*162 Decision will be entered under Rule 50.
Petitioner's wife joined in hypothecation of insurance policies under which she was beneficiary, in order that he might borrow money and purchase 125 shares, half of the corporate stock of a corporation in which he held the other 125 shares. Thereafter he gave her 10 shares. Later, the petitioner, his wife, and an auditor decided that a partnership would be more economical, that taxes would be saved, and necessary capital more easily borrowed, as a partnership; and thereafter petitioner decided to and did give his wife 115 shares by unconditional irrevocable gift. The stock certificates were delivered to her. Thereafter the corporation was dissolved, one-half of the assets were delivered to the petitioner and one-half to his wife (they assuming all corporate liabilities), and they entered into a partnership, on equal terms as to gains, losses, and control. The wife had a substantial separate estate. The petitioner conducted the business operations of the partnership, the wife rendering no services. Held, the Commissioner erred in taxing the petitioner upon the entire partnership income.
*116 This case involves a deficiency in income tax for the calendar year 1940 in the amount of $ 231.37 and for 1941 in the amount of $ 5,614.87. *117 Petitioner admits the correctness of the Commissioner's determination for 1940.
The first issue arises out of the adjustment made by the Commissioner by the addition of $ 15,127.27 to the petitioner's net income for the calendar year 1941. That amount the Commissioner determined was the entire income for the period from July 1 to December 31, 1941, from the business conducted under the firm name of D. B. Thornton Co. The petitioner assigns this action by the Commissioner as error, asserting that D. B. Thornton Co. was a partnership between himself and his wife during the period in question, and further asserting that the alleged partnership was on a fiscal year basis and that the end of *164 the alleged partnership's first fiscal year was June 30, 1942.
The second issue arises out of the Commissioner's determination that petitioner's total taxable net long term capital gain in 1941 from the liquidation of D. B. Thornton Co., a corporation, was $ 1,121.23 1*165 rather than $ 4,276.69, as reported. 2 As a basis for this determination, the Commissioner held that petitioner was the legal owner of 125 shares of the capital stock of D. B. Thornton Co., a corporation, standing in the name of petitioner's wife; that the cost of the 125 shares (as well as that of another 125 shares of the same corporation admittedly owned by petitioner) was $ 10,027.89; and that the fair market value of the properties received in complete liquidation of the corporation attributable to each block of 125 shares was $ 11,149.42. Petitioner contends that he was not the legal owner of the 125 shares standing in his wife's name, also that the Commissioner's valuation of the properties received in liquidation of the corporation was erroneous. On brief he agrees with the cost basis, $ 10,027.89, contended for by the respondent.
FINDINGS OF FACT.
Petitioner is a married individual residing with his wife, Lucy Bagley Thornton, in Atlanta, Georgia. Petitioner's income tax return was filed on the cash basis for the calendar year 1941 with the collector of internal revenue for the district of Georgia.
Cromer & Thornton, Inc. (hereinafter sometimes referred to as Cromer, Inc.) was a corporation duly incorporated under the laws of the State of Georgia on April 15, 1919. Petitioner was one of its incorporators. On April 8, 1939, its charter was renewed for a period of 35 years. At that time it had only two stockholders, petitioner and Charles F. Cromer, each of whom owned 250 shares of the corporation's capital stock. Dissension and litigation between Cromer and *118 petitioner culminated, on November 16, 1940, in the purchase by Cromer, Inc., of Charles F. Cromer's 250 shares for approximately $ 41,000. *166 To consummate the purchase, Cromer, Inc., borrowed, on November 19, 1940, $ 30,000 from the First National Bank of Atlanta (hereinafter sometimes referred to as the bank). This loan was evidenced by two notes, each in the amount of $ 15,000. One of these notes was without specific collateral; the other was secured by various insurance policies on the life of petitioner. Cromer, Inc., was the beneficiary of some of these policies and petitioner's wife was the beneficiary of others. The face value of the policies in which Cromer, Inc., was named as beneficiary was $ 43,500, the face value of the policies in which petitioner's wife was named as beneficiary was $ 51,000, and the cash surrender value of the policies under which she was beneficiary in November 1940 was $ 12,800. Petitioner's wife joined her husband in the execution, on November 16, 1940, of assignments to the bank of the various policies in which she was named as beneficiary.
