Schoen v. Commissioner

*857 This is a proceeding for the redetermination of dediciencies in income taxes for the calendar years 1920, 1921, 1922, and 1923 in the amounts of $2,106.16, $120.31, $458.95, and $31.45, respectively It is alleged that the determination of the respondent that Isaac Schoen was the owner of a one-half interest in a partnership in 1920, and the owner of a one-third interest in 1921, 1922, and 1923 is erroneous.

FINDINGS OF FACT.

The petitioner is the duly appointed, qualified and acting executrix of the estate of Isaac A. Schoen, deceased. She is a resident of St. Louis, Mo.

Isaac A. Schoen was a resident of St. Louis, Mo., and prior to 1920 was the owner of a fur brokerage business in that city. Florence H. Schoen was his wife. Aaron Schoen and Lee M. Schoen were their sons.

*858 In 1919 Isaac Schoen had a number of conversations with his son Lee M. Schoen in which the father told the son that he had made Lee a member*3172 of the partnership of Isaac A. Schoen & Sons. In this way the son first learned that he was a member of the firm. About January 1, 1921, there were discussions between the members of the Schoen family as to an arrangement of the interests of the members of Isaac A. Schoen & Sons.

On March 1, 1920, Sidney M. Schiele was employed as bookkeeper for the partnership. The partnership had no adequate system of bookkeeping at that time and Schiele put the books in order and on May 1, 1920, opened a new set. A capital account was set up on the ledger as of May 1, 1920, showing a credit to Isaac A. Schoen, Capital Account of $30,787.60, designated as one-half proprietorship. On the same date the separate capital accounts of Aaron Schoen and Lee M. Schoen were credited on the ledger with $15,393.80 each. On December 31, 1921, an entry was made on the firm's journal debiting Isaac A. Schoen with $20,787.60, Aaron Schoen and Lee M. Schoen with $7,393.80 each, and a credit of the total of the three amounts was entered to profit and loss. On October 21, 1923, an entry was made in the firm's journal, debiting the capital accounts of Isaac, Aaron and Lee each $20,000 with the explanation, *3173 "three individual capital accounts combined into one."

On December 31, 1922, an entry was made in the journal debiting profit and loss in the amount of $4,259.27, and crediting the accounts of Aaron, Isaac, and Lee each in the amount of $1,419.75, with the explanation entry "70% of net distributable balance divided among partners." On the same journal page and under the same date is an entry showing the divisions of the 30 per cent remaining profits among the employees. There was an arrangement for the division of a portion of the firm's profits among certain employees. The entries referred to were all made in the handwriting of Schiele.

The entries in the capital accounts of the three individuals were made by Schiele, principally at the direction of Aaron. The entries showing a division of capital one-half to Isaac in 1920, and one-third thereafter were explained by Schiele to Isaac.

The partnership returns of Isaac Schoen & Sons for the years 1920, 1921, 1922, and 1923, showed Isaac Schoen as a member. The said returns for 1921, 1922, and 1923 were signed by Isaac A. Schoen under oath as a member, in the presence of Schiele. They were explained to Isaac by Schiele before*3174 Isaac signed them.

Florence H. Schoen had no account on the firm's books.

Schiele had a power of attorney from the firm at the National Bank of Commerce and acted with authority for the firm in general.

Applications for Federal Brokers Special Tax Stamp were made by the firm of Isaac Schoen & Sons for the fiscal years begun July 1, *859 of each of the years 1920, 1921, 1922, and 1923. One of the applications was signed for the firm by Aaron Schoen and the other three were signed for the firm by Schiele. Each application showed the members of the partnership to be Isaac A. Schoen, Lee M. Schoen and Aaron Schoen, and none others.

On or about December 31, 1921, Schiele, for the firm, rendered a statement to the Liberty Central Trust Co. on a sheet containing the firm's letterhead, showing the capital accounts of the firm to be as follows:

The letterhead referred to gave the firm name as Isaac A. Schoen & Sons, and contained in the upper left-hand corner thereof the name of Isaac A. Schoen, Aaron Schoen and Lee M. Schoen. This was substantially the letterhead used*3175 by the firm up to 1924 or 1925.

On or about September 24, 1920, a financial statement of the firm of Isaac A. Schoen and Sons, as of March 31, 1920, was rendered to the Central National Bank of St. Louis, Mo., signed by Isaac A. Schoen. The said statement showed the partners to be Isaac A., Aaron and Lee M. Schoen, and none others.

A suit against Isaac A. Schoen & Sons, in which Isaac A. Schoen was designated as a defendant, was defended between 1922 and 1924 without objection that he was not a member of the firm. The records of the partnership for the years 1920 to 1923, inclusive, show Isaac A. Schoen as a partner.

On or about August 22, 1924, Schiele called at the Liberty Central Bank at St. Louis, Mo., and advised them that Isaac A. Schoen had died the preceding Sunday at New Rochelle, N.Y.; that he (Schiele) expected that Mrs. Schoen and the two sons would come to St. Louis immediately after the funeral so that Mr. Schoen's will could be filed and the partnership estate arranged for; that there was no written partnership agreement but merely an oral understanding that Isaac, Aaron, and Lee were the recognized partners and Mrs. Schoen was the beneficiary of Isaac's interest.

*3176 In September, 1924, there was some discussion between Aaron Schoen and Schiele, on the hand, and Mr. Gennett of the Liberty Central National Bank of St. Louis, on the other hand, as to the provision of the Missouri law requiring the cessation of a partnership business in the case of the death of a partner and the administration of the partnership estate, and, upon request of the bank, and in order to avoid the necessity of such administration, an affidavit was given to the bank, signed by Mrs. Florence H., Aaron *860 and Lee M. Schoen, and Schiele, to the effect that Isaac had not been a member of the firm since January 1, 1921, and that Florence had acquired his interest at that time.

Mrs. Florence H. Schoen was not personally liable to the firm's bank on its obligations to the bank either before or after the death of Isaac A. Schoen.

OPINION.

SIEFKIN: The petitioner contends that Florence H. Schoen, the wife of Isaac A. Schoen, owned a one-fourth interest in the partnership in 1920, being one-half of Isaac A. Schoen's interest, and that she owned a one-third interest in 1921, 1922, and 1923, in place of her husband. The respondent contends, and has determined*3177 the deficiencies herein upon the theory, that Florence H. Schoen did not have any interest in the firm in any of the years, and that Isaac A. Schoen was taxable in 1920 with one-half the distributive earnings and in the three following years with one-third. We are satisfied that the respondent's action was correct.

The documentary evidence, without exception but for the affidavit made after Schoen's death - which may be explained as made to avoid the necessity of administration of the partnership estate, is in accord with the respondent's determination. The testimony of the witnesses as to oral understandings is not convincing as to the existence of a partnership in fact different in interest from that shown by the records of the partnership. Such understandings as may have existed, in view of the uncertain nature, are as consistent with a theory of assignment after receipt as with a theory of actual severance of a partnership interest. See Hellman v.United States (Ct. Cls., decided May 2, 1927); ; *3178 , and cases cited.

Judgment will be entered for the respondent.