Taylor v. Commissioner, Docket No. 38367
| Decision Date | 15 June 1955 |
| Docket Number | Docket No. 38367,38368. |
| Citation | 14 TCM (CCH) 563,1955 TC Memo 153 |
| Parties | C. Gilbert Taylor and Josephine M. Taylor v. Commissioner. C. Gilbert Taylor v. Commissioner. |
| Court | U.S. Tax Court |
Albert B. Arbaugh, Esq., 1200 Harter Bank Building, Canton, Ohio, for the petitioners. William R. Bagby, Esq., for the respondent.
Memorandum Findings of Fact and Opinion
The Commissioner determined deficiencies in income tax for the years 1943, 1944, and 1945, as follows:
Year Deficiency
1943............. $39,708.07
1944............. 13,490.38
1945............. 73,616.08
The year 1942 also is involved because of the provisions of the Current Tax Payment Act of 1943.
The chief question to be decided is whether petitioner's father, son, and daughter were partners with petitioner from 1942 to 1945 in three partnerships, Aircraft Products Company, Airmetal Products Company, and Taylor Engineering Company. The Commissioner has determined that they were not copartners. A second question relates to whether respondent erred in disallowing deductions of $1,539.85 and $1,879.54 claimed by the Aircraft Products Company as additions to its bad debt reserve in 1943 and 1944, respectively. The petitioners do not contest certain other adjustments made by the respondent.
C. Gilbert Taylor and Josephine M. Taylor, husband and wife, were residents of Alliance, Ohio, during the taxable years. Joint returns for 1944 and 1946 were filed. C. Gilbert Taylor filed individual returns for 1943 and 1945. All of the returns were filed with the collector for the eighteenth district of Ohio. Josephine is involved in these proceedings only because of the filing of the joint returns. C. Gilbert Taylor will be referred to hereinafter as the petitioner.
The petitioner is an engineer. Prior to 1942 he organized the Taylorcraft Aviation Corporation, Alliance, Ohio, and served as its president. This corporation manufactured airplanes. In February 1942, petitioner resigned from this company and became a consulting engineer. He became associated as an engineering consultant with the Gibson Refrigerator Company of Greenville, Michigan (hereinafter referred to as Gibson Company), in connection with the latter's contract with the Government to build gliders. Petitioner also served, without salary, as the coordinator for nine companies producing CG4-A gliders for the armed forces.
Petitioner's father, Arthur Taylor, was 72 years old in 1942. He was an experienced machinist and tool and die maker, and prior to March 1942, had been in charge of tooling at the Taylorcraft Aviation Company. Arthur Taylor also resigned from the latter company in February 1942.
Sometime in March 1942, petitioner and his father decided to establish a machine shop to produce war material. An undated partnership agreement executed by them sometime thereafter established a partnership under the name of Aircraft Products Co. (hereinafter referred to as Aircraft). The instrument provided that petitioner would pay 75 per cent of the costs incurred, and would hold a two-thirds interest in the enterprise. This agreement also provided "That all authority of management, policy, purchase, agreement, employment and discharge of personel sic, to be permanently vested in C. G. Taylor." Petitioner was given the right to delegate his authority for periods not in excess of six months. The agreement gave petitioner exclusive control over all the assets of the enterprise, and exclusive authority to sign all checks, drafts, and vouchers. Petitioner was given the right to purchase Arthur Taylor's interest at an appraised value in the event Arthur Taylor became disabled or died. Arthur Taylor was not given any reciprocal right to purchase petitioner's interest. A bank account in the name of Aircraft was opened in March, 1942. On May 3, 1942, petitioner and Arthur Taylor executed an application to register Aircraft's name in Stark County, Ohio. The application named petitioner as Aircraft's "business manager and designated agent."
Petitioner contributed $1,937.56 to Aircraft's capital between April 13 and November 1, 1942, and Arthur Taylor contributed $563.15 and some small tools. R. R. Vick, a public accountant hired by petitioner, set up books for Aircraft and opened capital accounts for petitioner and Arthur Taylor. Vick kept Aircraft's books, and was associated with petitioner's various enterprises until October, 1945.
