Fritschle v. Comm'r of Internal Revenue

• Decision Date: 27 July 1982
• Docket Number: Docket No. 134-81.
• Citation: 79 T.C. 152
• Parties: ROBERT T. FRITSCHLE and HELEN R. FRITSCHLE, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

79 T.C. 152

ROBERT T. FRITSCHLE and HELEN R. FRITSCHLE, PETITIONERS

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 134-81.

United States Tax Court

Filed July 27, 1982.

Petitioner-wife received payments for work done in assembling ribbons and rosettes. A large portion of that work was performed by petitioners' eight children living at home. Held, notwithstanding that part of the work was performed by the children, all such payments are included in petitioners' gross income under sec. 61, I.R.C. 1954, and that result is not changed by sec. 73, I.R.C. 1954. Held, further, petitioners are allowed an offsetting deduction for payments received by petitioner-husband as reimbursement for employee business expenses. Held, further, petitioners are entitled to a dependency exemption for their 18-year-old daughter. Charles M. Lock, for the petitioners.

David G. Justl and Donald L. Wells, for the respondent.

FAY , Judge:

Respondent determined deficiencies in and additions to petitioners' Federal income tax as follows:

+-------------------------------------+
                ¦      ¦            ¦Addition to tax  ¦
                +------+------------+-----------------¦
                ¦Year  ¦Deficiency  ¦sec. 6653(b) 1  ¦
                +------+------------+-----------------¦
                ¦1975  ¦$1,173.40   ¦$586.70          ¦
                +------+------------+-----------------¦
                ¦1976  ¦1,809.97    ¦904.99           ¦
                +------+------------+-----------------¦
                ¦1977  ¦200.00      ¦0                ¦
                +-------------------------------------+
                

After concessions,² the remaining issues are (1) whether payments received in 1975, 1976, and 1977 by petitioner Helen R. Fritschle for assembling ribbons and rosettes are includable in petitioners' gross income; (2) whether certain payments received in 1975 and 1976 by petitioner Robert T. Fritschle are deductible reimbursed employee expenses; (3) whether petitioners are entitled to a dependency exemption in 1977 for their 18-year-old daughter. ³

FINDINGS OF FACT

Some of the facts are stipulated and are found accordingly.

Petitioners Robert T. Fritschle and Helen R. Fritschle resided in St. Louis, Mo., when they filed their petition herein.

Petitioners have 11 children. The 8 youngest children lived at home with their parents during the years in issue.

Since 1956, petitioner Robert T. Fritschle (Robert) has been employed by American Gold Label Co. (AGL), a sole proprietorship owned by Elsie Walsh Fabel and engaged in the printing business. During the years in issue, Robert was general manager in charge of virtually every aspect of the business. In addition to wages of less than $10,000 a year, AGL paid Robert $1,060 and $1,113 in 1975 and 1976, respectively, as reimbursement for his out-of-pocket company incidental expenses such as automobile and gas costs, parts for repairs, office supplies, and postage.

Prior to 1970, AGL was engaged in a printing business generally limited to letterheads and stationery. Beginning in 1970, the business expanded to include more specialized types of printing which included printing on metals and cloth. Specifically, new items printed included ribbons and rosettes, much like the ribbons seen at horse and dog shows or the ribbon awarded the prize bull at the county fair. Even though AGL employed 15 people, outside help was needed to assemble the ribbons when the printing was completed. Petitioner Helen R. Fritschel (Helen) agreed with Elsie Walsh Fabel, the owner of AGL, to assemble the ribbons at home. Accordingly, in 1970, Helen, with the help of their children then living at home, began assembling ribbons and rosettes for AGL. From 1970 through 1976, this piecework was done in the basement washroom. In 1977, production was moved to the furnace room. The work involved cutting, shaping, and stapling of things like streamers, bezels, and ribbons to form the final product.

All materials were furnished by AGL at no cost to Helen. When the work was completed, Helen submitted a bill and received payment accordingly. During the years in issue, Helen was paid 3 cents per ribbon and 15 cents to 25 cents per rosette. Total payments received during 1975, 1976, and 1977 were $9,429.74, $11,136.41, and $8,262, respectively.

The children performed approximately 70 percent of all the work. Robert, the father, did not participate. The children were not employees of either Helen or AGL, nor was there any other arrangement for them to share directly in the compensation paid to Helen by AGL.

