*179 Decision will be entered for the respondent.
1. Family Partnership. -- The Commissioner did not err in refusing to recognize as partners the petitioner's mother and aunt, indigent elderly women, who took no part in the business.
2. Accounting Period -- Family Partnership -- New Agreement. -- The petitioner and a young man had been partners for a number of years and had used a calendar year accounting and reporting period for the business. The petitioner reacquired in her own name a part of her interest which she had theretofore put in the name of her aunt. The aunt was not recognized as a partner for income tax purposes. The petitioner and the young man, then about 22 years of age, entered into a new partnership agreement, which was substantially like the ones under which they had been operating for several years. Held, that they had no right to select a new accounting period for their partnership, either because they entered into a new agreement or because it was the first agreement entered into since the other partner had attained his majority.
*1094 The Commissioner determined a deficiency of $ 5,734.12 in income tax for 1944 and one of $ 15,935.48 for 1945. The issues for decision are whether the Commissioner erred in taxing to the petitioner 7/68 of *1095 the income of a partnership for the period from January 1 to April 12, 1944, which under an alleged partnership agreement was distributable to the petitioner's mother, Emily Tupper White, in taxing 6/68 of the income from the same business for the calendar year 1944 and for the period January 1 to July 2, 1945, which under the same alleged partnership agreement was taxable to*181 the petitioner's aunt, Blanche Tupper, and in holding that the petitioner's share of the income of the business for the calendar year 1945 was distributable income of the petitioner instead of recognizing that the partnership between the petitioner and William R. Wagner had a new fiscal year which began on July 2, 1945, and ended after the close of the petitioner's taxable year 1945.
FINDINGS OF FACT.
The petitioner filed her individual income tax returns for the years 1944 and 1945 with the collector of internal revenue for the first district of Illinois.
The petitioner inherited from her former husband, Eugene Melin, who died in 1939, 59 of the 68 outstanding shares of Industrial Gas Engineering Co., a corporation. She thereafter purchased 4 shares from two employees, so that on March 31, 1941, she held 63 shares and Joan J. Wagner owned the remaining 5 shares. The petitioner and Joan dissolved the corporation on April 1, 1941, and thereafter operated the same business under a partnership agreement using the same name as the corporation had used.
Their partnership agreement dated April 1, 1941, is incorporated herein by this reference. It provided, inter alia, that the interests*182 of the two partners in the assets and profits were to be 63/68 for the petitioner and 5/68 for Joan, after a salary payment of $ 3,000 to the petitioner. The petitioner was to conduct the business as a sole proprietorship and Joan was to have no voice in its operation or management. Joan was restricted in her right to dispose of her interest. The petitioner had the right to control the dates and amounts of distributions.
Joan, as she had a right to do under the agreement of April 1, 1941, assigned her interest as a partner under that agreement to her brother, William R. Wagner, on June 30, 1942. The petitioner recognized the change of partners but no new agreement was made. William R. Wagner was born on July 4, 1923.
The business conducted by the corporation and continued at all times material hereto under the various agreements herein mentioned was the manufacture, sale, and repair of high temperature furnaces and blowers for industrial plants. The petitioner had devoted her full time to the business of the corporation following the death of her husband and had received a salary of $ 26,495.76 from the corporation *1096 as its secretary for the fiscal year ended March *183 31, 1941. Her only business experience before the death of her husband had been as a bank clerk prior to 1923.
The petitioner entered into an agreement on April 1, 1941, with Fred B. Korb who had been one of the principal experienced employees of the corporation. The agreement provided that the petitioner employ Korb for a period of 5 years to act as general manager in charge of production and sales and to perform such other duties in the conduct of the business as the petitioner might specify. Korb was to give his entire time to the business. Korb was to receive $ 60 per week, plus 40 per cent of the net profits of the business. The agreement is incorporated herein by this reference. The employment of Korb under that agreement continued throughout the taxable years.
The petitioner also employed a certified public accountant to help her look after her interest in the business at all times material hereto. He prepared periodic reports for her and otherwise assisted her.
The petitioner remained a widow until after the taxable years.
The petitioner's mother, Emily Tupper White, was about 74 years of age in 1943. She died on April 12, 1944. The petitioner's aunt, Blanche Tupper, *184 was about 72 years of age in 1943. She is still alive. They had no property and no means of supporting themselves. Neither had had any business experience. Brothers of the petitioner who had been supporting them had died and the petitioner, in March, 1943, undertook to support and maintain these two women. The petitioner had then five brothers and sisters living.
