Losh v. Commissioner of Internal Revenue

• Decision Date: 03 November 1944
• Docket Number: No. 2901.,2901.
• Parties: LOSH et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Tenth Circuit

145 F.2d 456 (1944)

LOSH et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 2901.

Circuit Court of Appeals, Tenth Circuit.

November 3, 1944.

Stephen H. Hart, of Denver, Colo. (C. Keefe Hurley, Hale & Dorr, and Raymond B. Roberts, all of Boston, Mass., on the brief), for petitioners.

Warren F. Wattles, of Washington, D. C. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Robert N. Anderson, and Robert Koerner, Sp. Assts. to Atty. Gen., on the brief), for respondent.

Before PHILLIPS, HUXMAN, and MURRAH, Circuit Judges.

HUXMAN, Circuit Judge.

Both petitioners seek a review of the decision of the Tax Court sustaining a determination of deficiencies by the Commissioner in their income taxes for the year 1937. The decision turns upon whether a partnership arrangement effected a change in the economic status of petitioners within the decision of the Supreme Court in Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788. For convenience's sake, reference will be to A. R. Losh in the case of both appellants, and he will be referred to as petitioner.

Petitioner was a civil engineer of wide experience. From 1931 to 1935 he was technical adviser and salesman for a company selling road oils and asphalts. In the fall of 1935, petitioner, who was then 52 years old, decided to go into business for himself because he wanted to establish a business which would be available for his two minor sons. After surveying the possibilities, he located in Albuquerque, New Mexico, where he carried on a business known as the General Materials Company. He and his wife each contributed $1,000 thereto. By April, 1936, the business was progressing. His two minor sons, Thomas and Richard, took an active interest therein. They were told that in time they would be taken into the business. In the latter part of 1936 negotiations were opened for the purchase of a building materials business in Albuquerque. After many discussions between the four members of the family, the additional business was purchased. At about this time petitioners decided to give to each of their sons a fifteen per cent interest in the partnership. It was petitioners' plan to increase this interest as the boys worked more into the business. On November 30, 1936, petitioner instructed the bookkeeper in writing to set up the partnership books as of January 1, 1937, showing a thirty-five per cent interest in each of the petitioners and a fifteen per cent interest in each of the two sons. The letter to the bookkeeper contained this statement: "This is to be confidential except to Mrs. Losh and myself." Through failure to comprehend, the bookkeeper did not set up the accounts as directed.

Petitioner's accountant advised him that the partnership arrangement should be reduced to writing. Petitioner asked the accountant to have the agreement reduced to writing. Because the sons were minors, the attorney employed by the accountant advised and prepared a written instrument denominated "Agreement and Declaration of Trust and Partnership," which was executed by petitioner. The first part of the instrument created the partnership and defined the interests of the parties, as outlined above.

The instrument created a trust of the fifteen per cent interest given to each of the two sons. It provided that their interest was not to be given to them directly in their own names; that it should be held in trust by petitioner as trustee. The trustee was given absolute power of control and management of the trust estate. He had power to add the profits of the trust estate to the capital, or otherwise invest them as he saw fit, for the best interests of the estate. He was given power to expend from time to time income of the trust as he saw fit for the comfort, education, training, care, support and welfare of the sons. The trust was to continue until the sons respectively reached the age of 25 years. It gave petitioner the power to extend the trust period for an additional ten years and allowed him to retain all trust property in the partnership for the additional time, or invest it otherwise, as he saw fit. It provided that the sons could not sell, transfer or encumber the interest during the existence of the trust; that if either son died during the initial period of the trust, leaving no heirs of his body, then the trust estate should revert to petitioner and his wife.

In addition to the broad powers of management and discretion vested in petitioner as trustee, the instrument also gave him the absolute management and control of "all the affairs and business of said partnership . . restriction, interference or limitation." It gave him power to retain and use so much of the earnings of the partnership as in his judgment was wise as additional working capital, and to determine the time and manner of withdrawals therefrom. No one could withdraw any funds without his approval. He alone had authority to sign checks.

As is...