*1751 Petitioner, his wife and daughter were residents of Michigan, and conducted a business under the name of the American Metal Weatherstrip Company. The respondent determined that all of the income from this business belonged to petitioner. Upon the record, held, that one-third of the income of such business belonged to the wife and one-third to the daughter. L. F. Sunlin, 6. B.T.A. 1232, and other cases, followed.
*1212 These proceedings, which were consolidated for hearing and decision, are for the redetermination of deficiencies in income taxes for the calendar years 1923 to 1926, inclusive, in the amounts of $1,333.92, $6,350.03, $3,093.29 and $178.71, respectively.
The issue involved in both proceedings is whether the respondent erred in including in petitioner's income for the years involved all of the income from a business carried on during those years under the name of the American Metal Weatherstrip Company, instead of leaving one-third of such income in the return of petitioner's wife and one-third in*1752 the return of petitioner's daughter, as originally reported by them.
*1213 FINDINGS OF FACT.
Petitioner is an individual and a resident of Grand Rapids, Mich.
Grace T. Dickinson is petitioner's wife. They had four children, only one of whom, Grace Dorothy, is involved in these proceedings. Grace Dorothy was married in 1924, and has since been, and is now known as Dorothy Dickinson Sanderson. Petitioner has four sisters, Julia, Irene, Marion and Martha. Petitioner's wife and children lived at home with him, and petitioner's four sisters all lived in Grand Rapids.
During the years 1914 to 1920, petitioner was interested in a corporation known as the American Metal Weatherstrip Company. This corporation was organized under the laws of Michigan in the year 1914, and was engaged in the manufacture and sale of weather stripping.
The capital stock of the corporation was of the par value of $18,000, of which $6,000 par value was issued to one Gould, the balance of the stock being issued to petitioner. In the latter part of 1919, petitioner purchased the stock of Gould and, thereupon, all the stock of the corporation was owned by petitioner.
After petitioner acquired*1753 all the stock in the American Metal Weatherstrip Company he formulated a plan to distribute all but a quarter of his total holdings in said corporation equally among his wife, his daughter, and his four sisters.
Petitioner had previously made gifts to his wife and daughter, Grace Dorothy. This was about 1918 or 1919, when he gave his wife and daughter a part of his stockholdings in the Grand Rapids Hardware Company, a corporation engaged in the window pulley business. The gift of the Grand Rapids Hardware stock was part of a plan formulated by petitioner to enable his wife to have an independent income and to do the same for his children, as they became of age. Grace Dorothy was the only one of the petitioner's children who reached the age of 21 prior to 1920.
In 1920 the four sisters of petitioner were not in as good a financial position as petitioner desired them to be. The four sisters had worked for years in the firm of Dickinson Bros., a printing and engraving business which originally was a partnership between petitioner and his brother, and later, upon the death of petitioner's brother, was owned entirely by petitioner. In planning to give them part of the American*1754 Metal Weatherstrip Company stock, petitioner felt that it would improve their financial condition and also indicate his appreciation for their efforts.
Petitioner acquainted his sisters, his wife and his daughter with his plans with respect to the distribution to them of a stock interest *1214 in the American Metal Weatherstrip Company. He did not, however, carry out these plans. Instead, he formulated a new plan whereby he would liquidate the corporation, because there was no further use for a corporation, and thereafter have the business continued as a partnership by giving to his wife and daughter and four sisters an eighth interest each, and retaining for himself a quarter interest. The corporation was accordingly liquidated and dissolved on April 15, 1920.
Petitioner discussed this new plan with his sisters and wife and daughter, and explained to them that under the plan they would each have an eighth interest in the business, and in its profits and losses, to which they all accepted and agreed.
Some time elapsed between the time the corporation was dissolved and the partnership between petitioner, his wife, daughter and sisters was organized. During this interim*1755 petitioner was continuing the business alone, under the name of the American Metal Weatherstrip Company. To cover his activities in this respect, petitioner's attorney, who was handling the corporate liquidation for petitioner, filed with the County Clerk of Kent County a "Certificate of Persons Conducting a Business under an Assumed Name," as required by the Michigan law, which showed that the business of the American Metal Weatherstrip Company was being carried on solely by petitioner. This certificate was filed before petitioner's wife, daughter and sisters agreed to become members of the partnership.
When petitioner's wife, daughter and sisters told him that they would enter into the partnership, a set of books as of January 1, 1920, was opened by the partnership, in which the opening sentence was as follows:
On January 1, 1920, a partnership, named the American Metal Weatherstrip Company, was formed for the purpose of carrying on a metal weatherstrip business.
The opening capital was $5,075.23, and was reflected in seven capital accounts, one in the amount of $1,268.83 for Albert G. Dickinson (the petitioner herein), and six in the amount of $634.40 each for Grace T. *1756 Dickinson, Grace Dorothy Dickinson, Julia A. Dickinson, Irene G. Dickinson, Marion L. Dickinson, and Martha Dickinson.
