Thorrez v. Comm'r of Internal Revenue

• Decision Date: 21 May 1945
• Docket Number: Docket Nos. 3250-3253.
• Citation: 5 T.C. 60
• Parties: CAMIEL THORREZ, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.JOSEPH MICHNER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.WALTER MICHNER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.EDWARD A. FORNER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

5 T.C. 60

CAMIEL THORREZ, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.JOSEPH MICHNER, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.WALTER MICHNER, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.EDWARD A. FORNER, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 3250-3253.

Tax Court of the United States.

Promulgated May 21, 1945.

Melvin S. Huffaker, Esq., for the respondent.

For several years prior to 1941 the petitioners operated a metal plating business in Jackson, Michigan, as equal partners. Early in 1941 they decided to bring their wives and six of their children, three of whom were minors, into the partnership with them. They agreed among themselves that each should split up his one-fourth interest in the business among the members of his family; that the existing partnership should be dissolved; and that a new partnership should be formed by all parties contributing their interests in the business to the new partnership. In accordance with such agreement new articles of copartnership were executed by the 14 members on January 3, 1941. Thereafter the partnership business was conducted in the same manner as before, under the management of the petitioners, except that the profits were distributable to the 14 partners on the basis of their respective interests. Held, as the respondent has determined, that each petitioner is taxable upon one-fourth of the partnership profits for 1941.

J. Adrian Rosenburg, Esq., and Everett M. Hawley, Jr., Esq., for the petitioners.

These proceedings, consolidated for hearing, involve income tax deficiencies for 1941 as follows:

+--------------------------------------+
                ¦Petitioner      ¦Docket No.¦Deficiency¦
                +----------------+----------+----------¦
                ¦Camiel Thorrez  ¦3250      ¦$18,661.57¦
                +----------------+----------+----------¦
                ¦Joseph Michner  ¦3251      ¦16,235.62 ¦
                +----------------+----------+----------¦
                ¦Walter Michner  ¦3252      ¦9,935.92  ¦
                +----------------+----------+----------¦
                ¦Edward A. Forner¦3253      ¦15,782.68 ¦
                +--------------------------------------+
                

In determining the above deficiencies the respondent has included in petitioners' income equal shares of the net earnings of a metal plating business which they operated as a partnership. Portions of such income had been reported in returns filed by petitioners' wives and children.

FINDINGS OF FACT.

Petitioners are residents of Jackson, Michigan. They filed their income tax returns for 1941 with the collector of internal revenue for the district of Michigan. In such returns each reported a portion of the income of a partnership conducting a metal plating business at Jackson under the name of Michner Plating Co.

History and Organization of Michner Plating Co.

The Michner Plating Co. was first organized as a partnership in September 1936. Its organizers were Camiel Thorrez and Joseph Michner, petitioners herein, and a third individual, John Piniewski. Each of the three partners made an initial capital contribution of $2,000 to the business.

On December 3, 1938, the partnership was dissolved and a new partnership formed to continue the business under the same name. At that time a fourth partner, petitioner Edward A. Forner, was admitted. Forner also contributed $2,000 in cash and his one-half interest in the assets of another metal plating business known as the Chromium Plating Corporation. The other one-half interest in the assets of that corporation was owned by Michner Plating Co., and was contributed to the new partnership by the three other parties.

On August 31, 1940, the partnership was again dissolved and a new partnership formed to admit a fifth member, Walter Michner, son of Joseph Michner. Walter had worked for the company since its organization in 1936 and the other partners considered that he was entitled to admission as an equal partner. He likewise was required to make a capital contribution of $2,000 to the business to equal that made by the other partners, although a one-fifth interest in the business at that time was worth considerably more than that amount.

On November 23, 1940, Michner Plating Co. acquired, by merger, all of the assets of another metal plating company, Jackson Chromium Plating Co. That company was also a partnership which at the time of the merger was owned by the partners in Michner Plating Co. In the latter part of December 1940 the other four partners in Michner Plating Co. bought out the interest of the fifth partner, John Piniewski, for $10,000.

