Monroe v. Comm'r of Internal Revenue

• Decision Date: 28 June 1946
• Docket Number: Docket No. 6380.
• Citation: 7 T.C. 278
• Parties: M. M. MONROE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

7 T.C. 278

M. M. MONROE, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 6380.

Tax Court of the United States.

Promulgated June 28, 1946.

Petitioner and his son executed an agreement of partnership under which his minor son agreed to devote his entire time to the business. The son, a minor, returned to school shortly after the agreement was executed. The facts show that he did not contribute any capital to the business originating with himself. Held, that petitioner is taxable on the entire income of the business. Q. L. Garrett, Esq., for the petitioner.

Edward L. Potter, Esq., for the respondent.

Respondent determined a deficiency in income tax for the fiscal year ended June 30, 1941, in the amount of $1,218.36. Petitioner concedes that there is a deficiency in that amount.

Respondent determined a deficiency in income tax for the fiscal year ended June 30, 1942, in the amount of $23,459.48. Petitioner concedes disallowance of a deduction of $5,400 for a contribution. Petitioner contests respondent's determination that he is taxable on all of the income of a business. Petitioner contends that a partnership existed, consisting of himself and his son, and that, therefore, the earnings of the business are taxable one-half to petitioner and one-half to his son.

Petitioner filed his returns with the collector for the district of Georgia.

FINDINGS OF FACT.

Petitioner resides at Waycross, Georgia. He is married and has three children, one of whom is Moi M. Monroe, Jr., who was born in 1922 or 1923.

Petitioner conducts a general business of purchasing, processing and selling furs, hides and pecans at Waycross, Georgia, and at Savannah, Georgia. He started his business in 1920. The business at Waycross is operated under the name of Georgia Hide & Fur Co. The business at Savannah is operated under the names of Blue Ridge Hide & Fur Co. and D. Kirkland Co. Petitioner personally conducts the business of the Georgia Hide & Fur Co. An employee, who is paid 50 per cent of the profits of the business at Savannah, manages the Blue Ridge Hide & Fur Co. and the D. Kirkland Co.

Petitioner's business is seasonal. During the peak season, from the latter part of October to the early part of January, petitioner employs 30 to 40 men, and during the slack season, 10 or 12 men.

The business which petitioner conducts is largely a trading business. Pecan nuts and hides are bought from producers around the countryside for cash. This produce is later sold by petitioner to customers, and from 20 to 50 per cent of the produce is sold through brokers who receive a commission. Petitioner has a line of credit for $200,000, unsecured, with a Florida bank. The income of petitioner's business is derived from the profits made upon the resale of the produce which is purchased from producers.

The real estate where the Waycross, Georgia, business is located, with a building and sheds, has at all times stood in petitioner's name. Very little equipment is used in the business; only office equipment, scales, pecan graders, pecan crackers, and trucks and tractors.

The income of the business at Waycross is reported for a fiscal year. During the fiscal year ended June 30, 1941, petitioner's gross receipts from his business at Waycross amounted to $1,037,567.27; cost of goods sold was $950,640.58; gross profit was $86,926.69; expenses and business deductions were $52,808.99; and net profit was $34,117.70.

The income from the business conducted at Savannah is reported separately from the income of Georgia Hide & Fur Co. A separate return is filed for Blue Ridge Hide & Fur Co. The income from that business was reported on a calendar year basis in 1941.

During 1941 petitioner's son Moi, Jr., was a student at Culver Military Academy. While he was at home in the summer of 1941 three documents were executed by petitioner as follows:

(1) June 27, 1941, consent of Moi M. Monroe and Mrs. Monroe for their son, Moi, Jr., a minor, to engage in business.

(2) June 30, 1941, a bill of sale between Moi M. Monroe and Moi M. Monroe, Jr.

(3) July 1, 1941, partnership agreement between Moi M. Monroe and Moi M. Monroe, Jr.

The consent given to the minor son by the parents to engage in business gave him permission to engage in the hide, fur, and pecan business; to receive the proceeds of his labor; to become an active general partner with his father in the businesses then operated by the father; to assume the full responsibilities of an adult partner; and to receive and hold the profits of his share from such business as his sole and separate property and estate.

