Grayson v. Deal

• Decision Date: 29 July 1949
• Docket Number: Civ. A. 6070.
• Citation: 85 F. Supp. 431
• Parties: GRAYSON v. DEAL et al.
• Court: U.S. District Court — Northern District of Alabama

85 F. Supp. 431

GRAYSON v. DEAL et al.

Civ. A. 6070.

United States District Court N. D. Alabama. S. D.

July 29, 1949.

Cabaniss & Johnston, Forney Johnston, Paul Johnston and Lucien D. Gardner, Jr., Birmingham, Ala., for plaintiff

John D. Hill, U. S. Atty., W. R. Bradford, Asst. U. S. Atty., Birmingham, Ala., and James P. Garland, Sp. Asst. to Atty. Gen., for defendants.

MULLINS, Chief Judge.

For the years 1943, 1944 and 1945, the Commissioner made deficiency assessments for income taxes against the plaintiff Grayson for some $247,000, which he paid. Plaintiff now sues to recover back some $100,000, or less than half of the deficiency, on the ground that the Commissioner wrongfully refused to recognize, for income tax purposes, the plaintiff's alleged family partnership.

The evidence shows that the taxpayer has since the year 1924 continuously engaged as an individual in the wholesale and retail lumber business at Birmingham, Alabama, under the name of Grayson Lumber Company. He built up a large and lucrative business. His income from the business was, in round figures, $28,000 for the year 1938, $64,000 for the year 1939, $83,000 for the year 1940, $120,000 for the year 1941, and skyrocketed to more than $170,000 for the year 1942.

In August, 1942, he joined in written documents with his wife and oldest daughter (20 years of age) whereby he purported to donate a 1/8 interest in his lumber business to each of them and purported to form a partnership for the purpose of operating the business. These documents stated that the partnership had been formed as of March 2, 1942, and attempted to make the partnership retroactively effective as of that date. On October 1st of the same year, the alleged partnership, by written agreements, was enlarged to include plaintiff's minor son (18 years of age) and his youngest daughter (14 years of age), the plaintiff purportedly giving each of them a 1/8 interest in the business, so that the business was then to be operated as a partnership, the plaintiff having a ½ interest, his wife a 1/8 interest, and each of his minor children a 1/8 interest. The disabilities of non-age of the two older children were removed so that they could contract (Title 27, Section 17, 1940 Code of Alabama), and the wife was made trustee for the 14 year old daughter.

The plaintiff transferred to the members of his family an interest in the cash on hand, accounts receivable, stock-in-trade and other assets, but retained title in his own name to the plant real estate, plant and machinery that was used in the conduct of the business. At the time of the first agreement he leased the plant and machinery to the alleged partnership for a period of three years — later extended to 10 years — at an annual rental of $3600 plus the payment of taxes on the property which he retained. The agreements provided that the plaintiff was to be the manager of the business at a salary of $500 per month, and indeed he testified on the trial that he saw no reason why he should not have retained the management of "his business". The original agreement provided that as to matters of policy in the conduct of the business, the plaintiff's decision was to be final. When the son and youngest daughter were added as partners, the agreement was modified to submit disputes to arbitration although it is not clear that matters of business policy were to be covered by the arbitration amendment.

In his attempt to prove the validity of the alleged partnership for tax purposes, plaintiff relied upon the written documents and the oral testimony of himself and his witnesses. The plaintiff testified in effect that his primary purpose for entering into the family group arrangement was to provide the members of his family with independent assets or income out of which they could purchase insurance on his life which would be exempt from estate taxes. Such an arrangement would, of course, have benefited the members of plaintiff's family upon his death, but it does not constitute a business purpose insofar as the operation of said lumber business was concerned during the tax years here involved. Obviously, the intent and purpose was to avoid the payment of estate taxes. Tax avoidance, within and of itself, is not a business purpose; otherwise, every family partnership would be impregnable to attack for tax purposes.

The plaintiff also testified that he wanted the members of his family to get experience and that he hoped they would thereby become interested and desire to continue the business. The evidence, however, utterly fails to show that the family members, other than the plaintiff, were capable of rendering any real assistance in the conduct of the business during the tax years in question, and the mere fact that plaintiff wanted them to learn something of the business would not constitute a valid business purpose. Moreover, the evidence shows without dispute that the members of taxpayer's family did not take advantage of the opportunity offered to gain business experience. This conclusively establishes that the wife and children had no intent to benefit the business by acquiring experience during these years.

The plaintiff testified that he did not expect to receive any assistance from them, and when he was asked if he did not conduct the business without the help and advice of his family both before and after the partnership, he replied, "Well to a great extent, that is true", and he said, "I managed it right on". He said that he would confer with the members of his family, including his 14 year old daughter, from time to time, and would say, "I want you children to get some training about how we conduct the lumber business", and that he would discuss the purchase of land or timber with them but tell them, "If you have any objection, I am going ahead with the deal, but I would like to know what you think about it." Thus, it is conclusively established that plaintiff himself had no real intent to benefit the business during said years by giving the other family members business experience.

The evidence is without dispute that the plaintiff's wife and children did not, during the years involved, contribute any capital originating with them to the alleged...