*2195 Upon the evidence, held that the petitioners constituted a partnership and that certain agreements between each petitioner and his wife did not relieve either petitioner from liability to pay tax upon his entire distributive share of the partnership income.
*155 These are proceedings, duly consolidated for hearing and decision, for the redetermination of deficiencies in income tax for the calendar year 1922 in the amount of $3,067.72 in the case of the petitioner, W. L. Heinickle, and in the amount of $2,692.83 in the case of the petitioner, Claude C. Haworth. Only a part of each deficiency is in controversy.
It is alleged that the respondent erred in adding to the net income of each petitioner his wife's share of the profits of the partnership of Heinickle & Haworth.
FINDINGS OF FACT.
The petitioner, W. L. Heinickle, is an individual with place of business at Venice, Calif.
The petitioner, Claude C. Haworth, is an individual with place of business at Santa Monica, Calif.
Claude C. Haworth was married about 19 years ago. He was at that*2196 time and for years thereafter a salesman for the Zellerback Paper Co. His wife, Josephine I. Haworth, at the time of their marriage owned a lot at Larkspur, Calif. Sometime after their marriage Haworth exchanged this lot and $100 for a bungalow on 47th Street. This was later sold. Some other property which they had accumulated was also sold and they, together, had about $9,000.
At the time W. L. Heinickle and his wife, Bertha Heinickle, were married on July 19, 1912, they each had a small amount of money. They combined their money and W. L. Heinickle started dealing in real estate and thereby accumulated more money. Prior to October 1, 1919, W. L. Heinickle and his wife owned equal shares in some flats on 14th Street. In 1920 these flats were sold for an amount between $30,000 and $35,000. Bertha Heinickle assisted *156 in the real estate activities conducted by her husband, W. L. Heinickle.
At some time prior to October 1, 1919, W. L. Heinickle and Claude C. Haworth purchased the business of the H. M. Miller Co., which was a corporation engaged in the business of dealing in Ford automobiles at Santa Monica, Calif. Thereafter, the two petitioners, for a period*2197 of a year or a year and a half, operated under the name of the Miller Co. in order to be able to continue the same contract with the Ford Motor Co. Afterwards they entered into a contract with the Ford Motor Co. under the name of Heinickle & Haworth and the business was thereafter conducted under that name. In purchasing the business of the H. M. Miller Co., Heinickle and Haworth used funds which they and their wives had accumulated as set forth above. The proceeds of the sale of the flats by Heinickle and his wife also went into the automobile business later.
Under date of October 1, 1919, Claude C. Haworth and W. L. Heinickle entered into the following agreement in writing:
ARTICLES OF CO-PARTNERSHIP made and entered into the 1st day of October, A.D., 1919, between W. L. HEINICKLE, of the County of Los Angeles, State of California, on the one part, and C. C. HAWORTH of the same County and State, on the other part, WITNESSETH as follows:
The said parties above named have agreed by these presents and by these presents do agree to become co-partners in business, together, under and by the name, firm and style of MILLER COMPANY, until said co-partnership shall be dissolved*2198 by mutual consent, in the business of buying, selling and in every way dealing in automobiles, automobile parts, garages, automobile machine shops, and buying and selling all and every kind of merchandise, goods and wares, and especially carrying on the business heretofore carried on by the H. M. MILLER COMPANY, a corporation, in the Cities of Santa Monica and Venice, County of Los Angeles, State of California, said co-partnership to commence on the 1st day of October, 1919, and continue until dissolved by mutual consent, or in the event of the death of one of the partners, no dissolution shall occur without the joint consent of the other partner and the wife of the partner so deceased; it being understood that each of said partners has made a will covering this matter.
