Paster v. Commissioner of Internal Revenue

• Decision Date: 21 June 1957
• Docket Number: No. 15703.,15703.
• Citation: 245 F.2d 381
• Parties: Herman PASTER, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

245 F.2d 381 (1957)

Herman PASTER, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 15703.

United States Court of Appeals Eighth Circuit.

June 21, 1957.

Maurice Weinstein, Milwaukee, Wis., for petitioner.

Carolyn R. Just, Attorney, Department of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., and Hilbert P. Zarky, Attorney, Department of Justice, Washington, D. C., on the brief), for respondent.

Before GARDNER, Chief Judge, and VOGEL and VAN OOSTERHOUT, Circuit Judges.

GARDNER, Chief Judge.

This matter is before us on petition to review a decision of the Tax Court of the United States wherein the Tax Court affirmed the action of the Commissioner of Internal Revenue in determining deficiencies in petitioner's income tax for the fiscal years ending January 31, 1944, 1945 and 1946 in the respective amounts of $40,768.14, $24,588 and $34,637.69.

In the year 1937 one Samuel Taran took over from taxpayer a business then being operated by him under the name of Mayflower Novelty Company. The business was that of selling and distributing novelty equipment such as juke boxes, pinball machines and bowling alleys. At all times thereafter and until on or about January 31, 1946, the business was operated under the exclusive management and control of taxpayer at which time taxpayer purchased the business and became the sole owner. Income tax returns indicated that the business was that of a partnership composed of Samuel Taran, who was taxpayer's wife's uncle, Taran's nephew, J. H. Nilva, and a trust denominated as "S. H. Taran, J. H. Nilva Trust". Initially taxpayer's compensation was fixed at $35 per week plus 15% of the profits of the business. On some date not definitely shown, possibly late in 1939, taxpayer's compensation for services to Mayflower was increased to $75 per week plus 20% of the net profits and at the close of the fiscal year ended January 31, 1943, Mayflower, according to its books, was indebted to him for services rendered in the amount of $51,511.82.

In the meantime and under date of December 29, 1942, taxpayer executed three instruments entitled respectively "Herman Paster — Trust Agreement for the Benefit of Celia Paster", "Herman Paster — Trust Agreement for the Benefit of Donald Joseph Paster" and "Herman Paster — Trust Agreement for the Benefit of Edward Jacob Paster". In each instrument it was recited that taxpayer had "transferred, assigned, set over and delivered * * * unto himself and Sam Walzer" as trustees "A Ten Thousand ($10,000.00) Dollar interest in the proceeds due Herman Paster as earnings for services rendered to the Mayflower Novelty Company." Celia Paster is taxpayer's wife and Donald Joseph and Edward Jacob are his sons. Except as to the named beneficiaries and the dates for termination of the trusts the instruments were identical and among other things each instrument recited that the trustees should have full power to sell, buy and manage any property comprising the trust property, "to collect, recover, and receive the income thereof and therefrom", and should not be responsible for any loss or damage which might result from the exercise of judgment or discretion "nor for any moneys or property except such as shall actually and in fact come into their possession" under the instrument; that no part of the income should be used to pay any life insurance premiums on policies on the life of taxpayer; that at least fifteen per cent of the income should be distributed annually to the beneficiary and the remainder distributed or retained as corpus in the discretion of the trustees; that the trusts should terminate on November 18, 1960, in the cases of Celia and Donald Joseph, that date being Donald Joseph's twenty-first birthday, and in the case of Edward Jacob on August 22, 1962, which would be his twenty-first birthday; that in the event of death of the beneficiary distributions were to go to issue, and there being no issue, to heirs at law; that the trustees should "keep and maintain separate books and records covering the trust estate"; that the trust was irrevocable and should not be capable of modification except as in the instrument specifically authorized and directed; that additions to the trust res might be made by taxpayer or others by the execution to that effect by the contributor of an instrument in writing and written acceptance thereof by the trustees, and that each trustee should receive $100 per year as compensation for his services. Each instrument also contained other provisions not here material.

