*157 Decisions will be entered for respondent.
On the facts, held, (1) the four children of petitioners were not partners with their parents in the limited partnership of Russell Giffen & Co. and petitioners were taxable equally on all the partnership net income, and (2) respondent properly computed the income of petitioners from Russell Giffen & Co. on the basis of the fiscal year elected by the partnership rather than on the basis of the calendar year employed by petitioners in their individual tax returns.
*1272 The above entitled cases were consolidated for hearing. Respondent determined deficiencies in petitioner Russell Giffen's income and victory taxes for the calendar year 1943 in the amount of $ 26,757.22, and in his income tax for the calendar year 1944 in the amount of $ 110,447.97. Respondent determined deficiencies in petitioner Ruth P. Giffen's income and victory taxes for the calendar year 1943 in the amount of $ 50,018.07, and in her income tax for the calendar year 1944 in the amount of $ 132,537.97. Since the taxable year 1943 is in issue, the income tax liability of petitioners for the taxable year 1942 is also involved, due to the forgiveness features of the Current Tax Payment Act of 1943. Three questions are raised for our determination in this proceeding:
(1) Were petitioners' four children partners for Federal income tax purposes in the limited partnership, Russell Giffen & Co., during the period from October 15, 1941, through March 31, 1944?
(2) If it is held that the children were not such partners, were petitioners taxable on the whole of the partnership*159 income, notwithstanding purported transfers to the children of property interests invested in the partnership capital?
(3) If petitioners' children are not recognized as partners, did respondent err in computing the income of petitioners from Russell Giffen & Co. on the basis of the fiscal year elected by the partnership other than on the basis of the calendar year employed by petitioners?
*1273 FINDINGS OF FACT.
Part of the facts were stipulated and are so found.
During the taxable years 1942, 1943, and 1944 petitioners Russell Giffen and Ruth Giffen resided in Fresno County, California, and each filed individual income tax returns with the collector for the first district of California. They were married on November 21, 1924, and have resided in California ever since. They have four children, Patricia, born June 27, 1925; Michael, born March 23, 1926; Carolyn, born November 13, 1927; and Price, born October 24, 1928.
During the early years of marriage Russell Giffen engaged in a farming enterprise of his own in Kern County, California. This venture ended in failure, and in 1927 he moved his family to Mendota in Fresno County, California, which is in the western part of the*160 San Joaquin Valley. This area was undeveloped plains country devoted principally to sheep grazing. Only a limited amount of crops was grown on this land, since there was no gravity water available from nearby streams.
From 1927 until about 1932 Russell Giffen worked first as a day laborer and then as a salaried employee on a ranch in this territory. He earned extra money buying and selling remnants of cotton crops in the neighborhood. During this same period Ruth Giffen ran a clubhouse for boarders at the ranch where her husband worked, and the income therefrom was used to lodge and feed her family. Thus Russell Giffen was able to invest all his salary in cotton crops, the quantity of which he was able to increase gradually. Together petitioners discussed, planned, and saved to launch a farming venture of their own. About 1932 Russell Giffen was able to lease 80 acres of farm land and grow cotton on it. In each of the next few years he gradually expanded the acreage he had under cultivation. To finance the cotton crops he used his own savings and he also borrowed money from a branch of a credit concern, Anderson-Clayton Co.
Russell Giffen was convinced that the dry uncultivated*161 plains country was susceptible to large scale cultivation by means of deep well irrigation and in 1934 he bought a small tract of land to test whether enough water could be found underground to support a crop. After many months of trial and error a test well pumped up a satisfactory supply of water. Following this success Anderson-Clayton Co. financed this farming experiment on a year to year basis. In about 1937 Russell Giffen harvested his first crop on this land. Thereafter, by purchase and by lease, he continued to expand the amount of barren land placed under cultivation, and the harvest he reaped grew larger each year.
