Foster v. United States

• Decision Date: 25 June 1963
• Citation: 221 F. Supp. 291
• Parties: Thomas Browne FOSTER, Plaintiff, v. The UNITED STATES of America, Defendant.
• Court: U.S. District Court — Southern District of New York

221 F. Supp. 291

Thomas Browne FOSTER, Plaintiff, v. The UNITED STATES of America, Defendant.

United States District Court S. D. New York.

June 25, 1963.

Peter J. George, New York City, for plaintiff.

Robert M. Morgenthau, U. S. Atty., John Paul Reiner, Asst. U. S. Atty., of counsel, for defendant.

LEVET, District Judge.

This is a suit to recover refunds of federal income taxes erroneously paid for the taxable years 1953, 1954 and 1955. The claims of plaintiff are based upon the assertion that he was a non-resident for the required period and earned his income as a salary from the partnership Emerson Engineers of which he was a partner. Defendant asserts that plaintiff's income for the respective years was derived as his partnership interest in Emerson Engineers. Jurisdiction is conferred upon this court by Title 28 U.S.C. § 1346. The case was tried to the court.

After hearing the testimony of the parties, examining the exhibits, the pleadings, the briefs and the proposed findings of fact and conclusions of law submitted by counsel, this court makes the following Findings of Fact and Conclusions of Law.

FINDINGS OF FACT

1. During the entire taxable years of 1953, 1954 and 1955 the plaintiff was a partner, and not an employee, of Emerson Engineers, a partnership situated in New York, New York.

2. The partnership agreement (Ex. 1) provides that "the partners shall devote all of their time and attention to the affairs of the co-partnership." (Par. Fifth)

3. Plaintiff became a non-resident of the United States on January 10, 1952 and remained a non-resident until July 29, 1956. He was a non-resident for the entire taxable years 1953, 1954 and 1955, being a non-resident for the requisite period of 510 days duration in 18 consecutive months for each taxable year.

4. Emerson Engineers had a contract with Arabian American Oil Co. (Aramco) to provide management consulting services in Saudi Arabia. The contract provided for Emerson Engineers to send monthly statements to Aramco for the services of the firm. The billings were in the firm name and Foster received no sum directly from Aramco. All sums received by Foster were through the firm. The plaintiff, as a partner, represented the partnership in Saudi Arabia during 1953, 1954 and 1955. Mr. Sloane, a senior partner, made periodic business trips to Saudi Arabia and reviewed the firm's work for Aramco with Foster.

5. Under the partnership agreement it was provided that "Thomas B. Foster shall be entitled to 4.0816 of the profits and shall bear 4.0816 of the losses * *." On December 1, 1950, when plaintiff became a partner, he contributed capital to the partnership in proportion to his partnership interest.

6. Paragraph marked "Twelfth" of the partnership agreement (Ex. 1) provided that: "Each partner shall be entitled to a monthly drawing account, the amount of which shall be determined and fixed by the majority in interest of all the partners, and shall further be entitled to a distributive share of the ordinary net income based upon his percentage interest of the profits."

7. Payroll sheets, such as Pl. Ex. 3, show Foster as a partner and receiving a monthly drawing, whereas "employees" are shown on a separate sheet as receiving salaries less deductions for WT (withholding) and F.I.C. (social security), not shown on the listing of Foster on the Partners Sheet. In addition to his monthly drawings, plaintiff received a distributive share of the net profits for the taxable years 1953, 1954 and 1955.

8. There is no evidence that the monthly drawings made to plaintiff during the years 1953, 1954 and 1955 were intended by the partnership to be guaranteed payments, without regard to partnership income.

9. Although some of the associates received salaries in excess of those of plaintiff, a partner, none of the associates either contributed to capital or shared in the net profits or losses.

10. During 1953, Emerson Engineers earned 59.4789% of its income from sources outside the United States. Plaintiff's income for the year 1953 was $17,458.00, consisting of "a drawing of a fixed amount" in the sum of $9,840.00, and his distributive share of the partnership profits for the year 1953 (at the rate of 4.0816%), totalling $7,618.00, less $1,000.00 credit for capital loss. The District Director allowed $10,383.83 (59.4789% of $17,458.00) as income earned outside the United States.

11. During 1954 Emerson Engineers earned 27.289% of its income from sources outside the United States. Plaintiff's income for the year 1954 was $10,167.41, consisting of "a drawing of a fixed amount" in the sum of $9,305.80, and his distributive share of the net partnership profits after all expenses, employees' salaries and partnership drawings for the year 1954 (at the rate of 4.0816%) totalled $861.61. The District Director allowed $2,834.07 (27.289% of $10,167.41) as excluded from gross income as earned outside the United States.