Under date of February 1, 1943, the $51,511.82 credited to taxpayer on Mayflower's books for services rendered was entered in an account entitled "Note Payable — H. Paster". Of the $51,511.82 there was no withdrawal of the $30,000 purportedly assigned by taxpayer to himself and Sam Walzer, his brother-in-law, as trustees under the trust instruments but under date of February 1, 1943 a debit of $30,000 was entered in the "Note Payable — H. Paster" account under the description "trans to Note payable — H. Paster, S. Walzer trust" and under the same date an account entitled "Note Payable — H. Paster, Sam Walzer Trust" was credited in the amount of $30,000 as "Amt set up as trust investment."

At the close of the fiscal year ended January 31, 1944, and as "Profits accruing to Trusts fiscal year end 1/31/44," $51,519.81 was entered as a credit to the above "Note Payable — H. Paster, Sam Walzer Trust" account. The amount so entered had been taken from a memorandum or tabulation prepared by Walter Johnson, Mayflower's bookkeeper. On this tabulation entitled "Mayflower Distributing Co. — Determination of moneys due others — year 2/1/43-1/31/44," and after Mayflower's "Combined income," together with some limited breakdown thereof, was shown as $245,332.42, the following appeared:

"In consideration of $10,000.00 invested in business for each of 3 trusts the partnership has agreed to pay 7% of profits to each of trusts in return the original investment to remain in business & not subject to being withdrawn without consent of partnership

                   7% due Celia Paster Trust ... 17,173.27
                   7% due Donald Paster Trust .. 17,173.27
                   7% due Eddie Paster Trust ... 17,173.27
                  ___                            _________
                  21% totals ................... 51,519.81
                  14% due H. Paster for services
                      rendered ................. 34,346.54
                                                 _________
                      Total Amt. due others ....            85,866.35"
                

There was testimony that the above tabulation was prepared by Johnson on instructions from Taran and it was shown to Taran before entries were made therefrom in Mayflower's books. Tabulations similar to that indicating "moneys due others" for the fiscal year 1944 were prepared at the close of the fiscal year ended January 31, 1945, and January 31, 1946, from which credit entries to the "Note Payable — H. Paster, Sam Walzer Trust" account were made, the credit under date of January 31, 1945, being shown as "Profits for year end 1/31/45," as $33,879.66 and that under date of January 31, 1946, as "Profits for fiscal yr end 1/31/46," as $31,680.28.

Taxpayer testified that Mayflower and the trustees agreed that in consideration of the trustees permitting the company to retain the corpus of the trusts in the business and agreeing not to withdraw the funds without Mayflower's consent the company would pay to each trust 7% of its annual profit. There was no written contract covering this alleged agreement as to the profit-sharing arrangement either between taxpayer and the trusts, or between Mayflower and the trusts, or between taxpayer and the named beneficiaries. Taxpayer testified in effect that Taran knew of taxpayer's action in creating the trusts and that he consented to the arrangement by which the trusts were to receive in the aggregate 21% of the profits of the business. Taran, however, was not called as a witness, nor was any other member of the partnership called as a witness.

In the regular course of keeping Mayflower's accounts and in the reporting of its income the amounts credited to the "Note Payable — H. Paster, Sam Walzer Trust" account, and as derived from the 21% of the profits due the three trusts and the 14% of the profits due taxpayer were lumped together on Mayflower's books as selling expenses. The income tax returns for all three years in question listed the so-called income to the trusts as "Selling Expenses" along with taxpayer's salary and bonus in contrast to the treatment of interest on loans and finance fees which were deducted as "administrative expenses". The evidence will be further developed in the course of this opinion.

The Tax Court, based on a consideration of all the evidence made the following, among other, findings:

"We have since examined and reexamined the transcript and the other evidence of record, and taking into account the record as a whole, we are satisfied and have found as a fact that in so far as the side tabulations of moneys or percentages of profits `due others\' for the fiscal years ended January 31, 1944, 1945 and 1946, the entries made on the Mayflower books and the sheets maintained by Johnson or other records relied on herein tend or purport to show that the amounts in question were the income of the trusts and not the income of petitioner, they were shams and did not reflect the truth."

Having found the issues in favor of respondent the court entered its decision determining that there were deficiencies in petitioner's income tax for the taxable years 1944, 1945 and 1946 in the respective amounts of $40,768.14, $24,588 and $34,637.69.

Petitioner in effect urges that the evidence is insufficient to sustain the decision of the Tax Court and that under the evidence and the applicable law the income held to be taxable to petitioner was in fact income of the trusts which were valid and irrevocable.

In considering the contentions of petitioner we must have in mind...