Smith's Estate v. CIR

• Decision Date: 12 February 1963
• Docket Number: No. 16759.,16759.
• Citation: 313 F.2d 724
• Parties: ESTATE of Craig M. SMITH, Deceased, Ruth E. Smith, Executrix, et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

313 F.2d 724 (1963) ESTATE of Craig M. SMITH, Deceased, Ruth E. Smith, Executrix, et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 16759.

United States Court of Appeals Eighth Circuit.

February 12, 1963.

J. Terrell Vaughan of Armstrong, Teasdale, Roos, Kramer & Vaughan, St. Louis, Mo., for petitioners, Charles E. Dapron and Edwin S. Baldwin, of Armstrong, Teasdale, Roos, Kramer & Vaughan, St. Louis, Mo., and Richard A. Beyer of Hubachek & Kelly, Chicago, Ill., on the brief.

John B. Jones, Jr., Acting Asst. Atty. Gen., Tax Div., Dept. of Justice, Washington, D. C., for the respondent, Louis F. Oberdorfer, Asst. Atty. Gen., Dept. of Justice, Washington, D. C., and Lee A. Jackson, I. Henry Kutz and Carolyn R. Just, Washington, D. C., on the brief.

Before SANBORN, VAN OOSTERHOUT and MATTHES, Circuit Judges.

VAN OOSTERHOUT, Circuit Judge.

The petitioning taxpayers named in the caption have filed timely petition for review of the decisions of the Tax Court determining substantial income tax deficiencies and penalties against the individual taxpayers and their wives, who joined in their returns, for the years 1951 to 1955 inclusive, and against the fund petitioners for the years 1953 and 1954.¹

The Commissioner sent each of the taxpayers notice of deficiency and each taxpayer petitioned the Tax Court for redetermination of the deficiency. The 18 cases before us for review involve common questions of law and fact. They were consolidated and tried upon a stipulated record to the Tax Court and are consolidated upon this review. The Tax Court entered a decision in each case determining the deficiency. The opinion of the Tax Court covering all of the cases and setting forth the factual determinations and the basis of the decision is found in 33 T.C. 465. Petitioners Smith,² Longstreet, Abbott and Hilby during all times material were partners in the firm of Longstreet-Abbott & Company. Like the parties, we shall refer to such firm as LACO. The firm had its principal place of business at Clayton, Missouri. The partners, through experience and study, had acquired knowledge and skill in the field of commodity trading and had developed plans which they believed would produce substantial profits in commodity trading. LACO is organized for the purpose of engaging in activities relating to commodity trading both in their own behalf and for others.

It is agreed that LACO is a partnership and that its members are to be taxed as partners. LACO during each year filed partnership returns and the individual members of LACO, with their wives joining, filed estimated tax returns and income tax returns for the years in controversy and paid taxes due in the amounts disclosed by such returns. The present litigation arises out of two types of transactions, thus described in the stipulation:

1. "Buying and selling commodity futures and spot commodities for others (`cash participants\') in Individual Trading Accounts, each managed independently by Longstreet-Abbott & Company. Such purchases and sales were made in the name of the `cash participant\'."

2. "Buying and selling commodity futures and spot commodities for others (`cash participants\') in six common `funds\', each of which `fund\' is managed independently by Longstreet-Abbott & Company for those who furnish the capital for such purpose. Such purchases and sales were made in the name of the `fund\' * * *"

LACO and its individual members had reported the income received from the individual trading accounts as income derived from the partnerships with the individual investors in the form of capital gains. The Commissioner determined that the individual trading accounts were not partnerships within the meaning of the income tax statutes, and that LACO's income derived from the individual trading accounts was not entitled to capital gain treatment as distributive shares of partnership income, but instead was ordinary income in the form of compensation for services rendered.

LACO and its members had also reported the income derived from the trading funds upon a capital gain basis, upon the theory that the trading funds were partnerships of which LACO was a member, and that the income LACO had received from the funds was its distributive share of partnership capital gains.

The LACO partnership agreement provided that Mr. Longstreet was entitled to LACO's share of the profits realized from certain designated trading accounts. Longstreet received such profits and reported them as capital gains. The parties agree that the taxability of such profits is controlled by the decision on similar issues relating to LACO's profit from the individual trading accounts and the funds.

