Ray D. Bateman and Helen C. Bateman v. United States of America, Dow R. Bateman and Elaine C. Bateman v. United States

490 F.2d 549 74-1 USTC P 9176 Ray D. BATEMAN and Helen C. Bateman, Plaintiff-Appellees, v. UNITED STATES of America, Defendant-Appellant. Dow R. BATEMAN and Elaine C. Bateman, Plaintiff-Appellees, v. UNITED STATES of America, Defendant-Appellant. Nos. 71-2894, 71-2895. United States Court of Appeals, Ninth Circuit. Dec. 4, 1973. 1 Michael L. Paup (argued), U.S. Dept. of Justice-- Fred B. Ugast, Acting Asst. Atty. Gen., Tax Div., Scott P. Crampton, Asst. Atty. Gne., and Meyer Rothwacks, U.S. Dept. of Justice, Washington, D.C., Lawrence W. Brooks, Asst. U.S. Atty., Los Angeles, Cal., for defendant-appellant. 2 C. E. Millikan, Jr. (argued), Millikan, Montgomery & Olafson, Pasadena, Cal., for plaintiffs-appellees. 3 Before HUFSTEDLER and WRIGHT, Circuit Judges, and RENFREW, * District Judge. OPINION RENFREW, District Judge: 4 The United States appeals from a decision permitting taxpayers recovery of additional taxes assessed and paid in two companion cases. The taxpayers transferred interests in a limited partnership to themselves as trustees for the benefit of their children and to a corporation owned solely by one of the taxpayers. The basic issue is whether income paid to the…

The United States appeals from a decision permitting taxpayers recovery of additional taxes assessed and paid in two companion cases. The taxpayers transferred interests in a limited partnership to themselves as trustees for the benefit of their children and to a corporation owned solely by one of the taxpayers. The basic issue is whether income paid to the trusts and corporation may be taxed to these entities or should properly be considered income to the respective taxpayers. Having carefully considered the points raised by the government, we affirm.

Ray and Dow Bateman 1 were general partners in Bateman Brokerage Company (BBC), a California limited partnership. BBC is a food broker, representing and distributing the products of food processors and manufacturers. In the tax years in question, 1963, 1964 and 1965, 2 BBC employed between 38 and 40 persons, 10 of whom were general or limited partners, and had gross receipts averaging approximately $574,000 per year and annual income varying between $74,007 and $101,158. Both Ray and Dow Bateman were employees as well as partners, and the court found their salaries as employees to be reasonable.

Prior to the tax years in…

(dissenting):

I respectfully dissent. I would reverse the judgment of the district court and remand the case for further factual findings.

I.

The district court found that the trusts were valid partners under Int. Rev.Code § 704(e), since the trusts owned “a capital interest in a partnership [Bateman Brokerage Co.] in which capital is a material income-producing factor.” The district court relied in part on the partnership’s good will, in the form of established client relationships, to support its finding that capital was a material income-producing factor. I would hold that good will in the form of established client relationships is capital for the purposes of § 704(e) only to the extent that it is associated with the business itself and not merely with particular partners individually.

The test that should be applied is whether the good will would remain with the business or follow the individual partner if the partner withdrew from the business and competed with it. Since the district court did not apply this test or make findings of fact that would allow this court to do so, the case should be remanded for a further factual determination.

The majority relies on Rees v.…