*64 Decision will be entered for the respondent.
On the evidence, held:
(1) Respondent is affirmed in taxing the net income for 1939, 1940, and 1941 of Packard Berk, an alleged partnership consisting of decedent and his wife, to decedent.
(2) Respondent is affirmed in his similar action as to the net income of Berk Finance Co., an alleged sole proprietorship of the wife of decedent.
*928 The Commissioner determined deficiencies in income tax of Ira L. Berk of $ 16,748.05, $ 14,410.19, and $ 57,366.01 for the years 1939, 1940, and 1941, respectively. The questions involved are (1) whether for income tax purposes a partnership existed between Ira L. Berk and his wife, Trixie I. Berk, during the taxable years, and (2) whether the*65 entire net income of Berk Finance Co. is taxable to Ira L. Berk for the taxable years.
FINDINGS OF FACT.
The petitioners are the executors of the estate of Ira L. Berk, who died June 5, 1945, leaving him surviving his wife, Trixie I. Berk, nee Boyle, to whom he was married on June 30, 1934. The decedent during the taxable years and for many years prior thereto was a resident of Pittsburgh, Pennsylvania, and filed his income tax returns for the taxable years in the twenty-third district of Pennsylvania, at Pittsburgh.
For some years prior to the taxable years and until its dissolution in 1939, decedent was president and owner of all the outstanding shares of Packard Motor Co. of Pittsburgh (hereinafter referred to as Packard of Pittsburgh), a Pennsylvania corporation incorporated February 15, 1915. From its organization until July 1, 1937, Packard of Pittsburgh acted as distributor of Packard motor cars and parts in Pittsburgh and vicinity and generally dealt in automobiles and automobile parts and engaged in the servicing of cars. It carried or discounted short term notes received from its customers on the sale of cars, but long term notes were financed through automobile finance*66 companies. Through his own efforts decedent had built up a business organization which functioned so efficiently that he was able to leave *929 Pittsburgh a month or more during the summer and winter of each year.
In 1929 decedent transferred by gift to Trixie I. Boyle 18,000 shares of Packard Motor Car Co. of Detroit in units of 100 shares. In 1935 decedent transferred by gift to Trixie I. Berk, his wife, an additional 20,000 shares in units of 100 shares of Packard Motor Car Co. of Detroit and 1,000 shares of Burroughs Adding Machine Co. Decedent filed a 1935 gift tax return in which he reported the transfer of the 20,000 shares of Packard stock and the 1,000 shares of Burroughs stock as a gift to his wife. The value as of May 1, 1937, of the 38,000 shares of Packard stock and 1,000 shares of Burroughs stock was approximately $ 390,000. On May 1, 1937, these securities were and thereafter remained in the safety deposit box at Mellon National Bank, together with numerous blank undated powers of attorney to transfer stock irrevocably signed by decedent's wife, except that the 1,000 shares of Burroughs stock were subsequently removed and deposited with Pitt National Bank *67 of Pittsburgh as collateral security for the payment of a personal note of Mrs. Berk.
The balance sheet of Packard of Pittsburgh as of January 1, 1937, was as follows:
| Assets | |||
| Cash | $ 99,708.46 | ||
| Notes receivable | 56,503.91 | ||
| Accounts receivable, less bad debt reserve | |||
| of $ 21,000 | 681,584.29 | ||
| Inventories: | |||
| Work in process | 311.09 | ||
| Finished goods | 131,480.49 | ||
| Deposit on contract | 4,000.00 | ||
| Investments: | |||
| Treasury notes | 15,075.00 | ||
| Stocks of domestic corporations | 354,106.35 | ||
| Capital assets: | |||
| Buildings | $ 32,200.00 | ||
| Machinery and equipment | 4,917.18 | ||
| Furniture and fixtures | 5,395.86 | ||
| Demonstration and service vehicles | 6,845.05 | ||
| 49,358.09 | |||
| Less depreciation reserve | 941.47 | ||
| 48,416.62 | |||
| Land | 18,670.75 | ||
| Total | 1,409,856.96 | ||
| Liabilities | |||
| Accounts payable | $ 120,994.50 | ||
| Accrued expenses: | |||
| City and county | |||
| taxes | 8,631.57 | ||
| Guaranty and policy | 6,558.98 | ||
| Reserve for contingencies | 61,460.86 | ||
| Capital stock, common | 500,000.00 | ||
| Surplus | 712,211.05 | ||
| Total | 1,409,856.96 |
The certificates for the above "Stocks of domestic corporations" were issued in the name of decedent and included a large number of shares of Packard*68 Motor Car Co. of Detroit.
