O'DONNELL v. Commissioner
| Decision Date | 19 February 1964 |
| Docket Number | Docket No. 94912-94916. |
| Citation | 23 TCM (CCH) 210,1964 TC Memo 38 |
| Parties | Jeremiah J. O'Donnell, Jr., et al. v. Commissioner. |
| Court | U.S. Tax Court |
Richard H. Appert, 14 Wall St., New York, N. Y., Guy Budd Maxfield, and William D. Conwell, for the petitioners. Edward H. Hance, for the respondent.
Memorandum Findings of Fact and Opinion
The respondent determined deficiencies in income tax as follows:
----------------------------------------------------------------------------------------------
Dkt. No. Petitioner Year Amount
----------------------------------------------------------------------------------------------
94912 Jeremiah J. O'Donnell, Jr........................... 1954 $ 10,295.66
94913 J. J. O'Donnell Woolens, Inc., successor by merger
to J. J. O'Donnell, Inc.......................... 11/30/54 32,162.68
94914 J. J. O'Donnell Woolens, Inc., as transferee of the
assets of J. J. O'Donnell, Inc................... 11/30/54 32,162.68
94915 Jeremiah J. and Margaret C. O'Donnell............... 1954 49,617.42
1955 120,354.84
1956 99,576.42
94916 Jeremiah J. and O'Donnell, Jr. ...................... 1955 21,926.68
1956 2,571.57
----------------------------------------------------------------------------------------------
The respondent also determined an addition to income tax of petitioners Jeremiah J. and Joan O'Donnell in Docket No. 94916, pursuant to section 6654 of the Internal Revenue Code of 1954, for the calendar year 1956 in the amount of $1,013.53.
The principal issues remaining for decision are: (1) whether the respondent erred in holding that a family partnership known as J. J. O'Donnell & Company consisted of only 3 persons (excluding 3 others) in the partnership's taxable years ended June 30, 1954, 1955, and 1956; (2) whether J. J. O'Donnell, Inc., predecessor of petitioner J. J. O'Donnell Woolens, Inc., is entitled to carry over and deduct in its taxable year ended November 30, 1954, net operating losses sustained by it in prior years; and (3) whether the respondent erred in allocating to the partnership from J. J. O'Donnell, Inc. certain commission income and related expenses reported by the corporation for its taxable years ended November 30, 1954 and June 30, 1955. Other issues relate to the deductibility by the partnership of business bad debts, business losses, and traveling, selling and advertising expenses; the deductibility by petitioner Jeremiah O'Donnell, Sr. of a long-term capital loss, of travel, auto and hotel expenses, and of charitable contributions; and the deductibility by petitioner Jeremiah O'Donnell, Jr. of travel, auto and hotel expenses.
Some of the facts have been stipulated and are incorporated herein by this reference.
The petitioners, Jeremiah. J. O'Donnell and Margaret C. O'Donnell (sometimes hereinafter referred to as Jeremiah, Sr. and Margaret, and collectively as the senior O'Donnells), are husband and wife, residing in Bronxville, New York. They filed their joint income tax returns for the calendar years 1954, 1955 and 1956 with the district director of internal revenue at New York, New York. Such returns were prepared in accordance with the cash method of accounting.
The petitioner Jeremiah J. O'Donnell, Jr. (son of the senior O'Donnells and sometimes hereinafter referred to as Jeremiah, Jr.) and his wife Joan reside in Bronxville. Jeremiah, Jr. filed his income tax return for the calendar year 1954 and he and his wife filed their joint income tax returns for the calendar years 1955 and 1956 with the district director of internal revenue at New York. Such returns were prepared in accordance with the cash method of accounting.
The petitioner J. J. O'Donnell Woolens, Inc. (sometimes hereinafter referred to as "Woolens"), is a Massachusetts corporation with its principal office in Farnumsville, Massachusetts, and is the successor by merger consummated on June 30, 1955, to J. J. O'Donnell, Inc. The latter filed its income tax return for the taxable year ended November 30, 1954, with the district director of internal revenue at New York. Such return was prepared in accordance with the accrual method of accounting.
