Humphreys v. Commissioner of Internal Revenue, 228.

• Decision Date: 01 March 1937
• Docket Number: No. 228.,228.
• Citation: 88 F.2d 430
• Parties: HUMPHREYS v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

88 F.2d 430 (1937)

HUMPHREYS v. COMMISSIONER OF INTERNAL REVENUE.

No. 228.

Circuit Court of Appeals, Second Circuit.

March 1, 1937.

Newton K. Fox, of New York City, for petitioner Adrian C. Humphreys.

James W. Morris, Asst. Atty. Gen., and Sewall Key and Morton K. Rothschild, Sp. Assts. to Atty. Gen., for the Commissioner of Internal Revenue.

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

This is a petition for review of an order of the Board of Tax Appeals determining deficiencies in the income taxes of Adrian C. Humphreys, the petitioner, for the years 1927, 1928, and 1929. A companion case of W. Jule Day, a partner of Humphreys, is to be disposed of in accordance with the final decision in the present proceeding.

Adrian C. Humphreys and W. Jule Day, and their wives, Caroline G. Humphreys and Phoebe D. Day, on January 1, 1920, orally agreed to become partners under the name of Humphreys Day & Co., and they thereafter engaged in public accounting and auditing and income tax work. Mrs. Humphreys and Mrs. Day contributed the original capital to the business from their separate funds of $5,000 and $6,000, respectively. They were neither lawyers, nor accountants. Mrs. Humphreys on one occasion procured some valuable business for the firm, but neither she nor Mrs. Day are shown to have done anything else for the firm except to contribute capital. Humphreys and Day were members of the Bar of Kentucky and the former was also a certified public accountant of the State of North Carolina and a member of the Bar of the Supreme Court of the United States. He was likewise admitted to the New York Bar in January, 1924. Day was not a member of the New York Bar but had been admitted to the Bar of the District of Columbia. Both men were admitted to practice before the Board of Tax Appeals. In the course of their copartnership they prosecuted some, but comparatively few, suits in the United States District Courts and in the United States Court of Claims, but never were engaged in any litigation on the law or equity side of the courts of the State of New York.

On January 4, 1923, Humphreys, Day, and their wives entered into an agreement in writing to form a partnership under the name of Humphreys & Day which provided that they "are and shall conduct business as co-partners in handling income tax matters and matters of corporate finance and also in the legal and general accounting business." It also provided that the copartnership theretofore formed should be continued for ten years subject to dissolution, modification, or extension by mutual agreement. It recited that the parties had theretofore contributed varying amounts of capital to the copartnership, that their capital contributions should thereafter be in equal proportions, and that the total of such capital contributions should never be reduced below $100,000. It further provided that all profits and losses were to be shared in the following proportions:

Adrian C. Humphreys, 27½ per cent. W. Jule Day, 22½ per cent. Caroline G. Humphreys, 27½ per cent. Phoebe D. Day, 22½ per cent.

That Humphreys and Day should give all their time and attention to the business and that their wives should give so much of their time as the duties assigned to them should require. There was a further provision for the continuation of the business in the case of the death of one of the parties and for the terms under which it should be continued. Upon the termination or dissolution of the partnership the assets were to be divided among the four partners in equal proportions.

The partners' respective accounts were credited with $30,000 or an aggregate of $120,000, and these accounts remained thus fixed until the liquidation of the partnership in the year 1928 when distribution of the assets was effected, leaving only unfinished cases to be settled. Mrs. Humphreys and Mrs. Day maintained separate bank accounts with banking institutions separate from those of their husbands. Litigations arose between Day and his wife and Humphreys and his wife over the partnership affairs, as the result of which a receiver of the partnership was appointed by the New York Supreme Court and a referee designated to state the accounts of the firm.

The records of the partnership showed that it employed fourteen accountants, none of whom were lawyers and all but two of whom had been employed at some time by the Bureau of Internal Revenue. It also employed at least eighteen other persons, twelve or fifteen of whom were employed at one time in the New York office.

The four partners reported their distributive shares of the income of the partnership in their individual returns for each of the years 1923 to 1929, inclusive, which returns were audited by the Commissioner and, with the exception of the years involved in this proceeding, were approved. The Commissioner assessed the distributive shares of the firm income which belonged to the wives as the income of the husbands and determined deficiencies for the years 1927, 1928 and 1929 upon that basis. The Board of Tax Appeals held that the amounts which the Commissioner transferred to the income of the husbands were earned through the personal services of...