*90 Decision will be entered under Rule 50.
Over a period of years the taxpayer, assisted by his wife, conducted hundreds of experiments for the improvement of abrasive wheels in the basement of his home. His wife, following instructions during the day, precisely weighed, mixed, and heated ingredients, producing plugs on which both experimented at night after his return from work. Having developed formulae for three types of wheels, the taxpayer applied for patents, which were eventually granted. He assigned all interest in these inventions to a manufacturer, which agreed to pay him a percentage of its profits from the sale of wheels and for his advisory services. Having orally promised his wife an equal share in the profits of their experiments, the taxpayer in 1941 assigned to her a half interest in this agreement, and in the same instrument both agreed to form a partnership for developing abrasive wheels, to which each contributed a half interest in the agreement. Experiments were discontinued early in 1942. The taxpayer rendered the manufacturer advisory services in 1942 and 1943, receiving by separate contract $ 6,000 therefor in 1942. In 1942 and 1943 the manufacturer*91 made substantial payments under the agreement to the taxpayer, who deposited them in a joint bank account of himself and wife used for making investments in their joint names.
(1) The wife's services, held, on the evidence a vital contribution to the development of inventions whereby the income-producing agreement was acquired.
(2) The wife's contribution of her one-half interest in such agreement to the partnership, held, a contribution of capital originating with her which requires recognition of the partnership for tax purposes.
(3) The value of the taxpayer's advisory services, held, to be $ 6,000 a year, which amount represents earned income taxable to him alone.
(4) Under the assumption, but without a decision, that payments received under the agreement are proceeds from the sale of a capital asset, the taxpayer's subsisting agreement to assign all inventions to the manufacturer, which in fact began to use them soon after perfection, held, to defeat claim, based on written agreements, that the inventions were held over six months when sold, and that the sale profits are hence taxable as short term capital gain.
*288 The Commissioner determined a deficiency of $ 27,466.07 in petitioner's income and victory tax for 1943, in part by including in income amounts which his wife had reported as her distributive share of the profits of an alleged partnership between them. The partnership income was derived from payments made by a manufacturer *289 to which petitioner had transferred inventions in consideration of a percentage of the profits from sales of wheels manufactured under them. Petitioner contends that the partnership is recognizable for tax purposes because of the wife's contribution of services in developing the inventions; and, in the alternative, that the wife had an equitable half interest in them and hence in the income from them; and, *93 further, that the payments received from the manufacturer resulted in long term capital gain from the sale of property and not ordinary income. Petitioner concedes that a disputed part of the payments were for his advisory services, required under the agreement, and that this part is taxable to him alone. The year 1942 is involved by reason of the unforgiven portion of the tax for that year added to the 1943 tax.
FINDINGS OF FACT.
Petitioner, a resident of Passaic, New Jersey, filed his income tax returns for 1942 and 1943 with the collector of internal revenue for the fifth district of New Jersey. He is married, and during 1942 and 1943 he received from J. K. Smit & Sons, Inc. (hereinafter called Smit), payments made pursuant to an agreement under which he had assigned inventions to Smit. These payments were reported on partnership returns as the income of a partnership formed by him and his wife on May 31, 1941. Each reported one-half of the partnership's net income, as computed on the returns, for 1942 and for 1943 in their respective individual incomes.
In 1923, when 17 years of age, petitioner was employed in Passaic by the Manhattan Rubber Manufacturing Co. (hereinafter *94 called the Manhattan Co.), and trained as an inspector in its abrasive wheel department. He remained constantly in that company's employ until June 1942, rising by successive promotions to be manufacturing superintendent of the department in 1939. He was married in 1931, and his wife, Elsie Kuzmick, then employed as a stenographer, gave up her position two months later. Both were earning modest salaries and had only a few hundred dollars of resources. The wife received a wedding gift of $ 500 from her father, and in July 1932 this money, with her other funds, was put in a bank account in their joint names.
