*2011 1. Held that the petitioner's two daughters were members of the partnership of W. H. Simmons & Company.
2. Respondent's determination that the rentals on certain buildings were income to the petitioner disapproved.
*1106 These proceedings which were consolidated for hearing and decision are for the redetermination of deficiencies in income tax as follows:
| Docket No. | Year | Deficiency |
| 1922 | $555.60 | |
| 31530 | 1924 | 18,885.60 |
| 44254 | 1925 | 8,566.53 |
| 1926 | 4,039.42 | |
| 48654 | 1927 | 22,309.24 |
At the hearing counsel for the petitioner waived all the issues raised by the petitions except the following: (1) The correctness of the respondent's action in determining that during the years 1924, 1925, 1926, and 1927 the petitioner's two daughters were not members *1107 of the partnership of W. H. Simmons & Company and that two-thirds of the profits of the partnership were taxable to the petitioner instead of one-third as reported by him, and (2) the correctness of the*2012 respondent's action in determining that certain rentals credited by the partnership on its books to the petitioner's wife for the years 1925, 1926, and 1927 for the use of certain buildings constituted income to the petitioner instead of income to his wife.
FINDINGS OF FACT.
The petitioner is a resident of Springfield, Tenn. On a farm near Springfield the petitioner and one O'Quinn in 1886 began a partnership business under the name of W. H. Simmons & Company. The business carried on by them was that of farming and buying and selling tobacco in small quantities. After carrying on operations on the farm for a few years the petitioner and O'Quinn moved to Greenbrier, Tenn., where they continued the partnership business until O'Quinn's death in 1903. In carrying on the business at Greenbrier they operated as tobacco dealers, buying and selling tobacco on their own account. From the beginning of the partnership until O'Quinn's death each had a one-half interest in the business. The partnership agreement between the parties was oral.
After O'Quinn's death the petitioner as sole owner continued to operate the business under the original firm name of W. H. Simmons & Company*2013 until 1915. In the meantime the petitioner had extended business operations. However, the principal portion of the business was conducted at Springfield. In 1915 J. M. Couts under a verbal agreement became associated with the petitioner in the business, acquiring a one-half interest in the future profits. Couts had been identified with the tobacco business for a number of years and had been associated with the petitioner in other business enterprises. The business continued to be operated under the name of W. H. Simmons & Company. Couts paid no money or property into the partnership. The petitioner, however, let what he had in the business remain in it to be used by the firm. As each year's business was handled separately and practically independently of other years and as the business consisted principally of buying tobacco on a commission basis for a principal in Rotterdam, Holland, an investment by Couts was not necessary. In buying the tobacco on a commission basis the services rendered by W. H. Simmons & Company consisted of buying the tobacco from farmers out in the country or elsewhere, redrying it, packing it in hogsheads ready for manufacture, and shipping it. For*2014 the services rendered the firm received a certain amount per hundred on the tobacco handled. The petitioner and Couts continued to operate the business as partners with a one-half *1108 interest each until 1920, when by an oral agreement between the parties the petitioner's son, Martin W. Simmons, was admitted to the firm with a one-third interest in the future profits without any investment. Thereafter the parties continued the operation of the business under the name of W. H. Simmons & Company, each having a one-third interest in the profits therein until the death of Couts in July, 1923, at which time most of the business for the partnership's fiscal year ended October 31, 1923, had been completed.
While Couts was connected with the business the profits for each year were ascertained and prorated to each of the parties. There was an understanding between the parties that the shares of each in the profits should remain in the business unless he needed it and that the firm would pay interest on the amount so left during the time the money was being used by it. While compliance with this understanding was not compulsory, the parties generally left most of their profits*2015 in the business, drawing out only such amounts as they needed. During the last two or three years that Couts was a member of the firm notes were executed by the firm to each member for the portion of his profits left in the business. Upon closing the books for the fiscal year ended October 31, 1923, settlement was made with the administratrix of Couts by paying to her Couts' share of the profits for that year, together with the profits of prior years which had been left by him in the business. While the firm had good will, nothing was paid in the settlement to Couts' administratrix on account of the good will, since the petitioner had in the beginning developed it, had the business himself, and had admitted Couts to share only in the profits thereof.
Prior to Couts' death the principal for which the firm had been buying tobacco suggested to the petitioner that inasmuch as he was growing older he should associate some younger men with him in the business and train them in it so that should he (the petitioner) drop out there would be a certain continuation of it. As Couts at that time was in very bad health and likely to die at any time, the petitioner entered into a tentative*2016 arrangement with his son-in-law, J. M. French, whereby a partnership to be composed of the petitioner, his son, Martin W. Simmons, and French, was to be formed, in which each was to have a one-third interest. Due to some domestic difficulty between French and his wife, Julia S. French, which finally resulted in their being divorced, the tentative arrangement was not carried out.
