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December 13, 1949

CAREY, Collector of Internal Revenue. RAMSEY v. CAREY, Collector of Internal Revenue

The opinion of the court was delivered by: JONES

These two cases were consolidated for the purpose of trial because they each involve the same questions and are directed to the same remedy.

Each of the plaintiffs, members of a partnership, filed individual income tax returns for the year 1944 including as income their respective distributions received from the profits of the partnership, on the basis of their participating interests.

 The Internal Revenue agent who considered and audited the returns made an adjustment in each case, the result of which was to add to their individual income returns the distributive share of the partnership profits received by their respective wives, and additional taxes against each of the plaintiffs were made the subject of subsequent deficiency assessments by the Commissioner of Internal Revenue. The additional taxes were paid, refund was denied, and these actions were commenced by the plaintiffs to recover such additional taxes assessed and paid.

 It does not seem necessary to recite the facts developed in evidence at trial with which the parties and the defendant Collector are familiar. It will be sufficient to set down my reactions and conclusions.

 The matter was submitted upon oral argument.

 Prompt decision while the evidence and impressions are fresh in mind will be beneficial to the parties as well as to the Court. The single question upon which decision turns is whether there was a real or genuine partnership which included the wives of these plaintiffs as participating members. If there was, the additional taxes imposed against the plaintiffs were illegally assessed and collected.

 In his opening statement counsel for the Government presented the suggestion or contention that the meticulous care with which the taxpayers' records had been kept of their relationship and financial transactions raised or tended to raise or support a probative inference, or that it was some evidence, of a plan or attempt to avoid or to save taxes, particularly since the members of the families were interested and participated. This struck me as a novel suggestion since usually the taxing authorities advise taxpayers that the more complete records that are kept and the more facts and data that are furnished to support the income returned to the Collector the better able are the tax agents to determine the true income or the accuracy of the tax as computed by the taxpayer.

 From the evidence it seemed to me that Mrs. Vaughan, if not a dominant, was certainly an active and influential member of the partnership. The same status can be attributed and accredited to Mrs. Ramsey although perhaps not to the full extent as to Mrs. Vaughan.

 True it is that family transactions in respect of potential tax liabilities, as in the case of intra-family gifts or transactions as they may be affected by the close intervention of bankruptcy, are to be carefully scrutinized, but if such transactions or business relationships are found to have been made in good faith and it is further found that the relationship is in reality what it purports to be, the taxing authorities are bound by it.

 On the basis of the evidence before me there is no more reason for denying Mrs. Vaughan partnership status than for conceding Mr. Vaughan's partnership status. I think her capital investment was as bona fide as was his. He does not appear actively to have participated to any greater extent in the affairs and management of the partnership than Mrs. Vaughan. Unless we hold that plaintiff Vaughan in truth and in fact held a one-half part of his financial investment in his wife's name, he contributed no more, and probably something less, than his wife did in the management and affairs of the partnership.

 The same may be said in respect of the Ramseys, and carried to its ultimate conclusion the defendant's contention here seems to be that plaintiff Vaughan loaned money to Mr. and Mrs. Ramsey to invest in the partnership and to share in the profits so that he, Vaughan, could save taxes for himself.

 The Government offered the testimony of Ralph Quail, a former and original partner, to rebut or refute the evidence tendered by the plaintiffs in support of their partnership claims. Quail had a ten percent interest and kept the books of the partnership during his spare hours after and away from his regular employment nearby with United States Rubber, as Property Manager. His testimony was directed largely to the lack of participation of the plaintiffs' wives in partnership meetings and business. He stated that he attended a majority of the meetings and that the wives of the plaintiffs attended few. Also, it was his opinion that they not only did not participate in those meetings which he attended but that he did not believe them capable of knowing anything about the business affairs of the partnership. Frankly, I was not impressed with his opinion and judgment of the capacity and knowledge of the plaintiffs' wives but in any event, on cross examination, he did conceded that the plaintiffs' wives participated in the engagement of experts and in securing additional equipment for the business. This, it seems to me, corroborates the plaintiffs' evidence rather than refuting it.

 It would be extremely unjust and contrary to all rules of evaluating and weighing evidence to deny recovery here on Mr. Sharp's rather vague and uncertain ...

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