164 F.2d 182 | 2d Cir. | 1947
This appeal concerns an assessment for deficiency in the income tax of the taxpayer for the year 1941. The question is whether a part of the income from his business as a wholesale and retail seller of gasoline, oil and automobile accessories should be included in his sister’s income, or in his. The facts as the Tax Court found them are not in dispute, and the substance of them is as follows. The taxpaj'er lived in Utica where he owned and conducted the business ; he was forty-one years old, was married and had an adopted daughter, aged twelve. Hg also had two brothers and two sisters; one brother was crippled, the other brother, Vincent, he employed. One sister was married and lived at Dannemora, New York; the other, Helen, lived in Utica with the taxpayer’s mother, a woman seventy-one years old in 1941; Helen was unmarried and worked as a secretary for a newspaper at a salary of $1500, which was not enough for hersel'f and her mother and to which the taxpayer added for his mother’s support. During the year 1940 he told his sister in his mother’s presence that he meant to give her $50,000 and one third of the income of the business; and in July of the following year he and she executed an agreement, creating a partnership between the two on which he relies to escape taxation upon one third of his income.
This agreement recited that he had “transferred” $50,000 to her “out of the capital account” of the business — $181,323.-35 in all — and had “set upon the books of the company” a capital account of $50,000 in her name. He “confirmed” this transfer; declared her to be “the unqualified owner” of that much of the “capital stock”; that the gift was “evidenced by the transfer upon the books”; and that the amount of her interest in the capital should not be affected by any profits or losses of the business. The taxpayer was to be “general manager” and “the net profits from-operations of the company shall be divided” two thirds to him, one third to her. The credit to the account of each partner was to be “subject to withdrawal in cash at such time as the cash position of the company warrants the same” as to which his decision “will be final.” He reserved a pre-emptive right, if she should wish to sell, to buy her out at $50,000, plus anything to her credit on the books and her share of any uncredited profits. It appeared that in 1941 she drew out at least $6500; but she took no part in the management and after July 1, 1941, Vincent had full charge of the retail branch. -The taxpayer’s motive in all this was in part to enable his sister to provide
If a taxpayer goes through the form of conveying property to his wife, or child, or parent, or sister or anyone else, wath the understanding that the grantee shall hold It at the grantor’s pleasure and shall give it back on demand, there has been no transfer at all, any more than if it were made as a jest. It is always possible to prove, no matter what documents the parties may have executed, that they have covertly agreed upon a substitute, although it must he owned that courts have at times supposed the contrary. If Tower’s case and Lusthaus’s case had concerned situations of that kind, they would have presented only commonplace attempts to defraud the Treasury by -setting up false screens. We do not understand that the court so regarded the transactions, although the opinion speaks of the articles as not forming “a real partnership,” <327 U.S. p. 287, 66 S.Ct. 536; that “no partnership really exists and that earnings are really his,” 327 U.S. p. 289, 66 S.Ct. 537; that “the wife was not really a partner,” .327 U.S. p. 289, 66 S.Ct. 537; that the Tax Court is not to “shut its eyes to the realities of tax avoidance schemes,” 327 U.S. p. 289, «66 S.Ct. 537; and that the issué is whether the spouses “really intended * * * a partnership,”'327 U.S. p. 289, 66 S.Ct. 537. Nevertheless, we do not read this use of the words “real,” “really” and “realities,” as meaning that as between the parties the papers did not measure the enforceable rights and liabilities. A partnership may jbe “real” in that sense, but “unreal” when it comes to taxing the partners; the question in such cases is what circumstances deprive it of this kind of “reality.” As we understand it, there are four conditions •whose combined existence will make such .a partnership “unreal” when taxes are in question : (1) If the grantee’s contribution to the firm capital is a gift of the grantor; (2) if the grantor and the grantee are spouses; (3) if the grantor retains control over the management of the business; (4) if he makes the gift and sets up the firm to avoid taxation. It is true that only Rutledge, J., heid that these were constitutive facts as such; and the majority merely held that they provided a basis for a finding by the Tax Court; but the difference is unimportant here, for this appeal too is from the Tax Court.
In all such situations a reserved power to manage the property transferred has been regarded as significant because it is so important a part of those powers and interests which, taken as a whole, make up the right of “property.” Its retention by the grantor goes far to keep the “property” in him, even in cases where he has finally transferred all beneficial enjoyment. For example, in the analogous situation of a “family trust,” this has always counted for much.
These are concededly innovations in the notion of property as it is ordinarily
Order affirmed.
327 U.S. 280, 66 S.Ct. 532, 90 L.Ed. 670,164 A.L.R. 1135.
327 U.S. 293, 66 S.Ct. 539, 90 L.Ed. ■679.
Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788.