*175 Decisions will be entered under Rule 50.
Income of part interest in family partnership held by petitioner in a trust created by him and his wife for the benefit of minor sons, over which he had large powers of control, including authority to use income for sons' support, held, taxable in part to petitioner and also in part to his wife in view of their community property status. Helvering v. Clifford, 309 U.S. 331">309 U.S. 331; Helvering v. Stuart, 317 U.S. 154">317 U.S. 154.
*1019 These proceedings challenge respondent's determination of deficiencies in petitioners' income tax for the year 1937 as follows: A. R. Losh, $ 4,839.94; Jennie C. Losh, $ 4,810.02.
An alleged bad debt deduction and certain alleged ordinary and necessary business expenses to the extent of $ 702.85 having been conceded by petitioners at the hearing, the remaining questions for our determination are the taxability to petitioners of the entire income under a partnership-trust agreement, it being alleged that their two minor sons were partners; *176 whether certain expenses constituted ordinary and necessary business expenses of the partnership for the year in question; and whether an item of income for which liability was denied by each of two possible debtors was a proper accrual in the taxable year.
FINDINGS OF FACT.
Petitioners, who are husband and wife, filed separate individual income tax returns on a community property basis for the year 1937 with the collector of internal revenue for the district of New Mexico. A. R. Losh will hereinafter for convenience be referred to as petitioner.
Petitioner is a civil engineer, with wide experience as a public official in road construction. During 1931 to 1935 he was successful as a technical adviser and salesman for a company selling road oils and asphalts. In the fall of 1935 petitioner, who was then 52 years of age, decided to go into business for himself because it was thought desirable that he settle down and develop a business that would be available for his two sons. After surveying other possibilities it was decided to start a business in Albuquerque, New Mexico.
In November or December of 1935, petitioner, with the help of his son Richard, operated a business from their*177 hotel room in Albuquerque. *1020 The operation of the business was continued from a house which the family rented in Albuquerque in January of 1936, and in February of that year an office was secured. The business was called the General Materials Co. and petitioner and his wife each contributed $ 1,000. Petitioner's son Thomas entered school in New Mexico in February of 1936. The business done by the General Materials Co. was the selling of road oils and construction materials on a brokerage and commission basis. By April of 1936 the business was progressing. Thomas and Richard took an interest in it and Richard expressed a desire to be taken into the business. The boys were told at that time that in time they would be taken into the business.
Petitioner's wife and his two sons gave him all the time they could spare from school and home to help in the business in the spring of 1936. By June of that year other help was required.
At about that time negotiations were under way for the purchase of a building material business owned by one Sorenson in Albuquerque. After several months of negotiations and many discussions among the four members of the family the purchase was*178 consummated, and the business thereafter included buying and selling building and road construction materials.
At about the time of the purchase, at a family discussion of the partnership interests, petitioner and his wife decided to provide each of the boys with a 15 percent interest in the partnership business and assets. It was their plan to increase this interest as the boys worked more into the business.
At about this time the name of the business and its bank account was changed to "A. R. Losh Company."
By written memorandum dated November 30, 1936, petitioner instructed the company's bookkeeper to set up the capital accounts of the business as of January 1, 1937, as follows:
| A. R. Losh | 35% |
| Jennie C. Losh | 35% |
| Richard C. Losh | 15% |
| Thomas C. Losh | 15% |
This was not done by the bookkeeper, who kept confused, inaccurate, and incomplete accounts, and at a later date an accounting firm was employed to install an adequate bookkeeping system. They discovered that the directions of the above memorandum had never been carried out by the bookkeeper. They made the proper entries as of January 1, 1937, at the time the new bookkeeping system was installed.
After the decision in*179 the fall of 1936, concerning the partnership interests for the boys, several merchants in the state were informed that the boys were in business with petitioner and would be coming out to see them.
