Lannan v. Kelm

• Decision Date: 26 April 1955
• Docket Number: 15042,No. 15041,15026.,15041
• Citation: 221 F.2d 725
• Parties: Robert W. LANNAN, Appellant, v. Elmer F. KELM, Appellee. Emil B. ASLESEN, Appellant, v. Elmer F. KELM, Individually and as Collector of Internal Revenue, Appellee. Elmer F. KELM, Individually and as Collector of Internal Revenue, Cross-Appellant, v. Emil B. ASLESEN, Cross-Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

221 F.2d 725 (1955)

Robert W. LANNAN, Appellant, v. Elmer F. KELM, Appellee.

Emil B. ASLESEN, Appellant, v. Elmer F. KELM, Individually and as Collector of Internal Revenue, Appellee.

Elmer F. KELM, Individually and as Collector of Internal Revenue, Cross-Appellant, v. Emil B. ASLESEN, Cross-Appellee.

Nos. 15041, 15042, 15026.

United States Court of Appeals Eighth Circuit.

April 26, 1955.

Joseph A. Maun, St. Paul, Minn. (William R. Busch and Bundlie, Kelley & Maun, St. Paul, Minn., were with him on the brief), for Robert W. Lannan and Emil B. Aslesen.

Philip R. Miller, Sp. Asst. to the Atty. Gen. (H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack and Hilbert P. Zarky, Sp. Assts. to the Atty. Gen., George E. MacKinnon, U. S. Atty., and Alex Dim, Asst. U. S. Atty., St. Paul, Minn., were with him on the brief), for Elmer F. Kelm.

Before GARDNER, Chief Judge, and COLLET and VAN OOSTERHOUT, Circuit Judges.

VAN OOSTERHOUT, Circuit Judge.

Nos. 15,041 and 15,042 are "family partnership" tax cases arising under sections 22(a), 181, 182, and 3797 of the Internal Revenue Code of 1939, 26 U.S.C. §§ 22(a), 181, 182, and 3797, wherein the validity of partnerships between husbands, wives, and children is in dispute. Two families are involved. Because both figured in the facts relating to three disputed partnerships, these actions were consolidated for trial before a jury in the court below and for purposes of appeal. The jury, in answering special interrogatories, found that the partnerships involved were "not bona fide partnerships within the meaning of the income tax laws," and it is from the jury's verdict and the judgments entered thereon that these appeals have been taken. In No. 15,026, the Collector of Internal Revenue appeals from the action of the trial court in declining to accept the special verdict of the jury in regard to income from and capital gain on real property held in joint tenancy by Emil B. Aslesen and his wife. This will be treated separately after the partnership problem has been determined.

The issues urged by appellants before this court in regard to the partnerships are briefly these:

1. Whether the trial court erred in not directing a verdict for the appellants as a matter of law, because the record does not warrant the findings by the jury that the parties were not bona fide partners and that certain transfers of corporate stock were not bona fide.

2. If there was no error in refusing to direct a verdict, the appellants were entitled to a new trial because of prejudicial error by the trial court in excluding certain evidence and in giving certain instructions to the jury.

The voluminous record and briefs in this case necessitate a statement of the facts. The three disputed partnerships involved and the composition of each are as follows:

The Northwestern Bakers Supply Company, hereinafter referred to as Northwestern, was composed of appellant Robert Lannan and his wife, Eleanor one family; appellant Emil Aslesen and his wife, Carrie, and their son, Kenneth, who was in the Marine Corps during the time involved one family; and Arthur and Bernice Aslesen, brother and sister-in-law, respectively, of Emil Aslesen one family. Arthur and Bernice Asleson are not involved in this litigation.

The Minneapolis Beverage Supply Company, hereinafter referred to as Minneapolis, was composed of Robert and Eleanor Lannan, Emil and Carrie Aslesen, and Arthur and Bernice Aslesen.

The Midland Food Products Company, which is successor to Midland Food Products, Inc., hereinafter referred to as Midland, was composed of Robert and Eleanor Lannan; Emil and Carrie Aslesen and their youngest son, Raymond, who was but 17 years of age in 1943; and Arthur and Bernice Aslesen.

Emil Aslesen, Robert Lannan, and Arthur Aslesen were primarily engaged in the conduct of K. Aslesen Company, not here involved, which is in the restaurant supply and institutional grocery business. All three were shown to have had considerable experience in this general type of activity in the State of Minnesota, which is in some respects related to that carried on by the three partnerships involved. All the partnerships dealt with sugar products, items in short supply because of World War II rationing that began in April 1942. There was no showing that any of the wives, or the two sons of Emil Aslesen, had any previous independent business experience of this nature. There own testimony was that they relied almost entirely on the advice of their husbands and father in their business dealings and investments.

