Cohan v. Commissioner of Internal Revenue, 114.

• Decision Date: 03 March 1930
• Docket Number: No. 114.,114.
• Citation: 39 F.2d 540
• Parties: COHAN v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

39 F.2d 540 (1930)

COHAN v. COMMISSIONER OF INTERNAL REVENUE.

No. 114.

Circuit Court of Appeals, Second Circuit.

March 3, 1930.

Arthur F. Driscoll and O'Brien, Malevinsky & Driscoll, all of New York City (Holmes, Brewster & Ivins, of Washington, D. C., of counsel; Frank B. Meseke, of New York City, on the briefs), for petitioner.

G. A. Youngquist, Asst. Atty. Gen., and Sewall Key, Andrew D. Sharpe, and Randolph C. Shaw, Sp. Assts. Atty. Gen. (C. M. Charest, Gen. Counsel, and Allin H. Pierce, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for respondent.

Before L. HAND, SWAN, and MACK, Circuit Judges.

L. HAND, Circuit Judge.

In the year 1918 Cohan was a theatrical manager and producer, doing business in partnership with one Harris. He had originally been an actor like his father and mother, with whom while a boy he had begun to act in vaudeville. After 1899 the parents with their two children, Cohan and his sister, divided their earnings, one quarter to each of the children and a half to the parents, the petitioner collecting for all and distributing. In that year they employed a manager and after his death another, who married the daughter in 1905 and with her left the group. The other three then employed Harris as their manager, and made a change in the distribution. Cohan had begun to write plays, on which he was getting royalties, which he first withdrew from the net earnings. The parents next took out five hundred dollars a week, and the four divided what was left, half to Harris, a quarter to Cohan, and the rest to the parents. Before 1914 Cohan and his father had left the stage and spent their time in directing their plays, until the father died on July 31, 1917.

On his father's birthday, in January, 1914, Cohan as an expression of affection wrote a letter to him, the only relevant parts of which declared that the two were, and had for years been, partners in all Cohan's enterprises. The mother had left the stage and was not engaged in helping her son when the father died. Shortly afterwards Cohan told her that his father's estate "was to be hers, that he wanted her to remain interested in their business affairs and that these affairs would be conducted as they had been in the past." Thereafter he always divided equally with her his profits from the firm of Cohan & Harris, as he had done with his father. On June thirtieth, 1920, he and Harris separated and Cohan continued alone, continuing to give her half his net profits.

The first question is whether upon the foregoing facts the Board was right in fixing Cohan's income as the whole of what he received from the firm of Cohan & Harris, while it lasted, and later as the whole of his own profits. He maintains that his mother was always his partner, and that he is entitled to deduct from his receipts the sums which he paid to her. If the father was a partner at the time of his death, that partnership ended and Cohan, the survivor, had to account to the legatees or next of kin. We do not know whether there was a will, but we may assume that there was none, as no mention is made of one. If so, the widow and each child took a third, but we are left in the dark as to what were the assets. They could not have included those of the firm of Cohan & Harris, of which the father was not a member, because although he helped Cohan in writing his plays, there is nothing in the findings to show that Harris was privy to this, or that he recognized him as an associate. The assets of the supposed firm of Cohan & Cohan were not therefore shown to have been more than such profits as might come to hand out of Cohan's share from Cohan & Harris, and of these the daughter had a third. Therefore, when Cohan told his mother that his father's estate "was to be hers," at most he did no more than increase her share of his undistributed profits from one to two thirds. There is no evidence that any part of these entered into his income for 1918, and the later years; or, if so, what that part was. The petitioner has therefore on any theory failed in his proof pro tanto.

Moreover, he did not create a new partnership between himself and his mother at the same interview. The relevant law of New York at the time was section two of the Partnership Law of 1909 (Laws N. Y. 1909, c. 44 Consol. Laws N. Y. c. 39), which defined a partnership as an "association * * * of two or more persons who have agreed to combine their labor, property and skill, or some of them, for the purpose of engaging in any lawful trade or business, and sharing the profits and losses, as such, between them." In October, 1919 (Laws 1919, c. 408), the Uniform Partnership Act became a law in New York, the definition in section ten of which is: "An association of two or more persons to carry on as co-owners a business for profit." "Combine" in the first act is probably the equivalent of "co-owners" in the second, and it is difficult to see any substantial difference between the two. At any rate it is clear that neither Cohan nor his mother intended to carry on a joint business, for it does not appear that she had the least direction of his affairs, or any part in the conduct of the business. What he apparently meant was to give her half his earnings in consideration of his filial affection for her, and for her assistance in his early unprosperous years. However this unusual gratitude may affect our estimate of his character, we have only to consider whether he had changed his legal rights. There can be no doubt that he remained always free to stop his payments, and that her share depended on the endurance of his feelings toward her.

