Losh v. Comm'r of Internal Revenue, Docket Nos. 106892
| Decision Date | 27 April 1943 |
| Docket Number | Docket Nos. 106892,106893. |
| Citation | 1 T.C. 1019 |
| Parties | A. R. LOSH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.JENNIE C. LOSH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Income of part interest in family partnership held by petitioner in a trust created by him and his wife for the benefit of minor sons, over which he had large powers of control, including authority to use income for sons' support, held, taxable in part to petitioner and also in part to his wife in view of their community property status. Helvering v. Clifford, 309 U.S. 331; Helvering v. Stuart, 317 U.S. 154. C. Keefe Hurley, Esq., for the petitioners.
Gene W. Reardon, Esq., for the respondent.
These proceedings challenge respondent's determination of deficiencies in petitioners' income tax for the year 1937 as follows: A. R. Losh, $4,839.94; Jennie C. Losh, $4,810.02.
An alleged bad debt deduction and certain alleged ordinary and necessary business expenses to the extent of $702.85 having been conceded by petitioners at the hearing, the remaining questions for our determination are the taxability to petitioners of the entire income under a partnership-trust agreement, it being alleged that their two minor sons were partners; whether certain expenses constituted ordinary and necessary business expenses of the partnership for the year in question; and whether an item of income for which liability was denied by each of two possible debtors was a proper accrual in the taxable year.
Petitioners, who are husband and wife, filed separate individual income tax returns on a community property basis for the year 1937 with the collector of internal revenue for the district of New Mexico. A. R. Losh will hereinafter for convenience be referred to as petitioner.
Petitioner is a civil engineer, with wise experience as a public official in road construction. During 1932 to 1935 he was successful as a technical adviser and salesman for a company selling road oils and asphalts. In the fall of 1935 petitioner, who was then 52 years of age, decided to go into business for himself because it was thought desirable that he settle down and develop a business that would be available for his two sons. After surveying other possibilities it was decided to start a business in Albuquerque, New Mexico.
In November or December of 1935, petitioner, with the help of his son Richard, operated a business from their hotel room in Albuquerque. The operation of the business was continued from a house which the family rented in Albuquerque in January of 1936, and in February of that year in an office was secured. The business was called the General Materials Co. and petitioner and his wife each contributed $1,000. Petitioner's son Thomas entered school in New Mexico in February of 1936. The business done by the General Materials Co. was the selling of road oils and construction materials of a brokerage and commission basis. By April of 1936 the business was progressing. Thomas and Richard took an interest in it and Richard expressed a desire to be taken into the business. The boys were told at that time that in time they would be taken into the business.
Petitioner's wife and his two sons gave him all the time they could spare from school and home to help in the business in the spring of 1936. By June of that year other help was required.
At about that time negotiations were under way for the purchase of a building material business owned by one Sorenson in Albuquerque. After several months of negotiations and many discussions among the four members of the family purchase was consummated, and the business thereafter included buying and selling building and road construction materials.
At about the time of the purchase, at a family discussion of the partnership interests, petitioner and his wife decided to provide each of the boys with a 15 percent interest in the partnership business and assets. It was their plan to increase this interest as the boys worked more into the business.
At about this time the name of the business and its bank account was changed to ‘A. R. Losh Company.‘
By written memorandum dated November 30, 1936, petitioner instructed the company's bookkeeper to set up the capital accounts of the business as of January 1, 1937, as follows:
+--------------------+
¦A. R. Losh ¦35%¦
+----------------+---¦
¦Jennie C. Losh ¦35%¦
+----------------+---¦
¦Richard C. Losh ¦15%¦
+----------------+---¦
¦Thomas C. Losh ¦15%¦
+--------------------+
This was not done by the bookkeeper, who kept confused, inaccurate, and incomplete accounts, and at a later date an accounting firm was employed to install an adequate bookkeeping system. They discovered that the directions of the above memorandum had never been carried out by the bookkeeper. They made the proper entries as of January 1, 1937, at the time the new bookkeeping system was installed.
After the decision in the fall of 1936, concerning the partnership interests for the boys, several merchants in the state were informed that the boys were in business with petitioner and would be coming out to see them.
Some time thereafter petitioner met a member of the firm handling the partnership's accounting and tax affairs and told him of the acquisition of the business and the proposal to transfer interest therein to the boys. The accountant's advice was that the agreement should be reduced to writing. Petitioner asked the accountant to get someone to prepare the papers which he thought were necessary. The accountant alone dealt with the lawyer who drew the papers, which were delivered to petitioner late in November and signed December 22, 1936, by petitioner, his wife, and petitioner as trustee for Thomas and Richard. The instrument was not recorded. Richard read it and both he and Thomas were familiar with what was being done and with the set-up of the partnership.
The instrument was entitled ‘Agreement and Declaration of Trust and Partnership.‘ It recited the nature of the business ‘in which his wife, Jennie C. Losh, has and had a substantial interest in the nature of a partnership, ‘ and stated that petitioner and his wife desired to define more specifically their relations in the partnership therein to be held, however, in trust for them.‘ Petitioner and his wife transferred their entire business to the partnership. The instrument recited the gift to each of the children of a beneficial interest of 15 percent in the partnership, and further provided:
The interest hereinabove provided to be transferred to the children, Richard C. Losh and Thomas C. Losh, will be and constitute their respective share in the partnership assets, and not to be given or held by them, or either of them directly or in their own names, but both principal and accruing future profits therefrom, is hereby declared, and hereafter to be held and controlled, in trust for the said children and each of them by and in the hands of the said Albert R. Losh, as trustee for the use and benefit of his said sons and each of them; with full right, power and authority in the said Albert R. Losh to control, use and manage the same as trustee for the use and benefit of the said sons and each of them, and to retain and add such shares in the accruing profits as shall accrue to them and each of them from time to time, to the total capital of said partnership on their respective behalves; or in his own discretion otherwise invest the same in such a manner as he shall from time to time determine to be for their best interests aforesaid.
The instrument vested petitioner with the entire management and control of the partnership business and it further provided:
The said Albert R. Losh as trustee, may expend, use and lay out for the comfort, education, training, care, support, and welfare of each of his sons aforementioned, such amounts from their respective shares of the income, profits and increases from said partnership operations as to him shall seem proper and for their best interest, from time to time.
The respective trusts hereby created shall continue until, and terminate when, the said sons and each of them respectively, shall reach the age of twenty-five (25) years; subject, however, to the right and power in the trustee to extend the same for a further period as hereinafter provided. Upon the termination of said trust, the corpus and the possession and full enjoyment hereof shall pass to each of said sons respectively, discharged of said trust.
By the terms of the instrument the interest of the sons could not be sold, transferred, assigned, or encumbered by them. On the death of either of the sons without issue during the initial period of the trust their respective interest was to revert to petitioner and his wife. If at the time provided for termination the trustee was of the opinion, ‘based upon reasonable ground,‘ that the children were not to be entrusted with the property, he could extend it for a period of ten years and permit the interest to remain in the partnership or otherwise invest it.
By its terms petitioner as trustee could nominate a successor trustee in his will or on failure so to do petitioner's wife became trustee.
During the taxable year in question Richard was a pre-law student at the University of New Mexico at Albuquerque. He devoted a substantial part of his time after school and during summer vacations to the partnership business, working particularly in the credit and collection end of the business and in preparing forms for applications for credit and contracts. He also assisted in collection cases before justices of the peace.
During the first half of the taxable year in question, Thomas was a student away from home at Roswell, New Mexico. In the last half of the taxable year he attended high school in Albuquerque. During his summer vacations and other available time he worked in the yard and on retail business. He assi...
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