Schnitzer v. Comm'r of Internal Revenue

• Decision Date: 14 July 1949
• Docket Number: 14209,14280,14279,14372.,Docket Nos. 14208,14278
• Citation: 13 T.C. 43
• Parties: SAM SCHNITZER, PETITIONER, ET AL.,* v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

13 T.C. 43

SAM SCHNITZER, PETITIONER, ET AL.,*

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 14208

14209

14278

14279

14280

14372.

Tax Court of the United States.

Promulgated July 14, 1949.

1. Two individuals, engaged for many years in the junk business signed a partnership agreement in 1928, giving to the wife of each a one-fourth interest. When the husbands began the junk business in a humble way, the wives' doweries in part supplied capital, and the wives also gave assistance by services. As the business expanded into a large and profitable enterprise, the wives were constantly consulted about policy; the husbands deferred to their judgment in business matters; and the wives participated fully and often decisively in important decisions. For 1941 the four spouses successfully contested tax deficiencies which the Commissioner had determined against them by disallowing as excessive a part of the salaries paid by the partnership to family members, and in its report this Court made a finding that the four were conducting business as partners, as alleged by them and admitted by the Commissioner. For 1942 and 1943 the Commissioner determined that the wives were not recognizable as partners for tax purposes. Held:

(1) That the status of the wives as partners recognizable for tax purposes, is not res judicata by virtue of the decision in the prior proceeding, and, as the question was not there put in issue, the Commissioner is not collaterally estopped to raise it here. Commissioner v. Sunnen, 333 U.S. 591.

(2) That, on the evidence, the wives are recognizable for tax purposes as members of the partnership.

2. The partnership and the son of a partner in and after 1941 made numerous advances on open account to a corporation organized with an authorized capital of a quarter of a million dollars to erect and operate a steel mill. The corporation issued its shares to the son, the partners, and their wives, and in March 1943, when advances aggregated about three-quarters of a million dollars, entries were made on the books of the partnership and of the son's business crediting $187,800 to payment for the shares issued, which were of that par value; about a quarter of a million dollars to payment for corporate bonds issued in that amount; and the remainder was carried on open accounts receivable by the partnership and son and on corresponding open accounts payable by the corporation. Under a contract with RFC the corporation was forbidden to make any payments (except salary) to the stockholders until a $700,000 RFC loan should be paid off by it, and the stockholders agreed among themselves that the son, who held one-third of the shares, was to bear one-third of any total losses from the venture and the partnership, two-thirds. The corporation was unsuccessful and in November 1943 the stockholders sold their shares at one cent each and about $300,000 of the open accounts was written off as worthless. By contribution from the son the partnership's share of this loss was reduced to about $200,000. On the evidence, held, that the advances constituted contributions to capital, and hence the partnership's loss is not deductible as a bad debt. Robt. T. Jacob, Esq., and Randall S. Jones, Esq., for the petitioners.

Leonard A. Marcussen, Esq., for the respondent.

The Commissioner determined a 1943 income tax deficiency of $151,044.45 against Sam Schnitzer; of $151,049.05 against Harry J. Wolf, now deceased; and of $42,273.99 against the estate of Jennie Wolf, deceased. He determined further that Monte L. Wolf, Blossom M. Goldstein, and Charlotte C. Cohon are liable for the deficiency of Jennie Wolf's estate as transferees of all the estate's assets. The deficiencies determined against Sam Schnitzer and Harry J. Wolf, deceased, resulted from including in the income of each one-fourth of the profits of a partnership, which fourth had been reported by their respective wives as partners. The deficiency against the estate of Jennie Wolf resulted from an alternative determination that she was recognizable as a partner. In all three determinations the distributable shares of partnership profits were increased by disallowance of a bad debt deduction claimed by the partnership on account of the worthlessness of advances made by it to a corporation in which Sam Schnitzer, Harry J. Wolf, and their wives were stockholders. Petitioners contend that the wives were bona fide members of the partnership and recognizable as such for tax purposes; that the partnership's advances to the corporation were loans, not contributions to capital as respondent contends; and that the part of them which became worthless and was written off in 1943 is deductible as a bad debt.

FINDINGS OF FACT.

