US v. Morton, 87-0045C(6).
| Decision Date | 04 April 1988 |
| Docket Number | No. 87-0045C(6).,87-0045C(6). |
| Citation | 682 F. Supp. 999 |
| Parties | UNITED STATES of America, Plaintiff, v. Dormilee MORTON, et al., Defendants. |
| Court | U.S. District Court — Eastern District of Missouri |
Joseph Moore, Asst. U.S. Atty., St. Louis, Mo., Robert D. Metcalfe, Trial Atty., Tax Div., U.S. Dept. of Justice, Washington, D.C., for the U.S.
John D. Beger, Rolla, Mo., for defendants Dormilee, Gary, Judith and Kenneth Morton, James and Vicki Woods.
The United States seeks to reduce to judgment certain tax assessments for unpaid federal withholding and FICA taxes made against defendant Dormilee Morton in the sum of $44,680.52. It also seeks to set aside transfers of certain real property as fraudulent conveyances and to foreclose the tax liens on such property.
The cause arises out of the tax consequences of the operation of the Morton Construction Company in Salem, Missouri by defendant Dormilee Morton and her son Steven Morton.1
Until his death in 1980, Cody Morton, deceased husband of Dormilee Morton, operated a commercial and residential construction business from his home in Salem. Upon Mr. Morton's intestate death, Dormilee Morton succeeded to her husband's ownership interest in the business, including ownership of supplies, materials and construction equipment. Steven Morton, the son, took over the operation and management of the construction company, with Mrs. Morton contributing the capital assets of business, which consisted of the construction equipment. The operation ceased in 1985.
Between 1980 and 1984, the Morton Construction Company employed laborers and other persons to construct commercial and residential buildings and was required to withhold federal withholding and Federal Insurance Contributions Act (FICA) taxes from the wages paid to its employees.
For the taxable quarters between 1980 and 1984, Employer's Quarterly Federal Tax Returns and Employer's Annual Federal Unemployment Tax Returns for the Morton Construction Company were filed with the Internal Revenue Service in the names of Dormilee Morton and Steven D. Morton, partners, by Steven D. Morton.
Due to business conditions and difficulties, the Morton Construction Company failed to make the required deposits of federal withholding and FICA taxes or otherwise pay the amounts of these taxes over to the United States. A delegate of the Secretary of the Treasury properly and timely made assessments against Dormilee Morton and Steven D. Morton, partners, Morton Construction Company, for delinquent taxes, penalties and interest for the taxable periods in the amount of $44,460.52.
Notices of federal tax liens under the Internal Revenue Code for the assessments were filed properly with the recorder of deeds of Dent County, Missouri.
From time to time Mrs. Morton would sign bank notes and supporting documents granting security interests in the equipment, designating the borrower as "Dormilee Morton and Steven Morton d/b/a Morton Construction Company." In addition, Mrs. Morton also provided funds for the operation of the business.
The telephone listing for the business was situated in Mrs. Morton's home where she also received the business mail.
Partnership returns signed by Steven Morton and filed with the Internal Revenue Service for the taxable years 1980-82 listed Dormilee Morton as a partner in the Morton Construction Company. Mrs. Morton's individual tax returns for 1981 and 1984 reported her distributive shares of profits and losses from Morton Construction Company on attached Partner's Share of Income, Credits, Deductions, etc., schedules. Mrs. Morton did not protest taxes assessed against her, and I.R.S. officials made frequent attempts to secure delinquent returns and taxes.
Dormilee Morton asserts that she should not be liable for taxes, as she was not a general partner in the business but, at most, a limited partner. In support of this contention she notes Steven Morton's indication on the appropriate tax forms that the Morton Construction Company was a limited partnership and that Steven was the general partner. In 1981, Dormilee's K-1 form was executed to indicate that she was a "silent" partner, vis-a-vis a general partner.
Prior to March 19, 1984, Dormilee Morton was the owner of 92.1 acres of farmland in Dent County, Missouri on which she lived. On March 19, 1984, five months after the I.R.S. demand on her for payment of the delinquent taxes of the Morton Construction Company, Dormilee Morton conveyed all of the land to her children and their spouses by separate warranty deeds. Each transfer was made without any consideration, and each deed contained a clause as follows:
Except that as long as Dormilee Morton cares to, shall live in the house, and shall have full and unrestricted control of the lands and buildings described above, and shall receive all benefits thereof.
After the transfers Dormilee Morton continued to occupy her home on the farm and to receive from unrelated persons the rents and profits therefrom. She continues to pay real estate taxes assessed against a portion of the property.2
The I.R.S. contends that the conveyances of property were fraudulent and designed to avoid payment of delinquent taxes.
The United States of America filed its complaint in this action on January 12, 1987. Suit was authorized by the District Counsel, Internal Revenue Service, a delegate of the Secretary of the Treasury, and was brought at the direction of the Attorney General of the United States, pursuant to 26 U.S.C. §§ 7401 and 7403.
The Court has jurisdiction of this action under 28 U.S.C. §§ 1340 and 1345, and 26 U.S.C. § 7402. Venue is proper pursuant to 28 U.S.C. § 1396.
Defendant Dormilee Morton suggests to the Court that she is only a limited partner in the Morton Construction Company and is thereby exempt from tax assessments against the business. In this regard, she relies upon Cube-H Investments v. Price, 58 A.F.T.R.2d (P-H) 86-5615 ¶ 86-5177 (W.D.Wash.1986) Available on WESTLAW, 1986 WL 10512. The Court finds Price inapplicable, because there is no limited partnership in this case.
State law is not controlling on the question of whether a partnership exists for federal income tax purposes. Kohl v. Commissioners, 170 F.2d 531 (8th Cir. 1948), cert. denied, 337 U.S. 959, 69 S.Ct. 1528, 93 L.Ed. 1756 (1949), reh'g denied, 338 U.S. 839, 70 S.Ct. 33, 94 L.Ed. 513 (1949). But it is essential that a limited partnership be validly organized and conducted under state law before it will be recognized as such for tax purposes. Finlen v. Healy, 187 F.Supp. 434 (D.Mont. 1960).
The record here belies the existence of a limited partnership. Section 359.020, R.S.Mo.1986 sets forth in substantial detail the requirements for the formation of a limited partnership. None of the statutory requirements has been fulfilled.
Rather, it is apparent from the credible evidence before the Court that Dormilee Morton and Steven Morton were general partners or, at a minimum, joint venturers, in the business, sharing joint liability for the taxes due. Bank of St. Louis v. Morrissey, 442 F.Supp. 527, 529 (E.D.Mo.1978), aff'd, 597 F.2d 1131 (8th Cir.1979), appertains to the issues of this case, for in Morrissey the Court concluded that a limited partnership was never formed because the limited partnership agreement was not signed, recorded or published. Id. at 532. The same situation exists in this case.
Moreover, there is no evidence which suggests the existence of a limited partnership other than Steven Morton's designation of the partnership as such on the tax returns for the business in 1980 and 1982 and, Dormilee Morton's 1981 individual return containing a notation to indicate that she was a "silent partner" in the business. All other evidence establishes Mrs. Morton's participation in the business as a general partner, or, at least, a member of a joint venture and, hence, her responsibility for taxes owed. See 26 U.S.C. §§ 761(a) and 7701(a)(2); Smith's Estate v. Commissioner, 313 F.2d 724, 728 (8th Cir.1963) (); see also Tony Thornton Auction Service, Inc. v. United States, 791 F.2d 635, 638 (8th Cir.1986) ().
Mrs. Morton contributed...
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