Petitioner performed experimental work at the plant of the Manhattan Co., and after marriage he solicited and obtained his wife's cooperation in tests and experiments which were conducted at their residence and were expected to result in commercially profitable inventions. Funds in the joint bank account were used in buying equipment. While occupying an apartment, he obtained permission to use the basement as his laboratory, and with scrap materials he endeavored in 1933 to perfect an improved type of valve for milk pasteurizers. *290 During the day his wife ground old*95 valves and washed and scrubbed them for testings, and, on returning from the plant, petitioner was assisted by her at night in experimental work on them. Because of the vibration and noise, however, objection was made to these activities, and in 1934 this work was discontinued without results.
Upon acquiring a home in February 1936, petitioner assembled laboratory equipment in the basement and began a protracted series of experiments designed to produce an improved matrix and formula for an abrasive grinding wheel containing diamond particles. The Manhattan Co. was then producing an abrasive wheel cut to shape, and the Norton Co. of Worcester, Massachusetts, manufactured a synthetic wheel which bonded diamond particles with bakelite. Petitioner sought to develop a harder wheel that would hold the diamond particles longer in position. To this end he successively prepared a series of formulae of various metals and other ingredients which had to be weighed and mixed with a high degree of precision; baked at precise temperatures; nicely examined for defects, and subjected to severe grinding tests. In carrying out the experiments, he gave instructions to his wife, who spent several*96 hours four days a week or more, in accurate weighing on a carat scale, pounding ingredients in a mortar, examining the compound with a spatula, placing it in a steel mold, and condensing it in a press. She would then bake the nondefective samples in an electric oven at a specific temperature for a specific time, and when petitioner returned from the plant he would join in these operations, making careful examinations of results with magnifying glasses and by other tests. Satisfactory plugs were then subjected to hours of grinding to determine durability.
In these experiments petitioner supplied the technical knowledge and direction, but his wife became very proficient in laboratory processes, which are normally executed by men, and devoted more actual time to the work than he. When the experimenting ceased in 1942 she had produced many hundreds of plugs, and had spent many hours at grinding, a tiring task, which, because of vibration and heat generated, had to be interrupted at three-minute intervals. She also learned the use of electric presses, which she used in other phases of the experimental work.
In August 1938 petitioner discovered a satisfactory formula for the matrix. *97 He had previously discussed his experiments with an official of Smit, a New York firm, from which he bought rough diamonds for the Manhattan Co., and after the matrix was perfected the official supplied him with crushed diamond particles for wheels which he produced and on which he made durability tests for about a year. Not being financially able to purchase the crushed diamonds, petitioner had used a silicon carbide in prior experiments. He had an oral understanding *291 with Smit that he would assign to it his prospective invention for a "royalty." Having applied for a patent (which was granted on May 27, 1941), he made a written assignment of all interest in the invention to Smit on July 25, 1939, with the understanding that the assignee would pay him 15 per cent of the proceeds from the sale of wheels manufactured by the formula. In December 1939 Smit produced the first wheel for commercial use at a small plant in Passaic. But few were sold, and in November 1941 manufacture was discontinued. In the meanwhile Norton Co. had instituted a patent infringement suit against Smit, but that was settled by compromise on May 10, 1941. After ending experiments with this wheel, *98 petitioner, with his wife's steady cooperation, developed a copper screen for holding diamond particles to a wheel. He applied for a patent, and on September 18, 1939, assigned all interest in it to Smit, with the same understanding about payments. But the screen was never used commercially on wheels. The patent on it was granted January 6, 1942.