On September 2, 1936, decedent and his wife established a joint bank account at the Mellon National Bank of Pittsburgh (hereinafter referred to as Mellon Bank), captioned "I. L. Berk or Mrs. Trixie I. Berk -- Special Account." The funds in the special account were subject *930 to withdrawal on the signature of either decedent or his wife. A safety deposit box was maintained in the Mellon Bank, to which both petitioner and his wife had access. Decedent's wife had a separate individual bank account at Mellon Bank and also one at the Forbes National Bank. She also maintained a safety deposit box at Forbes National Bank, to which decedent did not have access. Packard of Pittsburgh had a bank account at Mellon Bank, which was the only bank account it maintained. Decedent was well acquainted with many of the officers of Mellon Bank, having been a customer of such bank for many years prior to 1937.
Packard Berk Co. Issue.
Decedent was advised in the latter part of 1936 or the early part of 1937 by his income tax counselor and A. W. McEldowney, the vice president of Mellon Bank, that distribution of the undivided profits of Packard of Pittsburgh should*69 be made, that it would be advantageous to dissolve that corporation and distribute its capital and surplus, and, if desired, the automobile business could be continued as a sole proprietorship or in partnership with others. The decedent on various occasions discussed with his wife the formation of a partnership to take over and conduct the automobile sales business of Packard of Pittsburgh and under date of May 1, 1937, decedent and his wife executed the following agreement:
Partnership Articles Made This 1st Day of May, 1937, Between Ira L. Berk and Trixie I, [sic] Berk, Both of Pittsburgh, Pennsylvania.
1. Ira L. Berk and Trixie I. Berk, agree to form a co-partnership under the firm name of Packard Berk Company, for the purpose of selling, servicing and repairing motor cars. The partnership shall do business at 4709 Baum Boulevard, Pittsburgh, Pennsylvania, and at such other place or places as may be agreed upon from time to time.
2. The partnership shall continue for a term of ten (10) years from May 1, 1937, and thereafter from year to year, but either partner shall have the right to terminate the partnership during the ten year period or any extension thereof upon giving*70 to the other partner ninety (90) days notice in writing of his or her desire so to do.
3. The initial capital of the partnership shall be $ 200,000.00 contributed in the proportions herein set forth, and the partners agree that if, at any time, additional capital is needed for the business of the partnership, they will pay to the partnership such amounts as may be necessary in the proportions herein set forth.
4. Contributions shall be made to the partnership assets and the profits and losses shall be shared in the following proportions:
Sixty (60) per cent by Trixie I. Berk, and
Forty (40) per cent by Ira L. Berk.
*931 5. The partnership may appoint such Agents as the partners may deem necessary to act for and on behalf of the partnership. All moneys belonging to the partnership and all checks, notes, drafts and orders for the payment of money shall be deposited in the Mellon National Bank of Pittsburgh, Pa., or in such other Bank as may from time to time be selected by the partnership, and shall be deposited in the partnership name. Either partner may sign the partnership checks but where authority is given to Agents of the partnership, two Agents must sign the partnership*71 checks, with the exceptions that checks in the amount of $ 50.00 or under, may be signed by one Agent.
6. An accounting shall be made at least once in twelve months during the continuance of the partnership.
In Witness Whereof, the parties have hereunto set their hands and seals the day and year first above written.
Witness:
[Signed] H. R. Fitzpatrick
[Signed] Ira L. Berk (seal)
Trixie I. Berk (seal)
Pursuant to arrangements made, Mrs. Berk signed as maker under date of May 1, 1937, in the office of McEldowney at Mellon Bank a demand note payable to "Myself" in the sum of $ 180,000, and endorsed the same. Instructions addressed to McEldowney typewritten on stationery of Packard of Pittsburgh, dated May 1, 1937, were signed by Mrs. Berk as follows:
I have filled in the name of Packard Berk Company, which is the name decided upon for the partnership, on check for $ 180,000 and enclose it herewith to be held with my note which I left with you. Please place proceeds of my note to my credit on July 1st and deliver check to Mr. Fitzpatrick who will open an account therewith in the name of Packard Berk Company.
On the same date decedent executed a pledge of collateral security consisting*72 of 15,000 shares of Burroughs Adding Machine Co. and 30,000 shares of Packard Motor Car Co. of Detroit owned by him or in his name, securing to Mellon Bank the payment of the demand note for $ 180,000 executed by his wife. These securities were in the possession of Mellon Bank and had been used prior thereto in connection with transactions of Packard of Pittsburgh. They are still in the possession of the bank as collateral.
In 1937 decedent was more than 63 years of age and his wife was about 36 years of age.
As of May 4, 1937, the Department of State of Pennsylvania issued to decedent and his wife a certificate of compliance with the Act of the General Assembly of Pennsylvania relating to the conduct by individuals of business under a fictitious name, and on May 3, 1937, the office of the Prothonotary of Allegheny County, Pennsylvania, issued a similar certificate.
