Tower v. COMMISSIONER OF INTERNAL REVENUE

• Decision Date: 02 April 1945
• Docket Number: No. 9868.,9868.
• Citation: 148 F.2d 388
• Parties: TOWER v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Sixth Circuit

148 F.2d 388 (1945)

TOWER v. COMMISSIONER OF INTERNAL REVENUE.

No. 9868.

Circuit Court of Appeals, Sixth Circuit.

April 2, 1945.

Oscar E. Waer, of Grand Rapids, Mich., for petitioner.

S. Dee Hanson, of Washington, D. C. (Samuel O. Clark, Jr., Sewall Key, and Melva M. Graney, all of Washington, D. C., on the brief), for respondent.

Before SIMONS, MARTIN, and McALLISTER, Circuit Judges.

SIMONS, Circuit Judge.

This case, involving the question whether a wife's share of the earnings of a partnership are taxable to her or to her husband from whom her interest in the partnership is derived, is a close one, and falls somewhere in the area between the Second Circuit's decision in Humphreys v. Commissioner, 88 F.2d 430, and decisions in the Fifth and Tenth Circuits in Mead v. Commissioner, 131 F.2d 323, and Earp v. Jones, 131 F.2d 292, respectively.

The taxpayer, in 1933, owned 425 shares out of a total of 500 shares of the R. J. Tower Iron Works, Inc., the remaining 75 shares being held by two employees of the corporation, Amidon having 50 shares and Lawrance having 25 shares. In 1934 the taxpayer purchased Lawrance's stock and made a gift of 5 shares to his wife, who was made a director and vice-president of the corporation, so that subsequently, and until the tax years here involved, the taxpayer owned 445 shares of the company. In July, 1937, after some discussion with his wife and Amidon in regard to the advisability of dissolving the corporation and setting up a partnership, and all concluding that this would result in tax savings and avoid the necessity of filing multitudinous corporate reports, it was decided that the taxpayer would transfer some of his stock of the corporation to his wife, so that she would be able to contribute a substantial part of the partnership capital. In furtherance of this decision, the taxpayer, on August 25, transferred 190 shares of his corporate stock to his wife, upon condition that she would contribute the corporate assets, which the shares represented, to the new partnership. The transfer was recorded on the corporate books, a new stock certificate was issued and delivered to the wife, and the taxpayer filed a gift tax return and paid the taxes shown to be due thereon. Thereafter, the corporation was completely liquidated and a limited partnership agreement entered into between the taxpayer, his wife, and Amidon, for the purpose of carrying on the business of the corporation, all of the assets of which were transferred to the partnership.

The partnership agreement was to be for 20 years, unless sooner terminated by a majority in interest of the partnership capital. The taxpayer and Amidon were general partners, and Mrs. Tower was a limited partner. Tower's contribution to partnership capital was $81,600; his wife's was $62,400; Amidon's was $16,000. The partners were to share in the profits and losses in proportion to their respective contributions to capital, except that Mrs. Tower was not to be liable for losses in excess of her contribution. The general partners were to have the exclusive management and control of the business, the right to fix salaries, and were to distribute the net profits for each year at such times as they might determine. The taxpayer's share of the partnership profits amounted to 51 per cent, his wife's to 39 per cent, and Amidon's to 10 per cent. Amidon had formerly been employed by the corporation as bookkeeper and continued to perform similar work for the partnership until the early part of 1938 when, by reason of additional responsibilities and duties devolving upon him because of increase in the volume of business, the Towers felt that he was entitled to a larger share in the profits, and they were increased on September 1, 1938, from 10 per cent to 25 per cent, with proportionate decreases to the Towers. It was then also agreed between Tower and Amidon, that neither would draw salaries for future services.

Mrs. Tower, as vice-president and a director of the corporation after the withdrawal of Lawrance, attended directors' and stockholders' meetings, but was not actively engaged in the business, nor did she render service to the partnership or draw salary therefrom. Prior to the partnership agreement the taxpayer gave his wife a regular allowance of $75 a week for household expenses, and this allowance continued during the taxable years. She had a savings and checking account at the bank, wherein she deposited some of the money received from the partnership, and kept some in the form of cash in a safe at home. Following the bank holiday, the taxpayer also kept money and papers in the safe, but used a separate box. In 1940 the Towers built and furnished a summer cottage, Tower contributing approximately $2,000 thereto, and his wife $3,000. During that year Mrs. Tower also repaid her husband some $1,400 which he had advanced for the payment of her income taxes and other expenses. They bought war bonds together, each contributing one-half of the purchase price. The taxpayer performed the same services for the partnership that he had previously performed for the corporation. Upon the basis of these circumstances substantially as found by the tax judge, it was concluded that the gift of corporate stock by the taxpayer to his wife in 1937, was not valid and complete, in that the wife did not gain full dominion and control over the shares, so that she was not a bona fide partner in the business during the taxable years. Deficiencies asserted by the Commissioner in Tower's income tax for the fiscal years ending July 31, 1940, to and including July 31, 1941, based upon the inclusion in his income of the amounts withdrawn by or credited to the wife from the earnings of the partnership, were therefore sustained.

The tax judge reasoned that the taxpayer did not relinquish control of the stock transferred to his wife since she could use it in but one way, namely, to place corporate assets, which the stock represented, into the partnership. Because of the condition attached to it, the transfer did not constitute a valid and complete gift of shares. There was no purpose and intent to vest absolute dominion over the shares in the wife, and since she lacked untrammeled freedom in their disposition, she made no capital contribution to the partnership, and was not a bona fide partner. The conclusion that the transfer was invalid as a gift is rested on the ground that title, dominion, and control of the subject matter were not, in praesenti, conveyed. Reliance is chiefly placed on Edson v. Lucas, 8 Cir., 40 F.2d 398, where essential elements of a gift inter vivos, are catalogued. In that case, however, the conditions attached to the gift went far beyond that here involved, including reversion of the subject matter to the donor. Notwithstanding, the gift was sustained, Judge Sanborn, after an exhaustive analysis of cases, arriving at the conclusion that a gift is not invalid because of conditions imposed by the donor which are not inconsistent with the immediate vesting of such legal title in the donee. The case is authority for the validity of a gift, even though coupled with a condition subsequent which doesn't interfere with the vesting of title in the donee. Such was the gift here involved.

Granted, however, that, because of the condition, Tower's gift was not complete at the time he gave the shares to his wife, the condition was almost immediately performed. The gift was then both valid and complete, vesting title in the wife to the corporation assets contributed by her to the partnership capital. The question that remains is whether the gift was bona fide or a mere sham. We know of no rule, statutory or otherwise, which requires that a gift within the family must, without more, be ignored for tax purposes, and have frequently given effect to such gifts. Commissioner v. Olds, 6 Cir., 60 F.2d 252; Rose v. Commissioner, 6 Cir., 65 F.2d 616; Tracy v. Commissioner, 6 Cir., 70 F.2d 93.¹ It is true that in family trust cases stemming from Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788, any arrangement by which income is spread among the members of a single family is subject to severe scrutiny, but adjudication has invariably been based upon the measure of control reserved by the donor over the subject...