On January 2, 1941, the four partners in Michner Plating Co., all petitioners herein, executed an agreement which purported to authorize each of them to transfer portions of their partnership interests to their wives and children. The agreement provided that the four partners should retain complete management and control over the partnership and that no wife or child could dispose of his or her interest without offering it first to the partner from whom it was acquired, if he should be a partner in the business, and then to the other partners at its appraised ‘fair value.‘ If none of such partners should desire to purchase the interest it might then be offered at the appraised value ‘to anyone acceptable to the remaining partners. ‘ Paragraph 5 of the agreement reads as follows:

It is further mutually understood and agreed that the parties hereto, having at the present time the control and management of said partnership, shall retain such control and management of said partnership regardless whether such aforedescribed transfers are made or not. It is further agreed that if any of the parties hereto should make such transfers of portions of their partnerships interests as has been heretofore agreed upon, such transfers shall be made with the understanding and subject to the condition that the active control, operation and management of the said partnership shall remain in the parties hereto and although such transfers shall constitute outright transfers and unconditional transfers of interests in the assets, income and liabilities of said co-partnership, such transfers shall only constitute transfers of interest in the assets, income and liabilities in said co-partnership, but shall not constitute transfers of shares in the control, operation or management of the partnership, and no purchases, sales, orders, notes, letters, bills, receipts, payments, contracts, securities, dealing and transactions which shall be made, given or taken for any matter or things concerning the partnership business shall be so made, given, taken or entered into by or through any transferee aforedescribed, but only by and through the parties hereto.

On the following day, January 3, 1941, another agreement, styled ‘ARTICLES OF CO-PARTNERSHIP,‘ was executed by petitioners as ‘parties of the first part‘ and the members of their respective families, referred to in the agreement of January 2, 1941, as ‘parties of the second part.‘ The agreement recites that:

WHEREAS, the parties of the first part have been associated as co-partners in operating the Michner Plating Company, a going concern engaged in the general plating business in the City of Jackson aforesaid, and

WHEREAS, the parties of the first part on the 2nd day of January, A.D. 1941, entered into an agreement whereby it was agreed that said parties of the first part could transfer portions of their undivided interests in said co-partnerships to certain members of their families,

and whereas each of the parties of the first part had accordingly made such transfers of designated portions of their interests to the members of their families (the several interests purportedly transferred by each of the petitioners are shown below), and whereas the parties of the second part were desirous of becoming members of the partnership and the parties of the first part were desirous of having them do so:

NOW, THEREFORE, all the aforesaid parties hereby enter into a co-partnership agreement for the purpose of carrying on a general metal plating business in the City of Jackson aforesaid under the style and firm name of Michner Plating Company, being a successor to the co-partnership heretofore carried on under that style and firm name by the parties of the first part herein named and the names of the members of this co-partnership and their undivided percentage interests are as follows:

The undivided percentage interests of each of the petitioners and members of their families as shown in the agreement were as follows:

+---------------------------------------+
                ¦                             ¦Percent  ¦
                +-----------------------------+---------¦
                ¦Camiel Thorrez (petitioner)  ¦5        ¦
                +-----------------------------+---------¦
                ¦Flavia Thorrez (wife)        ¦5        ¦
                +-----------------------------+---------¦
                ¦Albert Thorrez (son)         ¦5        ¦
                +-----------------------------+---------¦
                ¦Henry Thorrez (son)          ¦5        ¦
                +-----------------------------+---------¦
                ¦Morris Thorrez (son)         ¦5        ¦
                +-----------------------------+---------¦
                ¦                             ¦         ¦
                +-----------------------------+---------¦
                ¦Walter Michner (petitioner)  ¦12 1/2   ¦
                +-----------------------------+---------¦
                ¦Marie Michner (wife)         ¦12 1/2   ¦
                +-----------------------------+---------¦
                ¦                             ¦         ¦
                +-----------------------------+---------¦
                ¦Joseph Michner (petitioner)  ¦8 1/3    ¦
                +-----------------------------+---------¦
                ¦Lottie Michner (wife)        ¦8 1/3    ¦
                +-----------------------------+---------¦
                ¦Elsie Michner (daughter)     ¦8 1/3    ¦
                +-----------------------------+---------¦
                ¦                             ¦         ¦
                +-----------------------------+---------¦
                ¦Edward A. Forner (petitioner)¦6 1/4    ¦
                +-----------------------------+---------¦
                ¦Veda Forner (wife)           ¦6 1/4    ¦
                +-----------------------------+---------¦
                ¦Lorraine Forner (daughter)   ¦6 1/4    ¦

...