*932 On July 1, 1937, $ 180,000, the proceeds of the note of Mrs. Berk heretofore referred to, was credited to the bank account of Packard Berk Co. (hereinafter referred to as Packard Berk) at Mellon Bank. On July 2, 1937, pursuant to instructions of decedent, $ 20,000 of his own funds was deposited in such bank*73 account. To reflect the above transaction in the bookkeeping records of Packard Berk under date of July 7, 1937, the amount of $ 200,000 was entered in the cash receipts book, with the notation "Deposit Mellon Nat. Bank, I. L. B. and T. I. B.," from which cash receipts book the amount of $ 200,000 was posted or carried as a credit to a ledger account captioned "Investment Account." The deposits of $ 180,000 and $ 20,000 were debited to a ledger account captioned "Cash in Bank." No entries, other than the credit of $ 200,000, were made thereafter in the investment account. There were also set up in the records of Packard Berk two separate ledger accounts, one entitled "I. L. Berk" and the other "Mrs. T. I. Berk," to which withdrawals, advances, or payments made by, to, or in behalf of either party were debited and the annual profits or losses in the proportion of 40 per cent to decedent and 60 per cent to his wife were credited or debited. The charges or debits to such individual accounts included monthly payments of interest to Mellon Bank and also payments of income taxes, personal property taxes, real estate taxes, club dues, personal bills, and advances.
Decedent arranged for*74 and procured from Packard Motor Car Co. of Detroit a distributor's franchise agreement to Packard Berk, effective as of July 1, 1937. Decedent also arranged on behalf of Packard for a lease of the premises theretofore occupied by Packard of Pittsburgh and for insurance coverage, both to be effective as of July 1, 1937.
On or about May 4, 1937, decedent and his wife sailed for England and Europe, returning to Pittsburgh sometime in August of that year.
By appropriate corporate action Packard of Pittsburgh was placed in liquidation and, as of June 30, 1937, it sold on open account to Packard Berk all of its operating assets, including stock of new cars, parts, machinery, and tools, but not including used cars and accounts receivable. No formal bill of sale was executed. Following the sale Packard Berk was indebted to Packard of Pittsburgh on an open account payable in the sum of $ 215,472.16, plus a prepaid item of insurance of $ 2,595.10, and had assumed the liability of Packard of Pittsburgh of $ 29,329.29 for direct payments to customers and dealers.
*933 The purchase was reflected on the books of account of Packard Berk as of July 1, 1937, as follows:
| Debit | Credit | ||
| New Packard 6's | $ 38,165.85 | ||
| New Packard 8's | 91,005.30 | ||
| New Packard Super 8's | 37,330.08 | ||
| New Packard 12's | 26,043.38 | ||
| Freight, Tax, Advertising, etc. on new cars | 14,259.96 | ||
| Stores: | |||
| Packard Parts | 16,411.21 | ||
| Rental Parts | 423.85 | ||
| Coach Parts | 453.50 | ||
| Accessories | 11,517.11 | ||
| Labor | 260.41 | ||
| Outside Work | 387.75 | ||
| Plant Equipment | 3,390.75 | ||
| Machinery & Tools | 2,910.65 | ||
| Furniture & Fixtures | 4,836.75 | ||
| Accounts Payable -- Packard Motor Co. of | |||
| Pittsburgh | $ 215,472.16 | ||
| Prepaid Expense -- Insurance | 2,595.10 | ||
| Deposits -- Customers | 1,445.99 | ||
| Deposits -- Dealers | 27,883.30 |
*75 As Packard Berk acquired funds from the operation of its business, payments were made to Packard of Pittsburgh in payment on account of the assets acquired from it. The balance sheet of Packard Berk as of December 31, 1937, shows a balance due on the account payable to Packard of Pittsburgh of $ 128,775.16. Such account is not listed under the liabilities as shown by Packard Berk's balance sheet as of December 31, 1938, 1939, 1940, and 1941.
On July 1, 1937, Packard Berk commenced business at 4709 Baum Boulevard, Pittsburgh, the same premises in which Packard of Pittsburgh had conducted its business, taking over practically the entire personnel of Packard of Pittsburgh. Decedent retained operation control and supervision of the business. There was no change in the operation and control of the business as carried on by Packard Berk from its operation and control as carried on by Packard of Pittsburgh. H. R. Fitzpatrick, secretary and treasurer of Packard of Pittsburgh up to the time of its dissolution, and also office manager of Packard Berk, pursuant to instructions of decedent, set up the bookkeeping records of Packard Berk, and he continued in charge thereof until 1944. The*76 capital of $ 200,000 was not sufficient to operate the business, and from time to time Packard Berk borrowed from Mellon Bank substantial amounts of money on the credit and pledge of personal securities of decedent. The total amount loaned by Mellon Bank was *934 $ 300,000 as of December 31, 1938, and $ 800,000 as of March 31, 1939. The checks of Packard Berk were signed by decedent and H. R. Fitzpatrick. It adopted stationery on which appeared, in addition to the name "Packard Berk Company," the names "Ira L. Berk" and "T. I. Berk."
