Earp v. Jones
| Decision Date | 15 February 1943 |
| Docket Number | No. 2553.,2553. |
| Citation | 131 F.2d 292 |
| Parties | EARP v. JONES, Collector of Internal Revenue. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Streeter B. Flynn, of Oklahoma City, Okl. (R. M. Rainey, R. M. Rainey, Jr., and Rainey, Flynn, Green & Anderson, all of Oklahoma City, Okl., on the brief), for appellant.
Earl C. Crouter, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key and Samuel H. Levy, Sp. Assts. to Atty. Gen., and Charles E. Dierker, U. S. Atty., and George H. McElroy, Asst. U. S. Atty., both of Oklahoma City, Okl., on the brief), for appellee.
Before PHILLIPS, HUXMAN, and MURRAH, Circuit Judges.
Appellant paid deficiency assessments on his income tax returns for 1937 and 1938 under protest, and then instituted this action to recover the same. He has appealed from an adverse ruling.
On December 1, 1937, by written deed of gift, appellant conveyed to his wife a one-half interest in his insurance business which he had been conducting in Oklahoma City as sole owner, under the name of Ancel Earp and Company. In consideration of the gift, she released her claim to any or all of his estate at the time of his death, and agreed that he might dispose of it as he saw fit. On the same day, he and his wife then entered into a written partnership agreement under which they became copartners in the business under the same firm name. The old agency contracts were canceled and new ones were executed with the partnership. Partnership books were opened and kept, reflecting the interests of the two partners.
The government's position is that the partnership arrangement effected no substantial change in appellant's status within the meaning of the provisions of the applicable revenue statute and that therefore he is chargeable with the entire taxable income from the business.
It may be conceded that the arrangement is sufficient to constitute a legal partnership under Oklahoma law. It remains only to inquire if it is sufficient to effect a change in appellant's economic status for income tax purposes under the federal income tax law.
Section 181 of the Revenue Act of 1936, 49 Stat. 1648, 1709, 26 U.S.C.A. Int.Rev. Code § 181, provides that: "Individuals carrying on business in partnership shall be liable for income tax only in their individual capacity."
The Supreme Court has quite clearly laid down the principles which must guide us in the determination of this question. In Harrison v. Schaffner, 312 U.S. 579, 61 S.Ct. 759, 85 L.Ed. 1055, in considering a gift of income by assignment, the court held that the operation of the taxing statute was not controlled by attenuated subtleties, but rather by the import and reasonable construction of the Act; that the court was not so much concerned with the refinements of title as with the command over the income. Concerning attempts to avoid the effect of a taxing statute by various devices, the court held that one having the right to enjoy income could not escape the tax by any kind of anticipatory arrangement, however skilfully devised, by which he procured payment to another. In Burnet v. Leininger, 285 U.S. 136, 52 S.Ct. 345, 76 L.Ed. 665, one partner conveyed one-half of his interest in an existing partnership to his wife. In upholding the right of the government to tax the entire income of his share to him, the court stressed the fact that there was no readjustment of rights in the partnership property and management.
In Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731, the court stressed the power to tax income to him who earns it, and stated that no anticipatory arrangement, no matter how skilfully devised, can avoid this. The court said that the fruit must be attributed to the tree on which it grew. In Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596, 97 A.L.R. 1355, the court held that while a taxpayer was free to choose any organization for the conduct of his business, the government was not bound thereby; that it could look to the actualities and that if it found the form for doing business unreal or a sham, it was free to disregard the effect of the fiction as best served the purpose of the tax statute. In Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788, the court held that multiplying one economic unit into two or more by devices, although valid under state law, would not be conclusive on the federal government under the federal income tax law.
A careful examination of the record leads us to conclude that no substantial change...
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