*228 Decision will be entered for the respondent.
Prior to the taxable years petitioner assigned a 48 percent interest in an automobile parts agency and warehouse business, which he had established with his own capital, to his wife as trustee for their two daughters, and simultaneously executed a partnership agreement purporting to make the wife, as trustee, an equal partner with him in the business. Petitioner remained in complete control and management of the business. Held, that all of the profits of the business are taxable to petitioner as his individual earnings.
*748 The respondent has determined income tax deficiencies of $ 5,464.45 for 1940 and $ 9,693.84 for 1941. The only question in issue is whether there was a partnership between petitioner and his wife, the wife acting as trustee for their two daughters.
FINDINGS OF FACT.
Petitioner is a resident of Jacksonville, Florida. He filed his income tax returns for 1940 and 1941 with the collector of internal revenue for the district of Florida, at Jacksonville.
In about 1920 petitioner began business*229 in a small way at Jacksonville, selling automobile parts at retail under the trade name of Auto Parts Co. In 1927 he secured the distributing agency for south Georgia and most of Florida for the products handled by the National Automotive Parts Association. This business consisted principally of maintaining a warehouse for stocking and distributing the *749 products to various jobbers in the territory. Petitioner undertook to operate the warehouse in conjunction with his regular established business, but later on he found it advisable to separate them.
In 1928 petitioner and his wife formed a partnership under which they operated both branches of the business. No question as to this partnership is involved here. In 1930 the business was incorporated under the name of Auto Parts Co. Petitioner and his wife became the principal stockholders and president and secretary, respectively.
In 1937 petitioner decided to separate the warehouse business from the retail sales business. To carry out that plan he caused the corporation to sell to him, individually, the warehouse inventory, accounts receivable, and equipment at their book value of $ 73,956.96. The inventory alone amounted*230 to approximately $ 67,000. Petitioner paid the corporation, Auto Parts Co., $ 417.50 in cash, received a credit for $ 5,582.50 on the company's indebtedness to him, and gave his promissory note, signed "L. C. Benson, N. A. P. A. Jacksonville Warehouse," for $ 67,956.96, with interest at 6 percent. The note was paid out of the profits from the warehouse business, $ 7,956.96 in 1939, $ 20,000 in 1942, and $ 40,000 in 1943.
Until 1940 petitioner conducted the warehouse business as a sole proprietorship under the name of "N. A. P. A. Jacksonville Warehouse." That branch of the business will be referred to hereinafter as the warehouse and the other as the sales agency.
At January 2, 1940, petitioner and his wife were living together and had two daughters, Adelaide Benson, 23 years of age, and June Benson, 18 years of age. On that date petitioner executed two separate trust deeds, in each of which he transferred to his wife as trustee for one of the daughters a 24 percent interest in the warehouse. Each of the gifts was valued at $ 10,800, which represented the book value of a 24 percent interest in the assets. Petitioner retained a 52 percent interest. On the same date, January 2, *231 1940, petitioner and his wife, the wife acting as trustee for Adelaide and June, entered into a partnership agreement under which they proposed to operate the warehouse as equal partners. The agreement provided that petitioner was contributing to the partnership a 52 percent interest in the business and that his wife was contributing the two separate 24 percent interests which she held as trustee for Adelaide and June. It was further provided:
12. It is expressly covenanted and agreed that the party of the first part shall have the sole and exclusive management of the partnership business, and shall carry on and manage the same for the common benefit of the partners to the utmost of his skill and ability, and to employ such clerks, workmen, and other employees as he shall deem necessary; that the party of the second part shall *750 not take any part or in any way interfere in the conduct or management of said business; nor shall she use the firm name of the partnership or sign her name as a partner therein unless requested to do so by the party of the first part.
It was further provided:
6. That the receipts of the business conducted by the partnership shall be promptly deposited*232 to the credit of the partnership in some bank to be agreed upon by said parties and unless otherwise agreed upon by said parties, the same shall not be withdrawn except upon the signature of the party of the first part; and that said party of the first part shall not pay any bills of the partnership business except by check drawn on said account; provided, however, that minor incidental expenses in the course of a day's business may be paid in cash, from the coffers of the business, and a memorandum showing the nature and amount of such expenditure be substituted for the cash drawn.
It was also provided that "it shall not be necessary" to disclose the wife's name in any dealing between the partnership and a third party or in any matter affecting the partnership; that either partner might terminate the partnership upon 30 days' notice, but that neither party could dispose of his or her interest without first offering it to the other party.
After execution of the partnership agreement petitioner continued to manage the warehouse and the sales agency just as he had been doing. He drew a salary from the sales agency (the amount thereof for 1940 and 1941 is not shown) but received no*233 salary or compensation of any kind from the warehouse. He devoted most of his time to the sales agency. The warehouse work consisted principally in stocking and distributing the heavier replacement parts to the various jobbers in the territory. The merchandise inventory amounted to approximately $ 69,000 at January 2, 1940, $ 88,000 at December 31, 1940, and $ 89,000 at December 31, 1941. About 15 men were employed at the warehouse in 1940 and 1941. Petitioner was at all times in complete control and management of the business. Neither his wife nor either of the daughters took any active part in it.
