Skaar v. Department of Revenue

211 N.W.2d 642, 61 Wis. 2d 93, 1973 Wisc. LEXIS 1246

• Court: Wisconsin Supreme Court
• Decided: November 12, 1973
• Docket: 293
• Status: Published

Opinions

Hanley, J.

The sole issue is whether the Wisconsin tax appeals commission erred in affirming the Department of Revenue’s denial of the taxpayers’ application for abatement of the additional income tax assessment by concluding that, as a matter of law, no bona fide partnership existed.

While the Wisconsin income tax is modeled upon the federal system, the personal income tax treatment of married individuals under the federal and Wisconsin tax provisions is dissimilar. Under the federal system, married individuals are permitted to file a joint return and effectively split their income even though all income and deductions belong to only one spouse.¹ Wisconsin, on the other hand, while permitting married individuals to file jointly, taxes each spouse individually on his income and deductions and income splitting is not allowed.²

As a result of such treatment under the Wisconsin income tax, taxpayers attempted through numerous devices to achieve an income tax splitting similar to that allowed under the federal system. One of these devices was the family or husband-wife partnership. By availing himself of this device, the taxpayer who at that time was a sole proprietor of a business would form a partnership with his wife. Since partnership income is taxed to the partners and not the partnership itself, a taxpayer could, by making his wife or another family member his partner, effectively split his income and realize a result similar to that of the federal joint tax return.

The family partnership was, prior to a statutory definition thereof in 1950,³ an often litigated tax saving device. Such litigation arose primarily because of suspicion generated as to the bona fideness of such inter-family transactions. As a result, the federal courts closely scrutinized each individual transaction.

“. . . transactions between husband and wife calculated to reduce family taxes should always be subjected to special scrutiny.” Commissioner v. Tower (1946), 327 U. S. 280, 291, 66 Sup. Ct. 532, 90 L. Ed. 670.

We concur with this rationale and shall closely scrutinize the alleged partnership here present so as to determine whether or not for Wisconsin income tax purposes a bona fide partnership exists.

Since Wisconsin has adopted the Uniform Partnership Act,⁴ we must initially look there for guidance. Sec. 178.03 (1), Stats., defines a partnership as an “association of 2 or more persons to carry on as co-owners a business for profit.” More specifically, it is recognized that four elements need be met so as to qualify as a partnership. Initially, the contracting parties must intend to form a bona fide partnership ⁵ and accept the legal requirements and duties emanating therefrom. Secondly, there must exist a community of interest in the capital employed.⁶ Thirdly, there must be an equal voice in the management of the partnership.⁷ Finally, there must he a sharing and distribution of profits and losses.⁸ Applying these elements to the case at bar, we hold that a bona fide partnership was not created. While the taxpayers may have desired to create a marital financial relationship similar to a partnership, it is clear they did not intend to create a bona fide partnership.

Initially, the parties to a partnership must intend to contractually form the legal relationship of a partnership. Such an intent is not shown here. While the W.T.A.C. found that the parties had reached an oral understanding, such oral understanding does not show the necessary intent. The oral understanding is more consistent with their marital relationship than with the existence of a bona fide partnership.

There do exist many indications that the taxpayers did not intend to create a bona fide partnership. They did not file partnership tax returns as required both federally and in Wisconsin. We think that if the taxpayers had intended to form a bona fide partnership they would not have violated the federal ⁹ and Wisconsin ¹⁰ legal requirement of filing. Likewise, the taxpayers failed to pay the federal self-employment tax for Mrs. Skaar which would have been required had said business arrangement been a partnership.¹¹ Such tax surely would have been paid had the taxpayers intended to form a partnership and fulfill the legal requirements. The record discloses they were familiar with such requirements.

There are other indications the taxpayers did not intend to form a partnership. There was no automobile liability insurance coverage for Mrs. Skaar even though had a bona fide partnership been created, Mrs. Skaar would be liable for the tortious acts of her partner.¹² Similarly, the books of the farm operation were not kept in a manner consistent with a bona fide partnership in that there was no division of the farming operation profits between the taxpayers. In fact, the lower court found that the taxpayers did not consider themselves partners in a legal sense.