The profits and losses of Packard Berk from 1937 to 1941, inclusive, as shown by its records, and as credited or debited to the individual accounts of decedent and his wife, are as follows:
| I. L. Berk | Mrs. T. I. Berk | ||||
| Profit or | |||||
| (loss) | |||||
| Dr. | Cr. | Dr. | Cr. | ||
| Dec. 31, 1937 | |||||
| (7/1 to 12/31) | $ 5,711.99 | $ 2,284.80 | $ 3,427.19 | ||
| Dec. 31, 1938 | (43,202.73) | $ 17,281.10 | ($ 25,921.63) | ||
| Dec. 31, 1939 | 40,065.59 | 16,026.24 | 24,039.35 | ||
| Dec. 31, 1940 | 32,561.33 | 13,024.53 | 19,536.80 | ||
| Dec. 31, 1941 | 104,718.55 | 41,887.42 | 62,831.13 |
By its check dated August 25, 1938, Packard Berk paid to Mellon Bank $ 100,000 on account*77 of principal on the $ 180,000 note of Mrs. Berk. On the same date the amount of $ 100,000 was charged to the individual account of Mrs. Berk, after which there was a debit balance in such account in the amount of $ 107,385.97, which debit balance was increased by debits, including loss for 1938 of $ 25,921.63, by December 31, 1938, to $ 134,647.95. On December 31, 1938, there was a debit balance in the account of I. L. Berk of $ 124,643.16.
Under date of March 22, 1939, Packard Berk, by decedent, executed a promissory note in the amount of $ 250,000, payable six months after date to the order of Ira L. Berk. Under date of June 30, 1939, another promissory note, in the amount of $ 150,000, was executed by Packard Berk, by decedent, payable three months after date to the order of Ira L. Berk. Both notes were discounted at the Mellon Bank and the proceeds thereof credited to the bank account of Packard Berk. Of the discount of $ 3,211.80 on the $ 250,000 note, $ 1,927.08 was charged to the account of Mrs. T. I. Berk as interest and $ 1,284.72 was charged to the account of I. L. Berk as interest. The discount or interest of $ 979.16 on the $ 150,000 note was charged to the account*78 of I. L. Berk. The note account of Packard Berk with Mellon Bank indicates that the note of $ 150,000 executed on June 30, 1939, was a renewal note, the original note payable in three months having been discounted on December 30, 1938, and renewed on March 30, 1939, for another three months. This bank note account also shows that, whereas all other notes entered on such account from November 29, 1937, to January 28, 1944, were discounted at the rate of 4 per cent, the original note of $ 150,000, dated December 30, 1938, and its renewals and the note of $ 250,000 were discounted at 2 1/2 percent.
*935 Under date of February 25, 1939, Packard of Pittsburgh purchased a certificate of deposit of Mellon Bank in the amount of $ 150,000, payable six months from date, with interest to maturity of one-half per cent per annum. Under date of March 22, 1939, Packard of Pittsburgh purchased another certificate of deposit from Mellon Bank in the amount of $ 250,000, payable six months from date, with interest at one-half per cent per annum. On September 22, 1939, the two certificates of deposit were endorsed by Packard of Pittsburgh, by I. L. Berk, president, and cashed and the proceeds*79 thereof, together with interest, in the amount of $ 150,375 and $ 250,625 were credited to the bank account of Packard of Pittsburgh. On the same date two checks payable to I. L. Berk in the respective amounts of $ 150,000 and $ 250,000 were issued by Packard of Pittsburgh and charged against its bank account at Mellon Bank. On the same date these two checks in the aggregate amount of $ 400,000 were deposited in and credited to the account of "I. L. Berk or Mrs. Trixie I. Berk -- Special Account." On the same date two checks, payable to Mellon Bank, bearing the notation "Pay note of Packard Berk," and signed by I. L. Berk, in the respective amounts of $ 150,000 and $ 250,000, were charged to such special account and the withdrawal of $ 400,000 from that account was used by Mellon Bank to discharge the two notes of Packard Berk of $ 250,000, dated March 22, 1939, and $ 150,000, dated June 30, 1939. To reflect this transaction on the records of Packard Berk "Notes Payable account" numbered 155 was debited as of September 30, 1939, with $ 400,000, thereby reducing its note liability by that amount, and the account of I. L. Berk numbered 115 was credited with $ 300,000 and the account*80 of Mrs. T. I. Berk numbered 115-1 was credited with $ 100,000. The journal entry made at the time from which the above debit and credits were posted is as follows:
| 155 | $ 400,000.00 | ||
| 115 | $ 250,000.00 | ||
| 115 | 50,000.00 | ||
| 115 1 -- Note repaid August 1, 1938 | 100,000.00 |
During December 1938 we borrowed money from the Mellon Bank to pay off loan made by Packard Pgh. at time the assets were purchased from it, which had been carried in open account. Mr. Berk owed money to Packard Pgh. which he repaid so the Packard Co. used the funds received to purchase certificate of deposit. The certificate of deposit was cashed in September and Mr. Berk repaid loan made to Packard Berk Co. so we make this entry to expunge outstanding notes.
