Kohl v. Commissioner of Internal Revenue, 13673.

• Decision Date: 06 December 1948
• Docket Number: No. 13673.,13673.
• Citation: 170 F.2d 531
• Parties: KOHL v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

170 F.2d 531 (1948)

KOHL v. COMMISSIONER OF INTERNAL REVENUE.

No. 13673.

United States Court of Appeals Eighth Circuit.

November 12, 1948.

Rehearing Denied December 6, 1948.

Tyrrell M. Ingersoll of Elliott, Shuttleworth & Ingersoll, all of Cedar Rapids, Iowa, and Charles T. Akre of Miller & Chevalier, all of Washington, D. C., for petitioner.

Theron Lamar Caudle, Asst. Atty. Gen., George A. Stinson, Ellis N. Slack, A. F. Prescott, Robert M. Weston, and Louise Foster, Sp. Assts. to Atty. Gen., and Charles Oliphant, Chief Counsel, Bureau of Internal Revenue, of Washington, D. C., for respondent.

Before GARDNER, Chief Judge, and JOHNSEN and COLLET, Circuit Judges.

GARDNER, Chief Judge.

This matter is before us on petition to review a decision of the Tax Court which held petitioner liable for a deficiency in income taxes for the taxable year 1941. The basic facts are not in dispute; neither is there any dispute as to the amount of the tax deficiency if such deficiency is to be determined against petitioner.

From 1933 to 1941, petitioner Otto A. Kohl was the sole owner of Bupane Gas Company, an unincorporated enterprise, with its principal place of business at Cedar Rapids, Iowa. The name Bupane Gas Company was simply a trade name under which petitioner was transacting business. For the purpose of convenience we shall refer to it as an entity. It bottled, sold and distributed liquid petroleum gas for domestic use in several states. Its assets included land, buildings, furniture, manufacturing machinery, trucks, automobiles, steel cylinders and utilization equipment. As of April 30, 1941, its property had a net book value of $90,355.05.

At the times here in question petitioner's family consisted of his wife and three minor children, the oldest of whom was his son, then seventeen years of age and attending college. Petitioner had in his employ Clark Van Meter and Marvin M. Cobb, both college graduates and both trained by petitioner to assume positions of responsibility in the Bupane business. They had been in his employ since 1935 and 1936 respectively. In the early part of 1941 Van Meter was designated general manager of Bupane Company and Cobb was designated as comptroller of the company. Subsequent to the installation of these men in their respective positions, petitioner devoted much of his time to other business interests.

Under date April 21, 1941, petitioner executed a trust agreement for the benefit of his wife and minor children, naming Van Meter and Cobb as trustees, and also naming petitioner's son who was to become a co-trustee upon his attaining the age of twenty-one years. The trust agreement did not identify any property but provided that petitioner would convey and assign certain property irrevocably to the trustees who were given discretion to pay up to 25 per cent of the income to petitioner's wife and to pay the balance in equal shares to his children, or to accumulate the income in a general fund for the benefit of each of the children and their survivors. The trustees were given control and management of the trust property, except that they might not make any sale, investment or re-investment during petitioner's lifetime without his written approval. The agreement contained numerous other provisions not here deemed material.

On April 30, 1941, petitioner entered into an agreement with Van Meter and Cobb, in their capacity as trustees, by which petitioner and the trustees agreed to engage in and carry on the business that had theretofore been owned and carried on by petitioner under the name of Bupane. By the terms of this instrument petitioner purported to sell to the trustees "a forty-nine one hundredths interest in the business and all of the property, real and personal, of every kind and description" which the petitioner then owned and used in connection with the business conducted and carried on by him under the name of Bupane Gas Company, for the agreed price of $44,273.97, and the trustees agreed to buy the property so described and to pay the price which was to be evidenced by a promissory note. The note, however, was to be paid "from that portion of the net profits after paying all operating costs and expenses derived from the conduct of the business by said company, and that first party (petitioner) is limited in his right to demand payment of either principal or interest on said note except that the same may be derived and is available from said net income earned on the interest of second parties (trustees) in said business and in the conduct thereof." The agreement contained provision that the business to be carried on should "include the right to own, buy and sell real estate, to own, buy and sell personal property of all kinds, including liquified petroleum gases and all appliances for using the same, either at wholesale or retail, and for cash or credit, as may be deemed proper, and to rent or lease either real or personal property, and enter into such contracts for rentals or leasing as may be deemed proper and necessary to protect and promote the rights and interests of said company."

The agreement also contained provision that the petitioner "has and is hereby given the right to determine all questions of buying or selling either real or personal property, or renting the same, or any part thereof, and pledging the credit of the Company whenever he deems it necessary, in the exercise of his judgment and discretion necessary and proper to do so, and to determine credits to be extended by the Company in the carrying on and conduct of its business and the pledges of credit to be taken by the Company to secure any credits extended in order to preserve the rights and protect the interests of the Company, and that whenever a question arises about which there is a difference of opinion, as between or among the parties hereto, the ultimate determination of the First Party as to the course to be pursued in any such matter, shall be final and binding upon all of the parties hereto." The agreement contained provision that the petitioner named in the agreement as "first party," "has and is hereby given the right to determine the number of and who shall be the employees of said Bupane Gas Company, and the compensation to be paid to each and all of said employees at any time during the period covered by this contract."

Following the execution of this agreement entries were made in the books of the Bupane Gas Company reflecting the transaction, and Bupane was registered as a trade name for the petitioner and the trustees. Net profits for the year 1941 were reported and the taxes on the income were paid by Bupane on behalf of the trust. The note given by the trustees as evidencing their purchase of the 49 per cent interest in Bupane was paid by Bupane on behalf of the trustees in three installments. A bank account in the name of the trust was first opened in February, 1944, and monthly disbursements to that account were made by Bupane beginning February 28, 1944, and the first distribution to the trust beneficiaries was made in 1946, in the form of paid-up life insurance for the beneficiaries. Van Meter and Cobb each received $2,000 per annum trustees' fees in the years 1944 to 1946, inclusive. Van Meter was paid a salary of $2850 in 1941 and $3600 in 1942 through to 1944, while Cobb was paid a salary of $2400 in the years 1941 to 1944, and a salary of $4200 in 1946. These salaries were paid to them as employees. Petitioner filed a partnership return in the name of Bupane for the nine months' period May 1, 1941 to January 31, 1942, that being the fiscal year,...