Jackson v. Comm'r of Internal Revenue
| Decision Date | 06 November 1952 |
| Docket Number | Docket No. 21207. |
| Citation | 19 T.C. 133 |
| Parties | HUGH C. JACKSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Bayley Kohlmeier, Esq., and George H. Koster, Esq., for the petitioner.
T. M. Mather, Esq., for the respondent.
FAMILY PARTNERSHIP— HUSBAND AND WIFE— WIFE NOT RECOGNIZED.— The evidence does not establish that the wife of the petitioner, the petitioner, and others intended to enter into a contract of partnership in 1939, or in 1943, by which the petitioner's wife would become a partner in an established partnership of which the petitioner was a member. Accordingly, it is held: That the wife of the petitioner was not a partner in a partnership, in which he was a member, during the taxable years 1943 and 1944, and that the petitioner is taxable on a four-ninths share of the partnership income for 1943 and 1944, none of which is taxable to petitioner's wife.
The Commissioner has determined deficiencies in income tax for 1943 and 1944 in the amounts of $9,342.01 and $5,371.41, respectively. The only issue for decision is whether the Commissioner erred in determining that the petitioner's wife, Ada Jackson, could not be recognized as a partner for tax purposes, and that partnership income credited to her is taxable to the petitioner.
The petitioner and his wife, Ada Jackson, resided in Syracuse, Kansas, during the taxable years 1943 and 1944. At the time of the trial of this proceeding, they resided in California. They were married in 1936, and their three children were born in 1940, 1941, and 1943.
In 1929, the petitioner's father, Ray Jackson, was vice president and part owner of Thomas Monohan Company of Syracuse, Kansas, which was engaged in the business of dealing in broom corn; and, also, he was a broom corn broker. The petitioner, at one time, was employed by the Monohan Company. Ray Jackson actively engaged in the business of the Monohan Company until 1940, when he then sold his interest in Monohan Company, and engaged in a broom corn brokerage business of his own.
Prior to 1929, the petitioner speculated in wheat and accumulated about $1,500. In 1929, he leased wheat farming lands near Syracuse, the rental of which was 25 per cent of the corps raised. The petitioner invested his savings of $1,500 in this venture. His father assisted him in his undertaking by loaning funds and helping him obtain the lease, but otherwise he did not participate in the farming operations. In February 1930 the petitioner and his father leased additional land, 2,500 acres southwest of Syracuse, and the petitioner's brother, Ray Jackson, Jr., participated in this venture by giving his time and services; he had very little money. He was killed in the war in Spain in 1938. The farming operations thus undertaken in 1929 and 1930 by the petitioner and his father were continued up to and including the taxable years. The business was financed, in part, through bank loans and loans by Ray Jackson. In 1930, the petitioner established a line of credit with the Valley State Bank in Syracuse, and a bank account in the name of Jackson Brothers was maintained there up to 1945 or 1947. The name of the account was changed to Ray Jackson and Sons after 1947. The amounts of the bank loans varied, depending upon each year's operations. In addition, the petitioner received Department of Agriculture Conservation payments.
By 1940, the petitioner was farming about 7,000 acres of leased wheat lands. During 1940, he went into the business of raising sheep. He purchased 1,378 lambs. He obtained a loan, as an individual, from the Garden City Production Company and used $1,500 cash in making this purchase. Petitioner's account with Garden City Production Company remained in his name only until 1943 when the account was changed to the name of Ray Jackson and Sons. Ray Jackson was not acquainted with the sheep raising venture, and the petitioner managed that venture. In 1941, he purchased a band of 1,600 ewes for about $12,000, of which amount he paid $2,500 in cash. The sheep raising venture was very profitable. In 1942, the petitioner's chief interests were wheat farming and sheep raising. However, an interest in a drug store in Syracuse was purchased in 1942 for $3,000.
Prior to 1942, the petitioner did not keep any accounting records for the business operations in which he was engaged. At the end of each year, the petitioner and his father figured how much money the father had advanced during the year and how much was due him. He was repaid his advances of funds.