After French had decided not to enter into the proposed partnership and after the death of Couts, the petitioner on several different occasions discussed with his son and his two daughters, Julia S. French and Mary Simmons, the matter of forming a partnership and carrying on the business conducted by the former partnership *1109 and in which the daughters would have the one-third interest that French had contemplated taking. About November, 1923, it was orally agreed by the petitioner, his son and the two daughters that beginning November 1, 1923, the daughters should each have a one-sixth interest in the future earnings of the business. The petitioner and his son, Martin W. Simmons, were at that time partners, the son having a third interest. While the nature of the business was such that losses*2017 would not be likely to occur, the daughters were informed by the petitioner that they were "supposed to look out for your own losses." There was also a tacit understanding between the parties that the shares of each in the profits would be left in the business if he or she did not need the money. It was also agreed that interest would be paid on the amounts so left during the time it was being used in the business. Neither of the daughters made any investment in the business or paid anything for the interests acquired by them.
The firm continued to carry on operations under the name of W. H. Simmons & Company and continued to conduct the commission business theretofore conducted under that name. Most of the partnership business was for the principal in Holland for which the prior partnership had acted. There was no standing or continuing contract between the firm and the principal, but each year's business stood alone, the principal at the beginning of each season placing with the firm an order to buy for it certain amounts of specified grades of tobacco. Up until some time in 1923 prior to Couts' death, the principal had financed such purchases through its New York office. *2018 As a result of a new arrangement made by the principal and the then existing firm the firm began to finance the purchases. This new arrangement was continued after the daughters were given an interest in the earnings of the business, the principal being charged with interest on money used for such purposes.
The petitioner had the control and management of the business. The firm's 10 to 15 tobacco buyers, together with the other principal employees, were selected by the petitioner and his son. It has been the policy of the petitioner that no one issue checks on the firm account except the bookkeeper. Salary checks are an exception to this rule, the petitioner signing them. Notes, drafts, etc., are signed by the petitioner and in his absence by his son. However, some of the notes given to local banks are signed by the bookkeeper. Neither of the petitioner's daughters signed notes. Checks issued by the firm for the withdrawal of profits are signed by the bookkeeper.
The firm carried on business at Springfield, Greenbrier, and Clarksville in Tennessee and at Hopkinsville, Franklin, Russellville, and Bowling Green in Kentucky. It had no real estate, but rented from *1110 *2019 the owners the premises used by it in carrying on its business. The rent paid for such purpose was charged as an expense against the earnings of the firm. The real estate used by the firm at Greenbrier, Hopkinsville, and Clarksville is owned by the petitioner. The buildings in Springfield that were used by the firm were constructed by the petitioner on land in which his wife had an interest, such interest being hereinafter referred to in more detail. Other real property used in the business was owned by a joint stock company. The firm owned the office fixtures and equipment used by it, together with some "tobacco sticks." The following is a statement of the financial condition of W. H. Simmons & Company at December 1, 1926:
| Dr. | Cr. | |
| Cash on hand | $12,415.14 | |
| Accounts deferred | 1,908.74 | |
| Accounts payable | $6,970.15 | |
| Accounts receivable | 94,963.65 | |
| Bills receivable | 1,288.70 | |
| Building account | 38,969.52 | |
| Consignment | 83,196.51 | |
| Contingent fund | 10,994.84 | |
| Tobacco inventory | 53,872.98 | |
| Tobacco sticks | 600.00 | |
| Working capital | 269,322.25 | |
| 287,287.24 | 287,287.24 |
During the fiscal year ended October 31, 1924, Julia S. French was living with the petitioner. *2020 Being a good driver, she and the petitioner drove about and looked at a great deal of tobacco. In prior years she had driven the petitioner around to look at tobacco. In September, 1925, Julia S. French married one Russell and went to California to live, continuing to reside there until July, 1927, when her husband was employed by the firm and they returned to Springfield. While in California she obtained orders for W. H. Simmons & Company from two firms, and she solicited orders from others. Some time in 1924 Mary Simmons married one Stevenson and went to England to live. Since then she has returned to Springfield on an average of once a year, spending from three to four months each time. When she is in Springfield she is about the office of the firm very little. Through her husband's efforts and with her help the firm received an order from Ireland and one from Belgium and there are prospects for other orders. She also traveled with Martin W. Simmons in Europe soliciting business.
Shortly after the arrangement was made with the daughters, a new bookkeeper was employed and soon afterwards the petitioner informed him as to the interest of the parties in the business. Since*2021 then the books and records of the firm have been kept so as to show that Mrs. Russell and Mrs. Stevenson each had a one-sixth interest *1111 and that the petitioner and Martin W. Simmons each had a one-third interest.
