Doll v. Commissioner of Internal Revenue, No. 12773.

CourtUnited States Courts of Appeals. United States Court of Appeals (8th Circuit)
Writing for the CourtSTONE, SANBORN, and THOMAS, Circuit
Citation149 F.2d 239
Decision Date11 May 1945
Docket NumberNo. 12773.
PartiesDOLL v. COMMISSIONER OF INTERNAL REVENUE.

149 F.2d 239 (1945)

DOLL
v.
COMMISSIONER OF INTERNAL REVENUE.

No. 12773.

Circuit Court of Appeals, Eighth Circuit.

April 24, 1945.

Rehearing Denied May 11, 1945.


149 F.2d 240
COPYRIGHT MATERIAL OMITTED
149 F.2d 241
Malcolm I. Frank, of St. Louis, Mo. (William M. Fitch, of St. Louis, Mo., on the brief), for petitioner

Helen Goodner, Sp. Asst. to the Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key, Robert N. Anderson, and Louise Foster, Sp. Assts. to the Atty. Gen., on the brief), for respondent.

Before STONE, SANBORN, and THOMAS, Circuit Judges.

STONE, Circuit Judge.

This is a review of a decision by the Tax Court on claims for refund of parts of individual income taxes paid by Francis Doll for the years 1937, 1938 and 1939. Petitioner contends that included in his individual assessment for these years was the entire income of a business conducted as partnership in which he was but one member — his wife being the other partner. Petitioner urges error in the adverse finding of the Tax Court because the evidence proved a partnership and because a declaratory judgment of a State court that this partnership existed is binding upon the Tax Court. Logically, we examine these two issues in inverse order from that just stated.

I. Judgment of State Court.

After these claims for refund had been made, Mrs. Doll filed a petition in the Circuit Court of St. Louis County, Missouri, for a declaratory judgment to construe the partnership agreement and to determine her rights in the partnership business, assets, and profits. Petitioner answered admitting all material allegations of the petition. There was no controversy between the parties as to the subject matter of the suit, either before or after it was filed. The court entered judgment that the agreement constituted a partnership and that each of the parties was entitled to one-half of the income and assets, less amounts theretofore paid to either or to both jointly.

Petitioner contends that the Tax Court was bound to accept this judgment as determinative of the existence of the partnership; that the parties were entitled to share equally in the income therefrom; and that they should be taxed separately thereon. Respondent contends: (1) that this decision is not material because the question is who earned the income and whether this arrangement between petitioner and his wife affected their subsequent economic status for tax purposes; (2) that the decision is not binding because no real controversy existed between the parties thereto and, therefore, this was a consent judgment — if not collusive — not binding on the United States, not a party thereto; and (3) that the judgment was by an inferior State court.

We do not examine the issues as to the force of a judgment of an inferior court or as to whether this was a consent judgment or collusive or if either, its effect under the declaratory judgment law of Missouri or under the national revenue statutes. We omit this because we think this judgment is not decisive of this case. We have remaining the issue as to whether or not the existence of rights and of status so established controls the incidence of taxation under the applicable national revenue statutes. Broadly, this is the problem of when the incidence of national taxation depends upon State law and when it does not.

The successive revenue acts, as well as courts in construing and applying those acts, have recognized various legal relationships (such as trusts, partnerships, corporations, gifts, assignments, etc.) as sometimes determining or affecting the incidence of taxation. Usually, State law determines the creation and existence of legal relationships and their attendant rights, duties, obligations and incidents. This situation that national revenue laws sometimes recognize legal relationships and that State laws govern legal relationships has posed the frequent

149 F.2d 242
issue of when the State law determines the incidence of national taxation and when it does not

The general rules are: (1) that the plenary power of Congress to tax is not subject to State control1 but (2) that Congress may choose its own criteria and make or not make State law control the application of its acts.2 Thus it is the intention of Congress which governs (Helvering v. Stuart, 317 U.S. 154, 161, 63 S.Ct. 140, 87 L.Ed. 154).

In determining whether or not Congress intended State law to control, several tests have developed. Among these are: that State law does not control "unless the language or necessary implication" of the revenue statutory provision so requires;3 whether, as to such provision, a uniform application of a nation-wide scheme of taxation would be interfered with if State law was the criterion4; and whether the purposes of the taxing act would be avoided or defeated by applying the State law.5