For the sake of clarity, at the expense of brevity, it will be necessary to consider the formation and operation of each partnership separately.

Northwestern was organized in November 1942 to take advantage of the intangible assets Robert Lannan acquired for $500 from the trustee of a bankrupt corporation. The most valuable asset was a sugar allotment. Initially, an oral partnership between Emil Aslesen, Robert Lannan, Eleanor Lannan, and Kenneth Aslesen, was formed. No business was conducted except some litigation involving the sugar allotment until May 1, 1943, when a new written partnership agreement was executed which included Arthur, Bernice, and Carrie Aslesen, for the first time. No fixed amount of capital was specified, but percentages for capital contributions to be made as needed and profit distributions were included, which resulted in each of the three families when considered as a unit contributing and receiving a one-third share. Emil Aslesen and Robert Lannan were to receive a percentage of the profits for their services. All the others were to contribute capital, which they did several months later. The partnership had but one salaried employee, a bookkeeper with an office at K. Aslesen Company. This was sufficient as its products were produced entirely by an independent manufacturer and sold exclusively by brokers. Thus, none of the partners contributed valuable services other than the occasional advice of Emil Aslesen and Robert Lannan who were full time employees of the K. Aslesen Company. Eleanor Lennan's capital contribution was by check from Robert Lannan, made payable to Northwestern, which was claimed to be a gift. The capital contribution of Carrie and Kenneth Aslesen was by Emil Aslesen's check to Northwestern, which was claimed to be a loan of one-half the amount to each. No provision was made for the repayment of these claimed loans. Periodic distributions of profits were made according to the agreement. The partnership continued until 1946 when it was dissolved, and a corporation was formed to carry on the business. The corporate stock was distributed to the partners who had contributed capital, thus Emil Aslesen and Robert Lannan were excluded.

Minneapolis was organized in the spring of 1942 by Emil Aslesen, who contributed the initial capital of $10,000, Robert Lannan, and Arthur Aslesen. The profits were to be divided equally after January 1, 1943, at which time, because of financial success, Emil Aslesen was able to withdraw his original contribution. Like Northwestern, Minneapolis was operated through an independent manufacturer, brokers, and the same bookkeeper. Early in 1943, the addition of partners was discussed. The wives of the three original partners consented to become partners, and a written partnership agreement was executed on May 1, 1943, the same day as that of Northwestern, under the supervision and with the advice of the same attorney. The women were to contribute capital, the men were to contribute services, and all were to share equally in the profits. At that time Minneapolis was using past profits for working capital and continued to do so for approximately six months, when the women made their first and only capital contributions. The 1943 profits when distributed were shared equally with the women, even though their capital contributions had been made only about two months prior to the computation of such profits. Eleanor Lannan's contribution was said to be a gift made in the same manner as that in the Northwestern partnership. Carrie Aslesen's contribution was by her own check of November 1, 1943, but on the preceding day she allegedly borrowed the same amount of money from Emil Aslesen, her husband. Here also, as in Northwestern, none of the partners contributed valuable services except for occasional advice from one or the other of the men. Profits were distributed according to the provisions of the partnership agreement. Minneapolis was terminated in 1946 on the same date and in the same manner as Northwestern. It was succeeded by a corporation with only the three women as stockholders.

Midland, initially, had been a corporation, the unsuccessful successor to the bankrupt Northwest Bakers and Confectioners Company whose intangible assets were the basis of Northwestern, in which Emil Aslesen, Robert Lannan, and Arthur Aslesen purchased the outstanding stock in 1943, each securing one-third. Several months later Robert Lannan allegedly gave his wife, Eleanor, a large portion of the stock. Emil Aslesen also allegedly sold a large portion of his stock to his wife, Carrie, and son, Raymond, on credit, but no evidence of an obligation to repay was shown to have been made. That appropriate entries were made on the corporate books in regard to these transfers is disputed on appeal. Midland in its corporate form was liquidated on December 31, 1943, but continued operations as a partnership on January 1, 1944. The capital gain resulting from this transaction was reported by Robert and Eleanor Lannan separately, but Emil Aslesen included in his 1943 individual tax return the capital gain which, according to the claimed stock ownership, should have been reported by Carrie and Raymond Aslesen. Emil Aslesen said during the trial that he prepared his own return for 1943 and made a mistake because he was not accustomed to making his own returns. Midland, unlike the other two...