Thereafter petitioner, with his wife's cooperation, continued to conduct experiments for an improved type of abrasive wheel, and in May 1941 perfected a process for producing one without metallic ingredients, called the B-bond type. Thereafter and on August 25, 1941, he agreed to assign all interest in inventions made and to be made by him to Smit under a contract effective as of January 1, 1941, whereby he bound himself "to exercise his inventive faculties in relation to diamond wheels for the benefit of Smit" and to "give to Smit and its employees such assistance and advice as may be in his power." Smit agreed to pay him "as full compensation for his inventions and services hereunder 27 1/2% of the annual net profits of its Diamond Wheel Department," allowing him an immediate drawing account for 1941 of "a minimum of One Hundred Dollars*99 a month," chargeable against his share of profits, or as an expense in the absence of profits. In November 1941 Smit began production of the B-bond wheel, which was commercially successful, and Smit is still manufacturing it under a patent which was granted November 2, 1943. Petitioner and his wife continued grinding tests of this wheel until early in 1942, and by instrument dated April 1, 1942, petitioner assigned all interest in it to Smit.
On January 3, 1942, petitioner was employed for one year as a consultant by Smit at a salary of $ 6,000, which was expressly not "to be deducted from such income as you may receive from the profits which may be derived from your interest in the profits of the diamond wheel business as provided for in a separate agreement." Petitioner spent about a day a week at the Smit plant in 1942, giving engineering advice, and received $ 6,000 compensation. He had rendered similar services in 1941, for which he was paid about $ 2,300 and also drew $ 100 from his drawing account. In 1943 he spent half a day or more *292 a week at the Smit plant in an advisory capacity. He resigned his position with the Manhattan Co. in June 1942, and later in the*100 year formed with others the New York Grinding Wheel Corporation to manufacture and sell abrasive wheels. He and his wife acquired 50 per cent of its stock, held in their joint names, but received no dividends. In 1943 this corporation paid him a salary of $ 6,500.
Except for periods during 1935, 1938, and 1941, in which children were born, petitioner's wife was normally engaged at home in experimental work. She was assisted in household work and with the children by a maid, but from early in 1936 until experiments ceased in 1942 she devoted long hours in carrying out petitioner's instructions by day and in working with him by night. In 1936 he was earning $ 3,600 a year. He was unable to employ assistants and would have been reluctant to do so because his work required secrecy for the protection of his interests. His wife's services were vital and necessary for the practical application of his inventive ideas, and to render them she sacrificed social and cultural activities and leisure. Their manner of life was consistently frugal, and they took no vacations until 1941.
In 1933 petitioner promised his wife an equal share in the fruits of the experiments, and he confirmed this*101 understanding in 1937. When he proposed to apply for a patent on the first type of wheel, she suggested that application be made in their joint names, but he refrained from doing so on the ground that a single name would facilitate business transactions; and she was never mentioned in his negotiations with Smit. Anticipating the commercial success of the B-bond wheel, she asked for some written evidence of her promised interest, and he promptly instructed an attorney to draw up a proper instrument establishing it. The attorney prepared a partnership agreement, which both signed on May 31, 1941. In this agreement it was recited that petitioner, with his wife's assistance and their joint savings, had developed a process for manufacturing industrial wheels for which patent application had been filed; that all interest in any patent obtained had been assigned to Smit for a 27 1/2 per cent royalty, and "that it would be only fair and just that such royalty agreement and any other contracts, resulting from any experimental efforts, should inure to their equal benefit." It was then agreed that they form a partnership, under the name Kuzmick Developments, to experiment as partners "in*102 inventing, developing, or processing, new and useful improvements to abrasive wheels, and therewith, to exploit the same, and, likewise, enter into the business of manufacturing abrasive wheels."
4. That the partnership shall commence business with its assets consisting of the aforementioned royalty agreement with J. K. Smit & Sons, a New York corporation, and the sundry tools, equipment and machinery * * * [at their *293 home], which assets shall belong to them equally, and, in order so to vest such assets in them equally, the said Paul L. Kuzmick hereby assigns to the said Elsie Kuzmick an undivided equal one-half interest in said royalty contract and the other assets mentioned, and, therewith, the said Elsie Kuzmick releases the said Paul L. Kuzmick of all claims for moneys advanced and for services performed.
