Seabrook v. Commissioner of Internal Revenue

• Decision Date: 18 April 1952
• Docket Number: No. 13677.,13677.
• Citation: 196 F.2d 322
• Parties: SEABROOK v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fifth Circuit

196 F.2d 322 (1952)

SEABROOK v. COMMISSIONER OF INTERNAL REVENUE.

No. 13677.

United States Court of Appeals Fifth Circuit.

April 18, 1952.

Robert Ash, Washington, D. C., Chas. S. Ausley, Tallahassee, Fla., for petitioner.

Robert M. Weston and Ellis N. Slack, Sp. Assts. to Atty. Gen., Theron Lamar Caudle, Asst. Atty. Gen., Charles Oliphant, Chief Counsel, and John M. Morawski, Sp. Atty., Bureau of Internal Revenue, Washington, D. C., for respondent.

Before HUTCHESON, Chief Judge, and BORAH and RIVES, Circuit Judges.

BORAH, Circuit Judge.

This is the second review of this case in this court. When it was here before we withheld decision until the Supreme Court had decided the case of Commissioner v. Culbertson, 337 U.S. 733, 69 S.Ct. 1210, 93 L.Ed. 1659, and then we ordered a reversal of the Tax Court's opinion and judgment and remanded the cause to the Tax Court for further proceedings in conformity with the Supreme Court's opinion in the Culbertson case, with the right preserved in either of the parties to offer such additional evidence as would be appropriate. Seabrook v. Commissioner, 5 Cir., 176 F.2d 605. Upon remand, additional testimony was taken and the Tax Court again sustained the determination of the Commissioner of Internal Revenue of a deficiency in income tax for the fiscal year ended June 30, 1944.¹

The conflict between the parties rests upon the Commissioner's determination, which was sustained by the Tax Court, that the entire net income of a business conducted under the name of Seabrook Hardware Company was taxable to L. W. Seabrook. Opposed to this determination, the taxpayer contended that the net income should be assessed among the members of a family partnership composed of L. W. Seabrook and his two children, Inez Seabrook Davenport and William Whitmarsh Seabrook.

The facts may be summarized as follows: Petitioner, L. W. Seabrook, has been in the hardware business in Tallahassee, Florida, since 1919. From 1927 until July 1, 1942, he conducted the business as a sole proprietorship under the firm name of Seabrook Hardware Company. By July 1, 1942, the business had grown until it encompassed not only a retail hardware business but included wholesale hardware, building supplies, construction equipment, General Motors trucks, Allis-Chalmers tractors, well drilling, and a repair and machine shop.

The son, William Whitmarsh Seabrook, worked in the business from the time he was a small boy; he worked after school, on week ends, and during vacations; he waited on customers, checked inventories, signed checks, went over accounts receivable, and did whatever was necessary for the good of the business. Thus he became familiar with all facets of the business and showed a real aptitude for it. When William had completed the course of study offered by the local schools at Tallahassee, he entered The Citadel, a military college, located in Charleston, South Carolina. There he majored in civil engineering because both he and his father believed that it would be helpful to him in the hardware business.

Petitioner's daughter, Inez Seabrook Davenport, attended local schools in Tallahassee and graduated from the Florida State College for Women. While she was going to school she worked in the hardware store on week ends and at other times when additional help was needed. For the most part she did office work, which included typing, helping with statements, making up payrolls, making bank deposits, collecting bills, paying bills, signing checks, and advising the persons buying for the homewares department. After completing her work at the Florida State College for Women, in order to obtain more business experience Inez attended the New York University School of Retailing in New York City and as a part of that course she worked in Wanamaker's Department Store each afternoon until December, when she worked full-time. Upon returning to Tallahassee, she commenced working full-time in the hardware business and studying typewriting a few hours each morning at a local vocational school. She ceased to work regularly in the store after April, 1939, and in December, 1940, married James Davenport. Mr. Davenport had a degree in electrical engineering from the Georgia Institute of Technology, as well as practical experience in that field, which made him a desirable prospect for employment in the hardware business. Shortly after they were married Mr. Davenport entered the military service and in February, 1942, he was sent overseas and Inez returned to Tallahassee.