On July 3, 1941, all the farming property, real and personal, owned by the Giffens consisted of community property achieved by labor *1274 and capital contributed by Russell and Ruth Giffen after 1927. On that day they entered into a series of written property agreements whereby all their farming property, real and personal, was transmuted from property held in community to property held as tenants in common in equal shares.
Several reasons persuaded the Giffens to make this change in their ownership of the farming property. In the last few years the*162 farming venture had shown promise of blossoming into a considerable financial success, even though the total amount of outstanding indebtedness was large and their property was heavily encumbered. Petitioners felt at last they had something of real value and desired to get their business affairs, which had been operated on a day to day basis, on a sound financial footing. Furthermore, lengthy consultations with tax counsel made them fear that the community property status in California, with all its tax advantages, might be abolished. Thus, by their property agreements petitioners hoped to secure permanently the right of Ruth Giffen to a portion of their farming property, regardless of the fate of community property.
In addition to planning a change in their community property status, petitioners had discussed at length the possibility of forming a corporation or partnership for their farming business and giving their children a proprietary interest therein. They had talked this matter over with counsel on many occasions and were aware of the tax savings inherent in either of these forms of business organizations. Equally important, petitioners for many years had given considerable*163 thought to their children's future and wondered what they might do for them if the farming venture ever paid off. Such thoughts had originated in 1932, when both Ruth Giffen and two of her children were stricken with tuberculosis and forced to bed.
At the time of the property agreements of July 3, 1941, petitioners were still uncertain as to the expedient form in which to conduct the farming business and as to the best means for giving the children a share in the enterprise. All the farm assets which were used in operations prior to formation of the tenancy in common remained in the enterprise thereafter. Russell Giffen continued to manage the entire conduct of the business as before.
After July 3, 1941, the discussion between petitioners and their counsel centered on the children and the form of business to be adopted. Russell and Ruth Giffen desired to give their sons and daughters separate parcels of the farming property, but it was impossible to convey such independent estates to them at that time, due to the fact all the property was encumbered with indebtednesses owing to Anderson-Clayton Co. This creditor looked to Russell Giffen to pay off his obligations from the proceeds*164 of his farming enterprise. Finally, *1275 petitioners determined to operate as a limited partnership and include their children as limited partners, with the hope that the business would be successful enough at some future time that the children might realize independent estates from their interests therein. A limited partnership agreement was drawn up, naming Russell Giffen a general partner and his wife and children as limited partners. This agreement was submitted to Anderson-Clayton Co. for its approval, not only because of present indebtednesses owed it, but because of future financing which would be necessary. Consent to the proposed partnership was given upon the promise of Russell Giffen that all the net income of the partnership would be retained and applied in reduction of indebtedness to Anderson-Clayton Co. until it was paid off, and because under the agreement full management control was vested in Russell Giffen.
In September, 1941, petitioners instructed their attorneys to proceed with the necessary legal steps to form the limited partnership. On October 14, 1941, Ruth Giffen was appointed guardian of the estates of the four minor children by order of the Superior*165 Court of California in and for the County of Fresno. On the same day petitioners executed an instrument whereby each transferred to each of the four children one-sixteenth of his respective undivided half interest in the farm property, subject to one-sixteenth of the liabilities outstanding from the operation of the farm business. The transfers were expressly conditioned upon an order by the court having jurisdiction over the estate of each child authorizing Ruth Giffen to accept the gifts on their behalf, to invest the gifts in the limited partnership, and to execute the articles of limited copartnership on their behalf.
On October 13, 1941, by order of the Superior Court of California, Ruth Giffen was authorized as guardian of the estates of each of her children to carry out the steps upon which the transfers to the children were conditioned. The petitioners each filed a gift tax return setting forth the transfers to each child and paying the tax thereon.
On October 15, 1941, Russell Giffen, Ruth Giffen for herself individually, and their four minor children severally by their guardian, Ruth Giffen, executed a certificate of limited partnership, reflecting formation of a limited*166 partnership doing business under the name of Russell Giffen & Co. On the same day other papers necessary for formation of a limited partnership in California were excuted, published, and recorded.