Net profits and losses were to be divided equally; compensation received by petitioner as a consultant was to be considered his personal income; a bank account was to be opened "in the name of the said Paul L. Kuzmick for and in behalf of the said partnership," and disbursements from it were to be reported monthly. The partnership was to continue for a period of five*103 years or indefinitely if the partners so desired, and could be terminated on six months notice by either partner or upon their legal separation or divorce, in which event petitioner reserved the right to purchase his wife's interest at a fair value.
When the partnership agreement was signed, petitioner had a small checking account in his name and he and his wife had a savings account in their joint names with the Bank of Passaic & Trust Co. Petitioner used the checking account for payment of living expenses, and deposited any unspent income in the savings account, drawing from it funds for working equipment and investments of a permanent character, such as his home, which was recorded in the spouses' joint names. In 1942 petitioner opened a checking account with the same bank in the name of the partnership, and thereafter he deposited in it payments made to him by Smit. All property of petitioner and his wife is held in their joint names, and most of it was acquired with money derived from royalties under the patents. This property consists of the bank accounts and home, shares of stock in the Kuzmick Development Corporation, a real estate enterprise, 50 per cent of the stock in*104 the New York Grinding Wheel Corporation, and shares in the Bank of Passaic & Trust Co. About $ 37,000, drawn from the joint accounts, was invested in these stocks.
Petitioner received no income from Smit in 1939. In 1940 he received and reported on his individual income tax return $ 1,416.27 representing royalties of 15 per cent on the metallic wheel. In 1941 he received and reported on his individual income tax return $ 3,500, of which $ 2,300 represented fees for engineering services rendered to Smit and $ 1,200 represented withdrawals of $ 100 a month under his drawing account created by agreement. In 1942 petitioner received from Smit $ 52,365.84, of which $ 6,000 was compensation for engineering services and of the remainder 99 per cent was attributable to the B-bond wheel and 1 per cent to the metallic wheel. In 1943 petitioner received from Smit $ 59,951.82, of which $ 6,000 represented compensation and the remainder was attributable to the B-bond wheel.
*294 On the partnership return filed for 1942 petitioner reported gross income of $ 52,365.84, subtracted aggregate deductions of $ 7,638.26, and reported one-half of the resulting net income of $ 44,727.58, or $ 22,363.79, *105 as the shares respectively distributable to himself and wife as partners. Each reported a half on his individual return. The Commissioner added the $ 22,363.79, reported by the wife, to petitioner's income.
On the partnership return filed for 1943 petitioner reported gross income of $ 75,866.07, representing payments received from Smit under the agreement and $ 6,500 compensation received from the New York Grinding Wheel Corporation; subtracted aggregate deductions of $ 9,414.25; and reported one-half of the resulting net income of $ 66,451.82, or $ 33,225.91, as the shares respectively distributable to himself and wife as partners. Each reported a half on his individual return. The Commissioner added the $ 33,225.91 reported by the wife to petitioner's income.
OPINION.
Petitioner assails the Commissioner's determination that he is taxable on the incomes reported in 1942 and 1943 by his wife as her share of partnership profits. He contends primarily that the partnership was recognizable for tax purposes, contrary to the Commissioner's finding that "no partnership existed," and, in the alternative, that regardless of the partnership agreement his wife was the equitable owner of*106 a half interest in the inventions and hence entitled to a half of the proceeds derived from them. He contends further that such proceeds should be taxed as long term gain from the disposition of capital assets held over six months. The respondent minimizes the value of the wife's assistance in experiments, arguing that she contributed no capital, performed no vital services, and had no control over or participation in the business, so that the alleged partnership was nothing more than an anticipatory arrangement for division of future income, which, under Lucas v. Earl, 281 U.S. 111">281 U.S. 111, is ineffective for tax purposes.