On November 16, 1940, petitioner made a gift to his wife of 10 shares of the capital stock of Cromer, Inc. Thereupon, at a meeting of the stockholders of Cromer, Inc., held on November 16, 1940, attended by petitioner and his wife, representing*167 all of the issued and outstanding stock of the corporation except the 250 shares owned by the corporation, petitioner's wife, who acted as secretary, was elected a director of the corporation. At this meeting the bylaws of the corporation were amended to allow one person to fill the offices of president and treasurer, and to provide that the president should have active management of the business of the corporation and should make all contracts in its name and should execute on behalf of the corporation all deeds, notes, mortgages, and other contracts and should, with the treasurer, have control of the financial affairs of the corporation. This was followed by a meeting of the board of directors of Cromer, Inc., also held on November 16, 1940, and the minutes of that meeting recite that petitioner was elected president and treasurer; also that petitioner's wife was elected a director of the corporation and further that she was elected vice president and secretary of the corporation. Petitioner's wife acted as secretary at these and subsequent meetings of the corporation's stockholders and board of directors, but she never received a salary from the corporation.
On March 13, 1941, *168 the corporate name of Cromer & Thornton, Inc., was changed to D. B. Thornton Co.
Some time in the early part of May 1941 petitioner, after discussing with his attorney, his auditor, personnel in the credit department of the bank, and his wife, the desirability of dissolving the corporation and conducting the business as a partnership composed of himself and his wife, decided upon the partnership. After this decision had *119 been made, petitioner then determined to give his wife 115 of the 240 shares he owned of the corporation's capital stock. The stock certificates as to both the 10 shares and the 115 shares were delivered to the wife. The transfer of these 115 shares took place on June 11, 1941, and the transaction was duly reported for Federal gift tax purposes. The gifts were unconditional and irrevocable, with the right in the wife to do as she pleased therewith, and thereafter the petitioner exercised no control or dominion over the stock or the property received by the wife as a liquidating dividend.
On June 12, 1941, a meeting of the board of directors of D. B. Thornton Co. was held, attended by petitioner and his wife. It was resolved to retire and cancel the 250*169 shares of stock previously acquired from Charles F. Cromer, and it was further resolved that a meeting of the stockholders be called for the purpose of considering the recommendation of the board of directors to liquidate and dissolve the corporation and surrender its charter and franchise to the State of Georgia. Pursuant to that resolution, the stockholders of D. B. Thornton Co. held a meeting on the same day. The minutes of this meeting recite that notice was duly waived by the holders of all the outstanding capital stock to wit: "D. B. Thornton, holder of 125 shares and Mrs. Lucy Bagley Thornton, holder of 125 shares." At this meeting of the stockholders it was resolved that the corporation go into complete liquidation and distribute all of its net assets to its stockholders in complete cancellation or redemption of all of its outstanding stock; that such liquidation be completed on or before June 30, 1941; that the corporation's charter and franchise be surrendered to the State of Georgia; that the corporation be dissolved; and that the transfer of all of its property to its stockholders in proportion to their respective holdings of stock in the corporation be on the terms *170 that such stockholders shall assume and agree to pay all of the debts and liabilities of the corporation and to perform all outstanding contracts.
On June 24, 1941, D. B. Thornton Co. assigned its lease to the premises on which it conducted its business to D. B. Thornton and his wife, who agreed to perform all the obligations imposed by the lease on D. B. Thornton Co.