And to the end and for the purpose of said co-partnership, the said parties have delivered in as capital stock, the stock, good will in business, machinery etc. purchased by them from the H. M. Miller Company, the earnings and proceeds from the same to be used and employed in common between them for the support and management of the said business to their mutual benefit and advantage;
And it is agreed by and between*2199 the said parties, that at all times during the continuance of their co-partnership, they and each of them will give their attendance, and to their and each of their best endeavors, and to the utmost of their skill and power exert themselves for their joint interest, profit, benefit and advantage, and will buy and sell merchandise with their joint stock, and the increase thereof, and carry on the shops and business of said co-partnership in the business aforesaid; that they shall and will at all times during their *157 co-partnership, bear, pay, and discharge, equally between them, all rents and other expenses that may be required for the support and management of the said business, and as a salary for their faithful work in the premises, each of said partners shall be entitled to the sum of Fifty ($50.00) Dollars per week, for which sum they shall be credited each week, and the same paid as demanded by such partner.
It is understood that said partners in their personal capacity have executed certain notes, chattel mortgages and agreements to complete the payment for said stock, fixtures, etc. This indebtedness shall be and constitute an indebtedness against the said co-partnership*2200 and it shall be paid out of any moneys and profits which may be received from said business, or in the event that it is impossible to take sufficient money out of their business to pay said notes and indebtedness as they become due, then each of said partners shall pay into the said co-partnership his proportion of said deficiency, which moneys shall be used in canceling said indebtedness and such other indebtedness as may accrue against said co-partnership; that all gains, profits and increase that shall come, grow or arise from or by means of said business, shall be divided between them, share and share alike; and all loss that shall happen to their joint business, by bad debts or otherwise, shall be borne and paid equally between them; that there shall be kept, at all times during the continuance of their co-partnership, perfect, just and true books of account, wherein each of the said co-partners shall enter and set down, as well all money by them, or either of them, received, paid, laid-out, and expended in and about the said business, as also all the goods, wares, commodities and merchandise, by them or either of them bought or sold, or received for repairing or other work in*2201 their shop by reason or on account of said business, and all other matters and things whatsoever tothe said business and management thereof in any wise belonging; which said books shall be used in common between the said co-partners, so that either of them may have access thereto without any interruption, or hindrance of the other; that the said co-partners, once in each year, during the continuance of the said co-partnership, as aforesaid, to-wit: on the first day of January in each year after 1920, or oftener, if necessary, shall make, yield, and render each to the other a true, just and perfect inventory and account of all the profits and increase by them, or either of them, made, and of all loss, by them, or either of them, sustained; and also, of all payments, receipts and disbursements and of all other things by them made, received, disbursed, acted or suffered, in their said business; and the same account being so made, they shall and will clear and adjust, each to the other, at the time, their just share of the profits so made as aforesaid; that during the continuance of said co-partnership, neither of them shall or will endorse any note, or otherwise become security for any*2202 person or persons whomsoever, without the consent of the other said co-partner.
It is further understood that neither partner or his successor in interest shall sell, mortgage or in any way hypothecate his interests in said co-partnership to any other person without the writtem consent of the other partner and an acceptance bythe successor in his interest of the terms of this agreement and any supplement or amendment thereto; that at the determination of their co-partnership, the said co-partners each to the other shall and will make a true, just and final account of all things relating to their said business; and in all things truly adjust the same; and that all and every stock and stocks, building supplies and equipment, machinery, tools and other articles belonging to said co-partnership, as well as the gains and increase thereof which shall appear to be remaining in either money, goods, wares, fixtures, debts or otherwise, *158 shall be divided between them share and share alike. That neither party shall contract liabilities in the name and on the credit of the firm in purchasing and replenishing their stock of goods, building, supplies and equipment, merchandise and*2203 machinery, to exceed the sum of Five Hundred ( $500) Dollars at one time, without the consent of the other partner: that neither of said co-partners shall or will, during the said term, exercise or follow the business mentioned in this agreement except as a member of said firm, but shall at all times do his best endeavor, in and by all lawful means, to the utmost of his skill and power, for the joint interest, profit, benefit and advantage of the co-partnership aforesaid.
IN WITNESS WHEREOF, the parties have hereunto set their hands the day and year in this agreement first above written.
Under date of October 1, 1919, W. L. Heinickle and his wife, Bertha Heinickle, entered into the following agreement in writing;
ARTICLES OF CO-PARTNERSHIP, made and entered into this 1st day of October in the year of our Lord One Thousand Nine Hundred and Nineteen, 1919, between WILLIAM L. HEINICKLE and BERTHA HEINICKLE, husband and wife, of the City of Santa Monica, County of Los Angeles, State of California.