*1021 Some time thereafter petitioner met a member of the firm handling the partnership's accounting and tax affairs and told him of the acquisition of the business and the proposal to transfer interests therein to the boys. The accountant's advice was that the agreement should be reduced to writing. Petitioner asked the accountant to get someone to prepare the papers which he thought were necessary. The accountant alone dealt with the lawyer who drew the papers, which were delivered to petitioner late in November and signed December 22, 1936, by petitioner, his wife, and petitioner as trustee for Thomas and Richard. The instrument was not recorded. Richard read it and both he and Thomas were familiar with what was being done and with the set-up of the partnership.
The instrument was entitled "Agreement and Declaration of Trust and Partnership." It recited the nature of the business "in which his wife, Jennie C. Losh, has and had a substantial interest in the nature of a partnership," *180 and stated that petitioner and his wife desired to define more specifically their relations in the partnership enterprise "and to give their said children a substantial interest therein to be held, however, in trust for them." Petitioner and his wife transferred their entire business to the partnership. The instrument recited the gift to each of the children of a beneficial interest of 15 percent in the partnership, and further provided:
The interest hereinabove provided to be transferred to the children, Richard C. Losh and Thomas C. Losh, will be and constitute their respective share in the partnership assets, and not to be given or held by them, or either of them directly or in their own names, but both principal and accruing future profits therefrom, is hereby declared, and hereafter to be held and controlled, in trust for the said children and each of them by and in the hands of the said Albert R. Losh, as trustee for the use and benefit of his said sons and each of them; with full right, power and authority in the said Albert R. Losh to control, use and manage the same as trustee for the use and benefit of the said sons and each of them, and to retain and add such*181 shares in the accruing profits as shall accrue to them and each of them from time to time, to the total capital of said partnership on their respective behalves; or in his own discretion otherwise invest the same in such a manner as he shall from time to time determine to be for their best interests aforesaid.
The instrument vested petitioner with the entire management and control of the partnership business and it further provided:
The said Albert R. Losh as trustee, may expend, use and lay out for the comfort, education, training, care, support, and welfare of each of his sons aforesaid, such amounts from their respective shares of the income, profits and increases from said partnership operations as to him shall seem proper and for their best interest, from time to time.
The respective trusts hereby created shall continue until, and terminate when, the said sons and each of them respectively, shall reach the age of twenty-five (25) years; subject, however, to the right and power in the trustee to extend the same for a further period as hereinafter provided. Upon the termination *1022 of said trust, the corpus and the possession and full enjoyment hereof shall pass to each*182 of said sons respectively, discharged of said trust.
By the terms of the instrument the interest of the sons could not be sold, transferred, assigned, or encumbered by them. On the death of either of the sons without issue during the initial period of the trust their respective interest was to revert to petitioner and his wife. If at the time provided for termination the trustee was of the opinion, "based upon reasonable ground," that the children were not to be entrusted with the property, he could extend it for a period of ten years and permit the interest to remain in the partnership or otherwise invest it.
By its terms petitioner as trustee could nominate a successor trustee in his will or on failure so to do petitioner's wife became trustee.
During the taxable year in question Richard was a pre-law student at the University of New Mexico at Albuquerque. He devoted a substantial part of his time after school and during summer vacations to the partnership business, working particularly in the credit and collection end of the business and in preparing forms for applications for credit and contracts. He also assisted in collection cases before justices of the peace.
During the*183 first half of the taxable year in question, Thomas was a student away from home at Roswell, New Mexico. In the last half of the taxable year he attended high school in Albuquerque. During his summer vacations and other available time he worked in the yard and on retail business. He assisted petitioner in making estimates.
It was generally known and understood by employees and others with whom the partnership dealt that the boys had an interest in the business. Neither of the boys was paid a salary for the work he performed for the partnership.
Petitioner had the exclusive authority to sign checks on the partnership account. The boys at various times would prepare checks covering items or funds for themselves and present them to petitioner for his signature. During the year net profits of the business were credited to capital accounts set up on the partnership books in July of 1937 as of January 1, 1937, in the percentages above indicated. The delay in setting up such capital accounts was occasioned by the incompetence of the bookkeeper previously employed. The net profits of the business were credited to the capital accounts in the indicated percentages and personal withdrawal*184 accounts were closed out into the capital accounts.