In 1948 the senior O'Donnells and Jeremiah, Jr. formed a partnership known as J. J. O'Donnell & Company. Each of the senior O'Donnells owned a 40 percent interest and Jeremiah, Jr. owned a 20 percent interest. The partnership engaged in the business of selling, on a commission basis, woolen products manufactured by Somerville Manufacturing Company (sometimes hereinafter referred to as Somersville), the stock of which was not owned by the O'Donnell family. Its office was located in New York City. The partnership agreement of these three individuals was to terminate on January 2, 1955.
Mary P. Holden and Virginia Ann DeLuca are daughters of the senior O'Donnells, and Catherine A. Macauley is a sister of Margaret O'Donnell. These three individuals were members of a partnership known as Macauley & Holden, which had been engaged in rendering, for compensation, valuable services as stylist specialists to J. J. O'Donnell & Company.
On January 2, 1953, a partnership agreement was entered into by the senior O'Donnells, Jeremiah, Jr., Mary Holden, Virginia DeLuca (then Virginia O'Donnell), and Catherine Macauley. Therein it was recited that the senior O'Donnells and Jeremiah, Jr. were desirous of terminating their existing partnership agreement and executing a new agreement adding as new partners Mary Holden, Virginia O'Donnell, and Catherine Macauley. Therein it was provided that the six individuals would, as partners, engage in and conduct the business of selling agents for manufacturers and dealers in textiles and of dealers in textiles, the term of the partnership to begin on January 2, 1953, and to continue until terminated by mutual agreement. Such agreement stated that the capital of the partnership would be the sum of $20,000, the respective contribution of each party to be as follows: the senior O'Donnells, $5,000 each; Jeremiah, Jr., $4,000; and Mary Holden, Virginia O'Donnell and Catherine Macauley, $2,000 each. It also stated that net profits and net losses of the partnership were to be shared by the partners in the following proportions; the senior O'Donnells, 25 percent each; Jeremiah, Jr., 20 percent; and Mary Holden, Virginia O'Donnell and Catherine Macauley, 10 percent each. It was also provided that upon termination of the partnership the net assets were to be distributed in the same proportions. It was further provided that any controversy among the partners should be submitted to and determined by arbitration by an arbitration association. This partnership (sometimes hereinafter referred to as "the partnership") continued to bear the name of J. J. O'Donnell & Company, and continued to carry on essentially the same business.
On January 2, 1953, Mary Holden, Virginia O'Donnell and Catherine Macauley each paid $2,000 to the partnership. All of the parties to the partnership agreement executed and filed with the clerk of New York County and amended business certificate, also dated January 2, 1953, stating that they were partners conducting or transacting the business.1 Shortly after January 2, 1953, Mary Holden, Virginia O'Donnell and Catherine Macauley each contributed an additional $6,000 to the partnership. Records of the partnership reflect the capital accounts of the six individuals as of the end of its fiscal years ended June 30, 1953 through June 30, 1956, as follows:
--------------------------------------------------------------------------------------------------------
6/30/53 6/30/54 6/30/55 6/30/56
--------------------------------------------------------------------------------------------------------
Jeremiah, Sr. ................. ($18,255.43)* ($29,921.06)* ($18,287.10)* $ 39,360.43
Margaret O'Donnell ............ 37,742.80 29,809.47 22,787.10 66,602.01
Jeremiah, Jr. ................. 15,091.49 11,434.96 20,564.47 69,295.62
Mary Holden ................... 13,362.50 13,624.61 18,654.26 47,406.69
Virginia DeLuca ............... 13,529.38 12,441.49 17,179.57 47,602.11
Catherine Macauley ............ 13,574.54 12,166.65 16,721.12 45,108.10
__________ __________ __________ ___________
Total .................... $75,045.28 $49,556.12 $77,619.42 $315,374.96
========== ========== ========== ===========
* (Deficit)
--------------------------------------------------------------------------------------------------------
During the years 1953 through 1956 Jeremiah, Sr. drew against anticipated profits of the partnership $1,500 per month which was charged to his drawing account on the books of the partnership, and these withdrawals contributed toward the deficits in his capital account as of the end of each of the partnership years ended June 30, 1953 through 1955. Margaret O'Donnell similarly withdrew $1,000 per month during this period or a part thereof. During such years Jeremiah, Sr. acted in a supervisory and advisory capacity with respect to the partnership business; he performed no selling activities, but did participate, to some extent, in an advisory capacity with respect to styling. Jeremiah, Jr....
To continue reading
Request your trial