Spiesman v. Commissioner of Internal Revenue
| Decision Date | 17 October 1958 |
| Docket Number | No. 15752.,15752. |
| Parties | Mathew J. SPIESMAN, Jr., and Mary Spiesman, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Paul Castoldi, Francis J. Butler, Spokane, Wash., for petitioners.
Charles K. Rice, Asst. Atty. Gen., Marvin W. Weinstein, Robert N. Anderson, Lee A. Jackson, Attys., Dept. of Justice, Washington, D. C., for respondent.
Before HEALY and FEE, Circuit Judges, and JAMES M. CARTER, District Judge.
This case involves the validity of a family partnership, Section 191 of the Internal Revenue Code of 1939, as added by Section 340(b) of the Revenue Act of 1951, c. 521, 65 Stats. 452, 26 U.S. C.A. § 191 and Section 3797 of the Internal Revenue Code of 1939 Section 340(a) of the Revenue Act of 1951, supra, 26 U.S.C.A. § 3797. The texts of the statutes are set forth in the margin.1
The petitioner, Mathew J. Spiesman, Jr., and his wife, filed joint federal income tax returns for the calendar year 1951 and 1952, and the family partnership, "Spiesman & Sons" filed information returns on Form 1065 for the same year. The matters in controversy concern only one month of 1951, December 1st to December 31st, and all of 1952. The petitioner, Mary Spiesman, the wife, is a party solely because she and her husband filed joint returns for the years in question. She is not otherwise involved in this controversy.
The Commissioner determined deficiencies existed in the return of income and tax, notice was mailed, and the taxpayers filed a petition with the Tax Court for redetermination of deficiencies, within the statutory time. The case was heard by the Tax Court on a record consisting in part, of stipulated facts and in part of oral testimony. Deficiencies in income tax were found in the amounts of $2,155.22 and $14,056.20 for the years of 1951 and 1952, respectively. Written findings of fact and opinion were filed, 28 T.C. No. 62. The decision was reviewed by the full Tax Court. The Tax Court held that the five minor children of the petitioner, Mathew J. Spiesman, Jr., were not bona fide partners in the partnership known as "Spiesman & Sons" during the years 1951 and 1952, within the meaning of the sections of the Internal Revenue Code set forth above, and that income reported for the children as partners on Form 1065, should have been included in the return of Spiesman Jr. The case comes here on petition to review the decision of the Tax Court.
Prior to 1950 Spiesman Jr., owned certain slot machines located in the Gem State Club of Idaho. Under agreement with the club, Spiesman received 20% of the receipts from the slot machines; he was also President and Manager of the club. On February 1, 1950, Spiesman Jr. and his father, Mathew Spiesman, Sr., hereafter referred to as Spiesman Sr., entered into a partnership known as "Spiesman & Spiesman" for the purpose of operating amusement devices. The agreement recited that "the assets to be taken over by the partnership are in the possession and owned by the partner, Mathew J. Spiesman, Jr." and that Spiesman Sr., "agrees to pay a sum equal to one-half of the value of the assets;" that the partners should bear equally all expenses, fees, licenses, permits and share the profits one-third to Spiesman Sr., and two-thirds to Spiesman Jr., the petitioner.
Spiesman Jr., claims to have learned in October of 1951 about the amendments of the Internal Revenue Act of 1951 referred to above, and on or about December 1st, a new partnership agreement was entered into between Spiesman Sr., Spiesman Jr., and the latter's minor children, who on or about that date were of the following ages: Mathew Joseph, 11, Philip James, 8, Leonard John, 6, Mathew James III, 5, Francis Edward, 1.
The record shows that Spiesman Sr. was 80 years of age in 1956, the date of the Tax Court hearings and would have been about 75 years of age in 1951. He testified he made gifts to his son, Spiesman Jr., and gifts to the children of Spiesman Jr., consisting largely of stock at times from 1945 to 1951, and that in December of 1951, he gave each of the five children an interest in the equipment of "Spiesman & Spiesman," the partnership of Spiesman Jr. and Spiesman Sr. Spiesman Jr., testified he gave the five children part of his interest in the old partnership.
The result reflected in the partnership agreement of "Spiesman & Sons" showed that Spiesman Jr. claimed a 3/9 interest, Spiesman Sr. a 1/9 interest and each of the five children claimed a 1/9 interest in the partnership of "Spiesman & Sons."
