his wife discussed their business with an accountant. In the fall of 1943, petitioner Harry Klein and his wife Esther Klein discussed the percentage of the profits that Esther Klein was entitled to for the year 1943, and agreed that she was entitled to 25 per cent of the 50 per cent profits which petitioner was entitled to receive as a partner in Allen's. Petitioner's wife was not a partner in Allen's, but she rendered valuable services to Allen's and performed essential executive duties. Petitioner and his wife Esther during the year 1943 were, by agreement, engaged in a joint venture under the terms of which petitioner was to receive as his share of the joint venture profits 75 per cent of the 50 per cent net profits which petitioner was entitled to receive as a partner in Allen's, and Esther Klein was to receive 25 per cent of these profits as her share of the joint venture. This agreement was carried out by the parties. Payment of 25 per cent of the profits to petitioner's wife was reasonable.

The partnership return of Allen's for 1943 shows distributive partner's share of income to petitioner of $32,572.10. The petitioner reported his income from Allen's for the taxable year 1943 as follows:

+-------------------------------------------+ ¦Allen's—Nashville, Tennessee ¦$32,572.10¦ +--------------------------------+----------¦ ¦Less 25% apportionment of income¦8,143.03 ¦ +--------------------------------+----------¦ ¦ ¦$24,429.07¦ +-------------------------------------------+

Esther S. Klein included in her Federal income tax return for the taxable year 1943 an amount described on her return as follows:

+--------------------------------------------------+ ¦Harry Klein's distribution from Allen's¦$32,572.10¦ +---------------------------------------+----------¦ ¦Less amount apportioned to Harry Klein ¦24,429.07 ¦ +---------------------------------------+----------¦ ¦ ¦$8,143.03 ¦ +--------------------------------------------------+


BLACK, Judge:

The issue raised here is whether in 1943 petitioner is taxable in full for his share of one-half of the profits of Allen's, or for only 75 per cent of his share. Allen's was a retail women's clothing store. Allen's was a partnership composed of petitioner and his brother, and was managed by petitioner and his wife. Petitioner's wife had many years of business experience and was responsible for buying, displays, pricing merchandise, and much of the general management. Her services were managerial, valuable, and essential to the conduct of the business. In the fall of 1943, petitioner and his wife agreed that his wife's share of the profits for 1943 was to be 25 per cent of petitioner's one-half of the partnership profits. During 1943, petitioner's wife was not a partner in Allen's nor did she receive a salary from the partnership as an employee.

Respondent determined petitioner was taxable in full for his share of the partnership, while petitioner contends he is not taxable on the 25 per cent which his wife reported as income. The evidence shows that Esther reported on her income tax return for 1943, 25 per cent of petitioner's 50 per cent share of the profits from the partnership of Allen's. We think it was proper that she should do this. While it is conceded that she was not a partner in Allen's during the year 1943, yet it is clear that she was a joint venturer with her husband, petitioner herein, in managing and carrying on petitioner's 50 per cent share in the partnership of Allen's. See Rupple v. Kuhl, 177 F.2d 823, affirming 81 F.Supp. 318; United States v. Atkins, 191 F.2d 146 and 191 F.2d 951.

It is true, of course, that if petitioner had merely assigned his wife 25 per cent of his interest in the partnership of Allen's, such assignment, even though it might have been effective as between the parties, would not have relieved petitioner from taxation on his entire 50 per cent of the share in the partnership profits of Allen's. Burnet v. Leininger, 285 U.S. 136; Lucas v. Earl, 281 U.S. 111. But the instant case is no Burnet v. Leininger or Lucas v. Earl case. Here there was no mere assignment of income. Esther Klein was rendering full time service in the business of Allen's and the uncontradicted evidence is to the effect that her services were very valuable and important to the success of the business of Allen's. She received her 25 per cent share of petitioner's 50 per cent of the partnership earnings, not because petitioner had assigned them to her but because she had earned them as a member of the joint venture. Her contribution to the joint venture was important and essential services. In the Rupple v. Kuhl case, supra, the contribution of the wife to the joint venture with her husband was capital—here it is services. However, we see no distinction between the two in so far as the validity of the joint venture is concerned. In the instant case respondent relies heavily on Burnet v. Leininger, supra, but so he did in Rupple v. Kuhl, supra, and the Seventh Circuit in ruling against the Government in that case, said:

As the District Court aptly stated (81 F.Supp. 318, 321). ‘The statutes accord a joint venture the same tax treatment as a partnership.‘ That each venturer is entitled to recognition for tax purposes was established by Tompkins v. Commissioner, 4 Cir., 97 F.2d 396. Decisions of the Tax Court are in accord with the decisions of the lower court to the effect that the income from a partnership interest which is owned by parties to a joint venture is taxable proportionally to the members of the joint venture. See Hinckley v. Commissioner, 6 B.T.A. 312; Wing v. Commissioner, 17 B.T.A. 1028; Tuthill v. Commissioner, 22 B.T.A. 887. That these decisions antedate the decision in Burnet v. Leininger, supra, does not weaken their authority, for, as has been pointed out, in the Leininger case the husband and wife were not participants in a joint venture. In this case, to tax all the income from the partnership interest to the taxpayer would be to fail to accord to the joint venture between the taxpayer and his wife the tax recognition to which it is entitled under the statute and which it received in the court below.

The Fifth Circuit in United States v. Atkins, supra, adopted the views of the Seventh Circuit in Rupple v. Kuhl, supra, and in so doing said at page 147:

This is not a case of the taxpayer assigning fees, wages, salaries, or other income, to be earned by him in the future from work to be performed by him in the future. Atco's income resulted from capital invested in operating partnerships, and from the services performed by managing partners. The taxpayer did not assign income from those operating partnerships: he assigned his share, his entire interest, in those partnerships to a separate partnership (Atco Investment Company), the members of which firm were engaged in a joint venture. See Rupple v. Kuhl, 7 Cir., 177 F.2d 823, 825. Burnet v. Leininger, 285 U.S. 136, 52 S.Ct. 345, 76 L.Ed. 665, distinguished.

See also Estate of Archie L. Blades, 15 T.C. 190.

On this issue we hold in favor of the petitioner.

Decision will be entered under Rule 50.