It seems clear that the wife had no control over the business and took no part in negotiations or agreements with Smit, and no patents, patent applications, or contracts bore her name. There is evidence that in 1932 at least $ 500 of funds originating with her were deposited in a joint account used to some undisclosed extent for the purchase of experimental equipment, but, as the account was also used for general family expenses, we perceive no sufficient connection to consider any part of such funds as an intentional contribution *107 to a business. Experiments with milk valves, begun in 1933, were discontinued in 1934, and petitioner's work on abrasive wheels did not begin until 1936.
*295 But even if the wife exercised no control and contributed no cash capital, she may still be deemed a partner if she rendered services vital to the business. Commissioner v. Tower, 327 U.S. 280">327 U.S. 280; Lusthaus v. Commissioner, 327 U.S. 293">327 U.S. 293. Respondent, stressing that Smit's payments were for inventions and services, argues forcefully that in 1942 and 1943 no business was carried on by the partnership. This statement is not literally true, in that the B-bond wheel was subjected to durability tests during the early part of 1942 and patents were assigned to Smit. Throughout both years petitioner rendered engineering advice pursuant to the agreement, but this service could not be deemed a partnership function, and petitioner does not so contend. It is apparent, however, that except in a relatively minor degree the wife rendered no services in 1942 and 1943. But to sustain the determination on this ground would oversimplify the issue. The evidence is convincing*108 and we have found that in the development of the wheel-making processes her services were substantial and vital. With constancy, application, and alert care, she devoted over a period of years her time and attention to the meticulous production of hundreds of experimental plugs. She acquired skill and competence in the precise weighing, mixing and heating of these plugs, in the examination of them for defects, and in the use of electric presses, and she spent hours of grinding toil in testing the durability of the wheels produced. These services were not of the kind ordinarily performed by a wife. To render them, she sacrificed her opportunities for leisure and social diversions. She devoted more time to the work than petitioner, although he admittedly supplied the technical knowledge and direction. Recognizing her right to a reward, petitioner orally assured her in 1933 and later that any benefits that might flow from their joint efforts would be equally shared, and, when the commercial success of the B-bond wheel was anticipated, he instructed an attorney to prepare a proper instrument implementing this promise. The attorney prepared the partnership agreement which was signed*109 on May 31, 1941.
At that time petitioner had already assigned the metallic wheel patent to Smit, and on August 25, 1941, by an instrument which in part reflected an existing understanding, he agreed to assign to Smit all inventions and the patents covering them when issued. Smit manufactured both types of wheel and agreed to pay petitioner 27 1/2 per cent of the annual profits of its wheel department. By the same contract petitioner agreed to render engineering advice to Smit. He did so in 1942 and 1943, receiving therefor $ 6,000 in 1942 by separate contract, and nothing in 1943 apart from the payments under the contract of August 25, 1941. Although this contract was not signed until after the signing of the partnership agreement, the latter, referring to its terms, purports to transfer to petitioner and his wife as partners "the *296 aforementioned royalty agreement with J. K. Smit & Sons" and sundry tools, equipment and machinery at their home, "to vest such assets in them equally." By a further provision petitioner assigns to his wife "an undivided equal one-half interest in said royalty agreement" and she releases him from all claims for moneys advanced and services *110 performed.
Literally, neither petitioner nor his wife contributed any rights in inventions or patents to the partnership, and this they could not do, for all such rights were conveyed, or subject to conveyance, to Smit under an oral agreement shortly thereafter reduced to writing. But they did contribute to the partnership, as its only substantial asset, the Smit contract, and during the taxable years this asset produced the income here in controversy. Under these circumstances the issue depends not on whether or not the wife rendered services to the partnership, but rather on whether or not the purported assignment of a half interest in the contract may properly be regarded as a capital contribution originating with her. In considering this question, we shall ignore for later discussion the effect of the provisions in the Smit agreement relating to petitioner's personal services, and assume for present purposes that all of the consideration passing from Smit was for assignment of the invention and patent rights.
