The opinion of the court was delivered by: BRENNAN
This is an income tax litigation, the crux of which is the determination as to the existence of a partnership between husband and wife.
The plaintiff seeks in this action to recover a money judgment which represents, as he claims, an overpayment of income tax to the defendant in his official capacity as Collector of Internal Revenue for the 21st Collection District of New York.
The necessary procedural steps have been taken, and the basis of plaintiff's cause of action is that he filed income tax returns for the years 1941-1943 inclusive, in which he reported the total annual profit of the Walsh Trucking Service as his personal income. Both plaintiff and his wife thereafter filed amended tax returns for the above years in which the proceeds of the business were divided equally between them. Mrs. Walsh paid an income tax on the basis of the amended returns. This resulted in a claim for a refund by reason of an overpayment by plaintiff, which refund was refused, and this action was instituted.
There appears to be no serious dispute either as to the facts or the law. It is the application of the law which causes this litigation. The facts are set forth in some detail, as it seems clear that the determination of whether or not a partnership existed depends upon the application of well recognized rules of law.
The plaintiff, Michael F. Walsh, and his wife, Mabel Easton Walsh, have resided for years at Massena, New York. Prior to October, 1925, the plaintiff was employed in the delivery or express business. He was engaged to be married to Mabel Easton, and they were in fact married on June 12, 1926. About October, 1925, plaintiff and his intended wife discussed the advisability of purchasing the business conducted by Walsh's employer. Such purchase was made for the sum of $ 1500. About two-thirds of the purchase price had been paid at the time of the marriage of the parties. Mrs. Walsh had been employed as a telephone operator prior to her marriage. She kept a book record of the business transactions of the Walsh Trucking Service. These records lack the clarity of a set of business books, but no doubt is cast upon the accuracy of the entries therein, or the sincerity of the intention of the parties to keep an accurate record of the business venture. It is at least fair to say that upon her marriage Mrs. Walsh assumed control of the records of the company, maintained the books of account, and contributed her efforts to the success of the business. She continued to be employed by the telephone company, and later by the Massena Ice Company until about 1930, and since that date has devoted her full time to the conduct of the trucking business. The housework was done by hired household help. Up to 1930 the uncontradicted testimony is that Mrs. Walsh contributed her salary to the business. The book record confirms her statement, although the Court is unable to find entries which reach the total of $ 3796, as testified to upon the trial. It is fair, however, to say that in 1927 the books show entry 'Amt. Sal. Mabel Walsh' $ 450 and $ 255. In 1928 similar monthly entries in the amount of $ 1125 appear. In 1929 similar monthly entries were made for the months of January, February, March and April, and thereafter weekly entries of $ 18 per week appear upon the books of the company for the balance of the year 1929 and up to June, 1930, in the total amount of $ 1399 for 1929 and 1930. During the period above referred to and continuing to date the household expenses were paid from the earnings of the company. The personal expenses of Mr. and Mrs. Walsh were also paid therefrom. All bank accounts were carried in the names of Michael Walsh and Mabel Walsh, and were subject to withdrawal upon the check of either one. The books contain occasional entries showing the addition of sums of money to the business, same having been withdrawn from an interest account. Real property purchased with the profits of the expanding business were taken in the names of both parties, and both parties contributed their energy, intelligence and business ability to the success of the enterprise. It is not necessary to detail the duties of Mrs. Walsh other than as above stated. In her own words, 'I have done everything, including driving a truck.' It can be stated, however, that she took charge of the office of the company, supervised the labor of office employees, and that Michael Walsh performed and supervised the labor of outside employees engaged in the physical operation of the business. Matters of policy and of unusual importance were discussed and decided by their joint action.
Neither Mr. Walsh nor Mrs. Walsh drew a salary until about 1941, when there was set up upon the books of the company entries fixing the salary of each at $ 7200 annually.
In 1935 a certificate of doing business under an assumed name was filed, by which the plaintiff certified that he was the owner of the business of the Walsh Trucking Service. Automobiles used in the business were registered in the name of the Walsh Trucking Service, Michael F. Walsh, owner. Reports to regulatory boards were made over a period of years in which Michael F. Walsh was indicated as the sole owner of the business. Income tax returns were also filed to the same effect. There is no doubt but that Mrs. Walsh had knowledge of the existence of such paper and reports, and in fact took part in their preparation.