The partnership agreement named Russell Giffen as general partner and his wife and children as limited partners. It stated that the assets of the partnership were to consist of the assets of the tenancy in common of Russell and Ruth Giffen, subject to the liabilities outstanding against them. Six-sixteenths of the capital was stated to be the contribution *1276 of Russell Giffen, while a like proportion constituted the contribution of his wife. It set forth that each child contributed one-sixteenth of the capital and thereby was entitled to one-sixteenth interest therein. Both Russell and Ruth Giffen were entitled to six-sixteenths of the net income of the partnership, while each child was entitled to one-sixteenth thereof. No income was to be distributed to either a general or a limited partner in the event this would impair the capital of the partnership or jeopardize the interest of a partnership creditor. Russell Giffen, as general partner, was entitled to salary of $ 25,000*167 per year in addition to his right to share in the partnership net income. The general partner was given full power to conduct the business of the partnership as general manager. He further was authorized to reinvest in the partnership such net income of the partners as he in his sole discretion deemed advisable or to withhold such income from the partners and accumulate it in the partnership for future investment or distribution. Losses were to be borne ratably, but no limited partner was to be liable for loss beyond his capital contribution. A limited partner was denied the right to assign his interest in the limited partnership. In the event of the death of any limited partner the agreement stated the partnership should automatically be dissolved and the general partner should purchase the decedent's share at its appraised value. Finally, the agreement provided that the general partner was entitled at any time to purchase the interest of any limited partner for cash at the appraised value of such interest.
Books of account of the farming business prior to October 15, 1941, were closed and net income realized during the period January 1 to October 14, 1941, was credited in *168 equal shares to the account of Russell and Ruth Giffen.
Books of account were established for the limited partnership on October 15, 1941, which reflected its assets and liabilities, as well as separate capital accounts of the six members of the Giffen family. The value of the capital contributions credited to each of the Giffens was as follows:
| Russell Giffen | $ 347,032.74 |
| Ruth P. Giffen | 347,032.74 |
| Patricia Giffen | 57,838.79 |
| Michael Giffen | 57,838.79 |
| Carolyn Giffen | 57,838.79 |
| Price Giffen | 57,838.79 |
The assets of the partnership at the time of its formation included approximately 8,500 acres of land owned by the partnership, 16,500 acres of leased land, 53 deep water wells and pumps, 14 tractors, 10 autos and trucks, 15 grain harvesters, 251 pieces of farm equipment, and 6 Butane, Diesel, and water storage tanks. All of these assets had been used in the farming operations prior to October 15, 1941. During the period from October 15, 1941, through March 31, 1944, the amount of property, real and personal, devoted to the farming enterprise increased to a moderate extent.
*1277 The limited partnership adopted a fiscal accounting period ending March 31, and submitted *169 partnership returns on that basis in 1942, 1943, and 1944. Petitioners continued to file their individual returns on a calendar year basis, as they had done during all prior years.
The partnership business was carried on in its name, "Russell Giffen and Company." At no time from October 15, 1941, through March 31, 1944, did Ruth Giffen or any of the children render vital services to Russell Giffen & Co. or take part in its management and control. Russell Giffen alone determined all policies and managed all the farming operations and dealt with the partnership net income as he saw fit.
The principal crops grown by the partnership were cotton, flax, barley, and wheat. All of these crops were high on the list of essential farm produce for the conduct of war and thus were in great demand. The number of farming employees hired by the partnership varied from 275 to 2,000, depending on the season of the year.
