*2200 From 1916 until on or about January 1, 1923, the petitioner and his mother conducted a corpartnership in the State of New Jersey, he owning at the latter date a two-thirds interest, and his mother a one-third interest, which she sold to him and thereupon retired from the business. The petitioner transferred the one-third interest so acquired to his wife on or about January 1, 1923. Held, the one-third interest transferred to the petitioner's wife and all of the rents, issues and profits thereafter accruing thereto became her sole and separate property and the petitioner is not taxable upon profits accruing to her one-third interest and set aside for her during the years 1923, 1924, and 1925.
*1033 These proceedings, which have been consolidated for hearing and decision, are for the redetermination of deficiencies in income tax of $825.49, $1,336.47, and $10,934.19 for the years 1923, 1924, and 1925, respectively.
The sole question urged for consideration is whether the respondent erred in his failure to determine that income of $5,487.19, $6,951, *2201 and $34,892.61 earned by the Stryker Transportation & Contracting Co. during the years 1923, 1924, and 1925, respectively, belonged to Grace Stryker, the petitioner's wife.
FINDINGS OF FACT.
The petitioner is a resident of the State of New Jersey who with his mother, in 1916 acquired and operated an express route between the cities of Summit and Newark in that State under the firm name of Summit & Newark Express Co., each of them contributing equally to the business under and by virtue of the following articles of corporatnership entered into between them:
THIS AGREEMENT made this eighth day of November Nineteen Hundred and Sixteen, between M. Stryker and Arthur Stryker, both of the City of Summit, County of Union and State of New Jersey.
WITNESSETH THAT: The said parties hereby agree to form and do form a co-partnership for the purpose of carrying on and conducting a Motor Trucking business in the City of Summit aforesaid and elsewhere, on the following terms and articles of agreement, to the faithful performance of which they mutually agree and bind themselves ech to the other.
The style and name of the co-partnership shall be "The Summit and Newark Express Co." and*2202 shall commence on the date hereof and continue for the period of one year.
*1034 Each of the partners agrees to contribute to the funds of the co-partnership the sum of Nie Hundred and Fifty Dollars.
The said Arthur Stryker agrees to devote all of his time necessary to the conducting of the business of the co-partnership outside of the Bookkeeping and the said M. Stryker agrees to devote all of the time necessary in keeping the accounts of the co-partnership.
All profits which may accrue to the said partnership shall be divided equally and all losses happening to the said firm and all expenses of the business shall be borne by the said parties equally.
All transactions and accounts of the firm shall be kept in a book of accounts which shall always be open to the inspection of both parties.
All accounts between the parties shall be settled every three months if desired by the partners or either of them.
The indebtedness of the said Arthur Stryker to the said M. Stryker as evidenced by his promissory note shall be deducted from his share of the profits before he shall be entitled to receive any profits from the co-partnership.
Neither of the partners shall*2203 subscribe to any bond sign or endorse any note or assume any liability verbal or written without the approbation or consent of the other partners.
Neither partner shall employ and person or persons without the consent of the other partner and either partner may discharge any employee of the partnership.
At the expiration of the aforesaid term or earlier dissolution of the co-partnership if the partners cannot agree upon a division of the property, all the partnership effects shall be sold at public auction at which both of the partners shall be at liberty to bid and the proceeds of the sale after the payment of all debts, shall be divided equally between the partners.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands and affixed their seals, the day and year first above written.
(Signed) MINNIE STRYKER
ARTHUR STRYKER
Signed, sealed and delivered in the presence of
(Signed) E.A.U. KEOQUIN.
The foregoing articles of copartnership were entered into for a period of one year only for the reason that the parties thereto wished to experiment with the relationship. As it proved satisfactory it was continued thereafter.
The petitioner's mother devoted*2204 considerable of her time to the business from 1916 to 1922, handling all the bookkeeping and performing some of the clerical duties and the profits during that period of time were divided equally in accordance with the articles of copartnership hereinabove.
The name of the Summit & Newark Express Co. was changed in 1918 to Stryker Transportation & Contracting Co. in order to adapt its name to a new and different business in which it was about to engage. Its principal business then was the operation of dump trucks for road contractors but later in 1923, 1924, and 1925 it engaged in the building of streets, sidewalks and the development of improvements for land improvement companies.
In 1922 the business of the Stryker Transportation & Contracting Co. was moved to Trenton. The petitioner's mother not caring to *1035 move from Summit, her then place of residence, and being in need of the money she had invested in the business, sold her interest therein to the petitioner on or about January 1, 1923, which at that time had been reduced from one-half to one-third by reason of capital withdrawals. At the close of business on December 31, 1922, her capital account in the business, *2205 after deducting her drawing account of $2,681.92, was $10,399.17. The petitioner gave his mother a check for $399.17 and two notes for the balance in approximately equal amounts, one of which he paid in November, 1923, the other being renewed upon which various payments were made from time to time until fully paid early in 1926. The petitioner's interest in the business at that time was $25,433.51, which, however, if reduced by the amount of his drawing account of $11,393.04, was $14,040.47.