In prior cases a wife's services, no more extensive or vital to business than those here proved were vital to the inventions, have been held sufficient to warrant recognition*111 of an alleged partnership for tax purposes, Wilson v. Commissioner (C. C. A. 7), 161 Fed. (2d) 661; Sinne B. Forsythe, 10 T. C. 417; Francis A. Parker, 6 T. C. 974; Willis B. Anderson, 6 T. C. 956. And such services rendered in years preceding a formal partnership agreement have been considered relevant as support for the decision reached, Samuel Goodman, 6 T.C. 987">6 T. C. 987; Leo Marks, 6 T. C. 659; Felix Zukaitis, 3 T.C. 814">3 T. C. 814, even though the wife's services thereafter were reduced or negligible. Singletary v. Commissioner (C. C. A. 5), 155 Fed. (2d) 207. The purpose of the partnership, as stated in the agreement, is to develop by experiment improved abrasive wheels, to manufacture such wheels, and "to exploit the same." There happened to be little or no experimenting in the taxable years, but there was very substantial income from the agreement, attributable chiefly to the inventions already developed. That was the business' asset, and*112 in it the wife held a one-half interest -- by assignment from petitioner, it is true, but the assignment was made pursuant to his oral agreement and in recognition of services rendered. Cf. J. Kammerdiner, 25 B. T. A. 495; Carl G. Dreymann, 11 T.C. 153">11 T. C. 153. Those services had been an essential factor in the development of the inventions with which the agreement was acquired, and in a very real sense the wife's contribution to the partnership's income-producing *297 asset originated with her. We hold, therefore, that the Commissioner erred in failing to recognize the partnership for tax purposes.
As respondent stresses, Smit's payments were made in consideration not only of inventions, but also of services which petitioner rendered to Smit as a consultant in 1942 and 1943. We agree with the contention that the portion of the payments applicable to the services represented earned compensation, tax on which could not be shifted from the earner by any assignment or agreement. Lucas v. Earl, supra.So recognizing, petitioner concedes sole tax liability in respect of $ 2,600 in 1942 and*113 $ 3,000 in 1943, amounts which he testified were the reasonable value of his services in the respective years. But this appraisal falls before the more persuasive evidence that in January 1942, and before the B-bond wheel was an assured commercial success, Smit agreed by separate contract to pay petitioner $ 6,000 for such services in 1942. We hold that figure to be the reasonable value of the services, and in computing income of the partnership it should be deducted in each year from the total payments received from Smit and taxed to petitioner in full.
In an amendment to his petition, petitioner charges error in respondent's failure to treat the payments received from Smit as capital gains. He argues that the part of them ascribable to the inventions are sale proceeds; that the property represented by the inventions qualifies as a capital asset under section 117 (a) (1), Internal Revenue Code, and, as it was held over six months, the profit on its disposition is a long term capital gain (sec. 117 (a) (4)), of which only 50 per cent should be taken into account in computing net capital gain (sec. 117 (b)). No cost or other basis is claimed, so that under the theory advanced all*114 proceeds received are gain.
Even assuming, without deciding, that the petitioner had a capital asset, still we do not agree that petitioner or petitioner and his wife as partners had held the inventions over six months prior to sale. Smit acquired a right to them upon petitioner's perfecting of them. Such was the oral understanding which the agreement of August 25, 1941, evidenced in writing, and this understanding was reflected in Smit's use of them prior to formal written assignment. Under such circumstances the dates of the written assignments lose their significance. There was never a time when petitioner could have disposed of them to another or withheld them from Smit without breaching the parties' understanding. Since this is so, the payments from Smit were for inventions not held over six months, and the resulting gains were short term and recognizable 100 per cent in the computation of taxable income.
Decision will be entered under Rule 50.