Gettler v. Commissioner
| Citation | 34 TCM (CCH) 442,1975 TC Memo 87 |
| Decision Date | 31 March 1975 |
| Docket Number | 5664-72,4921-73,5616-72,5619-72,5691-72,Docket No. 5562-72,4922-73.,5665-72 |
| Parties | Benjamin and Ann B. Gettler, et al. v. Commissioner. |
| Court | United States Tax Court |
Benjamin Gettler, pro se, 6 E. Fourth St., Cincinnati, Ohio, in docket no. 5562-72. Robert S. Brown, for the petitioners. Conley G. Wilkerson, for the respondent.
Memorandum Findings of Fact and Opinion
Pursuant to respondent's motion, these eight cases were consolidated for the purpose of trial, briefing and opinion. Respondent determined deficiencies in petitioners' income taxes as follows:
_____________________________________________________________________________________
Calendar Year or
Taxable Year
Petitioners Ending Deficiencies
_____________________________________________________________________________________
Benjamin Gettler and Ann B. Gettler .... 1968 $ 9,490.33
J.W. Brown and Shirley Brown ........... 1968 21,889.46
1969 39,112.00
John R. Taylor and Mary E. Taylor ...... 1968 1,016.50
1969 5,106.16
David E. Taylor and Deborah M. Taylor .. 1968 1,016.16
1969 5,295.04
Robert S. Brown and Phyllis Brown ...... 1968 1,814.98
1969 1,386.00
Brown, Gettler and Brown, Inc. ......... Jan. 31, 1968 27,184.00
Jan. 31, 1969 15,588.00
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Concessions having been made by the parties, the following issues are presented:
1. Whether the income of the law partnership of Brown & Gettler for the taxable years ending January 31, 1968 and 1969 should be increased by $30,448 and $12,701.88, respectively, as a result of reallocating to the partnership the net income from fees of the corporation Brown, Gettler & Brown, Inc. for its taxable years ended January 31, 1968 and 1969.
2. Whether the corporation is subject to personal holding company tax during the taxable years ended January 31, 1968 and 1969.
3. Whether the corporation is entitled to deduct as an ordinary and necessary business expense, for its taxable years ended January 31, 1968 and 1969, $10,594 and $7,397, respectively, representing medical expense payments made on behalf of its officer-stockholders under its medical expense reimbursement plan.
4. What were the fair market values of the land and building components respectively of the Mitchell Avenue Property on July 1, 1968?
5. Whether renting of the Villa Romar in Acapulco, Mexico, constituted a trade or business, or whether the Villa was property held for the production of income, thereby entitling petitioners J.W. and Shirley Brown to deduct losses incurred in connection with the Villa during 1968 and 1969.
6. Whether petitioners Robert S. and Phyllis Brown are entitled to claim a theft loss of $1,420, or any lesser amount, for 1968.
For the years in question, all individual petitioners lived in Cincinnati, Ohio and filed Federal joint income tax returns with the District Director in Cincinnati. All were residents of Cincinnati, Ohio, when they filed their petitions. During the years in issue and at the time it filed its petition in this case, Brown, Gettler & Brown, Inc. was an Ohio corporation with its principal office in Cincinnati. It filed its Federal corporate income tax return with the District Director in Cincinnati. During the years in issue Brown & Gettler was a law partnership located in Cincinnati, Ohio, which filed its Federal income tax returns with the District Director in Cincinnati.
Some of the facts have been stipulated and are accordingly found.
Petitioner J.W. Brown has been an attorney since 1936 specializing in representing labor unions. In 1953 J.W. Brown and petitioner Benjamin Gettler, also an attorney, formed a partnership to engage in the practice of law. Commencing with the fiscal year ending January 31, 1968, petitioner Robert S. Brown, son of J.W. Brown, became a partner in the law partnership.