The Uniform Partnership Act has been similarly understood in New York (Martin v. Peyton, 246 N. Y. 213, 158 N. E. 77), and elsewhere (Giles v. Vette, 263 U. S. 553, 44 S. Ct. 157, 68 L. Ed. 441; In re Hoyne, 277 F. 668 C. C. A. 7; Petition of Williams, 297 F. 696 C. C. A. 1), though none of these decisions are in point upon the facts. It has much changed the common law, even if the equivocal decision of Cox v. Hickman, 8 H. L. C. 267, be accepted as controlling in this country. While it still remains true under section eleven (Laws 1919, c. 408) that profit sharing is prima facie evidence of the "association" defined in section ten, we are not to understand that it is ever more. The later subdivisions of that section deny to it any probative effect in the situations defined, but do not under any circumstances make profit-sharing ventures partnerships when it is otherwise apparent that the parties did not intend to "carry on as co-owners" any business whatever. The law has no doubt been brought into accord with business usage, yet there is not, as there should not be, any standard other than that the parties shall enter upon a joint business venture, vague as that is.

While the point is not argued, it is theoretically possible to debate whether the transaction was a transfer of one half Cohan's rights in Cohan & Harris and later in his own business, though it did not create a partnership. In any such aspect it must be remembered that the attempt was not to give her any direct interest in the firm of Cohan & Harris, or, if it was, it was ineffectual, because of Harris's failure to assent. Cohan could have given her no present right in such profits as he might thereafter withdraw, and there could not be an immediate gift, even if present words of gift had been used. Whether such a gift would have inured to the benefit of the donee as soon as Cohan withdrew any profits, and before he paid them over, we need not say; the gift was revocable until then in any case, and the case falls within Mitchel v. Bowers, 15 F. (2d) 287 (C. C. A. 2), where the agreement contained an express power of revocation. Finally, the words were not those of present gift in any event, but at most only a promise to share with his mother as the profits came in, and this is equally true after the firm of Cohan & Harris was dissolved as before.

The next question is as to certain royalties upon a play produced in 1910, called "Get Rich Quick Wallingford." Cohan had written this in collaboration with his father who contributed the fourth act. As joint authors, each had a share in the resulting property (Maurel v. Smith, 271 F. 211 C. C. A. 2), and we may assume that in the absence of any contract they would share alike. Cohan agreed, however, while the work was in preparation, that his father was to have all the profits, and this we take at least as a gratuitous contribution of his services. The father thus became the owner of the play, and it passed to his representatives upon his death. Since the widow and the children shared alike, Cohan's part in the royalties was only one-third, with which at most his income could be charged. Whether that part passed to his mother depends again upon the effect of the transaction we have been discussing, but which we have hitherto found it unnecessary to decide. Being a right of literary property incapable of delivery, we know of no way by which a valid gift could be made save by deed. Beaver v. Beaver, 117 N. Y. 421, 429, 432, 22 N. E. 940, 6 L. R. A. 403, 15 Am. St. Rep. 531; In re Van Alstyne, 207 N. Y. 298, 100 N. E. 802. While therefore we think that the income should have been reduced by two-thirds of the royalties for 1918 — the only year in question — Cohan must bear his third. The Board's finding is modified pro tanto.

The next question arises over the royalties for the years 1919 and 1920 which came to Cohan for some songs which he wrote for a play called "The Royal Vagabond." All that the findings say, is that he "agreed with his wife, Agnes M. Cohan, to give her the royalties from the sale of the songs." Quite aside from anything else, this does not show even an effort to make a present gift.

Cohan and Harris were joint lessees of a theatre in Chicago, and had assigned the lease to a little company whose shares they held half and...