*2355 Held that the petitioner is taxable on the net distributable profits of an enterprise in which he is engaged in proportion to the interest which he owns therein.
*651 The respondent has asserted deficiencies in income tax for the years 1922 and 1923 in the respective amounts of $3,372.14 and $4,893.80. Parts of such deficiencies are based on adjustments made by the respondent in his determination of the total distributive profits of a certain partnership income and the resulting changes in the adjustments of partnership income and the resulting changes in the tax liabilities of the several partners are not in controversy. For his cause of action the petitioner alleges that the respondent erroneously added to his income for each of the years 20 per cent of the distributive net profits of a certain partnership which was in fact the income of his wife.
FINDINGS OF FACT.
The petitioner is an individual with his domicile and principal office at Cambridge, in the Commonwealth of Massachusetts.
Prior to 1921 the petitioner conducted the Cambridge*2356 Rubber Co. as an individual business. The capital employed in such business was almost all supplied by Isaac MacPherson, the petitioner's father, but the management and operation of the business were under the sole control and direction of petitioner. There was an understanding between father and son that each owned a 50 per cent interest in the enterprise.
In the latter part of 1921 petitioner and his father each gave a 10 per cent interest in the business to George H. Rockwell. At about the same time a 10 per cent interest in the business was acquired by Ernest W. Dunbar.
Prior to and after 1922 the petitioner's wife rendered valuable services to the business by designing certain styles of footwear and supervising the advertising of the concern. In October or November, 1921, Isaac MacPherson, who then owned at least 40 per cent of the business, declared that he wished her to have a substantial share of the business and at that time gave her a 20 per cent interest *652 therein. Thereafter, there was an oral understanding that the business should be conducted with respective interests as follows: petitioner, 30 per cent; Isaac MacPherson, 20 per cent; Elizabeth H. *2357 B. MacPherson, 20 per cent; George H. Rockwell, 20 per cent; and Ernest W. Dunbar, 10 per cent.
On the first day of February, 1922, a partnership agreement, set forth below, was executed.
AGREEMENT made this first day of February, 1922, by and between WARREN MACPHERSON of Cambridge, County of Middlesex, GEORGE H. ROCKWELL of Brookline, County of Norfolk, ERNEST W. DUNBAR of Hudson, County of Middlesex, ELIZABETH MACPHERSON of said Cambridge, all of the Commonwealth of Massachusetts, and ISAAC MACPHERSON of Bridgeton, County of Cumberland, State of New Jersey.
It is hereby mutually agreed as follows:
1. The parties hereto agree to form and hereby do form a partnership under the name of the CAMBRIDGE RUBBER COMPANY for the purpose of manufacturing and selling rubber footwear, clothing, heels and other articles of which rubber is a component part, and hereby take over the business conducted under the name of the Cambridge Rubber Comany by the said Warren MacPherson, George H. Rockwell, and Ernest W. Dunbar under agreements dated January 2, 1922, but the interest of said Ernest W. Dunbar shall be subject to the agreement made between him and the said Warren MacPherson and the*2358 said George H. Rockwell dated January 2, 1922.
2. The said Warren MacPherson shall have a thirty per cent (30%), the said Rockwell a twenty per cent (20%), the said Dunbar a ten per cent (10%), the said Elizabeth MacPherson a twenty per cent (20%) and the said Isaac MacPherson a twenty per cent (20%) interest in the assets of the business of the Cambridge Rubber Company and in the profits thereof, after deducting all expenses and losses incurred in the conduct thereof.
3. This agreement of partnership shall be retroactive and take effect as of the second day of January, 1922, and shall terminate the first day of January, 1927, or upon such date as said business may be incorporated prior thereto.
4. Any losses suffered or incurred in the conduct of the business of the partnership shall be borne by all the parties in the same proportion in which they are entitled, as aforesaid, to share in the assets and profits of the partnership.
5. Each of the partners hereby agrees that he or she will not, during the term of this agreement, in his or her name endorse any mercantile paper, or become surety, in any way or form whatsoever, for any other person, firm or corporation.
*2359 6. The said Warren MacPherson, George H. Rockwell and Ernest W. Dunbar hereby agree to give their whole time to the business of the said partnership and that they will not, individually or otherwise, during the term of this agreement, engage in any other business.
7. For trade purposes, it is hereby agreed that said business be conducted in the names of Warren MacPherson, George H. Rockwell and Ernest W. Dunbar, as the Cambridge Rubber Company.
8. At all times during the continuance of this agreement, the partners shall cause to be kept full and correct books of account, in which shall be entered fully and accurately all transactions of said partnership, and all of said partners shall, at all times, have access to said books of account, without hindrance or interruption.
