Greene v. Comm'r of Internal Revenue

Decision Date17 June 1946
Docket NumberDocket No. 4370.
Citation7 T.C. 142
PartiesPAUL G. GREENE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

1. Petitioner and Johnson were partners in the Johnson & Greene construction company. Petitioner had petitioner's wife and Johnson enter into a partnership agreement forming the Alliance Co. The Alliance Co. purchased and immediately leased to Johnson & Greene the exact construction equipment which Johnson & Greene needed to perform its construction contracts. Petitioner's wife contributed to the Alliance Co. no capital originating with her, nor did she perform any services for the Alliance Co. Held, petitioner was taxable under section 22(a) on the income of the Alliance Co. distributable to the wife in 1941.

2. In 1941 petitioner and his wife received rental income from property which they held in the State of Michigan as tenants by the entireties. Held, petitioner was taxable on only one-half of the rental income. Louis E. Burke, Esq., for the petitioner.

A. J. Friedman, Esq., for the respondent.

Respondent has determined a deficiency in the income tax liability of petitioner for the calendar year 1941 in the amount of $19,869.04. Certain adjustments have been conceded. Two issues, however, remain for decision. One relates to the inclusion in petitioner's gross income of all the rents derived from real property owned in the names of petitioner and his wife. The other issue is whether petitioner, and not his wife, was taxable on one-half of the income of a partnership in which petitioner's wife and Hollis L. Johnson were the alleged partners.

Petitioner filed his return with the collector for the district of Michigan.

FINDINGS OF FACT.

Issue 1.— Petitioner and his wife, Margaret C. Greene, were married in 1931. They have since continued to be, and have lived together as, husband and wife in Whitmore Lake, Michigan.

Petitioner's wife has suffered from tuberculosis since 1926. Petitioner himself has an arrested condition of tuberculosis. His wife, however, constantly has been under the care of a doctor and frequently has been confined to several hospitals and sanitariums. During the last three months of the taxable year 1941 here involved she was confined to a sanitarium. At the time of the hearing in May 1945 petitioner's wife was excused from answering the subpoena to appear and testify because of ill health.

During the period here involved petitioner and his wife each maintained a separate bank account in the State Savings Bank. Petitioner's account was entitled Paul Greene or Margaret.‘ His wife's account was in the name of Margaret C. Greene or Paul.‘ The accounts were opened in the joint names of petitioner and his wife only to give the right of survivorship to the surviving spouse in case of the death of the other. Petitioner had no interest in his wife's account while she was alive. She likewise had no interest in his while he remained alive. The bank treated each account as the separate account of petitioner and his wife, respectively.

Petitioner paid from his own account his personal expenses and certain expenses connected with the home, such as taxes, telephone bills, and other utilities. He also deposited in his wife's account various amounts throughout the year. The wife paid from her account during 1941 all the other household expenses, including food and merchandise, and the salaries of a housekeeper and a gardener, as well as her expenses at the sanitarium. Petitioner has never drawn on his wife's account.

In 1927 petitioner and Hollis L. Johnson formed a partnership to engage in the business of building and constructing highways, bridges, airports, and similar structures. The firm name of the partnership was Johnson & Greene. Petitioner was the so-called inside man of the firm. He obtained the new work, estimated on contracts, submitted bids, arranged finances, and attended to the other paper work and correspondence. Johnson, on the other hand, was the practical contractor, who supervised the actual construction work.

In 1940 Johnson & Greene derived gross income from its construction business in the amount of $346,852.05. The net ;income distributable to the partners was $80,908.43. In 1941 the gross income from the business was $402,084.21. The net amount distributable to the partners after adjustments by the Commissioner was approximately $60,000.

The central office of Johnson & Greene in 1941 was petitioner's home in Whitmore Lake. The firm, however, maintained a trailer as a working office, which it moved around from job to job.

During 1940 Johnson & Greene owned machinery and equipment consisting of graders, tractors, scrapers, trucks, and power shovels which were used in its business. In addition it rented other trucks and equipment for the approximate sum of $10,500. In 1941 Johnson & Greene paid about $72,500 as rental for equipment. More than $68,000 of this amount for equipment rental was paid to the Alliance Equipment Co., the income of which company gives rise to the present controversy.

In the latter part of 1940 and in the early part of 1941 Johnson & Greene submitted bids for several large construction jobs. By the early part of 1941 the firm had been awarded contracts for construction work at contract prices totaling well over $600,000. Petitioner conceived of the idea of having his wife and present partner, Johnson, form a new partnership for the purpose of having the new partnership buy and lease to Johnson & Greene, the machinery and equipment which Johnson & Greene needed to perform the construction contracts already obtained for the year 1941. Johnson & Greene at that time had an open line of credit in the amount of $100,000 with the State Savings Bank and there was no reason why Johnson & Greene, itself, could not have purchased the necessary equipment, other than petitioner's desire to have the new partnership formed for that purpose.

