Goemans v. CIR

• Decision Date: 03 June 1960
• Docket Number: No. 12843,12844.,12843
• Citation: 279 F.2d 12
• Parties: Edward M. GOEMANS, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Seventh Circuit

279 F.2d 12 (1960)

Edward M. GOEMANS, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 12843, 12844.

United States Court of Appeals Seventh Circuit.

June 3, 1960.

John S. Best, Roy C. La Budde, Milwaukee, Wis., William J. Froelich, Chicago, Ill., Frank J. Pelisek, Milwaukee, Wis. (Jacob I. Grossman, Chicago, Ill., of counsel), for petitioner.

Charles K. Rice, Asst. Atty. Gen., Helen A. Buckley, Atty., Tax Division, U. S. Dept. of Justice, Lee A. Jackson, Robert N. Anderson, Attys., Dept. of Justice, Washington, D. C., for respondent.

Before HASTINGS, Chief Judge, CASTLE, Circuit Judge, and MERCER, District Judge.

MERCER, District Judge.

Taxpayer, Edward M. Goemans, prosecutes two petitions to review decisions of the Tax Court determining certain deficiencies in taxpayer's federal income tax for the taxable years 1945 through 1947, on the ground that the income of four separate trusts, created by taxpayer in November, 1944, was taxable to him as individual income in each of the years in question.

This case, like most of the so-called Clifford-trust cases, presents an issue which is difficult of decision and perplexing, simply because such cases, by their nature, do not admit of the development of absolute standards of decision. No clearly defined standard may be drawn on one side of which taxability, and on the other non-taxability, results. The basic issue here, and in each of the Clifford-trust cases, is whether taxpayer, as settlor of the trusts, exercised such incidents of ownership of the trust property as to render him taxable on the income therefrom under the broad general definition of gross income which is set forth in Section 22(a) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 22(a). A review of the reported opinions in the Clifford-trust cases reveals only that the courts, in their resolution of that issue, have searched for a standard of decision which would make meaningful in this type of case the principle of stare decisis. In each instance, the court's searchings have ultimately led to the simple truth that decision of the final Clifford-trust case must probably travel the same road which decision of the first traveled, namely, that the question of taxability hangs upon the unique facts and circumstances of the particular case.

Taxpayer devotes a large part of his brief and argument to lengthy analyses of prior decisions of this and other courts, pointing out that taxability, where found and sustained, is influenced by specific elements of control which are lacking here, and pointing out that the decision has been one of non-taxability in several cases upon fact situations somewhat similar to that of the case at bar. We do not find those analyses particularly helpful. Elements present in the case at bar were lacking in each of the cited cases and elements found in each of such cases are lacking here. To the extent of that distinction between the case at bar and the cases upon which taxpayer's reliance is placed, the Tax Court was traversing uncharted seas in its decision of this case. To the same extent our decision on review is uncharted by precedent and our decision must rest ultimately upon the evaluation of the unique facts and circumstances touching the formation and management of the trusts created by taxpayer.

There is no material dispute in the evidentiary facts. On November 24, 1944, taxpayer executed four trust agreements, each of which established a separate trust for the prime use and benefit of one of taxpayer's four minor children. The four trust instruments were identical except for the names of the beneficiaries and of the trustees named therein. Each of the trusts was irrevocable. Taxpayer reserved no contingent interest therein. Income was to be accumulated during the minority of the principal beneficiary in each instance and, with the corpus, was to be distributed to the beneficiary by installments, to be paid periodically from his majority to his age of 35 years.

An individual trustee was appointed for each of the trusts who were respectively, taxpayer's wife, and two sisters and a brother-in-law of taxpayer. Taxpayer expressly reserved control over each of the trusts only to the extent that he had authority to name successor trustees in the event of a vacancy, and to contribute additional assets to either of the trusts if he saw fit to do so.

Each trustee was authorized by his respective trust agreement to enter into a partnership, or partnerships, for the purpose of investing the funds of the trust and was authorized and empowered to employ others to manage such business ventures.

On the same day the trust agreements were executed, the four trustees, in their fiduciary capacities, entered into a partnership agreement organizing Mansgo Company, which was organized for the purpose of investing funds of the respective trusts. Each trust, as a partner in Mansgo, had a 25% interest in that company. On the same day, the four trustees appointed taxpayer as their attorney in fact to conduct the business of Mansgo. At the same time, taxpayer delegated his authority to Leo Roemer who was his brother-in-law and a business associate.

