*275 Decision will be entered under Rule 50.
Family Partnership -- Wife Recognized. -- A husband who managed a business but who contributed only a small percentage of the capital, is not taxable on his wife's share of the partnership income where the wife's mother contributed most of the capital and dictated the terms of the partnership agreement, including the provision that his wife should have a one-fourth interest and where the wife contributed more capital than the husband and took an active part in partnership discussions and decisions.
*201 The Commissioner determined a deficiency of $ 2,739.14 in income tax of the petitioner for the year 1944. The only issue is whether one-half or only one-fourth of the income of Odle Chevrolet Co. for 1944 is taxable to the petitioner. The decision depends upon whether his wife Ruth is recognized as a partner.
FINDINGS OF FACT.
The petitioner filed a separate individual income tax return for 1944 with the collector of internal revenue for the district of Tennessee.
The petitioner was married*276 in November 1929 to Ruth Threadgill of Lexington, Tennessee. He was then employed by Porter Chevrolet Co. at a salary of $ 125 per month. He had worked for that company for about five years. He and his wife lived with his wife's parents for a number of years after their marriage.
The petitioner learned in 1930 that Porter wanted to sell his business in Lexington. H. H. Threadgill, Ruth's father, suggested that his wife furnish the money to purchase the business and that the petitioner operate it. Mrs. Threadgill agreed to invest and did invest about $ 10,306.67 in the business upon condition that Ruth invest her money and that the petitioner sell his only asset, his automobile, and invest the proceeds. The business was purchased from Porter late in June 1930. Ruth invested $ 581.79 of her own money, being all of the property which she had at that time. The petitioner sold his car and invested the proceeds, amounting to about $ 330, in the business. Mrs. Threadgill had proposed orally that they form a partnership to operate the business, the petitioner to receive a salary of $ 125 a month for being the active manager and all additional profits or losses to be *202 shared*277 one-half by her, one-fourth by Ruth and one-fourth by the petitioner. The petitioner and Ruth agreed. Their partnership agreement was never reduced to writing. The fact that Ruth was a partner was known to and relied upon by their banker, was known to others with whom the partnership dealt, and was generally known in Lexington. The partnership continued until January 1947, when the partnership interests were changed to one-third each by gifts from Mrs. Threadgill.
The business was operated after June 1930 under the name of Odle Chevrolet Co. It sold several kinds of automobiles, a line of appliances, and a line of farm machinery.
The parties intended in 1930 that Ruth would give full time to the business as a bookkeeper, but during the first few years she had to take care of her mother, who became ill. Later her mother recovered and Ruth worked regularly in the office from 1934 until shortly before the birth of her first child in the latter part of 1937. She did bookkeeping under the direction of an employee and received a salary of $ 50 per month while she was working in the office. She never worked regularly thereafter, but occasionally assisted at the place of business *278 during rush periods. Mrs. Threadgill never worked regularly in the business. There were about 35 employees in 1944.
The petitioner managed the business and handled all routine matters, but decisions on all other important matters, such as the borrowing of money, the purchase of real estate, and changes in or additions to the lines of merchandise handled, were made by all three partners. Ruth took an active part in frequent business discussions of the firm and at times agreed with her mother as opposed to the petitioner.
The business sustained losses in 1931 and 1932, but since then it has operated at an annual profit.
An investment account was set up on the books of the partnership in the name of Mrs. Threadgill and her investment, withdrawals, and shares of profits and losses were recorded therein. A similar account was set up on the books in the name of the petitioner. Ruth's investment, withdrawals, and her shares of the profits and losses were recorded in that account along with those of the petitioner, without being separately identified. A separate investment account in the name of Ruth was set up for the first time at the beginning of 1947.
Ruth drew many checks upon the*279 firm bank account in all years. She used money thus withdrawn to pay personal expenses, family living expenses, income tax, and the purchase price of several pieces of real estate which she purchased in her own name. The partnership *203 took title to real estate in the names of all three partners on May 5, 1945. Previously it had taken title to real estate in the firm name.
Ruth regularly filed separate returns, reporting her one-fourth of the income of the partnership. Those returns, up to the one for 1944, were accepted by the Commissioner as a basis for her income tax and the tax was paid accordingly.
The Commissioner, in determining the deficiency for 1944, held "that the share of the distributive net income of the Odle Chevrolet Company, Lexington, Tennessee, which was reported for taxation in a return filed by Ruth T. Odle, your wife, is properly includible in income taxable to you and such income has been transferred to you accordingly."
OPINION.
This is not a family partnership case in which a husband attempts to divide his successful business for tax purposes by gifts to his wife. Cf. ; .*280 This petitioner had no assets to give when this partnership was formed. His mother-in-law decided to give him an opportunity to operate a business. She supplied most of the money, without which there would have been no business, no partnership, and no income to tax, and she dictated the terms of the oral partnership agreement. She named her daughter as an equal partner with the petitioner. The latter was entirely satisfied to receive a one-fourth interest as his share. He had no money and his managerial abilities were then untried and unproven. Furthermore, Ruth contributed some of her own money to the business at the beginning. She assumed the risk involved. She also contributed services in the office for a few years but they were not "vital." She actively participated in the firm councils and exercised her rights as a partner in making decisions, sometimes being the deciding factor on important decisions. She was intended to be and she was a real partner, not a sham one. Her right to one-fourth of the 1944 income is not to be denied merely because no account was set up in her name on the partnership books until after 1944. .*281 Those books were clumsily kept, which is an explanation but a poor excuse. She made withdrawals freely, many for her own purposes. The petitioner had no right to Ruth's share of the partnership income and the Commissioner erred in taxing it to him, since Ruth was a real partner. Cf.
Decision will be entered under Rule 50.