Tomlinson v. Commissioner
| Decision Date | 12 January 1949 |
| Docket Number | Docket No. 10449,10450. |
| Citation | 8 TCM (CCH) 34 |
| Parties | Elwyn White Tomlinson v. Commissioner. Elwyn White Tomlinson and Kate Palmour Tomlinson v. Commissioner. |
| Court | U.S. Tax Court |
John L. Westmoreland, Esq., 815 Wm. Oliver Bldg., Atlanta, Ga., John W. Stokes, Esq., 1775 Broadway, New York, N. Y., and Frederick D. Dassori, Esq., for the petitioners. Edward L. Potter, Esq., for the respondent.
These consolidated cases involve deficiencies for the years and in the amounts following:
Docket
No. Year Deficiency
10449 1941 Income Tax ............. $73,633.69
10449 1943 Income and Victory Tax.. 52,469.04
10450 1940 Income Tax.............. 69,361.09
The principal issue is whether the petitioners, husband and wife, were partners for tax purposes, in the business known as the Capital Automobile Company. Respondent determined that the business was operated by Elwyn W. Tomlinson and taxed the income to him. In determining the deficiencies respondent made various adjustments to reflect income of the business on the calendar year basis instead of a fiscal year ending October 31st. The adjustments increased the taxable income of Elwyn W. Tomlinson for each of the calendar years 1940, 1941 and 1943, and decreased his taxable income for 1942. Petitioners challenge the adjustments made by respondent for the several years. Petitioners also allege that respondent's determination is erroneous in that it failed to provide a fair return to the wife on her investment. In Docket No. 10450 petitioners allege that the statute of limitations bars the deficiency determined by the respondent.
Petitioners' allegation that respondent erred in determining that capital gain was realized upon liquidation of the corporation known as Capital Automobile Company is conceded by respondent. This concession will be taken into account in recomputing the deficiencies under Rule 50.
The petitioners, husband and wife, reside in Atlanta, Georgia. There income tax returns for the taxable years were filed with the collector of internal revenue for the district of Georgia. For the calendar year 1940 they filed a joint return. For the calendar years 1941, 1942 and 1943 they filed separate returns. Partnership returns were filed by the Capital Automobile Company for the two-day period ending October 31, 1940, and for the fiscal years ending October 31, 1941, 1942 and 1943, with the collector for the district of Georgia.
Elwyn W. Tomlinson entered the automobile business in 1919. Ten years later he became assistant sales manager for the Cadillac Company of Atlanta. In June 1932 he became a dealer for Cadillacs and Oldsmobiles for Motors Holding Division of General Motors Corporation. Tomlinson had no investment in the business in 1932.
In 1935 the Capital Automobile Company, a Delaware corporation, was formed by Motors Holding. The new corporation had Class A and Class B stock. Motors Holding Division of General Motors Corporation controlled the new corporation by its investment in Class A stock, which was the voting stock. Tomlinson continued as dealer and president of the new corporation. Tomlinson purchased four shares of the Class B stock at $100 per share. The stock was issued in his name. The funds used to purchase such stock came from petitioners' joint checking account and represented an accumulation out of money earned by Tomlinson. His wife operated the household on a monthly budget and the savings, achieved through her management, were accumulated in their joint account. Tomlinson recognized his wife's ability to take care of earnings entrusted to her.
Tomlinson entered into the customary "Option Agreement" and "Bonus Agreement" with Motors Holding which provided, in part, that Class B stock could be acquired from funds received from dividends and bonuses paid by the new corporation. It was stipulated between the parties that such stock should be issued in the name of Tomlinson and that he could not transfer or encumber such stock without jeopardizing his dealership and relations with Motors Holding.
From 1935 to July, 1940, Tomlinson used his dividends and bonuses to acquire additional Class B stock, all of which was taken in his name. Tomlinson requested permission from Motors Holding to transfer some of the Class B stock to his wife, but his request was refused. By July, 1940, Tomlinson had acquired the entire outstanding capital stock of Capital Automobile Company and Motors Holding had no further financial interest in the corporation.