With the above background of facts, approach is made to the determination as to the existence of a partnership between Michael and Mabel Walsh in the years of 1941, 1942 and 1943, which would warrant the application of the provisions of Sec. 182 of the Internal Revenue Code, 26 U.S.C.A.Int.Rev.Code, § 182, in the computation of plaintiff's income tax for the above period, insofar as same is affected by the income from the trucking business above referred to.
The matter of the existence of and the recognition of a partnership between close relatives is the subject of many court decisions involving the determination of tax liability. Discussion of precedents is rendered unnecessary by the now well recognized guides afforded by the decision in Commissioner of Internal Revenue v. Tower, 327 U.S. 280, 66 S. Ct. 532, 90 L. Ed. 670, 164 A.L.R. 1135, and re-affirmed by reference in Lusthaus v. Commissioner, 327 U.S. 293, 66 S. Ct. 539, 90 L. Ed. 679. The three quotations set out below indicate the legal yardstick by which the arrangement between the plaintiffs must be measured.
'A partnership is generally said to be created when persons join together their money, goods, labor, or skill for the purpose of carrying on a trade, profession, or business and when there is community of interest in the profits and losses. When the existence of an alleged partnership arrangement is challenged by outsiders, the question arises whether the partners really and truly intended to join together for the purpose of carrying on business and sharing in the profits or losses or both. And their intention in this respect is a question of fact, to be determined from testimony disclosed by their 'agreement, considered as a whole, and by their conduct in execution of its provisions.' Drennen v. London Assurance Corp., 113 U.S. 51, 56, 5 S. Ct. 341, 344, 28 L. Ed. 919; Cox v. Hickman, 8 H.L.Cas. 268. We see no reason why this general rule should not apply in tax cases where the government challenges the existence of a partnership for tax purposes.' Commissioner of Internal Revenue v. Tower, supra, at pages 286, 287 of 327 U.S.at page 535 of 66 S.C t.
'There can be no question that a wife and a husband may, under certain circumstances, become partners for tax, as for other purposes. If she either invests capital originating with her or substantially contributes to the control and management of the business, or otherwise performs vital additional services, or does all of these things, she may be a partner as contemplated by 26 U.S.C. §§ 181, 182 (26 U.S.C.A.Int.Rev.Code, §§ 181, 182). The Tax Court has recognized that under such circumstances the income belongs to the wife.' Commissioner of Internal Revenue v. Tower, supra, at page 290 of 327 U.S.at page 537 of 66 S. Ct.
'It is the command of the taxpayer over the income which is the concern of the tax laws. Harrison v. Schaffner, 312 U.S. 579, 581, 582, 61 S. Ct. 759, 761, 85 L. Ed. 1055. And income earned by one person is taxable as his, if given to another for the donor's satisfaction. Helvering v. Horst, 311 U.S. 112, 119, 61 S. Ct. 144, 148, 85 L. Ed. 75, 131 A.L.R. 655. It is for this reason, among others, that we said in Helvering v. Clifford, supra, 309 U.S. (331), 335, 60 S. Ct. (554), 556, 84 L. Ed. 788, that transactions between husband and wife calculated to reduce family taxes should always be subjected to special scrutiny.' Commissioner of Internal Revenue v. Tower, supra, at pages 290, 291 of 327 U.S.at page 537 of 66 S. Ct.
The Court was impressed at the trial of this action that the facts relative to the alleged partnership were correctly stated, and for the most part were corroborated by circumstances, actions and records.
Here no written agreement exists, and no witness pretends to give the exact conversation which made up the partnership contract. Plaintiff's testimony, ' * * * so I bought it (the business) before we were married with the intention of conducting the business together when we were married,' and Mrs. Walsh's statement, ' * * * we would go in together and if we could make a success of it, O.K., if not, we would build again; either sink or swim in other words,' taken together with facts previously recited as to the operation and control of the business and its finances, lead conclusively ...