*3682 Held, that the Wilson Family Partnership for the years 1919 and 1920 was composed of the three petitioners and their respective wives.
*963 These proceedings which were consolidated for the purpose of trial are for the redetermination of deficiencies in income tax for 1919 and 1920 as follows:
| 1919. | 1920. | |
| Docket No. 8500 | $26,207.29 | $80,371.16 |
| Docket No. 8501 | 32,408.98 | 79,028.07 |
| Docket No. 8502 | 38,936.38 | 78,784.88 |
*964 The respondent decided that the three petitioners, who are brothers, were the only members of the Wilson Family Partnership and determined their tax liability on that basis. The petitioners contend that the partnership was composed not only of themselves but also of their wives.
FINDINGS OF FACT.
The Wilson & Willard Manufacturing Co. was organized under the laws of California about 1907 by Elihu Clement Wilson and Arthur Willard, who were the principal stockholders. Qualifying shares were held by their wives. The corporation*3683 was organized to manufacture various kinds of oil well tools for the trade and also under patents owned individually by each of the organizers. The patented oil well tools were to be jobbed by each of the patentees individually. The corporation kept separate accounts for each of the patented articles manufactured for Wilson and for Willard, charging such accounts with the labor, material and other expenses connected with the manufacture of the articles and crediting the accounts with the proceeds received from the sale thereof. The credit balances of these accounts represented liabilities of the corporation to the individual for whose patents the accounts were carried.
About 1913 Wilson acquired the stock owned by Willard in the company. The corporation continued to carry on the same business as formerly, manufacturing articles the patents on which were held by Elihu Clement Wilson and William W. Wilson, who had been associated with the corporation since shortly after its incorporation. One article was manufactured under a royalty agreement with Willard. The accounts for the patented articles manufactured for the Wilsons were handled in the same manner as had been done previously*3684 in the case of Elihu Clement Wilson and Willard.
The success of the business invited infringements and by 1916 adverse decisions by the lower courts in serious patent litigation threatened disaster to the entire business. About this time George B. Wilson, who is an attorney, interested himself in the patent litigation on behalf of his brothers. He was then residing at Salt Lake City, Utah, and was employed by the American Smelting & Refining Co. He directed appeals in the various suits and prepared briefs therein with the result that the infringement suits brought against the business as well as those instituted against competitors terminated favorably to the business.
During this time the brothers discussed with George B. Wilson the advisability of his resigning his position with the American Smelting & Refining Co. and becoming associated with them in their business *965 at Los Angeles, in order that he might attend to the legal matters connected with the business. This matter had also been discussed by the three brothers and their wives. After the signing of the Armistice in 1918, arrangements were made for George B. Wilson to come to Los Angeles for the holidays*3685 during the latter part of December in order that a definite conclusion might be reached in regard to his becoming associated in business with his brothers. Accordingly, he and his family arrived in Los Angeles about December 22, 1918, and spent some time with his brothers. That evening William W. Wilson and his wife met with the others at the residence of Elihu Clement Wilson. The three petitioners after discussing the details of their proposed business association, decided upon the formation of a partnership. After some time their wives came into the conference and Elihu Clement Wilson stated to them that it was proposed to form a family partnership of the three petitioners and their wives, in which all six would be equally interested. As the petitioners understood the California community property law gave the wife an equal interest with the husband in whatever property he owned, it was agreed that the wives be made equal partners in the partnership from the beginning, and that they should share equally in the profits and losses. This was expressly agreed to by each of the petitioners and their wives. It was also agreed that the partnership would begin business as of January 1, 1919, and*3686 would take over the jobbing business or selling of the articles manufactured under patents held by Elihu Clement Wilson and William W. Wilson, the accounts for which were carried on the books of the Wilson & Willard Manufacturing Co. under the designation of elevator account, improved reamer and perfection reamer. The partnership was called the Wilson and Willard Sales Department.
About January 3, 1919, George B. Wilson returned with his family to Salt Lake City, where he resigned his position and would up his business affairs there. On March 7, 1919, he returned to Los Angeles with his family and entered on his duties as a member of the partnership.
The bookkeeper of the Wilson & Willard Manufacturing Co. was instructed early in January, 1919, to open up a set of books for the partnership, but having been only recently employed and due to the moving of the business from one location to another, and the pressure of work, the instructions were not carried out at that time, and the accounts for the articles which the partnership was formed to sell were carried on the books of the corporation as in prior years.
