Stanchfield v. Commissioner of Internal Revenue, 14296.

• Decision Date: 11 October 1951
• Docket Number: No. 14296.,14296.
• Citation: 191 F.2d 826
• Parties: STANCHFIELD v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

191 F.2d 826 (1951)

STANCHFIELD v. COMMISSIONER OF INTERNAL REVENUE.

No. 14296.

United States Court of Appeals Eighth Circuit.

October 11, 1951.

O. A. Brecke, Minneapolis, Minn., for petitioner.

Irving I. Axelrad, Sp. Asst. to Atty. Gen., (Theron Lamar Caudle, Asst. Atty Gen. and Ellis N. Slack and Carolyn R. Just, Sp. Assts. to Atty. Gen., on the brief), for respondent.

Before SANBORN, JOHNSEN, and RIDDICK, Circuit Judges.

RIDDICK, Circuit Judge.

This is a petition to review a decision of the Tax Court denying the validity as between petitioner and his wife of two family partnerships. The taxable year involved is the calendar year 1943.

On February 1, 1943, petitioner, R. A. Stanchfield, and his wife, V. M. Stanchfield, residents of Minnesota, executed a written partnership agreement, valid under the laws of Minnesota, providing that the partnership business should be conducted under the name of Priority Mills, that it should engage in the milling, mixing, and sale of feed, grains, and cereals of all kinds, that the capital of the partnership should be contributed in equal amounts by each of the partners, and that each should own a one-half interest in the business and share equally in the net profits and bear equally any losses sustained in the business. The agreement further provided that the compensation to be paid to either of the partners for services actually rendered in the partnership business should be fixed by the partners from time to time, and that such compensation should be deducted from the gross earnings along with other expenses in determining the net profits or net losses of the firm to be distributed to or borne by the respective partners.

For about ten years prior to the execution of this agreement R. A. Stanchfield had been employed by the A. L. Stanchfield Company, a partnership engaged in the buying and selling of grain and feed ingredients. A. L. Stanchfield was the father of R. A. Stanchfield whose salary for the year 1942 was $5,324.00. Petitioner and his wife resided on a small farm near Minneapolis which they had acquired in February 1942 at a cost of $12,000.00 and which they held as joint tenants. Of the purchase price of this property petitioner and his wife had contributed $5,000 from their savings and petitioner's father had made them a gift of the balance. Neither petitioner nor his wife owned other property. His wife had never engaged or been employed in business.

Some time in 1942 the A. L. Stanchfield Company had acquired an old mill from the State of Minnesota. This property had been purchased at a low price and remained idle and unused until the organization of the Priority Mills partnership. Petitioner proposed to his father that petitioner and his wife lease this mill and engage in the business of mixing and selling feed. His proposal was accepted. The Priority Mills partnership agreement was executed by petitioner and his wife. The A. L. Stanchfield Company rented the mill to the partnership under an oral agreement for $100 a month subject to future adjustment. Petitioner and his wife borrowed from A. L. Stanchfield Company $10,000 on their note payable on demand and signed by both of them. These funds constituting the capital with which Priority Mills began business were deposited in a bank account in the name of Priority Mills. Both partners were authorized to sign checks on the partnership account. A certificate of trade name was filed with the District Court of the County in Minnesota in which the business was operated on April 16, 1943. On December 15, 1943, a written lease of the mill was executed by the A. L. Stanchfield Company as lessor and Priority Mills as lessees for one year at a rental of $250 a month. This lease was signed by both petitioner and his wife.

Petitioner's wife took no part in the operation of the Priority Mills partnership. The active management of the business was entirely in the hands of petitioner whose salary was fixed at $6,000.

The business met with remarkable success in the year 1943, the net earnings before taxes being $57,572.45. The partners disbursed the income of Priority Mills as follows: Within 60 days after the beginning of business they paid their note to the A. L. Stanchfield Company in the amount of $10,000. They acquired additional farm land for $6,300 as joint tenants, spent $11,000 in improvements upon the property acquired for the purpose of operating an experimental farm for the testing of their feed products, paid petitioner's agreed salary and insurance, and purchased war bonds.

Petitioner and his wife reported their shares of partnership income for 1943 in accordance with the partnership agreement. The Commissioner determined that the partnership was invalid for income tax purposes and assessed the entire income of the partnership to the petitioner.

In April 1943 A. L. Stanchfield Company purchased the assets of International Sugar Feed Company, a defunct corporation, for the sum of $10,000, and turned these assets over to a newly-formed partnership as the capital contribution of A. L. Stanchfield and E. R. Stanchfield, his wife. On May 19, 1943, petitioner drew a check on Priority Mills for $10,000 payable to the Sugar Feed partnership as a capital contribution on behalf of himself and his wife. This partnership commenced business in May 1943 with five members each contributing $5,000 for a one-fifth interest. At the outset no formal written partnership agreement was executed, but it is undisputed in the record that the interested parties agreed that the Sugar Feed...