149 F.2d 243

Our immediate concern is (having income taxation in mind) with the third of these rules for construction of revenue acts — that having to do with the purposes of the taxing act. "The dominant purpose of the revenue laws as to incomes is the taxation of income to those who earn or otherwise create the right to receive it and enjoy the benefit of it when paid" (Helvering v. Horst, 311 U.S. 112, 119, 61 S.Ct. 144, 85 L.Ed. 75, 131 A.L.R. 655) and this includes "any economic or financial benefit." Commissioner of Internal Revenue v. Smith, 324 U.S. 177, 65 S.Ct. 591. Substance and not form controls in applying income tax statutes6 and "the realities of the taxpayer's economic interest, rather than the niceties of the conveyancer's art, should determine the power to tax." Helvering v. Safe Deposit & Trust Co. of Baltimore, 316 U.S. 56, 58, 62 S.Ct. 925, 86 L.Ed. 1266, 139 A.L.R. 1513 note 1.7

In view of the rules in the preceding paragraph and of the very broad scope given, in the various revenue acts (here section 22(a) of the 1936 Act, 26 U.S.C.A. Int.Rev.Code § 22(a), to the definition of gross income subject to taxation8, the Supreme Court has stated general criteria as aiding in determining tax liability as to income derived from capital, from labor, and from combined capital and labor.9 Since tax liability on income from capital is based on ownership, the criterion there has to do with possession of attributes of ownership by the taxpayer — such as control by (Harrison v. Schaffner, 312 U.S. 579, 580, 61 S.Ct. 759, 85 L.Ed. 1055; Helvering v. Horst, 311 U.S. 112, 119, 61 S.Ct. 144, 85 L.Ed. 75, 131 A.L.R. 655; Helvering v. Clifford, 309 U.S. 331, 335, 60 S.Ct. 554, 84 L.Ed. 788; Corliss v. Bowers, 281 U.S. 376, 378, 50 S.Ct. 336, 74 L.Ed. 916) or benefits to him (Helvering v. Horst, 311 U.S. 112, 119, 61 S.Ct. 144, 85 L.Ed. 75, 131 A.L.R. 655; Douglas v. Willcuts, 296 U.S. 1, 9, 56 S.Ct. 59, 80 L.Ed. 3, 101 A.L.R. 391). Where the income is from labor, a test is who "earned" the income (Helvering v. Horst, 311 U.S. 112, 119, 61 S.Ct. 144, 85 L.Ed. 75, 131 A.L.R. 655; Lucas v. Earl, 281 U.S. 111, 114, 50 S.Ct. 241, 74 L.Ed.

149 F.2d 244
731; and see Commissioner of Internal Revenue v. Laughton, 9 Cir., 113 F.2d 103). Where the income is from combined labor and capital a test is the personality who or which "produced" the income. Burnet v. Leininger, 285 U.S. 136, 141, 52 S.Ct. 345, 76 L.Ed. 665

A recurring situation is that involving a family group. Usually, a family group is an economic unit. Therefore, as to transactions within such a group "special scrutiny of the arrangement is necessary lest what is in reality but one economic unit be multiplied into two or more by devices which, though valid under state law, are not conclusive so far as § 22(a) is concerned." Helvering v. Clifford, 309 U.S. 331, 335, 60 S.Ct. 554, 84 L.Ed. 788.10 The test applied in the Clifford case was whether a conveyance by taxpayer in trust for his wife had made "any substantial change in his economic position," 309 U.S. at page 336, 60 S.Ct. at page 557, 84 L.Ed. 788. The family relationship does not preclude arrangements between its members which will affect tax liability (Commissioner of Internal Revenue v. Branch, 1 Cir., 114 F.2d 985, 987, 132 A.L.R. 839) but it is "one of the elements to be considered by the trier of the facts." Commissioner of Internal Revenue v. Katz, 7 Cir., 139 F.2d 107, 110.

We have here a written instrument which is sufficient to create a partnership, both at common law and under Missouri decisions. Schneider v. Schneider, 347 Mo. 102, 146 S.W.2d 584; Stone v. Guth, 232 Mo.App. 217, 102 S.W.2d 738. The judgment here is at most an adjudication of what was never in doubt. The existence of such a contract is not determinative of this tax issue. There remains the impact of the test of an analysis of "all the circumstances attendant on its creation and operation." Helvering v. Clifford, 309 U.S. 331, 335, 60 S.Ct. 554, 556, 84 L.Ed. 788. This test must be applied in view of the statutory scheme of taxation prescribed in § 22(a), Clifford case, 309 U.S. at page 334, 60 S.Ct. at page 556, 84 L.Ed. 788, and under the special scrutiny arising from the situation that only a husband and wife are parties to the contract. Clifford case, 309 U.S. at pages 335-337, 60 S.Ct. at pages 556, 557, 84 L.Ed. 788. The question posed for this analysis is whether this contract caused "any substantial change in his petitioner's economic position." Clifford case, 309 U.S. at page 336, 60 S.Ct. at page 557, 84 L.Ed. 788.11 The answer is to be found in the pertinent facts. Determination of such fact situation is the exclusive province of the Tax Court and its decision must be upheld if based upon substantial evidence. This brings us to the second issue in this case which is whether or not there was substantial evidence to sustain the decision of the Tax Court.