The partnership as organized required no capital to begin with, *3687 as the entire business was handled through the Wilson & Willard Manufacturing Co. from whom purchasers of the manufactured articles purchased such articles and to whom payment therefor was made. *966 It was not, however, until June 1, 1920, that the partnership had a separate bank account which was carried in the name of the Wilson & Willard Manufacturing Co. Sales Department. Prior to that time there was only the one bank account which was in the name of Wilson & Willard Manufacturing Co.
When the books of the Wilson & Willard Manufacturing Co. were closed as of December 31, 1919, the profits shown by the elevator, improved reamer and perfection reamer accounts were credited to the accounts set up at that time for the members of the partnership, and made subject to their withdrawal. The amounts so credited were as follows:
| From improved reamer | From elevator | From perfection reamer | |
| Elihu Clement Wilson | $10,506.55 | $58,748.91 | |
| Eva Pearl Wilson | 10,506.55 | 58,748.92 | |
| George B. Wilson | 58,748.91 | ||
| Nelle Wright Wilson | 58,748.92 | ||
| William W. Wilson | $54,120.05 | ||
| Ada M. Wilson | 54,120.06 |
Inasmuch as the patents from which the petitioner's*3688 income was derived were involved in litigation at the time of closing the books for 1919, it was agreed upon the advice of George B. Wilson, in order to preserve the identity of the profits, to make distribution on the basis indicated above instead of totaling the profits on the three accounts and dividing them exactly into sixths. For the year 1920 an equal one-sixth distribution was made to the partners. The accounts of the partners after being credited with profits from the patented devices appeared on the books of the Wilson & Willard Manufacturing Co. as liabilities.
While no withdrawals of profits were made by any of the partners during 1919, withdrawals were made during 1920.
In the 1919 partnership return, the income was reported as being distributable on the basis heretofore set out, except that George B. Wilson was shown as being entitled to an additional amount of $9,973.86. This additional amount represented a remuneration allowed to him for services rendered in prior years in connection with patent litigation. In the 1920 return the partnership income was reported as being distributable on the basis of one-sixth to each member. In the individual returns filed*3689 by each of the partners for 1919 and 1920 there was reported their share of income as shown by the partnership returns for the corresponding years.
The wives of the petitioners performed no services in connection with the partnership. On two or three occasions they attended meetings of the members at which matters relating to the partnership were discussed.
*967 With two or three exceptions all the property owned by Elihu Clement Wilson and his wife, Eva Pearl Wilson, at the time of the formation of the partnership had been acquired subsequent to their marriage. All the property owned by George B. Wilson and his wife, Nelle Wright Wilson, at the time of the formation of the partnership had been accumulated subsequent to their marriage. At the time the partnership was formed William W. Wilson and his wife, Ada M. Wilson, owned a home in which each had a one-half interest. Whatever property William W. Wilson owned had been acquired subsequent to his marriage. His wife, however, had some property in her own right aside from her interest in the property acquired by him after marriage. Each of the petitioners and his wife had a joint bank account.
The partnership was*3690 continued until about July 1, 1923. It was then succeeded by the Wilson Oil Tools Corporation, which was organized under the laws of California to take over and carry on the business previously conducted by the partnership. The accumulated profits of the partnership were distributed to the partners and the inventories of raw materials and finished products were transferred to the corporation in consideration of stock issued by it in equal amounts to the six members of the partnership.
During or about November, 1921, the books of the partnership and of Wilson & Willard Manufacturing Co. were examined by internal revenue agents who, in a report dated November 30, 1921, assigned the entire partnership profits for the years 1919 and 1920 to Elihu Clement Wilson and William W. Wilson. On May 16, 1922, a conference was held with a representative of the Income Tax Unit, but a final decision was not reached, and the question of whether in California husbands and wives could legally enter into partnership with each other was submitted to the then Solicitor of Internal Revenue for decision. On June 5, following the conference a brief on the partnership question was submitted by George*3691 B. Wilson. Under date of May 23, 1923, Elihu Clement Wilson and William W. Wilson were advised in letters signed by E. W. Chatterton, Deputy Commissioner, of additional taxes computed on the basis that the profits of the Wilson Family Partnership were distributable only to them. Subsequently, these petitioners were advised to disregard letters of May 23, 1923, as the cases would be reaudited on the basis of the additional information submitted upon points taken under advisement at the conference held on May 16, 1922. Under date of December 27, 1923, Elihu Clement Wilson and William W. Wilson were advised by letters signed by J. G. Bright, Deputy Commissioner, of the additional tax shown in the letters of May 23, 1923. Another conference was held before the Income Tax Unit on March 20, 1924, at which the representative of the Unit held that for the year 1919 *968 it was a partnership composed of three members and for the year 1920 a partnership composed of six members. An appeal was taken from the decision of the Unit to the Committee on Appeals and Review where an oral hearing was had on March 27, 1924. The following decision was made by the committee on the appeal, on*3692 May 6, 1924:
The above-named taxpayers, Elihu Clement Wilson, William W. Wilson, and George B. Wilson, a partnership trading under the name and style of Wilson and Willard Sales Department, appeal from the action of the Income Tax Unit in proposing the assessment of additional taxes against them for the year 1919 in the aggregate amount of $95,099.42.
