148 F.2d 388 (6th Cir. 1945), 9868, Tower v. C.I.R.

Docket Nº9868.
Citation148 F.2d 388
Party NameTOWER v. COMMISSIONER OF INTERNAL REVENUE.
Case DateApril 02, 1945
CourtUnited States Courts of Appeals, Court of Appeals for the Sixth Circuit

Page 388

148 F.2d 388 (6th Cir. 1945)

TOWER

v.

COMMISSIONER OF INTERNAL REVENUE.

No. 9868.

United States 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

Page 389

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 known 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, 600; 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...

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21 practice notes
  • Barter v. C. I. R., FEDTAX, 35294-87
    • United States
    • Federal Cases United States Tax Court
    • March 19, 1990
    ...the substance of the transaction is clearly at odds with the form finally chosen. Commissioner v. Tower, 327 U.S. 280, 291 (1946), revg. 148 F.2d 388 (6th Cir. 1945), revg. 3 T.C. 396 (1944). In order to determine the substance of a questioned transaction, we routinely examine all of the fa......
  • 5 T.C. 351 (1945), 4109, Adams v. C. I. R.
    • United States
    • Federal Cases United States Tax Court
    • June 29, 1945
    ...of a reorganization under the statute. Clarence J. Schoo, 47 B.T.A. 459. See also C. A. Monroe, 39 B.T.A. 685; Tower v. Commissioner, 148 F.2d 388. A reduction in the corporation's liability for dividends or interest also constitutes a legitimate business purpose. Annis Furs, Inc., 2 T.C. 1......
  • 6 T.C. 345 (1946), 111066, Haldeman v. C. I. R.
    • United States
    • Federal Cases United States Tax Court
    • March 6, 1946
    ...difference, except tax-wise, how the family income was allocated among the members. Cf. Commissioner v. Tower, 327 U.S. 280, reversing 148 F.2d 388, reversing 3 T.C. 396; and Lusthaus v. Commissioner, 327 U.S. 293, affirming 149 F.2d 232, and affirming 3 T.C. 540. We have found no cases pre......
  • 163 F.2d 664 (6th Cir. 1947), 10386, Dawson v. C.I.R.
    • United States
    • Federal Cases United States Courts of Appeals Court of Appeals for the Sixth Circuit
    • September 22, 1947
    ...and $92, 477.66, respectively. The petition presents in general the same question previously considered by us in Tower v. Com'r, 6 Cir., 148 F.2d 388; Lowry v. Com'r, 6 Cir., 154 F.2d 448; Thorrez et al. v. Com'r, 6 Cir., 155 F.2d 791, and DeKorse v. Com'r, 6 Cir., 158 F.2d 801, that is, wh......
  • Request a trial to view additional results
21 cases
  • Barter v. C. I. R., FEDTAX, 35294-87
    • United States
    • Federal Cases United States Tax Court
    • March 19, 1990
    ...the substance of the transaction is clearly at odds with the form finally chosen. Commissioner v. Tower, 327 U.S. 280, 291 (1946), revg. 148 F.2d 388 (6th Cir. 1945), revg. 3 T.C. 396 (1944). In order to determine the substance of a questioned transaction, we routinely examine all of the fa......
  • 5 T.C. 351 (1945), 4109, Adams v. C. I. R.
    • United States
    • Federal Cases United States Tax Court
    • June 29, 1945
    ...of a reorganization under the statute. Clarence J. Schoo, 47 B.T.A. 459. See also C. A. Monroe, 39 B.T.A. 685; Tower v. Commissioner, 148 F.2d 388. A reduction in the corporation's liability for dividends or interest also constitutes a legitimate business purpose. Annis Furs, Inc., 2 T.C. 1......
  • 6 T.C. 345 (1946), 111066, Haldeman v. C. I. R.
    • United States
    • Federal Cases United States Tax Court
    • March 6, 1946
    ...difference, except tax-wise, how the family income was allocated among the members. Cf. Commissioner v. Tower, 327 U.S. 280, reversing 148 F.2d 388, reversing 3 T.C. 396; and Lusthaus v. Commissioner, 327 U.S. 293, affirming 149 F.2d 232, and affirming 3 T.C. 540. We have found no cases pre......
  • 163 F.2d 664 (6th Cir. 1947), 10386, Dawson v. C.I.R.
    • United States
    • Federal Cases United States Courts of Appeals Court of Appeals for the Sixth Circuit
    • September 22, 1947
    ...and $92, 477.66, respectively. The petition presents in general the same question previously considered by us in Tower v. Com'r, 6 Cir., 148 F.2d 388; Lowry v. Com'r, 6 Cir., 154 F.2d 448; Thorrez et al. v. Com'r, 6 Cir., 155 F.2d 791, and DeKorse v. Com'r, 6 Cir., 158 F.2d 801, that is, wh......
  • Request a trial to view additional results