Prior to the credit of the $ 100,000 to the account of Mrs. T. I. Berk there was a debit balance of $ 138,206.12 in the account. As of December 31, 1939, there was a debit balance of $ 24,587.78 in the account, and as of December 31, 1940, $ 18,123.98. The payment of the proceeds of $ 400,000 from the two certificates of deposit by Packard *936 of Pittsburgh represented a payment in liquidation of Packard of Pittsburgh to decedent.
Decedent's*81 wife at no time rendered any services for or in behalf of Packard Berk.
Partnership returns for Packard Berk were filed for the years 1937 to 1941, inclusive. For 1938 decedent and his wife filed a joint income tax return in which taxable income was reduced by the net loss reported in the partnership return for 1938. For the years 1939, 1940, and 1941 decedent and his wife filed separate returns. In their returns for such years decedent included in his taxable income 40 per cent and his wife included in her taxable income 60 per cent of the net profits reported in the partnership returns filed for such years.
Complete liquidation of Packard of Pittsburgh was accomplished October 1, 1939. Its remaining assets, distributed to decedent, its sole stockholder, as of October 1, 1939, were shown by the closing journal entry as follows:
| Cash (bank) | $ 1,074.41 |
| Investments -- Packard Motor Car Co. Stock | 250,432.95 |
| Investments -- Burroughs Adding Mach. Co. Stock | 20,250.00 |
| Investments -- Pullman Co. Stock | 9,542.65 |
| U. S. Government Bonds | 10,000.00 |
| U. S. Government Bonds | 5,075.00 |
| U. S. Treasury Certificates | 20,436.00 |
| U. S. Treasury Certificates | 32,550.00 |
| Notes receivable | 11,830.00 |
| Key Realty Co. | 182,633.32 |
| I. L. Berk | 19,121.44 |
| I. L. Berk special account | 407,855.50 |
| Ira L. & A. C. Berk, Ltd. | 47,666.70 |
*82 Berk Finance Co. Issue.
At the suggestion of decedent, and upon application certificate signed by his wife under date of March 29, 1937, H. R. Fitzpatrick procured certificates from the Commonwealth of Pennsylvania dated March 31, 1937, and the Prothonotary of Allegheny County, Pennsylvania, dated March 30, 1937, certifying that Mrs. Trixie I. Berk, carrying on or conducting business under the assumed or fictitious name of Berk Finance Co. (hereinafter referred to as Finance Co.), had filed the certificate in compliance with the Act of the General Assembly of Pennsylvania relating to the conduct by individuals of business under a fictitious name. Thereafter Finance Co. engaged at 4709 Baum Boulevard, Pittsburgh, in the financing of long term notes for Packard of Pittsburgh until July 1, 1937, and thereafter for Packard Berk. Loans were passed upon only by Fitzpatrick and Joseph J. Keenan, former employees of Packard of Pittsburgh and later of Packard Berk, and at times by decedent. Fitzpatrick and *937 Keenan handled the business of Finance Co. without receiving any compensation for their services from Finance Co. They were the employees of Packard Berk and received their*83 compensation from it. Trixie I. Berk took no part in the management of the affairs of Finance Co.
Fitzpatrick also opened and supervised the bookkeeping records of Finance Co. He set up an investment account captioned "Mrs. T. I. Berk," to which account there was credited on March 31, 1937, the amount of $ 25,000 and on May 14, 1937, an additional amount of $ 25,000. These two amounts were paid in by checks on Mellon Bank dated March 31 and May 3, 1937, respectively, payable to Finance Co. and signed by I. L. Berk. These checks were drawn on decedent's own funds. No account was set up in the records of Finance Co. showing that the two amounts of $ 25,000 paid in by decedent represented loans to his wife or to the Finance Co. Although the records of Finance Co. contained an account captioned "I. L. Berk," no entry was made therein to show that the two checks of $ 25,000 constituted loans to his wife.
In addition to the two checks of $ 25,000 each, the cash receipts book of Finance Co. shows an entry of the receipt of $ 25,000 on August 5, 1937, from Packard of Pittsburgh, of which $ 15,000, designated as a "Return of loan," was repaid to Packard of Pittsburgh on December 9, 1938. *84 It also shows receipt of $ 10,000 in October 1939 from Packard Berk. On the individual account of Mrs. Berk on the records of Packard Berk there appears a charge under date of October 31, 1939, of $ 10,000 designated as "Loan to Berk Finance Co."
Finance Co. had a bank account at Mellon Bank captioned "Berk Finance Company, Mrs. Trixie I. Berk, Proprietor." The opening entry in such bank account was made on March 31, 1937, in the amount of $ 25,000. The records of Mellon Bank show that funds were withdrawable from the Finance Co. account on the signature of "Berk Finance Company, Mrs. Trixie I. Berk, with power of attorney to I. L. Berk and H. R. Fitzpatrick." The vast majority of checks drawn on such account were signed by Fitzpatrick. Mrs. Berk never signed a check of Finance Co.