Oral hearing was held March 27, 1924.
Elihu Clement Wilson and William W. Wilson are the owners of certain patents covering inventions of oil-well underreamers, etc., which are manufactured by the Wilson and Willard Manufacturing Company, Inc. This company is controlled by Elihu Clement Wilson. The products manufactured by the corporation were sold by the Wilson and Willard Sales Department and credit for sales was given to the individuals, Elihu Clement Wilson and William W. Wilson according to the articles manufactured.
The taxpayers contend that on the basis of an oral agreement entered into in December, 1918, effective as of January 1, 1919, a partnership relationship existed consisting of the three above-named Wilson brothers and their wives. The partnership filed a partnership return for 1919. The income was shown*3693 as distributable to the taxpayers mentioned above and their wives (six members) in various percentages, the same percentage accruing to the wife as accrued to her husband.
The Unit is unable to concede the contention of the taxpayers relative to the existence of the partnership so far as the wives are concerned, for the reason that no written articles of co-partnership were ever drawn up and signed, and furthermore, for the reason that the wives contributed no capital and performed no services for the alleged partnership.
In accordance with the foregoing, the Committee recommends that it be held that one-half of the partnership profits accruing to each brother and wife for 1919 be held to constitute*3694 income of the wife. The appeal is, therefore, sustained so far as the tax liability is concerned.
A copy of the foregoing holding, approved by the Acting Commissioner, was forwarded by the Commissioner to the partnership with the following transmittal letter:
This is to advise you that the Commissioner of Internal Revenue has approved the recommendation of the Committee on Appeals and Review in the case of the above-named taxpayers from the action of the Income Tax Unit for the year 1919.
*969 A copy of the recommendation as approved is transmitted herewith.
The case and related papers have been returned to the Income Tax Unit for such action as is necessary under the Committee's decision.
The petitioners were advised of the determination of the deficiencies herein involved and informed that in accordance with a recommendation of the Solicitor of Internal Revenue it was held that the Wilson Family Partnership for 1919 and 1920 consisted only of the three petitioners.
OPINION.
TRAMMELL: The issues involved in these proceedings are: (1) Whether the Wilson Family Partnership during 1919 and 1920 was composed of the three petitioners and their wives or only*3695 of the three petitioners, (2) whether the approval by the Acting Commissioner of Internal Revenue of the recommendation made by the Committee on Appeals and Review constituted res judicata, and (3) whether the respondent is estopped from assessing the proposed deficiencies.
With respect to the first issue, the petitioners contend that the Wilson Family Partnership during the years 1919 and 1920 was composed of six persons, the three petitioners and their wives. The respondent contends that the partnership was composed of only the three petitioners.
While the partnership agreement involved in these proceedings was not in writing, the petitioners and their wives testified as to the making of the agreement and their testimony stands unimpeached and uncontradicted. The evidence shows that the agreement which constituted the petitioners members of the partnership, as is admitted by the respondent, was the same agreement as that entered into by all six. Under this agreement, which was subsequently modified with respect to the distribution of profits for the year 1919 but given effect for 1920 and subsequent years, each of the six was to share equally in profits and losses of*3696 the partnership.
Section 158 of the Civil Code of California provides as follows:
Husband and wife may make contracts. - Either husband or wife may enter into any engagement or transaction with each other, or with any other person, respecting property, which either might if unmarried; subject, in transactions between themselves, to the general rules which control the actions of persons occupying confidential relations with each other, as defined by the title on trusts.
We have heretofore considered the question of whether under the laws of California a husband and wife could legally enter into a valid partnership with each other and others and have held that they could.
Section 1622 of the Civil Code of California provides that -
All contracts may be oral, except such as are specifically required by statute to be in writing.
