Graham v. Commissioner

8 B.T.A. 1081, 1927 BTA LEXIS 2743

• Court: United States Board of Tax Appeals
• Decided: October 29, 1927
• Docket: Docket Nos. 644, 645.
• Status: Published

Opinions

OPINION.

Smith:

Under the provisions of the Eevenue Act of 1918 individuals carrying on business in partnership shall be liable for income tax only in their individual capacity. (Section 218(a).) “The term partnership as used in these sections obviously refers only to ordinary partnerships.” Burk-Waggoner Oil Association v. Hopkins, 269 U. S. 110.

Chancellor Kent defined 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. 3 Kent’s Commentaries.

In Story on Partnerships a partnership is similarly defined as:

A voluntary contract between two or more competent persons to place their' money * * * in lawful commerce or business, with the understanding that there shall be a communion of the profits between them.

Mr. Justice Lindley says:

By the law of this country, a valid contract of partnership can be entered into between any persons who are not under the disabilities of minority or unsoundness of mind, and are not convicts within the meaning of 33 and 34 Viet ch. 23 * * * There are certain trades, businesses and professions which can not be lawfully carried on either solely or in partnership, unless some statutory requisite has been complied with, but now that the disabilities under which spiritual persons formerly lay have been removed, the author is not aware that there is any class of persons (except convicts), who, being of sound mind and over twenty-one years of age, are rendered incapable of becoming member's of partnerships * * * Agreements entered into between several persons, some of whom are by law incompetent to contract, are not wholly null and void, but are only in some respects less effective than if all the parties to them were competent. Hence there is nothing to prevent a person who is not swi juris from being a partner. But if any such person is a partner, his or her want of capacity to contract will necessarily give rise to consequences deserving special notice. Lindley on Partnerships (8th ed.), page 86.

Although a question might be raised as to whether a partnership containing one or more minors is an ordinary partnership within the meaning of the above-cited decision of the Supreme Court, we think it is not necessary to decide that question in this instance. The evidence of record does not show that the petitioners ever intended to enter into a partnership agreement with their son. The following is from the transcript of testimony of John W. Graham.

Q. Was that conversation with the boy with you and your wife?

A. Yes, both of us.

Q. You may relate to the Member of the Board as near as you can the conversation that took place with your boy. I

A. We called him in at home there and told him that we were considering putting him on his own hook; that is, we would give him a one-third interest in the profits and losses of the Edinburg Cabinet Company, and he was to be on his own hook, his own responsibility from that time on; that he was to educate himself; about that time he was going away to school, in a few months from then, first going to Culver, Indiana, and to school in Indianapolis; we told him that out of that money he was to buy his clothes, pay his expenses — in fact, buy everything he used.

We wanted him to be careful, not to be too extravagant, but our idea, where the idea came from, was the same basis our whole family had started on, to put a boy on his own responsibility, when he is leaving you, when you are getting ready to send him away, to absolutely put him on his own responsibility, not only in a monied way, but to allow him to make his own arrangements for whatever he does, buy his own clothes, pay his expenses, do everything for himself.

The son assented to the proposition made to him. Likewise, when in 1922 it was suggested to the son that by reason of the fact that his expenses were not nearly as great as those of his father and mother and he was becoming the owner of too large an interest in the business, he readily acquiesced in their suggestion to the cancellation of the arrangement existing between them.

There is no evidence in the record that the son ever contributed any property or any services to the partnership and it is very improbable, considering his age, that he ever performed any services for the partnership. The arrangement, as the father stated in his testimony, was simply for the purpose of allowing the son to have a fund from which he could support himself. In Appeal of Julius Goldenberg, 5 B. T. A. 213, the Board held that an oral agreement between a sole proprietor and members of his family that they should receive a stated percentage of the profits of the business did not establish the existence of a partnership. The application of the same principle to the case at bar leads us to approve the action of the respondent in denying the existence of an ordinary partnership between the petitioners and their minor son.

Reviewed by the Board.

Judgment will be entered on 15 dags’ notice, wider Bule 50.