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Keywords

lawsuitsummary judgmentpartnership

depositionaffidavitpartnership

Related Cases

Armstrong v. Phinney, 394 F.2d 661, 21 A.F.T.R.2d 1260, 68-1 USTC P 9355

Facts

Tobin Armstrong is the manager of a cattle ranch in Texas, owned by a partnership in which he holds a five percent interest. The partnership provides him with a home, groceries, utilities, and other benefits, which he did not include in his gross income for the years 1960, 1961, and 1962. The IRS determined these benefits should be included in his taxable income, leading Armstrong to pay the deficiencies and file a refund claim, which was denied, prompting this lawsuit.

Taxpayer is the manager of the 50,000 acre Armstrong ranch located in Armstrong, Texas. Beef cattle are raised and some of the land contains certain mineral deposits. The ranch is owned by a partnership in which taxpayer has a five percent interest. In addition to his share of the partnership profits and a fixed salary for his services as manager of the ranch, the partnership provides taxpayer certain other emoluments which are the subject of this controversy.

Issue

Is it legally possible for a partner to be considered an employee of his partnership for purposes of section 119 of the Internal Revenue Code?

Under the Internal Revenue Code of 1954 is it legally possible for a partner to be an employee of his partnership for purposes of section 119 of the Code?

Rule

Under the Internal Revenue Code of 1954, a partner can stand in various relationships with his partnership, including that of an employee, allowing for the exclusion of certain benefits from gross income if provided for the convenience of the employer.

However, in 1954 Congress rejected this ‘aggregate theory’ in favor of the ‘entity theory’ in cases where ‘a partner sells property to, or performs services for the partnership.’

Analysis

The court analyzed the legislative history and the language of the Internal Revenue Code, concluding that Congress intended to allow a partner to be treated as an outsider in transactions with the partnership. This interpretation aligns with the entity theory adopted in the 1954 Code, which permits a partner to be considered an employee for the purposes of section 119, thus allowing the exclusion of the value of meals and lodging from gross income.

Consequently, it is now possible for a partner to stand in any one of a number of relationships with his partnership, including those of creditor-debtor, vendor-vendee, and employee-employer.

Conclusion

The court reversed the District Court's summary judgment in favor of the government, indicating that the taxpayer may be entitled to exclude the value of the provided emoluments from his gross income under section 119.

Our reversal of the District Court is not dispositive of the issues upon which rest taxpayers ultimate right of recovery.

Who won?

Tobin Armstrong prevailed in the case as the court found that he could potentially exclude the value of meals and lodging from his gross income, reversing the lower court's decision.

Taxpayer filed an affidavit in support of his allegations and his deposition was taken.

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