*2494 Petitioner B. J. Rucker's distributive share of partnership income held to be separate property under the laws of the State of Washington, and therefore taxable to him.
*916 This is a proceeding for the redetermination of deficiencies in income taxes in the amounts of $24,276.98 and $24,276.97 asserted by the respondent against W. J. Rucker and B. J. Rucker, for the year 1919.
This case came on for hearing on June 14, 1927, at which time it was, on motion of the parties, ordered that the cases of W. J. Rucker, Docket No. 3508, and B. J. Rucker, Docket No. 3509, be consolidated and heard jointly.
The petition of W. J. Rucker raises eight issues identical with eight of the issues raised by the petition of B. J. Rucker, all of which are as follows:
1. Whether the respondent erred in adding to the income of the partnership of Rucker Brothers, the sum of $13,805.10, and
2. Whether the respondent erred in adding to income of said partnership the sum of $11,143.19, and
3. Whether the*2495 respondent erred in adding to the income of said partnership the sum of $12,149.29, and
4. Whether the respondent erred in adding to the income of said partnership the sum of $22.55, and
5. Whether the respondent erred in adding to the income of said partnership the sums of $2,704.67 and $905.33, representing certain losses on the sales of stocks and bonds, and
6. Whether the respondent erred in adding to the income of said partnership the sum of $4,467.20, and
7. Whether the respondent erred in adding to the income of said partnership the sum of $2,633.50, and
8. Whether respondent erred in deducting from the income of said partnership the sum of $73.60, instead of the sum of $673.60, and
9. Whether the respondent was in error in computing the tax of B. J. Rucker, a married man, on the entire distributive share of the income of the said partnership.
FINDINGS OF FACT.
The petitioners, W. J. and B. J. Rucker are brothers, comprising the copartnership operated under the name of Rucker Brothers, Lake Stevens, Wash.
Each of the petitioners entered into written stipulations with the respondent as follows:
1. That the Commissioner of Internal Revenue in determining*2496 the net income of the above-named taxpayer for the year 1919, included in said income one-half of the net income of the partnership of Rucker Brothers for the year 1919.
2. That the Commissioner of Internal Revenue in the 60-day statutory deficency letter determined the net income of the above-named taxpayer for the year 1919 to be $117,180.40.
3. Included in the determination of the net income of the above-named taxpayer for the year 1919, there was an amount of $108,345.65 which represented one-half of the net income of Rucker Brothers partnership for the year 1919.
*917 4. That the Commissioner of Internal Revenue erred in the determination of the net income of Rucker Brothers partnership for the year 1919 by including in income $13,805.10 representing "Inventory Wire Rope at Camps" as alleged in error No. 1 of the taxpayer's petition.
5. That the Commissioner in the determination of the net income of the partnership of Rucker Brothers for the year 1919, did not err in adding to the income $11,143.19 on account of "Stumpage Disallowed Camp Boulder" as alleged in error No. 2 of the taxpayer's petition.
6. That the Commissioner of Internal Revenue in the*2497 determination of the net income of the partnership of Rucker Brothers for the year 1919 did not err in adding to the income $12,149.29 on account of "Stumpage Disallowed Camp Silverton" as alleged in error No. 3 of the taxpayer's petition.
7. That the Commissioner of Internal Revenue in the determination of the net income of Rucker Brothers partnership for the year 1919 erred in the addition to the income of the partnership of $22.55 on account of "Stumpage Disallowed Camp Cavano"; that the correct amount to be added is $19.10; that the income of the partnership of Rucker Brothers for the year 1919 should be decreased by $3.45 on account of this discrepancy as alleged in error No. 4 of the taxpayer's petition.
8. That the Commissioner of Internal Revenue erred in adding to the income of the partnership of Rucker Brothers for the year 1919, $905.33 on account of "Loss on Sale of Bonds" as alleged in error No. 5 in the taxpayer's petition.
9. That the loss sustained by Rucker Brothers partnership for the year 1919 on account of "Sale of Bank Stock" was $704.67; that the Commissioner of Internal Revenue added to the income of the partnership of Rucker Brothers for the year*2498 1919, $2,704.67; that $2,000.00 of the amount of $2,704.67 alleged in error No. 5 of the taxpayer's petition as a loss on the sale of bank stock was properly added to the income of Rucker Brothers partnership for the year 1919 by the Commissioner of Internal Revenue.