On August 5, 1938, the investment account of Mrs. Berk was charged with the amount of $ 50,000, which represented payment of $ 50,000 by Finance Co. on the $ 180,000 note of Mrs. Berk. At that time the Finance Co. had not realized profits in that amount. The profits of Finance Co., reported in the joint return of decedent and his wife for 1938 and in the individual returns of Mrs. Berk for 1939, 1940, *85 and 1941, were as follows: 1938, $ 7,927.68; 1939, $ 3,055.18; 1940, $ 5,709.62; and 1941, $ 4,966.51. The profits of Finance Co. for the years 1937 to 1943, inclusive, were credited to the investment account of Mrs. Berk. Such account shows complete disbursement or distribution *938 of both investment and profits, the last entry under date of September 30, 1943, being shown as a distribution to Mrs. Berk. At that time, due to conditions brought about by the war, Finance Co. became inactive.
OPINION.
Respondent included the entire net income of Packard Berk and that of the Berk Finance Co. in the taxable income of decedent for the years 1939, 1940, and 1941 in determining the present deficiencies against decedent for each of those years. Petitioners contest this action.
The basis upon which respondent supports the inclusion of Packard Berk income is that the evidence does not establish that a partnership, recognizable for Federal income tax purposes, existed during those years between decedent and his wife, Trixie I. Berk. Petitioners argue that such status is proved. We agree with respondent.
Regardless of state law recognizing an arrangement as a partnership, it is now*86 settled that, for Federal income tax purposes, such recognition is not controlling. The question is whether the decedent and his wife, Trixie I. Berk, the members of the alleged partnership, really intended to carry on business as such. And the answer to this question here turns on the answer to the query as to whether Trixie I. Berk invested capital, originating with her, or substantially contributed to the control of the business, or otherwise performed vital additional services. Commissioner v. Tower, 327 U.S. 280">327 U.S. 280; Lusthaus v. Commissioner, 327 U.S. 293">327 U.S. 293.
It is conceded by petitioners that Trixie I. Berk did not contribute substantially to the control and management of the business, nor perform vital services for it. This restricts the issue to whether she "invested capital originating with her."
Petitioners contend that she did invest such capital in the amount of $ 120,000 which she borrowed on her note in that amount from Mellon Bank. Respondent argues that she was merely an accommodation maker on that note, while petitioners insist she was the real maker.
Under the pertinent law of Pennsylvania, since*87 Trixie I. Berk was a married woman, she was prohibited from becoming an accommodation maker of a note. Purdon's Pennsylvania Statutes, title 48, sec. 320. If, however, she did sign the note as such a maker, the note "as to her [was] utterly void." First National Bank of Verona v. Walsh, 349 Pa. 241">349 Pa. 241; 37 Atl. (2d) 130. And the obligation to pay the note would be that of decedent alone under his specific pledge. In that event it would follow that Trixie I. Berk did not, in fact, borrow and, therefore, did not contribute $ 120,000, or any amount, to the business.
*939 Under Pennsylvania law "An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person." Purdon's Pennsylvania Statutes, title 56, sec. 66. Have petitioners carried their burden of proof and established that Trixie I. Berk was not an accommodation maker of this note? We think not. This is said despite any presumption created by Pennsylvania law that she was the real maker. That presumption, if such there be, must yield*88 here to the stronger presumption of correctness attaching to the respondent's determination. Rosemary Herold Lazard, 5 T.C. 277">5 T. C. 277; affd., 153 Fed. (2d) 348, and cases there cited. In a recent Pennsylvania case, Western National Bank of York v. Levin, 331 Pa. 113">331 Pa. 113; 200 Atl. 71, the Supreme Court of that state, in discussing the rule to be applied in determining whether a married woman was an accommodating party on a note, said:
* * * But where the wife does not borrow and receive the money in such manner as to give her full control and dominion over it, where the right and the opportunity of free and voluntary disposition of it is denied her, where the money is paid directly to the accommodated party or for his use and benefit, where the transaction is but a device to evade the purpose and spirit of the statute by making it falsely appear that the wife is the real instead of merely the nominal actor, then, if the lender is a party to the scheme or aware of its true object and nature, the court will refuse him the right of recovery against the wife. * * *
Here it is*89 true that Trixie I. Berk possessed a very substantial personal estate. She could easily have borrowed this amount of money on her own collateral directly. But this was not done. After some discussion, as to the meaning of which the testimony, particularly that of Trixie I. Berk, is hazy, followed by arrangements at home with her husband, the decedent, she signed the note at the Mellon Bank as maker and endorser. Then, although her own collateral was readily available at that very bank, it was not used. Rather, the decedent, in writing, specifically pledged his own collateral to secure its payment. It is true, of course, that decedent and his wife, Trixie I. Berk, testified with varying degrees of clarity that this pledge was made because the bank already had in its possession, collateralizing notes of deceased, sufficient collateral of his to secure the note for $ 180,000, and that Trixie I. Berk agreed not only to save decedent from loss on account of that pledge, but also to turn over to him securities of hers to assure her performance on that contract. But that agreement was not committed to writing. McEldowney, the only alleged witness thereto other than decedent and his*90 wife, died before the hearing and did not testify. Moreover, there is no evidence to show that Trixie I. Berk ever thereafter *940 carried out this alleged oral agreement by delivering any of her securities to decedent. Except as to the 1,000 shares of Burroughs Adding Machine stock, her securities were left in the joint safety deposit box of decedent and his wife at the Mellon Bank, with a "pad" of her powers of attorney, just as they had been before that time. True, these certificates were available to decedent, but they were not exclusively so. No change in their status occurred after her alleged oral contract with decedent, and her certificate for 1,000 shares of Burroughs Adding Machine stock was later removed from their joint box in the Mellon Bank and pledged by Trixie I. Berk at the Pitt National Bank to secure a personal note of hers at the latter bank.
