Docket No. 51813.
O. Jennings Rife, Esq., and D. Paul Camilletti, Esq. for the petitioner. James F. Shea, Esq., for the respondent.
Petitioner's late husband, John Russo, died in 1941 possessing a one-seventh interest in one partnership and allegedly possessing a one-half interest in another. The businesses were continued without interruption after his death, and petitioner became a one-seventh partner in one enterprise and a one-half partner in the other. She received her distributive shares of partnership income and reported them on her individual returns. Although the five children of petitioner and John Russo were entitled to intestate shares of any partnership assets in which he had an interest at the time of his death, no such distributions were made to them or on their behalf and petitioner did not, in her capacity as their guardian, enter into agreements with the other partners that her children were to be regarded as partners in the two enterprises. The children were not regarded as partners in such enterprises during the years here in issue by petitioner, by her partners, or by the business community. Held, since there was no intent that petitioner's children join together with the other partners in the conduct of the enterprise, they cannot be regarded as having become partners in the two enterprises upon the death of their father. O. Jennings Rife, Esq., and D. Paul Camilletti, Esq. for the petitioner. James F. Shea, Esq., for the respondent.
This proceeding involves deficiencies in income tax determined by respondent against Nellie Russo Linsenmeyer (hereinafter referred to as petitioner) for the taxable years 1947, 1948, and 1949 in the amounts of $756.26, $311.50, and $168.31, respectively. Petitioner has claimed overpayments in her tax for such years.
The sole issue to be decided is whether petitioner is taxable on one-half of the partnership income of the North Pole Distributing Company and one-seventh of the partnership income of the North Pole Ice Company for the taxable years 1947, 1948, and 1949, or, whether part of such shares of partnership income is taxable to petitioner's children rather than to petitioner.
Some of the facts were stipulated.
FINDINGS OF FACT
The stipulated facts are so found and are incorporated herein by this reference.
Petitioner resided in Huntington, West Virginia, during the years 1947, 1948, and 1949. She filed her returns for such years with the collector of internal revenue for the district of West Virginia.
In 1923, petitioner was married to John Russo (hereinafter referred to as Russo) and five children were subsequently born to them.
For several years prior to 1935, Russo was associated with a group of individuals in the operation of a brewery at Fairmont, West Virginia. This brewery was known as the North Pole Brewing Company. This same group later acquired an ice company at Huntington, West Virginia, which was operated as a separate partnership under the name of the North Pole Ice Company. In 1934, the Huntington partnership added the distribution of beer to its business and put Russo in charge of this department. The name of the Huntington partnership was changed to the North Pole Ice and Distributing Company.
In 1937, the North Pole Ice and Distributing Company decided to dispose of its beer-distributing business. It sold that part of its business for approximately $3,000, and it was thereafter operated by Russo and his wife's brother, Frank J. Lombardo (hereinafter referred to as Lombardo) under the name, North Pole Distribution Company. Russo retained his one-seventh interest in the North Pole Ice and Distribution Company and that partnership resumed the use of its former name, the North Pole Ice Company.
Lombardo was at that time a single man and he resided with his sister, the petitioner herein, and her husband, Russo. A telephone extension of the business phone was placed in petitioner's residence and she aided her husband and Lombardo in the conduct of the business by answering the business phone while they were out selling and delivering beer to their customers.
Russo and Lombardo had no formal, written partnership agreement, but they were known as partners to the members of their local business community and to people who had dealings with them in the course of their business. Russo acted as a partner by pledging the credit of the firm in securing loans for it and in making contracts on behalf of the firm. In a credit application signed by Lombardo in connection with the purchase of a truck for the firm, he indicated that he and Russo were equal partners in the North Pole Distributing Company. A license for the transport of beer was granted by the State of Pennsylvania to Frank Lombardo and John Russo, doing business as the North Pole Distributing Company. However, the beer distributing license which was issued to the firm by the State of West Virginia was issued in the name of Frank Lombardo, doing business as the North Pole Distributing Company; and, from 1937 to 1941, the firm filed no partnership returns of income. Lombardo reported the total income of the firm for these years as his own on his individual returns. The firm filed social security reports under the heading, Frank Lombardo, d.b.a. North Pole Distributing Company, listing as many as 11 employees, including the father and another brother of the petitioner, but Russo's name did not appear thereon either as an employee or as a partner.
The State of West Virginia's application for a beer distributor's license in 1937 required that an applicant state his ‘place of birth * * * and, if a naturalized citizen, when and where naturalized; * * * .’ Russo claimed derivative citizenship through the naturalization of his parents, but he was unable to obtain proof of their naturalization and he registered as an alien under the Alien Registration Act.
On May 23, 1941, Russo died, intestate, a resident of the State of West Virginia. He was survived by petitioner and their five children who were, at that time, 15, 13, 11, 5 and 3 years of age, respectively.
