Cobb v. Comm'r of Internal Revenue, Docket No. 19711.
| Decision Date | 30 September 1949 |
| Docket Number | Docket No. 19711. |
| Parties | DEWEY F. COBB, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. For several years prior to December 1, 1945, petitioner was a member of a partnership engaged in the canvas business. Both prior and subsequent to his marriage in March 1945, his wife was employed in the office of the partnership as a secretary-bookkeeper. On November 30, 1945, when the partnership's sales had doubled those of the preceding year, petitioner purchased the interest of his partner and entered into an oral agreement of partnership with his wife. Held, under the facts, the petitioner and his wife did not in good faith and acting with a business purpose intend to join together in the conduct of the business as partners, and respondent correctly included the entire income of the business for the years 1945 and 1946 in the gross income of petitioner. Commissioner v. Culbertson, 337 U.S. 733, followed.
2. Respondent correctly determined that the amount of losses sustained in 1945 and 1946 from the business of operating a training stable should be reduced by the cost of boarding and training horses owned and used by petitioner and his wife. Briggs G. Simpich, Esq., for the petitioner.
A. J. Friedman, Esq., for the respondent.
The Commissioner determined a deficiency in income tax for the taxable year 1945 in the amount of $1,129.52 and a penalty thereon in the amount of $169.43, and an income tax liability for the taxable year 1946 in the amount of $5,796.09. The basic questions presented to us for solution are:
(1) Did respondent err in determining that the Cobb Canvas Co. was not a bona fide partnership between petitioner and his wife, Ida E. Cobb, during the period December 1 through December 31, 1945, and the calendar year 1946, and that, therefore, petitioner is taxable upon all of its net income for those years?
(2) Did respondent err in determining that the farm loss of Maple Knoll Farm during the calendar years 1945 and 1946 be reduced by the petitioner's estimated value of the personal use of horses?
Petitioner resides at 14300 Plymouth, Michigan. He filed his income tax return with the collector of internal revenue at Detroit, Michigan. He has a seventh grade education and since 1935 he has been engaged in manufacturing and repairing articles made of canvas. He began this business associated with his brother as a partner and in 1938 he and his brother took in one H. L. Carson as a partner. His brother died in 1941 and a new partnership was formed between petitioner and Carson.
On November 30, 1945, petitioner purchased Carson's one-half interest in the partnership, paying therefor approximately $7,800 in cash, and in addition thereto petitioner conveyed to Carson a one-half interest in certain real estate which had a value of approximately $5,000. At the time of the purchase petitioner assumed all of the old partnership indebtedness and he agreed that he, together with his wife Ida E. Cobb, would execute a mortgage to Carson on a half interest in some real estate which petitioner owned to indemnify Carson against liability for any unpaid debts of the old partnership. The written agreement between Carson and Cobb was designated ‘Dissolution of Co-Partnership‘ and was prepared by petitioner's attorney. In this agreement was the following provision:
The co-partnership shall stand dissolved as of November 30th, 1945. From and after said date, the said Dewey F. Cobb and Ida E. Cobb, his wife, shall become co-partners as the COBB CANVAS COMPANY, and shall open an account in their own name and shall do business as said COBB CANVAS COMPANY, heretofore conducted by both of the parties hereto; that the said Harold L. Carson has withdrawn and that therefore all credit extended is on the basis of the credit rating of the new company.
Petitioner's wife did not sign this agreement and it does not purport to be a partnership agreement between petitioner and his wife.
Ida E. Cobb left school at the age of 15, with one-year of high school education. She married her first husband in 1930, separated from him in 1937, and divorced him in 1942. She has one daughter by this marriage aged 17 years at the time of the hearing.
Petitioner was a personal friend of Ida's mother and step-father and in 1937 he gave Ida part time employment in the Cobb Canvas Co. This work consisted of keeping the books and answering the telephone. In 1938 Ida became a full time employee and received approximately $8 per week. At this time the partnership was operating on a small scale, and in 1939 the partners themselves earned but $652.98 each. As the business grew Ida's salary advanced, at undetermined dates, to $18, then to $20, to $25, and finally, before her marriage to petitioner in 1945 she was receiving $35 a week.
