1947 U.S. Tax Ct. LEXIS 16">*16 Decision will be entered for respondent.
1. Family Partnership. -- Petitioner owned all of the stock of a corporation which was operating a business. He dissolved the corporation and entered into a partnership agreement with his wife and daughter, and later his son, for continuation of the business formerly conducted by the corporation. Petitioner's wife contributed no services to the partnership, but petitioner claimed that in consideration of her cancellation of a bond issue of the corporation to facilitate its dissolution she acquired an equitable interest in the corporation's assets which became the partnership's capital. Thus, it is claimed she contributed to the partnership capital. A share of the partnership income was allocated to her in the taxable years involved, which she returned for Federal income tax purposes. Respondent determined that the income so allocated was taxable to petitioner and determined a deficiency in tax against him on the basis thereof. Held, (a) that petitioner's wife contributed neither capital nor services to the partnership and was not joined with petitioner and others in carrying on the business of the partnership, and (b) that the1947 U.S. Tax Ct. LEXIS 16">*17 partnership income allocated to his wife was taxable to petitioner
2. Question involving statute of limitations determined.
9 T.C. 1099">*1099 Respondent determined deficiencies in petitioner's income tax for the years 1939, 1940, and 1941 as follows:
| 1939 | $ 627.11 |
| 1940 | 525.66 |
| 1941 | 5,066.79 |
| Total | 6,219.56 |
The questions involved are whether the wife of the petitioner was, during the years in question, a bona fide partner for Federal tax purposes and whether the statute of limitations bars the assessment of deficiencies for 1939 and 1940. Other issues presented by the petition are abandoned by petitioner. The returns were filed with the collector of internal revenue for1947 U.S. Tax Ct. LEXIS 16">*18 the fifth district of New Jersey.
FINDINGS OF FACT.
Petitioner is an individual, now residing at Lake Alfred, Florida. About 1883 petitioner entered the business started by his father in 9 T.C. 1099">*1100 1854. The business involves the wholesale and retail dealing in photographic supplies. After 1917 and until 1922 petitioner alone owned and operated the business as a sole proprietorship. In 1922 the business was incorporated. Petitioner gave some of the stock in the new company to his son Morris, to his daughter Olga, and to the employees of the company and retained some for himself. Petitioner continued to run the business, having the title of president and treasurer.
The new company issued bonds. The issue is explained in the indenture dated December 15, 1922, as follows:
Whereas the Company has purchased and acquired from Gustave C. Gennert all of the property and assets formerly owned by him and employed in connection with his business as a dealer in photographic materials and supplies, and has agreed to execute and deliver as partial consideration therefor and as part of the purchase price thereof, its Ten year, 5% bonds in the aggregate amount of Two Hundred Thousand ($ 200,000) 1947 U.S. Tax Ct. LEXIS 16">*19 Dollars, to be secured by the pledge of all of the said property and assets: * * *
Petitioner held these bonds for about two years and then endorsed them to his wife, Florence. Thereafter, interest on the bonds was credited to Florence's account with the company.
In January 1930 Florence and petitioner jointly executed a mortgage and bond for a loan of $ 10,000. The mortgage covered real property which was owned by Florence. Of the proceeds of such loan, $ 8,000 was loaned to the company and a note in that amount was given to Florence. The note has not been paid. Endorsements of payments on the above mentioned bond indicate that it was paid by quarter-yearly principal installments of $ 250 each, beginning with August 4, 1936, and that $ 5,000 of the principal had been paid prior to that date. The bond was fully paid and the mortgage was discharged of record February 18, 1941.
In 1938 business was bad for the company and its credit was handicapped by the $ 200,000 bond issue. The company was unable to pay either the principal or interest on the bonds. Petitioner wanted to dissolve the company. To effect such dissolution petitioner was advised to and did buy up the outstanding1947 U.S. Tax Ct. LEXIS 16">*20 stock. He also took possession of the bonds on the understanding with Florence that the bonds were to be canceled. Petitioner turned the bonds over to the trust company for cancellation thereof and of the mortgage securing them. The dissolution of the company was effected by a surrender of all its stock for cancellation and the distribution in kind to its stockholder of its assets. Thereupon an agreement was entered into by petitioner, Florence, and Olga under which the business was continued under the management of petitioner as the business of a partnership, in which each of the named individuals purportedly owned a one-third interest. The distributed assets of the company constituted the capital of the partnership.
In January 1941 a new agreement was entered into by which petitioner's 9 T.C. 1099">*1101 son Morris was brought into the business as a partner, each individual then having a purported one-fourth interest. Florence has never contributed any capital or services to the business.
Respondent explained his deficiency determination as follows:
(a) It is held that you did not make a gift of a one-third interest in certain property to Florence C. Gennert as claimed; that she did1947 U.S. Tax Ct. LEXIS 16">*21 not contribute capital or services during the years under consideration to the partnership operating under the name of "G. Gennert"; that she is not therefore a member of the partnership; and that you should, therefore, report 66 2/3% of the partnership's net income for the years 1939 and 1940 and 50% for the year 1941. The income reported by you has been adjusted accordingly.
Statute of limitations. -- In his individual income tax return for the calendar year 1939 petitioner's gross income was stated to be $ 6,567.66. Respondent determined that petitioner had understated his gross income by a similar amount, which is in excess of 25 per cent of the gross income stated in such return.
In his income tax return for the year 1940 petitioner's gross income was stated to be $ 5,315.64. Respondent determined that petitioner understated his gross income by the amount of $ 5,249.71, which is in excess of 25 per cent of the gross income stated in such return.
