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January 31, 1957

Alvin SHEERR, Plaintiff,
Francis R. SMITH, formerly Collector of Internal Revenue, Defendant

The opinion of the court was delivered by: GRIM

This is an action by a taxpayer to recover $ 41,250.14 in income taxes and interest for the years 1945 and 1946, assessed against him and paid by him on income tax which he claims was not his but his wife's. Under the income tax laws then in effect the total taxes payable by the husband and wife would have been less if the income had been partly attributable to each.

There was first a partnership of four brothers and a sister. Later the brothers purported to admit their wives as partners. Plaintiff is one of the brothers. He contends that his wife was a true partner for all purposes including income tax purposes. The government contends that for income tax purposes she was not. He sues here to recover amounts of taxes paid which he contends were overpayments resulting from the determination that his wife was not a partner. The problem of the income taxes of the other brothers and their wives and sister is not before me.

 In 1947, the four Sheerr brothers, Robert, Maurice, Alvin (the plaintiff), and Stanley, formed a partnership, Arms Textile Manufacturing Co., to manufacture and deal in textiles (principally hair canvas, used as inner lining in men's suits), with a plant at Manchester, New Hampshire. All of them took an active part in managing and running the business. Alvin was the most active, and lived for a time in Manchester. He married Vivian Sheerr in June, 1942. He began active duty in the Navy the month before the marriage and remained in the service, principally at Newport, Rhode Island, until the early fall of 1945.

 In 1941 their sister Pearl Sheerr Bensinger contributed to the partnership capital the sum of $ 50,000 which she had received some eight or ten years before from their father, and was admitted as a partner. She was to share in the profits and losses, but was not to and did not perform any services for the partnership or receive any salary.

 In 1944 the partners felt that the firm would need additional capital to buy new machinery and repair parts when the end of the war would make them available. Although the partnership had made very large profits during the war, high wartime tax rates had made it impossible to save enough money out of the profits to provide the needed capital. The partnership had just made a profit of over $ 1,200,000 in a ten-month period, and from an income tax standpoint it was advantageous to permit the wives of the brothers to contribute the new capital and become partners in the business. The brothers, including Alvin, decided that the source of new capital would be their wives. On October 30, 1944, a new partnership agreement was executed in which the wives of the brothers purported to be partners along with the brothers and sister.

 Alvin's wife Vivian had no money of her own to make her partneship contribution and no established credit. To enable her to make the contribution, arrangements were made for her to borrow $ 55,000 from the National Safety Bank of New York, later Chemical Bank & Trust Company. With this money she made her $ 50,000 contribution to the capital of the partnership. She had never before dealt with the National Safety Bank. The loan was arranged by Robert Sheerr, one of the brothers. The note was sent to Vivian in Newport for her signature. Alvin, her husband, executed an instrument guaranteeing payment of the loan. It was this guarantee which made the loan possible. Repayments were made out of partnership profits directly by the partnership to the bank, as follows: February 26, 1945 $ 20,000 June 29, 1945 6,000 October 31, 1945 10,000 $ 36,000


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