Professional Documents
Culture Documents
2d 500
DYER et al.
v.
COMMISSIONER OF INTERNAL REVENUE.
Nos. 36-40.
Dockets 22677-22681.
These are appeals, involving income taxes, from five decisions of the Tax
Court which were consolidated for trial as well as for decision by this
court. On the basis of a stipulation, depositions, exhibits and oral
testimony, the Tax Court, per Judge Van Fossan, made the following
findings:
"B. W. Dyer & Company is a partnership (hereinafter referred to as the
Partnership) engaged in business as sugar brokers and economists in New
York, New York. The Partnership filed an income tax return on the cash
receipts and disbursements basis for the calendar year 1944 with the
collector of internal revenue for the second district of New York.
Petitioners B. Wheeler Dyer, Ruth W. Dyer, Benjamin W. Dyer, Jr., and
Daniel L. Dyer were members of the Partnership. Benjamin W. Dyer, Jr.,
was in the Armed Services and during 1944, was stationed in the
European theatre of operations. The partners each filed income tax returns
for the calendar year 1944 on the cash receipts and disbursements basis
with the collector of internal revenue for the second district of New York.
Petitioner Leonard Francis Daidone became a limited partner of the
Partnership in June 1943. William Harry Vanderveer was an employee of
the Partnership during 1944. The latter petitioners also filed income tax
returns for the year 1944 on the cash receipts and disbursements basis
with the collector of internal revenue for the second district of New York.
"On February 5, 1944, the Office of Price Administration issued a
Revised Ration Order allowing the use of imported sugar-containing
products without the surrender of ration stamps or certificates if the
"The venture was closed out on the books of the Partnership showing a
total profit of $186,875.05. Profits were distributed on May 14, 1944, as
follows:
"Dorothy H. Daidone ............. $9,075.11
"Laura E. Vanderveer ............ 9,075.11
"Yvonne L. Dyer ................. 4,537.56
"Deborah S. Dyer ................ 4,537.56
"Harriette W. Price ............. 4,537.56
"Viola W. Hollriegel ............ 4,537.56
or security, nor did they render services to the venture. By the terms of the
letter of offer, they undertook to share in the profits or losses of the
undertaking according to their percentage interest. Profits were realized
and distributed according to a later agreement.
"The petitioners contend that the share of profits distributed to the women
are taxable to them because they participated in the speculative venture by
assuming part of the risks of the undertaking. No claim is made that the
wives or half sister became members of the Partnership. It is petitioners'
position that the women committed themselves to the financial risks
involved and that, by reason of this participation, they are taxable upon
the share of profits distributed to them. Respondent denies that the women
were participants in the joint venture and for that reason allocates the
profits to the petitioners.
"On the facts here present and under well-established law, the transactions
by which the petitioners sought to minimize their business losses by
assigning a share of the profits to the several women were wholly
ineffective to divert taxability of the profits from those who earned the
income. Under Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731,
and Burnet v. Leininger, 285 U.S. 136, 52 S.Ct. 345, 76 L.Ed. 665,
petitioners are taxable on all of the profits. Cf. Richter v. Commissioner of
Internal Revenue, 4 T.C. 271. In no sense can it be said that the women
earned the income in question. They paid nothing, contributed nothing,
earned nothing. They were merely the passive recipients of a share of the
profits earned by the real participants in the joint venture. See also
Commissioner of Internal Revenue v. Culbertson, 337 U.S. 733, 69 S. Ct.
1210, 93 L.Ed. 1659."
Before CLARK, FRANK and HINCKS, Circuit Judges.
Alger B. Chapman, Brady O. Bryson, Walter W. Walsh, Arthur K. Mason
and David S. Smith, New York City, for petitioners.
H. Brian Holland, Ellis N. Slack, A. F. Prescott and I. Henry Kutz,
Washington, D. C., for respondent.
FRANK, Circuit Judge.
As between the partnership and these women, the contracts legally obligated
each of the women to bear a risk of loss up to $5,000. There is evidence (1) that
each had enough assets to meet such a liability and (2) that, when they executed
the contracts, a real and substantial risk of loss existed;11 and the judge found
nothing to the contrary. Thus, under "local law," as between the women and the
partnership, the women and the partnership became parties to a new, separate
and distinct arrangement known as a "joint venture." That venture concerned
not many future enterprises but only the sale of a limited quantity of sugar
syrup; consequently, it was by its nature to have a short duration; and its chief
element was a commitment to a considerable financial risk, since it called for
little capital or skill in its operations. True, the partnership, in addition to its
sharing in the risk, contributed some necessary capital for a brief interval, and it
performed some slight necessary services. But, bearing in mind that the
partnership did not contribute to the joint venture its compensation for its
selling services,12 those facts do not negative the important fact that the women,
under their contracts, assumed a part of that financial hazard which constituted
the major factor in the joint undertaking. It follows that if one does not peer
It will not do to say that such a contribution must invariably take the form of
tangible property; for, under Culbertson, an intangible such as a promissory
note, an endorsement of a note, a guaranty, or an indemnity against loss will
suffice. 13 Significantly, the Commissioner so recognized in not seeking to deny
the reality of the contribution of Viola Hollriegel, an employee of the old
partnership who was in no way related to any of the partners. Indeed, the
Commissioner's attitude toward taxability to her of her share of the profits goes
to show that, if the other women similarly had had no familial ties to any of the
partners, the profits allotted to those women could not have been treated as
anything but part of their taxable incomes, respectively. So that the crucial
question comes to this: Where there were family relationships, are the contracts
to be deemed tax-evading devices?
