Schneider v. Kelm

• Decision Date: 30 October 1956
• Docket Number: 15581.,No. 15580,15580
• Citation: 237 F.2d 721
• Parties: Robert S. SCHNEIDER, Appellant, v. Elmer F. KELM, (Formerly) Collector of Internal Revenue (St. Paul, Minnesota), Appellee. Adolph SCHEIN, Appellant, v. Elmer F. KELM, (Formerly) Collector of Internal Revenue (St. Paul, Minnesota), Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

237 F.2d 721 (1956)

Robert S. SCHNEIDER, Appellant, v. Elmer F. KELM, (Formerly) Collector of Internal Revenue (St. Paul, Minnesota), Appellee.

Adolph SCHEIN, Appellant, v. Elmer F. KELM, (Formerly) Collector of Internal Revenue (St. Paul, Minnesota), Appellee.

Nos. 15580, 15581.

United States Court of Appeals Eighth Circuit.

October 30, 1956.

Harry L. Altman, Minneapolis, Minn., for appellants.

Louise Foster, Atty., Dept. of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., and Lee A. Jackson, Robert N. Anderson and Walter R. Gelles, Attys., Dept. of Justice, Washington, D. C., and George E. MacKinnon, U. S. Atty., St. Paul, Minn., were on the brief), for appellee.

Before JOHNSEN, VAN OOSTERHOUT and WHITTAKER, Circuit Judges.

WHITTAKER, Circuit Judge.

These are "family partnership" income tax cases, involving the legitimacy, for Federal income tax purposes, of a partnership, created in February, 1944, between husbands and wives.

For each of the years 1946 and 1947 appellant, Robert S. Schneider, and his wife, Bertha, and appellant, Adolph Schein, and his wife, Jennie, each filed individual Federal income tax returns reporting 25% of the net income from a partnership, engaged in manufacturing ladies' dresses in Minneapolis, known as Boulevard Frocks Co. The Commissioner, asserting that the partnership was not legitimate for Federal income tax purposes, attributed the income reported by the wives to their husbands, resulting in proposed deficiency assessments against the husbands and in overassessments against the wives. Each of the husbands filed a protest with the Commissioner, but therein proposed settlement of the controversy on the same basis as he had earlier settled a like controversy with the Commissioner, respecting the years 1944 and 1945, while pending in the Tax Court. That basis was to apply the wife's refund upon the husband's deficiency, and for the husband to pay, in cash, 50% of the excess of the proposed deficiency assessments against him over the resulting overassessment against his wife. The Commissioner agreed to the proposed settlements, and, accordingly, on November 30, 1950, the husbands each executed a document (Treasury Form 870), consenting to the assessment against them of, and agreeing to pay, a deficiency, computed on the settlement basis stated, and, on the same day, the wives each executed a document (Treasury Form 873), agreeing to the proposed overassessment against them and that the refunds resulting to them were to be applied toward payment of the amounts agreed to be paid by their respective husbands, and that they would not file any claim for refund of income taxes for those years. On the same day the husbands each paid to appellee the balance of the amounts of the settlements.

In reliance upon the settlements, the Commissioner took no further action, and the statute of limitations barred any further assessment against the husbands, in respect of the year 1946, on March 15, 1952, and in respect of the year 1947, on March 15, 1953, and barred any claim for refund by the husbands after two years from the date of the settlements on November 30, 1950.

Becoming dissatisfied with the settlements, and understanding that the Treasury Department Form 870 which they had signed was not a bilateral or enforceable contract of settlement, nor a final closing agreement under Section 3760 of the Internal Revenue Code, 26 U.S.C.A. § 3760, the husbands each filed, on November 26, 1952 — and, therefore, within two years from the date of their payments, but after the Commissioner was barred from making any further assessment against them in respect of the year 1946 — claims for refund of the deficiencies so paid, in which they each recognized that their claims, if successful, would result in deficiencies against their respective wives. Those claims were disallowed by the Commissioner, and soon afterward these suits, to recover the sums paid by, and credited to, the husbands on the settlements mentioned, were instituted in the District Court.

