Cohen v. Commissioner of Internal Revenue

• Decision Date: 09 April 1929
• Docket Number: No. 2818.,2818.
• Citation: 31 F.2d 874
• Parties: COHEN v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fourth Circuit

31 F.2d 874 (1929)

COHEN v. COMMISSIONER OF INTERNAL REVENUE.

No. 2818.

Circuit Court of Appeals, Fourth Circuit.

April 9, 1929.

Allan H. Fisher, of Baltimore, Md. (Joseph M. Schlessinger, of Baltimore, Md., on the brief), for petitioner.

Millar E. McGilchrist, Sp. Asst. Atty. Gen. (Mabel Walker Willebrandt, Asst. Atty. Gen., Sewall Key and Randolph C. Shaw, Sp. Asst. Attys. Gen., and C. M. Charest, Gen. Counsel, and Shelby S. Faulkner, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., on the brief), for respondent.

Before WADDILL and PARKER, Circuit Judges, and McDOWELL, District Judge.

PARKER, Circuit Judge.

This is a petition to review a decision of the Board of Tax Appeals which upheld the action of the Commissioner of Internal Revenue in assessing against one Louis Cohen, hereinafter called the taxpayer, deficiencies in income taxes for the years 1920 and 1921. There is no dispute as to the facts, which may be briefly stated as follows:

Taxpayer is the owner of a wholesale wall paper business in the city of Baltimore. He owns also a one-third interest each in partnerships engaged in that business in Baltimore and Washington and one-third of the stock of a corporation so engaged in Richmond, Va. His three sons, Samuel, Jacob, and Benjamin, have been working for him in the business for a number of years. Their services are of great value to him, not only because of their industry and interest in the business, but also because taxpayer is unable to read or write and therefore depends upon their fidelity to an extent greater than would otherwise be necessary. With the aid of these sons, taxpayer has built up a large business and naturally desires to retain their services and keep alive their interest in its progress and development. With this end in view, he entered into a contract with them in the year 1919 to pay them additional compensation for their services under terms and conditions which have given rise to this controversy.

This contract began with a recital that taxpayer was desirous of making the employment of his sons as attractive as possible and of fostering their interest in the business, and that it was his desire that the inducements and interests given them, "in consideration of their services and efforts," should inure to their benefit at certain times as provided in the contract. The consideration set forth was the foregoing recital in the premises and the promise and agreement on the part of the sons "to continue their active work and interest for the continuous welfare and prosperity of the business and interests built up by said Louis Cohen from very small beginning and to insure a continuance of said business and allied interests by binding said sons to said business." It provided that taxpayer should pay to each of his sons 25 per cent. of the net amount which he might receive annually from his interest in the partnerships and the corporation above referred to, which should not be paid to them forthwith, but should be credited to each upon the books, and held in trust for him until he should marry or arrive at the age of 35 years, when it should be paid to him with interest at the rate of 3 per cent. per annum.

The contract further provided that upon marriage the sons should marry girls of Jewish faith and parentage, subject to the approval of taxpayer and his wife, and that, if the taxpayer should deem the conduct of any of his sons unsatisfactory in and about the business, or if he or his wife should object to the bride selected by any of his sons, a board of arbitrators should be chosen who should determine whether the son in question had performed the conditions and agreements of the contract. If the arbitrators should decide adversely to the son, his interest in the further income derived from the partnerships and corporation should cease; but in that event the funds already placed to his credit were not to be forfeited, but to be held in trust for him until the time should arrive when they were payable to him under the contract, i. e., upon marriage or arrival at the age of 35 years, when they were to be paid to him with interest. The contract concluded with the following paragraph:

"The special inducement and interest hereinbefore provided by said Louis Cohen, for his said sons, is not made solely for the purpose of accelerating the interest in his business by the said sons, for pecuniary reasons alone, but because it is the heartfelt desire of said Louis Cohen that the large business and the name he has established in the wall paper business may be continued by his sons as a monument to the genius of the father, who through poverty and adversity, by unfailing zeal and hard labor, established the business and allied enterprises and made the name of Louis Cohen a by-word in the wall paper business."

The Board of Tax Appeals, after finding the execution of this contract, found the other facts of the case as follows:

"The circumstances under which the agreement was executed were that the three sons, at that time, had been in the petitioner's employment for from four to nine years. Samuel was receiving $4,000 a year, Benjamin and Jacob were each receiving $25 a week. Samuel, the oldest son, attended to the advertising; all three sons assisted their father, who could neither read nor write, in selecting manufacturer's samples and in compiling sample books for use in the jobbing trade of the petitioner. While their time was primarily spent in Baltimore with the National Wall Paper Company, their efforts were also directed to the advantage of the two partnerships and the corporation in which the petitioner was interested. The sons were dissatisfied with the compensation they were receiving and demanded more money. As a result the agreement above was executed.

"After the agreement was executed, and in the years 1920 and 1921, the petitioner credited the individual accounts of each of his three sons with 25 per cent. of the earnings of interest in the partnerships and the corporation and notified the sons of the amounts. In making financial statements to his banks in 1920 and 1921, the petitioner included the amounts credited to the sons as a liability on his part, but he also listed among his assets the value of his interest in the two partnerships and the corporation. He made similar reports to the mercantile agencies. One of the sons married after 1921 and withdrew the amount standing to his credit on the petitioner's books, including the amounts credited in 1920 and 1921.

"The petitioner's business increased materially in 1919 and 1920, and it would have been impossible for the petitioner to conduct the...