*2968 Held, that the petitioner transferred its business and part of its property to a partnership; that such transfer was effective from January 2, 1920; and that the income thereof is taxable to its members in proportion to their interests therein.
*470 The respondent asserts a deficiency in income and profits tax for the year 1920 in the amount of $1,813.78, and for the period from January 1, 1921, to May 31, 1921, in the amount of $213.71. The only issue is whether a certain partnership operating under the trade name of the Royal Wet Wash Laundry took over the laundry business and certain assets of the petitioner as of January 2, 1920, or at May 31, 1921.
FINDINGS OF FACT.
The petitioner is a Minnesota corporation with its principal office at Minneapolis. It was incorporated in 1913 and during the taxable year and period it had outstanding capital stock of the par value of $7,000, divided into 70 shares of the par value of $100 each. The stockholders and stockholdings during the time involved were: Phil Greenberg, 1 share, J. R. Greenberg, *2969 34 shares, and Sam Steinman, 35 shares.
For the year 1919 the petitioner made its income and profits-tax return as a personal service corporation. Early in 1920 its incometax advisers, a lawyer and an accountant, advised it that the Commissioner probably would not accept its returns as a personal service corporation and suggested the formation of a partnership to take over the operating department of the business.
*471 On January 2, 1920, the stockholders of the petitioner held a special meeting and took the action recorded in the following minutes:
Notice of the calling of the meeting and the purpose thereof was waived by all of the stockholders of the corporation, evidenced by their signed approval of these minutes.
All of the stockholders of the corporation were present in person.
The President announced that J. R. G.reenberg and B. G. Steinman, a copartnership, have offered to the corporation to take over the Laundry business of the corporation, and to purchase certain supplies and other personal property from the corporation on the following conditions, to-wit:
First: That the corporation should advance to the co-partnership the sum of Fourteen Hundred*2970 Forty-four and 97/100 ($1444.97) Dollars.
Second: That the co-partnership, as a part of the consideration, would assume the indebtedness of the corporation, amounting to Fifty-seven Hundred Twentysix and 12/100 ($5726.12) Dollars.
Third: That the co-partnership would operate the Laundry business under the name of the ROYAL WET WASH LAUNDRY, and conduct the same in such manner as to relieve the corporation of any responsibility in connection with the operation of a Laundry business.
Fourth: That the co-partnership would lease from the corporation, the building, machinery, laundry appurtenances, autos, auto trucks and delivery equipment belonging to the corporation, for a period of five years, at an annual cash rental of Two Thousand ($2000.00) Dollars per year, and, in addition to said cash rental, the co-partnership agrees to pay all of the real estate taxes that will accrue from time to time on the said laundry building during the life of the lease, all interest charges on the real property and laundry equipment and personal property of the corporation used by the co-partnership, including, among other things, repairs and insurance; the co-partnership shall also pay all water*2971 bills and incidental expenses that may be charged against the property by reason of its use and occupation by the said co-partnership, and, in addition thereto, the co-partnership shall pay to the corporation a reasonable amount for depreciation on both the real and personal property so ieased.
After discussing the proposition offered to the corporation, the stockholders of the corporation decided that it was for the best interests of the corporation to accept the proposition made by J. R. Greenberg and B. G. Steinman.
It was thereupon moved, seconded, and unanimously carried by the affirmative vote of all the stockholders of the corporation, that the corporation accept the proposition of J. R. Greenberg and B. G. Steinman, and that the Board of Directors and officers of the corporation be and hereby are authorized to carry out this transaction on behalf of the corporation.
There being no other business to come before the meeting, the same was adjourned.
Approved:
(Signed) J. R. GREENBERG,
Secretary.
On January 2, 1920, a special meeting of the board of directors of the petitioner took the action recorded in the following minutes:
All of the directors were present*2972 in person.
Notice of the calling of the meeting and the purpose thereof was waived by all of the directors, as evidenced by their signed approval of these minutes.
*472 The President notified the directors that the Stockholders at a Special Meeting, had voted to sell the personal property of the corporation to J. R. Greenberg and B. G. Steinman, and also voted to give J. R. Greenberg and B. G. Steinman the lease of the Laundry Building owned by the corporation.
The following resolution was unanimously adopted by all of the directors:
"RESOLVED: That the President of the Company, for and on behalf of the corporation, make, execute and deliver to J. R. Greenberg and B. G. Steinman a Bill of Sale of certain personal property of the corporation, and a lease of the Laundry Building, with equipment thereof, including machinery, laundry appurtenances, autos, auto trucks and delivery equipment belonging to the corporaton, according to the proposition made by J. R. Greenberg and B. G. Steinman, as authorized by the stockholders."
There being no other business before the meeting, the same was duly adjourned.
Approved:
(Signed) J. R. GREENBERG,
Secretary.
