*148 Decision will be entered for the respondent.
The income of a lumber business held taxable to husband in its entirety where the partnership relation between him and his wife, the latter acting individually and as trustee for their children, was shown to be lacking in reality because capital contributions of wife and trusts originated with the husband, the wife had no voice in control or management, and the services rendered by her were minor.
*182 The respondent determined a deficiency in income tax for the year 1941 in the *149 amount of $ 90,586.26. The only issue presented is whether all of the net income of a partnership is taxable to the petitioner.
FINDINGS OF FACT.
The petitioner, a resident of Birmingham, Alabama, filed a separate income tax return for the taxable year 1941 with the collector of internal revenue for the district of Alabama.
*183 The petitioner and his wife, Nell Vandergrift Belcher, were married in December 1932. They have three children, William Albert Belcher, Jr., Van Elam Belcher, and Katharine Anne Belcher, whose respective ages on December 23, 1940, were six years, three years, and ten days. The petitioner also has a child by his first wife, namely, Mary Earnestine Belcher, who was fourteen years of age on December 23, 1940.
The petitioner entered the lumber business in 1926. In 1935 he went into that business for himself and conducted it as sole proprietor under the name of W. A. Belcher Lumber Co. until the close of 1940. His activities consisted of the purchase of standing timber, cutting and transporting the timber to his own mills, and manufacturing it into lumber. In 1940 he had about 250 men in his employ.
In 1936 the petitioner made an agreement with the Tennessee*150 Land Co. for the purchase of the standing timber on a 34,000-acre tract of land in Jefferson County, Alabama. The timber was situated in rough country, about 35 or 50 miles from the petitioner's mill, and it had to be ferried across a river. The timber "cruised" about 104 million feet in 1936, and the greater part of it remained uncut in 1940, The petitioner also owned other standing timber on another tract in Shelby County. The timber in Jefferson County was divided into 8 tracts and the petitioner was required to complete cutting on 4 of those tracts within 10 years and on the other 4 within 13 years. The Tennessee Land Co. held 8 notes of the petitioner, one for the purchase price of each of the 8 tracts. The notes matured successively every 18 months, and the timber on each tract had to be completely paid for before the petitioner could begin cutting it.
In addition to the timber rights, the petitioner in 1940 owned the equipment used in his business, consisting of mills, machinery, tools, trucks, tractors, rolling stock, and river equipment (tow boat and barges). He also owned the real estate on which the mills were situated and a stock of manufactured lumber. Other assets*151 of his business consisted of accounts receivable and cash in bank.
On December 23, 1940, by a deed of gift, the petitioner transferred and assigned to his wife, Nell V. Belcher, an undivided 34 per cent interest in part of the physical assets used in his business, consisting of the above mentioned mills, machinery, equipment, tools, trucks, tractors, and rolling stock. The deed expressly excepted from the interest granted the real estate on which the mills and equipment were situated, all finished and unfinished lumber on hand, and all standing or cut timber owned by the petitioner. On the same date he executed four identical deeds of trust, in each one of which one of his children was named as the beneficiary. Nell V. Belcher was trustee of each trust and the petitioner transferred to each trust an undivided 8 per cent interest in the same physical assets in which he had transferred a 34 *184 per cent undivided interest to his wife (amounting to an aggregate undivided interest of 32 per cent to the four trusts). The trusts were irrevocable and each was to terminate when the beneficiary reached the age of twenty-one years, when he or she was to receive the corpus and accumulated*152 income. The trustee was given authority to invest the trust property in any partnership business and to participate in the management of such business as a partner, either personally or through her duly appointed agent. With respect to the income of the trusts, paragraph 12 of the deeds of trust provided as follows:
The trustee shall use any part of the income from the trust estate for the use and benefit of the beneficiary hereunder in any way and in any manner that she, in her uncontrolled discretion may deem best for beneficiary's future welfare, but this trust is not created for the purpose of furnishing to the beneficiary the income for her maintenance, support and comfort, during my lifetime, and this trust shall in no sense relieve me of my obligation for the maintenance, support and comfort, of my said child, which obligation I plan to continue to discharge as I have in the past.