After Russo's death, petitioner and her brother, Lombardo, continued the business of the North Pole Distributing Company without interruption. Although no formal, written partnership arrangement was entered into by them, they conducted themselves as equal partners in the business. Lombardo acted as general manager of the business and petitioner maintained the partnership books, answered phone calls, and performed miscellaneous other duties. Licenses to distribute beer were issued by the State of West Virginia and the City of Huntington, West Virginia, to petitioner and Lombardo, doing business as the North Pole Distributing Company. The partnership filed partnership returns for the taxable years 1941 to 1949, inclusive, showing petitioner and her brother, Lombardo, as the sole partners. After the allowance of a ‘salary’ for Lombardo because of his managerial duties, partnership profits were equally divided between petitioner and Lombardo.
In 1945, petitioner requested Lombardo to furnish her with documentary proof of her one-half interest as a partner in the North Pole Distributing Company. At that time the draft status of Lombardo was uncertain, and, in addition, petitioner was contemplating marriage to George Linsenmeyer who was employed by a rival beer concern. At the suggestion of Lombardo, petitioner called upon an attorney at Huntington, West Virginia, and asked him to prepare a document to evidence her one-half partnership interest in the North Pole Distributing Company. Upon the advice of this attorney, an instrument entitled ‘Bill of Sale,‘ dated as of July 1, 1941, was executed by petitioner and Lombardo. This instrument states, in part, as follows:
That, I Frank J. Lombardo, doing business under the name of North Pole Distributing Company located in the City of Huntington, Cabell County, State of West Virginia, in consideration of the sum of $1.00 in cash in hand paid and other good and valuable consideration paid by Nelle (Nellie) F. Russo, the receipt whereof is hereby acknowledged, do hereby grant, sell, transfer, and deliver unto the said Nelle F. Russo an undivided 1/2 interest in and to the North Pole Distributing Company located in the City of Huntington, Cabell County, West Virginia, together with the stock in trade, fixtures, office furniture, contracts with various breweries and all other equipment pertaining to and used in connection with said business, together with the good will of the North Pole Distributing Company heretofore carried on by me.
That I, the said Frank J. Lombardo, do covenant with the said Nelle F. Russo that I will warrant the title to the said stock in trade, fixtures, office furniture and all equipment pertaining to said business free form the claims of all persons whatsoever.
It is further agreed and understood by and between the parties hereto, that the said Frank J. Lombardo is to be the owner of an undivided 1/2 interest, and the said Nelle F. Russo is to be the owner of the other 1/2 interest in and to the business known as the North Pole Distributing Company.
Sometime during the year 1944, petitioner was appointed administratrix of the estate of her deceased husband. Shortly after such appointment, an appraisement of the estate was filed with the proper authority in the State of West Virginia, listing among the assets of the estate a one-seventh interest in the North Pole Ice Company, but it showed no interest of the decedent in the North Pole Distributing Company. Petitioner has not made an accounting to the Court of Cabell County at any time since John Russo's death in relation to the profits of either the North Pole Distributing Company or the North Pole Ice Company.
On September 10, 1946, the respondent began an income tax investigation of Frank J. Lombardo which lasted until April of 1947. During the course of the investigation, the revenue agent was informed by Lombardo that he had given petitioner a one-half interest in the North Pole Distributing Company because her first husband died in 1941 leaving her with five children, and only a thousand dollars in life insurance, in addition to the one-seventh interest in the North Pole Ice Company.
Petitioner reported, on her individual returns for the taxable years 1941 to 1949, inclusive, the distributive share of partnership profits allocated to her on the partnership returns of the North Pole Distributing Company for such years. She also reported one-seventh of the net income shown on the partnership returns filed by the North Pole Ice Company for the taxable years 1941 to 1946, inclusive. For the taxable years 1947, 1948, and 1949, the North Pole Ice Company partnership returns reported petitioner's distributive shares of its net income as being $1,051.26, $1,148.87, and $1,643.97, respectively, whereas petitioner reported her distributive share of the North Pole Ice Company net income on her individual income tax returns for such years as being $440.35, $358.67, and $139.90, respectively.
The parties concede that the North Pole Distributing Company and the North Pole Ice Company were partnerships during the years 1947, 1948, and 1949, and that petitioner was a partner in these two enterprises during such years. We must decide the extent of her partnership interests therein. We must decide whether, for tax purposes, petitioner is to be regarded as possessing a one-half interest in the North Pole Distributing Company and a one-seventh interest in the North Pole Ice Company during the years 1947, 1948, and 1949, or, whether her children acquired two-thirds of the aforementioned partnership interests upon the death of their father, intestate, in 1941 and continued to own two-thirds of such partnership interests during the years here in issue. Petitioner contends that her deceased husband, John Russo, possessed a one-half interest and a one-seventh interest, respectively, in these two partnerships at the time of his death in 1941, and that one-third of these partnership interests were inherited by her and the remaining two-thirds were inherited by her children under the laws of intestate succession of the State of West Virginia. She argues that her children are to be regarded as silent partners in these two enterprises during the years here in issue, and that she erred in reporting both her own and her children's distributive shares of partnership income on her individual returns for such years.