The individual members of LACO and their wives made personal investment in the various funds, such investments being authorized by the fund contracts. They treated such income as capital gain on their distributive share of partnership income.

The Commissioner determined that the trading funds were associations taxable as corporations and that LACO's share of the fund profits was ordinary income in the form of compensation for services. The Commissioner further held that the petitioning LACO members with respect to their individual investment in the funds realized ordinary income in the form of dividends, and that the investing petitioners did not suffer losses when the funds suffered a net loss for a taxable year. The Commissioner also assessed penalties in some instances for late payment of estimated taxes and for substantial underestimation of income.

All the foregoing determinations by the Commissioner were upheld by the Tax Court. The petitioners here challenge the determination of the Tax Court upon all of the foregoing issues. The factual background is fully and fairly stated in the Tax Court's opinion. The agreements which it is claimed create joint ventures, both with the individual investors and with the fund investors, are set out in full. We cannot set out all such material without unduly extending this opinion. We will, however, summarize the basic facts during the course of this opinion.

We observe that the individual investors and the cash participants in the funds are not parties to this litigation. Some of the cash participants in the funds have, by leave of court, filed brief as amici curiae.

The standards for review of decisions of the Tax Court are well established and are not seriously in dispute. Findings of the Tax Court which are supported by substantial evidence upon the record as a whole, and which are not against the clear weight of the evidence or induced by an erroneous view of the law, cannot be upset. The findings of the Tax Court are presumptively correct. The burden rests upon the petitioner to show that the findings upon which the Tax Court decision is based are clearly erroneous. We do not try issues of fact de novo. Schoenberg v. Commissioner, 8 Cir., 302 F.2d 416, 419; Kemper v. Commissioner, 8 Cir., 269 F.2d 184, 185; Greenspon v. Commissioner, 8 Cir., 229 F.2d 947, 949.

The Tax Court is permitted to draw reasonable inferences from established facts. This rule is operative in situations where facts are stipulated or undisputed. Commissioner of Internal Revenue v. Duberstein, 363 U.S. 278, 291, 80 S.Ct. 1190, 4 L.Ed.2d 1218; G. W. Van Keppel Co. v. Commissioner, 8 Cir., 295 F.2d 767, 771; American Metal Products Corp. v. Commissioner, 8 Cir., 287 F.2d 860, 864; Crown Iron Works Co. v. Commissioner, 8 Cir., 245 F.2d 357, 360; Heil Beauty Supplies, Inc. v. Commissioner, 8 Cir., 199 F.2d 193, 195.

We shall now consider the errors relied upon for reversal.

Individual Trading Accounts.

Petitioners state:

"The individual trading accounts were partnerships for tax purposes between LACO and cash participants; LACO\'s share of the profits and losses from such partnerships was in the form of capital gains and capital losses.

"The Tax Court, therefore, erred in holding that LACO was an employee of the cash participant; that LACO\'s share of the profits was ordinary income in the form of compensation for personal services; and that LACO sustained no deductible loss when an individual trading account suffered a net loss for a calendar year."

The Tax Court made the following finding and determination upon the partnership issue:

"Moreover, there is no noteworthy evidence that the parties, particularly LACO\'s clients, really and truly intended to form partnerships with LACO. On the contrary, it would seem that all that was intended was an employer-employee relationship with a provision for payment of a percentage of the profits as compensation. Respondent\'s determination is sustained."

We believe that such finding is supported by substantial evidence and is not induced by any erroneous view of the law.

The tax burden for partnership income is placed upon the individual partners. Their distributive share of the partnership income takes on the same character as if such income were realized directly from the source. I.R.C. 1954, § 702; I.R.C.1939, §§ 182-183. The Tax Court here found that the profits realized from the trading in commodities were capital gains and the Commissioner has not appealed from such determination. Hence, if a partnership existed between LACO and the individual investors, the LACO partners properly reported their distributive share of income as capital gains. On the other hand, if the Tax Court properly determined no partnership relationship existed and the income received by the LACO partners was in fact compensation for services rendered, the Tax Court's decision upon this issue should be affirmed.

Thus the critical issue here presented is whether petitioners have demonstrated that the Tax Court's finding that no partnership relationship existed between LACO and the individual investors is clearly erroneous; that is, was the finding induced by an erroneous view of law or does it lack substantial evidentiary support?

We shall...