From $ 800 to $ 900 of partnership profits was used in the taxable year by Thomas to pay expenses of his education, support, and maintenance while attending school in Roswell. Richard withdrew approximately $ 1,800 from his partnership account during 1937 for a $ 300 *1023 purchase of real estate and general purposes. He withdrew $ 45 a month for university and personal expenses. He was never forbidden to make a withdrawal. Some of his withdrawals were effected through a bank account in his name in which partnership funds had been deposited. Richard became 21 years old on April 3, 1937.
Gift tax returns were prepared for the transfers of the interests in the partnership, but were not filed because of a conclusion that the gift was of a value of less than $ 5,000.
Petitioners remained in control of the trust property, and in substance the owners thereof, and retained direct and indirect benefits from the income.
In the taxable year in question a partnership information return was filed showing petitioner, his wife, Richard, and Thomas as the partners entitled to distributive shares of $ 35,579.20, $ 31,379.20, $ 13,448.23, *185 and $ 13,448.24, respectively. There was no indication that the partnership interests of Richard and Thomas were in trust. Individual partner returns were filed. The returns for Richard and Thomas were signed by petitioner as trustee. No fiduciary returns were filed.
In its return for the taxable year the partnership claimed, inter alia, the following as business expenses:
| 3/ 8/37 | A. R. Losh, in entertainment | $ 50.00 |
| 3/22/37 | Cash in entertainment | 100.00 |
| 6/ 3/37 | Strombergs in promotion | 10.20 |
| 6/ 9/37 | A. R. Losh in promotion | 150.00 |
| 6/ 9/37 | A. R. Losh in promotion | 150.00 |
| 6/25/37 | A. R. Losh general expense | 50.00 |
| 7/10/37 | A. R. Losh entertainment | 200.00 |
| 7/10/37 | A. R. Losh promotion | 500.00 |
| 7/26/37 | A. R. Losh entertainment | 500.00 |
| 8/20/37 | A. R. Losh promotion | 400.00 |
| 9/ 3/37 | A. R. Losh promotion | 200.00 |
| 9/14/37 | Tom McCaffrey in commissions paid | 250.00 |
| 12/ 4/37 | Jack Evan in promotion | 250.00 |
| 12/ 3/37 | Strombergs in promotion | 12.24 |
| 12/28/37 | Ralph J. Delcher in commissions paid | 75.00 |
| 12/31/37 | Jennie C. Losh in entertainment | 30.00 |
The item of $ 50 dated March 8, 1937, related to obtaining plans and information on the letting of contracts on a New Mexico*186 state highway project and to entertaining contractors and their superintendents who were interested in bidding on the jobs. The next nine items were amounts expended in entertaining highway contractors or for the purchase of hats for contractors' superintendents. The item of $ 75, dated December 28, 1937, was not for commissions but for the purchase of an overcoat for a contractor customer.
The item dated September 14, 1937, was paid as a commission on 10 cars of road oil at $ 25 a car, and the item dated December 4, 1937 *1024 was commission paid for selling 10 cars of road oil. The last item of $ 30 covered expenditures made by petitioner's wife in giving a party for wives of contractors, engineers, and superintendents while they were visiting in Albuquerque.
It is customary in the road materials business to entertain prospective customers. Petitioner's business was furthered by such expenditures.
The expenses paid were primarily for entertainment of contractors and their engineers and superintendents. Any entertainment of employees on a state, county, or city pay roll was merely incidental and occurred by reason of their being present at the same time.
The total business*187 expenses deducted by the firm for the tax year was 3.32 percent of gross sales. The sales in connection with the above expenditures were made to private contractors on a competitive basis. The expenditures were not payments to public officials.
The items above enumerated were ordinary and necessary expenses of petitioner's business.
