Miller v. Commissioner of Internal Revenue, 11003.

• Decision Date: 02 June 1950
• Docket Number: No. 11003.,11003.
• Citation: 183 F.2d 246
• Parties: MILLER v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Sixth Circuit

183 F.2d 246 (1950)

MILLER v. COMMISSIONER OF INTERNAL REVENUE.

No. 11003.

United States Court of Appeals Sixth Circuit.

June 2, 1950.

Lee C. McCandless, Butler, Pa., Lee C. McCandless, Butler, Pa., on brief, for petitioner.

S. Walter Shine, Washington, D. C., Theron Lamar Caudle, Ellis N. Slack, Robert N. Anderson, and S. Dee Hanson, all of Washington, D. C., on brief, for respondent.

Before MARTIN, McALLISTER, and MILLER, Circuit Judges.

McALLISTER, Circuit Judge.

Petitioner, Sam H. Miller, appeals from a decision of the Tax Court holding that he and his wife were not partners in a business enterprise so as to be recognized as such for income tax purposes; that they were not equal partners with certain trusts, claimed to be partnership interests, established for their children; and that petitioner was not entitled to a deduction for a loss on a pedigree dog purchased and used for breeding purposes.

The factual background of the case is as follows: Petitioner and his wife, Florence R. Miller, were married June 26, 1929, and in 1941, at the time they filed the separate tax returns which resulted in the present controversy, they had three children. Prior to his marriage in 1929, Miller, who had graduated from college with a degree in engineering, determined, because of bad eyesight, not to follow that profession, but to enter the drug business. He became a drug clerk; acquired outright ownership of what was described as "a drug store in failing financial condition" in Warren, Ohio; and became a part owner of two drug stores in Youngstown, Ohio. Before her marriage, Mrs. Miller had worked in stores in the sale and merchandising of toilet goods, cosmetics, and feminine hygiene items. She had been a trained beauty technician. Even before the parties were married, she had been working with her fiance at the Warren store, on Sundays, and through her efforts, had helped "to pull the Warren store out of the red." By 1934, petitioner was operating five stores under the name of S. H. Miller & Company, later changed to Miller's Cut Rate Drugs, and capitalized at $42,000. In that year, petitioner made a gift to his wife of a one-half interest in the company, for the purpose of establishing a partnership with her; and a gift tax return, with the donee's consent, was filed, with a valuation of $21,000 on the gift. The Commissioner, however, refused to recognize the gift or the partnership until 1936. In that year, petitioner and his wife drew up articles of copartnership, which were presented to the Commissioner; and the earnings of the business were thenceforth reported on partnership returns from 1936 to 1940, which the Commissioner did not question. The taxes in controversy are income taxes for the year of 1941.

During the period from 1936 to 1941, the business continued to expand and to increase its earnings. Six new drug stores were added to the chain, and earnings increased from $20,000 in 1936 to more than $34,000 in 1941. During this period, additions of capital to the business were made by both the petitioner and his wife in substantially equal amounts. The wife also made payments on company indebtedness to companies controlled by petitioner's father and brother, although she herself was not legally subject to liability on the loans; and new obligations to these creditors were assumed and signed by Mrs. Miller. The payments made by Mrs. Miller on the indebtedness of the company matched payments made by petitioner. Most of the earnings of the business were added to capital and expansion.

In December, 1940, and January, 1941, the petitioner and his wife created twelve trusts for the equal benefit of their three children. All of the trusts created by petitioner and his wife were created from their existing interests in the business. In January, 1941, William R. Miller, the petitioner's father, created three additional equal trusts for the children, with substantially the same provisions as the trusts created by the petitioner and his wife. The purport of the fifteen trusts was to divide the business between the petitioner and his wife and the three children, who were considered partners through the trustees, so that each member of the family was credited with a one-fifth interest in the business, and a corresponding one-fifth of the earnings of the business, which was conducted just as it had been before.

In addition to the foregoing, petitioner claimed a deduction for a loss sustained in the operation of a kennel.