The net profits of the warehouse for 1940 and 1941, as shown in the partnership returns which were filed for those years, were, respectively, $ 38,383.40 and $ 44,124.57. Of the 1940 profits, $ 1,517.07 was withdrawn by petitioner and the balance was left in the business. The drawings for the years 1941, 1942, and 1943 were as follows:
| Adelaide | |||
| Year | L. C. Benson | Benson | June Benson |
| 1941 | $ 14,400.00 | $ 13,800.00 | $ 13,800.00 |
| 1942 | 30,000.00 | 6,000.00 | 6,000.00 |
| 1943 | 42,800.00 | 21,146.34 | 21,146.34 |
The partnership balance sheets for 1940 to 1943, inclusive, showed*234 the following investment accounts: *751
| Celestia Morgan | |||
| Benson, trustee | Celestia Morgan | ||
| Year | L. C. Benson | for Adelaide | Benson, trustee |
| Benson | for June Benson | ||
| 1940 | $ 41,842.29 | $ 20,012.02 | $ 20,012.02 |
| 1941 | 50,387.06 | 16,801.92 | 16,801.92 |
| 1942 | 53,772.56 | 26,210.60 | 26,210.60 |
| 1943 | 43,637.75 | 20,140.50 | 20,140.50 |
The wife as trustee for the daughters received their distributions and deposited them in separate bank accounts for their benefit. She alone, as trustee, had the power to draw on their accounts and handle the funds in the accounts. From time to time she invested the funds in securities for the beneficiaries and recorded such investments in books of account which were kept for the trusts.
Petitioner filed a gift tax return for 1940 in which he reported the gifts in trust of a 24 percent interest in the warehouse to each of his daughters at a value of $ 10,800 each. The respondent accepted these returns, but increased the value of each 24 percent interest to $ 20,160. This increased valuation resulted in a gift tax deficiency of $ 411.60, which petitioner paid under protest, with interest, on June 16, 1944.
In his income tax returns*235 for 1940 and 1941 petitioner reported as his income 52 percent of the profits of the warehouse for those years. His wife, as trustee, filed fiduciary returns for those years for both of the trusts and reported in each return 24 percent of the partnership profits. Upon examination and audit of petitioner's returns for 1940 and 1941 the respondent proposed to include all the profits from the warehouse in petitioner's income. After protest by petitioner and conference with the revenue agent in charge, the proposal was modified to the extent of permitting petitioner to report in each year $ 10,000 of the warehouse profits as compensation for services and to report 52 percent of the remaining profits as distributable income. Corresponding, or offsetting, adjustments were permitted in the trust returns filed for those years. These adjustments resulted in deficiencies against the petitioner of $ 1,670.53 for 1940 and $ 2,436.02 for 1941, and lesser amounts of refunds for the trusts. Petitioner paid the additional assessment, with interest, on June 13, 1944.
In the deficiency notice herein, mailed to petitioner on September 8, 1944, the respondent determined that:
* * * the entire net*236 income of an alleged partnership and two trusts established by the taxpayer for the benefit of his two minor daughters, is taxable to the taxpayer as the real owner thereof.
The warehouse was operated by petitioner during 1940 and 1941 as his own business and not by petitioner and his wife as partners.
*752 OPINION.
Our only question here is whether there was a business partnership between petitioner and his wife, the wife acting as trustee for their two daughters, as to the business operated under the name of "N. A. P. A. Jacksonville Warehouse."
We think that the above stated facts, which we shall not repeat, bring this case within the rule of Commissioner v. Tower, 327 U.S. 280">327 U.S. 280, and Lusthaus v. Commissioner, 327 U.S. 293">327 U.S. 293. Petitioner's claim for recognition of the partnership here rests entirely upon the alleged ownership by each of the daughters of an undivided 24 percent capital interest in the business. These capital interests were assigned to the daughters by trust deeds to their mother simultaneously with the execution of the partnership agreement.
In Commissioner v. Tower, supra,*237 the Court said:
* * * The question here is not simply who actually owned a share of the capital attributed to the wife on the partnership books. A person may be taxed on profits earned from property, where he neither owns nor controls it. Lucas v. Earl, supra. The issue is who earned the income and that issue depends on whether this husband and wife really intended to carry on business as a partnership. Those issues cannot be decided simply by looking at a single step in a complicated transaction. To decide who worked for, otherwise created or controlled the income, all steps in the process of earning the profits must be taken into consideration. See Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331, 334. Of course, the question of legal ownership of the capital purportedly contributed by a wife will frequently throw light on the broader question of whether an alleged partnership is real or pretended. But here the Tax Court's findings were supported by a sufficient number of other factors in the transaction, so that we need not decide whether its holding as to the completeness of the gift was correct. Cf. Helvering v. Hallock, 309 U.S. 106">309 U.S. 106, 117, 118;*238 Burnet v. Wells, 289 U.S. 670">289 U.S. 670, 677.
II. There can be no question that a wife and a husband may, under certain circumstances, become partners for tax, as for other, purposes. If she either invests capital originating with her or substantially contributes to the control and management of the business, or otherwise performs vital additional services, or does all of these things she may be a partner as contemplated by 26 U. S. C. §§ 181, 182. The Tax Court has recognized that under such circumstances the income belongs to the wife. A wife may become a general or a limited partner with her husband. But when she does not share in the management and control of the business, contributes no vital additional service, and where the husband purports in some way to have given her a partnership interest, the Tax Court may properly take these circumstances into consideration in determining whether the partnership is real within the meaning of the federal revenue laws.Neither the wife nor the daughters here invested any capital "originating" with them; the capital all originated with the petitioner. Neither did the wife *239 nor the daughters contribute any services to the business which produced the income. It was at all times under the exclusive management and control of the petitioner. The conclusion here is inescapable that the trust conveyances and the partnership *753 agreement were all related steps in a plan of the petitioner to divide his income among the members of his immediate family for the purpose of reducing his taxes.
The circumstances of the creation of the trusts with the wife acting as trustee for the daughters does not affect the question of whether there was a partnership which should be recognized for tax purposes. A trustee's participation in a business partnership stands on the same considerations as an individual's.
We think that the respondent correctly determined that all of the warehouse profits are taxable to the petitioner as his individual income.
Decision will be entered for the respondent.