Before DUFFY, Chief Judge, and MAJOR and LINDLEY, Circuit Judges.
The Commissioner of Internal Revenue (respondent) determined deficiencies in the income tax of petitioner, Joe Lynch (sometimes referred to as the taxpayer), for the years 1944 and 1945, in the amounts of $24,821.01 and $23,839.04, respectively. Upon the taxpayer's petition, the Tax Court of the United States, on September 29, 1953, rendered its decision upholding the deficiencies thus determined. The controversy is here upon taxpayer's petition to review and set aside the decision of the Tax Court.
The case involves the validity for tax purposes of a family partnership. For reasons subsequently disclosed, only a brief outline of the facts is required for the purpose of our decision. In 1937, and for several years previous thereto, the taxpayer was engaged as a retail merchant in men's clothes in the city of Milwaukee, Wisconsin. At that time he had a family consisting of his wife, three daughters, Marjorie, age 26, Helenjane, age 20, and Ruth, age 18, and a son, Joe, age 12. Marjorie and Helenjane were both married in 1940, and Ruth in 1942. For the most part, the daughters since their marriage have lived at places other than in the city of Milwaukee. In 1937, the net worth of petitioner's business was about $44,000. The net income from the business during that and previous years averaged from $4,000 to $6,000. In 1937, petitioner conceived the idea of dividing his estate with his children and for that purpose consulted with Mr. Carl B. Rix, an attorney. (We mention the name of the attorney because of his high standing as a lawyer and splendid reputation for integrity, professionally and otherwise.) Mr. Rix suggested to the taxpayer numerous ways in which the purpose could be achieved, including the formation of a partnership. As a result, a partnership agreement was prepared by Mr. Rix and signed by taxpayer and his three daughters on July 1, 1937. The agreement provided:
"1. The parties hereto have agreed to become copartners in business for the purpose of engaging in the sale of men's clothing, furnishings and hats in the City of Milwaukee under the firm name and style of Joe Lynch. The partnership shall begin as of July 1st, 1937, and shall continue for a period of fifteen years.
"2. To that purpose Joe Lynch has agreed to transfer, sell and convey to the partnership all his right, title and interest in and to the present business and the assets thereof, including the good-will and trade name thereof, now carried on by him at No. 230-W. Wisconsin Avenue, Milwaukee, subject to the assumption by the partnership of all liabilities of said business. The interest of the various parties in and to such partnership is as follows: Joe Lynch, one-fourth thereof; Marjorie Lynch, one-fourth; Helenjane Lynch, one-fourth; Ruth Lynch, one-fourth. The statement of the business now conducted by Joe Lynch as of July 1st, 1937, shall be the basis for the opening of the books of the partnership."
The agreement made provision in considerable detail for the conduct of the partnership business, the manner in which the books were to be kept, a distribution of one-fourth of the profits to each of the partners, and for numerous other matters common and incidental to a partnership business. Petitioner filed a Federal gift tax return for the year 1937 in which he reported gifts of one-fourth interest in the Joe Lynch business to each of his three daughters, and each of the daughters has for that and each succeeding year reported and paid income tax upon the profits of the business distributed to her.
Petitioner before the Tax Court relied upon the doctrine of collateral estoppel as a bar to the instant proceeding, which issue was decided adversely to petitioner. Thereupon, the Tax Court proceeded to hear evidence, make findings and decide the case on what is referred to as the merits, that is, that there was no valid partnership for tax purposes during the years 1944 and 1945, those for which deficiencies have been determined in the instant proceeding.
The taxpayer in his petition before the Tax Court alleged:
"The identical partnership and the identical issue was before the United States Board of Tax Appeals in the case of Joe Lynch, decided April 17, 1941, Docket No. 102149, reported in the 1941 Memorandum Decisions published by Prentice-Hall in Paragraph 41,227. The Board of Tax Appeals' decision that the Joe Lynch partnership in question was valid, and that only one-fourth of the partnership's net income could be allocated to petitioner in accordance with the partnership agreement, constituted a finding of fact by the United States Board of Tax Appeals."
The Commissioner, as respondent, in answer to this allegation stated:
"Admits that the business of the alleged Joe Lynch partnership is and always has been the ownership, conduct and operation of a retail men's clothing store located in the City of Milwaukee, Wisconsin. Admits that the same partnership agreement and the same issue as to the year 1937 was before the Board of Tax Appeals in the case of Joe Lynch, Docket No. 102149, Memorandum Opinion April 17, 1941, but avers that the facts pertaining to the years 1944 and 1945 were not the same as 1937. Denies that the Board of Tax Appeals' decision as to the year 1937 that the Joe Lynch partnership was valid, and that only one-fourth of the partnership's net income could be allocated to petitioner in accordance with the partnership agreement, constitutes a finding of fact by the United States Board of Tax Appeals controlling as to the years 1944 and 1945."
On January 19, 1940, the Commissioner determined that the entire income of the Joe Lynch partnership business for the period from July 1 to December 31, 1937 was includible in taxpayer's income for the reason that the purported partnership was not recognizable for Federal income tax purposes. On taxpayer's petition, the Board of Tax Appeals, on April 17, 1941, entered its decision in favor of the taxpayer and adverse to the Commissioner. This decision was not appealed by the Commissioner and, therefore, became final.
In its 1941 decision, the Board stated:
"In the instant case no bad faith has been charged nor shown to have existed in connection with the organization of the partnership. The purpose and intention of the parties, as shown by the record, establishes that the agreement of July 1, 1937, was in fact a bona fide agreement between petitioner and his three daughters, whereby he was to give to each of them an interest in his business and the assets thereof; the four of them as co-partners were to carry on the men's clothing business for profit; the four of them were to have equal capital interests in the business at the start thereof on July 1, 1937; and, also, the four of them were to have equal distributive shares of the net profits derived from that business.
"The petitioner had the right to give each of his daughters an interest in his business and the partnership agreement was not rendered invalid because of the designation of petitioner as the manager thereafter having sole executive control of the business or because of the restriction of the rights of several of the partners to dispose of their capital interest in the partnership, except to petitioner and his son. Commissioner [of Internal Revenue] v. Olds [6 Cir.], 60 F.2d 252 (11 A.F.T.R. 741). The partnership agreement, the setting up of the capital accounts of each of the four partners on July 1, 1937, and the subsequent entries of debits and credits on their respective accounts on the partnership books sufficiently evidenced petitioner's completed gift of cash to his three daughters and their ownership of a one-fourth interest in the clothing business and property from which the income here in question was produced. The partnership agreement was executed by the parties thereto and a valid partnership between petitioner and his three daughters was formed on July 1, 1937. [Citing cases.]"
The instant proceeding was heard by Judge C. P. LeMire, a Judge of the Tax Court, and on June 4, 1953, the division of that court to which the case had been assigned filed a memorandum opinion, in which it was stated:
"In this proceeding, although the taxable years are 1944 and 1945, the issue relating to taxation of the income of the 'Joe Lynch' business for those years involves the same gifts, the same partnership agreement, the same partnership, and the same parties as were involved in Docket No. 102149, Joe Lynch, supra. * * *
"Upon consideration of all of the evidence and circumstances we find that the parties had a real intention, in entering into the agreement of July 1, 1937, to join together as partners in carrying on the 'Joe Lynch' ...