DeKorse v. Comm'r of Internal Revenue
| Decision Date | 22 May 1945 |
| Docket Number | 2117.,Docket Nos. 2116 |
| Citation | 5 T.C. 94 |
| Parties | JACOB DEKORSE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.LOUIS KOPPY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
During 1939 and 1940 and until February 28, 1941, petitioners operated a tool and die manufacturing business under corporate form. On that date they dissolved the corporation and had the assets transferred to an alleged newly formed partnership composed of themselves and their wives and the minor son of petitioner Koppy. They each purportedly made gifts to their wives, and Koppy to his minor son, of a portion of their interests in the assets. Held, that the wives and minor son were not bona fide partners in the business and that all of the income from the business for 1941 is taxable to petitioners in proportion to their proprietary interests therein. Edgar W. Pugh, Esq., for the petitioners.
Walter W. Kerr, Esq., for the respondent.
These proceedings, consolidated for hearing, involved income tax deficiencies for 1940 and 1941 as follows:
+-------------------------------------+
¦Petitioner ¦Docket¦Year ¦Deficiency¦
+-------------+------+-----+----------¦
¦ ¦No. ¦ ¦ ¦
+-------------+------+-----+----------¦
¦Jacob DeKorse¦2116 ¦1941 ¦$14,401.11¦
+-------------+------+-----+----------¦
¦Louis Koppy ¦2117 ¦(1940¦95.40 ¦
+-------------+------+-----+----------¦
¦ ¦ ¦(1941¦34,783.30 ¦
+-------------------------------------+
The principal question in issue is whether the profits of the Koppy-DeKorse Tool & Die Co. for the period March 1 to December 31, 1941, are all taxable to petitioners or whether portions of such profits are taxable to petitioners' wives and Arthur Koppy, minor son of Louis Koppy, as partners in the business. There is also the question of whether Louis Koppy is taxable on the earnings of his minor son, Arthur, for 1940 and 1941.
By an amended answer the respondent claims increases in deficiencies for 1941 of $351.81 in Docket No. 2116 and $568.99 in Docket No. 2117. The proposed additional amounts of the deficiencies result from a recomputation of the gain which petitioners realized upon the distribution of the assets of a predecessor corporation which was dissolved upon organization of the partnership.
Petitioners are residents of Detroit, Michigan. They filed their income tax returns for 1940 and 1941 with the collector of internal revenue for the district of Michigan.
In 1939 petitioners organized the Koppy-DeKorse Tool & Die Co., a Michigan corporation, to manufacture tools, dies, jigs, and fixtures at Detroit. Forty percent of the company's capital stock was issued to Jacob DeKorse for cash and 60 percent to Louis Koppy for cash. The time of acquisition and the cost of such shares to petitioners were as follows:
+------------------------------------------+
¦ ¦Jacob DeKorse¦Louis Koppy ¦
+-------------+-------------+--------------¦
¦Date issued ¦Shares¦Cost ¦Shares¦Cost ¦
+-------------+------+------+------+-------¦
¦Feb. 9, 1939 ¦840 ¦$8,400¦1,260 ¦$12,600¦
+-------------+------+------+------+-------¦
¦Feb. 13, 1940¦800 ¦8,000 ¦1,200 ¦12,000 ¦
+-------------+------+------+------+-------¦
¦ ¦1,640 ¦16,400¦2,460 ¦24,600 ¦
+------------------------------------------+
After considerable discussion of the matter with their attorney and accountant petitioners decided early in 1941 to change the form of the business carried on by the Koppy-DeKorse Tool & Die Co. to a partnership. The partnership was to be composed of petitioners and their wives, Helen DeKorse and Ella Koppy, and Arthur Koppy, the 15 year old son of Louis and Ella Koppy. The saving in taxes was considered in the discussions that led up to the change.
A special meeting of the board of directors, consisting of petitioners and Ella Koppy, was held on February 28, 1941, at which the following resolution was adopted:
WHEREAS, Jake DeKorse, the owner of 40% of the outstanding stock of the Company, has requested that to make effective the gift which he has this day made to Helen DeKorse of one-half of his interest and ownership in the assets of the KOPPY-DEKORSE TOOL AND DIE COMPANY, to which he is entitled by way of distribution in liquidation, the assets be distributed in such manner that the 40% interest of the said Jake DeKorse be distributed in equal shares to himself and Helen DeKorse.