WITNESSETH
The said parties above named have agreed, and by these presents do agree, to become co-partners in business together to the extent of equal interests in fifty per cent*2204 (50%) of the business now conducted in the name of HEINICKLE and HAWORTH, a co-partnership composed of Wm. L. Heinickle and Claude C. Haworth, in the business of general automobile garage and sales rooms, and in the buying, selling and vending of all sorts of automobiles, tractors, automobile delivery trucks, automobile accessories of all sorts and kinds and in the carrying on of all lines of trade usually conducted by and carried on in a general automobile garage, repair shop, and sales agency, and occupying the store, sales and garage room known as 210 Santa Monica Boulevard in the City of Santa Monica, County of Los Angeles, State of California.
Their said co-partnership to commence on the 1st day of October, 1919, and to continue thereafter for such length of time as the parties hereto may elect, or until the same may legally and lawfully dissolve as provided by law.
And it is agreed by and between the said parties, that at all times during the continuance of their co-partnership, they and each of them will give their attendance, and do their and each of their best endeavors, and to the utmost of their skill and powers exert themselves, for their joint interest, benefit, *2205 profit and advantage, and will buy and sell merchandise with their joint stock, and the increase thereof, in the business aforesaid; that they will at all times during their co-partnership, bear, pay and discharge, equally between them, all rents and other expenses that may be required for the support, management, and furtherance of the said business; that all gains, profits and increase that shall come, grow, arise from or by means of the said business, shall be divided between them share and share alike, and all loss that shall happen to their said joint business, by bad debts, or otherwise, shall be borne and paid equally between them; that the said William L. Heinickle shall have the management and control actively of the said business subject to ratification of such acts as he may do, perform, in and about the management and control of the said business by the said Bertha Heinickle; that there shall be kept at all times during the continuance of their co-partnership, perfect, just and true books of account, wherein each of said co-partners shall enter and set down, or cause to be entered and set down, as well as all money by *159 them, or either of them, received, paid, *2206 laid out and expended in and about the said business as also all goods, wares, commodities, and merchandise, automobiles, accessories, supplies, by them or either of them bought or sold by reason or on account of the said business, and all matters and things whatsoever to the said business and management thereof in any wise belonging; which said books shall be used in common between them, so that either of them may have access thereto without interruption or hindrance of the other;
That the said co-partners, once each year, during the continuance of the said co-partnership, as aforesaid, to-wit: on the 1st day of January in each year, or oftener if necessary, shall make, yield, and render, each to the other, a true and just inventory and account of all the profits and increase by them or either of them, made in the said co-partnership business and of all loss, by them, or either of them, sustained; and, also, all payments, receipts, disbursements and of all other things by them made, received, disbursed, acted or suffered in their said business; and the same account being so made they shall and will clear and adjust each to the other, at the time, their just share of the profits*2207 so made as aforesaid; that during the continuance of the said co-partnership neither of them shall or will indorse any note or otherwise become the security for any person or persons whomsoever, without the written consent of the other said co-partner, except that the said William L. Heinickle, shall and may so indorse any note or security, or become the same, for and on behalf of the said co-partnership business as he as the manager thereof may deem proper and necessary;
That at the end, or other sooner determination of their said co-partnership, the said co-partners, and each to the other, shall make and will make a true, just and final account of all things relating to their said business, and in all things truly adjust the same; and that all and every stock, and stocks, as well as the gains and increase thereof which shall appear to be remaining, either in money, goods, wares, merchandise, debts or otherwise shall be divided between them, share and share alike.
On October 1, 1919, Claude C. Haworth and his wife, Josephine I. Haworth, entered into an agreement identical in its terms with the one entered into between W. L. Heinickle and his wife, Bertha Heinickle, except that*2208 the Haworth agreement did not contain the clause "made in the said partnership business and of all loss, by them or either of them" which appears in the next to the last paragraph of the Heinickle agreement.
Each and every party to the above agreements knew of each agreement and consented thereto. None of the agreements were ever recorded.