The Tax Court held that petitioner and his wife were not partners for income tax purposes; that the trusts established by petitioner and his wife for their minor children were not partnership interests; and that petitioner did not establish a loss on his claim for a deduction. The Tax Court further found that the trusts established by petitioner's father for the children resulted in valid partnership interests. From the decision of the Tax Court, petitioner appealed.

We come, then, to the principal issue: whether, for income tax purposes, all of the income of Miller's Cut Rate Drugs was, under the circumstances disclosed, properly taxable to the husband alone, or whether it was to be divided between the husband and his wife.

Petitioner contends that his wife, Florence R. Miller, invested her independent capital in the business; that she contributed substantially to the management and control of the business; that she performed other vital services; and that the arrangement met the requirements of a valid family partnership.

At the outset of its opinion, the Tax Court quoted from the opinion of the Supreme Court in Commissioner v. Tower, 327 U.S. 280, 66 S.Ct. 532, 537, 90 L.Ed. 670, 164 A.L.R. 1135, as follows: "There can be no question that a wife and a husband may, under certain circumstances, become partners for tax, as for other, purposes. If she either invests capital originating with her or substantially contributes to the control and management of the business, or otherwise performs vital additional services, or does all of these things she may be a partner as contemplated by 26 U.S.C. §§ 181, 182, 26 U.S.C.A. Int.Rev.Code §§ 181, 182. * * * But when she does not share in the management and control of the business, contributes no vital additional service, and where the husband purports in some way to have given her a partnership interest, the Tax Court may properly take these circumstances into consideration in determining whether the partnership is real within the meaning of the federal revenue laws."

The latest pronouncement of the Supreme Court on the subject of partnerships under the income tax law is found in Commissioner v. Culbertson, 337 U.S. 733, 69 S.Ct. 1210, 1212, 93 L.Ed. 1659, which was decided subsequent to the decision of the Tax Court in the instant case. In the Culbertson case, the Supreme Court, in reversing a decision of the Tax Court on a question of a family partnership under the income tax law, observed that "The Tax Court read our decisions in Commissioner v. Tower, supra, and Lusthaus v. Commissioner, 327 U.S. 293, 66 S.Ct. 539, 90 L.Ed. 679, supra, as setting out two essential tests of partnership for income-tax purposes: that each partner contribute to the partnership either vital services or capital originating with him. * * * It treated as essential to membership in a family partnership for tax purposes the contribution of either `vital services' or `original capital.' Use of these `tests' of partnership indicates, at best, an error in emphasis. It ignores what we said is the ultimate question for decision, namely, `whether the partnership is real within the meaning of the federal revenue laws' and makes decisive what we described as `circumstances (to be taken) into consideration' in making that determination." The court continued: "The question is not whether the services or capital contributed by a partner are of sufficient importance to meet some objective standard supposedly established by the Tower case * * *." The court then proceeded to announce the rule that the test whether a family partnership is a real partnership for income tax purposes is "whether, considering all the facts — the agreement, the conduct of the parties in execution of its provisions, their statements, the testimony of disinterested persons, the relationship of the parties, their respective abilities and capital contributions, the actual control of income and the purposes for which it is used, and any other facts throwing light on their true intent — the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise. There is nothing new or particularly difficult about such a test. Triers of fact are constantly called upon to determine the intent with which a person acted. * * * Whether the parties really intended to carry on business as partners is not, we think, any more difficult of determination or the manifestations of such intent any less perceptible than is ordinarily true of inquiries into the subjective."

With these criteria before us, we come to the consideration of the circumstances surrounding the parties' conduct, their business abilities, contributions, agreements, and whatever facts may throw light upon their true intent.

Inasmuch as the case turns upon the facts in their entirety, we review them in some detail. The record reveals that Mrs. Miller had been trained as a beauty technician and was experienced in selling toilet goods in a leading department store. Except for the time when her infant children required her care, her testimony shows that she was either helping with the personnel in the stores, or was with her husband continuously on out-of-town trips, looking for new locations of stores and attending merchandise shows and displays. Petitioner testified that he consulted with his wife every single day about the details of the business; that this commenced before 1934, the year in which h...