The suits were consolidated for trial and tried before the Court without a jury. The principal question involved at the trial was whether the partnership was legitimately created in good faith and for a sound business purpose. After hearing the voluminous evidence adduced, the Court concluded that it was not, and made findings of fact accordingly and entered judgment of dismissal upon the merits in each case, and the husbands, separately, have appealed to this Court.

Because appellants contend that the trial Court's findings are not supported by any substantial evidence and are "clearly erroneous", it is necessary for us to summarize the relevant evidence in some detail.

The evidence disclosed that in 1918 appellant, Schein, and others, created Boulevard Frocks, Inc., a Minnesota corporation, to engage in manufacturing and selling ladies' dresses; that in 1928 appellant, Schneider, purchased 20% of the outstanding stock of the corporation for $15,000. He had half of the money, and the other half was advanced to him as a loan by his wife's father. He repaid three-fourths of the loan, and the remaining one-fourth was forgiven; that in 1937 other stockholders retired from the business and Schein and Schneider acquired their stock, so that, thereupon, each owned one half of the outstanding stock of the corporation, or 342 shares;

That in 1943 the corporation was "in a bad excess profits tax position due to low base period earnings", and, because of its comparatively large surplus and the desire of Schein and Schneider to accumulate and retain a still larger surplus as a "cushion", the corporation faced undistributed profits taxes or penalties;

That in November, 1943, Schneider told Schein that he proposed to make a gift of one half of his stock in the corporation to his wife, and Schein testified: "I felt that as long as he was going to make a gift to his wife, I, in turn, would do the same thing * * * I didn't want to discredit against Mrs. Schein, I said I will make the same decision as long as you want to make the decision. I will give Mrs. Schein one half of my stock", and, thereupon, and on the same day, without communicating with the wives, both Schneider and Schein transferred one half their stock in the corporation, or 171 shares, to their respective wives; that the certificates to the wives were placed and retained in the company's office safe; that the value of each gift was about $30,000, and that gift tax returns were filed but they involved no tax. Schneider testified that his reasons for the gift to his wife were that her father had loaned half of his original investment and had forgiven part of it, and she had rendered services to him in the nature of counsel and advice, and, he felt, she was entitled to the security that the gift would give her. Schein testified: "Our reasons as I stated before were that we felt that the women were entitled to one-fourth of the stock at that time and as long as Mr. Schneider had made up his mind, I followed suit";

That a little over two months later, in February, 1944, the corporation, though not dissolved, was liquidated by the transfer of all its assets to Adolph Schein, Jennie Schein, Robert S. Schneider and Bertha L. Schneider, who assumed its liabilities, and, thereupon, under the same date, the four parties signed a partnership agreement to carry on the same business at the same place, with the same assets, as equal partners, and providing that Adolph Schein and Robert S. Schneider "shall devote their full time to the conduct of the business of the partnership, having and being responsible for the same duties as they were authorized and bound to discharge in said liquidated corporation", for which they were to be paid salaries (and they were paid salaries of $15,000 per annum for a term, and later at the rate of $20,000 per annum), but the wives were only to "devote to the business so much of their time as shall be advantageous and expedient in the judgment of the partners", and were not to be paid any salaries.

Schneider testified that he had thought about liquidating the corporation and forming a partnership for some time, but could not state the exact length of the period, but he denied that he was thinking of forming a partnership when he gave the stock to his wife. Jennie Schein testified that the matter of creating a partnership came up at the time of the gifts of the stock.

Schneider testified that the reasons for liquidating the corporation and forming a partnership were that "we felt that our wives would take more interest in the business as partners", and that inasmuch as it was frequently necessary for both Mr. Schein and Mr. Schneider to be absent "we felt that the wives would sign checks while we were gone", and he said, "Furthermore, we were in a low bracket due to excess profits tax at the time, and we felt that we couldn't keep sufficient money on that basis to take care of us in case of an emergency, and we felt that as a partnership we would be taxed the one time, whereas the other way, the...