*1965 The evidence, consisting, among other things, of an instrument executed by a decedent declaring himself trustee of part of his interest in a partnership for the benefit of his wife and daughters, for life, a declaration of intention to make a gift to them of an interest in a separate business owned entirely by him, and detailed facts concerning the extent of the donees' participation in the conduct of the businesses, and the method of keeping accounts and distributing profits, is insufficient to establish that the wife and daughters were in fact partners or joint owners. The income received by them was, therefore, properly taxed to the decedent, and the full value of decedent's interests in both businesses was properly included in his gross estate.
*1335 Docket No. 28209 involves a deficiency of $1,791.26 in income tax for 1922; No. 31482, deficiencies of $3,361.81 and $942.21 in income tax for 1923 and 1924, respectively; No. 38721, deficiencies of $58.15 and $566.54*1966 in income tax for 1925 and the period May 1 to December 31, 1926, respectively; No. 42144, a deficiency of $2,139.60 in estate tax, of which $427.92 is proposed for assessment. Petitioner contests respondent's inclusion in decedent's gross income of all the profits arising from a business alleged to have been owned jointly with other members of his family. At the hearing, respondent moved to increase the deficiencies by including in decedent's gross income profits from a three-ninths interest in a partnership which petitioner claims had been conveyed to members of decedent's family. Docket No. 42144 involves the inclusion in decedent's gross estate of the full value of the aforesaid business and the value of the three-ninths interest in the partnership.
FINDINGS OF FACT.
Petitioner is the duly appointed administrator of the estate of Dan M. Rose, deceased, who died a resident of Knoxville, Tenn., on April 23, 1926. Decedent was survived by his wife and three children, D. Morton Rose, Mrs. Evelyn Rose Cheyney, and Mr. Elizabeth Rose Winter.
At the time of his death and for many years prior thereto, decedent had been interested in the D. M. Rose Company, a partnership which*1967 his father and brother had founded in 1880 and which was engaged in the lumber business at Knoxville, Tenn. In 1918, he and his brother, Thomas H. Rose, having bought out all other partners, held a six-ninths and a three-ninths interest, respectively, in the business. By gift effective January 1, 1919, decedent transferred a one-ninth interest to his son, who had been and continued to be actively engaged in the firm's affairs (except for a short period during the World War), and received a salary for his services. There was no partnership agreement in writing. The three partners drew salaries in addition to profits.
At the time decedent made the gift to his son he considered making similar gifts to his wife and daughters, mentioning to them and to others that he wanted to give each an interest in the business. He executed the following instrument on or about January 1, 1919:
THIS INSTRUMENT Made on this 1st day of January, A.D. 1918, at Knoxville, Tennessee, between Dan M. Rose, of the First Part, and his wife Bessie C. Rose, and his daughters, Mrs. Evelyn Rose Cheyney and Miss Elizabeth Rose, Parties of the Second Part,
*1336 WITNESSETH: I. That the First Party*1968 hereto is a member of a firm or partnership styled "D. M. Rose & Company," - the other members thereof being Thos. H. Rose and D. Morton Rose - engaged in the manufacture and sale of lumber, etc., at Knoxville, Tennessee: and the said Company is the owner of certain lands (as shown by deeds and records), and of buildings and factories situate on said lands, including a saw mill and much woodworking machinery, and a large amount of lumber on the yards adjoining and used in connection with the mill and factories, - all in Knoxville, and Knox County, Tennessee: the said partners having interests as follows:
| Dan M. Rose | 5/9 |
| Thos. H. Rose | 3/9 |
| D. Morton Rose | 1/9 |
Now be it known that D. M. Rose, of the First Part, is desirous of providing for his said wife and daughters, and does now, in consideration of his love for them, (the second parties) agree and coverant with them and each of them to stand seized and to hold for them severally, and as Trustee to handle, control and manage for each of them a one-ninth interest in the business and properties aforementioned, under and in accordance with the terms, limitations and conditions stated and set forth in each case, that*1969 is to say:
II. In each case First Party shall have and retain the full and absolute control of the said interest of each until final disposition of the same, controlling and representing the same in the conduct of the business of said partnership in as full a manner as if the same were his own, investing and guarding the same to the end that it may be secure and yield the best income for the said beneficiaries, keeping faithful account of the same, and to each of sais parties of the second part, paying over the net income, profits, dividends and interest arising or accruing, to each at such times and in such manner and sums as First Party may determine, Provided, however, that the said one-ninth interest held for Mrs. Bessie C. Rose (wife of First Party) shall be only for life: and the income, profits, dividends and interest arising or accruing, shall be to her for life, and likewise to each of said daughters the one-ninth interest held shall be for life only: and the income, profits, dividends and interest arising and accruing shall be to them, respectively, for life, - provided, however, First Party may at any time give said interests, denuding himself altogether*1970 of the trust which herein he has burdened himself with.