During the period 1916 to 1922 the petitioner's wife, Grace Stryker, assisted in the clerical work of the business, principally in typing and billing, for which she received no compensation. In 1918 she also supplied the business with capital through loans, aggregating $4,000, which she obtained from her father. Those loans were left in the business and interest was paid thereon to her father until the settlement of his estate, he having died in or about 1924, since which time interest has been paid to her. The amount so loaned represented at that time somewhere in the neighborhood of 50 per cent of the petitioner's interest in the business, and it was in a great measure responsible for*2206 the rapid expansion of the business.
The partnership did not have an elaborate system of accounts, practically everything being carried on check stubs. A statement was prepared annually and the respective partners' interests were computed from those records. During the period 1916 to 1922, inclusive, the profits of the business were divided between the petitioner and his mother in proportion to their respective capital accounts.
Upon the acquisition of his mother's interest in the copartnership the petitioner discussed the matter of giving his wife an interest in the business. He told her that the interest he had acquired from his mother was being transferred to her for the services she had rendered to the company in the past, for which she had received no compensation and also because the assets of the business were getting larger and he wanted her to have an interest therein in her own right. The understanding with his wife was that she would practically step into the position which his mother had formerly occupied and that the business would continue as theretofore. She understood that she was to receive a one-third interest in the business as her own separate property*2207 and that there was a possibility of loss should the business not prove profitable. The petitioner instructed his office to transfer the interest his mother formerly held to his wife, *1036 which was done, and thereafter, during the years here in controversy, one-third of the profits of the business was set aside for her account. During 1923 petitioner's wife withdrew $910 from the business, and $850 in 1924, which she deposited in her separate bank account and the amounts thereof were expended for her own personal use.
The statements of assets and liabilities prepared by the Stryker Transportation & Contracting Co. after January 1, 1923, showed capital accounts in the names of the petitioner and his wife in the following amounts:
| Petitioner | Grace Stryker | |
| Jan 1, 1924 | $40,467.08 | $20,233.54 |
| Jan 1, 1925 | 54,569.08 | 27,284.55 |
| Jan 1, 1926 | 119,473.81 | 59,736.90 |
The foregoing amounts are as they were recorded in the company's journal.
The net income of the Stryker Transportation & Contracting Co. was $16,461.58 for 1923, $28,853.01 for 1924, and $124,677.84 for 1925.
After the business of the Stryker Transportation & Contracting Co. was moved*2208 to Trenton other office help was employed to take the place of the petitioner's mother and it was, therefore, not necessary for the petitioner's wife to perform the clerical duties as theretofore. His wife, however, had intimate knowledge of the business and she was consulted with regard to expansion of the business, questions of personnel and other matters of importance.
On January 2, 1926, the business of the Stryker Transportation & Contracting Co. was divided into two separate companies, A. Stryker, Inc., and Stryker Transportation Co., and incorporated under the laws of the State of New Jersey, the former to conduct the contracting business and the latter the transportation business. The petitioner's wife received 330 shares of stock in A. Stryker, Inc., of the total 1,000 shares authorized, and 60 shares of stock in the Stryker Transportation Co. of the total authorized issue of 150 shares for her interest in the Stryker Transportation & Contracting Co., and certificates were made out in her name. She is still a stockholder in those companies and receives the dividends on said stock.
There having been more assets in the Stryker Transportation & Contracting Co. than required*2209 to incorporate the two companies aforesaid, some were retained. The partnership affairs were wound up and distributions of capital were made, the petitioner's wife receiving $20,700 in 1927, which she deposited in her separate bank account.
The Stryker Transportation & Contracting Co. filed partnership returns of income for the years 1923, 1924, and 1925, showing therein *1037 the distributable interest of the petitioner and his wife to be two-thirds and one-third, respectively, of the net income. During those same years the petitioner and his wife filed separate individual income-tax returns showing therein the distributable income reported by the Stryker Transportation & Contracting Co.
The petitioner's returns were audited by the respondent and under date of June 20, 1928, he was advised that "inasmuch as the laws of the State of New Jersey do not recognize a partnership contract entered into by a husband and wife, the entire profit derived from the operation of the Stryker Transportation and Contracting Company has been included in your return."
OPINION.