IT IS THEREFORE RESOLVED that the assets of this Corporation be, and they hereby are transferred and set over unto Louis Koppy, Ella Koppy, Arthur Marvin Koppy, Jake DeKorse and Helen DeKorse in equal shares, each of the said persons to receive and be vested with ownership of 20% of all of the assets of every kind and description now owned or possessed by KOPPY-DEKORSE TOOL AND DIE COMPANY, and each of said persons to be charged with 20% of all of the liabilities of the said Company as at the close of the business on February 28, 1941.
AND IT IS FURTHER RESOLVED that the President and Secretary of KOPPY-DEKORSE TOOL AND DIE COMPANY be, and they hereby are authorized and directed to execute such instrument or instruments as are required to transfer ownership in the assets of KOPPY-DEKORSE TOOL AND DIE COMPANY to the persons and in the ratios as aforesaid.
After adoption of the above resolution the attorney and accountant for petitioners prepared an agreement styled ‘PARTNERSHIP AGREEMENT OF KOPPY-DEKORSE TOOL & DIE COMPANY‘ which was signed by all of the parties as of March 1, 1941. Ella Koppy signed as guardian for her son, Arthur Koppy, as well as for herself, although she was not legally appointed his guardian until March 19, 1942. The partnership agreement of March 1, 1941, provided in part as follows:
1. The parties hereto commencing on the date of the execution of this agreement shall conduct and carry on as co-partners the business of manufacturing, operating, selling, distributing and otherwise dealing in tools and dies and kindred products and such other industrial manufacturing business as shall be agreed upon from time to time for a period of one year from date hereof, and said co-partnership shall automatically renew itself for a like period subject to the privileges for withdrawal and termination as hereinafter set forth.
2. The capital of the co-partnership shall consist of the assets less the liabilities, set forth in Schedule ‘A‘ attached hereto, and each of the parties hereto is the owner of twenty (20%) percent of said assets less said liabilities.
4. The parties hereto shall share equally in any and all gains and profits of the said co-partnership business, and shall bear and be obligated for any and all deficits and losses of the said business— share and share alike.
5. Each of the parties hereto shall at all times diligently and sincerely conduct themselves in behalf of the business of the co-partnership and carry on the same to the greatest advantage of the co-partnership.
7. LOUIS KOPPY AND JAKE DEKORSE shall devote their entire time to the business of said co-partnership. For such services LOUIS KOPPY and JAKE DEKORSE shall receive reasonable compensation as agreed upon between the parties hereto, and partners other than LOUIS KOPPY and JAKE DEKORSE shall also receive reasonable compensation for any services performed by them as agreed upon between the parties hereto.
9. All checks, notes, drafts and other writings pledging the credit of affecting the property of the co-partnership shall be signed by either LOUIS KOPPY or JAKE DEKORSE and not otherwise.
No partner could sell or otherwise dispose of his or her interest in the partnership without first offering it to the other members at book value of the tangible assets less the liabilities of the company. The value of the company's assets, and also the value of its capital stock, at the date of dissolution of the corporation was $52,524.93.
Under petitioners' instructions their accountant made book entries to show a change of the business to a partnership. Capital accounts were set up for the alleged five partners in each of which was entered an amount of approximately $10,035.13 representing one-fifth of the appraised value of the assets as of February 28, 1941. Notice of the organization of the partnership was given to Federal and state authorities in connection with social security and unemployment compensation matters and also to insure companies and other interested parties.
After organization of the partnership the business was conducted precisely as it had been before except for the distribution of the profits. Petitioners DeKorse and Koppy continued in complete management and control. Ella Koppy worked for the company three days a week regularly and sometimes more when conditions required it and received regular compensation for her services. She had done so since the corporation was organized in 1939. She did the typing, prepared the pay roll and looked after the office work generally. Arthur Koppy worked at the plant occasionally as an apprentice during his school vacation periods and sometimes on Saturdays and Sundays. He was also paid for his services. Helen DeKorse never performed any services for the...
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