The bill of sale provided that petitioner conveyed to his son Moi, Jr., ‘a one-half undivided interest in and to Georgia Hide and Fur Company, D. Kirkland Company, and Blue Ridge Hide and Fur Company, consisting of the following property, to wit:‘ (Followed by a list of trucks and motor equipment, 2 scales, 1 pecan grader, 4 pecan crackers, office furniture and equipment, and a general reference to the stock of merchandise contracts, and money on hand and on deposit.) The bill of sale provided, further, as follows:

This conveyance is expressly made subject to the payment by second party of one-half of all obligations of said businesses consisting of notes, open accounts, and other forms of indebtedness.

The bill of sale was recorded on July 2, 1941, with the clerk for Ware County, Georgia.

The partnership agreement purported to admit Moi, Jr., into partnership with his father in the three firms, Georgia Hid & Fur Co., Blue Ridge Hide & Fur Co., and D. Kirkland Co., and to create a partnership as of July 1, 1941. The agreement recited that ‘as a preliminary step to the formation of the partnership, Moi M. Monroe has this day conveyed by bill of sale to Moi M. Monroe, Jr., a one-half undivided interest in and to the assets and property of said Georgia Hide and Fur Company, D. Kirkland Company, and Blue Ridge Hide and Fur Company.‘

The agreement provided that petitioner would receive a salary of $5,000 per year for his services. It provided that ‘Moi M. Monroe, Jr., is to devote his entire time to the business and is to receive a salary of $50.00 per week. ‘ The agreement provided, further, as follows:

It is contemplated that the partners will agree mutually to increase the salary of Moi M. Monroe, Jr., as he gains experience and knowledge of the businesses.

The agreement provided, also, that after paying the salaries and expenses, the profits of the business would be divided equally between the two partners.

At the time the three documents described above were executed, Moi, Jr., was 18 1/2 years of age.

In September of 1941 Moi, Jr., returned to Culver, where he continued a two-year course to completion in June of 1942, at which time he received a diploma. He started this course at Culver in 1940, after graduating from high school. During 1941 he was at home for three months during the summer vacation, and for three weeks during the Christmas vacation.

When he completed his course at Culver in June 1942 Moi, Jr., went direct to the city of Bowling Green, Kentucky, where he enrolled at the Bowling Green Business University to take a course in business administration. He remained there until December 1942, when he enlisted in the Army. He was married in November 1943, just before he went over seas. He served in the Army until September of 1945, when he received his discharge and returned to Waycross. Since his discharge from the Army Moi, Jr., has devoted his full time to the business at Waycross.

As of June 30, 1941, the net worth of petitioner's business at Waycross, according to the books, was $80,000, exclusive of $19,480 owing to petitioner. The total amount of the assets and liabilities of both Georgia Hide & Fur and Blue Ridge Hide & Fur was $226,517.62.

On July 1, 1941, an account was set up on the books of the business entitled ‘partnership,‘ with a credit of $80,000. No separate capital accounts were set up for petitioner and his son, so that there was no account on the books showing that Moi, Jr., had an interest in the business. A drawing account was opened for Moi, Jr. Petitioner already had a drawing account on the books. At the close of the fiscal year ended June 30, 1942, each drawing account was credited with one-half of the year's profits, but Moi, Jr., did not receive any distribution out of the profits. All that he received was the sums he withdrew against his drawing account, which had no original credit made in it, the total withdrawals being only $3,011.23. The credit to the son's drawing account at the end of the year more than offset the withdrawals during the year.

Moi, Jr., was not paid or credited any sum as salary during the fiscal year ended June 30, 1942, nor during the period he was in the service. He drew against his drawing account the total amount of $3,011.23 during the year ended June 30, 1942. Some of the above total amount was used for the purchase of defense bonds.

Petitioner paid the tuition and school expenses of Moi, Jr., at Culver, which amounted to at least $1,100.

The banks where petitioner had accounts for the businesses and where he obtained loans were not told a partnership had been formed. The son of petitioner signed seven checks for the Georgia Hide & Fur Co. in August 1941. These checks have the name of the firm printed on them. Petitioner knew the officers of the bank, and they understood that petitioner's son might sign some checks. Moi, Jr., did not sign any notes for the company, which were signed only by petitioner.

A new letterhead of Georgia Hide & Fur Co. was printed after July 1, 1941, on which the name M. M. Monroe, Jr., appears. However, the firm name is printed thereon simply as Georgia Hide & Fur Co., and there is no reference to the nature of the organization, i.e., whether it is a corporation or a partnership, or otherwise.

From the time Moi, Jr., was a lad of about 12 years he had done a boy's work at his fa...