Evans v. Commissioner
| Decision Date | 26 April 1946 |
| Docket Number | 4912.,Docket No. 4911 |
| Citation | 5 TCM (CCH) 306 |
| Parties | C. P. Evans v. Commissioner. Fay Evans v. Commissioner. |
| Court | U.S. Tax Court |
H. E. Kleinecke, Jr., Esq., 903 Medical Arts Bldg., Galveston, Tex., for the petitioners. Stanley B. Anderson, Esq., for the respondent.
*Memorandum Findings of Fact and Opinion
The respondent determined a deficiency of $11,403.95 in income tax against each petitioner for the year 1941. Petitioners do not contest some of the adjustments made by the respondent. There are two issues, (1) whether petitioners are taxable upon income of an alleged family partnership which was credited in the taxable year to a son and two daughters; and (2) whether petitioners sustained a deductible loss arising from the sale of a building.
The petitioners, husband and wife, filed separate income tax returns on a community property basis with the collector for the first district of Texas. They reside in Galveston.
The facts which have been stipulated are incorporated herein by reference. Petitioner, Fay Evans, is the wife of C. P. Evans. C. P. Evans will be referred to hereinafter as the petitioner because the issues chiefly relate to him. In 1941 and in prior years, petitioner owned and operated fifteen food stores. Under the community property law of Texas, the stores were the community property of petitioner and his wife.
Issue 1. Petitioner, as early as 1919, was employed by Swift & Co., at Yoakum, Texas, as a branch manager. In October, 1919, he resigned and bought a food store in Yoakum. From 1919 to 1927, he purchased seven additional food stores in various towns in Texas with his brother. In 1927 he severed business relations with his brother. Thereafter he purchased and operated food stores on his own account. In 1939, profits from the food stores increased and petitioner prospered. In 1941 petitioner owned 15 stores located in Galveston, Beaumont, Texas City, Alvin, Edna, and Bay City. He conducted business under the name of C. P. Evans Food Stores, as a sole proprietorship. The book value of the entire business was $450,000, which included real estate and buildings having a net book value of $100,000. The capital of the business was carried in the balance sheet as $450,000, "C. P. Evans — Proprietorship".
Petitioners have four children whose names and ages in 1941 were as follows: Christine A. Evans, 22 years old; Hazel Faye Evans, 20; Jack S. Evans, 19; and Margaret Jane Evans, 17 years old. At that time all the girls were unmarried. Christine lived with her parents; Hazel attended the University of Texas, at Austin; Margaret attended St. Mary's Hall in San Antonio. Jack, who was married, attended Washington and Lee University, at Lexington, Virginia.
On October 6, 1941, petitioner and his wife executed four documents, called bills of sale, by which they purported to give to each of their children an undivided 12 percent interest in all of the personal property in the business of C. P. Evans Food Stores, exclusive of any interest in real property. These documents were delivered to each child.
On October 6, 1941, petitioner, his wife, and the four children executed an agreement entitled Articles of Partnership which recited that all of the parties agreed to become partners under the name of C. P. Evans Food Stores beginning on October 6, 1941. The agreement recited, further, that petitioner and his wife had given each child a 12 percent interest in the business conducted under the name C. P. Evans Food Stores, excepting the real estate standing in the name of C. P. Evans; that all of the children "agreed with their father and mother to continue the business as a partnership, and to put into the partnership all of the interests that were given to them; and that the undivided interests in the partnership were 52 percent in petitioner and his wife, and 12 percent in each of the four children."
It was provided, further, that the partnership should exist for ten years, unless terminated earlier, and that the death or retirement of any partner should not dissolve the partnership as to the other partners. If a partner died, the surviving partners would succeed to his share and pay to the representatives of the deceased member the book value of the share at the date of death, without any value being placed on the good will of the business.
It was provided in the agreement, further, that C. P. Evans, (petitioner), would devote his whole time to the business, and that he would have the sole and exclusive right to manage the business with the assistance of such employees as he deems necessary; that "no other partner shall take any part or in any way interfere in the conduct or management of the business or use the firm name of the partnership or sign his name as a partner therein"; that C. P. Evans would be allowed an annual salary of $8,775; that all contracts, checks, notes, etc., signed by C. P. Evans shall be valid and binding without inquiry "even if drawn to the individual order of C. P. Evans or tendered in payment of his individual obligations"; that C. P. Evans may appoint in his stead any person to exercise his powers on such terms and at such salary as he sees fit.
