Jarvis v. Commissioner of Internal Revenue, 052846 FEDTAX, 5126

Docket Nº:5126
Opinion Judge:Black, J.
Attorney:J. N. Welch, Esq., Anthony Brayton, Esq., and Edward J. Keelan, Jr., Esq., for the petitioner. J. T. Haslam, Esq., for the respondent.
Case Date:May 28, 1946
Court:United States Tax Court

1946 PH TC Memo 46,133




No. 5126

United States Tax Court

May 28, 1946

Husband and wife partnership operating contracting business not recognized for 1940 but recognized for 1941-fraud penalty disapproved for failure of proof.-

J. N. Welch, Esq., Anthony Brayton, Esq., and Edward J. Keelan, Jr., Esq., for the petitioner.

J. T. Haslam, Esq., for the respondent.

1. Held, on the facts, that for the year 1940 the business of Alexander Jarvis Company of Manchester, Connecticut, was conducted as a sole proprietorship, and all the net income therefrom is taxable to petitioner, Alexander Jarvis, Held, further, on the facts, that for the year 1941 the business was conducted as a partnership between Alexander Jarvis and his wife, Alice Jarvis, she having in prior years contributed substantial amounts of capital to the business out of her own private savings and she, during the taxable year, having contributed to the control and management of the business and performed vital services for it and the parties having entered into a legal and binding written partnership agreement on or about January 1, 1941, which was in effect throughout the year. Felix Zukaitis, 3 T. C. 814, followed.

2. Held, on the facts, that petitioner's income tax returns filed for the years 1940 and 1941 were not false or fraudulent with intent to evade the tax and none of the deficiencies due for either taxable year is due to fraud with intent to evade tax and the fraud penalties determined by the Commissioner are not sustained.


Black, J.

The Commissioner has determined deficiencies in petitioner's income tax, plus 50 percent fraud penalties, as follows:

Year Deficiency 50% Penalty

1940........ $10,708.07 $ 5,354.04

1941........ 23,215.47 11,607.74

The deficiencies for each year are due primarily to the addition to petitioner's net income of one-half of the income of the business of Alexander Jarvis Company which had been reported by petitioner's wife, Alice Jarvis, on her own income tax return which she filed in each of the taxable years.

The Commissioner determined that the business of Alexander Jarvis Company was not a partnership but was a sole proprietorship owned by petitioner, Alexander Jarvis. The Commissioner determined the 50 percent fraud penalties because petitioner had not reported all the income of Alexander Jarvis Company upon his net income tax returns.

The petitioner on his part alleges that the determination of tax and fraud penalties set forth in the notice of deficiency is based upon the following errors:

a. In determining that the entire income of the Alexander Jarvis Company-a co-partnership-for the calendar years 1940 and 1941 was taxable to the petitioner.

b. In determining that any part of the deficiencies for the calendar years 1940 and 1941 was caused by a false or fraudulent understatement of taxable income or tax by the petitioner, with intent to evade Federal income tax.

The Commissioner made other adjustments in petitioner's income tax returns for each of the taxable years which are not contested. Due to these other adjustments petitioner concedes there is a deficiency for 1940 of $772.64 and for 1941 of $2,321.19, but denies liability for any fraud penalty for either year.


The petitioner is Alexander Jarvis, a resident of Manchester, Connecticut, and will be referred to sometimes hereafter as Alexander. He filed his income tax return for each of the taxable years with the Collector of Internal Revenue for the District of Connecticut. The petitioner's returns reported income from a partnership called ‘Alexander Jarvis Company‘ in the amount of $22,175.30 for the year 1940 and $29,992.26 for the year 1941. Partnership returns were filed for the calendar years 1940 and 1941 in the name of Alexander Jarvis Company, signed by Alice Jarvis as partner. Alice Jarvis is petitioner's wife and will sometimes hereafter be referred to as Alice. The partnership returns showed distributable partnership profits for 1940 in the amount of $22,175.30 to the petitioner and an equal amount to Alice and of $29,922.26 to the petitioner and an equal amount to Alice for the year 1941.

Alexander had been obliged to give up his school education in order to take care of the business of his father who had become ill. His father had horses; he raised tobacco; he also had a wood business and a little sand and gravel. Later on, Alexander started in business for himself in a small way with a pick and shovel, hiring a few horses from his father and selling a little sand and gravel, and digging cellars.

In 1927 the petitioner and Alice M. Jarvis were married. At the time of his marriage Alexander's business was comparatively small. All the property he then owned consisted of only two small trucks assessed for $3,900. Before her marriage Alice had accumulated about $6,700 from her earnings working at Cheney Bros. over a period of about ten years. Of this there was about $3,000 in a savings bank; $2,000 in a building and loan association; and $1,700 in cash. After their marriage Alexander and Alice lived with her family about a year. During that year Alice continued to work at Cheney Bros. at $35-$38 a week. Some of that money went into the business. In 1928 Alexander and Alice set up housekeeping in one side of a duplex house that they rented. They used the dining room as an office and ate in the kitchen. About $700 of Alice's savings were used to furnish the house. In addition to her current earnings, Alice turned over to the business practically all of her own money from time to time, whenever the business needed it. There was turned over to and used in the business $2,000 from the savings account; the $2,000 in the building and loan association; and the $1,000 remaining in cash after buying furniture for the house. In all she put into the business over $5,000 of her own money accumulated while she worked for Cheney Bros.

From the time the Jarvises set up housekeeping, Alice actively participated in the business. She solicited business. She took care of telephone calls, interviewed people, and took orders and collected bills at the house. She kept an eye out for advertisements of equipment and materials for sale. She conducted negotiations for the purchase of materials. She discussed business matters with Alexander, including plans for the business, whether or not they would take on any particular contract, the buying of equipment, the estimating of contracts, and the hiring and firing of employees. She and petitioner usually talked over the more important business matters and together...

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