The government insists that Burnet v. Leininger, 1931, 285 U.S. 136, 52 S.Ct.
345, 346, 76 L.Ed. 665, must control the decision here. We do not agree. There
the taxpayer entered into a contract with his wife purporting to constitute her
his equal "partner" in his interest in an active partnership of which he had been
a member for the 22 previous years, and she agreed to assume liability for onehalf the losses he might bear as a member of that existing partnership. His other
partners did not consent to this arrangement, and no recognition of her status
appeared on the books of the 22-year-old partnership which continued to pay
the husband the same percentage of profits as theretofore and made no
payments to the wife. The wife contributed nothing whatever to the previous
partnership and took no part in the conduct of its business; there was created no
new, separate, joint venture between husband and wife; there was never any
formal accounting between them. On these facts, the Supreme Court sustained
the Board of Tax Appeals which had held the husband taxable on the whole of
the income earned as his share of the old partnership. The Supreme Court said:
"Upon the facts as found, the agreement with Mrs. Leininger cannot be taken to
The judge here made no such finding. Had he done so, basing it on all the
elements of the situation (including, among other things, the fact that the
women had not read the contracts they signed) and resting his finding in part on
a testimonial inference resulting from his observation of the demeanor17 of the
witnesses who testified orally, we would have affirmed.
As it is, we think we must not infer such an implied finding nor contrive an
express one of our own. If this case had arisen before Culbertson's advent, we
might have done one or the other. For we might have surmised that, had there
been losses, the women never would have been asked to live up to their
obligations, and that the contracts served solely as paper covers for a taxreducing scheme benefitting the partnership's members. But we live in the postCulbertson era and have noted the warning that the ordinary judicial eyes have
not the "gimlet" quality, possessed by the Tax Court only, to "pierce" the
family-partnership "guise" and thus to differentiate "between the real thing and
the imitation".18 Some commentators have criticized Culbertson as requiring
sheer ritualism of the Tax Court. But we have not the privilege of criticism: We
must obey a Supreme Court decision.
Even so, we need not and shall not here close the door to Tax Court compliance
with the Culbertson requirement. "In order that injustice may not be done"19 to
the government, and following the practice, particularly in a case of this type,
adopted by the Supreme Court (and by us20), we reverse and remand for the
purpose of permitting the judge, if he believes the evidence so warrants, to
make a further finding relative to the issue of good faith.
10
Notes:
1
10
See 337 U.S. 733 at pages 743 note 12, and 744 note 13, 69 S.Ct. 1210
11
Among the uninsured risks, according to the evidence, were the following: (1)
The OPA order of February 5, 1944 might be illegal or might be revoked, or the
cut-off date (named in the order) advanced. (2) Because of the submarine war
then occurring, ocean transportation might be unavailable or the syrup might
not be delivered to a purchaser by the cut-off date. (3) The syrup might become
contaminated in transit
12
The accepted offer from the partnership to each of the women contained the
following: "We also wish to point out that you will have no interest in the five
percent (5%) selling commission which is paid to us as an expense by the joint
account between Kaplan and ourselves. We are to continue to receive this and it
will be considered as an expense in any share of this venture that you may
assume."
13
14
See Kocin v. United States, 2 Cir., 187 F.2d 707, 708: "For the partnership
served no business purpose. In keeping with the decisions, it could be called a
`sham,' a `disguise,' a `masquerade,' a `fiction,' a `subterfuge,' a `make-believe,'
a `mere pretense,' a `mask,' a `screen,' a `veil,' an `artifice,' a `ruse,' or other
names, supplied by the dictionary, which indicate that it does not succeed as an
insulator * * * from tax liability."
15
See Grant v. Commissioner of Internal Revenue, 2 Cir., 1953, 209 F.2d 430,
434: "[J]ust as elsewhere the meaning of a fact indeed what is a fact often
varies with the purpose in hand e.g., a hammer is not the same fact to a
carpenter, a painter, a physicist and a murderer so in the legal realm what is
a fact often depends on the special legal context in which the question arises.
More particularly, in applying tax statutes, the Supreme Court frequently turns
away from the interpretations of conduct under `local' or `private law,' and
remarks that it is `speaking with reference to taxation' or dealing with an event
`for tax purposes.' When, in tax cases, the Court says that, because `taxation * *
* is eminently practical,' it regards `substance' rather than `form,' or looks
through a `sham' or `disguise' or `masquerade' to the `realities,' it is saying, in
effect, that it treats as mere `form' or as a `sham' that which in a different legal
setting represents `substance' or `reality.' For thinking in the domain of `tax law'
is necessarily contextual. It operates in a specialized `universe of discourse.'
