West v. Commissioner of Internal Revenue, 14771.

• Decision Date: 30 June 1954
• Docket Number: No. 14771.,14771.
• Citation: 214 F.2d 300
• Parties: WEST et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fifth Circuit

214 F.2d 300 (1954)

WEST et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 14771.

United States Court of Appeals Fifth Circuit.

June 30, 1954.

William H. Bronson, Shreveport, La., Tucker, Bronson & Martin, Shreveport, La., of counsel, Katherine Brash Jeter, Shreveport, La., for appellants William D. West et al.

Davis W. Morton, Jr., Ellis N. Slack, Hilbert P. Zarky, Alonzo W. Watson, Sp. Assts. Atty. Gen. Dept. of Justice, Washington, D. C., H. Brian Holland, Asst. Atty. Gen., Washington, D. C., Kenneth W. Gemmill, Acting Chief Counsel Bureau Int. Rev., John M. Morawski, Sp. Atty., Washington, D. C., for respondent.

Before HUTCHESON, Chief Judge, RIVES, Circuit Judge, and DAWKINS, District Judge.

HUTCHESON, Chief Judge.

This petition is brought by taxpayers to review a decision and order of the Tax Court,¹ written by Judge Turner but reviewed by the court, four judges dissenting,² which concluded and held: that Pleasant W. West, as trustee of several trusts, was not entitled, as a partner in West Bros., a retail mercantile partnership business, or otherwise, in the years 1945, 1946, 1947 and 1948, to the share of the income earned by the business which was allocable and allotted to his interests as trustee, but the taxpayers were; and redetermined deficiencies in their taxes accordingly. It presents for our decision the single question: whether the Tax Court erred in answering the question, "Whose is the income from the trust interests?"

Petitioners, by brief and oral argument, point out that all the facts of record were either stipulated or testified to without dispute, and, setting out in their brief the controlling facts³ as the Tax Court's opinion finds them to be, insist that the dissenting opinion is in accordance with and follows, the majority opinion is in direct conflict with and does violence to, the settled law as declared by the Supreme Court in the Culbertson case and in the great number of circuit court cases that have followed.

They, therefore, urge upon us: that the conclusion, "The petitioners and the other active partners did not, in good faith and acting with a business purpose, intend to join together with the trustee in present conduct of the mercantile business carried on by the partnership in the name of West Brothers", finds no support in the record, indeed is a complete distortion of it; and that, if it is regarded as a finding of fact, it is mere fiating, and, if as a conclusion of law, it is completely erroneous.

They insist that this is another case like Scofield's⁴ was, where, instead of approaching the determination and decision of the over all question, "Whose is the income?" on the basis of the controlling facts, Commissioner and Tax Court have approached it, with a predisposition to give the situation a label and a name which, once affixed, will, by begging the question, produce the assumed, the desired, conclusion. They insist, in short, that Commissioner and Tax Court, without a single fact upon which to base their determination, by labelling the arrangement under which the income was earned by the trust, "a spurious family partnership", seek to separate the income from its owner, the fruits from the tree.

Pointing to the stipulated and uncontradicted proof that there were valid gifts to the trustee of the interests in the business and that a valid partnership in commendam under LSA-Civil Code, Art. 2849, to the extent of those interests was actually formed and maintained throughout the whole period in question, they urge upon us that the facts proven and found by the Tax Court leave in no possible doubt that whether the relationship of the owners of the capital, in this large business, in which capital was a dominant factor, be labelled as that of partners, or as that of joint owners of the properties and businesses which produced the income, the result is the same. This result is that since the interests in the property and enterprises which produced the income involved in this case belonged in fact and in law to the individuals and the trustee in the proportions fixed in and by their instruments and dealings, the attribution by the Commissioner and the Tax Court of all the income to the brothers was a distortion of the undisputed facts, a misapprehension and misapplication of the law and contrary to the truth and right of the case.

They point to the fact too that, though stating that it would not do so, the Tax Court, as it did in the Marcus case,⁵ undertook, to, and did, determine the matter at issue on the basis of the objective tests of the Tower and Lusthaus cases,⁶ though these concepts no longer find warrant in the decided cases. So pointing, taxpayers call to our attention the comment of the Tax Court upon the fact that no new capital came into the business. "Mere legal title to capital acquired by gift alone changed hands, West Brothers, its assets, and its business were unchanged".

Finally, they point out that the Tax Court fell into the same error into which it fell in the Marcus case, when, contrary to the law governing partners in commendam or in limited partnership who have no right to participate in the conduct of the business or exercise management of it, the Tax Court declared as an indication that the partnership was not genuine, "There was no intention that P. W. West, Trustee, should have or exercise rights of management or control over the capital interest, legal title to which was conveyed or purportedly conveyed to him. He did not participate as a partner in the present conduct of the business".

As further evidence of the judge's preoccupation,⁷ with his idea, that all that was being accomplished by the gifts of the interest in the business and the creation of the partnership in commendam was a reduction of the tax burdens of the partners, and that since it was conceded that the arrangement had effected a considerable savings in the taxes of the general partnership, no business purpose was served by it, and the arrangement was a sham, attention is called to his inability to understand and his attitude toward Mr. West's testimony as to the business results and advantages of creating a partnership in commendam. These, as Mr. West testified to them were: (1) the trusts would not be subject, as the general partners were, to a general liability for the debts of the partnership; (2) the part of the profits belonging to their interests which were drawn from the business annually and invested elsewhere would be taken entirely out of the hazards of it; and (3) they felt that by giving the children this interest and setting up a trust in the partnership, this would give them a business to go in business in when they are old enough to take care of it.

On his part, the Commissioner urges upon us that whatever the record might have shown in other cases as to the attitude of the Tax Court in its approach to, and decision of, family partnership cases, this time the record affirmatively shows that the Tax Court did not decide the case upon the use of objective tests but squarely upon the test laid down in the Culbertson case, whether the taxpayers in good faith and acting with a business purpose intended that the trustee of the trust should join together with them as a partner in commendam in the present conduct of their mercantile business.

Because the decision that the trustee and the partners did not join together in good faith as partners is entirely without basis in the facts, we cannot at all agree that in this case the Tax Court has followed and applied the law as the Culbertson case and those following it have laid it down. There is no evidence that the general partners did not in good faith enter into partnership with Pleasant W. West as Trustee. All the evidence, record and otherwise, showed that the arrangement as a whole was entered into for the business purpose of divesting the general partners of interests in the business, and at the same time forming a partnership in respect of it in commendam with the trustee to whom they had conveyed the interests.

In fact and in law they acted, in forming the limited partnership, with as much, indeed with the same, business purpose and effect as if the arrangement had been made with a stranger to whom they had sold an interest. No one could contend that if the general partnership had sold an interest in the business to a stranger and he had been made a partner in commendam, the profits which accrued to his share would be chargeable to the general partners as their income. Unless objective tests, which have long been discarded, are allowed to dominate the thinking of the decider as they did here, the findings and conclusions that there was no good faith partnership here are clearly erroneous, indeed unreasonable.

While correctly insisting that generally the question of partnership vel non is one of ultimate fact and that where there is evidence reasonably supporting the finding the Tax Court's finding will not be set aside unless clearly...