On March 1, 1945, petitioner consented in writing to the extension to June 30, 1946, of the period of limitation with respect to the calendar year 1939, which consent was accepted by the respondent on March 7, 1945.
On March 1, 1947 U.S. Tax Ct. LEXIS 16">*22 1945, petitioner consented in writing to the extension to June 30, 1946, of the period of limitation with respect to the calendar year 1940, which consent was accepted by respondent on March 7, 1945.
The notice of deficiency with respect to the calendar years 1939 and 1940 was mailed to petitioner on June 29, 1945.
OPINION.
The validity of the partnerships only with respect to Florence's interest therein is the first question before us. There is no claim that Florence contributed any services or that her claimed partnership interest was a gift to her. The validity of Florence's claimed partner status is staked by petitioner on the claim of a capital contribution by her. Petitioner spells out Florence's contribution to the partnership from the cancellation of the bonds and from the unpaid loan of $ 8,000. On the state of the record we can not conclude that Florence was a partner in the business within the purview of the Federal tax statutes.
We will assume for present purposes that petitioner made a valid gift of the bonds to Florence, although the record is not fully convincing that such is the fact. Neither the bonds nor any of the company's 9 T.C. 1099">*1102 records were produced 1947 U.S. Tax Ct. LEXIS 16">*23 or offered in evidence to show (a) the transfer of the bonds to Florence by petitioner, (b) that the interest accruing thereon was thereafter credited to her account, or (c) the cancellation of the bonds. Petitioner admitted that the company's records covering the period of such claimed transactions were in existence, but stated that it was inconvenient to bring them into court.
But, assuming Florence owned the bonds, their cancellation is not established by the record as a contribution by her to the partnership. The bonds were canceled and a partnership purporting to include Florence was formed, but no relationship between these two events is established. There is no evidence or admitted fact in the pleadings that the cancellation of the bonds was in consideration of an economic or equitable interest of Florence in the assets of the company or in the partnership.
Petitioner also contends that payment of the $ 8,000 note given by the company to Florence was assumed by the partnership and that its nonpayment constitutes a capital contribution by her to the partnership. There is no evidence or admitted fact to support the contention that the partnership assumed payment of the $ 8,0001947 U.S. Tax Ct. LEXIS 16">*24 note. Nor is there any evidence as to what disposition, if any, was made of the note. It was not produced at the hearing or offered in evidence. No record of the company or of the partnership was offered in evidence respecting this note transaction. Neither of the partnership agreements was offered in evidence, notwithstanding copies of such agreements were available at the hearing if desired for that purpose. If, however, it should be held, as contended by petitioner, that payment of the note was assumed by the partnership, such assumption would not constitute a capital contribution to the partnership. It would constitute only a debtor-creditor relationship between the partnership and Florence. Moreover, the $ 8,000 note evidenced a loan to the company from proceeds of the $ 10,000 mortgage bond which was the joint and several primary obligation of petitioner and Florence. The bond was paid apparently in quarter-yearly installments of $ 250 each over a period of about ten years, but there is no evidence in the record as to who paid it. Since about $ 6,750 of the bond was paid during the existence of the company and the remainder during the existence of the partnership, it1947 U.S. Tax Ct. LEXIS 16">*25 may well be, for all the record shows that the entire bond obligation was paid with funds of the company and the partnership. If so, it could not be successfully contended that Florence either made a contribution of the amount of the $ 8,000 note to the capital of the partnership or that the partnership is indebted to her in respect of the note, even if the note should still be outstanding.
On this state of the record we think petitioner has failed to sustain 9 T.C. 1099">*1103 his burden of proving that Florence made a capital contribution to the partnership.
For the reasons above indicated we are unable to say on the basis of the record before us that petitioner and Florence really intended to join together for the purpose of carrying on a business. We hold, therefore, that the amount of partnership income allocated to Florence in each of the three years here in question is chargeable to petitioner for income tax purposes.
The remaining question involves the statute of limitations. Petitioner alleges that the deficiency determined is barred by the statute of limitations with respect to the years 1939 and 1940. It is true, as admitted by respondent, that petitioner's returns for 19391947 U.S. Tax Ct. LEXIS 16">*26 and 1940 were timely filed. Therefore, if section 275 (a), Internal Revenue Code, were applicable, a determination of deficiency with respect to the calendar years 1939 and 1940 would have been timely only if made on or before March 15, 1943 and 1944, respectively. The deficiency was determined June 29, 1945. However, in his returns for both 1939 and 1940 petitioner, as we have held above, understated his gross income by an amount which is in excess of 25 per cent of the gross income reported in those returns. The situation here, therefore, falls squarely within the purview of section 275 (c), Internal Revenue Code, which provides that under such circumstances a deficiency in tax may be determined within five years of the due date of the return. Moreover, on March 1, 1945, which was before the expiration of the five-year limitation period prescribed in section 275 (c), petitioner consented in writing to the extension to June 30, 1946, of the period of limitation for both the 1939 and 1940 returns. Therefore, since the deficiency notice for the calendar year 1939 was mailed on June 29, 1945, the statute of limitations is not a bar to respondent's determination as to that year. 1947 U.S. Tax Ct. LEXIS 16">*27 With respect to the return for 1940, the deficiency notice was mailed on June 29, 1945, which was well within the applicable five-year period of limitation. Accordingly, on the question of the statute of limitations, we hold for respondent.
Decision will be entered for respondent.