Gunderson v. Commissioner

*45 This proceeding was brought to redetermine the deficiencies in the income taxes of the petitioner for the years 1924, 1925, and 1926 in the amounts of $3,350.87, $3,397.64, and $221.79, respectively.

The sole issue is whether or not a partnership existed between the petitioner, Leonard H. Gunderson, and his wife, Irma Wood Gunderson, during the years under consideration.

FINDINGS OF FACT.

The petitioner and his wife were residents of Cleveland Heights, Ohio. The petitioner's father, Martin Gunderson, was engaged in the roofing business in Cleveland prior to his death in 1913. Upon his death the petitioner, who was a high school student at the time, abandoned his school work and, without salary, assisted his mother in the business, which was continued by her until just before his marriage to Irma Wood on June 24, 1916. In January, 1916, the petitioner became engaged to Miss Wood, who*1930 was in the millinery business. Shortly thereafter he discussed with her and with his mother the desirability of purchasing the roofing business for himself and his intended wife. Negotiations resulted in the sale of the enterprise for $7,000, for which sum the petitioner and Irma Wood assumed liability by executing their joint notes in that amount. Neither maker had any financial resources at the time. The notes were paid from the profits of the business with the exception of $2,000, which was canceled by the petitioner's mother as a Christmas present to her son and his wife.

Prior to their marriage the petitioner and his wife decided to purchase the roofing business jointly, to operate it as partners, to share equally all profits and losses therefrom, and to divide all assets equally if the partnership should terminate. They discussed the method of conducting their business and the duties of each. They determined that the petitioner was to have charge of the outside work, to direct the crews of workmen and to figure the prices of jobs for which they desired to bid. Mrs. Gunderson was to do the *46 office work. The business was conducted along the proposed lines, *1931 but under the petitioner's name in order to preserve the appearance of being the same business as that formerly carried on by the petitioner's father. Mrs. Gunderson used as an office a room in their home, set apart for such purpose. She kept the books, handled all credits, took care of telephone calls, called prospective owners and builders to arrange for figuring bids, prepared and mailed bids, ordered materials and supplies, assisted in collecting accounts, wrote out checks, and performed all other duties incidental and necessary to the office management of the business.

In 1920 a bookkeeper-accountant was employed. The petitioner knew nothing about books and did not concern himself with what they showed. He had his own unique method of arriving at the profits of the partnership and its net worth. Mrs. Gunderson instructed the bookkeeper in her duties, exhibiting a thorough knowledge of all the details of the business. No partnership books were then opened and the bookkeeper assumed that the enterprise was owned by the petitioner alone. Consequently, she prepared income-tax returns in the petitioner's name for the years 1921, 1922, and 1923. However, in 1924 the bookkeeper*1932 was informed that the petitioner and his wife were and "always had been" a partnership, and hence she prepared partnership returns for the business covering the years under consideration.

The bookkeeper opened an account in the name of L. M. Gunderson. Against this account were charged all personal expenses such as bills for meat, clothing and groceries purchased by both the petitioner and his wife. Likewise, all expenditures of cash withdrawn by either partner were so charged. Neither the petitioner nor his wife received any salary nor maintained a drawing account. The partnership maintained only one bank account, against which checks for all purposes, business and personal, were drawn. Mrs. Gunderson prepared all checks for the petitioner's signature. She verified bills for all goods ordered by her, whether for personal or business use, and her husband did likewise with reference to all purchases made by him. The petitioner and his wife maintained a joint savings account.

The business being conducted under the name of the petitioner as "L. M. Gunderson" and "Gunderson Company," all checks were signed by him, advertisements were carried in his name or in the name of "Gunderson*1933 Company," insurance policies were maintained in his name, and mercantile reports relating to the business were made out in the same name.

As the roofing business prospered and a surplus became available for investment the petitioner and his wife put it into real estate *47 ventures at different times. Lots were purchased, plans were drawn, and contracts for building were made by the petitioner and his wife, both of whom were consulted by the real estate owners and the builders prior to and during the erection of buildings on the land. No purchase was made without the inspection and approval of Mrs. Gunderson. The titles to the real estate purchased were taken in the name of the petitioner, his wife, or both of them jointly. The financial transactions relating to the building enterprises were handled by the bank in which the partnership account was carried. During the construction of the houses Mrs. Gunderson took an active part in making plans, effecting alterations when needed and inspecting the properties in their successive stages of construction. All expenditures involved in the real estate ventures were entered on the L. M. Gunderson account and payments therefor*1934 were made from the common bank account which was used for all business and personal purposes of the partnership. In 1927 the method of entering real estate transactions on the books of the partnership was changed and the real estate was set up on the books as an asset to the business regardless of which partner held title thereto.

The petitioner and his wife were wholly unfamiliar with income-tax matters. Their returns, prior to 1921, were prepared by their bank and those subsequent to that year by the bookkeeper. The petitioner and his wife considered it of no importance to enter into a written contract setting forth the terms and conditions of their business relationship, since they had been conducting their business satisfactorily under a verbal agreement for many years. However, in 1928 they found that the Government "was not satisfied" and immediately they executed a written partnership agreement, reciting that such instrument was for the purpose of reducing to writing the understanding and partnership agreement made by them on June 24, 1916, and governing the operation of the partnership since that date.