A bill of sale was executed by D. B. Thornton Co. on June 30, 1941, of all of its property in consummation of its plan for complete liquidation and distribution of all of its assets to the stockholders in complete cancellation or redemption of all of its outstanding stock. The bill of sale recites that D. B. Thornton is the owner of 125 shares of stock and that Lucy Bagley Thornton is the owner of 125 shares of stock and that the conveyance is made to these two in proportion to their respective ownerships of the corporation's stock and that they agree to pay in proportion to their respective ownerships of stock all *120 the corporation's liabilities and to perform all of its outstanding contracts.
On June 30, 1941, D. B. Thornton Co. was duly dissolved and its charter surrendered under the laws of the State of Georgia*171 by the Superior Court of Fulton County.
On June 30, 1941, a partnership agreement was entered into between petitioner and his wife. We incorporate herein by reference this agreement in its entirety. It provides in pertinent part that the partnership property was to consist of the property which petitioner and his wife received upon the liquidation of the corporation, including the lease to the premises at which the corporation's business was formerly conducted; that the interest of each partner in the partnership was to be equal, with equal division upon termination thereof; that each of the partners was to have free access to the partnership books of account at all times; that partnership moneys should be deposited in banks to be mutually agreed upon; that checks of the partnership were to be signed by either partner and countersigned by some employee to be mutually agreed upon; that no partner was to assume or make on account of the firm any pecuniary liability for the accommodation of any person, nor use the funds or credits of the partnership for any purpose not connected with its business, without the written consent of the other partner; that unanimous consent of all the partners*172 was required before any new partner could become a member of the firm; and that the partnership could be dissolved only upon the mutual consent of petitioner and his wife. The partnership agreement also contained the following two paragraphs:
10. The net profits arising out of the conduct of the business shall be equally divided between the undersigned partners, and all losses shall be borne by the partners in the same proportion.
11. Each year there shall be taken a full and complete inventory of the business and a just and true account of the business shall be made, and thereupon the profits or losses, as the case may be, shall be ascertained and divided equally between the partners. If profits have been made, each partner shall be credited with his or her proportion thereof, and if losses shall have been sustained, each partner shall be charged with his or her proportion thereof.
On or about July 1, 1941, petitioner's wife was the owner of a house the then value of which for mortgage purposes was approximately $ 30,000. The house was built shortly after December 7, 1936, and the mortgage which was placed upon it when it was built was subsequently paid off. Petitioner's wife*173 also had a separate bank account and owned some stocks and bonds.
One of the motives in establishing the partnership was the thought that the borrowing power of the business would be enhanced thereby. Under the laws of Georgia, if petitioner's business were conducted as a corporation the bank could not accept the endorsement of petitioner's wife on the corporation's liabilities; but if the business were operated *121 as a partnership, petitioner's wife would be liable for the partnership's debts equally with her husband. However, the predominant motive in establishing the partnership was petitioner's desire to save Federal income taxes.
The partnership was registered in the office of the clerk of the Superior Court of Fulton County, Georgia, on July 8, 1941, showing petitioner and his wife to be the persons composing the partnership.
A separate capital account was set up on the partnership's books in the name of Lucy Bagley Thornton and another in the name of Davis B. Thornton. The original entry in each of these accounts was a credit dated July 1, 1941, in the amount of $ 11,053.37. The $ 11,053.37 represented the capital contribution of each partner to the partnership and*174 its source was the property received by each partner upon the liquidation of the corporation. As of December 31, 1941, the capital account of petitioner showed a credit balance of $ 17,698.20 and the credit balance of petitioner's wife as of December 31, 1941, was $ 17,698.19. The partnership books also reflect a drawing account in petitioner's name and the original entry on that account was a credit in the amount of $ 11,250 made July 1, 1941. The $ 11,250 represents the amount owing to petitioner at the time of the corporation's dissolution. As of December 31, 1941, the balance in petitioner's drawing account was $ 7,250. The partnership was on the basis of a fiscal year ending June 30, 1942.
