Miller v. Commissioner of Internal Revenue

• Decision Date: 19 March 1953
• Docket Number: 11552.,No. 11551,11551
• Citation: 203 F.2d 350
• Parties: MILLER v. COMMISSIONER OF INTERNAL REVENUE (two cases).
• Court: U.S. Court of Appeals — Sixth Circuit

203 F.2d 350 (1953)

MILLER v. COMMISSIONER OF INTERNAL REVENUE (two cases).

Nos. 11551, 11552.

United States Court of Appeals Sixth Circuit.

March 19, 1953.

Lee C. McCandless, Butler, Pa. (Lee C. McCandless, Butler, Pa., on the brief), for petitioners.

S. Dee Hanson, Washington, D. C. (Charles S. Lyon, Ellis N. Slack and S. Dee Hanson, Washington, D. C., on the brief), for respondent.

Before ALLEN, McALLISTER and MILLER, Circuit Judges.

McALLISTER, Circuit Judge.

These cases come again before us after remand and subsequent rehearing before the Tax Court. See Miller v. Commissioner, 6 Cir., 183 F.2d 246. A comprehensive statement of the facts may be found in our prior opinion. This appeal is taken from the Tax Court's decision holding that the taxpayers, Sam H. Miller and Florence Miller, in making alleged transfers of portions of their interests in their partnership to themselves, as trustees for the benefit of their three minor children, did not intend to form a real business partnership with the children, or with themselves, as trustees for the children, and, therefore, that the children's twelve trusts are not to be recognized as bona fide partners for income tax purposes, with the result that all of the income from the partnership, for the taxable year 1941, was attributable and chargeable to the taxpayers, under Section 22(a) of the Internal Revenue Code, 26 U.S.C.A. § 22(a).

Prior to the making of the above named trusts, Sam H. Miller and Florence R. Miller, his wife, as copartners, owned equal interests of $60,000 each in a drug store business. During the year 1940, the Millers had lost a prominent location for one of their stores in Butler, Pennsylvania, when a large chain store corporation had acquired the lease. At that time, they felt it was necessary to secure another location in that city, and, in making arrangements to purchase a drug store, they called on Mr. Miller's father, W. R. Miller, for financial assistance. Thereafter, during the fall of 1940, Mr. and Mrs. Miller had many talks with W. R. Miller on the subject, and it was finally agreed among all of them that the elder Miller would invest $15,000 in the business in order to purchase the drug store in question, subject to certain conditions. In the first place, this sum of $15,000 was to be used to secure interests of $5,000 to each of the three children of Sam H. Miller and Florence Miller. At that time, these children were William, aged eleven, Samuel, aged ten, and Barbara, aged eight. Mrs. Miller was also the mother of a boy, John Siebert, aged sixteen, by a prior marriage. In addition to securing interests for the three children, as above mentioned, the elder Miller was concerned about what might happen to them in the case of the death or remarriage of either of their parents. His purpose was to insure the most substantial provision for the children, in so far as he was able. After many consultations, the elder Miller required, in addition to providing three trust interests in the partnership for the children in the amount of $5,000 each, that Sam H. Miller and Florence Miller set up trusts for the children out of their own interests in the business in such a way that each of the children would have an interest of 20% in the partnership business, with the result that each of the children and their parents would each be the owners of a one-fifth interest in the business. Mr. and Mrs. Miller agreed to this proposition. They both were possessed of sources of income from an entirely different enterprise. After the understanding was entered into between W. R. Miller and Sam H. Miller and his wife, Florence, the elder Miller instructed them to consult their attorneys and reduce the agreements to writing. They, accordingly, called upon Myron Ullman, an attorney of Youngstown, Ohio, and after a drafting and preparation of agreements that extended over a period of four or five months until they were satisfactory to the parties, the final drafts were eventually executed, as follows:

On December 31, 1940, the first trust agreement was entered into by Sam H. Miller and Florence R. Miller, as donors, whereby each donor placed an interest in the partnership in trust for each of the three children, making six trusts in all, valued at $4,000 each.

A new partnership agreement dated January 1, 1941, was executed, reciting that the partnership, which was formerly owned by Sam H. Miller and Florence R. Miller, was now owned one-fifth by Sam H. Miller, one-fifth by Florence R. Miller, one-fifth in trust for William R. Miller II, one-fifth in trust for Samuel H. Miller, Jr., and one-fifth in trust for Barbara J. Miller.

On January 2, 1941, Sam H. Miller and Florence R. Miller, as donors, by separate agreements, recited that W. R. Miller was investing $15,000 additional capital in the partnership, in trust for his three grandchildren, thus raising the value of the new partnership to $135,000, and further recited that the Millers were placing additional interests in the partnership in trusts for each of their three children, making an additional six trusts, which, with the prior trusts, amounted to a total of twelve trusts, giving each child a one-fifth interest in the business, valued at $27,000 each.

On January 17, 1941, W. R. Miller became the donor in a trust agreement in which it was recited that on January 1, 1941, he had discussed with his son the advisability of enlarging the business by acquiring a new store, and had agreed to invest $15,000, thereby acquiring a 15/135th interest, and had instructed his son to prepare the appropriate agreement so that he might give the interest in trust to the children of Sam H. Miller and Florence R. Miller. This agreement, by reference, incorporated the applicable provisions of the first trust instrument entered into by Sam H. Miller and Florence Miller dated, as above mentioned, December 31, 1940.

It appears from the evidence that several days prior to the execution of the first trust instrument above mentioned, at a meeting, on December 21, 1940, of the Mercer Water Company, which was apparently owned by the members of the Miller family, a motion was adopted in which it was unanimously resolved that Sam H. Miller, Florence R. Miller, and Sam H. Miller and Florence R. Miller, Trustees for the Trust Estates held for William R. Miller II, Samuel H. Miller, Jr., and Barbara Jeanette Miller, be authorized to assume, as of January 1, 1941, certain loans of Sam H. Miller and Florence R. Miller. At this meeting, the President of the company, W. R. Miller, was present. As of the date of the meeting, however, Sam H. Miller and Florence R. Miller had not yet set up the trusts in favor of their children, the action being afterward ratified. The incident is here mentioned, however, as indicating that some time before any of the trust agreements was executed, W. R. Miller, Sam H. Miller, and Florence Miller proceeded upon the assumption that the parents were acting as trustees for...