The profits of the firm and the division thereof as shown by its books for the fiscal years ended October 31, 1924, 1925, and 1926 were as follows:
| Division of profits shown by books | |||||
| Year ended Oct. 31 - | Firm profits | Julia S. Russell | Mary S. Stevenson | W. H. Simmons | Martin W. Simmons |
| 1924 | $141,297.02 | $23,549.50 | $23,549.50 | $47,099.01 | $47,099.01 |
| 1925 | 79,415.22 | 13,235.87 | 13,235.87 | 26,471.74 | 26,471.74 |
| 1926 | 48,159.92 | 8,026.65 | 8,026.65 | 16,053.31 | 16,053.31 |
Profits and interest not withdrawn and remaining in the business at the beginning of each fiscal year as shown by the firm's books were as follows:
| Year ended Oct. 31 - | W. H. Simmons | Martin W. Simmons | Julia S. Russell | Mary S. Stevenson |
| 1924 | $71,406.91 | $58,765.54 | ||
| 1925 | 102,497.07 | 102,855.45 | $23,549.50 | $23,549.50 |
| 1926 | 30,404.56 | 118,327.84 | 36,326.16 | 36,399.34 |
| 1927 | 46,091.50 | 132,158.12 | 45,509.01 | 45,563.62 |
Interest*2022 credited to the accounts as shown by the firm's books for the years indicated was as follows:
| Year ended Oct. 31 - | W. H. Simmons | Martin W. Simmons | Julia S. Russell | Mary S. Stevenson |
| 1924 | $1,967.36 | $1,741.97 | ||
| 1925 | 3,587.41 | 3,599.94 | $824.23 | $824.23 |
| 1926 | 1,912.28 | 5,655.20 | 1,792.84 | 1,795.88 |
At the end of the firm's fiscal year ended October 31, 1924, the bookkeeper prepared nonnegotiable notes to be executed by the firm and given to the petitioner and his son and daughters as representing the amount of the undrawn profits and interest standing to the credit of each on the firm's books. The notes were never executed. In subsequent years no attempt was made to carry out this arrangement, but at the end of each year the account of each of the parties was credited with the profits and interest applicable thereto.
Each year income tax returns were filed either by or for the petitioner's daughters, in which the profits and interest credited to their accounts for the respective years were reported as income. Checks issued in payment of the tax shown to be due by such returns were *1112 signed by the bookkeeper. The accounts of the daughters*2023 were charged with the amount of the tax paid for each year. While the petitioner and Martin W. Simmons made substantial withdrawals from the firm the daughters did not. With the exception of $100 withdrawn by Mrs. Russell in April, 1925, and charged to their accounts for the payment of the income tax, the daughters have made no withdrawals from the firm.
Local banks in dealing with the firm made no inquiry as to who were members of the firm and consequently statements to them did not set forth that the daughters were members thereof. In connection with a loan the firm was arranging for with a New York bank in January, 1927, it informed the bank that the daughters were members. The firm's return executed by the petitioner for registry as packers and dealers in tobacco for the period July 1, 1925, to June 30, 1926, and filed with the Collector of Internal Revenue, Nashville, Tenn., on June 27, 1925, listed the daughters as being "interested in the business." In a tobacco dealers' bond dated October 6, 1928, and filed by the firm with the Collector of Internal Revenue at Nashville and relating back to November 1, 1923, the daughters were shown as being members of the firm.
*2024 In determining the deficiencies here involved for 1924, 1925, 1926, and 1927 the respondent determined that the daughters were not members of the partnership of W. H. Simmons & Company and that the petitioner had a two-thirds interest in the profits of the business. He accordingly included in the petitioner's income for the respective years two-thirds of the amount of the partnership profits for such year, together with the amounts of interest credited to the accounts of the daughters for the respective years.
In September, 1902, J. W. Huey and his wife for a stated consideration conveyed to Fannie W. Simmons, wife of the petitioner, certain real estate located in Springfield on the following terms:
To have and to hold the lot herein conveyed so long as Mrs. Fannie W. Simmons is the wife or widow of Wm. H. Simmons, if at her death Wm. H. Simmons, her husband is alive then said lot herein conveyed is to be the absolute property of the said Wm. H. Simmons in fee simple. If the said Wm. H. Simmons should die in the lifetime of Mrs. Fannie W. Simmons and she should again marry then said lot herein conveyed is the property of and to belong to the children of the said Wm. H. Simmons*2025 in fee simple. The said Wm. H. Simmons and his wife Mrs. Fannie W. Simmons have the power to sell and by the joint deed of both of these convey the lot herein conveyed and make a deed to the purchaser and the purchaser shall not be required to see to the reinvestments of the proceeds of sale.
It was on the foregoing property that the petitioner constructed certain buildings which were used by the partnership as set out above.