The nature of the partnership's business was the buying, selling, and manufacturing of building supplies of all kinds, and particularly the preparation and sale of ready-mixed concrete and ready-mixed mortar. The partnership carried on substantially the same business as the corporation and petitioner's duties in the partnership did not vary from those he had performed for the corporation. The partnership employed a bookkeeper, a stenographer, an operator for ready-mixed concrete, and*175 a warehouseman. All other duties -- and they amounted to substantially all the work carried on by the partnership -- were performed by petitioner. Petitioner's wife did no work in connection with the partnership business.
The partnership, and the corporation which preceded it, required considerable capital at times. The amounts borrowed by the corporation were substantially the same as those borrowed later by the partnership.
The notes executed in connection with the loans made by the bank to the partnership were signed "D. B. Thornton and Company by D. B. Thornton." The bank considered both petitioner and his wife liable for whatever loans were made to the partnership. The insurance policies on petitioner's life which had been pledged on November 16, 1940, as collateral for the loan to Cromer, Inc., remained as collateral against the partnership's liability to the bank for a $ 17,500 loan made on *122 September 24, 1941. After January 1, 1942, the bank made loans to the partnership of $ 10,000 from time to time without collateral, and later gave the partnership a line of credit up to $ 10,000.
From July 1, 1941, to December 31, 1941, both petitioner and his wife were credited*176 with their respective shares of the partnership profits. Petitioner and his wife made no withdrawals from the partnership during the period from July 1 to December 31, 1941, except petitioner's withdrawals from the $ 11,250 credited to him on July 1, 1941. Petitioner made no withdrawals during the period from January 1 to December 31, 1942, but his wife withdrew $ 199.24 on June 30, 1942. Petitioner made his first withdrawal on June 30, 1943, in the sum of $ 4,752.07, and on the same day petitioner's wife withdrew $ 2,365.89. These were the only withdrawals from the separate "capital" accounts, set up when the partnership was formed in the individual names of petitioner and his wife, made by either petitioner or his wife from July 1, 1941, to June 30, 1943. Prior to July 1, 1941, petitioner, who paid such household expenses as gas, electricity, and telephone, gave his wife $ 150 a month for other household expenses, such as food. A few months after July 1, 1941, petitioner increased his wife's monthly allowance to $ 250, but the division of household expenses remained unchanged.
OPINION.
Does this case belong among those where family partnerships have been denied reality for*177 tax purposes, or among those which have been considered real and effective in that respect? After extended consideration of the facts here involved, and study of the various cases cited to us, we are of the opinion that the petitioner may not properly be taxed upon the entire income of the business involved. The essential inquiry in such matters is whether there has, in reality, been an assignment of income without real transfer of that which produced it. We do not think that a conclusion of such mere assignment of income can in reason here be reached.
Prior to November 16, 1940, petitioner and another, one Cromer, owned the stock of a corporation. On that date, because of dissension and litigation between the two men, the corporation purchased the stock of Cromer for about $ 41,000, borrowing on November 19, 1940, $ 30,000 with the assistance of petitioner's wife, who by joining in assignments permitted the hypothecation, to secure a part of the loan, of insurance policies on petitioner's life, as to some of which she was beneficiary. Of about $ 94,500 face value of policies hypothecated, she was beneficiary as to $ 51,000. On November 16, 1940, the petitioner gave her 10 shares, *178 out of 250 issued by the corporation, and she became a director and secretary. She received the stock certificate *123 and used the shares, voting them at stockholders' meetings. On the same date the bylaws were amended, in substance, to give petitioner, who was president and treasurer of the corporation, the active management of the corporation, with power to make all contracts in its name and control its financial affairs. The name of the corporation was changed on March 13, 1941. About May 1941 it was decided that a partnership would be more economical, since it would save taxes. It was also felt that a partnership would give advantage in borrowing money for conduct of the business. The petitioner thereafter determined to give his wife 115 additional shares of the stock, and did so on June 11, 1941, the stock certificate being delivered to the wife. No conditions were attached to the gifts of stock to petitioner's wife. They were irrevocable gifts, and she had the right to do as she pleased with them. The petitioner never thereafter exercised any control over the shares or influence over her as to the voting of them.