Respondent has determined that petitioner's children possessed no partnership interests in these two enterprises during the years in issue. He concedes that Russo was a one-seventh partner in the North Pole Ice Company but denies that Russo possessed any partnership interest in the North Pole Distributing Company. The evidence presented with respect to the ownership of this latter enterprise prior to Russo's death is inconclusive and contradictory. We have been unable to make any finding of fact as to whether it was then operated as a sole proprietorship by petitioner's brother, Lombardo, or whether Russo was, in fact, a silent partner with Lombardo, each sharing equally in the risks and profits of the business. However, we may pass this factual hurdle, for, even assuming that Russo was an equal partner in this business, we think that respondent has correctly determined that Russo's five children did not become partners therein, or in the North Pole Ice Company, upon his death.
The devolution of property upon death is determined by State law. See Lyeth v. Hoey, 305 U.S. 188 (1938). It appears that under West Virginia law Russo's children were entitled to a share of any partnership interests possessed by him at the time of his death. However, this does not automatically render the children partners in the businesses, particularly for Federal tax purposes. It is a general rule that a partnership is terminated by the death of a partner. It is then the duty of the surviving partner to wind up the business and distribute the decedent's share of partnership assets to those entitled to receive them. Hooper v. Hooper, 32 W.Va. 526, 9 S.E. 937 (1887). However, in lieu of accepting a distribution of a decedent's share of the partnership assets, the widow and heirs of the deceased partner may agree with the surviving partner to continue the business. They may agree to leave the decedent's share of the partnership assets in the business and to substitute themselves as partners with respect to his partnership interest, thus fractionalizing his partnership interest among themselves. Hoyt v. Sprague, 103 U.S. 613 (1880).
It is the essence of the agreement entered into by petitioner and Lombardo after the death of Russo which is the nub of the question here. Even though no formal, written partnership agreement was entered into by petitioner and her brother, Lombardo, after Russo's death, it is clear that they had an oral understanding as to how the profits and risks of the business were to be divided. It is also clear that at no time during the period extending from the death of Russo though the taxable years here in issue were petitioner's children considered as partners in either enterprise. They were not considered as such by either petitioner or Lombardo, or by her partners in the North Pole Ice Company. The fundamental criterion in determining the existence of a valid partnership is the existence of an intent to join together in the conduct of the business. Commissioner v. Culbertson, 337 U.S. 733 (1949); Commissioner v. Tower, 327 U.S. 280 (1946); Lusthaus v. Commissioner, 327 U.S. 293 (1946); Mary Frances Lewis, 23 T.C. 538 (1954); L. C. Olinger, 10 T.C. 423 (1948). Each of the partners must signify such intent to the others and enter into an agreement, either oral or written, that they will each share in the profits and losses of the enterprise. It is true that petitioner, as guardian of her five minor children at the time of Russo's death, could have made such agreements on their behalf. But there is no evidence to that effect in the record. To the contrary, it is obvious that petitioner and her partners in the two enterprises did not consider the children as possessing any partnership interests therein. It was not until 1950 that petitioner's tax counsel advanced the theory that petitioner's children were partners in the two partnerships. Certainly, it is logical to assume that the children themselves would have been surprised had anyone suggested to them sometime prior to 1950 that they might be liable for debts and obligations incurred by the partnerships.
We recognize that petitioner may have contributed the children's shares of partnership assets to the new partnerships which were formed upon the death of her husband for the purpose of continuing the businesses. We do not attempt to decide here what the children's rights are with respect to such assets. But even though such assets were to be viewed as a contribution of capital on behalf of the children, under the circumstances of the present case the children cannot be considered as partners in the businesses. In Commissioner v. Culbertson, supra, the Supreme Court made the following statement in order to dispose of the misconception that it had laid down a yardstick, in the Tower case, supra, for measuring the reality of a family partnership in terms of capital contributions or the rendition of services:
The Tower case thus provides no support for such an approach. We there said that the question whether the family partnership is real for income-tax purposes depends upon
whether the partners really and truly intended to join together for the purpose of carrying on business and sharing in the profits or losses or both. And their intention in this respect is a question of fact, to be determined from testimony disclosed by their ‘agreement, considered as a whole, and by their conduct in execution of its provisions.’ Drennen v. London Assurance Co., 113 U.S. 51,56; * * *
The question is not whether the services or capital contributed by a partner are of sufficient importance to meet some objective standard supposedly established by the Tower case, but whether, considering all the facts— the agreement, the conduct of the parties in execution of its provisions, their statements, the testimony of disinterested persons, the relationship of the parties, their respective abilities and capital contributions, the actual control of income and the purposes for which it is used, and any other facts throwing light on their true intent— the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise. * * *
Capital contribution is only one of the factors to be considered in determining the existence or nonexistence of a valid partnership. Since neither the petitioner nor any of her partners intended to join in the conduct of a business with petitioner's children as partners during the years in issue, no part of the income of either of the two partnerships is taxable to said children for such years. The income of the two partnerships in question is taxable to the individuals who were operating the businesses, who considered themselves as the sole partners, and who held themselves out as the sole partners. Cf. Frances Marcus, 22 T.C. 824 (1954).
Decision will be entered for the respondent.