Hardymon v. Glenn, 656.
| Decision Date | 28 June 1944 |
| Docket Number | No. 656.,656. |
| Citation | 56 F. Supp. 269 |
| Parties | HARDYMON v. GLENN, Collector of Internal Revenue. |
| Court | U.S. District Court — Western District of Kentucky |
Louis Seelbach and Hubert T. Willis, both of Louisville, Ky., for plaintiff.
Eli H. Brown, III, U. S. Atty., of Louisville, Ky., and R. N. Ivins, Sp. Asst. to the Atty. Gen., for defendant.
The plaintiff, J. F. Hardymon, of Maysville, Kentucky, brought this action to recover from the defendant, Seldon R. Glenn, Collector of Internal Revenue for the District of Kentucky, the sum of $17,570.68 with interest from December 16, 1942, which he claims he was illegally required to pay by reason of an erroneous income tax deficiency assessment for the year 1940. The assessment was the result of the refusal on the part of the Commissioner to recognize a family partnership entered into in January 1940 between the plaintiff, his wife and six children.
Prior to December 23, 1939 the plaintiff was the principal stockholder in each of three corporations, namely, J. F. Hardymon Company, with a capital of $100,000, Limestone Lumber Company, with a capital of $50,000 and the Burley Warehouse Company, with a capital of $100,000. The remaining stock in each corporation was held by different members of his family which consisted of his wife, four sons and two daughters, the youngest of which was over twenty-one. His oldest son Kenneth had worked with the businesses for 15 years. His daughter Lillian had acted as bookkeeper for some years, and two other sons had also worked with the businesses before they entered the armed services. The businesses had proved very successful and some two years prior to December 1939 the plaintiff began to consider a shifting of the responsibility of the management from himself to his children and the devotion of more of his time to the management of several farms. In addition, the existence and operation of three separate corporations was causing some tax and other complications which he wished to avoid. In November of 1939 he discussed his problems with a firm of accountants from Louisville, Kentucky, but reached no decision. About December 20, 1939 one of the accountants returned to Maysville and after conferring further with the plaintiff advised and assisted him in making a gift of 494 shares of the Limestone Lumber Company, constituting the entire ownership of the plaintiff in that corporation, to his wife and children. In order to take advantage of the annual gift tax exemption to each donee 100 shares were distributed by gift on or about December 23, 1939, 16 shares being given to his wife and 14 shares to each of the six children. The remainder of the gift was deferred until January 3, 1940 when 58 shares were given to his wife and from 40 to 88 shares to each of five children. The stock certificates in each case were endorsed by the plaintiff and actually delivered to the donees and were thereafter transferred on the company's books to the respective names of the new owners with new certificates being issued and delivered to them for their respective interests. Stock transfer stamps were fixed to the certificate stubs and were properly cancelled. In due time gift tax returns were filed and the required gift tax was paid.
On January 4, 1940 the three corporations were dissolved by proper action with unanimous consent of all the stockholders in each instance. By deed dated, executed and delivered on January 4, 1940 the Limestone Lumber Company conveyed to the plaintiff, his wife and six children all the real estate with improvements thereon and personal property owned by the corporation. On January 5, 1940 written articles of co-partnership were entered into between the plaintiff, his wife and six children for the purpose of carrying on a general business under the name of J. F. Hardymon Company which included the different businesses previously conducted by the three corporations. The articles provided for the contribution of cash and other assets by the partners as follows:
J. F. Hardymon $115,705.97
K. T. Hardymon 43,149.20
L. G. Hardymon (daughter) 29,450.33
J. C. Hardymon 27,289.37
O. G. Hardymon 22,731.83
P. B. Hardymon 22,731.83
A. H. Little (married daughter) 20,019.44
F. V. Hardymon (wife) 17,370.48
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Total $298,448.45
The foregoing contributions to the capital of the partnership were effectuated by the eight individual partners transferring at that time to the partnership their respective individual interests in the three corporations which had been dissolved on the day previous thereto. Partnership books were set up crediting to each partner his share in the partnership assets. The books also reflected the liabilities of the three dissolved corporations.
Articles 6, 12, 13 and 14 of the articles of co-partnership provided as follows:
Other articles provided for the keeping of a complete and correct set of books for the partnership with the right of reasonable inspection in each partner, the obligation of each partner to use his best efforts and utmost skill to promote the interest of the partnership, for the continuation of the partnership in case of death or withdrawal of any partner during any fiscal year, and for the valuation and purchase by the remaining partners of the interest of any partner withdrawing, the obligation on the part of each partner that any withdrawal from the firm on his part would be done in such a way that it would not cripple or interfere with the necessary working capital of the company, and for the right of the firm to continue to use the firm name and its goodwill in the event of the retirement, death or bankruptcy of any partner.
Following the execution of the articles of co-partnership the three businesses formerly conducted under corporate form were continued in operation by the partnership, largely under the direction and management of the son Kenneth and the daughter Lillian. In January 1940 the plaintiff owned three farms and after the formation of the partnership purchased three more, which brought his total farm acreage up to approximately 2,000 acres of farm land in Kentucky and Ohio. The farms were operated by tenants under supervision of the plaintiff. The activities of the plaintiff were largely shifted from active participation in the partnership businesses to the operation of his farms. The operation of the partnership was successful and the net profits therefrom were regularly divided equally among the eight partners, namely, one-eighth to each partner. The ones who worked with the partnership also received salaries. Each partner's investment in the business has been considered and treated as his own separate property and individual investment in the partnership. No partner has returned to the plaintiff any portion of the gift which he or she received from the plaintiff nor any part of his or her share of the net profits from the partnership business. Before the plaintiff made the gifts of stock in the three corporations to his wife and children he had talked with them generally for some time about the advisability of a partnership over the corporate form of operations, but had reached no decision in his own mind and had no agreement with any of his family to do so prior to making the gifts of corporate stock on December 23, 1939 and January 3rd, 1940. Said gifts were not conditioned upon any contract or enforceable agreement on the part of the wife or any of the children that after becoming stockholders in said corporations they would dissolve the same, and the plaintiff was advised by the accountants that following the making of the gifts to his wife and children there would be no obligation upon them in any way to dissolve the corporations and to operate as a partnership if they did not voluntarily desire to do so. The plaintiff requested the accountants that the gifts to his wife and children be handled in such a way that they would be absolute and unconditional gifts with no strings or obligations attached, and such purpose was carried out. Following the partial gifts on December 23, 1939, one of the accountants returned to Louisville, Kentucky, and drafted tentative articles of co-partnership, which were reviewed by one of the senior members of the firm and then submitted to the plaintiff and his daughter Lillian before the final draft with some changes from the original draft was drawn up. It is customary in many cases where the partners are more than a few to have one partner named and agreed upon as the managing partner with authority to run and operate the partnership business.
The plaintiff and each member of the new partnership filed income tax returns for the year 1940 and in each instance reported gains resulting to each member by reason of the gifts of stock hereinabove referred to and the subsequent dissolution of the corporations and the distribution of their assets, and in each...
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