On December 31, 1940, the petitioner entered into a "Partnership Agreement," the business to be operated under the style of "W. A. Belcher Lumber Company," with Nell V. Belcher, the latter acting in both her individual capacity and as trustee of the trusts above described. The "partnership" was*153 to commence on January 1, 1941, and was to last seven years. The pertinent provisions of the agreement were as follows:
The capital of the "partnership" was defined as the aggregate interest which the partners owned in the mills, machinery, equipment, tools, trucks, tractors, and rolling stock theretofore used by the petitioner under the trade name of W. A. Belcher Lumber Co. in the manufacture and transportation of lumber and timber, which interest was valued at $ 80,000 as of December 1940; and the proportionate interests of the partners therein were stated to be petitioner, 34 per cent; Nell V. Belcher, individually, 34 per cent; and Nell V. Belcher, trustee, 32 per cent. Any further capital which might be required was to be contributed by the partners in the same proportions. No part of the timber, lumber, or real estate owned by the petitioner at the date of the agreement was to be considered as part of the "partnership" assets, except and unless it was purchased by it on terms stated in the agreement. In order to enable the partnership to acquire a supply of timber and manufacture lumber and to enable the petitioner to market all lumber theretofore manufactured by him and*154 all timber then owned by him, the partnership was to buy from the petitioner all lumber then owned by him at $ 17.50 per thousand feet, payable as the lumber was resold and collected for by the partnership; and to buy from him all timber, standing or cut, then owned by him at *185 $ 2.50 per thousand feet, payable as the timber was processed into lumber. The petitioner was entitled to withdraw all sums due for lumber and timber so purchased at any time, but could elect to leave the money in the partnership as a loan and draw interest thereon. Partnership funds not required for current expenses, and all notes, bills, checks, and other negotiable securities for money were to be deposited in bank to the credit of the partnership, and checks drawn on the account could be drawn only in the firm name and on the signature of the general manager and of the bookkeeper when authorized by the general manager. All expenses of the business, including those incurred for equipment and machinery replacements, should be paid out of the income or capital by the general manager without any further authorization from the partners. In order to create a reserve fund for future contingencies, including*155 purchases of lumber, timber, machinery, equipment, and real estate, and for the purpose of the firm's business, all partnership profits were to be kept in the partnership assets, except such part as should from time to time be distributed by agreement of all of the partners. However, the partners could withdraw all of the net profits at any time if they unanimously agreed to do so, and any partner could leave his share of the profits in the firm as a loan and receive interest thereon. The petitioner was to act as general manager and receive a salary of $ 400 per month, and his wife was to act as secretary and head bookkeeper and receive a salary of $ 250 per month. With respect to the duties of the latter, the agreement provided as follows:
It shall be her duty to ascertain and require that adequate records and books of partnership transactions are kept and for this purpose she is authorized to employ, from time to time, a Certified Public Accountant to audit the records and books of the firm and to agree upon and pay from the partnership assets reasonable compensation for such services. For the purpose of enabling her to properly discharge her duties in this capacity, the records*156 and books of the firm shall be open to her at any and all times, and it shall be her duty to check such books and records regularly each month, but she shall not be required to give her full time to this work.
The plan of making the gifts and forming the partnership was from time to time discussed by the petitioner with his wife and with C. M. Dendy. The latter was assistant manager of the business and a salesman and had held those positions since 1936. He also had supervision of the petitioner's books. The petitioner told them that he was making money and his purpose was to provide for the financial security of Mrs. Belcher and the children. Petitioner's income was increasing from year to year. His net income was $ 12,702.81 in 1938, $ 24,894.99 in 1939, and $ 32,091.70 in 1940. In a discussion of his financial affairs with the trust officer of a bank in Birmingham the petitioner was advised *186 by that officer to make gifts of property to his wife and children and form the partnership, because he was heavily obligated to the Tennessee Land Co. and the business was a hazardous one. The trust officer and the petitioner's attorney both informed him that through such an*157 arrangement he could reduce his income taxes and the tax on his estate in the event of his death. When the deed of gift and the deeds of trust were delivered to Mrs. Belcher on December 23, 1940, she fully understood that the physical assets conveyed thereunder were to be contributed to the partnership under the agreement of December 31, 1940, which then was in course of preparation. Each of the four deeds of trust contains the following declaration:
I make and declare this trust in view of the uncertainness of my personal business and investment venture, which have caused me concern with respect to the future welfare of my beloved child, hereinafter named as beneficiary, during the unsettled economic conditions existing in the world to-day, and I, therefore, create this trust estate in order to establish an estate independent of my personal business obligations and funds so that the fluctuation in my personal fortune will not deprive the beneficiary named herein of some of what I consider to be his [or her] just proportionate part of my present holdings. I carve out this particular part of my personal property and set it up in trust for my child mentioned below for the further*158 reasons that I desire that he [or she] shall share in the future profits arising from the operation of this property and to encourage him [or her] to become interested in, and if he [or she] desires to do so, follow me in the business of lumber manufacture and sales.