III. If said wife shall die before the First Party hereto (the provision herein for her not having been made absolute), the said one-ninth interest shall revert to and be taken by First Party, - and so, also, any accretions not turned over to her: but if her death occur after that of First Party said interest and all accretions shall go to and be taken by the son and daughters of First Party (D. Morton Rose, Mrs. Evelyn Rose Cheyney and Elizabeth Rose), share and share alike, if all be living: but if one or more be dead, the representative, or representatives, of such deceased shall take such interest as the Tennessee statute of descent would cast, considering the interest as real estate.III. [Sic.] If either or both of the daughters of First Party should die during his life the interest herein provided for them shall nevertheless continue under his control and management as provided for during their lifetime, the income, profits, dividends and interest arising or accruing, however, shall be turned over to or for the benefit of any child or children or such decedent or decedents, if child or children be left by them. *1971 If no child or children of theirs be living at my (First Party) decease such interest so held and managed by me shall be a part of my estate and pass as real estate under Tennessee law, unless any will I may leave make different disposition of the same.
*1337 The Trust herein created was determined about the date this instrument bears, but not formally acknowledged till the date given in the Notary's Certificate.
Witness, [etc.]
DAN M. ROSE.
At the time of execution of this instrument the partnership owned real estate, machinery and other physical assets, open accounts, etc., but no legal record, other than the instrument, was made of any transfer of ownership in this property. Capital accounts, however, were set up on the books of the partnership in 1919 and subsequent years showing a sum representing two-ninths of the firm's capital belonging to decedent personally, and three sums representing one-ninth each belonging to him as trustee for his wife and two daughters. Neither wife nor daughters ever took an active part in the business, and during most of the time the instrument was in effect the daughters resided in Chicago.
Prior to 1920, decedent had regularly*1972 paid all bills of his wife and daughters. Thereafter the bills or a list of them was sent to him in the same way, and settlement was made by checks of the partnership drawn payable to decedent as trustee and endorsed by him and the beneficiary. Entries reflecting these disbursements and notes given by the beneficiaries in adjustment of overdrawings of the portion of profits payable to them were made upon the partnership's books. Neither decedent nor the other parties had any personal bank account, but all transacted their private business through checks of the partnership, and its books contained personal accounts in which their private transactions were reflected.
After decedent's death, petitioner was by court order made trustee under the above instrument for the wife and daughters, and the capital account of decedent in the partnership, then of $100,000 representing a two-ninths interest, was divided equally between the wife and three children, each having after such division capital accounts of $75,000. On June 30, 1928, the partnership was incorporated with a capital stock of $450,000, of which three-ninths, or $150,000, was issued to petitioner as trustee for the three*1973 beneficiaries.