*1113 In making arrangements with a New York bank in January, 1927, for a loan the firm, in addition to furnishing the bank with a statement of its financial condition, also furnished a statement of the real estate owned by the petitioner without encumbrance. Included in the latter statement were the two buildings in question, which were shown to have a total value of $70,000.
In determining the deficiencies here involved for 1925, 1926, and 1927 the respondent added to the petitioner's income the amounts of $3,800, $6,200, and $7,000, respectively, representing the amounts credited to the petitioner's wife on the books of the firm as rent for the use of the buildings.
OPINION.
TRAMMELL: The petitioner contends that for the years 1924, *2026 1925, 1926, and 1927 his two daughters were members of the partnership of W. H. Simmons & Company; that the respondent erred in determining that they were not, and that the amounts credited to them on the partnership books as profits and interest were taxable to him. The respondent contends that the daughters were not members of the partnership and that he did not commit any error in determining that the amounts credited to the daughters on the partnership books were taxable to the petitioner.
As we view all the evidence in this case, it establishes the following facts: That the petitioner and his son, who were members of the partnership, agreed with the petitioner's daughters that each of the daughters would have a one-sixth interest in the future earnings of the business and that the daughters would share any losses in the same proportion; that the petitioner permitted the firm to use his capital which had been accumulated in the past and which would remain his; that the two daughters rendered some service to the business. We think that all of the evidence goes to establish these facts and the question is whether these facts are sufficient to constitute the two daughters members*2027 of the partnership.
Shannon's Annotated Code of Tennessee (1918) provides:
3141b6. Partnership defined. -
(1) A partnership is an association of two or more persons to carry on as coowners a business for profit.
3141b7. Rules for determining the existence of a partnership. -
In determining whether a partnership exists, these rules shall apply.
(1) Except as provided by section 3141b16, persons who are not partners as to each other are not partners as to third persons.
* * *
(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived.
*1114 (4) The receipt by a person of a share of the profits of a business, is prima facie evidence that he is a partner in the business, * * *
Subsection (4) of section 3141b6 above quoted prescribes a rule of evidence in determining whether a person is a member of a partnership, that is, a person who receives a share of the profits of a business is presumptively a partner. When this is shown a prima facie case is made. It is clear in this case that the daughters*2028 were credited with shares of profits of the business, that they agreed to share in the profits and the losses, and that they rendered some service to the business.
We think that it is of no importance that the petitioner and his son, members of the partnership, did not give to the petitioner's daughters an interest in the accumulated profits or in the property used by the partnership in the business. There may be a partnership in which one partner is the sole owner of the property and the firm capital may consist merely of the right to use property contributed by and belonging to one member. See ; . See also ; ; ; . This case is to be distinguished from those cases which hold that where one person or a partnership promises to give to another person an interest in the profits of an enterprise without any consideration*2029 or without anything being furnished in the way of capital or services to the business. See . See also 47 C.J. 654; . The verbal agreement was to share profits and losses and not merely to share profits. And the daughters did render services. It is not of great importance what the value of the services rendered was so long as services were contemplated as one of the considerations. We think, too, that when the taxpayer has shown that the person agreed to receive, and did receive profits of the business, the agreement being entered into by members of the partnership and such person, a prima facie case is made out and the partnership is presumed to exist. All the evidence in the case taken together is not sufficient to overcome the prima facie case which is thus brought within the statute. But wholly aside from the presumption created by statute, we think that the agreement for the sharing of profits and losses and the rendition of the services is sufficient to establish a partnership. See *2030 , and .
The remaining issue is whether the amounts credited to the petitioner's wife on the partnership books in 1925, 1926, and 1927 as rentals for the use of two buildings in Springfield constitute taxable *1115 income to the petitioner for those years. The petitioner put up the buildings at his own expense upon property in which the wife had a life estate, and from the time of the erection of the buildings rentals therefor were duly credited to the wife. It is a well established principle of law that, where a person erects a building on property of another, knowing all the facts, the building becomes the property of the owner of the land. See ; ; . This is not a case where one person was induced by another to make improvements on property which he supposed or considered that he owned. The petitioner had a remainderman's interest in the property which he acquired in the*2031 same instrument by which his wife acquired the life estate, and he knew all the facts. We think also that the acts of the parties in crediting the rental to the wife represents the understanding of the parties at the time that the property belonged to the wife and that she was to have the rentals or income therefrom.
Great reliance is placed by the respondent upon the fact that the petitioner in 1927 submitted a statement to a New York bank in which he stated that the real estate was owned by him without encumbrance. This statement is inconsistent with the actions of the parties through all the years and we do not think that it alone is sufficient to take the case out of the general rule of law.
We think that under the facts and the law applicable thereto the petitioner did not receive any taxable income with respect to the rentals on the above property.
Reviewed by the Board.
Judgment will be entered under Rule 50.
STERNHAGEN dissents.