Eisenberg v. Comm'r of Internal Revenue

• Decision Date: 28 September 1945
• Docket Number: 2305.,Docket Nos. 2304
• Citation: 5 T.C. 856
• Parties: MORRIS EISENBERG, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.HERMAN SCHAEFFER, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

5 T.C. 856

MORRIS EISENBERG, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.HERMAN SCHAEFFER, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 2304

2305.

Tax Court of the United States.

Promulgated September 28, 1945.

Petitioners in 1937 organized, by oral agreement, a partnership to engage in the business of selling household goods and furniture at retail under the trade name of Bailey's Furniture Co. On December 30, 1939, they reduced their partnership agreement to writing. January 2, 1940, they conveyed in trust to themselves as trustees one-half of their respective interests in the partnership for their minor children. The next day, January 3, 1940, they entered into an agreement with themselves as individuals and as trustees of the several trusts to make the trusts members of the partnership of Bailey's Furniture Co. Held, that each grantor-petitioner retained such dominion and control over the corpus and income of the trusts which they created by the trusts and partnership agreements as to render them respectively taxable on the income thereunder under section 22(a), I.R.C., as construed in Helvering v. Clifford, 309 U.S. 331; held, further, that the trust indentures as written January 2, 1940, which were in force and effect during the two taxable years before us, 1940 and 1941, must control the tax liability of petitioners for those two years and not as the trust indentures were reformed and approved by a decree of a state court dated in May 1943. Robert Ash, Esq., for the petitioners.

Myron S. Winer, Esq., for the respondent.

These cases, which have been consolidated, involve deficiencies in income tax for the calendar years 1940 and 1941 as follows:

+-------------------------------------+
                ¦Taxpayer        ¦1940     ¦1941      ¦
                +----------------+---------+----------¦
                ¦Morris Eisenberg¦$6,671.58¦$18,891.32¦
                +----------------+---------+----------¦
                ¦Herman Schaeffer¦6,540.51 ¦18,936.08 ¦
                +-------------------------------------+
                

The deficiencies result principally from the addition to income of each petitioner, by respondent, of certain sums representing income from the partnership of Bailey's Furniture Co. during the respective taxable years.

Other adjustments made by the Commissioner are not contested. The adjustment complained of is explained in each deficiency notice as follows:

(a) Additional taxable income from the partnership of Eisenberg and Schaeffer, t/n Bailey's Furniture Company. It is held that 50 per cent of the net income of the partnership is taxable in your return.

Each petitioner by appropriate assignments of error contests the correctness of the foregoing determination of the Commissioner.

FINDINGS OF FACT.

The petitioners, Morris Eisenberg and Herman Schaeffer, are individuals residing in Philadelphia, Pennsylvania. They filed Federal income tax returns for the calendar years 1940 and 1941 with the collector for the first collection district of Pennsylvania at Philadelphia, Pennsylvania. By an oral agreement made on January 1, 1937, Eisenberg and Schaeffer entered into a partnership for the retail selling of furniture, household goods, and general merchandise under the trade name of Bailey's Furniture Co.

Petitioner Herman Schaeffer sometimes in 1930 opened four separate accounts with the Philadelphia Savings Society for each of his four children, respectively, in his name as trustee. There was no written instrument of trust in connection with the deposits in these accounts. All of the funds in the account in trust for Raymond Schaeffer, amounting to $6,006.78, were withdrawn by petitioner on July 30, 1937. All of the funds in the account in trust for Toby Schaeffer, amounting to $6,055.99, were withdrawn by petitioner on January 12, 1938. Funds in the account in trust for Harold Schaeffer, in the amount of $6,246.15, were withdrawn by petitioner on April 18, 1939. Funds in the account in trust for Alfred D. Schaeffer were withdrawn by petitioner Schaeffer as follows: $1,000 on June 10, 1938, and $2,327.15 on November 10, 1938, together with an additional amount of $57.62. The funds were withdrawn from the above accounts and were used in the business of Bailey's Furniture Co.