MORRIS: The question to be determined is whether certain income earned by the Stryker Transportation & Contracting*2210 Co. during the years in controversy was taxable to the petitioner or to his wife, who is alleged to have owned a one-third interest in the business. The respondent contends that the said Stryker Transportation & Contracting Co. was a sole proprietorship and that the petitioner was, therefore, taxable as an individual and he states as his reason therefor, that a partnership between husband and wife is invalid under the laws of the State of New Jersey. He further contends that, irrespective of the legal disability, the petitioner's wife owned no interest in that company. The petitioner claims that while under the law of New Jersey a wife might legally enter into a contract of copartnership with her husband, it is only necessary for us to determine whether she had a one-third interest in the Stryker Transportation & Contracting Co.; if so, the income derived from said interest would be income from her separate property and, therefore, taxable to her.
We are not called upon by the pleadings, nor do we deem it necessary under the circumstances, to determine whether a copartnership between husband and wife may exist under the laws of the State of New Jersey. If the petitioner's wife*2211 owned a one-third interest in the Stryker Transportation & Contracting Co., entitling her to a like interest in the profits of the business in her own right, she is taxable thereon in her individual capacity. Or, differently stated, if the petitioner owned only a two-thirds interest in said business and was entitled to only two-thirds of the profits therefrom he should not be taxed upon that which he is not legally entitled to.
The State of New Jersey has been referred to as among the most liberal of States modifying the rules of common law with respect to the property rights of married people. .
*1038 At page 3225, volume 3, Compiled Statutes of New Jersey, the "Act to amend the law relating to the property of married women" provides:
Separate property of married woman: Property acquired during marriage. - That the real and personal property, and the rents, issues, and profits thereof, which any married woman has received or obtained since the fourth day of July, in the year of our Lord one thousand eight hundred and fifty-two, or which she shall hereafter receive or obtain, by purchase, gift, grant, devise, descent, *2212 bequest, or in any manner whatever, shall be her sole and separate property as though she were a single woman.
The record shows that the interest which the petitioner's wife is alleged to have owned during the taxable years in controversy was formerly owned by his mother, who retired from the business and disposed of her interest to him on or about January 1, 1923; that during all of the years 1916 to 1922 his wife assisted in the clerical work of the business, for which she received no compensation; that she loaned money to the business in 1918 to the extent of about 50 per cent of the petitioner's interest therein which, in a great measure, was responsible for the rapid expansion of the business. When the petitioner acquired his mother's interest, mindful as he was of his wife's assistance in making the business a success, he informed her that his mother's interest was being transferred to her in recognition of the services she had performed in the past and, furthermore, because he wanted her to have an interest in the business in her own right. The interest formerly held by the petitioner's mother was transferred to his wife and a like percentage of the profits of the business*2213 was thereafter set aside for her account. She withdrew sums of money which she deposited in her separate bank account. The statements of assets and liabilities prepared by the company subsequent to January 1, 1923, the date of the mother's retirement from the business, show the capital accounts of the petitioner and his wife and the amounts set apart to their credit therein. Petitioner's wife, while not actively engaged in the detail clerical work subsequent to removal of the business to Trenton, was consulted with regard to all important matters pertaining to the business. Finally, the business of the Stryker Transportation & Contracting Co. was divided into two separate companies in the early part of 1926, which were incorporated under the laws of the State of New Jersey, and there were issued to the petitioner's wife 330 shares in one, and 60 shares in the other, for her interest in the Stryker Transportation & Contracting Co. The certificates of stock in those corporations were issued in her name and she thereafter received the dividends therefrom. In the liquidation of the Stryker Transportation & Contracting Co. she *1039 also received a sum of money from the assets*2214 not turned over to the corporations which she deposited in her separate bank account.
While there was no formal writing setting forth the transfer of the alleged gift of a one-third interest in the business of the Stryker Transportation & Contracting Co., the circumstances before, during and after the making of the gift convince us that a gift was in fact made and that the petitioner's wife received a one-third interest in the business in her own right, which became at that time and was thereafter her separate property under the laws of the State of New Jersey.
Under the statutes of New Jersey, hereinabove referred to, a married woman is not only entitled to the real and personal property which she may "receive or obtain, by purchase, gift," etc., but to the "rents, issues, and profits thereof." Therefore, since the petitioner's wife owned as her separate property a one-third interest in the Stryker Transportation & Contracting Co., and since there were credited to and set aside for her, during each of the taxable years in controversy, profits of the business accruing to her because of her said interest, she became the owner thereof as they were earned and credited. *2215 The petitioner himself being the owner of only a two-thirds interest in the business and therefore legally entitled to only two-thirds of the profits, is not liable for income tax upon the profits accruing to his wife's one-third interest. ; . Cf. .
Judgment will be entered under Rule 50.