About the middle of 1920, and after the partnership books were opened, petitioner's sisters came to him and stated that they did not think that they ought to retain the partnership interest. They advised him that they were about to acquire substantial financial means through an interest in their uncle's estate. Petitioner stated to his sisters that if that was their viewpoint, there was nothing he could do about it, and, accordingly, he would, and did, take back the interest that he gave them. Petitioner then acquainted his wife and daughter with the situation, and he proposed that, under the circumstances, *1215 there be a partnership among the three of them, each to have an equal one-third interest in the business, and in the profits and losses. This was satisfactory to petitioner's wife and daughter, and they accepted and agreed to the proposition. Petitioner, accordingly, informed the bookkeeper about the change in the individuals comprising the partnership, and their interest, and instructed him to give effect to the new partnership on the books*1757 by eliminating the interest of his sisters and by showing his wife, daughter and himself as equal partners. Accordingly, on December 31, 1920, the following entries were made on the books of the American Metal Weatherstrip Company:
| Debit | Credit | |
| $1,268.83 | A. G. Dickinson | |
| 634.40 | G. T. Dickinson | |
| 634.40 | G. D. Dickinson | |
| 634.40 | J. A. Dickinson | |
| 634.40 | M. L. Dickinson | |
| 634.40 | I. G. Dickinson | |
| 634.40 | Martha Dickinson | |
| A. G. Dickinson Inv | $1,691.75 | |
| Grace T. Dickinson Inv | 1,691.74 | |
| Grace D. Dickinson Inv | 1,691.74 | |
| To set up new partnership accounts according to agreement. | ||
| 18,789.33 | Surplus: | |
| A. G. Dickinson Inv | 6,263.11 | |
| Grace T. Dickinson Inv | 6,263.11 | |
| Grace D. Dickinson Inv | 6,263.11 | |
| Closing Earnings of year 1920 to partners Investment account. |
Separate capital accounts have been maintained on the books of the American Metal Weatherstrip Company up to the present time for petitioner, his wife, and his daughter. At the end of each year entries have been made transferring one-third of the profit or loss for the year to each of the capital accounts. Partnership returns have been filed by the American Metal Weatherstrip Company for*1758 each of the years 1920 to 1929, showing petitioner, his wife, and his daughter as the partners, each having a one-third interest in the profits or losses. Petitioner, his wife, and his daughter have filed personal income-tax returns for these years, and have included in these returns the distributive share of the profits or losses shown on the partnership return of American Metal Weatherstrip Company (except for the year 1924, when the partnership return showed the distributive shares as $12,272.78 each, and the individuals reported $12,372.78 each).
No written articles of partnership were drawn up between petitioner, his wife and daughter. Petitioner was a member of various *1216 other partnerships, and in no case had he written agreements with his partners.
The wife and daughter rendered no services to the business.
The business of the American Metal Weatherstrip Company was rapidly expanding, and, accordingly, the policy of the company was to leave a large part of the profits in the business. Petitioner, his wife and daughter had independent incomes and, hence, found it feasible to let the profits remain in the business. The profits that were credited and/or*1759 distributed to petitioner's wife and daughter were never received by petitioner directly or indirectly, and never came at any time into his possession.
When the partnership agreement was entered into between petitioner and his wife and daughter, petitioner did not immediately file with the county clerk a new "Certificate of Persons Conducting Business under an Assumed Name." In 1922 petitioner's collection attorneys (a different firm from the one that handled the liquidation of the corporation) were about to start suit against one of the American Metal Weatherstrip Company's customers. Investigation by the attorneys then disclosed that the certificate required by the Michigan statute had not been filed, and they recommended that it be done immediately. Accordingly, the required certificate was executed and filed, which certificate showed petitioner's wife, daughter and self as partners in the business. (The name of Eleanor T. Dickinson, one of petitioner's daughters, appeared in error on this certificate.)
At all times since the year 1920, petitioner, his wife and daughter have been held out to the outside world as partners in the business of the American Metal Weatherstrip*1760 Company. Specific representations as such were made to the Kent State Bank of Grand Rapids, with whom the American Metal Weatherstrip Company did its banking; to Messrs. Morrison & Skinner Company of Wakefield, Mass., a creditor; and to Bradstreet's.
The respondent determined that no partnership existed between petitioner, his wife and daughter and has included the entire income of the American Metal Weatherstrip Company in petitioner's income-tax returns for the years in question.
OPINION.
LOVE: The issue here presented is what portion of the net income of the business carried on under the name of the American Metal Weatherstrip Company for the calendar years 1923 to 1926, inclusive, was income to petitioner. The respondent has determined that the business was a sole proprietorship carried on by petitioner as an individual, and that all of the income therefrom was taxable to him. Petitioner contends that the business was that of a partnership *1217 between himself, his wife and daughter; that the profits and losses were to be shared equally among the three partners; and that, therefore, under section 218(a) of the Revenue Acts of 1921, 1924 and 1926, only one-third*1761 of the net income of the alleged partnership should be included in computing his net income.