There is controversy over this agreement. It recited that it was entered into between Spiesman Sr., Spiesman Jr., and the five minor children, and was signed by Spiesman Sr., Spiesman Jr., and by Spiesman Jr., as guardian for the five minor children. It is without dispute that Spiesman Jr., had been appointed in 1947 as guardian for the first four of the minor children, but he was not appointed as guardian for the youngest, Francis Edward until October of 1953. He was therefore not the guardian of Francis Edward at the time the agreement was purportedly signed on behalf of said minor.
More important, paragraph Second of the partnership agreement read: "At the time of this agreement the assets to be taken over by the partnership are in the possession and owned by the partner(s), Mathew James Spiesman Jr., (and Mathew James Spiesman Sr.) * * *". The words and letters within the brackets were interlineations inserted by Spiesman Jr., in 1953, after the execution of the agreement and after the initiation of the investigation of Spiesman Jr.'s income tax returns for the years involved. Thus, as originally written, the agreement recited that the assets were owned by Spiesman Jr.
The partnership returns filed by the new partnership, "Spiesman & Sons" for the period December 1, 1951 to December 31, 1951, showing net earnings distributable to the partners in the sum of $3,254.30; and for the year 1952 showed net earnings distributable to the partners in the sum of $46,021.71. This income was derived from the operation of slot machines and amusement devices, most of which were located in the Gem State Club and which had continued to be operated under the original agreement as to percentages, entered into between Spiesman Jr., and his father, prior to the formation of the partnership of "Spiesman & Sons." Licenses for the operation of the machines were obtained and paid for by the Gem State Club or by others at other locations where they were placed. Spiesman Jr., spent part of his time operating the affairs of "Spiesman & Sons", and the major part of his time as Manager of the Gem State Club, for which he received a salary. The Tax Court found that "Capital is a material income-producing factor of the Spiesman & Sons partnership and the salary paid Spiesman for managing the affairs of the partnership is reasonable."
From 1947 to 1952 no inventories or accountings were filed by Spiesman Jr., as guardian for the four older boys. In October of 1953, after the initiation of the investigation of the income tax returns for the tax years involved, Spiesman Jr., as guardian, filed inventories and accounts for the four older boys. The accounts were approved, allowed and settled by the Probate Court. In October 1953, he was appointed guardian for the youngest boy, and inventories and accounts were filed for the estates of all five boys in 1954, 1955 and 1956 for the respective preceding years.
The capital account shown on the partnership return for the portion of the year 1951, beginning December 1st, was as follows:
Beg. of End of
Period Period
Mathew J. Spiesman, I $ 100.00 $ 461.59
Mathew J. Spiesman, II 2,774.63 3,859.39
Mathew J. Spiesman, III 100.00 461.59
Philip Spiesman 100.00 461.59
Michael Joe Spiesman 100.00 461.59
Francis Spiesman 100.00 461.59
Leonard Spiesman 100.00 461.59
The partnership return filed for 1951 showed net earnings in the amount of $3,254.30, distributable as follows:
Mathew J. Spiesman, I $ 361.59
Mathew J. Spiesman, II 1,084.76
Mathew J. Spiesman, III 361.59
Philip Spiesman 361.59
Michael Joe Spiesman 361.59
Francis Spiesman 361.59
Leonard Spiesman 361.59
No withdrawals were made from the capital accounts of the partners during the period involved in 1951, namely the month of December.
The partnership return (Form 1065) for the year 1952 showed net earnings in the amount of $46,021.71, distributable as follows:
Mathew J. Spiesman, I $ 4,846.85
Mathew J. Spiesman, II 16,940.61
Mathew J. Spiesman, III 4,846.85
Philip Spiesman 4,846.85
Michael Joe Spiesman 4,846.85
Francis Spiesman 4,846.85
Leonard Spiesman 4,846.85
For the year 1952 the capital account of each partner, showing the amount at the beginning of the year, the withdrawals and the capital account at the end of the year, were as follows:
Capital Acct. Capital Acct
Beg. of Year Withdrawals End of year
----------------------------------------------
Mathew J. Spiesman, I $ 461.59 $ 3,688.83 $1,619.61
Mathew J. Spiesman, II 3,859.39 16,768.68 4,031.32
Mathew J. Spiesman, III 461.59 4,690.16 618.28
Philip
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