*5 Decisions will be entered for the respondent.
Prior to January 1941 petitioners, husband and wife, operated an auto parts concern as equal partners. The success of the business was due primarily to the activities of the husband, who was in complete control of the conduct of the business. On January 1, 1941, each of the petitioners gave one-half of his interest in the business to one of their two minor sons. The firm's books were set up to show an equal capital account for all parties. There was no formal partnership agreement executed at the time. The sons performed little service for the business and their withdrawals from their partnership accounts during the taxable year were negligible. The husband continued to operate the business as he pleased and he drew at will from the partnership funds for personal and family expenses without charge therefor against his share of profits. Held that, since there was no change in the management and control of the partnership business and income, nor any material change in the economic status of the petitioners in respect thereof, the sons were not members of the partnership during 1941 for Federal income tax purposes and the *6 income thereof is properly taxable one-half to each of the petitioners.
*1372 These consolidated proceedings involve income taxes for the calendar year 1941. In Docket No. 3425 the amount in controversy is $ 2,674.57 and in Docket No. 3426 the amount in controversy is $ 2,719.48. The only issue is whether respondent correctly included in the gross income of the petitioners the net income from the business conducted under the name of Keenan Auto Parts Co. Petitioners contend that a bona fide partnership existed between them and their two sons during 1941 and that each of the petitioners and their sons correctly reported 25 percent of the income from the business as their share of its earnings.
FINDINGS OF FACT.
Petitioner P. A. Keenan, Sr., and petitioner Mattie W. Keenan are husband and wife, residing in Albany, Georgia. Their individual income tax returns for 1941 were filed with the collector of internal revenue for the district of Georgia at Atlanta. They have two sons, P. A. Keenan, Jr., born November 15, 1920, and Walter, born February 12, 1922. Prior to the*7 sons' induction into the armed forces petitioners and their sons lived together as a family unit.
From 1934 until 1940 petitioners operated the Keenan Auto Parts Co. as a partnership. This firm had succeeded to the business of a corporation, the stock of which was owned by Keenan, Sr. Mrs. Keenan became a partner by virtue of a contribution to capital at the time the partnership was organized. She rendered occasional minor services to the business, but took no active part therein. Her status as a partner in the business is not challenged by the respondent. The firm's business was the distribution of automobile parts, and during the taxable year it was conducted through nine offices, consisting of the home office at Albany, Georgia, and eight branches throughout the state. At all times from 1934, when the partnership was organized, to the end of 1941 P. A. Keenan, Sr., was the principal executive officer and manager of the business. He did most of the buying and selling of merchandise, controlled the hiring and firing of employees, and in general was the dominant voice in the conduct of the business.
In November 1940 the respective petitioners discussed among themselves the *8 idea of bringing their two sons into the business. After some discussion they agreed that each of them would give a one-half interest in his share to one of the boys so that the four members of the family would each have an undivided one-fourth interest in the business. P. A. Keenan, Sr., discussed the formation of a partnership *1373 with his accountant and tax consultant, who advised that an oral agreement of partnership was sufficient. On or about February 1, 1941, when the audit of the firm's business for 1940 had been completed, P. A. Keenan, Sr., directed his accountant to set up the books of the business to show that there was a four-way partnership, effective January 1, 1941. Book entries were made crediting the accounts of the petitioners and their two sons in the following amounts:
| P. A. Keenan, Sr | $ 28,552.47 |
| Mattie W. Keenan | 28,552.47 |
| Paul A. Keenan, Jr | 28,552.46 |
| Walter Keenan | 28,552.46 |
No written articles of partnership were executed during the taxable year or prior to the year 1943.
On or about September 1, 1941, P. A. Keenan, Sr., became concerned over the legal aspects of the new arrangement in view of the fact that neither of the sons was of age*9 and no trustee or guardian of their estates had been appointed. At the suggestion of his banker he consulted the bank's attorney. Thereafter, on September 29, 1941, Mrs. Keenan executed an instrument whereby she purported to convey one-half of her interest in the partnership business to her husband as trustee for the benefit of her son, Walter Keenan. Keenan, Sr., was given entire control over the management and possession of the trust property. On the same day Keenan, Sr., executed an identical agreement transferring one-half of his interest in the business to his wife in trust for their son, P. A. Keenan, Jr. Each trust was to continue until the beneficiary named became of age. During 1942 each of the petitioners filed a gift tax return for the calendar year 1941, reporting a gift made in trust of a one-fourth interest in the business. The gifts were valued in the same amounts as the credits on the firm's books.
The Keenan Auto Parts Co. filed a partnership return for Federal tax purposes whereby the net income of the business for 1941 was shown as $ 35,342.11, equally distributable among the four members of the Keenan family. The respective petitioners, as trustees, were*10 named as the distributees of the income of the sons. The petitioners and P. A. Keenan, Jr., each filed an individual income tax return reporting one-fourth of the net income ($ 8,835.53) from the business as income from Keenan Auto Parts Co. Keenan, Sr., filed a return on behalf of his son Walter, reporting a similar amount as income from the business.