*970 Section 1624 provides what contracts must be in writing, but a contract of partnership is not among those mentioned. That oral partnership agreements are valid has been decided in *3697
The California Civil Code at section 2395 defines a partnership as follows:
A partnership is the association of two or more persons, for the purpose of carrying on business together, and dividing its profits between them.
While this section contains no provision as to sharing of losses, section 2404 provides that "An agreement to divide the profits of a business implies an agreement for a corresponding division of its losses, unless it is otherwise expressly stipulated."
The petitioners contend that the facts in their cases meet the requirements of the definition of partnership as contained in the Code, and that the partnership in question was composed of themselves and their wives. The respondent, however, contends that since the wives contributed neither money nor services they never became members of the partnership.
The evidence shows that Elihu Clement Wilson and William W. Wilson were the owners of the patents. *3698 The profits from the sale of manufactured articles thereunder constituted the income of the partnership. The partnership business was conducted through the Wilson & Willard Manufacturing Co., and in view of this method of carrying on the business there was no necessity for a contribution of money to the partnership.
In
The fact that neither Whitley nor Fisher has put any money into the business cannot change the situation in the least. This circumstance, as an evidentiary fact, tending, it may be, to negative the proposition of a partnership, was worthy only of such weight as the court deemed it entitled to, and no doubt was given proper consideration by the judge in determining whether there existed a partnership between the parties under the agreement, but it by no means follows that because one partner may not put up his share of the capital under an agreement to form a partnership the combination so formed is any the less a partnership.
*3699 The case of
In the foregoing case it was held that Fisher, although he had contributed neither money nor services, was a partner and could sue for a dissolution of the partnership, for an accounting and for a receiver.
Inasmuch as the Civil Code of California contains no provision whereby it is essential to the formation of a valid partnership that the members contribute any money*3701 or services, and in view of the holding of the court in
Another argument advanced by the respondent against the contention that the three wives were members of the partnership is their unfamiliarity with the business in which they were supposed to participate. Conceding this to be true, it is only an evidentiary circumstance to be considered in connection with all the other testimony. They were not active partners. This fact should also be considered.
A further argument advanced by the respondent against the contention of the petitioners is that no change was made in the books of the Wilson & Willard Manufacturing Co. as of January 1, 1919, to indicate that there was a partnership, and no entries were made during 1919 referring to the wives' accounts other than the distribution of profits at the end of the year. The evidence shows that Elihu Clement Wilson early in January, 1919, instructed the bookkeeper of the Wilson & Willard Manufacturing Co. to open up a set of books for the partnership, but inasmuch as the bookkeeper had just entered the employment of the*3702 company, and because of the pressure of other work at that time, the partnership books *972 were not opened then. About the middle of May, 1919, the bookkeeper had his work in such condition that he was ready to open up the partnership books. About this time it came to the attention of Elihu Clement Wilson that his instructions had not been carried out. Consequently, he informed the bookkeeper that inasmuch as the books had not been opened at the beginning of the year to delay such action until the end of the year. Since the partners contributed no money to the partnership and did not make withdrawals during the year, there was no necessity to set up accounts with them until the books were closed at the end of the year and the amounts of the profits determined. At that time accounts were set up for all six of the partners, who were given credit for their respective shares of the profits. In view of the other facts in the case, we do not think that this contention is sufficient basis for denial of the existence of the partnership composed of six members.
The respondent contends that his action in holding that the wives are not members of the partnership in 1919 is supported*3703 by the fact that the profits for that year were not divided on the basis of sixths as provided in the partnership agreement when made in December, 1918. The evidence shows that when the profits for 1919 were determined the patents were involved in litigation and that it was considered desirable in order to preserve the identity of the profits from each of the patents and to know to which members of the partnership they had been distributed that distribution be made on a somewhat different basis than that agreed upon at the time of the formation of the partnership. For the years subsequent to 1919, distribution of the profits was made on the basis of sixths as provided in the partnership agreement. This contention of the respondent in our opinion is not well founded. He determined that the three petitioners were members of the partnership for the year 1919. The deviation from the original agreement as to distribution of profits for 1919 that was applicable to the wives was also applicable to the petitioners.
From consideration of the facts in this proceeding, and the law relative thereto, we are of the opinion that for the years 1919 and 1920 the Wilson Family Partnership was*3704 composed of the three petitioners and their respective wives.
In view of the disposition made of the partnership question, it becomes unnecessary to consider the remaining issues.
Judgment will be entered on 15 days' notice, under Rule 50.