*2372 Under the facts in this case, the donees of a part of a partner's interest in a business became partners in that business on agreement of the other members of the firm, and their distributive shares of the profits were returnable by them, respectively, and not by the donor.
*577 This proceeding is for the redetermination of deficiencies in income taxes for the years 1922 and 1923, in the amounts of $3,420.81 and $3,455.30, respectively.
It is alleged in the petition that the deficiencies asserted, with the exception of a few hundred dollars (the exact amount not being disclosed), arose by reason of the erroneous inclusion by the Commissioner of distributions of profits made by the partnership firm *578 of C. W. Crane & Co. in petitioner's gross income, when such profits belonged to, and were distributed to and received by Mrs. Harriet C. Latham and Mrs. Mary C. Hahn. The amount of such distributed profits is not in dispute. The only controversy is as to whose income it was for income-tax purposes.
FINDINGS OF FACT.
Petitioner is an individual*2373 who resides in Elizabeth, N.J.
C. W. Crane & Co. was, and is a partnership, with its principal office at 17 Battery Place, New York City. It was organized in 1895. In 1913 the members of the firm were C. W. Crane, F. D. Hahn and William Kenny. Neither at the time of its organization, nor at any later date, was there any contribution or payment made by any member to a capital fund. The company, as such, owned no tangible assets other than a small amount of office furniture and insignificant items of that kind. Its business was transportation; that is, transportation by water in and around New York Harbor. It owned no boats of its own, but hired boats for each job it obtained. It succeeded in building up, and in later years possessed, good will which constituted a valuable asset.C. W. Crane was recognized as owning 40 per cent interest in the partnership, and was entitled to 40 per cent of its profits. Some time prior to 1919 Crane ceased being active in the business, but still held the same quantum of interest and received the same proportion of profits until 1919. He withdrew from the activities of that business because of his connection with other businesses that demanded*2374 all of his time and energy.
In 1919 petitioner gave to his wife, Ruth B. Crane, three-fourths of his 40 per cent interest in the partnership, which left him retaining 10 per cent interest. There was no written evidence made of that gift. Soon after that gift was made to Mrs. Crane, she in turn gave her 30 per cent interest (at first two-thirds of her interest, later the whole of it) to her two daughters, Mrs. Latham and Mrs. Hahn. There was no written transfer made by Mrs. Crane to her two daughters. C. W. Crane informed the other members of the partnership that he had given a part of his interest in the firm to his wife, and she in turn to their daughters, and the three members agreed to the transfer. The wife and daughters agreed to become partners and were from that date accepted, received and recognized as partners by the other members of the partnership. Thereafter, as the books show, Mrs. Hahn and Mrs. Latham were each duly credited with their proportions of the profits and drew out at appropriate times such credits for their own use and benefit. No part of such credits was received directly or indirectly by petitioner.
*579 During each year business operations*2375 were carried on, and as profits were earned they were retained as undivided profits or surplus. At the end of the year, or as soon thereafter as practicable, the books were closed and a computation of profits was made, and the profits were divided among those who were recognized as partners in the firm, in proportion to such interests, the respective amounts being carried in the "Profit and Loss" account as credits to each of such persons. If the demands of the business precluded the withdrawal of such credits, they were not released. When a time arrived that the demands of the business justified such action, these credits were then released and each drew on his or her credit as needed.
As an example of the manner of handling these credits on the books of the company, we copy an excerpt from the "Profit and Loss" account for 1923, entered as of December 31:
| C. W. Crane, share of profit, 10% | 4,000 |
| Wm. Kinney share of profit, 30% | 12,000 |
| F. D. Hahn share of profit, 30% | 12,000 |
| H. C. Latham share of profit, 15% | 6,000 |
| M. C. Hahn share of profit, 15% | 6,000 |
The same situation and mode of operation prevailed throughout the years 1922 and 1923.
OPINION.
*2376 LOVE: The only issue in this case is whether or not petitioner, for income-tax purposes, was the recipient of 40 per cent of the distributable profits of the partnership in question, in the taxable years 1922 and 1923, or only 10 per cent of such profits.
The respondent's contention is that petitioner's two daughters were not members of that partnership, and hence received the parts which they did receive, only through their father as a member of that firm, and after its legal receipt by him.
The record in this case clearly shows that C. W. Crane & Co. had no physical assets of any material value; that its entire working capital consisted of its surplus (in cash) and its undivided profits, at times augmented by divided but unreleased profits. All of such assets, that is, the working capital, were subject to the exigencies of the business, and subject to losses. To that extent at least, each and every person owning an interest in that working capital shared in the losses incident to the business. They also owned a proportional share in all the capital assets, if indeed it may be said that the company had any capital assets.
Summarizing the situation, it appears that each*2377 owned an interest in the capital assets; each shared the losses, at least to a limited *580 extent, incident to the business; each shared in the profits of the business. The case is made stronger when all parties concerned recognize, declare and contend that the status of these women was that of partners.
That a partner may sell or give a part of his interest to another is a legal right well recognized. See , where this question is discussed at some length, and distinguished from the situation existing in . As to whether the purchaser, or donee, becomes a partners, and if so, what status in the firm he will occupy, depends on the consent and agreement of the other members of the firm. If they agree to take him into the firm, as they did in the instant case, there is no law which interferes with that agreement.
We therefore hold that during the years 1922 and 1923, Mrs. Latham and Mrs. Hahn were partners in the firm of C. W. Crane & Co., and that each was entitled to receive in her own right 15 per cent of the profits of that firm, and that the said amounts so received*2378 by them were not taxable income to the petitioner.
By reason of the fact that, as disclosed by the petition, the entire amount of the deficiency is not dependent on the issues involved and decided in this opinion,
Judgment will be entered under Rule 50.
Reviewed by the Board.