The petitioner decided that these two women would feel less like objects of charity and would be more secure in case of her death if she gave them an interest in the business. She realized that giving them interests in the business would not serve any business purpose and that the two women would not be able to contribute to or in any way participate in the business. She also realized that if, instead of claiming them as dependents, a part of the income of the business could be taxed to them, her taxes would be reduced.
The petitioner filed a gift tax return for 1943 in which she reported gifts on July 5, 1943, of a 7/68 interest in "Industrial Gas Engineering Company (a partnership)" having a value of $ 7,000 to her mother, and a 6/68 interest valued at $ 6,000 to her Aunt Blanche. She claimed exclusions in the total*185 amount of $ 6,000 and a specific exemption of $ 7,000 to show no amount of net gifts subject to tax. The record does not show how she made the reported gifts.
The petitioner, William R. Wagner, Emily Tupper White and Blanche Tupper entered into an agreement dated July 6, 1943, stating that they were entering into a partnership to continue the business *1097 under the name of Industrial Gas Engineering Co., the interests in the capital and income would be 50/68 for the petitioner, 7/68 for Emily, 6/68 for Blanche, and 5/68 for Wagner. The petitioner was to have a salary of $ 3,000 a year before the computation of net profits. The petitioner had the option to purchase, under a prescribed formula, the interest of any deceased partner. There was a restriction on the right of the other three to dispose of their interests. Wagner was to have no voice whatsoever in the management and no authority to bind the partnership. The petitioner, in dealing with third parties, was, at her option, authorized to conduct the business as a sole proprietorship. The agreement is incorporated herein by this reference.
Emily and Blanche drew wills in October, 1943, leaving their interests in the*186 business to the petitioner.
The Wagners have received their 5/68 of the income of the business and the Commissioner has made no attempt to tax that income to the petitioner.
The partnership reported its income on a calendar year basis. A partnership return was filed on Form 1065 for the period January 1 through June 30, 1943, showing income in the amount of $ 87,227.69 distributable to the petitioner, and in the amount of $ 6,922.83 distributable to Wagner. A partnership return on Form 1065 was filed for the period July 1, 1943, to the end of that calendar year showing income distributable as follows:
| To the petitioner | $ 29,913.40 |
| To Wagner | 2,841.34 |
| To Emily | 3,977.88 |
| To Blanche | 3,409.61 |
The record does not show that either Emily or Blanche filed a return for 1943, but the petitioner claimed credit for both of them as dependents on her return for 1943.
A partnership return on Form 1065 was filed for the calendar year 1944 showing income distributable as follows:
| To the petitioner | $ 37,909.91 |
| To Wagner | 3,490.99 |
| To the petitioner as administratrix of her mother | 4,887.39 |
| To Blanche | 4,189.19 |
A partnership return on Form 1065 was filed for the period January *187 1, 1945, through June 30, 1945, showing income distributable as follows:
| To the petitioner | $ 23,820.77 |
| To Wagner | 2,232.08 |
| To the petitioner as administratrix of her mother | 3,124.91 |
| To Blanche | 2,678.49 |
*1098 A partnership return on Form 1065 was filed for the fiscal year beginning June 30, 1945, and ending March 31, 1946, showing income distributable as follows: To the petitioner $ 24,864.04, and to Wagner, $ 1,794.77.
The petitioner concedes that 57/68 of the income of the business from the date of the death of her mother until July 2, 1945, and thereafter 63/68 is taxable to her.
The amounts shown on the returns as distributable to Emily and Blanche were credited to their accounts on the books of Industrial. These books show withdrawals as follows:
| Emily Tupper | Blanche | |
| White | Tupper | |
| Mar. 31, 1944 | $ 2,500.00 | $ 850.00 |
| Oct. 13, 1944 | 1,477.88 | |
| 2,130.03 | ||
| Nov. 30, 1944 | 250.00 | |
| Dec. 31, 1944 | 2,500.00 | |
| Mar. 31, 1945 | 2,750.70 | |
| Apr. 20, 1945 | 3,993.09 | |
| June 1, 1945 | 1,624.66 | |
| Sept. 14, 1945 | 3,106.40 | 1,037.97 |
| Total | 11,965.01 | 10,255.72 |
The accountant for the petitioner prepared returns for Blanche on which the amounts shown as distributable *188 to her for 1944 and 1945 were reported. The petitioner paid the accountant and also paid the tax shown on the returns.