The petitioner and his wife represented to those with whom they*1935 had business and personal relations that they were jointly interested as partners in their commercial undertakings. The record discloses that several such persons whom the petitioner and his wife employed to construct buildings for them considered and treated Mrs. Gunderson as a partner in the roofing and real estate businesses. Mrs. Gunderson and the petitioner exercised equal authority in determining the plans and the procedure relating to the real estate ventures. On many occasions the petitioner stated that his wife was a partner in and a joint and equal owner of the business being conducted under the name of "L. M. Gunderson" and "Gunderson *48 Company." Likewise, Mrs. Gunderson stated to business men with whom the partnership dealt that she was a partner in the business. Such representations convered the period from the inception of the relationship in 1916 to the year 1928 when the petitioner and his wife entered into the formal written partnership agreement. Mrs. Gunderson was constantly consulted in all matters relating to the roofing business and real estate ventures and was thoroughly conversant with the details of both activities.

OPINION.

VAN FOSSAN: *1936 The sole issue in this proceeding is whether or not the petitioner, L. M. Gunderson, and his wife, Irma Wood Gunderson, were partners in the ownership and management of the roofing business conducted under the name of "L. M. Gunderson" during 1924, 1925, and 1926.

The original agreement which the petitioner contends initiated the partnership relation between himself and his wife was a verbal one made shortly preceding their marriage in June, 1916. In the State of Ohio a husband and wife may enter into a partnership contract by oral agreement. .

In , we said:

No rigid rules can be laid down as to the requirements to establish the relationship. Ordinarily where two or more persons associate themselves together for a common undertaking for profit, and share in the profits or losses, a partnership results. It is not necessary to constitute the relation that a person should contribute capital, or render services, and we have held in several cases that a husband may constitute his wife a partner by giving her an interest in the business.

In the McKnight case we quoted Chancellor Kent's*1937 definition of a partnership, as follows:

A contract of two or more competent persons to place their money, effects, labor and skill, or some or all of them in lawful commerce or business, and to divide the profit and bear the loss in certain proportions.

and also the definition contained in :

The requisites of a partnership are that the parties must have joined together to carry on a trade or adventure for their common benefit, each contributing property or services, and having a community of interest in the profits.

The evidence relating to the origin of the alleged partnership relation is uncontradicted. Prior to their marriage the petitioner and his intended wife discussed thoroughly their desire and purpose to purchase the roofing business from the petitioner's mother. For various reasons they decided to own the enterprise equally and to operate it as partners. The duties of each partner were well defined *49 and carefully conceived. Their negotiations culminated in the purchase of the property as a going concern for the sum of $7,000. Neither partner possessed any financial resources. Consequently, they*1938 gave their joint note to the vendor as a consideration for the transfer. In , we held that the borrowing of capital, needed in the conduct of a business, on a partnership note was, in effect, a contribution by each signatory party to the agreement of partnership. It is unquestioned that the roofing business and real estate ventures were undertakings for profit. The express agreement between the petitioner and his wife was that all profits and losses should be shared equally and that in the event of a termination of the partnership all assets, over and above the liabilities, would be divided equally.

There is nothing conclusive against the petitioner's position in the fact that the business was conducted in the name of an individual. That is a common custom in business and professional practice. An individual or firm name may have a great commercial value which its owners desire to preserve. See Placing advertising, carrying a bank account, issuing checks, filing bids and other such acts in the petitioner's name are merely normal and characteristic consequents of such a policy.

*1939 It is not necessary that the books of account maintained by the business show that all partners have an interest therein. ; ; ;

The cases of , and , cited by the respondent, are clearly distinguishable from the case at bar. In them the alleged partners contributed no capital or services nor were they instrumental in increasing earnings. Mrs. Gunderson, however, contributed an equivalent of capital to the enterprise, devoted her entire time and attention to the business, was efficient and active in performing her specific duties as a member of the partnership, and, jointly with her husband, exercised a keen and careful supervision over all the partnership activities. She participated in the business as a partner and conducted herself as such.

The record shows that the petitioner and his wife both held themselves out as partners, not only through their actions, but also by their affirmative statements made to*1940 business associates and persons who were engaged in similar lines of industry and with whom they came in contact in the usual course of business. Those were the very persons to whom the petitioner and his wife would normally and naturally disclose their status as partners and who might be personally and pecuniarily interested in ascertaining the owner of *50 the Gunderson concern. In his proof, the petitioner has brought himself well within the requirements of the Robertson opinion, which states:

There must be credible evidence of acts, conduct, facts and circumstances demonstrating the alleged partner's actual participation in the business and assumption of its responsibilities to those with whom the business is transacted.

The representations and asseverations of the petitioner and his wife that they had established a business partnership were made over a long period of time and long before this tax controversy arose. Thus, there is no suggestion that the relation was an artificial one, assumed for the purpose of avoiding tax.

Judgment will be entered for the petitioner.