In 1937 she worked but an hour or two a day. She opened the partnership books. Thereafter her duties included bookkeeping, taking orders over the telephone, and handling funds that came in and were paid out. As the business increased, it acquired more accounts and, as Ida became familiar with canvas, she was able to handle some business over the telephone. There were from 300 to 500 different customer accounts.
As the business grew petitioner employed a superintendent and hired as many as 20 or 30 employees. He was general manager of the business and spent his time on the inside, while Carson was primarily the outside salesman. The superintendent had authority over the employment and discharge of other employees. During 1943 petitioner was away from the plant for over 3 months, at which time Ida, who was then his fiancee, had charge of the office.
Ida and petitioner were married in March of 1945 after an engagement of approximately three years.
On November 30, 1945, immediately after the dissolution of the Cobb-Carson partnership, petitioner and his wife entered into a verbal agreement to continue the old business in the style of a partnership under its former name of Cobb Canvas Co. Thereafter both Cobb and his wife signed checks on the Cobb Canvas Co. bank account.
Petitioner and Carson, as individuals outside of their partnership relation, held title to real estate occupied by the Cobb Canvas Co. On September 20, 1947, petitioner and his wife executed four notes payable to Carson and his wife each in the sum of $500 as part payment for Carson's half interest in said real estate.
Books of account were set up by the Cobb Canvas Co. in the early part of December 1945, which showed the capital accounts of the two alleged partners as follows:
+-----------------------------------------------------------------------------+
¦ ¦Dewey Cobb ¦Ida Cobb ¦
+-------------------------------------+-------------------+-------------------¦
¦ ¦Debit ¦Credit ¦Debit ¦Credit ¦
+-------------------------------------+---------+---------+---------+---------¦
¦12/ 1/45 J1-Opening ¦ ¦$910.98 ¦ ¦$910.97 ¦
+-------------------------------------+---------+---------+---------+---------¦
¦2-Correction to debit Fire Loss ¦ ¦1,446.05 ¦ ¦1,446.06 ¦
¦Reserve ¦ ¦ ¦ ¦ ¦
+-------------------------------------+---------+---------+---------+---------¦
¦12/31/45 Profits 1945 ¦ ¦1,129.49 ¦ ¦1,129.50 ¦
+-------------------------------------+---------+---------+---------+---------¦
¦12/31/45 Cash (net) contributed ¦ ¦545.31 ¦ ¦ ¦
+-------------------------------------+---------+---------+---------+---------¦
¦12/31/46 Profits 1946 ¦ ¦12,883.03¦ ¦12,883.03¦
+-------------------------------------+---------+---------+---------+---------¦
¦12/31/46 Rents ¦ ¦600.00 ¦ ¦ ¦
+-------------------------------------+---------+---------+---------+---------¦
¦12/31/46 Drawings ¦$8,821.67¦ ¦$7,815.21¦ ¦
+-------------------------------------+---------+---------+---------+---------¦
¦12/31/46 Addn. Profits 1946 ¦ ¦61.93 ¦ ¦61.94 ¦
+-------------------------------------+---------+---------+---------+---------¦
¦12/31/46 Addn. Drawings ¦10.00 ¦ ¦ ¦ ¦
+-----------------------------------------------------------------------------+
Partnership returns of income on Form 1065 were filed by the Cobb Canvas Co. for the month of December 1945 and for the year 1946. These returns list petitioner and Ida Cobb as partners and show an equal division of partnership income in schedule I as follows:
+-------------------------------+
¦ ¦Dewey Cobb ¦Ida Cobb ¦
+---------+-----------+---------¦
¦Dec. 1945¦$1,129.49 ¦$1,129.50¦
+---------+-----------+---------¦
¦Year 1946¦12,944.97 ¦12,944.96¦
+-------------------------------+
Before her marriage, petitioner's wife worked from eight to ten hours a day at least five days a week. After her marriage, she worked three days a week and in consequence reduced her salary to $25 per week. Her duties were substantially the same as theretofore and another woman was employed to assist her with the general office work.
The net income of Cobb Canvas Co. for the period of January 1, 1939, to November 30, 1945, was as follows:
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