Hines v. Commissioner

• Decision Date: 12 April 1948
• Docket Number: Docket No. 11877.
• Parties: W. R. Frank Hines v. Commissioner.
• Court: U.S. Tax Court

7 TCM (CCH) 219

W. R. Frank Hines v. Commissioner.

Docket No. 11877.

United States Tax Court.

Entered April 12, 1948.

H. Cecil Kilpatrick, Esq., for the petitioner. E. L. Corbin, Esq., for the respondent.

Memorandum Findings of Fact and Opinion

JOHNSON, Judge:

The Commissioner determined a deficiency of $24,427.86 in petitioner's income and victory tax for 1943, in part by including in income 25 percent of the profits of an undertaking business for the period April 1-December 31, 1943, which profits were credited to his sister pursuant to a partnership agreement between them dated April 1, 1943. Petitioner contends that his sister rendered vital services to the business and should be recognized as a partner for tax purposes, and in the alternative that her services were reasonably worth $31,424.75, which amount should be allowed as a deduction.

Findings of Fact

Petitioner, a resident of Washington, D. C., filed his income tax return for 1943 with the collector of internal revenue for the district of Maryland. He has been engaged all of his active life as a funeral director and embalmer, first aiding in the business conducted by his father and in 1920 taking over that business and operating it as his individual enterprise under the trade name of S. H. Hines Company. In 1920 the business was small and insolvent, but under his management prospered steadily over the years, the number of funerals conducted in 1927 being 316; in 1943, 1,245.

In 1926 petitioner employed his sister, Mrs. Marion Hines Taylor, to assist him, at an annual salary of $1,680. To accept this work she resigned a position with the Federal Government and has since actively participated in the funeral business. She is a graduate of a teachers' college; studied law at a night school, and was admitted to the Bar of the District of Columbia in 1927. She is a registered funeral director, and on occasions has conducted funerals, but normally petitioner performs this service while she has charge of administration, supervising collections, disbursements, accounts and personnel. She has had authority to sign checks since prior to 1936; normally employed all the firm's female personnel, and was consulted about the employment and discharge of others. During petitioner's absences from Washington she took complete charge of the business. When petitioner made extended trips covering six months of 1936, he left with her a witnessed authorization to do so, and in his will, signed in February 1938, bequeathed the business to the sister and his attorney as trustees, directing that they continue its operation and pay the income in equal parts to his wife, two daughters and two sisters. She is normally at the place of business from 9:00 A. M. to 5:30 P. M. or later each working day, and is recognized as an executive by the firm's employees, and others. Petitioner consults her on matters of business policy, which they usually decide jointly. When he is out of the city, she alone makes such decisions. Both have never been absent at the same time.

Petitioner paid his sister for her services an annual salary of $2,400 during the years 1929-1935, $3,200 in 1936, $10,400 in 1937, $7,200 in 1938, $7,700 in 1939, and $8,300 thereafter. During the years 1937-1942 the net income of the business was as follows:

                  Year                       Net Income
                  1937 ...................  $122,152.91
                  1938 ...................    92,671.96
                  1939 ...................    81,299.00
                  1940 ...................   128,165.37
                  1941 ...................    90,549.46
                  1942 ...................   112,090.76
                

During 1942 petitioner advised his attorney that he wished "to do something" for his sister in recognition of her long service, thinking "it was only right that she should be protected." After numerous discussions the attorney prepared and petitioner and the sister signed an agreement, declaring themselves partners in the undertaking business for the term of ten years from April 1, 1943, and agreeing to devote their efforts diligently and exclusively to the business of the partnership. It was provided that out of the annual net profits realized petitioner should receive 75 percent and the sister 25 percent as their respective shares, and each was entitled to make from current earnings monthly withdrawals of which proper account should be taken in the annual division of income. By one year's notice either partner could terminate the partnership before ten years. Upon dissolution of the partnership by expiration of the term or by notice, its net properties were to be divided between the partners in the same proportions as the profits, but it was expressly stipulated that title to real and personal estate used in the business should not vest in the sister, and that on dissolution the firm name and good will should revert to petitioner. Among matters discussed with the attorney in the creation of the partnership were its tax consequences.

After April 1, 1943, the sister continued to render the same services as before. These services contributed substantially to the control and management of the business, which then employed between 40 and 50 persons. During the year she made withdrawals aggregating $13,318.69; petitioner withdrew $87,000. Net profits of $122,476.19 were earned and reported by the partnership during the period April 1-December 31, 1943, of which $91,857.14 was credited to petitioner, and $30,619.05 to the sister. At the close of the year petitioner's capital account with the partnership showed a balance of $395,381.68; the sister's, $17,300.36, representing the undrawn portion of her share of the profits. Since 1943 the sister has continued to withdraw a substantial part of the profits credited to her. The sister is married, living with her husband, and petitioner has never contributed to her support. Petitioner is married, has two daughters and another sister, none of whom has been associated with him as a partner

Opinion

The Commissioner included the entire profits of the partnership for the period April 1-December 31, 1943, in petitioner's income, adding to the share which petitioner reported, the $30,619.05 credited to the sister. He defends that determination, arguing that the partnership should not be recognized...