Petitioners planned from the beginning of their married life to proceed on a "fifty-fifty" basis. Their homes, first on Tenth Street, then on Club Drive, and finally on Habersham Road, were jointly owned. They were precluded from joint ownership of the stock of the Capital Automobile Company by reason of the existing agreement with Motors Holding. During the period that the Class B stock was being purchased the Tomlinson family lived on his salary and money borrowed from life insurance companies and the bank. The dividends and bonuses were used to buy more Class B stock. Loans were obtained on six life insurance policies on the husband's life, in each of which the wife was beneficiary. She consented to the borrowing on the policies with the understanding, and an oral agreement with her husband, that as soon as all the stock was acquired a partnership would be formed to operate the business. Operation of the business as a partnership was discusssed frequently by petitioners during the period that the Class B stock was being purchased.
After the capital stock of Capital Automobile Company was acquired, petitioners discussed with their attorney the question of dissolving the corporation and the formation of a partnership. Details of the operation of the business as a partnership were discussed with the attorney and with a certified public accountant. Petitioners were advised of their rights and liabilities as partners in the operation of the business. In dissolving the corporation and in organizing a new enterprise to operate the business petitioners followed the advice of counsel, who prepared the necessary papers and handled the legal matters arising in connection therewith.
Pursuant to the advice of their counsel, petitioners executed a written agreement on October 30, 1940, which provided that the business would be operated "under the name and style of Capital Automobile Company for the purpose of dealing generally in new and used automobiles and in rendering service therefor," for convenience sometimes hereinafter referred to as "new company". The agreement stated that the assets of the business were contributed 43/85ths by the husband and 42/85ths by the wife. The husband was to "have the complete direction and control of the management and conduct of the business of the partnership and shall be responsible therefor." The profits were to be distributed annually "on the basis of 50% thereof to each of the partners." The provision giving the husband complete direction and control of the business was written into the agreement to protect him in case of the death of his wife, who was in "just fair" health at that time.
On October 30, 1940, Tomlinson delivered certificates numbered 1 to 28, inclusive, to the corporation and a new certificate, certificate No. 29, was issued by the corporation to "Elwyn Tomlinson and Kate Tomlinson doing business as Capital Automobile Company, a partnership." Certificate No. 29 was for 850 shares of Class B stock1.
On October 30, 1940, Tomlinson transferred an undivided 21/85ths interest in and to all of the assets of the business to his wife. Subsequently he filed a gift tax return in which he reported this transfer as a gift.
On October 30, 1940, Tomlinson transferred an undivided 21/85th interest in and to all the business assets to his wife for the sum of $21,000. The wife evidenced her obligation with a five-year promissory note bearing interest at four per cent. The note was secured by an undivided 30/85ths interest in the business assets. This transfer was confirmed and approved by the Superior Court of Fulton County as a fair, reasonable and just transaction between husband and wife. Payments on the note were made out of earnings as follows: $5,500 on December 23, 1940; $7,000 on April 3, 1941; $10,000 on May 8, 1941, making total payments of $22,500. On July 15, 1941, Tomlinson refunded the $1,500 overpayment.
On October 30, 1940, the new enterprise opened its books of account. The capital interests of the petitioners were recorded therein as $43,000 to the husband and $42,000 to the wife, or a total of $85,000, represented by 850 shares of stock of the Capital Automobile Company, a corporation.
On October 31, 1940, the Capital Automobile Company, a corporation, was formally dissolved by action of its stockholders and directors. Certificate No. 29 was turned in by the new company and cancelled by the corporation. The corporate assets were distributed to the new company. The corporate and the new company's books of account were closed on October 31, 1940. New accounts reflecting the receipt of the corporate assets were opened by the new company on November 1, 1940. The profits of the new company for the two-day period October 30 and 31, 1940, in the amount of $1,895.47, were transferred proportionately to the investment accounts of the petitioners on its books.
After November 1, 1940, the Capital Automobile Company opened accounts with two Atlanta banks. Each petitioner was authorized to withdraw funds from these accounts. The trade name was registered by the petitioners with the clerk of the Superior Court of Fulton County, in accordance with the laws of Georgia. The new company entered into selling agreements, on November 1, 1940, with the Oldsmobile and Cadillac Divisions of General Motors Sales...
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