Petitioner had five children. The eldest, Robert, was 20 years old, and he was a student at the Case School of Applied Science, Cleveland, Ohio. He returned to Alliance on week ends. Petitioner's eldest daughter, Carol, was 17 and in her final year at high school. They were present during several discussions between petitioner and Arthur Taylor concerning Aircraft. Robert returned to Alliance in May or June at the end of the school year, and at about the same time, Carol graduated from high school.
The location chosen for Aircraft's operations was a brick garage approximately 26 × 28 feet in the rear of petitioner's home. In May 1942, Arthur Taylor and one of his grandsons, Howard Whelpton, began to set up equipment in the garage. The equipment consisted of light shaft machinery, three or four lathes, two or three drill presses, and a milling machine. The equipment was driven by a Model "A" Ford engine. Whelpton was Aircraft's first employee; he was hired by Arthur during a visit to Rochester, New York. Whelpton was 20 years old and had completed an advance machine shop course given at night at the Mechanics Institute in Rochester. Another relative, Addison, was Aircraft's second employee.
As a result of his connection with the CG4-A glider program, petitioner secured subcontracts for Aircraft from seven of the nine contractors producing the gliders for the Government. Aircraft's subcontracts were for production of mitred gear boxes for the glider's trim-tab control. This device is used in connection with the elevation mechanism. Aircraft operated under the subcontracts until the war ended, and also received subcontracts for the production of torque tube assemblies for the glider's elevator and rudder. Aircraft's principal function was to assemble parts received from suppliers.
Aircraft's first employee outside the Taylor family, Alice Sims, started work in July, 1942. Aircraft did not begin to produce a finished product until about August 1, 1942.
Petitioner's association with the Gibson Company and his other activities in connection with the CG4-A glider program kept him away from Alliance for approximately four days in each week after May 1942. Aircraft operated on a six-day, eight-hour basis, and during petitioner's absence, Arthur Taylor was in charge of production at the garage.
Robert and Carol assisted in Aircraft's operations during the summer and on week ends in the spring and fall of 1942. Robert helped set up the machinery in the garage, and on occasion contacted sources of supply, assisted in the preparation of bids for subcontractors, expedited and coordinated work of the subcontractors, and sat in on week-end conferences between petitioner and Arthur. He also instructed new employees in the use of Aircraft's equipment. At the time he returned to school in September 1942, Aircraft had seven employees. Carol attended to the telephone at her home and wrote letters, kept various records and performed other office work at an office which was set up in a den in petitioner's home. She was motivated by a desire to help her father. Robert and Carol Taylor were paid at least $282.72 and $110, respectively, by Aircraft in 1942.
Robert returned to the Case School in September 1942, and Whelpton was made foreman of production. Robert continued to return to Alliance on week-ends. Carol Taylor entered college at Albion, Michigan, in September 1942, and was replaced by one Edna Anthony. She studied a home economics course, and thereafter did not perform any services for Aircraft; she did, however, discuss Aircraft's business during visits from petitioner and on the telephone. Petitioner paid the living and school expenses of both Robert and Carol Taylor in 1942.
During 1942, petitioner and Arthur Taylor executed two additional agreements concerning Aircraft. The first, dated May 19, 1942, contains substantially the same terms as the undated agreement discussed above, except that petitioner's interest in the enterprise was increased to three-fourths from two-thirds. A supplement to this agreement dated August 29, 1942, provided that if Aircraft's net earnings exceeded $6,000 per year, the profits would be distributed equally between petitioner and Arthur Taylor. This change in the distribution of earnings was to be in effect for two years, and was subject to "further agreement between the parties" thereafter in the event the war was still on. Arthur's share in the profits was increased primarily because he was devoting considerably more time to Aircraft than petitioner was, and also because he had contributed tools to Aircraft subsequent to their original agreement.
On November 1, 1942, petitioner employed T. K. Broome to manage production at Aircraft. Broome and petitioner had met in 1936 and also had worked together for the Gibson Company. Broome was not in accord with many ideas on tooling and related matters held by Arthur Taylor, and had an understanding with petitioner that Arthur Taylor would have no part in production if Broome came to work for Aircraft. On November 14, 1942, Aircraft leased a building (hereinafter referred to as the Hillgreen factory), in Alliance, Ohio. The lease describes Aircraft as a partnership composed of petitioner and Arthur. All Aircraft's operations were moved to the Hillgreen factory in November 1942. Broome was in charge of production at the Hillgreen factory. He hired and managed the personnel. He was directly under petitioner's...
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