Written articles of copartnership agreement were executed between Eisenberg and Schaeffer on December 30, 1939. The pertinent provisions thereof are:

Whereas by oral agreement heretofore made on January 1, 1937, Morris Eisenberg, 1108 Medary Avenue, hereinafter referred to as ‘EISENBERG‘, and Herman Schaeffer, 7047 McCallum Street, hereinafter referred to as ‘SCHAEFFER‘, both of the City of Philadelphia, State of Pennsylvania, entered into a co-partnership for the retail selling of furniture, household goods, and general merchandise under the trade name of Bailey's Furniture Company at 635 Market Street, aforesaid City and State and

Whereas, it is the desire of the aforementioned parties to reduce to writing said co-partnership agreement

NOW THEREFORE THIS AGREEMENT WITNESSETH

1. That the said parties hereto hereby agree to associate themselves under these Articles of Co-Partnership for the conduct and operation of the business of retail selling of furniture, household goods, and general merchandise under the firm name of Bailey's Furniture Company at 635 Market Street, aforesaid City and State, which said co-partnership shall begin on the date hereof and continue during and for the full term of one year next ensuing; it being further agreed that unless either party hereto shall at least ninety days prior to the expiration of said term give to the other written notice of his intention to withdraw from said copartnership said co-partnership shall be renewed and continued in full force and effect for a further period of one year and so on from year to year until terminated by proper notice in writing as aforesaid.

2. And to that end and purpose the said EISENBERG and SCHAEFFER agree to contribute the entire stock of merchandise, fixtures, leases, insurance policies, good will, bank accounts, notes, bills, accounts receivable, cash on hand and in bank, and all and any other assets presently connected with or related to the business being presently conducted and operated under the trade name of Bailey's Furniture Company as hereinbefore referred to and as appears by reference to the books and records maintained by said co-partnership; their respective capital investments shall be considered the sum of $60,000.00 each, and all of which said assets as aforesaid shall be used, laid out, and employed between them, the parties to this agreement, for and in the management of said joint business to their general and mutual advantage.

4. There shall be kept during the continuance of this co-partnership a correct book of accounts wherein shall be entered all items of receipts and disbursements and each of the parties hereto may at any and all times have uninterrupted access thereto. Once a year or oftener, if the said parties hereto unanimously agree in writing, there may be made an account of all items of receipts and disbursements of assets and liabilities and a share of the profits, if any, may be paid to each of the parties hereto respectively only if and when the said parties hereto determine and order the payment of same in writing.

5. All monies received by any of the parties hereto and in the course of the co-partnership business shall be deposited in a bank account to be maintained in the names of Morris Eisenberg and Herman Schaeffer in a safe and reputable bank to be determined by the parties hereto and all payments shall be made by cash and/or check drawn against the said bank account and all checks so drawn shall be signed by either of the parties hereto.

8. It is hereby agreed by and between the parties hereto that the said Morris Eisenberg and Herman Schaeffer for and in consideration of the services to be rendered by them to the co-partnership herein for the year 1940 shall each receive and be entitled to draw the sum of $7800.00 as wages during the said year and shall be entitled to draw such sum or sums for the succeeding years as the parties hereto may agree upon in writing on or before the first day of January of any succeeding year. It is distinctly understood by and between the parties hereto that such drawings provided herein shall be paid out of gross receipts and shall be considered upon the books of said co-partnership as expense and shall not be chargeable to the capital investment of the said Morris Eisenberg and Herman Schaeffer.

9. At the termination of this co-partnership, the parties hereto shall render a true and final account of all assets and liabilities and after the payment of all debts and the adjustment of the respective capital accounts, the balance remaining shall be paid and divided equally between them, share and share alike. Each of the parties hereto shall be entitled to and shall receive an equal one-half share of the profits and all losses shall be borne in the same proportion.

By written instruments dated January 2, 1940, Morris Eisenberg created three separate irrevocable trusts for the benefit of his three children, Leon, Estelle, and Libby, in which he was named trustee, and to himself as trustee of each of the trusts there was transferred a percentage of his interest in the business of Morris Eisenberg and Herman Schaeffer individually and copartners trading as Bailey's Furniture Co., as follows:

+-------------------------------------------+
                ¦                 ¦Percentage of Morris     ¦
                +-----------------+-------------------------¦
                ¦                 ¦Eisenberg's interest in  ¦
                +-----------------+-------------------------¦
                ¦Trust            ¦Bailey's Furniture Co.   ¦
                +-----------------+-------------------------¦
                ¦Leon Eisenberg   ¦20%                      ¦
                +-----------------+-------------------------¦
                ¦Estelle Eisenberg¦15%                      ¦
                +-----------------+-------------------------¦
                ¦Libby Eisenberg  ¦15%

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