The deed of gift, the four deeds of trust, and the partnership agreement were recorded in Jefferson County, Alabama, a few days after they were signed. On March 14, 1941, the petitioner reported the gifts in a Federal gift tax return and he paid a gift tax of $ 145.20.
On January 1, 1941, the partnership took over the business of cutting timber and manufacturing and selling lumber, operating the business in the same manner as it theretofore had been carried on by the petitioner. While the petitioner retained title to all the timber, of which a large part then remained uncut, and was personally liable for payments to the Tennessee Land Co. under his contract, and while he retained title to the stock of lumber on hand and the cash in bank and the accounts receivable, he placed all of those assets at the disposal of the partnership. The cash and accounts receivable collected were used by the partnership to provide operating*159 expenses and to pay the petitioner's bills payable as of December 31, 1940. The cash and receivables exceeded his obligations as of that date by $ 33,344.34, and the latter amount was credited to the petitioner's account on the books. The partnership constructed roads and ferry landings and purchased equipment required for the logging operations. It paid the cost of drying, grading, and remanufacturing the stock of lumber on hand and the expense of selling it to customers. It paid the petitioner $ 2.50 per *187 thousand for the timber as it was cut, and it paid him $ 17.50 per thousand feet for the lumber on hand on December 31, 1940, as it was sold and shipped to customers, as provided in the partnership agreement.
At the beginning of 1941 the petitioner requested Dendy to set up the necessary accounts on the books to reflect the interests of the respective partners in the business. At that time the sawmills and other physical equipment were carried in a plant and equipment account, but Dendy made no change in that account to indicate the interest of Mrs. Belcher and the trusts as partners in those assets. Other accounts then on the books were a "W. A. Belcher, Personal" *160 account, in which the petitioner was credited with his salary and with lumber and timber purchased from him by the partnership during the year; and a "Bills Payable, W. A. Belcher, Personal Account," in which he was debited with bills paid for him by the partnership, including obligations to the Tennessee Land Co. The only change which Dendy made in the books was the addition of accounts entitled "Lumber Purchased, Partnership Account" and "Logs Purchased, Partnership Account." These accounts were debited during the year for lumber and logs purchased by the partnership from the petitioner and others.
In March 1941 the business was in need of operating capital and the petitioner informed his wife that additional capital should be contributed by her and the trusts. She and the children owned no property other than that which they had acquired from the petitioner and had contributed as capital of the partnership. On March 18, 1941, the partnership agreement was modified so as to provide for an additional contribution to the capital of $ 10,000 by Mrs. Belcher individually and $ 10,000 by her as trustee. The $ 20,000 was borrowed from the petitioner's brother, S. E. Belcher, through*161 negotiations of petitioner, on two unsecured promissory notes dated April 1, 1941, one for $ 10,000 signed by Mrs. Belcher individually and the other for $ 10,000 signed by her as trustee. The petitioner immediately borrowed the $ 20,000 from the partnership and used it to pay his individual obligation to the Tennessee Land Co. for timber. The $ 20,000 was charged to his personal account on the partnership books. On March 31, 1941, Dendy set up accounts on the books in the names of Mrs. Belcher individually and Mrs. Belcher as trustee, and credited each account with $ 10,000 paid in to the partnership out of the S. E. Belcher loan. Mrs. Belcher's individual account was credited during 1941 with her salary of $ 250 per month. No withdrawals were made from these two accounts until March 12, 1942, when they were debited with the amount of state and Federal income taxes for 1941 paid by the partnership on behalf of Mrs. Belcher and the trusts.
