Anderson v. Comm'r of Internal Revenue

• Decision Date: 06 May 1946
• Docket Number: Docket No. 4423.
• Citation: 6 T.C. 956
• Parties: WILLIS B. ANDERSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

6 T.C. 956

WILLIS B. ANDERSON, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 4423.

Tax Court of the United States.

Promulgated May 6, 1946.

Held, husband and wife were equal partners in a business in 1941 and entitled to divide its income equally between them where both contributed capital to the business and both performed services in its operation. Edgar W. Pugh, Esq., and J. Emmett Tunney, Esq., for the petitioner.

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

The respondent determined a deficiency in income tax against Willis B. Anderson for the year 1941 in the amount of $15,181.72.

The contested issues are (1) whether the income for the year 1941 of a business known as Standard Die Cast Die Co. is taxable in its entirety to the petitioner, and (2) determination of the amount allowable as a deduction for reasonable compensation for services paid in 1941 to Walter Anderson, an employee of the Standard Die Cast Die Co.

Certain of the respondent's adjustments were not contested. Other issues raised by the pleadings have been abandoned by the petitioner.

FINDINGS OF FACT.

The petitioner is an individual, residing at Detroit, Michigan. His return for the year in controversy was filed with the collector of internal revenue at Detroit.

In 1935 the petitioner was married to Emily Alice Thornton. At the time of her marriage the petitioner's wife was employed as a comptometer operator. She contributed $200 of her own as a down payment on their home, title to which was held in both their names jointly.

The petitioner has been in the machine tool and die business all his adult life. In 1938 he was employed as a machine tool and die hand for the Ternstedt Manufacturing Co. of Detroit. In that year, during his spare time and after working hours, he started purchasing secondhand machinery in various junk yards around Detroit. The machinery so purchased was set up and reconditioned for use in the basement of his home.

During the early part of 1939 the petitioner entered into a partnership agreement with one Nelson for the manufacture of molds and machinery for die casting and plastics. Under the agreement Nelson contributed $400 for a 20 percent interest in the business, the petitioner retaining 80 percent. This partnership was terminated after a short time. Later in the same year the petitioner formed another partnership with one Willmore, to engage in a similar line of endeavor. Under this agreement each partner was to have a 50 percent interest in the business. This partnership also proved unsatisfactory and was soon dissolved, the petitioner purchasing Willmore's interest for $846. In the fall of 1939 the petitioner, as an individual, filed with the proper official a certificate of doing business under the name of Standard Die Cast Die Co. (hereinafter for convenience sometimes called the company).

The business of the company was conducted in the basement of the petitioner's home until September 1939. Thereafter, until September 1941 it was located at 8530 Tireman Street. It was subsequently moved to another site.

In the summer of 1940 the company was in distressing financial condition. The machinery was mortgaged and no new orders were expected that year, due to the seasonal nature of the business. Petitioner had no more money to invest. About that time Mrs. Anderson made a trip to St. Louis, Missouri, to visit her mother. While she was there she discussed the financial difficulties she and the petitioner were having. Her mother offered to lend her $1,000 to be used in the business, which she accepted. She took the $1,000 with her to Detroit, in cash. She did not inform the petitioner immediately upon her return from St. Louis that she had obtained this money. After several weeks, she told him she had $1,000 which she would put into the company, providing the petitioner would abandon the die business and go into the machining business. At the same time she insisted that a written agreement be executed showing her to be an equal partner in the business. To this the petitioner agreed. About the first of September 1940 Mrs. Anderson advanced $400; the middle of September she advanced $300; and the remaining $300 about a month later.

The money which was advanced by the petitioner's wife was used to buy parts, repair, and put into condition used and run-down machinery. Some of the machines were sold and other productive machines were purchased with the proceeds.

