Boyt v. Comm'r of Internal Revenue, Docket Nos. 23940
| Decision Date | 19 September 1952 |
| Docket Number | 23945,Docket Nos. 23940,23942,23943,23947.,23946,23944,23941 |
| Parties | J. W. BOYT, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. DEDUCTION— SALARY OF EMPLOYEE.— Amount allowed by respondent sustained, upon failure to show extent or value of services rendered.
2. PARTNERSHIP.— Held, that three wives became bona fide partners in a general partnership with their respective husbands and several other persons.
3. TRUSTS— SHARE OF PARTNERSHIP NET INCOME.— Certain members of a general partnership made transfers in trust by gifts of percentage interests in the partnership. The trusts were neither partners nor subpartners or joint venturers with the respective grantors. Each grantor retained dominion and control over the corpus of the trust. Held, that the grantors actually earned the partnership income in question and are taxable thereon. Paul L. Martin, Esq., for the petitioners.
Frank M. Cavanaugh, Esq., for the respondent.
These consolidated proceedings involve income tax deficiencies for the calendar year 1943, determined against the respective petitioners in the following amounts:
+------------------------------------------+
¦Petitioners ¦Deficiency ¦
+-----------------------------+------------¦
¦J.W. Boyt ¦$149,371.95 ¦
+-----------------------------+------------¦
¦A.J. Boyt ¦90,038.20 ¦
+-----------------------------+------------¦
¦Estate of Paul A. Boyt, et al¦72,595.70 ¦
+-----------------------------+------------¦
¦Barbaradina Boyt ¦1,088.37 ¦
+-----------------------------+------------¦
¦Elizabeth M. Boyt ¦441.06 ¦
+-----------------------------+------------¦
¦B.B. and Eva Quiner ¦13,214.38 ¦
+-----------------------------+------------¦
¦P.J. Kurtz ¦1,357.57 ¦
+-----------------------------+------------¦
¦J.E. and Mearle N. Green ¦1,102.86 ¦
+------------------------------------------+
The calendar year 1942 is also involved in each of these proceedings because of the forgiveness feature of section 6, Current Tax Payment Act of 1943.
In determining the deficiencies involved herein the respondent made numerous adjustments in the determination of the net income, for each of the years 1942 and 1943, of the general partnership of Boyt Harness Company and the net income of the Boyt Harness Company Limited Partnership, respectively. With respect to the effect thereof on the incomes of petitioners only one of such adjustments is assigned as error in each of these proceedings. Accordingly, the tax in controversy in each proceeding is less than the amount of the determined deficiency.
Paul A. Boyt initiated the proceeding in Docket No. 23492 and following his death the administrators of his estate were substituted as the petitioners in that proceeding.
One question presented and common to all the proceedings, is whether respondent in his determination of the net income of the general partnership for the year 1942, erred in disallowing $3,320 of a claimed deduction of $6,320 as compensation to an employee.
A second question presented and common to the proceedings in Docket Nos. 23940, 23941, and 23942, is whether the respondent erred for each of the years 1942 and 1943, in failing to recognize the respective wives of J. W. Boyt, A. J. Boyt, and Paul A. Boyt as partners in the general partnership taxable on their income therefrom and in taxing to each husband his wife's alleged distributive share of the net income of that partnership.
A third question presented and common to the proceedings in Docket Nos. 23940, 23941, and 23945, is whether the respondent erred for each of the years 1942 and 1943, in failing to recognize various trusts for the benefit of certain children as taxable on designated portions of the net income of the general partnership and in taxing such income to the grantors of the trusts, respectively.
The stipulated facts are found accordingly and included herein by reference.
Each individual petitioner is a resident of Des Moines, Iowa. Their income tax returns for the periods involved were filed with the collector of internal revenue at Des Moines, Iowa.
The decedent Paul A. Boyt died intestate on July 20, 1951, a resident of Polk County, Iowa, and Dorothy F. Boyt and Fred H. Quiner are the duly qualified and acting administrators of his estate. The decedent's income tax returns for the periods involved were filed with the collector of internal revenue at Des Moines, Iowa.