The net income of the partnership during the years in question was as follows:
| 1922 | $42,637.21 |
| 1923 | 77,553.55 |
| 1924 | 35,182.44 |
| 1925 | 38,149.71 |
The Commissioner included in decedent's gross income the following amounts representing his distributive shares:
| 1922 | $9,474.93 |
| 1923 | 17,234.13 |
| 1924 | 7,818.32 |
| 1925 | 8,477.70 |
*1338 In 1914, decedent secured a patent on a machine to be used in the manufacture of hardwood flooring, known as an end matcher. This machine was built by the Ty-Sa-Man Company of Knoxville, and was first installed in the partnership's factory. Thereafter decedent received orders for it from others, which he transmitted to the Ty-Sa-Man Company for filling. Said company would manufacture and ship the machine to the customer and receive payment therefor from decedent, who in turn would collect from the purchaser, realizing a profit. Repair parts, kept in stock by the company, were sold in the same way. Certain portions of the machine were acquired by decedent from two other firms, and stored with the Ty-Sa-Man Company for use in manufacture. The chief assets of this business, consisting of a patent, *1974 drawings, patterns and a few tools, were owned individually by decedent. For services rendered in this business, D. Morton Rose was paid a salary of $500 a year. All transactions connected with sales of the machine were carried on through the partnership, and were reflected on its books under decedent's personal account. Stock on hand at the time of decedent's death was charged to and paid for by his estate.
During 1921, decedent mentioned his intention of giving an interest in this business to his wife and three children, and on August 19, 1924, wrote each a letter in which he referred to a gift of a one-sixth interest to each and the amount of profits therefrom which had been credited to each for 1922 and 1923.
In record books containing various accounts of the partnership, the following entries, reflecting distributions of profits from endmatcher machine sales, appear:
| 1922 | 1923 | 1924 | 1925 | 1926 | |
| End-matcher profit, total | $15,026.36 | $26,014.71 | $826.29 | $1,870.90 | $6,929.47 |
| 2/6 Dan M. Rose | 5,008.78 2/3 | 8,671.59 | 275.65 | 410.16 | 2,309.83 |
| 1/6 D. Morton Rose | 2,504.39 1/3 | 4,335.78 | 137.81 | 205.08 | 1,154.91 |
| 1/6 Mrs. Dan M. Rose | 2,504.39 1/3 | 4,335.78 | 137.81 | 205.08 | 1,154.91 |
| 1/6 Evelyn Rose Cheyney | 2,504.39 1/3 | 4,335.78 | 137.81 | 205.08 | 1,154.91 |
| 1/6 Elizabeth Rose Winter | 2,504.39 1/3 | 4,335.78 | 137.81 | 205.08 | 1,154.91 |
*1975 After decedent's death, the patent and business were sold to the S. A. Woods Machine Company by an instrument which, after reciting that decedent had owned a two-sixths and his wife and children a one-sixth interest each in the patent and business, provided for the payment of $12,000 in cash and a royalty on machines sold. The money so received was distributed, two-sixths to petitioner as administrator of decedent and one-sixth to the wife and children.
Profits from the partnership and sales of end-matcher machines received by the wife and children have been reported in their respective *1339 income tax returns. In decedent's estate tax return a two-ninths interest in the partnership, valued at $130,510.43, and a one-third interest in "Rose end-matcher," valued at $2,931.38, were reported. No separate returns were made during the years in question covering sales of the end-matcher machines.
OPINION.
STERNHAGEN: The decedent had for many years been actively engaged in two separate businesses - one, a general lumber business owned and conducted by a partnership in which he owned a 5/9 interest, and the other, the sale of patented end-matcher machines, owned and conducted*1976 by decedent individually. So long as he owned these interests, the income thereof was taxable to him; and he sought to reduce these taxes, as he had the right to do if he could. The question for decision is whether he succeeded. If so, it must be because, as shown by the evidence, the income was, when received, not even momentarily his, but, with its source, owned by others.
The respondent has determined that until his death the decedent continued to own the full five-ninths interest in the partnership and the entire end-matcher business, and that the income therefrom during his lifetime was derived by him. The petitioner seeks to prove that decedent had divested himself of three of his five-ninths of the partnership and of four-sixths of his ownership of the end-matcher patent and business. To this end evidence has been received in great detail of steps taken and statements made by the decedent to justify his belief that the income was not taxable to him. Having at one time practiced at the bar, he knew the nature of the evidence which would be required, and he used meticulous care to provide it. This we say only to explain that if we seem to test the evidence strictly, *1977 such a test was apparently what the decedent, knowing the subtlety often employed in the law, expected and provided for.