During the years 1929 up to 1943, there were three or four written partnership agreements under which Ray Jackson, the father, and the petitioner were partners, and petitioner's brother until after his death. The agreements set forth the respective interests of the three partners, the rights, duties, and salaries. From time to time the partnership agreements were modified. The written agreements are no longer in existence. The petitioner sometimes referred to the venture as his ‘farm account.‘ There was a written partnership agreement under which business was conducted in 1939. Under these agreements, the petitioner, as well as his brother, agreed to carry on farming operations, and petitioner's father was inactive as he had his own business. The interests of the partners were equal.1 The agreements were drafted by the petitioner's father and were quite short. The petitioner's wife, Ada Jackson, was not mentioned in any of the agreements. The venture was known at first as Jackson Brothers, and, later, as Ray Jackson and Sons.
Partnership income tax returns, Form 1065, were filed for Ray Jackson and Sons for 1939, 1940, 1941, and 1942. Each return was sworn to and subscribed by the petitioner. The petitioner swore to the correctness of each return and to the facts about the members of the partnership and their respective interests. The wife and daughter of petitioner's father, Ray Jackson, are Nellie and Dorothy Jackson. The petitioner swore to the fact that the members 2 of the partnership and their respective interests in the years 1939 through 1942 were as follows:
Although the petitioner learned on April 1, 1938, that his brother had been lost in action, the brother was reported in the partnership income tax return for 1939 as a partner or member of the venture in 1939. The petitioner's wife, Ada Jackson, was not reported in the partnership returns to be a member of the partnership in any of these years. The petitioner filed a joint income tax return for himself and his wife for the years 1939, 1940, 1941, and 1942.
In the partnership returns for 1939, 1940, 1941, and 1942, the profits of Ray Jackson and Sons were reported as follows:
+---------------+
¦1939¦$954.23 ¦
+----+----------¦
¦1940¦5,743.42 ¦
+----+----------¦
¦1941¦31,179.58 ¦
+----+----------¦
¦1942¦67,136.04 ¦
+---------------+
The assets of Ray Jackson and Sons in 1941 and 1942 amounted to $42,844.07 and $54,382.93, and they were as follows:
+----------------------------------------------+
¦ ¦1941 ¦1942 ¦
+-----------------------+-----------+----------¦
¦ ¦ ¦ ¦
+-----------------------+-----------+----------¦
¦Cash in bank ¦(not shown)¦$274.78 ¦
+-----------------------+-----------+----------¦
¦Seed, feed, coal ¦$800.00 ¦500.00 ¦
+-----------------------+-----------+----------¦
¦Sheep ¦30,000.00 ¦39,518.01 ¦
+-----------------------+-----------+----------¦
¦Machinery and equipment¦6,244.07 ¦7,551.02 ¦
+-----------------------+-----------+----------¦
¦Trucking account ¦0 ¦527.25 ¦
+-----------------------+-----------+----------¦
¦Drug store income ¦0 ¦277.25 ¦
+-----------------------+-----------+----------¦
¦Federal farm payments ¦5,000.00 ¦3,000.00 ¦
+-----------------------+-----------+----------¦
¦Wheat, milo, barley ¦800.00 ¦0 ¦
+-----------------------+-----------+----------¦
¦Granary buildings ¦— ¦2,234.44 ¦
+-----------------------+-----------+----------¦
¦Land ¦— ¦50.00 ¦
+-----------------------+-----------+----------¦
¦Mineral and oil rights ¦— ¦450.00 ¦
+-----------------------+-----------+----------¦
¦ ¦ ¦ ¦
+-----------------------+-----------+----------¦
¦ ¦ ¦ ¦
+-----------------------+-----------+----------¦
¦ ¦$42,844.07 ¦$54,382.93¦
+----------------------------------------------+
In 1942, the gross receipts of Ray Jackson and Sons from sheep, wool, farm operations, rents, Federal farm payments, and miscellaneous totalled $136,545.88; costs and expenses, and inventory at the beginning of the year amounted to $120,364.11; inventory at the end of the year was $51,973.71; and net farm expense was $68,990.40. Gross profit and net income were, respectively, $67,555.48 and $67,136.04.
In 1942, for the first time, the petitioner opened a simple set of books for the business known as Ray Jackson and Sons, in which he kept records of receipts, expenditures, loans, withdrawals, and so forth, according to the so called synoptic method of accounting. Included in this accounting record was a single ‘capital‘ account which showed the balance of...
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