The testimony as to the discussions at home and at the Mellon Bank between decedent and his wife, Trixie I. Berk, which included McEldowney in the talks at the bank, is cloudy. Particularly is this so as to that of Trixie I. Berk. The note, the directions to McEldowney as to the disposition of its proceeds, *91 and the check to Fitzpatrick for Packard Berk were prepared by decedent or somebody for him. The note and letter of directions were dated the same day, but, obviously, before the proceeds of the note became available, those directions as to their disposition which she had already signed had been delivered to the bank. It seems Trixie I. Berk was told by decedent what to do, and she did it without having any clear understanding of just what was being done. Under the circumstances, we are less than convinced that she ever had any real control over those proceeds.
It is equally doubtful that it was ever intended that Trixie I. Berk should ever pay this note or that she actually receive any valuable consideration for the proceeds of the loan. The $ 200,000 paid in as capital to Packard Berk was not sufficient to operate the business and large sums were obtained for that purpose upon the credit and pledge of securities belonging to decedent or in his name. The records of Packard Berk show that as of December 31, 1938, the account of Mrs. Berk was overdrawn by $ 134,647.95 and the account of decedent by $ 124,643.16, so that more than the initial capital of $ 200,000 had in effect been*92 withdrawn by them. Packard Berk, notwithstanding such heavy withdrawals, continued to operate and was able to operate only because of borrowed funds upon the credit established by decedent and the pledge of securities belonging to him.
The debit balance in Mrs. Berk's account was in part due to a charge on August 5, 1938, of $ 100,000 representing payment in that amount by Packard Berk on the principal of her $ 180,000 note. Packard Berk did not have accumulated profits in that amount. Its profits according to its records were only $ 5,711.99 for 1937 and it sustained a net *941 loss of $ 43,202.73 for 1938. The payment by Packard Berk of $ 100,000 on her note must have been made either out of capital or loans obtained upon decedent's credit.
To explain payment of the notes of $ 250,000 and $ 150,000 of Packard Berk dated March 22, 1939, and June 30, 1939, respectively, with the proceeds derived from the certificates of deposit in the same amounts, Fitzpatrick testified that the certificate of deposit for $ 150,000 came from the liquidation of Packard of Pittsburgh, but that Packard Berk on March 22, 1939, purchased from Packard of Pittsburgh the certificate of deposit of*93 $ 250,000 with funds obtained from the note of $ 250,000 of even date and that such certificate of deposit was purchased on or about July 31, 1939, from Packard Berk by decedent. However, there is no explanation as to why, if Packard Berk purchased the certificate of deposit on March 22, 1939, with funds obtained from the $ 250,000 note of even date, the discount of $ 3,311.80 on such note was charged to the accounts of decedent and his wife. Neither is there any evidence that the certificate of deposit of $ 250,000 was ever carried as an asset on the records of Packard Berk. Furthermore, the evidence clearly shows that Packard of Pittsburgh did not assign or transfer the certificate of deposit of $ 250,000 to either Packard Berk or decedent, but that it held such certificate until September 22, 1939, at which date it cashed the two certificates aggregating $ 400,000 and the proceeds therefrom were deposited in its own bank account. From that account they were paid on the same date to decedent, who immediately used them to pay two promissory notes of Packard Berk in the aggregate amount of $ 400,000. To show payment of the notes, notes payable account on the records of Packard*94 Berk was debited with $ 400,000. However, since the notes were not paid with assets or funds of Packard Berk, but with funds of decedent, no contra entry could be made thereto and therefore the account of decedent was credited with $ 300,000 and the account of his wife with $ 100,000. No reasonable explanation appears for this complicated series of transactions. In effect decedent actually paid from funds received in liquidation from Packard of Pittsburgh the $ 100,000 on his wife's $ 180,000 note. The only other payment yet made on the $ 180,000 note, $ 50,000, was made by Berk Finance Co. from its capital, the source of which was decedent, directly, or indirectly through Packard Berk, or Packard of Pittsburgh. See discussion on second issue, infra. Certain it is, therefore, as we view the evidence, she has never yet actually paid anything on account of the note.