On May 30, 1942, William graduated from college. He had received four years of military training at The Citadel and expected to receive a commission in the army upon graduation. He did not receive his commission, however, until July 13, 1942, despite the fact that most of the students who maintained a certain standing in the R. O. T. C. were commissioned before they finished school. In the meantime, following his marriage on May 30, 1942, he took a four or five day honeymoon trip and returned to Tallahassee to devote his full-time to the hardware business.

From the time the children were old enough to be interested in the business, the father had led them to believe that when they reached their majority and finished their education, he would take them in as partners provided they had learned the business and desired to become a part of it. And through the years he had refused to sell any portion of the business to others, always explaining to those desiring to buy an interest that he intended to bring his children in as partners when they had obtained an education and were old enough. Some six months prior to William's graduation from college, the father, the son, and the daughter discussed when would be the best time to enter into the anticipated partnership, and they agreed that July 1, 1942, the beginning of the new fiscal year, would be most seasonable. One consideration that motivated the father in forming the partnership at that time was the fact that the country was at war. Inez's husband had gone overseas and William, who had received R. O. T. C. training and was physically qualified, expected to be called into the service at any time. The father wanted William and his wife and Inez and her husband to know that they would have something to come back to after the war was over.

In discussions with his son and daughter Mr. Seabrook warned his children of the financial dangers and hard work incident to running a competitive business and told them that if they were not interested in carrying on the business and did not desire to work at it the rest of their lives, he would sell the business and give them their share in money. When informed of their choice, the father asked an attorney to draw up the necessary papers in order to give his son and daughter each a one-fourth interest in the business in consideration of love, affection and $1.00. These instruments recite that the business should be carried on as a partnership under the trade name of Seabrook Hardware Company but a formal partnership agreement was not executed until August 3, 1943, due to the fact that the Seabrooks did not know that a more formal instrument was customary in the formation of a partnership. Following the execution and delivery of the bills of sale, the father filed a gift tax return for the calendar year 1942, reporting the value of the interest in the company which he had given to the children, and the principal creditors, banks, employees of the company, the Allis-Chalmers Manufacturing Company, the State taxing authorities, and the hardware company's insurance agent were all duly notified of the existence of the partnership.

After the formation of the partnership, Inez and William had their own ideas concerning the operation of the business, which they desired to have carried out, and enthused with their own authority they discussed with their father various problems and policies such as expansion of the wholesale business, separation of the machinery business from the hardware business, the need for better facilities for handling the machinery business, construction of a new plant, personnel problems and shortages of merchandise.

On July 13, 1942, William received his commission in the armed forces and the next day entered on active military duty. Before leaving Tallahassee, William sought and received the assurance of the floor manager of the hardware business that he would remain with the company while William was in the service. Prior to the time when he was sent overseas, William returned to Tallahassee to discuss various business problems with his father and sister. On one occasion the father called William in Massachusetts and requested that he return to Tallahassee to discuss certain machinery contracts, which he did. Also, in the fall of 1942 Mr. Seabrook made a trip to New York to discuss with William the desirability of selling the business. Prior to going overseas in January, 1943, William executed a power of attorney naming his father as his agent and while overseas he continually communicated by correspondence with his father and sister concerning the affairs of the business. He was kept informed as to the operation of the business and at the end of each fiscal year he was furnished copies of the annual statements prepared by the company's auditors.

Inez gave birth to a daughter in October, 1942, and during the period in question she was predominantly busy taking care of the child. However, she went to the store almost every business day to observe how the business was being operated. On such occasions she would confer with the bookkeeper and clerks, see that the merchandise was properly displayed, or look after any other phase of the business. During this entire period Inez and her father constantly discussed various managerial problems and when necessary she helped out with the office work.

When Inez's husband was released from active duty in ...