During the last week of 1940 the petitioner and his wife executed an agreement drawn up by a lawyer at their request, the provisions of which, except for signatures, follow:

PARTNERSHIP AGREEMENT

This agreement made and entered into this 1st day of January, A.D., 1941 by and between Willis B. Anderson and Emily Alice Anderson, his wife, in which it is mutually agreed as follows:

Whereas the said Emily Alice Anderson has been an active participant in the organization, management and building up of the business of Standard Die Cast Die Company, which business is now registered in the name of Willis B. Anderson, and has contributed materially to the success of said business:

Wherefore, it is mutually agreed that Willis B. Anderson and Emily Alice Anderson shall share all the profits to be derived from the business known as Standard Die Cast Die Company and that each of the parties hereto shall share equally in the ownership of said business and each shall be entitled to any and all net profits from said business. It is further agreed that the said parties shall also share equally any and all debts and liabilities of said business. In case of the death of either of the parties hereto, the interest of said deceased partner shall go to the surviving partner and that said surviving partner shall be the sole owner of said business, known as Standard Die Cast Die Company.

The partnership was not disclosed to anyone during 1941, with the exception of a bookkeeper. No changes were made in the certificate of doing business under an assumed name, previously filed by the petitioner. Employer's tax returns filed in 1941 were signed by the petitioner as owner of the company. A chattel mortgage covering tools and equipment of the company, executed March 14, 1941, was signed only by the petitioner as owner of the company. The petitioner believed that such actions were necessary, since he was advised by a lawyer that the laws of Michigan in force at that time did not permit a wife to enter into a contract of general partnership with her husband.

Prior to 1941 Mrs. Anderson had regularly helped the petitioner in the conduct of the business. In the early days she helped to prepare for operation the second-hand machines the petitioner had purchased by cleaning, scraping, and painting them. When the company was making dies she also operated a shaper and drill press. She did most of the detail work on the books, although she did none of the actual bookkeeping. An accountant was hired periodically for that purpose.

During the taxable year in controversy Mrs. Anderson took care of the office end of the business, doing the letter writing, filing, matching the shippers' and receivers' invoices, telephone work, purchasing and general office work. She also figured the pay roll and, in addition, made deposits at the bank and performed similar errands.

During 1941 the company was engaged in machining war parts, tank parts, gun parts, motor parts, etc. At March 31, 1941, it had 41 employees; on June 30, 1941, the number of employees stood at 88.

Beginning in 1939 the company kept an informal set of books. In 1940 a bookkeeper was employed to supplement the records which were kept by Mrs. Anderson. A set of books was opened by the bookkeeper in the early part of 1941, which was kept throughout that year. In the fall of 1942, Alfred S. Dunnett, a certified public accountant, was called in to audit the books of the company. He conferred with the bookkeeper and took over the records from 1940, 1941, and 1942. When Dunnett received the books they contained salary accounts for the petitioner and his wife and a ‘withdrawal‘ account for Walter Anderson, an employee.

On March 16, 1942, the petitioner signed and filed a partnership return, Form 1065, for the Standard Die Cast Die Co. for 1941, disclosing gross receipts of $166,570.96, gross income of $97,832.56, and net income of $40,166.64. Included in ‘cost of goods sold‘ was the item ‘cost of labor, supplies, etc.‘ in the amount of $57,637.04. The return listed the sum of $20,771.82 as a deduction for salaries and wages. Included in this amount was $2,250 which had been received by Mrs. Anderson in that year and had been charged to her ‘salary‘ account by the bookkeeper. After the books had been audited by Dunnett an amended partnership return for 1941 was filed on December 7, 1942, in which the figure of $2,250 was eliminated from the deduction for salaries and wages. The amount of net income disclosed by the amended return was $48,146.29.

Of the total profits earned by the company from January 1, 1941, to July 31, 1945, one-half, or $237,042.92 was credited to the account of Mrs. Anderson. In addition, her investment account was credited with ‘original 1945 in the amount of $13,000, making total credits to her account in the sum of $255,501.39, exclusive of withdrawals. The total withdrawals charged to her account for the same period were $213,692.87. Of this amount $120,023.20 was withdrawn by checks payable to others than Mrs. Anderson and was used for the payment of income tax, the purchase of tax bonds, the purchase of farms and cattle, and miscellaneous items. In addition, the amount of $93,669.67 was paid by checks drawn to her order. These amounts were expended for personal items and for other purposes, including 50 percent of of the cost of a home, Federal income tax, mortgage payments on the house, repayment of the loan to her mother, purchase of stocks and real property, gifts to children, etc....