State v. Hitchcock
| Decision Date | 29 April 1949 |
| Docket Number | No. 34874.,34874. |
| Citation | 228 Minn. 335,37 N.W.2d 378 |
| Parties | STATE v. HITCHCOCK. |
| Court | Minnesota Supreme Court |
Appeal from District Court, Hennepin County; Paul W. Guilford, Judge.
Action by the State of Minnesota against Ralph C. Hitchcock to recover an additional unpaid income tax and penalty. From the judgment, defendant appeals.
Judgment affirmed.
R. H. Fryberger, of Minneapolis, for appellant.
J. A. A. Burnquist, Atty. Gen. and David W. Lewis, Asst. Atty. Gen. and Joseph S. Abdnor, Sp. Asst. Atty. Gen., for respondent.
This is an appeal from a judgment in favor of the state against a taxpayer for $11,511.07 plus costs, as additional income tax and penalty for the year 1942.
The complaint alleges that the taxpayer filed a return of income for 1942 and that the commissioner of taxation, after auditing that return, found and determined that the taxpayer was indebted to the state for an added income tax for 1942 in the amount of $9,635.03. The commissioner duly assessed the tax in the amount, which the taxpayer failed to pay when due. Suit was brought and penalty demanded.
In his answer, the taxpayer defendant admitted the assessment of additional income tax and that he had not paid it. He alleged that he had made a bona fide gift of a one-seventh interest in the real and personal property of his foundry business to each of his six children then living; that he had established a limited partnership with these children, two of whom were general partners and the other four limited partners only; and that as to the minor children the probate court authorized him, as their guardian, to transfer personal property from such minors to the partnership and empowered him to execute the papers making them members of the limited partnership. The reply alleged that the four younger children had contributed neither services nor capital to the alleged partnership and that they did not share in the management and control of the business from which the earnings flowed. The reply alleged that the partnership arrangement was a mere paper allocation of defendant's business income within the family group and that the entire income of the business, allocated to the four minor children, was in fact that of defendant.
At the trial, the issue was the validity of the partnership arrangement for tax purposes and whether the assessment made against defendant on the ground that the income distributed to the four younger children was in fact his.
The burden of proving the invalidity of the assessment fell on defendant, because the demand for additional tax had not been paid. M.S.A. § 290.47. The facts are not in dispute, except as to the inferences to be drawn therefrom as to the validity of the limited partnership for tax purposes and the assessment of an additional tax.
From 1916 until July 1941, taxpayer was the sole owner and operator of a pattern and foundry business in Minneapolis known as the Modern Pattern Company. He had six children. Harold M. and Carleton C., both of age as of June 2, 1941, were employed in the operation and management of the business. There were four other children: Claude R., a medical student at the University of Minnesota, aged 23; Margaret Ann, a minor of 20 years; Ralph C. Jr., a minor of 14 years; and Lucy U., a minor of 10 years. All but Harold and Carleton lived with defendant in his Minneapolis home and were dependent upon him for their maintenance, education, and support.
Defendant's foundry was engaged in the production of castings required in the manufacture of military equipment, including magnesium and heat-treated aluminum castings. An expansion program was initiated in 1939 and 1940 and military subcontracts were obtained. The two oldest sons sought an interest in the business during that time. They originally demanded a part ownership in the business in addition to their salaries as employes. Defendant acceded to their request, but asserts that he desired to treat all of his children alike, and, to that end, he desired to give an equal interest in the business to each. June 2, 1941, after consulting business associates and his attorney, he executed a warranty deed to convey by gift to each of his six children an undivided one-seventh interest in the real property occupied by the business. At the same time, he executed a bill of sale, which, on its face, purported to give to each of his children an undivided one-seventh interest in all personal property used in connection with the business. A gift tax was paid to both the federal and state governments. On the same date, taxpayer petitioned for and obtained from the probate court of Hennepin county his appointment as guardian of the persons and estates of his then minor children, Margaret Ann, Ralph C. Jr., and Lucy U. Under that order, defendant was authorized to accept and retain, as an investment of the funds of the minors, the property received as a gift by each of them from defendant. As guardian, he was authorized to transfer the property given to the minors to the partnership, to be organized and known as R. C. Hitchcock & Sons, and to convert it into interests therein for each of said minors as limited partners, as the contribution of each to the capital thereof. As guardian, he was authorized to execute the articles of limited partnership in behalf of the minors and in all respects to fully bind such minors and the property each contributed thereto. As guardian, he was authorized to execute and deliver a lease of their real property to the partnership for a period of one year and from year to year thereafter for a nominal consideration.
On that same date, defendant and his six children executed the articles of partnership whereby defendant and his two older sons, Harold and Carleton, became general partners as well as limited partners. The articles purported to constitute the four younger children limited partners to the extent of a one-seventh interest in the business, the articles being signed by defendant as guardian for the minors. There was a provision in the partnership articles that the profits be divided one-seventh to each member, subject to the right to fix and pay salaries to the general partners for the management and conduct of the business. There was also a provision that no limited partner might assign his interest except by the consent of all partners.
By a bill of sale, also dated June 2, 1941, taxpayer and his six children (the minors by their guardian, the defendant) transferred to the partnership their respective interests in the personal property connected with the business and executed a lease of the real estate to the partnership for a nominal annual rental of $1, the partnership to pay taxes, cost of upkeep, and maintenance. The record shows that except as to these transfers there was no contribution of capital to the partnership by any of defendant's children. After organization of the limited partnership, the business was managed by the three general partners. Defendant continued to perform certain types of management and control functions, dealing especially with the office, matters of credit, and maintenance of customer contacts. Carleton participated actively in management by handling personnel matters, procurement and supervision of the performance of customers' orders, and procurement of new and additional business. Harold supervised the maintenance and construction of plant structures and equipment, with Carleton designing certain new machinery necessary to meet the demands of the new business. The evidence tended to prove that the two oldest sons ran the business and procured the expansion which subsequently took place during the war years.
None of the other children performed any services, nor were they directly connected with the business. Margaret Ann came of age in January 1942. Defendant duly petitioned for discharge as her guardian, filed a final account, and was discharged. Claude was at this time a medical student at the University of Minnesota and had no connection with the business. Ralph, Jr., and Lucy were too young to participate in the affairs of the partnership, being aged 15 and 11 years respectively as of the taxable year 1942. December 31, 1942, appropriate credits in the capital account of the partnership were given to each donee as earnings, which were used in the operation of the purported partnership as capital. Income taxes were paid thereon.
However, upon the trial the court found:
As conclusions of law, the court held that the transfers by defendant to the four younger children were conditional, incomplete, and ineffective for income tax purposes to divest defendant of title, dominion, and control of the subject of the gift, and that such title, dominion, and control remained in him. The court concluded that no real and valid partnership was created by the execution of the articles of partnership as to the four younger children and that defendant was liable for payment of a tax upon five-sevenths of the net earnings of the business in the sum of $91,068.80. Judgment was entered accordingly. This appeal followed.
In his...
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