Thereafter petitioner consulted a certified public accountant concerning the organization of a partnership between petitioner's wife and Johnson. Neither Johnson nor petitioner's wife, the alleged partners, consulted the accountant. Subsequently the accountant prepared the 1941 income tax returns of petitioner, his wife, and the partnership which ultimately was formed between petitioner's wife and Johnson. The accountant's information was furnished solely by petitioner. The accountant, however, did not prepare the income tax returns of the firm of Johnson & Greene.

On April 3, 1941, petitioner's wife and Johnson entered into an agreement for the formation of a partnership which was to engage in the business of buying, selling, and leasing new and used road equipment. Johnson entered into the partnership agreement because petitioner thought it was a good idea for petitioner's wife to be in business. The name of the new partnership was ‘The Alliance Equipment Company,‘ hereinafter referred to as Alliance. The partnership agreement provided that petitioner's wife and Johnson were to own an equal interest in the partnership property and were to share profits and losses in equal proportions. It was also agreed that there should be an annual accounting of the business and that the partnership should continue until it was mutually terminated. At the time of termination, the assets were to be distributed in an equitable manner as mutually agreed upon. It was further provided that the funds of the partnership would be deposited in the State Savings Bank and that they could be withdrawn upon the signature of either partner or by such other person as the partners should jointly designate. Petitioner was so designated by the partners to have authority to withdraw the funds of Alliance from its bank account.

At the time of the formation of Alliance, Johnson and petitioner's wife each contributed $7,500 to the new venture. The wife borrowed from petitioner the $7,500 which she contributed to Alliance. For the loan from petitioner, the wife gave petitioner her noninterestbearing promissory note. The loan was repaid in 1942 by three installment payments of $2,500 each out of the profits of Alliance.

At the time of the formation of Alliance, petitioner ordered the equipment which Johnson & Greene needed to fulfill its contracts and which Alliance was to purchase and immediately lease to Johnson & Greene. As one of the financial arrangements relating to the purchase of this equipment by Alliance, petitioner and Johnson arranged for a loan of $55,000 from the State Savings Bank. Johnson signed the application for the loan for Alliance. Petitioner's wife entered into no negotiations with respect to the loan. The bank advanced Alliance $30,000 on May 2, 1941, and $25,000 on May 15, 1941. The loans were to be paid back within 90 days. Johnson executed the note which Alliance gave to the bank for the $55,000. Johnson & Greene, per petitioner, endorsed the note, Johnson & Greene then had an open line of credit with the bank to the extent of $100,000. The bank did not require a financial statement, security, or collateral from Alliance, nor did it investigate the credit standing of Alliance. It made the loan on the strength of Johnson's interest in Johnson & Greene and the endorsement of Alliance's note by Johnson & Greene. At the time of the negotiations for the loan, the equipment which petitioner had ordered was already enroute from the manufacturer.

The new equipment which Alliance purchased was received by Alliance some time prior to April 28, 1941, on which date Alliance leased to Johnson & Greene all of the equipment. This equipment consisted of tractors, scrapers, and generators. It cost Alliance $69,080.41. Although Alliance received only $15,000 from Johnson and petitioner's wife at its inception, and did not receive the $55,000 loan from the bank until May 2, and May 15, 1941, Alliance paid the manufacturer for this equipment $8,664.34 by a check dated April 23,...

To continue reading

Request your trial
38 cases
  • Hanson v. Birmingham
    • United States
    • U.S. District Court — Northern District of Iowa
    • 29 juillet 1950
    ...Slifka v. Commissioner, 2 Cir., 1950, 182 F.2d 345, 346; Zander v. Commissioner, 5 Cir., 1949, 173 F.2d 624, 626, 627; Greene v. Commissioner, 1946, 7 T.C. 142, 150, 151. The United States Supreme Court has not passed upon the question as to what significance is to be given to the matter of......
  • Rosen v. Commissioner
    • United States
    • U.S. Tax Court
    • 31 janvier 1994
    ...property held in tenancy by the entireties under Michigan law is taxable in equal shares to a husband and wife. Greene v. Commissioner [Dec. 15,226], 7 T.C. 142, 152 (1946); Gessner v. Commissioner [Dec. 9058], 32 B.T.A. 1258, 1260 We need not decide here whether the factors relied on by th......
  • Fakiris v. Comm'r
    • United States
    • U.S. Tax Court
    • 19 novembre 2020
    ...Gregory v. Helvering, 293 U.S. 465; Corliss v. Bowers, 281 U.S. 376. * * *Royce v. Commissioner, 18 T.C. at 768 (quoting Greene v. Commissioner, 7 T.C. 142, 150 (1946)). In our view, the determination that a donor has not relinquished dominion and control over the subject of a claimed gift ......
  • Parsons v. Comm'r of Internal Revenue, Docket No. 81746.
    • United States
    • U.S. Tax Court
    • 31 décembre 1964
    ... ... George E. Saulsbury, 27 B.T.A. 744 (1933); Paul G. Greene, 7 T.C. 142 (1946), acq. 1946-2 C.B. 2; Edwin F. Sandberg, 8 T.C. 423 (1947), acq. 1947-1 C.B. 4. It likewise follows that petitioner is entitled to ... ...
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT