Scofield v. Mauritz

• Decision Date: 10 July 1953
• Docket Number: No. 14372.,14372.
• Citation: 206 F.2d 135
• Parties: SCOFIELD v. MAURITZ et al.
• Court: U.S. Court of Appeals — Fifth Circuit

206 F.2d 135 (1953)

SCOFIELD v. MAURITZ et al.

No. 14372.

United States Court of Appeals Fifth Circuit.

July 10, 1953.

Carlton Fox, and Ellis N. Slack, Sp. Assts. to Atty. Gen., Charles S. Lyon, Acting Asst. Atty. Gen., C. F. Herring, U. S. Atty., Bradford F. Miller, Asst. U. S. Atty., San Antonio, Tex., H. Brian Holland, Asst. Atty. Gen., for appellant.

Homer L. Bruce, Thomas E. Berry and P. R. Rowe, Houston, Tex., Baker, Botts, Andrews & Parish, Houston, Tex., of counsel, for appellee.

Before HUTCHESON, Chief Judge, and RUSSELL and STRUM, Circuit Judges.

HUTCHESON, Chief Judge.

Consolidated for trial and appeal as Civil Action No. 1418, the three suits were for the recovery of income taxes overpaid for the taxable years 1942 to 1945, inclusive, on account of deficiencies assessed against plaintiffs,¹ as the result of the commissioner's action in allocating to the three brothers Mauritz and their wives income which had been allocated to, and returned by, the brothers as trustees of trusts each had created in 1935.

The claim was: that the grantors of these trusts had made valid and bona fide gifts to the trusts of the interests in the properties conveyed to them; that the properties were thereafter bona fide and in good faith operated by the three brothers and the trusts as joint owners; that where the trusts acquired at their creation interests in partnerships the trusts were valid and bona fide members in each partnership; that the trusts owned their corresponding proportion of the net income from said properties and partnerships; and that no part of the income attributed to the trusts should be included in the taxable income of the grantor of the trusts.

The answer, admitting that the deficiency assessments were made and collected as charged, denied that they were illegally collected and, alleging that the defendant was without knowledge or information as to the other matters alleged, the answer demanded proof thereof.

The case thereafter coming on for hearing, there was a lengthy trial, in the course of which plaintiffs offered, the trust instruments, a stipulation and detailed oral evidence as to the Mauritz family, as to their method and manner of doing business, and as to the businesses conducted and transactions had by them over a long period of years. At the conclusion of this testimony and of the very brief testimony of two witnesses offered by defendant, which in no manner controverted plaintiffs' proof, the cause was submitted and fully argued to the court.

The court, making full and detailed findings of fact² and conclusions of law, found and concluded: that the incomes claimed by the plaintiffs to belong respectively to five trusts created by T. N. Mauritz and and S. E. Mauritz, two trusts created by Fred Mauritz, and three trusts created by Harry and Ouida Mauritz on December 30, 1935, belonged in-law and in fact to those trusts; and that they had been improperly and illegally included by the Commissioner of Internal Revenue in the taxable income respectively of the creators of said trusts.

Based upon these finding and conclusions, the court determined that there had been overpayments as claimed by plaintiffs, and entered judgment for the recovery of the amounts sued for by them.

The collector is here insisting that in so finding and adjudging, the court erred. While the appellees, with equal vigor and apparently greater confidence, relying on the findings of fact and the record on which they rest, urge upon us, (1) that the question presented to this court is whether the extended findings of fact and conclusions of law of the district court in favor of taxpayers-appellees are, under Sec. 22(a) I.R.C.,³ clearly erroneous; and (2) that the answer must be in the negative and the judgment affirmed.

Insisting that the primary issue in this case is whether, as determined by the commissioner, each of the three Mauritz Brothers should, in the taxable years 1942 to 1945, inclusive, be charged under Sec. 22(a) of the Internal Revenue Code, with a third of the income of the business carried on by them in those years in the name of Mauritz Bros., or whether such income should be allocated, 40 percent in the aggregate to them and 60 percent in the aggregate to the ten trusts which, on December 30, 1935, they had created for the benefit of their respective children and other relatives, the Collector urges upon us that the commissioner's determination was right and should be approved, the judge's wrong and should be disapproved.

In putting forward its argument in support of this position, appellant brings it to a focus on pages 15 and 16 of his brief by declaring:

"The answer to this question depends upon the answer to each of two underlying or subsidiary considerations, namely, (1) whether the business was, for tax purposes, to be regarded as a partnership consisting of the three brothers and the ten trusts referred to, and (2) whether, regardless of whether there was such a partnership, the income of each of the trusts should, for federal tax purposes, be regarded as that of T. N. Mauritz and his wife, as the grantors of the five trusts they had created; of Fred Mauritz as the grantor of the two trusts he had created; and of Harry Mauritz and his wife as the grantors of the three trusts they had created.

"Obviously, the first of these underlying questions requires an application to the facts of this case of the principles of the case of Commissioner of Internal Revenue v. Culbertson, 337 U.S. 733 69 S.Ct. 1210, 93 L.Ed. 1659, and related cases hereinafter referred to, and the answer to the second, the application thereto of the principles of the case of Helvering v. Clifford, 309 U.S. 331 60 S.Ct. 554, 556, 84 L.Ed. 788, and related cases hereinafter referred to. * * *"

The brief then goes on to say:

"Our task here, then, is twofold: First, it is to show that the concern known as Mauritz Brothers was not a partnership during the taxable years, of which the trusts or their beneficiaries were members; and, second, that, whether or not Mauritz Brothers was a partnership and the trusts members thereof, the trusts were what are commonly called `Clifford case\' trusts, with the result that the income of the trusts which each brother and his wife had created was attributable to him and his wife for the taxable year in question.

"And finally, we wish to point out that, while the two subsidiary questions will be separately discussed under our subpoints A and B, respectively, the evidentiary factors involved in a consideration of the one are the same as those involved in a consideration of the other. The essential difference between the two problems lies, as has already been indicated, in the approach to each; that is to say, in considering the first, i. e., the so-called `family partnership\' issue, we must approach the problem with a view of applying the principles of the Culbertson and kindred cases to the facts, whereas, in considering the second, i. e., the so-called `Clifford\' issue, we must approach the problem with a view to applying the principles of the Clifford and kindred cases thereto."

It thus appears that, instead of approaching the decision of the over all question, whose is the income, on the basis of the underlying and over all facts as found by the district judge in the light of the plain and simple, the controlling, language of the statute, the collector approaches it with a predetermination to give the situation a label and a name which, once affixed to it, will, by a kind of begging of the question, produce the desired, the assumed conclusion.

In Batman's case, Batman v. C. I. R., 5 Cir., 189 F.2d 107, we undertook to carefully point up this tendency of advocates to beg the question by affixing a name or label, and also to point to the dangers and to ways and means of avoiding those dangers.

There it was the taxpayer who applied the label "partnership" to a device for separating the income from the earner, the fruits from the tree, and sought, by the magic of the name applied, to have the label supply the needed proof, that the income which he sought to have ascribed to the son was the son's income and not his, that in short, the son and not the father, was the owner to the extent of the income ascribed to him, of the tree which produced the fruit.

Here it is the commissioner who, first by invidiously labelling the whole congeries of business activities by which the Mauritz income was earned a spurious family partnership, and second by labelling the trusts "Clifford trusts", seeks to separate the income from its owner, the fruits from the tree.

Unfortunately for the commissioner under the facts proven and under the authorities cited and relied on by him, his effort to label plaintiffs' case away, turns out to be a case of misbranding and mislabelling.

In the first place, nothing in the Culbertson case⁴ at all supports the view implicit in the Collector's approach, that Culbertson merely repeats and dogmatically reaffirms the objective tests which the Tower and Lusthaus cases⁵ seemed by a kind of judicial legislating to have laid down.

On the contrary, the Supreme Court in the Culbertson case plainly and repeatedly declared that it had not been intended in the earlier cases to prescribe as determinative the objective tests, of which so much was then being made, and that in each case the question for determination was, whether on the facts as a whole the parties concerned had in good faith intended to, and in good faith and in fact, had entered into a bona fide partnership.⁶

Unfortunately for the commissioner, too, the facts as proven and as found by the district judge leave in no doubt that whether the relation of the trusts and the brothers be labelled as that of partners in a business or businesses or joint owners of properties and businesses which produced the income, the result is the same. This is that the activities, properties, enterprises and income...