Commissioner of Internal Revenue v. Olds

HICKS, Circuit Judge

(dissenting).

The question is well stated in the opinion of the court. The agreement is printed in tile margin. 1

During the year 1918 respondent operated a coal dock and owned certain timber properties and various bonds and stocks. He, with Mrs. Olds, lived at Cheboygan, Mich, lie had two unmarried daughters, Blanche and Gertrude, and one married daughter, Mrs. Florence Buhrman, who lived at Dayton, Ohio. During the summer of 1918 respondent conceived the idea of a general business partnership between himself and his daughters. While the family was together at the home of Mrs. Buhrman on December 31, 1918, there was a general discussion upon the subject, unimportant now in view of the written instrument above referred to which was executed by the parties on that date. At the same time the three daughters each executed a note for $400,000 in compliance with the terms of the writing. One of the notes is copied in the margin. 2

*256 The Board decided that a partnership existed between respondent and his daughters, and upon this basis determined respondent’s tax liability for the years involved in accordance with the applicable statutes above cited. The court is in accord.

I cannot accept this view.

I have briefly recited the circumstances leading to the execution of the instrument because of its very meager reference to the subject-matter, but their consideration is not required, or, as I understand, allowed, in ascertaining the intention of the parties. The writing, read in connection with the notes, is unambiguous. The “Memorandum of Agreement” is between the father and his daughters. Respondent agreed to sell, and each of his daughters agreed to buy, “one quarter interest in everything he owns.” Each daughter agreed to give her note for $400,000 in settlement. I need not discuss other features appearing in the second paragraph which the parties were fully competent to include if they chose to do so.

I think the weakness of respondent’s contention is found in the italicized paragraph. Therein the makers of the notes expressly reserved the right to have them returned if at any time or in any way they should become dissatisfied with 'the way respondent conducted the business and should think that their interest was being impaired by his management. The exercise of this right was to be determined by the independent judgment of the makers of the notes. See Miami Coca-Cola Bottling Co. v. Orange Crush Co., 296 F. 693, 694 , C. C. A. 5. This right imposed from the beginning an obligation upon the respondent to return the notes'upon demand. The effect was to destroy .the notes as enforceable obligations as between the parties and to strip the instrument of all mutuality of engagement. To promise to pay and at the same time to reserve the right to revoke the promise is no promise. The obligation to hold the notes subject to the demand for their return is wholly inconsistent with the idea that the notes were either a promise to respondent or a consideration for the purchase. I think, therefore, that the agreement was void. The obligation to pay the notes was negatived by the reserved right to demand their return.

I think we are not dealing with a contract effective until terminable at will but with a contract invalid from its inception. Velie Motor Car Co. v. Kopmeier Motor Car Co., 194 F. 324, 330 , C. C. A. 7; City of Pocatello v. Fid. & Dep. Co., 267 F. 181, 182 , C. C. A. 9; U. S. v. White Oak Coal Co., 5 F.(2d) 439, 441 , C. C. A. 4; Miami Coca-Cola Bottling Co. v. Orange Crush Co., supra; Bernstein v. W. B. Mfg. Co., 238 Mass. 589 ; 591, 131 N. E. 200 ; Rehm-Zeiher Co. v. F. G. Walker Co., 156 Ky. 6, 14 , 160 S. W. 777 , 49 L. R. A. (N. S.) 694; Hutchinson Baking Co. v. Marvel, 270 Pa. 380 , 113 A. 433 ; Bankers’ Trust & Audit Co. v. Farmers’ & Merchants’ Bank, 163 Ga. 352 , 136 S. E. 143 ; Page on Contracts (2d Ed.) vol. 1, § 572.

A different situation would have arisen if the makefs had paid the notes, but they have never done so. The notes were renewed on December 31, 1924, and respondent still holds them.

Section 6 (1) of part 2 of the Uniform Partnership Act adopted in Michigan (Comp. Laws Mich. 1929, § 9846), where the written agreement was to be performed defines a partnership as “an association of two or more persons to carry on as co-partners a business for profit.”

Upon the foregoing consideration, I think that respondent failed to establish before the Board by any substantial evidence that any partnership, as contemplated by the Partnership Act or by section 218(a) of the Revenue Acts involved, was ever effected between respondent and his daughters. The parties never became eo-owners of respondent’s property.

But, aside from all this, I think the matter can be brought into clearer view by the application of a very practical test. See Lucas v. American Code Co., 280 U. S. 445, 449 , 50 S. Ct. 202 , 74 L. Ed. 538 . Suppose we lay'aside everything that was spoken or written between the parties and examine the question from the standpoint of what they really did or failed to do. In this light it appears to me that the daughters did nothing of consequence. During the six years intervening between the execution of the agreement and the bringing of this action the daughters neither invested any money in the business nor contributed any service. The record fails to disclose that they even exercised the “privilege of looking over the books.” Upon the other hand, respondent managed the business for the whole period exactly as he did before the execution of the agreement, with this one difference: He distributed to them such “profits” as he chose to distribute, taking into consideration their living necessities. But there is no magic in words. Profits imply investment, and there was no investment by the daughters.

“This Memorandum of Agreement, made and entered into Ihis Stst day of December, 1918, by and between Millard D. Olds of tlie city of Cheboygan, Cheboygan County, Michigan, party of 1he first part, and each of his daughters, Edna Blanche Olds, Gertrude Gladys Olds, qjid Florence Olds Buhrman, parties of the second part.

“Witnesseth, that Millard D. Olds, party of the first part, agrees to sell one quarter interest in everything he owns to each of his daughters, parties of the second part, agreed to buy, giving their promissory note for $400,000.00 each. It is agreed that the business shall be conducted by party of the first part, by him and in his name, or in any other name that he sees fit to use. Parties of the second part are not to draw out any of the profits, only in such amounts as said party of the first part, sees fit to pay them, and as they, parties of the second part, may have neud for their living and comforts during his lifetime. Parties of the second part, may have the privilege of looking over the books, and everything pertaining to the business, at any or all times. These notes are to be made for $400,000.00 each payable on demand and without interest.

“If at any time, either party of the parties of the second part, are in any way dissatisfied with- the way said party of the first pari, conducts the business, and think that thevr interest is being impaired by such management, party of the first part agrees to return iheir notes and take over their interest«

“In witness whereof, the parties hereto have hero-urn o set their hands the day and year above mentioned.

“Millard D. Olds

“Edna Blanche Olds

“Gertrude Gladys Olds

“Florence Olds Buhrman”

“Cheyboygan, Mich., December 81, 1918.

“$-400,000.00

“On Demand after date without grace for value received, I promise to pay to the order of Millard D. Olds Four Hundred Thousand and no/100 Dollars at. M. D. Olds’ office, without interest. Due on Demand.

“Gertrude Gladys Olds.

“(Wrin.cn across the face of the above: Taid with renewal note. M. D. Olds’)”