II. The Evidence.

Prior to 1932, petitioner was engaged, in Cuba, in the business of selling shoes manufactured in the United States to dealers in Cuba. He operated under the name of F. Doll...

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37 practice notes
  • Apt v. Birmingham, Civ. No. 424.
    • United States
    • United States District Courts. 8th Circuit. Northern District of Iowa
    • March 25, 1950
    ...reality what they appear to be on their face has been approved in numerous decisions. See e. g., Doll v. Commissioner, 8 Cir., 1945, 149 F.2d 239, 244, cases cited in footnote 10, certiorari denied 326 U.S. 725, 66 S.Ct. 30, 90 L.Ed. 430. However, the United States Court of Appeals for the ......
  • Second National Bank of New Haven v. United States, Civ. No. 9435.
    • United States
    • United States District Courts. 2nd Circuit. United States District Court (Connecticut)
    • July 25, 1963
    ...Wolfsen v. Smyth, 223 F.2d 111, 113-114 (9 Cir. 1955); Newman v. Commissioner, 222 F. 2d 131, 136 (9 Cir. 1955); cf. Doll v. Commissioner, 149 F.2d 239, 241-242 (8 Cir. 1945), cert. denied, 326 U.S. 725, 66 S.Ct. 30, 90 L.Ed. 430 (1945); First-Mechanics National Bank of Trenton v. Commissio......
  • Birmingham v. Bartels, No. 13124
    • United States
    • United States Courts of Appeals. United States Court of Appeals (8th Circuit)
    • January 6, 1947
    ...the legislative arm of the government. The actual facts, not the names or terminology employed, must govern. Doll v. Commissioner, 8 Cir., 149 F.2d 239; Spillson v. Smith, 7 Cir., 147 F.2d 727; Matcovich v. Anglim, 9 Cir., 134 F.2d 834; Industrial Commission v. Northwestern Mutual Life Ins.......
  • Walling v. McKay, Civ. No. 155.
    • United States
    • United States District Courts. 8th Circuit. United States District Court of Nebraska
    • December 16, 1946
    ...the language of the Act and the realities of the case, and not from language appearing in the contracts. Doll v. Commissioner, 8 Cir., 149 F.2d 239; Spillson v. Smith, 7 Cir., 147 F.2d 727; Matcovich v. Anglim, 9 Cir., 134 F.2d 834; Industrial Commission v. 70 F. Supp. 174 Northwestern Mutu......
  • Request a trial to view additional results
37 cases
  • Apt v. Birmingham, Civ. No. 424.
    • United States
    • United States District Courts. 8th Circuit. Northern District of Iowa
    • March 25, 1950
    ...reality what they appear to be on their face has been approved in numerous decisions. See e. g., Doll v. Commissioner, 8 Cir., 1945, 149 F.2d 239, 244, cases cited in footnote 10, certiorari denied 326 U.S. 725, 66 S.Ct. 30, 90 L.Ed. 430. However, the United States Court of Appeals for the ......
  • Second National Bank of New Haven v. United States, Civ. No. 9435.
    • United States
    • United States District Courts. 2nd Circuit. United States District Court (Connecticut)
    • July 25, 1963
    ...Wolfsen v. Smyth, 223 F.2d 111, 113-114 (9 Cir. 1955); Newman v. Commissioner, 222 F. 2d 131, 136 (9 Cir. 1955); cf. Doll v. Commissioner, 149 F.2d 239, 241-242 (8 Cir. 1945), cert. denied, 326 U.S. 725, 66 S.Ct. 30, 90 L.Ed. 430 (1945); First-Mechanics National Bank of Trenton v. Commissio......
  • Birmingham v. Bartels, No. 13124
    • United States
    • United States Courts of Appeals. United States Court of Appeals (8th Circuit)
    • January 6, 1947
    ...the legislative arm of the government. The actual facts, not the names or terminology employed, must govern. Doll v. Commissioner, 8 Cir., 149 F.2d 239; Spillson v. Smith, 7 Cir., 147 F.2d 727; Matcovich v. Anglim, 9 Cir., 134 F.2d 834; Industrial Commission v. Northwestern Mutual Life Ins.......
  • Walling v. McKay, Civ. No. 155.
    • United States
    • United States District Courts. 8th Circuit. United States District Court of Nebraska
    • December 16, 1946
    ...the language of the Act and the realities of the case, and not from language appearing in the contracts. Doll v. Commissioner, 8 Cir., 149 F.2d 239; Spillson v. Smith, 7 Cir., 147 F.2d 727; Matcovich v. Anglim, 9 Cir., 134 F.2d 834; Industrial Commission v. 70 F. Supp. 174 Northwestern Mutu......
  • Request a trial to view additional results

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