Dawson v. Commissioner of Internal Revenue

• Decision Date: 22 September 1947
• Docket Number: No. 10386.,10386.
• Citation: 163 F.2d 664
• Parties: DAWSON v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Sixth Circuit

163 F.2d 664 (1947)

DAWSON v. COMMISSIONER OF INTERNAL REVENUE.

No. 10386.

Circuit Court of Appeals, Sixth Circuit.

September 22, 1947.

Lyall F. Martz and William C. Allee, both of Detroit, Mich. (Lyall F. Martz and William C. Allee, both of Detroit, Mich., on the brief), for petitioner.

Harry Baum, of Washington, D. C. (Sewall Key, Robert N. Anderson, and Harry Baum, all of Washington, D. C., on the brief), for respondent.

Before HICKS, MARTIN, and MILLER, Circuit Judges.

HICKS, Circuit Judge.

Russell B. Dawson seeks a review of the decision of the Tax Court affirming an assessment against him of deficiencies in income taxes for the calendar years of 1939, 1940 and 1941 in the amounts of $18,947.80, $27,937.18 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, whether business earnings, attributable under partnership agreements to petitioner's wife individually and as trustee for three minor children are taxable as income of the petitioner. The Commissioner and the Tax Court ruled that they were.

Petitioner has been a car dealer in Detroit since 1925. In 1934 he entered the automobile business for himself under the name of "Russ Dawson" and conducted the business as sole proprietor until March 1, 1939, when a partnership was formed under the same name. At that time the business was worth approximately $50,000.00. The members of the partnership were Dawson himself, with a 36% interest; his wife, Virginia, with 30% in her own name and as separate trustee for each of their three minor children, Russell, age 6, Frances, age 5, and Virginia Lee, age 2, with a 10% interest allocated to each trust. A 2% interest each was allocated to Noble S. Balch and Howard Lare, used car manager and sales manager, respectively, each of whom had had lengthy experience in the business under Dawson.

To effect the change, a number of instruments, all dated March 1, 1939, were executed. First, Dawson and his wife executed a trust agreement whereby trusts were created, one each for the three children, in which Dawson agreed to convey certain property and securities to the trusts, and his wife, Virginia, agreed to accept and hold same, including the income, and to invest the same as trustee. She was given broad powers of management without liability for loss or mistake of judgment not due to wilful misconduct or neglect. One half of the corpus was to be paid to the beneficiary when he or she reached the age of twenty-one and the remainder at the attainment of twenty-five years. Second, Dawson executed six Bills of Sale, one to Virginia herself, three to her as trustee, and one each to Balch and Lare, conveying to each the above noted percentage of "* * * interest in all the assets and properties, together with income and profits accruing therefrom after the date hereof, and including good-will, of the new and used car business heretofore conducted by the undersigned under the name of `Russ Dawson,' excepting * * * real estate which may have been owned by the undersigned and used in connection with the said business, which said real estate, if any, is reserved to the undersigned and not included in this bill of sale." Third. All the parties joined in the execution of a Partnership Agreement whereby the percentage of interest and the actual financial interest of each were fixed and wherein certain provisions were made for distribution of income and to take care of the eventualities of death, withdrawal, bankruptcy, etc., and wherein the partnership was given a life of thirty years. Fourth. All the parties executed an agreement providing for ascertainment and distribution of the interest of a partner in the event of death; and finally, each partner joined in the assignment of his interest in the business to "Russ Dawson," the co-partnership.

The partnership agreement was simplified by a document executed on January 2, 1940, but that modification is not material here.

On January 2, 1941, the partnership was dissolved to permit Virginia as an individual to withdraw and was reconstituted with each of the trusts assuming one-third of her interest.

Virginia gave as a reason for her withdrawal, that she had accumulated property of her own which would be liable for the partnership debts, and she decided to get out. The record does not clearly show just how her interest was transferred to the trusts. Dawson thought it was through a bookkeeping transaction. The record is vague as to how she obtained the value of her interest. Lare testified that it was paid off and she testified that the money was left "in there," but that she had removed most of it. Dawson couldn't remember, except that an adjustment was made for her to get the money. Genter, auditor and in charge of the bookkeeping, testified that when she withdrew, her interest was about $45,000.00, but that there was no transfer of assets, that she withdrew that amount as she wanted it.

After this transfer the interests of the partners were, Russell Dawson 36%; Virginia Dawson as trustee for the three minor children, 20% each; Balch 2% and Lare 2%. The children were too young to take part in the business and this was admitted. There was no convincing evidence that Mrs. Dawson participated in the management of the business. She never received any salary, although she testified that she attended some partnership meetings. Dawson, in answer to the question, "Did she voice her opinion on anything. In other words, did she know enough about the business to get in and talk at meetings of the management of the business?" replied, "No, I wouldn't say that she did." Mrs. Dawson on cross-examination, in answer to the question, "Did you do anything at all in the business? Did you work in the business?" replied, "No, I did not."

Lare testified:

"Q. Do you recall anything that was ever put up to Mrs. Dawson, any dispute that ever arose or any question or anything that had to be put up to her? A. I cannot name anything directly, other than financial matters.

"Q. Do you recall anything that happened that came up, with respect to Virginia Dawson as to financial matters, where any dispute arose? A. No, I cannot say that I do, that I can remember distinctly anything of that description. That was a long time ago.

"Q. Can you remember anything even vaguely? A. No."

Virginia Dawson made a number of investments from funds that came to her personally from partnership earnings. These investments were primarily in real estate and most of them were...