During the taxable year Keenan, Sr., withdrew $ 9,905.11. Mrs. Keenan withdrew $ 2,086.71, and each of the sons withdrew $ 150 with the consent of Keenan, Sr. The withdrawals were not charged against the respective distributable shares of the partnership net income reported in the partnership return and in the income tax returns of petitioners and their two sons. The total of the withdrawals, $ 12,291.82, *1374 was deducted from a net operating profit shown by an audit statement as $ 38,389.68, and only the remainder, $ 26,097.86, was distributed. Such distribution was effected by allocating and crediting to each of the four alleged partners on the books of the partnership one-fourth of such remainder, to wit, $ 6,524.47.
The business conducted by the Keenan Auto Parts Co. required an experienced executive in that line, and*11 P. A. Keenan, Sr., was such an executive. The business earnings were due primarily to his activities in that his knowledge of the business, his experience therein, and his all-round executive ability made them possible. It would have been difficult to secure a man of equal ability to come into the business and take Keenan's place at compensation equal to 25 percent of the firm's earnings during 1941. The sons attended college during the greater part of the taxable year, but each of them worked in the business during the summer vacation.
There was no change in the conduct of the business after the formation of the partnership in January 1941 or after the execution of the trust agreements in September 1941. At all times during the taxable year Keenan, Sr., remained the manager and dominant figure in the business.
OPINION.
The evidence shows that the petitioners conducted a business as equal partners during the years 1934 to January 1941 and that the business grew substantially during that period. The evidence further shows that during that period Keenan, Sr., was the dominant partner and ran the business as he pleased. His wife's interest therein, which is not challenged by the*12 respondent, arose by virtue of a contribution of capital in the days when the partnership was first organized. Her participation in the management of the business was negligible. She was entirely content to let her husband run the business and left all decisions up to him. That was the situation immediately preceding the start of the taxable year before us.
Petitioner P. A. Keenan, Sr., received no salary or other compensation as wages for his services in conducting the partnership business. He did, however, draw at will on the funds of the partnership and such withdrawals were not charged against his distributive share of the profits. Mrs. Keenan likewise drew on the partnership funds without any charge therefor to her share of the profits. Also, the sons, with permission of Keenan, Sr., were permitted to draw on such funds for relatively small amounts without a charge against their share of the profits. The record is silent as to the purposes of such withdrawals or the uses made thereof. It appears that the partnership arrangement and relationship of the partners thereto were entirely ignored to the extent at least of treating the funds of the business as available for *1375 *13 withdrawal by petitioners for purposes other than compensation before determining the amount of the partnership distributable income. We find, therefore, that petitioners under such practice and treatment in respect of the partnership income may divide and reduce the tax liability attaching to such income without accounting for withdrawals therefrom either as compensation or distributions of partnership income.
The legal questions posed in these family partnership cases are few and basically very simple. They are: (1) What effect did the new arrangement have on the economic position of the original owners? (2) Was there such a change in the conduct of the management of the business as would support a finding that the old and new partners are really carrying on a business in partnership? See (certiorari granted Oct. 8, 1945); ; . Applying those tests to the case before us, does the evidence herein relating to the taxable year show such a change in the conduct *14 of the business or in the economic status of the petitioners as would justify our holding that the petitioners and their sons were carrying on a business in partnership? We think the evidence is overwhelmingly against such a finding. The record shows that during the taxable year 1941, when the sons were purportedly made partners in the business, the conduct of the business remained unchanged. The sons were in college during most of the taxable year and the value of any services performed by them is not shown. Keenan, Sr., remained the dominating and controlling partner. The new arrangement had no effect on his status as the dominant partner or on his complete control of the business. Also, as hereinabove indicated, the petitioners availed themselves of the use and enjoyment of a substantial portion of the profits of the business in a manner inconsistent with the legal concept of a partnership of which their sons were members. The language in , is peculiarly controlling here.
* * * While formal bookkeeping entries were made crediting petitioner, his wife, and the four children with equal shares in the profits of*15 the partnership, the only withdrawals were made by petitioner in the form of salary and for the support and maintenance of the family for which petitioner is personally obligated. In other words, he continued to manage and control the partnership property and to enjoy the economic advantages and the profits flowing therefrom and the wife and the children received only credits evidenced by formal bookkeeping entries.
See also ; and .
The insignificant withdrawals by the sons as compared with the withdrawals of petitioners are additional proof that they were not regarded as real partners in the business. It is obvious that at all *1376 times their partnership accounts were subject to the influence and control of Keenan, Sr. That fact in itself is important as indicating that the sons had no real status in the business as partners.
While the foregoing is, in our opinion, sufficient to sustain the respondent, we think it important to call attention to the nature of the business conducted. While not a personal service business, nevertheless the record shows*16 that the earnings of the business were due primarily to the activities, management, and business acumen of Keenan, Sr. That fact alone is persuasive proof that the respondent's determination is correct. Cf. ; certiorari denied.
This opinion would be unduly lengthened if we attempted to fortify our conclusion by the many different theories advanced by respondent or to distinguish the cases relied upon by petitioner. The more recent cases on this question are collected in In the light of the authorities above cited we hold, on the very convincing evidence offered by petitioners themselves, that the arrangements entered into by them prior to and during the taxable year had absolutely no effect on the conduct of the business or on their own economic status therein. With such a finding, we have no alternative but to sustain the respondent in his conclusion that the sons of the petitioners had no real proprietary interest in the business and the business income is taxable in full to the petitioners.
Decisions will be entered for the respondent.