Sam Schnitzer, petitioner in Docket No. 14208, and Harry J. Wolf, deceased, residents of Portland, Oregon, in 1942 and 1943 prepared their income tax returns for those years on the cash basis and filed them with the collector of internal revenue for the district of Oregon. Harry J. Wolf died on February 6, 1948, and his son, Monte L. Wolf, is executor of his estate, petitioner in Docket No. 14209. Monte L. Wolf is also administrator de bonis non with the will annexed of the estate of Jennie Wolf, deceased, petitioner in Docket No. 14372. Jennie Wolf, wife of Harry J. Wolf, died on April 8, 1945, a resident of Portland, and the owner of property in excess of the deficiencies in tax asserted against her. She filed her income tax returns, prepared on the cash basis, for 1942 and 1943 with the collector of internal revenue for the district of Oregon. Monte L. Wolf, Blossom M. Goldstein, and Charlotte C. Cohon, petitioners in Docket Nos. 14278, 14279, and 14280, also residents of Portland, are children of Harry J. and Jennie Wolf, and received, as distributees of the residue of Jennie Wolf's estate, assets of a fair market value of $22,923.09, $23,855.57, and $24,112.08, respectively. The distribution of these assets left the estate without means to pay taxes, and these petitioners became thereby liable as transferees for any deficiency in tax of the transferor estate to the extent of the value of property received by each.

During the years 1942 and 1943 Sam Schnitzer and Harry J. Wolf were active in the operation of the Alaska Junk Co. (hereinafter called Alaska Junk), a partnership engaged in the business of buying, selling, and generally dealing in junk, pipe, tools, machinery, hardware, scrap, and other metal products at Portland. Its books were kept on an accrual basis, and partnership returns, prepared on that basis, were filed for it in 1942 and 1943 with the collector of internal revenue for the district of Oregon. On these returns Sam Schnitzer and his wife, Rose Schnitzer, and Harry J. Wolf and his wife, Jennie Wolf, were listed as the partners, and a share of profits was reported as distributable to each.

Wolf and his wife were married at Portland in 1906. Both were born abroad, but the wife had been educated in this country and spoke fluent English. Wolf did not. Her father was engaged in the junk business and employed Wolf as an assistant, but Wolf was unhappy in his work because his handicap exposed him to ridicule. He remained with his father-in-law long enough to know the various metals, and, as his wife was familiar with the junk business, they decided to operate independently. She had brought a dowry of about $1,000, and with this Wolf purchased a horse and wagon, and began to collect scrap metal in rural areas on trips that sometimes lasted two weeks or more. This scrap was sorted in the basement of their home, and his wife took customers' calls, dept records, and performed those duties of the business which required writing. Schnitzer and his wife were also born abroad. She brought the customary dowry, and Schnitzer began to buy and sell scrap metal also, developing a business in a petty way with his wife's aid. About 1911 Wolf and Schnitzer began working together in in the junk business, Wolf contributing his horse and wagon and some machinery and Schnitzer providing about $1,000 capital. In February 1912 they and S. Horwitz organized a corporation to engage in the junk business, and one share of $1,000 par value was issued to each of the three. Because of differences with Horwitz, the corporation was dissolved the following April. Thereafter Wolf and Schnitzer jointly operated a junk business without any formal agreement, and developed it into a large and profitable enterprise. The two families were on intimate terms during the ensuing years, and there were daily discussions of business problems and policies by the four at one or the other's home or at the business office. In these conferences the wives took an active part, especially Jennie Wolf, whose business acumen was respected by both husbands.

On January 3, 1928, the four spouses entered into a written agreement which recited that the two husbands ‘in consideration of love and affection * * * desire to admit‘ the two wives ‘as co-partners‘ in the business of buying and selling machinery, iron and iron products, which ‘S. Schnitzer and H. J. Wolf have heretofore carried on * * * under the names of Alaska Junk Company and Schnitzer-Wolf Machinery Company.‘ It was then agreed that the two husbands ‘assign, sell and transfer‘ to their respective wives a one-fourth interest in the business; that the husbands carry on the business in the same manner as before; that active management and control be vested in them; and that they have the exclusive right to enter into contracts, to obligate the partnership on notes, bills, and orders, to sign all checks, and to determine all questions of management and policy. The interest of each partner was fixed as one-fourth; each was to be allowed to draw weekly wages for services, and, after deduction of these wages and other business expenses, the resulting net profits were to be divided equally by the four and losses were to be so...