The A. R. Losh Co. obtained a contract for the purchase of building materials which it placed with the Cosden Oil Co., a corporation. The Cosden Oil Co. could not fill the order and assigned it to a related corporation, the Cosco Oil Co. The material was shipped by Cosco direct to the customer, who was billed for the purchase price. The amount of the invoice was paid to Cosco in 1937 and it entered on its books commissions of $ 2,261.49 earned on the sale as an obligation to the A. R. Losh Co. All the work required to earn the commission was performed and completed within the taxable year 1937. Both Cosden and Cosco denied liability for the commission, each asserting that the other was liable. The partnership attempted to effect collection from both of them. A. R. Losh sought the aid of an attorney in Oklahoma City in his efforts to make collection. *188 They were not successful. In 1938 the attorney suggested that the partnership purchase material from both Cosden and Cosco and then adjust their claim. This was done and the claim was satisfied by merchandise in 1938.
The partnership's books and its income tax return for 1937 were on an accrual basis. The selling commissions of $ 2,261.49 were neither entered on its books nor reported in the partnership tax return for 1937.
Respondent included the commissions in question in the partnership's income for 1937.
OPINION.
Except for one feature, this case would be controlled by , decided herewith, and this proceeding could be disposed of accordingly on the authority of *1025 , and . Petitioner retained complete control over principal and income, both as trustee and as managing partner. The beneficiaries were members of his intimate family group. He was expressly permitted to "expend, use and lay out for the comfort, education, training, care, support, and welfare of each *189 of his sons aforesaid, such amounts from their respective shares of the income * * * as to him shall seem proper * * *," and expenditures were made for these purposes during the tax year for each of the children. The trusts "were intended to be for a short period of time." If there is any difficulty in determining the extent to which petitioner actually treated the property as the subject of a trust and in deciphering the somewhat vague and occasionally inconsistent attitude of the parties toward the arrangement, that is rather a ground for inferences unfavorable to petitioner and for doubts whether any real transfer to the children was intended than the justification for transforming into an outright gift the sweeping discretionary trust which petitioner was so careful to arrange. See .
The respect in which this proceeding differs from the Armstrong case where only the husband's separate property was placed in trust, is that here an interest in the partnership belonged to petitioner's wife, who is his co-petitioner. It is suggested that it was part of the property transferred, and that if petitioner's retained*190 control subjects him to tax under the doctrine of the Clifford case, the same can not be said of the wife. It seems to us, however, that the principles of Helvering v. Clifford, combined with the effect of community property concepts, lead to the opposite conclusion. Respondent is not seeking to tax to petitioner the share of the community income which, were it not for the trust, would have been taxable to the wife. His endeavor is to attribute to the wife that part of the income on the theory that as to her the trust has made no greater change in her economic position than did the corresponding trust created by the husband in his position.
It is not evident from the record what, if any, portion of the partnership income set aside for the sons came from the wife's share. No direct statement appears that she owned one-half, and the "Declaration of Trust and Partnership" recites only that petitioner's "wife, Jennie C. Losh has, and had a substantial interest." It might accordingly be concluded that it was entirely the petitioner's share which he held in trust for the boys and, if so, of course, the Clifford theory would apply in full to him.
We may assume, however, *191 in petitioner's favor, that prior to the declaration of trust the wife's interest was equal to that of petitioner. The evidence is not clear as to the character of that interest, as to the *1026 source of the wife's investment, as to whether the funds which the wife contributed in the first instance were hers or those of the community, or as to the extent to which the earnings from her personal services, inescapable community assets, , contributed to the ultimate capital used to expand the business. The presumption is that any property acquired during coverture belongs to the community. ; . And the most convincing information comes from the tax returns in which husband and wife reported all of the income on the community basis. If any of it was that of the wife alone, such treatment would have been inaccurate. We accordingly take it for granted that the wife's partnership interest, along with the corresponding interest of the husband, was community property and that the income*192 would be community income. As to both, under the community property law of New Mexico, the wife's interest and control were completely subject to the domination and management of petitioner. New Mexico Stat. (1941) Ann. Official Ed., § 65-403. So long as he lived petitioner would be the manager of the community and the agency for determining the disposition of the property and the manner of expenditure of the income.
