Pflugradt v. United States, 13761-13764.

• Citation: 310 F.2d 412
• Decision Date: 04 December 1962
• Docket Number: No. 13761-13764.,13761-13764.
• Parties: Allen PFLUGRADT and Ethel Pflugradt, his wife, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee. John Roggenbauer MOELLER, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. James W. PFLUGRADT and Lillian Pflugradt, his wife, Plaintiffs-Appellants. v. UNITED STATES of America, Defendant-Appellee. Jane WOLFE, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

310 F.2d 412 (1962)

Allen PFLUGRADT and Ethel Pflugradt, his wife, Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.

John Roggenbauer MOELLER, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

James W. PFLUGRADT and Lillian Pflugradt, his wife, Plaintiffs-Appellants. v. UNITED STATES of America, Defendant-Appellee.

Jane WOLFE, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

Nos. 13761-13764.

United States Court of Appeals Seventh Circuit.

December 4, 1962.

Thomas F. Carroll, Richard H. Lauritzen, Milwaukee, Wis., for appellants.

Louis F. Oberdorfer, Asst. Atty. Gen., Arthur E. Strout, Atty., Tax Division, U. S. Dept. of Justice, Washington, D. C.

James B. Brennan, U. S. Atty., Milwaukee, Wis., John B. Jones, Jr., Acting Asst. Atty. Gen., Lee A. Jackson, David O. Walter, Attys., Dept. of Justice, Washington, D. C., for appellee.

Before HASTINGS, Chief Judge, and SCHNACKENBERG and KILEY, Circuit Judges.

HASTINGS, Chief Judge.

These four proceedings are before us on appeals by taxpayers for review of a judgment of the district court dismissing their respective suits for refunds of taxes paid pursuant to deficiency assessments.¹

The basis for the deficiency assessments was the Commissioner's determination that certain minor children were not the owners of limited partnership interests under Int.Rev.Code of 1954, § 704(e), enacted in 1951.² The Commissioner ruled that the income from such interests was taxable to taxpayers, who were the purported transferors, rather than the children.

The deficiency assessments were for the taxable years 1956, 1957 and 1958.

In January, 1945, Allen G. Pflugradt, Ethel M. Pflugradt, Isolde M. Posluszny and Andrew J. Malloy organized a limited partnership known as Pflugradt Construction Company, Ltd. This was done pursuant to Chapter 102 of the Wisconsin Statutes. The limited partnership engaged in the business of contracting and installing heating, ventilating, air conditioning and plumbing equipment. The partnership was one in which capital was a material income producing factor.

At the time of its formation, Allen G. Pflugradt was the sole general partner, and the other three were limited partners. On six separate occasions prior to May, 1956, the partnership certificate was amended to provide for the admission of additional limited partners and the withdrawal of other partners. The certificate of partnership and amendments thereto were duly executed and filed with the proper authorities.

The partnership certificate at all times provided that the general partner would have sole control of the business, sole authority to determine the time and amount of profit distributions and sole discretion to approve the admission or removal of limited partners. Removal, however, was subject to the return of the limited partner's capital contribution and undistributed share of profits.

In 1945, James W. Pflugradt was admitted as a limited partner. In 1946, Joan Pflugradt (also referred to as Joan Pflugradt Moeller and Joan Roggenbauer Moeller) was admitted as a limited partner. The amendment to the partnership certificate in each case was signed by Allen G. Pflugradt, as trustee for James W. and for Joan. No instrument of trust was executed at any time. At the time of their admission into the partnership, James W. and Joan were 20 and 16 years of age, and were children of Allen G. Pflugradt.

Subsequent to acquisition by James W. and Joan of their interests, internal revenue agents examined such acquisition. No change was made by the Commissioner in allocation of partnership income, and the partnership was advised that the Commissioner was accepting the partnership returns as filed.