The net income of the partnership before deduction of salary in the period from October 15, 1941, through March 31, 1944, and the allocation of profits to the capital accounts of the Giffens, as recorded on the partnership books, were as follows:
| Oct. 15, 1941- | Apr. 1, 1942- | Apr. 1, 1943- | |
| Mar. 31, 1942 | Mar. 31, 1943 | Mar. 31, 1944 | |
| Net income before salary | $ 307,817.29 | * $ 332,135.52 | $ 1,124,981.60 |
| Russell Giffen: | |||
| Salary | 11,458.33 | 25,000.00 | 25,000.00 |
| Share of profits | 111,134.61 | 115,175.82 | 412,493.10 |
| Ruth Giffen, share of profits | 111,134.61 | 115,175.82 | 412,493.10 |
| Patricia Giffen, share of profits | 18,522.44 | 19,195.97 | 68,748.85 |
| Michael Giffen, share of profits | 18,522.44 | 19,195.97 | 68,748.85 |
| Carolyn Giffen, share of profits | 18,522.43 | 19,195.97 | 68,748.85 |
| Price Giffen, share of profits | 18,522.43 | 19,195.97 | 68,748.85 |
The only partnership income the limited partners were permitted to withdraw during the taxable years under consideration was to enable them to pay income taxes on the profits credited to them on the books of Russell Giffen & Co. The limited partners were not allowed to withdraw any greater portion of income credited to them because the partnership remained indebted to Anderson-Clayton Co. at all times from October 15, 1941, through March 31, 1944. The partnership borrowed from this concern every year to help finance its crops and expand its facilities. Russell Giffen used his own salary and withdrawals from his capital account to pay the family living expenses and educate the children.
In his individual income tax returns for 1942, 1943, and 1944, filed on the calendar year basis, petitioner Russell Giffen reported income of $ 122,592.94, $ 137,679.97, and $ 437,493.10, respectively. Of the $ 137,679.97 reported in 1943, $ 2,542.72 constituted the portion of the *1278 partnership capital gains he reported. In her individual income tax returns for 1942, 1943, and 1944, also filed on the calendar year basis, petitioner Ruth Giffen*171 reported income of $ 111,134.61, $ 112,679.97, and $ 412,493.10, respectively. Of the $ 112,679.97 reported for 1943, $ 2,542.72 represented the portion of the partnership capital gains she reported.
In notices of deficiency sent to each petitioner respondent determined that the "purported partnership agreement" was ineffective, for purposes of the Federal income tax, to permit allocation of shares of income to the four minor children, and therefore, "the total income of the alleged partnership" should be divided equally between petitioners. Respondent determined that in the calendar year 1942 each petitioner received one-half of the partnership income of $ 307,817.30 for the fiscal period October 15, 1941, through March 31, 1942; that in the calendar year 1943 each petitioner received one-half of the partnership income of $ 318,699.34 for the fiscal year April 1, 1942, through March 31, 1943, plus one-half of the reportable capital gains of the partnership of $ 6,780.60; that in the calendar year 1944 each petitioner received one-half of the partnership income of $ 1,124,981.60 for the fiscal year April 1, 1943, through March 31, 1944.
The purported gifts by Russell and Ruth Giffen*172 to their four children were not complete and absolute, but were made on condition that the property remain in the farm business and under the absolute management and control of petitioner Russell Giffen in respect of both capital and income therefrom.
The income realized by Russell Giffen & Co. from October 15, 1941, to March 31, 1944, resulted both from the capital contributions of each petitioner and from services performed by Russell Giffen.
Petitioners did not really and truly intend to join together with their four children in the conduct of the business of Russell Giffen & Co. as a bona fide partnership at any time from October 15, 1941 through March 31, 1944.
OPINION.
The first question for our decision in this proceeding is whether the four children of petitioner, namely, Patricia, Michael, Carolyn, and Price, were bona fide partners for income tax purposes in the limited partnership of Russell Giffen & Co., during the period from October 15, 1941, through March 31, 1944. Respondent concedes that petitioners should be recognized as valid partners in this partnership during these years.