Any such specialized talk-world (or think-world) has its own restricted
`attentional attitudes,' and confers the accent of reality on some matters (and the
accent of unreality upon others) whereas in another alternative talk-world (that
of decedent's estates for example) some of the reals of the `tax-law' world
become unreals, ghosts or phantoms. Consequently, we think that the ordinary
rules, relative to private rights and duties growing out of the facts of a particular
contract, must give way to the paramount aim of the revenue statute before us
here. See, e.g., Lucas v. Earl, 281 U.S. 111, 114, 50 S.Ct. 241, 74 L.Ed. 731,
where the Court (per Holmes, J.), when applying a section of the Revenue Act,
disregarded the legal consequences of a contract under state `law.'"
16
The Culbertson case tells us that the question of bona fide intention is one of
fact. But it is the kind of fact which is seldom a "testimonial inference"; usually
it is a "derivative inference." See, e.g., American Tobacco Co. v. Katingo
Hadjipatera, 2 Cir., 194 F.2d 449, 451; E. F. Drew & Co. v. Reinhard, 2 Cir.,
170 F.2d 679, 684; 5 Moore, Federal Practice (2d ed.) p. 2615
17
18
Commissioner of Internal Revenue v. Culbertson, 337 U.S. 733, 737, 749, 753,
See Ford Motor Co. v. N. L. R. B., 305 U.S. 364, 373, 59 S.Ct. 301, 83 L.Ed.
221; Hormel v. Helvering, 312 U.S. 552, 560, 61 S.Ct. 719, 85 L.Ed. 1037;
Estho v. Lear, 7 Pet. 130, 8 L.Ed. 632; Armstrong v. Lear, 8 Pet. 52, 74, 8 L.Ed.
863; Chicago, M. & St. P. R. Co. v. Tompkins, 176 U.S. 167, 180, 20 S.Ct. 336,
44 L.Ed. 417; United States v. Rio Grande Dam & Irrigation Co., 184 U.S. 416,
424; Lincoln Gas & Electric Light Co. v. City of Lincoln, 223 U.S. 349, 361365, 32 S. Ct. 271, 56 L.Ed. 466; Security Mortgage Co. v. Powers, 278 U.S.
149, 159-160, 49 S.Ct. 84, 73 L.Ed. 236; Railroad Commission of Wis. v.
Maxcy, 281 U.S. 82, 50 S.Ct. 228, 74 L.Ed. 717; Interstate Circuit, Inc. v.
United States, 304 U.S. 55, 58 S.Ct. 768, 82 L.Ed. 1146; Levesque v. F. H.
McGraw & Co., 2 Cir., 165 F.2d 585, 587; Porter v. Leventhal, 2 Cir., 160 F.2d
52; Kreste v. United States, 2 Cir., 158 F.2d 575, 580; Nachman Spring-Filled
Corp. v. Kay Manufacturing Co., 2 Cir., 139 F.2d 781, 787; Zalkind v.
Scheinman, 2 Cir., 139 F.2d 895, 904; Phelan v. Middle States Oil Corp., 2 Cir.,
154 F.2d 978, 1000; Benz v. Celeste Fur Dyeing & Dressing Corp., 2 Cir., 136
F.2d 845, 848; Wyant v. Caldwell, 4 Cir., 67 F.2d 374; Columbus Gas & Fuel
Co. v. City of Columbus, 6 Cir., 55 F.2d 56, 58; Pfeil v. Jamison, 3 Cir., 245 F.
119
20
See Levin v. Commissioner of Internal Revenue, 2 Cir., 199 F.2d 692; cf.
Sommers v. Commissioner of Internal Revenue, 2 Cir., 195 F.2d 680
11
12
with the actual partners, and no search for that kind of reality is necessary or
even in point. There is no occasion to call these arrangements sham or
unintended; they are just an inadequate basis for holding the production of
income not taxable to those who produce it.
14
Thus, while I can see how the concept of "good faith" can be bandied back and
forth on the conceded facts to support practically any result, I do not perceive
how it is or can be anything more than a conclusory label indicating a decision
otherwise made. But the holding herein, thus importing to the application of the
label a truly functional vitality, seems to me not only legally erroneous for the
reasons stated, but practically unfortunate in the invitation and hope extended to
beleaguered taxpayers. One need not retreat into a "specialized talk-world" or
"think-world" to realize that here is now expression of judicial purpose to
validate a simple, but extraordinarily streamlined, method of tax "reduction" or
evasion, of infinite adjustability and adaptability, operable by any taxpayer, be
he partner or no, and for the benefit of any of "his sisters and his cousins and
his aunts," not to speak of those closer, and with stated risk-limits well below
the $5,000 here employed if such seem desirable. Reversal here, however tied
to some ritual of fact-finding unrelated to business realities, will inevitably
stimulate that hope. Nor do I believe a reviewing court well-advised in
upsetting a reasoned, reasonable, and straightforward decision of the tribunal
charged with primary responsibility unless it can offer a more direct and
understandable concept of the measure of a taxpayer's obligation than is here
proffered. I would affirm.