1982 U.S. Tax Ct. LEXIS 60">*60
Petitioner-wife received payments for work done in assembling ribbons and rosettes. A large portion of that work was performed by petitioners' eight children living at home.
79 T.C. 152">*152 Respondent determined deficiencies in and additions to petitioners' Federal income tax as follows: 79 T.C. 152">*153
Addition to tax | ||
Year | Deficiency | sec. 6653(b) 1 |
1975 | $ 1,173.40 | $ 586.70 |
1976 | 1,809.97 | 904.99 |
1977 | 200.00 | 0 |
1982 U.S. Tax Ct. LEXIS 60">*62 After concessions, 2 the remaining issues are (1) whether payments received in 1975, 1976, and 1977 by petitioner Helen R. Fritschle for assembling ribbons and rosettes are includable in petitioners' gross income; (2) whether certain payments received in 1975 and 1976 by petitioner Robert T. Fritschle are deductible reimbursed employee expenses; (3) whether petitioners are entitled to a dependency exemption in 1977 for their 18-year-old daughter. 3
1982 U.S. Tax Ct. LEXIS 60">*63 FINDINGS OF FACT
Some of the facts are stipulated and are found accordingly.
Petitioners Robert T. Fritschle and Helen R. Fritschle resided in St. Louis, Mo., when they filed their petition herein.
Petitioners have 11 children. The 8 youngest children lived at home with their parents during the years in issue.
Since 1956, petitioner Robert T. Fritschle (Robert) has been employed by American Gold Label Co. (AGL), a sole proprietorship owned by Elsie Walsh Fabel and engaged in the printing business. During the years in issue, Robert was general manager in charge of virtually every aspect of the business. In addition to wages of less than $ 10,000 a year, AGL paid Robert $ 1,060 and $ 1,113 in 1975 and 1976, respectively, as reimbursement for his out-of-pocket company incidental expenses such as automobile and gas costs, parts for repairs, office supplies, and postage.
79 T.C. 152">*154 Prior to 1970, AGL was engaged in a printing business generally limited to letterheads and stationery. Beginning in 1970, the business expanded to include more specialized types of printing which included printing on metals and cloth. Specifically, new items printed included ribbons and rosettes, much like1982 U.S. Tax Ct. LEXIS 60">*64 the ribbons seen at horse and dog shows or the ribbon awarded the prize bull at the county fair. Even though AGL employed 15 people, outside help was needed to assemble the ribbons when the printing was completed. Petitioner Helen R. Fritschel (Helen) agreed with Elsie Walsh Fabel, the owner of AGL, to assemble the ribbons at home. Accordingly, in 1970, Helen, with the help of their children then living at home, began assembling ribbons and rosettes for AGL. From 1970 through 1976, this piecework was done in the basement washroom. In 1977, production was moved to the furnace room. The work involved cutting, shaping, and stapling of things like streamers, bezels, and ribbons to form the final product.
All materials were furnished by AGL at no cost to Helen. When the work was completed, Helen submitted a bill and received payment accordingly. During the years in issue, Helen was paid 3 cents per ribbon and 15 cents to 25 cents per rosette. Total payments received during 1975, 1976, and 1977 were $ 9,429.74, $ 11,136.41, and $ 8,262, respectively.
The children performed approximately 70 percent of all the work. Robert, the father, did not participate. The children were not1982 U.S. Tax Ct. LEXIS 60">*65 employees of either Helen or AGL, nor was there any other arrangement for them to share directly in the compensation paid to Helen by AGL.
Petitioners' daughter, Diana, turned 18 in 1977. She lived at home during the entire year. Diana worked at AGL for 9 months during 1977, earning wages totaling $ 3,988.15. She traveled to and from work with her father. Petitioners furnished her room, board, clothes, and transportation.
Petitioners did not report the income received by Helen in 1975 and 1976 for assembling the ribbons and rosettes. In 1977, the income received by Helen was reported. 4 Petitioners 79 T.C. 152">*155 did not include in gross income the reimbursed employee business expenses of Robert in 1975 and 1976. Petitioners claimed a dependency exemption for Diana in 1977.
In his notice of deficiency, respondent determined petitioners1982 U.S. Tax Ct. LEXIS 60">*66 must include in income all payments received by Helen for work performed in assembling the ribbons and rosettes and all payments received by Robert for reimbursed incidental business expenses. Respondent also disallowed the dependency exemption for Diana in 1977.
OPINION
Helen and the children assembled the ribbons and rosettes in the basement of their home. There is no question that payments received for this work are income under
It is axiomatic that income must be taxed to him who earns it.