The Boyt Harness Company, an Iowa corporation (hereinafter sometimes referred to as the Boyt Corporation), was organized in the latter part of 1933 and, at its place of business in Des Moines, Iowa, engaged in manufacturing harness, leather goods and kindred lines for farm use, until dissolved in 1941 as hereinafter mentioned. A predecessor corporation owned by members of the Boyt family had engaged in a similar line of business from 1901 until January 1934 when its assets were sold by a receiver to a group of persons consisting of the individual petitioners herein and Paul A. Boyt, now deceased. That group transferred such assets to the newly organized Boyt Corporation and received stock in proportion to their respective cash contributions for the purchase of the assets.
The stock of the Boyt Corporation so issued in 1934 in the names of J. W. Boyt, A. J. Boyt, and Paul A. Boyt was held by them on behalf of themselves and their respective wives, each of whom had made a substantial contribution, from her own funds, towards the venture. During the existence of the Boyt Corporation each of those wives rendered vital services to that company which had to develop new products if it was to remain in business because there was very little demand for harness. Mrs. J. W. Boyt performed various types of office work. Mrs. Paul A. Boyt assisted in advertising and selling. Mrs. A. J. Boyt experimented in designing and sewing new textile products such as horse and cow blankets, canvas covers, tractor seat and church pew cushions, etc., and estimated costs and selling prices. In 1940 the Boyt Corporation started bidding on comparatively small Government contracts for canvas and leather goods and the wives rendered vital services in connection therewith; namely, Mrs. J. W. Boyt handled the preparation of the numerous forms involved in the submission of bids, Mrs. A. J. Boyt helped develop the textile work contracted for and supervised the women engaged thereon, and Mrs. Paul A. Boyt interviewed all applicants for work in the then expanding business. None of the wives received adequate compensation for the long hours of services rendered.
During 1940 the Boyt Corporation did not have sufficient working capital or credit to finance large Government contracts and endeavored to interest Glen C. Herrick to that end, but he refused because it had assets of less than $50,000, and its machinery consisted mainly of heavy harnessmaking equipment. However, Herrick proposed the formation of a limited partnership between the corporation and himself to engage solely in the business of manufacturing certain types of canvas and leather military equipment.
On November 4, 1940, the Boyt Corporation as the general partner and Herrick as the limited partner entered into a limited partnership agreement, under the laws of Iowa, to conduct business at Des Moines, Iowa, under the firm name of Boyt Harness Company (hereinafter referred to as the Limited Partnership) to procure contracts with and manufacture products for the United States Government. Herrick agreed to contribute $500 as special capital, to procure the bidding and performance bonds, and to advance necessary funds for financing the contracts obtained, with such advances evidenced by the 4 per cent demand notes of the Limited Partnership. The Boyt Corporation agreed to contribute certain tools, equipment, machinery, etc., and also management. It was agreed that the Limited Partnership would purchase special dies, machinery and equipment; that it would pay the Boyt Corporation the actual cost of the manufacture of products contracted for, without allowance for the use of that company's machinery, equipment and premises or for salary to that company's officers; that it would not bid on work without Herrick's approval; and that its profits from completion of any contract would be divided between the general partner and the limited partner in the amounts of two-thirds and one-third, respectively. It was agreed that the limited partner would not be liable for any losses in excess of his special capital contribution and further, that the Limited Partnership's books of account, funds, and disbursements would be maintained under the control of an employee of that partnership designated by Herrick. That agreement remained in effect until terminated in December 1944, except as modified with respect to the identity of the general partner as hereinafter mentioned. During the existence of the Limited Partnership it entered into and performed numerous contracts with several branches of the Armed Forces for production of items made from canvas, leather, and webbing, including haversacks, cartridge belts, gun covers, water tanks, pack saddles, pistol holsters, rifle slings, etc.
Entirely separate and apart from the Limited Partnership enterprises, the Boyt Corporation continued to engage in the production of certain civilian goods and maintained its own books of account and bank account, until its dissolution as of August 30, 1941.
During 1941 the stockholders of Boyt Corporation considered the dissolution of the company and the formation of a general partnership. Before any definite conclusion had been reached as to whether such a step could be carried out, in view of the limited partnership agreement, J. W. Boyt, A. J. Boyt, and Paul A. Boyt caused one-half of...
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Boyt v. COMMISSIONER OF INTERNAL REVENUE
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