It was provided that if any partner should sell, assign, or encumber his share in the partnership the other partners could terminate the partnership so far as concerns said partner, and his interest should be treated as though he had died, i.e., the other partners would succeed to his interest, as set forth above.
It was agreed that the partnership would pay rent to C. P. Evans for the use of real property owned by him in the same amount as he was then receiving from the business as rent.
With respect to annual net profits, it was provided that 50 percent should be left in the business in a reserve fund, and should be invested in such manner as C. P. Evans should determine; and that each of the partners could withdraw from time to time his pro rata portion of the remainder of the net profits.
Petitioner and his wife filed separate gift tax returns on March 15, 1942, reporting the gifts of the interests in the business to the children. Gift tax was paid. Subsequently, the Commissioner determined deficiencies in gift tax, and the deficiencies were paid.
As of October 6, 1941, new books of account for the C. P. Evans Food Stores were opened, and separate capital accounts were opened in the names of the parties to the partnership agreement, according to the respective interests. The capital of the business, $350,000, was credited as follows: To C. P. Evans (and wife), $182,000; to each child, by name, $42,000, each. Separate drawing accounts were opened in the names of the four children and petitioner.
October 6, 1941 was the date selected as the beginning of the partnership because it was an accounting period date.
The total assets and liabilities of the C. P. Evans Food Stores as of October 5, 1941 were carried on the books at $776,994.52. The assets consisted of cash $22,559.42; inventories, $371,588.11; notes receivable and other current assets, $19,155.90; furniture and fixtures, automobiles and trucks, less depreciation, $102,547.03; prepaid insurance expense $5,337.78; and fixed assets consisting of buildings $180,747.99, and land $91,243.25. When the new accounts were opened for the partnership, all of the above items of assets except buildings and land were carried as assets of the partnership, in the total amount of $521,188.24. The liabilities of the business, on the books, as of October 5, 1941, included notes payable, secured by real estate, in the amount of $147,500. That item was not set up as a liability in the new accounts of the partnership on October 6, 1941. Also, the capital account in the name of C. P. Evans, which was $450,000, prior to the partnership, became $350,000 in the new accounts set up for the partnership. A few adjustments in items in the liability side of the balance sheet of the business were made so that the total liabilities on the books of the partnerships were $521,188.24 as of October 6, 1941, instead of $776,994.52, as of October 5, 1941.
The balance sheets of the C. P. Evans Food Stores, as of October 5, 1941, October 6, 1941, December 31, 1941, and December 31, 1942 are incorporated herein by reference.
On or about November 10, 1941, assumed name certificates, executed and acknowledged by each of the parties to the agreement dated October 6, 1941, were filed in the offices of the various County Clerks of counties in Texas where any of the stores of C. P. Evans Food Stores were located. Petitioner advised one bank of the agreement, and in the following year, he also informed Dun & Bradstreet of the agreement. A new Social Security number was also obtained. The business used the same stationery for several years which had been used previously, on which was printed "C. P. Evans Food Stores, C. P. Evans owner of Evans Food Stores."
Jack attended Washington and Lee University, at Lexington, Virginia, during 1941 and 1942; graduated in 1943, and in August returned to Galveston and became manager of one of the Evans Food Stores there. In 1944, he was manager of the largest Evans Food Stores in Galveston.
In 1941 and 1942, Margaret Jane was attending St. Mary's Hall school in San Antonio, Texas. She was married in 1944, and resided with her husband in Florida.
In 1941 and part of 1942, Hazel attended the University of Texas. In 1942 she was married, and in 1944 she resided with her husband in Nebraska. Christine was married in 1942 and is living in Galveston.
In 1941 and 1942, the disabilities of minority of Hazel, Jack, and Margaret were removed by orders entered in the 56th District Court of Galveston County, Texas. Thereafter, the agreement of October 6, 1941, was ratified in writing by Jack and Hazel, on November 18, 1941, and by Margaret on November 12, 1942.
The partnership return for the period October 6 to ...
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