1982 U.S. Tax Ct. LEXIS 60">*68 Helen was solely responsible for the performance of all services. AGL contracted only with Helen, and no contract or agreement existed between AGL and any of the children. All checks were made payable to Helen, and the children received no direct payments or compensation for their work. Clearly, the compensation was made in payment purely for the services of Helen. Although the company knew the children were performing part of the work, that does not change the fact that AGL looked exclusively to Helen for performance of the services. 6 In short, Helen managed, supervised, and otherwise exercised total control over the entire operation. It was she who controlled the capacity to earn the income, and it was she who in fact received the income. It does not necessarily follow that income is taxable to the one whose personal efforts produced it. Thus, despite the fact that a portion of the amounts received can be traced to work actually performed by their children, Helen is treated as the true earner of all such income for tax purposes. Accordingly, pursuant to
1982 U.S. Tax Ct. LEXIS 60">*70 79 T.C. 152">*157 Nevertheless, petitioners argue
Petitioners argue the language and meaning of
The purpose of
If, on the other hand, we made a finding that it was the services of the children that were being contracted for and that the children were the true earners of the income, then
While from a literal reading of the statute, petitioners' argument has superficial appeal, petitioners incorrectly assume the children are the true earners of the income in the first instance. However,
1982 U.S. Tax Ct. LEXIS 60">*74 In summary, we find Helen the true earner of all amounts received for the ribbons and rosettes, and
In addition to wages, Robert received payments of $ 1,060 and $ 1,113 from AGL in 1975 and 1976, respectively. We have already found as fact that all of these amounts were paid to Robert for incidental business expenses of AGL which were paid out of his own pocket. Thus, we reject respondent's contention that these were payments for services rendered (maintenance work). We hold petitioners are entitled to a section 162 business deduction for these amounts. 12
1982 U.S. Tax Ct. LEXIS 60">*75
The issue is whether petitioners are allowed a dependency exemption for their 18-year-old daughter Diana.
Parents are entitled to an exemption for any of their children younger than 19 years old if they provide over half of that child's support.
Diana lived at home with her parents the entire year. She worked at her father's business, AGL, for 9 months of the year earning $ 3,988.15 at minimum wages. Not all of her earnings were spent for her own support. Petitioners furnished Diana's room and board, clothes, transportation, and living expenses. Diana received no support from other sources. Based on the record, we are convinced petitioners did in fact furnish over half of Diana's support; thus, we allow the claimed exemption.
While we have disposed of the issues before us, we have really only touched the surface of this case. Respondent asserted fraud on the part of petitioners, the parents of an 79 T.C. 152">*160 industrious and hardworking family of 13, none of whom has ever had1982 U.S. Tax Ct. LEXIS 60">*76 a scrape with the law. First, the record shows petitioners are clear of any impropriety or bad faith. Second, it is apparent the fraud allegation had a deep and resounding effect on this family. The mere allegation of fraud can tarnish a man in the eyes of his neighbors and, more importantly, in his own eyes. We are not dealing here only with tax deficiencies and money; we are dealing with people's lives. Fraud should be asserted with discretion.
This Court spent over 9 hours listening to testimony and conducting discussions with the parties in chambers. By far, the largest portion of that time was devoted to the fraud issue, and it is apparent respondent had no chance of presenting a case sufficient to carry his burden of proof. Petitioners manifested a sincere willingness to settle this case if the fraud allegation was dropped. In reality, this case should never have come before this Court. Facing an ever-increasing backlog of cases, this Court's valuable time commands a better sense of responsibility by those practicing before it. 13 The scars and wasted time are not undone by respondent's concession of the fraud issue on brief.
1982 U.S. Tax Ct. LEXIS 60">*77 To reflect concessions and the foregoing,
1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954 as amended.↩
2. Respondent conceded the fraud issue on reply brief.↩
3. Also in issue is whether petitioners omitted from their 1975 gross income an amount in excess of 25 percent of the gross income stated on their 1975 Federal income tax return. If so, respondent is not barred from assessing the 1975 tax since the 6-year statute of limitations applies. See sec. 6501(e). Petitioners reported 1975 gross income of $ 9,540. Thus, in the event we find greater than $ 2,385 was omitted from petitioners' 1975 gross income, respondent will not be barred from assessing 1975 taxes. Resolution of this issue depends solely on the outcome of other issues stated above. The parties agree respondent is not barred from assessing 1976 and 1977 taxes.↩
4. Since petitioners included all payments received in 1977 for this work in their 1977 Federal income tax return, they now claim an overpayment of taxes for 1977. See sec. 6512(b).↩
5. Although
6. We are given no reason to believe AGL intended to contract for the services of the children. Thus, we do not place controlling significance on the fact that, under applicable State law, minors may lack capacity to enter into valid contracts. Moreover, no trustee or legal guardian was appointed on behalf of the children.↩
7. In 1975, those payments totaled $ 9,429.74. Since this amount exceeds 25 percent of the gross income reported on petitioners' 1975 Federal income tax return, respondent is not barred from assessing the 1975 taxes. See note 3
Petitioners make no claim for a deduction with respect to the services rendered by the children. Indeed, no such deduction would be allowable since no payments to the children were made or set aside in some way for their services actually performed. The only benefit accruing to the children was an increased budget for general family and living expenses. See
8.
9. In
10. Apparently, under the law of Missouri, a parent is entitled to the services and earnings of his child. See
11. The Committee reports state: "Thus, even though the contract of employment is made directly by the parent and the parent receives the compensation for the services, for the purposes of the Federal income tax, the amounts would be considered to be taxable to the child because earned by him." H. Rept. 1365,
12. Since Robert was not required to account to his employer and, in fact, made no accounting for incidental expenses for which he was reimbursed, he does not fall within the exception to the general rule that employees are required to include reimbursements in gross income. See
13. We will not hesitate to call attention to an unsettling situation when the time and effort expended by the parties and this Court in litigation are totally disproportionate to any requirement of justice. See