10. That the 60-day statutory deficiency letter reflects profits from the sale of timber to the Panther Lake Company by Rucker Brothers partnership in the year 1919 of $31,598.39; that a correct determination of said profits from said sale of timber is $27,000.02; that the net income of Rucker Brothers partnership for the year 1919 should be decreased by $4,598.37 on account of the adjustment in the determination of the profits from the sale of timber in 1919 to the Panther Lake Company by Rucker Brothers partnership as alleged in Error No. 6 in the taxpayer's petition.
11. That the Commissioner of Internal Revenue erred in the determination of the income of the partnership of Rucker Brothers partnership for the year 1919 by including $2,633.50 as income on account of "Supply Inventories" as alleged in error No. 7 in the taxpayer's petition.
12. That the Commissioner of Internal Revenue in the determination*2499 of the net income of Rucker Brothers partnership for the year 1919 deducted from income $73.60 on account of interest paid; that the correct deduction on account of interest paid is $673.60; that the net income of Rucker Brothers partnership for the year 1919 should be decreased $600.00 on account of this discrepancy as alleged in error No. 8 of the taxpayer's petition.
Since the above stipulation disposes of all the allegations of error in the case of W. J. Rucker and since the facts hereinafter recited are with respect to the case of B. J. Rucker, we shall sometimes for convenience, refer to him as Rucker.
*918 B. J. Rucker was married in December, 1904, and he has lived continuously with his wife since that time. At the time of his marriage Rucker owned a one-half interest in the copartnership of Rucker Brothers, the assets of which consisted of lands and town lots and some shares of stock in the Rucker Bank. Rucker Brothers were engaged in the real estate business at the time of Rucker's marriage, but in 1907 or 1908 the firm entered into the logging and sawmill business. The lands and town lots owned by the partnership at the time of Rucker's marriage were nonproductive*2500 properties from which there has been no income from the time of his marriage to the present time. In fact they have paid in taxes several times what the property would sell for to-day.
The profits earned by the partnership of Rucker Brothers have come from enterprises they have engaged in, such as timber and sawmill and logging operations for which the firm borrowed money and started. They have bought most of their timber on the installment plan, making only a small initial payment therefor.
Rucker has kept no record of the property he had at the time he was married, nor of what he has accumulated subsequently to marriage.
Rucker Brothers purchased a quantity of timber from the Puget Mill Company in 1917 at a total purchase price of $625,000, for which they paid $5,000 in cash and the balance of $620,000 in promissory notes extending over a period of several years, all of which notes were signed by W. J. and B. J. Rucker for the partnership. A portion of that timber was later sold at a profit of upward of $80,000. The portion of that timber that was not sold was cut and sawed at their own sawmill and was paid for as it was cut and removed.
During the period 1907 to*2501 1916 the firm of Rucker Brothers borrowed several sums of money for use in the partnership.
All of Rucker's property at the time of his marriage was his equity in the partnership and all of his income has been from the partnership distributions.
Rucker filed an individual income-tax return for the year 1919 on March 15, 1920, showing therein as his share of the partnership distribution $62,741.12, also salary received from the partnership of $9,000, making a total net income reported of $71,741.12.
Mrs. B. J. Rucker had no separate property in 1919. Mrs. Rucker filed an individual income-tax return for the year 1919 on May 5, 1921, reporting $35,870.56, one-half of the total income reported by Rucker in his original return. On May 5, 1921, Rucker himself filed an amended individual income-tax return showing therein one-half of the total net income reported by him in his individual return of $35,870.56.
*919 OPINION.
MORRIS: All of the issues raised by the petition of W. J. Rucker, Docket No. 3508, and eight of the issues raised by the petition of B. J. Rucker, Docket No. 3509, have been agreed upon and evidenced by written stipulation between the parties set*2502 forth herein in the findings of fact and will be settled in accordance therewith.
The sole question remaining for determination is whether the respondent correctly held that the entire distributive share of the income of B. J. Rucker in the partnership of Rucker Brothers was separate property or whether said distributive share was community income under the laws of the State of Washington.
Sections 6890, 6891, and 6892, respectively, of Remington's Compiled Statutes of Washington, 1922, are as follows:
Property and pecuniary rights owned by the husband before marriage, and that acquired by him afterward by gift, bequest, devise or descent, with the rents, issues, and profits thereof, shall not be subject to the debts or contracts of his wife, and he may manage, lease, sell, convey, encumber of devise by will, such property without the wife joining in such management, alienation, or encumbrance, as fully and to the same effect as though he were unmarried.