On January 2, 1920, J. *2973 R. Greenberg, the wife of Phil Greenberg, and B. G. Steinman, the wife of Sam Steinman, executed the following partnership agreement:
THIS AGREEMENT, Made and entered into this 2d day of January, 1920, by and between J. R. GREENBERG, on the one part, and B. G. STEINMAN on the other part, WITNESSETH:
THAT WHEREAS, the parties hereto are desirous of forming a co-partnership for the purpose of engaging in the laundry business, at Minneapolis, Minnesota, -
NOW THEREFORE, In consideration of the foregoing recitals and in consideration of the mutual covenants and agreements as hereinafter expressed, the performance by the one being the consideration for the performance by the other, the parties hereto do hereby agree as follows, to-wit:
The parties hereto hereby agree to and do form a copartnership for the purpose of engaging in the wet wash laundry business at Minneapolis, Minnesota for a period of five years from the date hereof, under the firm name and style of "ROYAL WET WASH LAUNDRY," on the following express terms and conditions, to-wit:
1. Both the parties hereto shall invest an equal amount in the said laundry business;
2. That neither of the said parties hereto shall*2974 be obligated to perform any special services in pursuance of the copartnership business except in the general management thereof, and that each of the parties hereto shall have the right and privilege to select a competent person, familiar with the wet wash laundry business, to perform all the necessary work in connection with the operation and maintenance of the wet wash laundry business. Such person, so selected by each of the parties hereto must be satisfactory to the other party hereto, and the compensation paid to such persons so employed by this co-partnership shall be fixed by the parties hereto.
Before employing such persons to operate said laundry business, the parties hereto shall enter into an employment contract with such persons, specifying the nature of the employment, the duration thereof, and the amount of compensation for the same.
3. True and correct books of account shall be kept by the co-partnership, and both parties hereto shall have equal right of access to the said books of account at any time.
*473 4. All moneys of the co-partnership shall be deposited in a bank selected by both parties hereto, and all the funds drawn against such deposit*2975 shall be signed either by the parties hereto jointly or by some agent or agents selected by the parties hereto.
5. No notes or written obligations of any kind shall be incurred or made, executed and delivered by the co-partnership unless both parties hereto shall join in making execution and delivery thereof, or agree to incur the same, and each of the parties hereto hereby agrees to hold the other party harmless as against any loss caused or damage suffered by either one of the parties hereto by reason of any unauthorized indebtedness incurred by the other party for and in behalf of the copartnership.
6. The parties hereto shall employ and discharge all help used in said copartnership business unless both parties hereto in writing give authority to any other person employed in the said co-partnership business either to employ or discharge help therein.
IT IS UNDERSTOOD AND AGREED that the parties hereto are equal partners in every respect.
Salaries shall be agreed upon by the parties hereto and paid to each of them, the same to be in an equal amount.
All the net profits of the business shall be divided by the parties hereto share and share alike. Losses, if any, *2976 shall be borne by the parties hereto in the same proportion as the said profits.
IN TESTIMONY WHEREOF, the parties have hereunto set thier hands and seals the day and year first above written.
Signed, Sealed and Delivered in Presence of
(Signed) FELIX MOSES.
J. R. GREENBERG.[SEAL.]
(Signed) LEWIS SWARTHE.
B. G. STEINMAN.[SEAL.]
On May 31, 1921, the members of the partnership filed with the Clerk of the District Court the certificates required by law showing the real owners of a business conducted under a trade name.
On May 31, 1921, the petitioner executed the following bill of sale:
BILL OF SALE.
KNOW ALL MEN BY THESE PRESENTS, That ROYAL WET WASH LAUNDRY, INCORPORATED, of the County of Hennepin and State of Minnesota, party of the first part, in consideration of the sum of One ($1.00) and other valuable considerations to it in hand paid by J. R. GREENBERG and B. G. STEINMAN, of the County of Hennepin and State of Minnesota, party of the second part, the receipt whereof is hereby acknowledged, does hereby Grant, Bargain, Sell and Convey unto the parties of the second part, their executors, administrators and assigns, forever, the following described*2977 Goods, chattels and Personal Property, to-wit:
All that certain personal property belonging to the party of the first part, - a true and correct schedule thereof being hereto attached and made a part hereof.
The parties of the second part, as a part of the consideration whereof, hereby assume and agree to pay the sum of Fifty-seven Hundred Twenty-six and 12/100 ($5,726.12) Dollars, due and owing by the first parties to its various creditors, and the said second parties hereby agree to hold the said first party harmless from the obligation to pay the same.
TO HAVE AND TO HOLD THE SAME, Unto the said parties of the second part, their executors, administrators and assigns, Forever. And the said party of the *474 first part, for itself, its successors and assigns, covenants and agrees to and with the said parties of the second part, their executors, administrators and assigns, to Warrant and Defend the Sale of said Goods, chattels, and Personal Property hereby made unto the said parties of the second part, their executors, administrators and assigns, against all and every person and persons whomsoever, lawfully chaiming or to claim the same.
IN TESTIMONY WHEREOF, The*2978 said party of the first part has caused these presents to be executed in its corporate name by its president and its Secretary, and its corporate seal to be hereunto affixed this 31 day of May, 1921.
ROYAL WET WASH LAUNDRY, INCORPORATED. [SEAL.]