The test for determining the validity taxwise of all partnerships, general or limited, *173 was stated in Commissioner v. Culbertson, 337 U.S. 733">337 U.S. 733, 742. The question is:
*1279 * * * whether, considering all the facts -- the agreement, the conduct of the parties in execution of its provisions, their statements, the testimony of disinterested persons, the relationship of the parties, their respective abilities and capital contributions, the actual control of income and the purposes for which it is used, and any other facts throwing light on their true intent -- the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise. * * *
Using this test, we have found as a fact that petitioners did not really and truly intend to conduct the business of Russell Giffen & Co. as a bona fide partnership between themselves and their children in the taxable year under consideration.
Both the partnership agreement of October 15, 1941, and the conduct of the partnership thereafter make it clear that petitioners' children, as limited partners, were not intended to perform any services or take part in the management of Russell Giffen & Co. By the agreement entire control of the partnership*174 business was placed in the hands of the general partner, Russell Giffen. At no time from October 15, 1941, through March 31, 1944, did any of the children actually participate in the control of the business activities of the partnership or contribute their services in any form.
Despite petitioners' arguments to the contrary, we are also convinced their children made no contribution of capital to Russell Giffen & Co. Beyond question, they did not contribute independent capital originating with themselves. All the assets of the partnership at its inception were owned by petitioners and used by them in the farming business prior to October 14, 1941. Even were we to recognize the purported gift of an interest in this property to each of the children on that date, yet no capital not available for use in the business before was brought into the business as the result of forming the partnership and investment of those interests therein. But we found as a fact that the alleged transfers to each of the children of one-sixteenth of each petitioner's one-half interest in the farming properties originally invested in the partnership were not absolute and complete. Petitioners do not claim*175 that their offspring made any contribution of capital subsequent to the formation of Russell Giffen & Co. partnership.
The instrument executed by petitioners on October 14, 1941, expressly conditioned the transfers upon a court order authorizing Ruth Giffen to accept the gifts on behalf of the children, invest them in the limited partnership, and execute the articles of copartnership on behalf of the minors. The strings attached to these gifts conform to the testimony of petitioners that they intended that all the assets used in the farming enterprise prior to October 15, 1941, should be invested in the partnership. The conditions imposed on the gifts, were made imperative by the heavily encumbered status of the farming *1280 properties at that time. Investment of these gifts in the partnership stripped the children of all freedom of ownership therein. By the terms of the partnership agreement Russell Giffen had complete command over the disposition of all assets and could do with them as he saw fit. The children had no right to assign their interests. Russell Giffen was entitled to purchase them at any time. He alone had the discretion to accumulate or distribute the *176 income earned thereon. It is true that Ruth Giffen exercised no control over the interests which she transferred to the children, but such transfers were conditioned upon investment of the properties in the partnership where they were completely subject to the control of her husband. All these facts conclusively show that petitioners had no intent to relinquish ownership over the property interests allegedly transferred to the children.
We are aware that limited partners are restricted in the extent of their participation in a partnership, but in the instant case the children contributed nothing of value to the production of partnership income at any time. "To hold that individuals carrying on business in partnership include such persons would violate the first principles of income taxation that income must be taxed to him who earns it." Commissioner v. Culbertson, supra, pp. 739, 740.
Moreover, we find significance in the fact that the young Giffens were unable to presently enjoy the fruits of the partnership in the form of net income during the tax years in question. As noted before, Russell Giffen was given full discretion by the partnership*177 agreement whether to distribute the net profits of Russell Giffen & Co. or keep them in the business. The only net profits distributed to the children from October 15, 1941, through March 31, 1944, were for the payment of taxes on the partnership net income credited to their partnership capital accounts.