*653 9. In the event of the death of any partner, except said Dunbar, during the term of this agreement, the partnership shall not be thereby dissolved, but the personal representative of the partner so dying shall immediately succeed to his or her place with respect to said deceased partner's share in the business of the partnership, during the remainder of the term thereof. In the event of the*2360 death of said Dunbar during the term of the partnership, such partnership shall not be thereby dissolved, but shall be continued by the survivors, subject to the terms of the agreement dated January 2, 1922, by and between the said Warren MacPherson, the said Rockwell and the said Dunbar.
10. If the said Rockwell or the said Warren MacPherson, Elizabeth MacPherson or Isaac MacPherson shall desire to withdraw from said partnership during the term thereof, the remaining partners, except the said Ernest W. Dunbar, shall have the option to purchase the share of the partner or partners desiring to withdraw.
11. Upon the termination of the partnership or the dissolution thereof for any cause, or in case of the withdrawal of any partner as set forth in paragraph 10 of this agreement, the amount of the assets and liabilities of said partnership or the value of the share of any partner, as the case may be, shall be determined by the books of the partnership, but in any case, goodwill shall not be taken into account as an asset. In the event of any dispute as to the amount of the assets and liabilities or as to the value of the share of any partner, the same shall be determined by arbitrators, *2361 one arbitrator to be chosen by the partner, the value of whose share is to be determined or his representative, one by the other members of the partnership and the third by the two so chosen; and the award of a majority of such arbitrators shall be binding and conclusive.
13. Thirty (30) days after the written request of a majority of the partners to incorporate, the business of the partnership shall be incorporated.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals, the day and year first above written.
(Signed) WARREN MACPHERSON
ELIZABETH H. B. MACPHERSON
ERNEST W. DUNBAR
ISAAC MACPHERSON
G. H. ROCKWELL.Pursuant to an oral understanding entered into at the time the above instrument was executed, the Cambridge Rubber Co. was incorporated about June, 1924, and all the authorized stock thereof was issued to the five signers of the partnership agreement in proportion to the interest set out in such agreement.
In each of the taxable years the company made an information return as a partnership and showed therein that its distributive profits belonged to the parties to the partnership agreement in the proportions above set out. Each of the*2362 partners reported his distributive share of such profits as income and paid the taxes thereon. Upon audit of such returns the respondent added the amount reported by Mrs. MacPherson as her distributive share of the profits of the partnership to the income of the petitioner, made other adjustments that are not in controversy and asserted the deficiencies which, for the most part, are in controversy in this proceeding.
*654 OPINION.
LANSDON: The single issue here is whether the amounts which the respondent added to the income of the petitioner in the taxable years in the circumstances set forth are taxable to him. In support of his action the respondent denies (1) that the purported partnership agreement was valid under the laws of Massachusetts, (2) that petitioner's wife ever acquired any interest in the Cambridge Rubber Co., and (3) that any portion of the income from such business in 1922 and 1923 was separate income of the petitioner's wife in the taxable years.
Since we are concerned only with the income of the petitioner, it is not necessary to decide whether the amounts in question were the income of the wife and taxable to her. The evidence is clear that the*2363 petitioner was the owner of no more than a 30 per cent interest in Cambridge Rubber Co. Petitioner testified to that effect and his testimony is corroborated by his associates. This contention is also supported by the partnership agreement. Whether valid or not for the purpose of effecting a partnership under the laws of Massachusetts, that instrument is evidence of the relative interest of the parties thereto. The evidenc shows very clearly that the petitioner's wife owned a 20 per cent interest in the business. There is nothing in the partnership agreement that can be construed as assignment of any part of that interest to the petitioner or any of the other associates, either individually or severally. In , the Supreme Court of Massachusetts said:
She invested her money under a written agreement with her husband and the other persons who composed the firm, by which it is obvious that she did not intend to give it to her husband, but to employ it for her own benefit, as her separate property. If she could not contract with her husband, she had rights against the other contracting parties, which were at least equitable, *2364 if not well defined. An assignment, relinquishment and transfer of all her claims arising from the investment she had made, regarded by herself and by the defendants as valuable, and which, so far as appears, were not contested by the firm of J. H. Lord & Co., would certainly constitute a sufficient consideration to support an express promise. She had no more given this right of property to her husband than she had to the other members of the firm. .
As the petitioner owned only 30 per cent of the Cambridge Rubber Co., it follows that he is taxable only on that proportion of the distributable net profits thereof unless under the laws of Massachusetts income from property separately owned by the wife is taxable to the husband. As far back as 1842, Massachusetts began to modify and alleviate the harsh rules of the common law which govern the property relations of husband and wife. In 1906, in , the court, in discussing the *655 husband's control over the pension or property of the wife, said, "His control has been reduced to a minimum, if it has not entirely disappeared. *2365 " This conclusion is amply supported by a study of chapter 209 of the General Laws of Massachusetts.
In the light of the evidence and the statute and decisions of the Commonwealth of Massachusetts, we are of the opinion that the petitioner is taxable in 1922 and 1923 on only 30 per cent of the distributive profits of the Cambridge Rubber Co. , and cases cited thereunder.
Decision will be entered for the petitioner under Rule 50.