On June 12, 1941, the stockholders voted to liquidate*179 and dissolve the corporation, and to transfer the corporate property to the stockholders, they to assume the liabilities. On June 30, 1941, such dissolution took place and a bill of sale of all assets was executed to the stockholders in cancellation and redemption of all stock, petitioner and his wife agreeing to assume all corporate liabilities. Also on June 30, a partnership agreement was entered between petitioner and his wife, providing for equality of interest, equal division of profits and losses, also for signing of partnership checks by either (with counter-signature of an employee to be designated); also for annual inventory and accounting of the business. The business has since been so conducted. The petitioner's wife has contributed no services to the business. She has at all times had her own bank account and independent property, including securities and a house worth at least $ 30,000.
It is apparent, we think, from the above that though the gift of stock, as to the 115 shares, was after the decision to form a partnership, the gift was real, and the partnership did not leave in the petitioner dominion over the subject matter of the gift. Among the cases extant *180 on this subject, the two in which we held the partnership to be unreal and which most nearly parallel the instant case on the facts, are , and . In the Tower case, as here, corporate stock was transferred to the petitioner's wife, but the transfer was conditioned upon her placing the corporate assets represented thereby in a partnership. The corporate assets were never transferred in liquidation to the stockholders, but were transferred to the partnership. The limited partnership formed between the husband and wife was formed prior to the dissolution of the corporation, though upon the date of liquidation. The wife was not liable for losses, except to the extent of her *124 capital contribution, and net profits were distributable in such manner as the general partners might determine. Nevertheless the Circuit Court of Appeals for the Sixth Circuit reversed, , saying that the condition attached to the gift of shares to the wife, that she would contribute the subject matter to the*181 partnership, had been performed, and upheld the partnership. In the Lowry case, corporate stock was given to the wives, but it was subject to a prior agreement between partnership and members that it must first be offered to stockholders. Mrs. Lowry gave the certificate back to her husband after receiving it. The partnership set-up was limited as to the wives, the husbands, the general partners, having control over the business and power to enter other business without consent of the wives, to receive such salaries as agreed upon by the husbands, and profits were to be distributed only when the husbands should decide to do so. The facts in the above cases which were held to negative reality of partnership serve to affirm such reality here, for here the wife, with estate and financial ability of her own, is subjected to full responsibility for the partnership's losses, and had, and exercised, her right, without hindrance from her husband, to her half of the profits. Nothing whatever in the articles of partnership gives the husband any exclusive control over the business. Instead of a dominion in him, continuing from the corporation into the partnership, we find that in the*182 corporation, as president and treasurer, he had complete and full management and financial control, but that under the partnership such exclusive control wholly disappears, he having no power except as a partner, so that his power was no greater than that of his wife. We find in this situation no such continuation of dominion and control over the subject matter of the gift of stock as would justify nonrecognition of the reality of the gift. We have here a gift of corporate stock, fully effectuated. The petitioner's income from such stock was divided by the gift, not by the partnership. No case, we think, goes so far as to deny the right to make gifts of property, even though the result is division of income in accordance with ownership thereof. ; . The right to make gifts of one's property is no "attenuated subtlety." The result here has been that the owners of such stock duly received a liquidating dividend and went into a partnership therewith. The history of that partnership shows a continuance of the ownership, in equal parts, with no continuation*183 of exclusive powers in petitioner. That the object was to operate a business more economically by saving taxes is, of itself, no reason for nonrecognition of the transaction, if it was real, and not illusory. Mere purpose to avoid tax does not in itself vitiate a transfer of property. .