In 1962, J.W. Brown, Benjamin Gettler and Ray R. Brown (who apparently is not related to J.W. Brown or Robert S. Brown) formed a corporation, Brown, Gettler & Brown, Inc., to handle work in the labor relations field for management. The first reason alleged for forming the corporation was to permit the representation of employers in labor matters. The partners believed that if this type of work were undertaken by the law partnership, it would jeopardize the partnership's relations with labor union clients. Labor unions generally will not employ anyone with a reputation for representing management in labor disputes. In fact, when the law partnership represented Cincinnati Transit Company (a client for whom the partnership handled all kinds of legal work and not just labor relations, and in which the partners had a financial interest) in a labor dispute, the union involved in the dispute went to other unions who were clients of the law partnership and appealed to them to cease hiring the law partnership, and derogatory statements were made about the law partnership before the Central Labor Council of Cincinnati. The formation of the corporation and the referral of representation of management in labor matters to the corporation was expected to lessen the risk that the law partnership would lose its union clients. The second reason for forming the corporation was that Ray R. Brown, one of the corporation's shareholders and employees, was not a lawyer and therefore not eligible to be a partner in the law partnership. Since the corporation was formed, its sole activity, other than investing, has been to represent management in those aspects of labor relations that do not necessarily require bar membership, namely, bargaining, arbitration, and representation before the National Labor Relations Board.
Prior to and throughout the period of the corporation's existence, the law partnership engaged in extensive labor relations work, including arbitration and negotiation of labor disputes and contracts on behalf of labor unions and other employee organizations. In three instances, however, the partnership represented management in labor matters: (1) the partnership has represented Coney Island, a company which J.W. Brown individually had represented since 1938 when he was recommended to the client by a labor union; (2) on several occasions in 1967 the partnership represented Cincinnati Transit Company in labor relations matters; both J.W. Brown and Mr. Gettler had direct financial interest in the Cincinnati Transit Company, and they handled all of its legal affairs; and (3) in 1967 the partnership represented Ohio Bus Lines Company, a subsidiary of Cincinnati Transit Company, with respect to certain labor relations work. These three instances were the only occasions on which the partnership represented management in a labor matter from 1953 through 1969.
The corporation was located at the same offices as the partnership. There was no indication on the door to the partnership offices that the corporation shared its offices. The corporation did not have a separate telephone listing. When the corporation performed labor relations work for management, it did so in the partnership offices with the aid of partnership secretarial employees and other partnership facilities.
The corporation on May 15, 1962 issued 100 shares of common stock in exchange for $500. J.W. Brown owned 55 shares, Benjamin Gettler owned 25 and Ray R. Brown owned 20.1 The corporation's minute book shows that there has been at all times full compliance with corporate formalities. For the calendar years 1963 through 1967, the corporation annually paid dividends of 10 cents per share on its common stock. For the calendar years 1968 through 1971, the corporation paid annual dividends of twenty-five cents per share.
The corporation paid the following salaries to its shareholder-officers for its fiscal years ended January 31, 1968 and 1969:
Employee Fiscal 1968 Fiscal 1969
J.W. Brown .......... $3,400 $3,629
Benjamin Gettler .... 4,000 6,659
Robert S. Brown ..... —0— 5,808
The corporation's gross and net income for fiscal years 1968 and 1969 was as follows:
Fiscal 1968 Fiscal 1969
Income
Fees ............ $45,000 $33,000
Interest ........ 113 2,362
Dividends ....... 4,874 6,082
_______ _______
Gross Income ...... $49,987 $41,444
Expenses .......... (25,565) (29,182)
_______ _______
Net Income ........ $24,422 $12,262
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At all times separate books and records for the partnership and the corporation were maintained by Mildred Kampman, an employee of the partnership. The funds of the partnership and the corporation were maintained in separate accounts. The corporation and the partnership used separate letterhead stationary throughout the period involved herein. The partnership billed some clients on the basis of a retainer, some on a contingency basis, and some on a basis varying with the legal responsibilities assumed, results obtained and importance of the matter. The corporation billed only on an hourly rate, varying according to the type of work involved.
The following schedule shows the sources of the corporation's total gross fees for...
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