Petitioners' daughter, Diana, turned 18 in 1977. She lived at home during the entire year. Diana worked at AGL for 9 months during 1977, earning wages totaling $3,988.15. She traveled to and from work with her father. Petitioners furnished her room, board, clothes, and transportation.

Petitioners did not report the income received by Helen in 1975 and 1976 for assembling the ribbons and rosettes. In 1977, the income received by Helen was reported.⁴ Petitioners did not include in gross income the reimbursed employee business expenses of Robert in 1975 and 1976. Petitioners claimed a dependency exemption for Diana in 1977.

In his notice of deficiency, respondent determined petitioners must include in income all payments received by Helen for work performed in assembling the ribbons and rosettes and all payments received by Robert for reimbursed incidental business expenses. Respondent also disallowed the dependency exemption for Diana in 1977.

OPINION

1. Payments to Helen for Ribbons and Rosettes

Helen and the children assembled the ribbons and rosettes in the basement of their home. There is no question that payments received for this work are income under section 61. The issue is who is taxable on those payments. Since a portion of the compensation was attributable to work performed by their children, petitioners argue that a proportionate amount of the payments should be included in the income of the children. Respondent contends Helen was responsible for, and retained total control over, the earnings, and, therefore, the income is properly includable in her income. We find for respondent.

It is axiomatic that income must be taxed to him who earns it. Lucas v. Earl, 281 U.S. 111 (1930); Commissioner v. Culbertson, 337 U.S. 733 (1949); Burnet v. Leininger, 285 U.S. 136 (1932); Corliss v. Bowers, 281 U.S. 376 (1930). Moreover, it is the command of the taxpayer over the income which is the concern of the tax laws. Harrison v. Schaffner, 312 U.S. 579, 581 (1941). Recognizing that the true earner cannot always be identified simply by pointing “to the one actually turning the spade or dribbling the ball,” this Court has applied a more refined test—-that of who controls the earning of the income. Johnson v. Commissioner, 78 T.C. 882, 890 (1982).⁵ Applying this test, it is clear that, for purposes of taxation, Helen, and not the children, was the true earner of the income attributable to the work performed on the ribbons and rosettes.

Helen was solely responsible for the performance of all services. AGL contracted only with Helen, and no contract or agreement existed between AGL and any of the children. All checks were made payable to Helen, and the children received no direct payments or compensation for their work. Clearly, the compensation was made in payment purely for the services of Helen. Although the company knew the children were performing part of the work, that does not change the fact that AGL looked exclusively to Helen for performance of the services.⁶ In short, Helen managed, supervised, and otherwise exercised total control over the entire operation. It was she who controlled the capacity to earn the income, and it was she who in fact received the income. It does not necessarily follow that income is taxable to the one whose personal efforts produced it. Thus, despite the fact that a portion of the amounts received can be traced to work actually performed by their children, Helen is treated as the true earner of all such income for tax purposes. Accordingly, pursuant to section 61, petitioners must include all payments received in 1975, 1976, and 1977 for assembling the ribbons and rosettes in their gross income. ⁷

Nevertheless, petitioners argue section 73 mandates a result in their favor. Section 73(a) provides:

SEC. 73(a). TREATMENT OF AMOUNTS RECEIVED .—-Amounts received in respect of the services of a child shall be included in his gross income and not in the gross income of the parent, even though such amounts are not received by the child.

Petitioners argue the language and meaning of section 73 are clear, and that the amounts received by Helen with respect to the services performed by the children clearly are included in the gross income of the children. However, when viewed in light of the origin and purpose of section 73, it is apparent that section was enacted in response to a different situation and, under these facts, does not purport to tax the children on a portion of the income at issue herein.

The purpose of section 73 is to provide, for Federal tax purposes, consistent treatment of compensation paid for the services of a minor child regardless of different rights conferred by State laws on parents' entitlement to such compensation. Prior to 1944, a parent was required to include in income all earnings of a minor child if, under the laws of the State where they resided, the parent had a right to those earnings. DeKorse v. Commissioner, 5 T.C. 94, 101 (1945), affd. per curiam 158 F.2d 801 (6th Cir. 1946). Since parents in all States were not entitled to the earnings of their minor children and since even in those States following the common law doctrine of the parents' right to those earnings, a parent could lose such rights if the child had been emancipated, different tax results obtained depending on State law. See detailed discussion in Allen v. Commissioner, 50 T.C. 466 (1968), affd. 410 F.2d 398 (3d Cir. 1969). To eliminate this discrepancy in the tax treatment of the earnings of minor children, Congress, in 1944...