Decedent started several years before their marriage to make substantial gifts to his wife. He continued this program after that event. Indeed, the testimony even of decedent is not inconsistent with the *942 idea that the creation of the Packard Berk partnership was a part of that plan and that he intended*95 to make her a gift of the partnership interest. Thus, he testified, inter alia:
Upon consultation with my tax advisor, we decided that the best method of operating the business in the future would be to dissolve the corporation. Then in deciding what I should do -- because I wanted to continue in business, having been in it a long time, and knowing that business more or less -- I thought of taking my wife in as a partner; and as she had substantial amount of moneys in the form of stocks, I wanted to give her an opportunity to increase her earnings, so that she could be earning some money herself, and in the long run it would not come out of my estate, in the event of my death, and she would have that money in her own right. [Emphasis supplied.]
Thus, assuming that she had an interest in the Packard Berk partnership, under Pennsylvania law, this record is far from convincing that it was not made to and received by her as a gift. And if that be so, obviously, she signed and endorsed the $ 180,000 note "without receiving value therefor."
Upon a careful consideration of all the evidence, we conclude that petitioners have not carried their burden of establishing that Trixie*96 I. Berk was not an accommodation maker on the $ 180,000 note. They have thus failed to establish that she did invest capital originating with her in the partnership. Consequently respondent is affirmed in taxing the entire net income of Packard Berk for each of the taxable years to decedent. See W. M. Buchanan, 20 B. T. A. 210; Harry C. Fisher, 29 B. T. A. 1041, 1048; affd., 74 Fed. (2d) 1014; American Felt Co., 18 B. T. A. 504; affd., 58 Fed. (2d) 530.
The second issue involves the taxability of the income of Finance Co. for the years in question, to decedent. We think the decision on this issue must follow the disposition of the first and that this is likewise taxable to decedent. Though the mechanics were somewhat complicated and nebulous, it is clear to us that Finance Co. was financed completely, directly or indirectly, through Packard Berk and Packard of Pittsburgh, by decedent. On August 5, 1938, Finance Co. paid $ 50,000 on the principal of Mrs. Berk's $ 180,000 note and the amount of $ 50,000 was charged to her investment*97 account. It is admitted that Finance Co. did not have earnings at that time in that amount, so that the $ 50,000, in large part at least, must have been paid out of capital. Since the initial capital of $ 50,000 had been advanced by decedent and the payment of $ 50,000 on Mrs. Berk's note was charged against that amount, the payment of $ 50,000 by Finance Co. was in effect paid by decedent, as was the $ 100,000 paid by Packard Berk on such note on the same date. Furthermore, it appears that, in addition to the $ 50,000 advanced by decedent, he advanced further sums to Finance Co., since the evidence shows a payment of $ 10,500 to him on an advance by him to Finance Co. And, the evidence further shows that on August 5, *943 1937, Finance Co. received $ 25,000 from Packard of Pittsburgh, and in October 1939 $ 10,000 from Packard Berk.
The business of Finance Co. consisted of merely the financing of long term automobile loans made by Packard Berk to its customers. Its business was wholly conducted by the decedent and personnel of the Packard Berk organization, who were paid by Packard Berk for those services. It is not disclosed whether Trixie I. Berk had any experience in*98 this business, but the evidence is that she took no part in it. The business was conducted in the same premises in which that of Packard Berk was conducted. Even to the drawing of checks on its account, the business of Finance Co. was conducted wholly by personnel, including the decedent, of Packard Berk. Except for the signing of the application required to obtain the certificate from Pennsylvania authorities with respect to the conduct of the business under an assumed or fictitious name, Trixie I. Berk did nothing whatever either in establishing the business or in operating it thereafter. Certain, it would seem, that such formal compliance with state law would be no more controlling in fixing the legal characterization of the business here than in the case of an alleged partnership. And, the Supreme Court has ended controversy on that point. See Commissioner v. Tower, supra;Lusthaus v. Commissioner, supra.It was merely an adjunct or department of Packard Berk. Our conclusion is not altered, under the circumstances here, by the fact that upon liquidation the distribution was made to Trixie I. Berk. We think*99 the facts here are not distinguishable in substance from those in the case of Robert E. Werner, 7 T. C. 39. We there said:
In the instant case, we think it is sufficiently clear that petitioner's wife merely held a bare legal title to Tri-State's tangible assets. We think it is equally clear that the income involved was not derived from mere ownership. Wilma Werner, though the title holder, did not engage in the business which created the income. As we said in Wade Allen, supra [6 T. C. 899]:
The determinative factor is that the wife of petitioner, alleged to have operated and conducted the business, as the manager and entrepreneur, did not devote any time in the taxable year to the business, and that she had not devoted any vital skill or capital or managerial services to the business in prior years. She had not developed the business. Petitioner did. * * *
See also Albert Nelson, 6 T. C. 764, and Paul G. Greene, 7 T.C. 142">7 T. C. 142.Petitioners have not met their burden of establishing that during the taxable years the decedent, for Federal income tax purposes, was not in fact*100 the owner of the business carried on by Finance Co.
The respondent is affirmed in taxing the income of Finance Co. for the taxable years to decedent.
Decision will be entered for the respondent.