Shortly after the trusts were set up, the taxpayer deposited $8000.00 in a bank account opened in the name of Mansgo, which purported to represent at once, a contribution by taxpayer of $2000.00 for each of the trusts, and a capital investment by each trust in Mansgo. No bank account was ever opened and established for either of the trusts as such, the only account employed on behalf of the trusts being the Mansgo account. The only persons authorized to withdraw funds from that account were the taxpayer and Roemer, and from and after September, 1946, the taxpayer's wife.

On September 30, 1946, one K. W. Feld, the chief accounting officer of several companies with which taxpayer was associated, succeeded the two sisters and the brother-in-law as trustees of three of the trusts. He acted as trustee for the three trusts until September 27, 1949, at which time taxpayer's wife was appointed successor trustee of each, thus becoming trustee of each of the four trusts.

The investment of the Mansgo funds was handled through a rather intricate financial arrangement. By way of background, in and prior to the year 1944, taxpayer was president, general manager, and a principal stockholder of Transit Bus Sales, a Wisconsin corporation, which is hereinafter referred to as Transit. That corporation was a franchised dealer in transit buses manufactured by the Ford Motor Company. The capital stock of the corporation was owned by taxpayer, one John P. Wagner, and Wagner's wife, who, for convenience, is hereinafter referred to as Mazie.

Transit began its operation under a franchise granted by the Ford Motor Company. In 1941, Ford organized Transit Buses, Inc., as the national distributor of its buses. On April 29, 1941, Transit received a new franchise from Transit Buses, Inc., which required Transit to handle parts and accessories for Ford buses and, also, to be equipped to render adequate service thereon to users thereof. Transit then installed a parts department which it operated until December, 1942. In December, 1942, at taxpayer's suggestion, a partnership, composed of taxpayer's wife and Mazie, was formed under the name of Transit Bus Parts, hereinafter, for convenience, referred to as Parts. On the date of the organization of Parts, the partners executed a power of attorney appointing taxpayer as their attorney in fact to conduct the business of the partnership. At the same time a sales agreement was entered into between Transit and Parts under which the latter purchased the parts department of Transit for its reasonable inventory value. Neither of the partners of Parts performed any active service for the partnership. After the sales agreement was executed, Transit purchased most of its parts and accessories from Transit Buses, Inc., and then resold them to Parts at cost without profit. Taxpayer managed the operation of Parts upon a commission basis.

The Tax Court held that Parts was a valid partnership for income tax purposes, and its history is important here only because of its relationship with one of the partnerships in which Mansgo's funds were invested.

On December 6, 1944, a partnership was formed under the name of Transit Bus Sales Company, hereinafter, for convenience, referred to as Sales No. 1. The partners of Sales No. 1 were Wagner, Mazie, Mansgo and Agnes Roemer, wife of Leo Roemer and taxpayer's sister, and their respective interests therein were Wagner, 20%; Mazie, 15%; Mansgo, 60%; and Agnes Roemer, 5%. Each partner was required to furnish his proportionate amount of capital, and profits and losses were to be shared and borne proportionately. On the same day, a power of attorney was executed by all of the partners of Sales No. 1, appointing Leo Roemer attorney in fact for the operation of the partnership business.

Sales No. 1 was organized for the purpose of buying, selling, leasing, and in all ways dealing with transportation equipment of any or all kinds, but from the minutes of a meeting of the directors of Transit, held December 4, 1944, it appears that the partnership was organized, at taxpayer's instance, for the specific purpose of operating a Ford bus dealership under the Transit franchise. That meeting was culminated with a resolution authorizing Transit to grant a franchise to a partnership to be organized by Roemer or to such other person or persons whom taxpayer might approve. Taxpayer was present when Sales No. 1 was organized and the franchise agreement with Transit was executed under which Sales No. 1 became the franchised dealer for the Ford buses in all of Transit's franchise area, except the City of Chicago. The franchise agreement between the parties was contingent upon the continuance of Transit's agreement with Transit Buses, Inc. Thereafter, at all pertinent times, Transit assumed...