As of June 30, 1955, the partnership consisted of Allen G. Pflugradt, the general partner; Ethel Pflugradt, his wife; Allen G. Pflugradt as "trustee" for Joan Roggenbauer Moeller, the daughter of Allen G. and Ethel Pflugradt; James W. Pflugradt, the son of Allen G. and Ethel Pflugradt; and Jane Wolfe, the mother of Ethel Pflugradt. In addition, there were six non-family members at that time.

On July 1, 1955, the partnership certificate was amended to admit the following minors as limited partners: Victoria Lee Pflugradt and Rick A. Pflugradt, the daughter and son of James W. Pflugradt; and Terry Ann Roggenbauer and Scott A. Roggenbauer, the daughter and son of Joan Roggenbauer Moeller. The ages of these four children at the time they acquired their alleged partnership interests ranged from one to three and one-half years. The necessary amendment of the partnership certificate was executed by James W. and Joan on behalf of their respective minor children. Each child allegedly acquired an eight per cent interest.

Notes were taken by taxpayers in "payment" of the purchase price of the partnership interests. It is not shown how these notes were executed by such infants. These notes were paid by application of savings accounts of the four children and by application of earnings distributed by the partnership on account of their interests. The funds in the savings accounts were originally supplied by gifts from the children's parents and grandparents.

During the taxable years in question, each child was credited with a distributive share of the partnership earnings in proportion to his or her capital account. Cash withdrawals were made from time to time on behalf of the children by their parents and were used for payment of school tuition, vacation travel, dancing lessons, state and federal taxes and payment on their notes. The excess of cash withdrawals over these payments was placed in the children's savings accounts. Ledger accounts were kept to accurately reflect the transactions involving each child's interest, and partnership books of account were maintained during all the years involved.

The Commissioner determined and the court below found that there had not been a bona fide absolute transfer of a partnership interest to each of the four minor children. The Commissioner's reallocation to taxpayers of partnership income reported by the children was accordingly upheld.

The question before us is whether there was a bona fide transfer of partnership interests to the minor children so that the distributive share of profits acquired by each child should be taxed to the child.

There is no dispute as to the facts. The parties entered into a stipulation which the district court adopted as its findings of fact. The brief testimony of Allen G. Pflugradt is not in dispute. Under such circumstances, the strictures of Rule 52(a), Federal Rules of Civil Procedure, 28 U.S.C.A. do not apply. Around The World Shoppers Club v. United States, 3 Cir., 309 F.2d 324 (1962); Sochurek v. C. I. R., 7 Cir., 300 F.2d 34, 37 (1962) and cases there cited; Patterson v. Belcher, 5 Cir., 302 F.2d 289, 292 (1962); contra, Austin v. C. I. R., 2 Cir., 298 F.2d 583 (1962). The ultimate finding by the district court that there were no bona fide transfers is thus fully reviewable.

Int.Rev.Code of 1954, § 704(e) (1) commands that these minor children are to be recognized as partners if they own a capital interest in the partnership. The test is no longer whether the parties acted in good faith with a business purpose in joining together to conduct the partnership business. This was the test set forth in Commissioner v. Culbertson, 337 U.S. 733, 69 S.Ct. 1210, 93 L.Ed. 1659 (1949), which was decided before present § 704(e) (1) was a part of the Code.

The committee report accompanying H.R. 4473 which became § 704(e) (1) states: "If the ownership is real, it does not matter what motivated the transfer to him the owner or whether the business benefited from the entrance of the new partner." H.R.Rep.No.586, 2 U.S. Code, Congressional and Administrative Service, 82d Cong., 1st Sess. p. 1814 (1951). The emphasis has shifted from "business purpose" to "ownership of a capital interest." See Spiesman v. Commissioner of Internal Revenue, 9 Cir., 260 F.2d 940, 947-948 (1958).

To be recognized for tax purposes, a transfer of a partnership interest must vest dominion and control in the transferee. Whether or not the transferee has dominion and control is to be determined from all the surrounding facts and circumstances. Treas.Reg. § 1.704-1(e) (1) (iii) (1954 Code).³ The control of which the regulation speaks is the transferee's participation in the partnership activities in accordance with his interest in the property. It includes not only...