*188 Early in 1942 an accountant, when making up the petitioner's income tax return for 1941, informed the petitioner that the books did not contain investment or drawing accounts to reflect the interests of Mrs. Belcher and the children*162 in the partnership, and, at the petitioner's direction, he rewrote the ledger from the original journal entries. He set up an investment account for the petitioner, Mrs. Belcher, and each of the trusts. The investment accounts, as so reconstructed, contain credits for the partners' respective shares of the physical assets contributed on January 1, 1941, the additional capital of $ 20,000 contributed on March 31, 1941, and the partners' distributive shares of the profits as of December 31, 1941. The accountant also reconstructed the petitioner's loan account, which discloses that the petitioner received credits in 1941 totaling $ 99,133.09, including $ 33,344.34 credited to him at the beginning of the year for the excess of cash and accounts receivable over accounts payable, and that he withdrew from the business during the year amounts totaling $ 295,171.96, leaving an indebtedness of $ 196,037.87 to the business at the close of 1941.
Mrs. Belcher did not have any accounts at any bank during 1941, either of her own or for the trusts. She did not withdraw any funds from the partnership during that year for herself or the children, and did not seek to do so. On September 1, 1942, *163 partnership funds were used to repay the S. E. Belcher loan of $ 20,000 and the investment accounts of Mrs. Belcher and the trusts were debited with their respective portions of such payment. In 1942 the partnership also paid state and Federal income taxes and interest on the S. E. Belcher loan on behalf of Mrs. Belcher and the trusts, and those amounts, together with a few small personal items, were charged to their drawing accounts.
The fact of the formation of the partnership was reported by the petitioner in 1941 to the First National Bank of Birmingham, where he maintained an account in his own name up to March 1941, and to the credit agency of Dun & Bradstreet. The petitioner and his wife were made defendants in a suit to enjoin them for violating the Fair Labor Standards of 1938. The bill of complaint in that suit alleged that they were doing business as partners in 1941. The suit was settled and a consent decree was entered on May 3, 1941.
Mrs. Belcher entered the employ of the petitioner in 1928, about two years prior to her graduation from high school. At that time her mother, Nora Vandergrift, was the only person employed in the petitioner's office and she kept the*164 books. Mrs. Belcher worked on a part time basis under the supervision of her mother, and performed such clerical duties as were assigned to her from time to time. Her principal duties consisted of making up pay rolls and writing invoices. *189 She also helped out in a commissary which was operated by the petitioner. In 1936, when C. M. Dendy was employed as assistant manager and given sole direction of the office, Nora Vandergrift continued to keep the books under his supervision. After her marriage, Mrs. Belcher performed the same kind of clerical work as before, devoting her time to the work when she was able to do so, care of her children occupying a portion of her time. She usually helped out when an employee was absent or when there was a seasonal rush of work. She has but slight knowledge of bookkeeping, does not understand double entry books, and does not know enough about the books which were kept by the partnership to explain any of the transactions reflected therein. The petitioner discussed business problems with her from time to time, but he managed the business and made all the decisions. Sometimes when he was called away on business and did not have time*165 to see any of the men engaged in the operation of the business, he left instructions with her concerning matters which required attention. After the partnership was formed, she performed no other service than before, except that she "looked at the books more," but she did not supervise the books or assume responsibility for any entries. She had no authority to draw checks on the partnership bank account.
The net income of the partnership for 1941, as disclosed by the partnership return was $ 188,786.91. The gross profit on sales, as computed on such return, was as follows:
| Sales | $ 963,641.26 | ||
| Less claims, commissions, freight, etc | 202,017.61 | ||
| Net sales | 761,623.65 | ||
| Cost of sales: | |||
| Lumber purchased | $ 99,915.22 | ||
| Lumber contracts | 157,411.82 | ||
| Logs purchased | 51,867.53 | ||
| Labor | 171,300.67 | ||
| Repairs | 43,257.24 | ||
| Supplies | 54,767.89 | ||
| Depreciation | 22,808.47 | ||
| 601,328.84 | |||
| Inventory Dec. 31, 1941 | 74,386.88 | ||
| Cost of sales | 526,941.96 | ||
| Gross profit on sales | 234,681.69 |
The petitioner reported $ 64,187.55 as his distributive share of the partnership's net income in his individual income tax return for 1941, which, after other minor items of income and deduction, *166 disclosed a *190 net income of $ 57,995.95, and a tax liability of $ 26,206.18. The respondent held the petitioner to be taxable on the entire net income of the business and he added to the petitioner's reported net income $ 124,599.36, which was the aggregate amount of the distributive shares of Mrs. Belcher, individually, and as trustee, as reported on the partnership return. Mrs. Belcher reported the amount of $ 64,187.56 in her individual income tax return for 1941 as her distributive share of the partnership income; and she reported $ 15,102.95 as income in each of four individual income tax returns filed by her on behalf of the Belcher children for 1941.