12. The plaintiff filed his tax return for 1955 on May 4, 1956 and a claim for refund on May 21, 1959. (Deft. Ex. B; Pl. Ex. 11)

DISCUSSION

The difference between the parties in the computation of the tax due resolves itself to this: Plaintiff seeks to exclude all of his monthly drawings plus a percentage of his year-end distribution of profits from gross income. Defendant allows only a percentage of the sum of both his monthly drawing and his year-end share of the profits. Plaintiff's contention is that the monthly amounts received by him were either salary or guaranteed payments and thus are totally excludable as income "from sources without the United States." Defendant contends that plaintiff was a partner and as such shared in the partnership profits and is permitted to exclude only that portion of his total income which represents the percentage of income received by the partnership from sources outside the United States.

The basic statutes involved are Section 116(a), Int.Rev.Code of 1939, governing the tax year 1953, and Section 911, Int.Rev.Code of 1954, governing the tax years 1954 and 1955. For the present purposes, the statutes may be considered identical as they existed for these years and essentially they exclude from taxation income earned from sources without the United States by individuals who are either bona fide residents of a foreign country or have been physically present in a foreign country for 17 of 18 consecutive months. "Earned income" is statutorily defined as "wages, salaries, professional fees * * * received as compensation for personal services actually rendered," Int.Rev.Code of 1939, § 116(a) (3); Int.Rev.Code of 1954, § 911(b). Income "from sources without the United States" is statutorily defined to include compensation for labor or personal services rendered outside the United States. Int.Rev.Code of 1954, § 862(a) (3).

The issue in this case resolves itself into determining the nature of the payments to Foster. If they were, in fact, a salary or its equivalent, they are totally excludable under the appropriate statutes as income earned from sources without the United States. If they were, in fact, distributions of partnership profits, then only that portion of them which corresponds to the percentage of the total partnership income which arose from sources outside the United States is excluded.

It is, of course, elementary that a taxpayer, claiming that income was exempt from income taxes in the United States, has the burden of proof. Seeley v. Commissioner, 186 F.2d 541 (2 Cir., 1951). There is no question but that Foster was a non-resident under the statutory definition for the taxable years. But in order to prevail here he must show that he was an employee, rather than a partner, as to income from 1953, and an employee or a partner with a guaranteed salary for the 1954 and 1955 period.

Whether plaintiff is a partner or an employee is a question of fact. The partners' relationships are basically subject to the laws of the State of New York. Section 10 of the Partnership Law of this state provides in subdivision 1: "A partnership is an association of two or more persons to carry on as co-owners a business for profit." It would seem basic that a partnership agreement is superior to that of any alleged employment contract. (Keen v. Jason, 19 Misc. 2d 538, 187 N.Y.S.2d 825, 828 (Sup.Ct. 1959), aff'd 11 A.D.2d 1039, 207 N.Y.S. 2d 1001 (1960). See also Napoli v. Domnitch, 34 Misc.2d 237, 226 N.Y.S. 2d 908 (Sup.Ct.), modified 18 A.D.2d 707, 236 N.Y.S.2d 549 (1962)) It is also noteworthy that subdivision 6 of Section 40 of the Partnership Law provides that "no partner is entitled to remuneration for acting in the partnership business, except that a surviving partner is entitled to reasonable compensation for his services in winding up the partnership affairs."

In the partnership agreement (Ex. 1) Foster and the other parties agreed to become co-partners. Each partner was to be entitled to a monthly drawing account. (Id. at Par. Fourth) As a partner, Foster was entitled to share in the partnership profits and was required to bear its losses. At no place in the partnership agreement was a partner guaranteed a salary within the meaning of Section 707(c) of the Int.Rev.Code of 1954, 26 U.S.C. § 707(c). Furthermore, no confirmed policy to this effect was established at the trial.

Foster's activities in Saudi Arabia were those of a partner and not those of an employee of the partnership. Foster's ultimate share of the income of the partnership depended not only on the return from the Aramco project, but on the money earned by the firm in various parts of the world. Foster received no sums directly from Aramco. All sums were paid to Foster through the partnership.

This case as to the 1953 earnings at least is controlled by the principles set forth in Lawrence L. Tweedy, 47 B.T.A. 341 (1942), where a similar situation existed. The mere fact that Foster and his firm may designate his receipts as "salary" or "compensati...