The property and pecuniary rights of every married woman at the time of her marriage, or afterward acquired by gift, devise, or inheritance, with the rents, issues, and profits thereof, shall not be subject to the debts*2503 or contracts of her husband, and she may manage, lease, sell, convey, encumber or devise by will such property, to the same extent and in the same manner that her husband can, property belonging to him.
Property, not acquired or owned as prescribed in the next two preceding sections, acquired after marriage by either husband or wife, or both, is community property. The husband shall have the management and control of community personal property, with a like power of disposition as he has of his separate personal property, except he shall not devise by will more than one half thereof.
Thus it will be seen that under the law of the State of Washington governing the question in controversy the "property and pecuniary" rights of the husband and wife are definitely settled and that "property" owned by them at the time of marriage together "with the rents, issues, and profits thereof" shall be their separate property, and that the property not so owned, but acquired subsequently to marriage, with the designated exceptions, is "community property."
The testimony reveals that Rucker was a member of the partnership of Rucker Brothers prior to 1904 and that he continued to be a partner*2504 up to and during the period in question; that he was married in December, 1904, and has continuously lived with his wife; that all of his income has been derived from salaries of the partnership and partnership distributions.
In the , we held that the decisions of the Supreme Court of Washington lay *920 down the rule that where business income was produced in part by separate property and in part by the efforts of the community, and each of these two factors was substantial, the court will attempt to allocate such earnings, but if it appears that the income is to be attributed primarily to one element, the other element may be disregarded. The Supreme Court of the State of Washington, in the case of , has summarized some of the more important rules of the courts of that State for determining the status of community or separate property:
1. The presumption is that property acquired during coverture is community property, and the burden is upon the person claiming it to be separate property to establish that as its character.
2. The status of property is*2505 to be determined as of the date of acquisition. This rule is equally true with regard to personal property as with real property.
3. If property is once shown to have been separate property, the presumption continues that it is separate until overcome by evidence. Separate property continues to be separate through all its changes and transitions, so long as it can be clearly traced and identified.
4. The rents, issues, and profits of separate property remain separate property and profits resulting from money borrowed on separate credit are separate property.
5. Separate property may lose its identity as such by being consolidated with community property.
The argument of petitioner's counsel that the distributive share of Rucker in the partnership is from services rather than from property is considerably weakened by the fact that he received a salary of $9,000 for the taxable year, which amount it is reasonable to assume, was the value placed upon his services by the partnership. Of course personal services must necessarily play an important part in the conduct of any business, but where the parties have themselves appraised the value of those services, we could not*2506 with the meager amount of evidence before us say that his services were worth any greater amount.
Applying the principles announced in the case of , to the instant facts we are lead to the conclusion that the income is to be attributed primarily to separate property. There is no question that the interest owned by Rucker in the partnership at the time of his marriage was separate property under the above quoted provisions of the Washington statute. The partnership interest being separate property, "the presumption continues that it is separate until overcome by evidence" and it "continues to be separate through all its changes and transitions, so long as it can be clearly traced and identified." There is no doubt that the property in question can be clearly traced and identified.
The evidence introduced affecting that presumption was that the only assets owned by the partnership at the time of Rucker's marriage *921 consisted of lands and town lots and some shares of Rucker Bank stock, and that such lands and town lots were nonproductive, and were a liability rather than an asset. We are not told anything at all about the*2507 value of the bank stock, which for all we know may have been considerable. About 1907 or 1908 the partnership engaged in the sawmill and lumbering business and borrowed the money to establish and carry on that business and continued to borrow money to be used in their operations. In 1917 a large tract of timber was purchased, only $5,000 in cash being paid therefor, the balance of the purchase price being evidenced by promissory notes. These notes were signed by W.J. and B. J. Rucker for and in the name of Rucker Brothers. Other notes were executed by one or both of them for funds borrowed for the use of the partnership. The profits from these transactions resulted from money borrowed on separate credit and are therefore separate property. In the , in which case the income was derived from the sale of merchandise purchased with the separate property of Shafer or on the credit of the partnership, the services rendered being incidental to the profits, we held:
Upon this basis there can be no presumption that the profits are to be attributed entirely to the services rendered*2508 by the community; that presumption has been overcome by the evidence, and if there is now any presumption it would be that this appeal fell within the decision , that it was the separate property which was the primary source of the profits.
We are therefore of the opinion that the primary source of the profits in the instant case was Rucker's separate property, and that he is taxable on his distributive share of the partnership income.
Reviewed by the Board.
Judgment will be entered on 15 days' notice, under Rule 50.