Mrs. Belcher did not expend any of the income of the trust during 1941 for the support or education of the four children. The children resided with her and the petitioner in their home in Birmingham, and the petitioner paid all household bills and all amounts required for the support and education of the children. The income of the trusts and the corpus were not used to pay premiums on any policy of insurance on the life of the petitioner.
On November 15, 1944, the petitioner, as grantor of the four trusts, and Mrs. *167 Belcher, as trustee, filed with the Commissioner a written consent or agreement to pay all taxes, under Chapter I of the Internal Revenue Code, or under corresponding provisions of prior revenue laws which would have been paid for 1941, if the amendment of section 167 of the Code made by section 134 of the Revenue Act of 1943 had been a part of the revenue laws applicable to 1941, arising by reason of the deeds of trust of December 23, 1940, or income therefrom during the year 1941.
OPINION.
The respondent determined the petitioner to be taxable on the entire net income of the business of W. A. Belcher Lumber Co. for the year 1941.
The crucial question to be decided is whether, for Federal tax purposes, the W. A. Belcher Lumber Co. was a partnership composed of petitioner, his wife individually, and his wife as trustee for his four children, in 1941.
We think that under the facts shown in our findings the answer to the question and the disposition of this case are controlled by Commissioner v. Tower, 327 U.S. 280">327 U.S. 280; Lusthaus v. Commissioner, 327 U.S. 293">327 U.S. 293; Abe Schreiber, 6 T. C. 707; *168 Floyd D. Akers, 693">6 T. C. 693; Ed. Dubinsky Durwood, 6 T. C. 682; Lewis Coleman Benson, 6 T. C. 748; Howard B. Lawton, 6 T. C. 1093; and John Lang, 7 T. C. 6.
*191 In the Tower case the Court said:
* * * If she [a wife] either invests capital originating with her or substantially contributes to the control and management of the business, or otherwise performs vital additional services, or does all of these things she may be a partner as contemplated by 26 U. S. C. §§ 181, 182. * * * But when she [a wife] does not share in the management and control of the business, contributes no vital additional service, and where the husband purports in some way to have given her a partnership interest, the Tax Court may properly take these circumstances into consideration in determining whether the partnership is real within the meaning of the federal revenue laws.
Here it is clear that none of the capital invested in the business at the outset was capital "originating" with the wife individually or *169 as trustee. We also think that the $ 20,000 borrowed from petitioner's brother did not constitute capital "originating" with the wife individually or as trustee, for, while this amount constituted funds borrowed by the wife individually and as trustee, such amount was afterwards repaid by the business. Cf. Lusthaus v. Commissioner, supra.
It is also clear that, as in the Lusthaus, Schreiber, Durwood, and Lawton cases, the wife, neither in her individual capacity nor as trustee, rendered any services that were "vital" to the business, since the most that can be said as to those services is that they were of a minor character and were rendered only during those times when petitioner's wife was not engaged in caring for her three young children, one of those children having been born only a few days before the beginning of the taxable year; and in this connection it would seem that, nothing to the contrary appearing, the wife was amply compensated for such services by the $ 250 per month paid her as a salary.
Also, the wife rendered no services of a managerial nature, since the business was at all times within the exclusive management and control*170 of petitioner, who made all decisions; and only the petitioner, or the bookkeeper upon petitioner's authorization, could sign checks on the bank account of the business. The fact that petitioner from time to time discussed business problems with his wife does not alter the situation as it would exist without such discussions. Abe Schreiber, supra;Floyd D. Akers, supra; and John Lang, supra.
In view of our conclusion as to the claimed partnership, it is unnecessary to consider whether, as a separate proposition, the petitioner would or would not be taxable on any income of the trusts as such.
The respondent did not err in taxing all the net income for 1941 of the W. A. Belcher Lumber Co. to the petitioner.
Decision will be entered for the respondent.