The case of ; , treats "the following propositions * * * as settled":
(1) That under the law in this jurisdiction the wife's interest in the community property is equal with that of the husband; that * * * he is by statute made the agent of the community and given dominion and control over the community property during the continuance of the marriage relation * * *.
The wife has "no voice in management of the property." ; .
In ; , the effect*193 of the statutory amendment of 1915 "not considered in the Beals v. Ares case" was stated to be not that "the husband is no longer the head of the community, and, as such, the manager of the community property," but merely that "the husband should no longer, after the amendment, have the absolute power of disposition of real property of the community. Beyond that, the husband acts as a sort of agent of the community." Even as to the real property, the New Mexico Supreme Court does "not believe that * * * it was the intention of the Legislature to take from him [the husband] the right and power to manage and control the real estate of the community in all other respects." ; . See also ; . Thus, when the wife permitted the husband to become trustee of the transferred community property she gave up no control or dominion that she had had previously, but *1027 placed petitioner in essentially the same relation to the property as trustee as he had formerly been in as manager*194 of the community.
The result is that, as far as petitioner and his wife were concerned, neither relinquished nor changed in any important respect the relationship and control which each had as to the family property. They accomplished a temporary reallocation of income within the family group just as in the Clifford case. But as in that case it is difficult to see that the wife any more than petitioner could have felt herself the poorer as a result of the creation of the trust.
Nor can it be granted that the principles of , and , are any the less applicable here to the wife than to the husband. The duty of support resting primarily upon the father in ordinary common law jurisdictions is apparently placed with equal weight upon the mother under the concept of community property. Thus, the New Mexico statute law places in both parents "equal powers, rights and duties concerning the minors. The mother shall be as fully entitled as the father to the custody, control and earnings of their minor * * * children." New Mexico Stat. (1941) Ann., Official Ed., *195 § 19-303. And as ; , points out:
It is the duty to support and maintain the child that gives to the father and mother the right to the custody of the child and to its earnings during minority * * *.
This is indeed the necessary corollary of the wife's equal right in community income, coupled with the dominion of the husband and father over its expenditure and the provision that his obligations shall be presumed to be those of the community. According to the Spanish Code, from which these principles were derived, "the conjugal partnership shall be liable for: * * * the support of the family and education of the children * * * ." McKay, Community Property, 2d Ed., p. 529. Since the wife's share in the community income is liable to be diminished by a proportionate part of the amounts spent for the support of the children of the marriage, it is clear that the wife's property interests are proportionately subject to the burden of these obligations and hence that any trust established to discharge them correspondingly inures to*196 her benefit.
These considerations lead us to the view that the trust income was taxable to petitioner and his wife equally, as determined by respondent. The consequence of the trust was to leave each for tax purposes in substantially the same position as before, and without the trust the tax law would have treated the income of the community as divided equally between them. Respondent's action in this respect appears to have been proper.
*1028 Concerning the business expenses of the partnership claimed and disallowed by respondent, we think the record adequately shows that they were not paid to public officials contrary to the doctrine of policy established with respect to such expenses, and that they were sufficiently related to current business so that it was not necessary to capitalize them as contributions to good will. If public officials partook to any extent of the entertainment furnished by petitioner, this was purely accidental and inconclusive. And the purpose of obtaining the favorable inclination of prospective bidders and their employees apparently related to contracts about to be let and not to mere long range expectancies.
The final issue relates to commissions*197 earned in the tax year but not accrued because disputed by the debtors. It seems to us the doubt of collectibility was sufficiently great so that the leeway permitted for the judgment of the taxpayer has not here been exceeded. ; ; affd. (C. C. A., 2d Cir.), . On all but the primary issue we think respondent was in error.
Decisions will be entered under Rule 50.