We are of opinion that, adding together all of the data in the record tending to prove that the omitted income, when derived, came not to decedent but went directly to his wife and children, the evidence falls short of the desired end. Despite all the decedent did to have it appear otherwise, he continued, in our opinion, to remain a five-ninths partner in the firm and to own the end-matcher business. Whether be obligated himself to dispose of the income from these interests among his family, we are not called upon to consider. But, even if he did, such disposition would be merely the exercise of a right of ownership; and ownership, even momentary, supports the tax. ; ; .
*1340 The existence of a partnership relation such as is contemplated by section 218, among members of a family, is not proven by an empty use of words to accompany a distribution of income which is in all respects voluntary. While, of*1978 course, a partnership within a family frequently exists and must be recognized, it is not because they call themselves a partnership as well as a family, but because in reality they are engaged together in carrying on the business of earning the taxable income. It is, for example, uncontroverted that D. Morton Rose, the son, was a one-ninth partner. When his interest was created in 1919, it was not necessary to say very much or to prepare an instrument in the form of a trust. He came into the business, participated in its operation, shared its responsibilities, and by his conduct was recognized as well by third persons as by the partners to be a member of the firm. Nothing like this occurred in respect of the wife and daughters, and the evidence makes it plain that they neither acted as partners nor were treated as such. They continued merely to receive because of kinship; and, if, as we have said, they had legal rights to the income as against the decedent, they were not the rights of partners in the partnership or end-matcher business and property, but rights to a distribution of the income after it was received by and taxable to the decedent. We conclude that the Commissioner's*1979 determination as stated in the notices of deficiency and as modified by claims at the hearing are sustained by the evidence. ; certiorari denied, ; ; ; ; .
Reviewed by the Board.
Judgment will be entered under Rule 50.
SEAWELL, dissenting: I agree that under Lucas v. Earl,281 U.S. 111">281 U.S. 111, the bare right to income can not be conveyed so as to escape income tax for the reason that the income is received by the donor before it is received by the donee. But when property is conveyed which produces income, the donor is never entitled to the income, but only the donee.
In this case the decedent covenanted "to stand seized" to the use of his wife and daughters for their several lives, in certain interests in the properties of the sawmill partnership. This ancient species of conveyance used by the decedent was of the same force and effect*1980 as a deed of bargain and sale. It was anciently permitted to be made use of among near domestic relations only and was said to be founded on the consideration of blood or marriage. *1341 This situation prevails here. Upon execution of the covenant the covenantees became seized of the use and the statute of uses immediately annexed the possession to the use. 4 Kent Com. 480, Cains' Lessee v. Jones, 5 Yerg. (Tenn.) 249. While this mode of conveyance has fallen into general disuse, the statutes of Tennessee are sufficiently comprehensive to include it. Shannon's Annotated Code, sec. 3680. Sanders v. Hackey, 10 Lea (Tenn.) 194. After the execution of the instrument set out in the findings of fact, the wife and daughters were entitled to the income arising from the property so conveyed. It was never for a moment income to the decedent, and in including it in the gross income of the decedent the Commissioner was in error.
Moreover, at the time of the death of the decedent these life estates were still outstanding and valid in the hands of the widow and daughters (with provision for certain contingent remainders) and to the extent*1981 of the value of the life estates so outstanding the five-ninths interest in the sawmill property should not be included in the gross estate of the decedent.
It seems also from evidence appearing in the record that the decedent had likewise given certain interests to his wife and children in the end-matcher patent. If so, to the extent of their interest in the property, as contradistinguished from mere right of income therefrom, the value of the patent right should not be included in the gross estate of the decedent.
SMITH and GOODRICH agree with this dissent.