The taxpayers argue that their desire to own everything together — their holding both farms in joint tenancy and their expressed desire to hold whatever personalty they own similarly — established the fact that they intended a partnership. Such is not the case. A partnership is not implied merely from a common ownership of property.¹³ The facts that the community recognized Mrs. Skaar as possessing the authority to bind the farming enterprise and that Mrs. Skaar helped manage and operate the farm are not in themselves controlling. Such facts are as common to a marital relationship as they are to a partnership. Further, whatever testimony that is adduced as to the agreement itself is necessarily self-serving.

Proof as to the fourth element of the partnership— the division of profits — is also insufficient to show the existence of a bona fide partnership. In fact, there was no proof whatsoever that the taxpayers agreed to divide and did in fact distribute the profits of the farming enterprise. The fact that the account books fail to show any division of profits between the taxpayers creates an inference that the taxpayers never intended to so distribute said profits. Similarly, the joint account into which all receipts, farm and other income were deposited is consistent with the relationship the taxpayers intend —that of marriage and not of partnership.

Consistent with our finding that the relationship in question was not a bona fide partnership, we likewise hold that their relationship failed to qualify as a joint venture because of the scope and period of time which such relationship encompasses.¹⁴

The taxpayer was assessed additional taxes by the Department of Revenue because it believed that the farm-related income split by the taxpayers on their Wisconsin return was attributable solely to Mr. Skaar. This was because the department determined the business relationship not to be that of partnership, but of a sole proprietorship. In Woller v. Department of Taxation (1967), 35 Wis. 2d 227, 151 N. W. 2d 170, we held that the burden of proof was upon the taxpayer to show the additional assessment to be erroneous. Based upon the evidence adduced at the administrative hearing, the W.T.A.C. concluded that a partnership did not exist and that the taxpayers had not met their burden of proof. We think the facts upon which the commission’s conclusion of law was based are clearly supported by substantial evidence in view of the record submitted.

The respondents raised multiple issues in their brief of which an answer was not required so as to decide the controlling question involved. We have not deemed such questions inappropriate. We likewise do not subscribe to the wisdom of income tax treatment of married persons in Wisconsin. We would prefer the federal system as it applies to married individuals. However, that is a matter for the legislature.

We conclude that on the facts of this case the taxpayers have failed to establish that they have in fact formed a bona fide partnership.

By the Court. — Judgment is reversed and cause remanded with directions to affirm the decision of the Wisconsin tax appeals commission.

1 26 USCA, sec. 6013.

2 This court ruled in Amerpohl v. Tax Comm. (1937), 225 Wis. 62, 272 N. W. 472, that Wisconsin’s income tax provisions as per joint returns — sec. 71.09 (4), Stats. 1937 — were unconstitutional as written. The legislature has since failed to enact a provision for filing joint returns similar to the federal system.

3 26 USCA, sec. 704 (e).

4 Ch. 178, Stats.

5 Anderson v. Anderson (1972), 54 Wis. 2d 666, 196 N. W. 2d 727.

6 Thomas v. Department of Taxation (1947), 250 Wis. 8, 26 N. W. 2d 310.

7 Sec. 178.15 (5), Stats.

8 Thomas v. Department of Taxation, supra.

9 26 USCA, sec. 6031.

10 Sec. 71.10 (3), Stats. Such a return is also required of a joint venture. Sec. 71.02 (2) (i), and 26 USCA, sec. 761 (a).

11 26 USCA, secs. 702 (a) and 1402 (a).

12 Sec. 178.10, Stats.

13 Sec. 178.04 (2), Stats.; Anderson v. Anderson, supra.

14 Cf. Insurance Co. of North America v. ILHR Department (1970), 46 Wis. 2d 361, 173 N. W. 2d 192; Estate of Starer (1963), 20 Wis. 2d 268, 121 N. W. 2d 872; Bowers v. Treuthardt (1958), 5 Wis. 2d 271, 92 N. W. 2d 878.