United States v. Coulby

• Decision Date: 26 June 1918
• Docket Number: 9771.
• Citation: 251 F. 982
• Parties: UNITED STATES v. COULBY.
• Court: U.S. District Court — Northern District of Ohio

251 F. 982

UNITED STATES v. COULBY.

No. 9771.

United States District Court, N.D. Ohio, Eastern Division.

June 26, 1918

E. S Wertz, U.S. Atty., of Cleveland, Ohio.

Hoyt Dustin, Kelley, McKeehan & Andrews, of Cleveland, Ohio, for defendant.

WESTENHAVER District Judge.

This is an action at law to recover $588.45, with interest and penalties thereon, alleged to be due as unpaid income tax for the nine months ending December 31, 1913, under the federal Income Tax Law of 1913. A jury trial was waived by the parties, and the case has been submitted to me for decision upon an agreed statement of facts. Briefly the facts are these The defendant, during the period in question, was a member of a partnership by the name of Pickands, Mather & Co. This partnership was then the owner of stocks in certain corporations, which were taxable upon their net income under the provisions of section G of the Income Tax Law. Dividends were declared and paid by these corporations upon the stocks held therein by the partnership. The defendant, in making return of his income for taxation, included as a part of his gross income his share of the profits of the partnership, but deducted therefrom such part thereof as was derived by or through the partnership from dividends on stocks in these corporations taxable upon their net income.

Later on or about June 27, 1917, the Commissioner of Internal Revenue examined the defendant's return and disallowed the deductions thus made and assessed the normal tax of 1 per cent. against the defendant on such deduction. The item of $588.45 represents that assessment.

The exact question presented for decision is whether or not a member of a partnership must include, as a part of his net income subject to the normal tax, such part of his income derived from or through a partnership which has been received by that partnership as dividends on stocks owned by it in corporations taxable upon their net income under section G of the federal Income Tax Law of 1913 (Act Oct. 3, 1913, c. 16, Sec. 2, 38 Stat. 172). Plaintiff's contention that profits thus derived are a part of the partner's net income, and subject to the normal tax, is based on the following paragraph of section D:

'Provided further, that any persons carrying on business in partnership shall be liable for income tax only in their individual capacity, and the share of the profits of a partnership to which any taxable partner would be entitled if the same were divided, whether divided or otherwise, shall be returned for taxation and the tax paid, under the provisions of this section.'

An examination of the entire Income Tax Law convinces me that plaintiff's contention is erroneous. Section B defines what shall constitute the net income of a taxable person; it includes his gains, profits, and income derived, not merely from salaries, wages, or compensation, for personal service, but also from businesses, trade, commerce, or sales or dealings in property, or the transaction of any lawful business carried on for gain or profit. This plainly includes such gains and profits derived from or through a partnership.

Section B also states what deductions shall be made from the gross income of a taxable person, in order to ascertain the net income for the purpose of levying the normal tax. Among these deductions is the amount received as dividends upon the stock or from the net earnings of any corporation, joint-stock company, association, or insurance company which is taxable upon its net income.

Section G provides for the normal tax upon the entire net income of corporations. It expressly excludes partnerships therefrom. This net income of corporations is subject only to the normal tax, such as is levied on the income of any natural taxable person, and not to the additional tax provided for by subdivision 2 of section A. This income from corporations received by a natural taxable person is exempt only from the normal income tax, and not from such additional tax.

Taking these provisions as a whole, the paragraph of section D, relating to partnerships, above quoted, must be considered and construed in the light of the general scheme thus outlined. No provision is anywhere made requiring a return to be made by a partnership upon its income. This is true, notwithstanding section D requires copartnerships, having the control, receipt, disposal, or payment of fixed income of another person subject to tax, to make a return in behalf of that person, and to deduct the same. This provision deals with the fiduciary relationship of guardians, trustees, executors, etc., having the possession and control of other persons' property; but, as regards an ordinary partnership and its ordinary business, the statement is true that no return is required to be made under the federal Income Tax Law of 1913 by a partnership.

Partnerships are expressly excluded from section G, requiring returns and payment of the normal tax by corporations. If Congress had intended that partnerships, as such, should be taxable upon their net income, the...