Lynch v. Commissioner of Internal Revenue
Decision Date | 04 November 1954 |
Docket Number | No. 11083.,11083. |
Citation | 216 F.2d 574 |
Parties | Joe LYNCH, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
Court | U.S. Court of Appeals — Seventh Circuit |
Martin R. Paulsen, George D. Spohn, Milwaukee, Wis., John G. Quale, Roy C. LaBudde, Milwaukee, Wis., of counsel, for petitioner.
H. Brian Holland, Asst. Atty. Gen., Melva M. Graney, Atty. Dept. of Justice, Washington, D. C., Ellis N. Slack, George F. Lynch, Sp. Assts. to the Atty. Gen., for respondent.
Before DUFFY, Chief Judge, and MAJOR and LINDLEY, Circuit Judges.
The Commissioner of Internal Revenue (respondent) determined deficiencies in the income tax of petitioner, Joe Lynch (sometimes referred to as the taxpayer), for the years 1944 and 1945, in the amounts of $24,821.01 and $23,839.04, respectively. Upon the taxpayer's petition, the Tax Court of the United States, on September 29, 1953, rendered its decision upholding the deficiencies thus determined. The controversy is here upon taxpayer's petition to review and set aside the decision of the Tax Court.
The case involves the validity for tax purposes of a family partnership. For reasons subsequently disclosed, only a brief outline of the facts is required for the purpose of our decision. In 1937, and for several years previous thereto, the taxpayer was engaged as a retail merchant in men's clothes in the city of Milwaukee, Wisconsin. At that time he had a family consisting of his wife, three daughters, Marjorie, age 26, Helenjane, age 20, and Ruth, age 18, and a son, Joe, age 12. Marjorie and Helenjane were both married in 1940, and Ruth in 1942. For the most part, the daughters since their marriage have lived at places other than in the city of Milwaukee. In 1937, the net worth of petitioner's business was about $44,000. The net income from the business during that and previous years averaged from $4,000 to $6,000. In 1937, petitioner conceived the idea of dividing his estate with his children and for that purpose consulted with Mr. Carl B. Rix, an attorney. (We mention the name of the attorney because of his high standing as a lawyer and splendid reputation for integrity, professionally and otherwise.) Mr. Rix suggested to the taxpayer numerous ways in which the purpose could be achieved, including the formation of a partnership. As a result, a partnership agreement was prepared by Mr. Rix and signed by taxpayer and his three daughters on July 1, 1937. The agreement provided:
The agreement made provision in considerable detail for the conduct of the partnership business, the manner in which the books were to be kept, a distribution of one-fourth of the profits to each of the partners, and for numerous other matters common and incidental to a partnership business. Petitioner filed a Federal gift tax return for the year 1937 in which he reported gifts of one-fourth interest in the Joe Lynch business to each of his three daughters, and each of the daughters has for that and each succeeding year reported and paid income tax upon the profits of the business distributed to her.
Petitioner before the Tax Court relied upon the doctrine of collateral estoppel as a bar to the instant proceeding, which issue was decided adversely to petitioner. Thereupon, the Tax Court proceeded to hear evidence, make findings and decide the case on what is referred to as the merits, that is, that there was no valid partnership for tax purposes during the years 1944 and 1945, those for which deficiencies have been determined in the instant proceeding.
The taxpayer in his petition before the Tax Court alleged:
The Commissioner, as respondent, in answer to this allegation stated:
On January 19, 1940, the Commissioner determined that the entire income of the Joe Lynch partnership business for the period from July 1 to December 31, 1937 was includible in taxpayer's income for the reason that the purported partnership was not recognizable for Federal income tax purposes. On taxpayer's petition, the Board of Tax Appeals, on April 17, 1941, entered its decision in favor of the taxpayer and adverse to the Commissioner. This decision was not appealed by the Commissioner and, therefore, became final.
In its 1941 decision, the Board stated:
The instant proceeding was heard by Judge C. P. LeMire, a Judge of the Tax Court, and on June 4, 1953, the division of that court to which the case had been assigned filed a memorandum opinion, in which it was stated:
On June 12, 1953, the Chief Judge of the Tax Court entered an order withdrawing the findings of fact and opinion lastly referred to. On September 23, 1953, findings of fact were made and an opinion rendered by the Tax Court, in which all of its members participated. Upon such findings and opinion, the decision now under review was predicated. After a detailed review of the facts and the law, the Tax Court concluded that "petitioner and his daughters did not in good faith and acting with a business purpose join or intend to join together in the conduct of the Joe Lynch business enterprise," and "that no valid partnership existed in the years 1944 and 19...
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