The opinion of the court was delivered by: SUGARMAN
Lena Drechsler sues the United States of America under 28 U.S.C.A. § 1346(a)(1) to recover income taxes paid to the defendant.
The testimony, exhibits and stipulation of facts received on the trial of the action establish the following:
On April 15, 1906, T. Frederick Jackson, Inc. was formed. On January 1, 1944, this domestic corporation was engaged in the business of electrical contracting with its principal office in New York City.
On March 8, 1944, T. Frederick Jackson, Inc. entered into a contract with East Coast Shipyards, Inc. (a prime contractor under a contract with the National Maritime Commission) to make electrical installations on certain tankers, compensation to be paid on the basis of a fixed amount per tanker.
On October 16, 1944, Gus Drechsler, Harold Webster and LeRoy Hagan who owned respectively 60 per cent, 20 per cent and 20 per cent of the capital stock of T. Frederick Jackson, Inc., meeting as directors of the corporation, resolved that the contract with East Coast Shipyards be assigned to a partnership to be known as T. F. Jackson, Co., composed of Drechsler, Webster and Hagan.
The partnership was capitalized with $ 20,000 brought in by the partners in the ratio of their stock interest in T. Frederick Jackson, Inc., viz., 60-20-20, and profits and losses were to be distributed or borne by the partners in the same proportion.
Drechsler, Hagan and Webster chose the formation of a partnership to carry out the maritime electrical contracts in order to separate them from the work done by T. Frederick Jackson, Inc. on shore projects. They feared that should the maritime contracts be completed by the corporation and additional work of this nature be diminished by cessation of hostilities, the corporation might encounter claims from the union because of a substantial wage differential allowed for the maritime electrical workers over the shore-working electricians. They also anticipated, in the event of stoppage of the maritime war work, a conflict between the union representing the men employed on the tankers and that representing those employed on shore work as to seniority determining retention in employment. In essence they sought a complete separation of the recently acquired tanker work from the original and ongoing shore work.
The assignment of the contract was made on October 26, 1944. It was approved by the East Coast Shipyards, inc. and the United States Maritime Commission. The corporation, however, was not released from its obligations under the contract despite the assignment thereof to the partnership.
Drechsler, Webster and Hagan on October 27, 1944 declared that they each held his interest in T. F. Jackson Co. partially in trust. Drechsler retained for himself a 6 per cent interest in the firm, Webster a 2 per cent interest and Hagan a 5 per cent interest.
By formal declarations of trust, Drechsler set up two trusts, one for his wife, Lena, and one for his daughter, Elaine, the corpus of each of which was a 27 per cent interest in the firm of T.F. Jackson Co.
The trusts were irrevocable. Gus Drechsler was appointed trustee of each trust with full power of management. One, Charles Drechsler, was named successor trustee of the trust for Lena Drechsler. Lena Drechsler was named successor trustee of Elaine's trust. Drechsler retained no right of reverter in these trusts. Lena Drechsler had the right in her discretion to take any or all of the trust property at any time during its existence.
Webster set up similar trusts for his wife and children. Hagan gave part of his interest in the firm to trusts for his son and daughter.
Drechsler donated to each trust the sum of $ 5,400, which represented a 27 per cent interest in the partnership's capital of $ 20,000. In 1945 Drechsler filed a gift tax return showing these gifts.
On October 27, 1944, T. F. Jackson Co. admitted as partners the trusts which had been set up by Drechsler, Webster and Hagan. Partnership and trade name certificates were filed in the New York County Clerk's office.
On December 13, 1944, T.F. Jackson Co. agreed to and thereafter did make electrical installations on two tankers in addition to those identified in the contract assigned by T. Frederick Jackson, Inc.
It was provided in the partnership agreement entered into by Drechsler, Webster, Hagan and the trusts that:
'6. There shall be paid by the partnership to Gus Drechsler, Leroy Hagan and Harold Webster, such a salary as shall be agreed upon by the partners in writing from time to time.
'7. * * * The salaries of Gus Drechsler, Leroy Hagan and Harold Webster, as provided in paragraph '6' hereof, shall not be considered as part of the profits to ...