The respondent argues that it is well settled that under the laws of Michigan a married woman may not enter into a business partnership with her husband, and cites in support thereof ; ; and ; . In the former case the defendant, a married man, entered into a business partnership with a widow. At that time his wife was in the process of obtaining a divorce. In order to prevent his wife's attorneys from attaching certain property, he executed and delivered to the widow a paper purporting to sell such property to the widow in consideration for the cancellation by her of an indebtedness he then owed her. His wife obtained her divorce, and five days later he and the widow were married. The latter died about six months later. Her personal representative, the plaintiff, claimed the property. The defendant resisted on two grounds: (1) That the purported sale was a fraud and so intended by him; and (2) that in any event the property was partnership*1762 property which devolved to him as surviving partner. The court held that he was estopped from setting up the fraud and that "the subsequent intermarriage of the parties worked an instantaneous dissolution" of the partnership, which left the ownership of the property, there in question, in his second wife, and as part of her estate. The plaintiff in , attempted to show that the defendants were husband and wife; that they had entered into a business partnership; that the wife had contributed the entire capital for the business; that the husband had no means; and that they were liable on the common counts in assumpsit for goods sold and delivered to them by the plaintiff. The court, in sustaining a directed verdict for the defendants, said:
It is the purpose of these statutes to secure to a married woman the right to acquire and hold property separate from her husband, and free from his influence and control, and if she might enter into a business partnership with her husband it would subject her property to his control in a manner wholly inconsistent with the separation which it is the purpose of the statute to secure, and might*1763 subject her to an indefinite liability for his engagements. A contract of partnership with her husband is not included within the power granted by our statute to married women. This doctrine was laid down in , and we see no reason for departing from it. The important and sacred relations between man and wife, which lie at the very foundation of civilized society, are not to be disturbed and destroyed by contentions which may arise from such a community of property and a joint power of disposal and a mutual liability for the contracts and obligations of each other.
*1218 As we analyze the issue here presented, it is not necessary to determine whether a legal partnership between husband and wife may exist in the State of Michigan. Our problem is to determine whether the respondent has included in petitioner's net income, income that was owned by, and, therefore, taxable to persons other than petitioner.
About seventy-five years ago Michigan passed an act relative to the rights of married women. Section 1 of this act (now section 11485, Compiled Laws Michigan, 1915) is as follows:
The People*1764 of the State of Michigan enact, That the real and personal estate of every female, acquired before marriage, and all property, real and personal, to which she may afterwards become entitled, by gift, grant, inheritance, devise, or in any other manner, shall be and remain the estate and property of such female, and shall not be liable for the debts, obligations and engagements of her husband, and may be contracted, sold, transferred, mortgaged, conveyed, devised or bequeathed by her, in the same manner and with like effect as if she were unmarried.
We think the evidence introduced by petitioner conclusively proves that the petitioner in 1920 made valid gifts to his wife and daughter of a one-third interest each in the business of the American Metal Weatherstrip Company. As fully set out in our findings, his discussions with his wife and daughter in 1920 relative to his intentions of making the gifts; their acceptance thereof; the book entries recording the transfers; the notices to the outside world; and his long established policy of making substantial gifts of property to his immediate family, all point to this one conclusion, namely, that the gifts were made. From that time*1765 on the wife and daughter each owned a one-third interest in the business.
In Michigan a husband and wife may become joint owners of property and operate it for profit without entering into a legal partnership. See ; ; and ; , where the husband and wife in both cases leased and operated a hotel; and ; , where they purchased and operated a garage.
We have in other proceedings (, and ) quoted the following from :
The married woman's act was passed for the protection of married women. It was intended as a shield, and not a sword. Its purpose was to enlarge her rights, not to contract them, and certainly it was not meant to deprive her of the right, either acting alone, or jointly with others, of protecting her interests in property, either real or personal.
*1766 It is interesting to note that although the Gillespie case was decided subsequent to the two cases of ,*1219 and , relied upon by the respondent, the court, in deciding the two earlier cases, recognized in substance the same general principles of protection which it later embodied and gave expression to in the Gillespie case.
In the instant case, after petitioner had given his wife a one-third interest in the business, such interest became the absolute property of the wife to do with as she pleased "in the same manner and with like effect as if she were unmarried." (Sec. 11485 C. L. Mich., supra. ) This being true, a court of equity would hold that she was the owner of one-third of the income from the business, and under , being the owner of the income, was entitled to include the same in her returns. For similar holdings by us involving persons residing in Michigan, see *1767 ; ; ; ; ; and . It follows that the respondent was in error in including in petitioner's returns income that belonged to his wife.
With respect to the daughter, there was no prohibition whatever against petitioner entering into a partnership with her. Suffice it to say that we think such a partnership existed and that the daughter was entitled to report one-third of the income in her returns, and that the respondent was also in error in including such income in petitioner's returns. Cf. , and .
Counsel for petitioner at the close of his brief remarks that "although the record does not show it, petitioner in this case has, in order to save interest, prepaid a portion of the deficiency while these cases have been pending before the Board. It is accordingly requested that upon decision of the issue here involved, this*1768 case be placed on the Board's calendar for a Rule 50 determination."
Judgment will be entered under Rule 50.