*125 Here, the wife owned some of the corporate stock before any idea of partnership arose (indicated by the fact that after her acquisition of 10 shares the corporate name was changed, the corporation remaining); her partnership income is shown to be no substitute for family expenses, since thereafter her former household allowance was increased, instead of decreased, by petitioner; her quite substantial estate was subjected to the hazards of the partnership business, and apparently she made no mean contribution to the acquisition of the stock later received by her when she subjected her rights as insurance beneficiary to a loan in order that such stock might be purchased. With her husband, she assumed the corporate liabilities in the liquidation. In all this we discern no mere assignment of right to income, but *184 transfer of property rights, later used in a business where the former donor, though managing the business operations much as before, had less dominion and authority than when there was a corporation, in the sense that his powers were no longer exclusive. He retained neither exclusive control of the property nor exclusive power to dispose of the income produced thereby (the test suggested in ), for though in fact he conducted the business, the wife rendering no assistance, that is by no means the same as exclusive control of the property, for the articles of partnership plainly negative exclusive control in either partner; and such articles also distinctly deprive him of any exclusive power to dispose of the income. In fact, even the management of the business operations is not assured to the petitioner by the articles of partnership -- thus distinguishing such cases as , where active management of the business and unlimited authority to conduct its affairs as he desired was reserved by the articles to the husband. Though the case*185 was not one involving gift of corporate stock prior to partnership, we note (C. C. A., 3d Cir.), where partnership was not recognized; and point out that management of the partnership business "was specifically provided for in the partnership agreement"; also, that it was not until a later year that the bank carrying the company's account was given the right to accept the wife as a partner, and that the husband continued to file social security tax returns as owner of the business. We see clearly here a distinction from cases where the wife's rights and powers were by agreement hedged and restricted toward the point of nothingness. We find no reason to tax the petitioner on the entire income of a property and business in which his wife has a clear half interest. We therefore hold that the partnership should be recognized, and that, the partnership being on the basis of a fiscal year ending June 30, 1942, the petitioner *126 is not chargeable with any partnership income during 1941, the calendar year here involved.
We hold, also, that the petitioner is taxable upon capital gain realized in the liquidation*186 of only 125 shares of the capital stock, using a cost basis of $ 10,027.89 used by the Commissioner and agreed to by petitioner. The petitioner also alleged error as to the valuations placed by the Commissioner upon the properties received in liquidation. No proof was offered on the point, therefore $ 11,149.42, the valuation used by the Commissioner for the property received upon liquidation of 125 shares of stock, is approved, in the calculation of capital gain.
Decision will be entered under Rule 50.
Murdock, J., concurring: I agree that the income of the business for the last one-half of 1941 is not taxable to the petitioner in 1941 because there was a partnership and its taxable year did not end in 1941.
Sternhagen, J., dissenting: The Commissioner has determined that the partnership of the petitioner and his wife may not be recognized for tax purposes. The Supreme Court said in Higgins v. Smith, 308 U.S. 473">308 U.S. 473, that if the form employed by a taxpayer for doing business is unreal or a sham, the Government has authority to disregard the effect of the fiction for the purpose of the tax statute. This is not a determination*187 that the partnership did not exist for any purpose, for, as the Smith case recognizes, the taxpayer may adopt such organization for his affairs as he may choose, even though for tax purposes the Government may not be required to acquiesce in the form which the taxpayer chooses. This was but a repetition of the idea that a taxpayer may not rely on a technical legal form as a means of reducing his tax. The judicial refusal to recognize for tax purposes the force of "technically elegant" legal arrangements has been repeated consistently whenever the occasion has arisen in litigation before that Court, Gregory v. Helvering, 293 U.S. 465">293 U.S. 465; Helvering v. Griffiths, 308 U.S. 355">308 U.S. 355; Helvering v. Clifford, 309 U.S. 331">309 U.S. 331; and Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331. So, I think, despite the technically correct forms adopted by the taxpayer for giving his wife an interest in the business and making a partnership agreement with her, the conduct of the business was unchanged and the Commissioner's refusal to recognize the partnership as an organization*188 which lessened the husband's income and tax was correct and should be sustained.