Furthermore, there is nothing in the evidence to indicate that petitioners included their children in the partnership for the purpose of advancing the farming business. On the contrary, it affirmatively appears that Russell and Ruth Giffen were aware of the tax benefits arising from this step. Undoubtedly Russell and Ruth Giffen also were motivated by a strong desire to eventually provide independent estates for their young ones, but this was a personal reason and had no relationship to a purpose to advance the business interests of the partnership. We can find no business purpose accomplished by inclusion of the children in the partnership. Formation of the partnership led to no substantial change in the economic relation of members of the Giffen family to the income produced by the farm enterprise. The husband remained in complete charge of all business operations and distribution*178 of profits as before. The income of the *1281 partnership was due entirely to the services of Russell Giffen and the capital contributed to the business by him and his wife. Despite insignificant factual distinctions the instant case, in our view, is controlled by Commissioner v. Tower, 327 U.S. 280">327 U.S. 280, and Ralph C. Hitchcock, 12 T. C. 22. We are convinced that there was no bona fide intent of petitioners to conduct their farming business in partnership with their children, and therefore we hold that for Federal income tax purposes the children were not members of the partnership during the taxable years in question.
The next question raised by petitioners for our determination is whether any of the income of Russell Giffen & Co. was taxable to Patricia, Michael, Carolyn, and Price, under section 22 (a) of the code, as the owners of portions of the capital invested in the partnership even though they were not partners for tax purposes. We agree with them that both the services of Russell Giffen and the capital invested in Russell Giffen & Co. were vital factors in the production of its income. Nevertheless, the*179 short answer to petitioners' contention that a portion of this income must be allocated to each child lies in our finding that the purported gifts of property interests in the farming enterprise to the children were incomplete and that petitioners in actuality never relinquished to the children any part of the assets invested in the partnership. We, therefore, reject petitioners' claim under section 22 (a) and hold that the net income of Russell Giffen & Co. was taxable to petitioners in equal parts.
Finally, petitioners argue that, if the partnership relationship between themselves and their children is not recognized for tax purposes and all the farming business income is taxable to them, then respondent erred in computing such income on the basis of the fiscal year of the partnership in accordance with section 188, Internal Revenue Code, rather than on the basis of the calendar year which petitioners have always employed. They contend that the net income earned by Russell Giffen & Co. from October 15 through December 31, 1941, should be excluded from their income for 1942 and the net income it earned from April 1 to December 31, in both 1942 and 1943, should be excluded from *180 their income for 1943 and 1944, respectively.
In support of this view petitioners first assert that respondent in his notices of deficiency challenged not only the partnership status of the children, but the validity of the limited partnership taxwise. The language of these deficiency notices does leave in doubt whether respondent was taxing the income of Russell Giffen & Co. to petitioners as partners, or as tenants in common, but the computation of such income implies the former, for it was based on the partnership fiscal year. The fallacy of this argument is that the phrasing of a notice of deficiency is not the cause of action and does not frame the issues. *1282 Dorothy Whitney Elmhirst, 41 B. T. A. 348, 356; Andrew Geller, 9 T. C. 484, 491. At the hearing and on brief respondent expressly concedes the partnership existing between Russell and Ruth Giffen in the conduct of Russell Giffen & Co.
In support of their contention Russell Giffen and Ruth Giffen next argue that they intended to go into partnership with their four children, and not just between themselves. If it is held that they were not in partnership*181 with their four minors, then, they contend, that there was no partnership at all; and, hence, there was no partnership fiscal year upon the basis of which to compute their income from the farming business.
It is true that if we had held that Russell Giffen & Co. was not to be recognized by us for tax purposes, then the provisions of section 188 would have no application and the income reported on a partnership basis would have to be adjusted to the calendar year basis used by each of the petitioners. But respondent did not challenge the validity of the partnership of Russell Giffen & Co. for tax purposes. He recognized it to the extent of petitioners, but gave no recognition to the partnership status of the four children therein. Necessarily, our determination in this case was limited to whether the young Giffens were bona fide members of the partnership. It follows that the partnership was still in existence taxwise. Therefore, the provisions of section 188 apply and we uphold respondent's computation of petitioners' income from the farming business based on the fiscal year which was elected by Russell Giffen & Co. in keeping its books and filing its returns.
Decisions will*182 be entered for respondent.
Footnotes
*. Including capital gains of $ 13,436.18.↩