The partnership was dissolved at the end of 1922. During the time of its existence there was only one distribution of profits. At one time $10,000 was divided equally between W. L. Heinickle and Claude C. Haworth. The remainder of the partnership profits or earnings was used to purchase property which was carried in the names of Heinickle and Haworth as individuals. A building in Venice was built by the partnership and two corners at Santa Monica and one in Sawtelle were purchased. During the time of the existence of the partnership Heinickle and Haworth each received *160 a salary. Neither Bertha Heinickle nor Josephine I. Haworth were regularly employed in the business. They were at the place of business part of the time and occasionally sold automobiles. Neither of them drew a salary. At the time the partnership was dissolved*2209 on December 31, 1922, Heinickle and his wife took one-half of the assets and Haworth and his wife took the other half. Heinickle took the business which was conducted at Venice and Haworth took the branch at Santa Monica. The remaining assets were divided as nearly equally as possible.
During the time of the existence of the partnership Haworth also conducted a business of financing the purchase of automobiles. The $5,000 which he received as a distribution from the partnership was placed by him in another bank account in his own name. Haworth and his wife continued to add to this fund and never withdrew any from it except to use in purchasing automobile paper.
At the time of the partnership agreement of October 1, 1919, between Heinickle and Haworth, Heinickle and his wife and Haworth and his wife contributed in all about $35,000, of which $22,000 was in cash.
The books of the partnership carried salary accounts in the names of W. L. Heinickle and Claude C. Haworth but no accounts were carried in the names of their wives. The books contained no capital accounts.
The partnership of Heinickle and Haworth filed a partnership return on Form 1065 covering the year 1922*2210 on or before March 15, 1923, and reported therein net income in the amount of $44,313.19. The respondent increased the amounts to $52,625.87.
W. L. Heinickle, Bertha Heinickle, Claude C. Haworth and Josephine I. Haworth each filed, on or before March 15, 1923, a complete and separate income-tax return for the year 1922. In determining the tax liability of each of these persons the respondent ruled that the wives were not members of the partnership of Heinickle & Haworth and increased each petitioner's reported income in an amount alleged by the petitioners to represent partnership income to each of the wives.
OPINION.
MCMAHON: The sole question for determination is whether the net income derived in 1922 by the business carried on in the name of "Heinickle and Haworth," is taxable equally to each of the petitioners or whether only one-half of such income is taxable to them equally. It is the contention of the petitioners that one-half of the income of the business was taxable to their wives, by virtue of the three agreements set forth in our findings of fact
*161 Section 218(a) of the Revenue Act of 1921 provides as follows:
SEC. 218. (a) That individuals carrying*2211 on business in partnership shall be liable for income tax only in their individual capacity. There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the poartnership for the taxable year, or, if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the partnership is computed, then his distributive share of the net income of the partnership for any accounting period of the partnership ending within the fiscal or calendar year upon the basis of which the partner's net income is computed.
A reading of the three agreements convinces us that the various parties did not intend to create one partnership consisting of the petitioners and their wives. Clearly, it was the intention of the petitioners to create a partnership between themselves, and this they accomplished. What then, was the result of the execution of the agreements between each petitioner and his wife?
The Civil Code of California, 1927, Art. V., par. 2450, provides:
A general partnership is dissolved as to all the partners:
* * *
(4) By the transfer*2212 to a person, not a partner, of the interest of any partner in the partnership property.
No attempt was made by either of the petitioners to transfer to his wife any interest in the partnership assets, there was no intention on the part of the petitioners to dissolve the partnership of which they were the members, and we know of no rule of law that would operate to dissolve such partnership in these circumstances.
There is no doubt that under the laws of California a wife is competent to enter into a partnership with her husband. Sec. 158, Civil Code of California. But, before the income from the business operations of the partnership of Heinickle & Haworth was income to the partnerships composed of each husband and wife, it was first income to the members of the main partnership and is taxable to them. See ; affd., ; and ; affd., ; ; certiorari denied, *2213 . See . We consider ; affd., , in conflict with this decision, but, in our opinion, the decision in that case is contrary to the weight of authority.
Reviewed by the Board.
Judgment will be entered for the respondent.
MARQUETTE, SMITH, and STERNHAGEN concur in the result only.