By President. [SEAL.]
And Secretary. [SEAL.]
On January 2, 1920, pursuant to corporate action taken on that day, the corporation transferred its business, operating equipment, and other specified personal property to the partnership.
Herman Greenberg was the manager and bookkeeper of the petitioner and of the partnership prior to January 2, 1920, and throughout all the time in controversy. During the year 1920 he kept all the accounts of both concerns in the books which theretofore had been used by the petitioner. At the close of the year he credited the partnership with the profits disclosed by the only profit and loss account that had been kept up to that time. Early in the year 1921, at about the time for making income-tax returns, he opened new books and thereafter kept the accounts separately. Some time in the year 1920 the insurance theretofore carried by the petitioner was changed to include the partnership*2979 as one of the parties covered by the terms of the policies.
The partnership made partnership income and profit-tax returns for the years ended December 31, 1920, and December 31, 1921. Upon examination of such returns the Commissioner held that the income reported was the income of the petitioner from January 1, 1920, to May 31, 1921, and of the partnership from June 1, 1921, to December 31, 1921, and asserted the deficiencies here involved.
OPINION.
LANSDON: The sole question here is whether the partnership which the respondent concedes operated the laundry business here in question after May 31, 1921, was engaged in such business on its own account from January 2, 1920, to May 31, 1921. The petitioner is a close corporation. One of the members of the partnership is the owner of 34 shares of the corporation stock and is the wife of the general manager of the business, who owns no stock; the other owns none of the stock of the corporation but is the wife of a stockholder who owns 35 shares. All of the alleged transactions may have been actual and legal, but they are in the nature of contracts or deals *475 between closely related parties and as they involve the*2980 rights of a third party, the taxing power of the Federal Government, they should be subject to the closest scrutiny. .
There is no question that the Mesdames Greenberg and Steinman might engage in any lawful business independent of their husbands or that if they did so the proceeds thereof were their own income in the proportion provided for by the partnership agrrement, and of course taxable to them. In ; , the Supreme Court of Minnesota said:
No question can be raised under our laws as to the legal rights of a married woman to the increase and product of her own estate, real and personal. * * * A married woman is entitled to the rents, increase, and product of her property, real or personal, and may manage the same through the agency of her husband.
It is clear that the two members of the partnership undertook nothing that is barred by law. They entered into a partnership agreement and if the partnership was legally formed and took over the petitioner's business and property as of January 2, 1920, and operated the same as its own during the taxable year and*2981 period here involved, the income from such operations is its own and the distributable shares thereof are taxable to its members. The respondent contends that as there was no bill of sale made by the petitioner to the partnership until May 31, 1921, and no certificate of ownership filed by the partners until that date, the partnership was not effective until such date.
In the course of the hearing in his cross-examination of the witness called by the petitioner, counsel for the respondent indicated that he relied to some extent on the manner in which the accounts of the corporation and the partnership were kept in the taxable year and period. The evidence discloses that Herman Greenberg was the manager and bookkeeper of the laundry, both prior to and throughout the term here involved and that the accounts of the business from January 2, 1920, to some time early in 1921 were kept in the books of the corporation and that there was no segregation thereof in 1920 except that at the close of such year the profit earned by operations was credited to an account that had been opened with the partnership. It is well established that bookkeeping in and of itself is not determinative of*2982 tax liability.
In this proceeding each party relies on our decision in , in which we said:
No books of account of the partnership or of the corporation were produced, no part of the record of the bank in which it is claimed that two separate accounts were kept was produced, none of the canceled checks of the so-called partnership were produced, none of its letterheads or of the letters sent out by it were produced, nor is the absence of any evidence of such a collateral *476 nature, which might have supported the contention of the petitioner, excused in any way.
The record is not convincing that there was in fact any bona fide delivery of the bill of sale which was executed on July 31, 1919, or any bona fide transfer of the assets named, or that the business was in fact carried on by the partnership and not by the corporation. It does not justify us in disturbing the determination of the Commissioner.
It is obvious that the case cited is not a precedent that supports the contention of either party since it establishes no rule other than that the burden of proof to overcome the determination of the*2983 Commissioner is on the petitioner.
The partnership agreement was executed on January 2, 1920. On the same date the petitioner, by appropriate corporate action, transferred its business and certain of its property to the partnership. The fact that no bill of sale was given at that time is not material since the transfer was complete and effective without being evidenced by such an instrument which is no more than a record of a transaction already effected. . Failure to file the certificate stating the true ownership of a business conducted under a trade name may have subjected the parties to penalties under the laws of Minnesota, but we fail to see that such negligence in any way affected either the transfer of the laundry business or the ownership and taxability of the income derived therefrom. As the Commissioner conceded that the partnership was effective on and after May 31, 1921, it is apparent that he refused to recognize its existence prior thereto solely because the bill of sale was given and the certificate of information was filed on that date. We are satisfied with the evidence that the partnership was effective at*2984 and after January 2, 1920, and that the income here involved was its income.
Reviewed by the Board.
Decision will be entered for the petitioner.