A check of Industrial dated March 10, 1944, in the amount of $ 2,500 was drawn to the order of Emily and endorsed by her payable to the Lake Shore National Bank. The petitioner had her personal checking account in that bank. Checks for the other amounts charged to Emily's account were drawn to the order of the petitioner as administratrix.
Blanche had a small amount in a savings account. Checks of Industrial for the withdrawals from Blanche's account on the books of Industrial were made payable to Blanche and endorsed either by Blanche or by the petitioner for Blanche. All of the checks payable to Blanche were deposited at her direction in the petitioner's checking account, on which only the petitioner could draw. The petitioner paid all expenses of Emily and Blanche at all times material hereto after March, 1943, with money withdrawn from that account. She also furnished Blanche with some spending money from that same source. The record does not show to what extent the expenditures offset the checks mentioned above.
Blanche executed an instrument on July 2, *189 1945, purporting to convey her 6/68 interest in the partnership to the petitioner for $ 6,000. The record does not show what motivated her in executing that document. The petitioner made out a check for $ 6,000 dated October 18, 1945, *1099 payable to Blanche Tupper, which had endorsed on the back thereof "In full payment of partnership interest in Industrial Gas Eng. Co." Blanche endorsed that check and it was marked paid on October 18, 1945. The petitioner placed the proceeds of that check in her safe deposit box and at some later time not disclosed by the record used $ 3,750 thereof to buy United States Savings bonds, maturing 10 years thereafter, in the amount of $ 5,000, payable to Blanche and on her death to the petitioner. Those bonds were placed in the petitioner's safe deposit box. Blanche did not have access to that box. There is no evidence in the record in regard to what was done with the remaining $ 2,250 of the cash received from the check above mentioned.
The petitioner and Wagner entered into a partnership agreement dated July 2, 1945, in which it was stated that the petitioner's interest was 63/68 and Wagner's 5/68. The petitioner was to have an annual*190 salary of $ 3,000. Wagner's right to dispose of his interest was restricted and he was to have no voice in the management. The petitioner was to have the right to conduct the business as a sole proprietorship. That agreement is incorporated herein by this reference.
The petitioner during the taxable years went regularly to the plant for an average of about one day per week. She signed all contracts, signed all checks for pay rolls and for the purchase of material, went over available information in the office, and generally inspected and checked on the operation of the business. She also made sure that Korb devoted his full time to the business and did not become interested in any other business. She actually exercised little control over Korb, but he consulted with her and fully realized that he was subservient to and employed by her.
Emily, Blanche, and Wagner rendered no services and contributed in no way to the business of Industrial except to permit it to continue, as previously, without interference from them.
The petitioner and William R. Wagner did not really and truly and in good faith for a business purpose intend to join together as partners with Emily Tupper White*191 and Blanche Tupper, and Emily Tupper White and Blanche Tupper did not really and truly intend to join together as partners with the petitioner and William R. Wagner for the purpose of carrying on the business of Industrial Gas Engineering Co. and sharing in its profits or losses at any time material hereto.
The books of Industrial were ruled off and closed on March 31, 1946. The decision to close them on a fiscal year basis was not made at the beginning of that 12-month period and no permission to change from a calendar year to a fiscal year basis was ever requested or obtained from the Commissioner.
The Commissioner, in determining the deficiency, gave the following explanation:
*1100 It is held that your aunt, Blanche Tupper, and your mother, Mrs. E. Tupper White, now deceased, were not bona fide members of the partnership operating as Industrial Gas Engineering Company for Federal income tax purposes during the calendar years 1944 and 1945, or any part thereof, and that the portion of the income of such partnership attributable to the interests claimed by Blanche Tupper and the late Mrs. E. Tupper White for these taxable years is taxable to you under section 22 (a) of the*192 Internal Revenue Code. It is further held that for the years 1945 and 1946 the aforesaid partnership is required to compute and report its income for Federal income tax purposes on the basis of a calendar year accounting period. In accordance with such determinations your distributable share of the revised net income of the partnership for the calendar years 1944, 1945 and 1946 includes a salary allowance of $ 3,000.00 for each year plus 63/68ths of the remaining distributable income * * *.
OPINION.
The Commissioner has refused to recognize the petitioner's mother and aunt as bona fide partners for income tax purposes and has taxed to the petitioner the shares of the income of the business which the agreement of July 6, 1943, allocates to those two women. Both parties rely upon Commissioner v. Culbertson, 337 U.S. 733">337 U.S. 733, and particularly the part where the Court said:
The question is * * * whether, considering all the facts -- the agreement, the conduct of the parties in execution of its provisions, their statements, the testimony of disinterested persons, the relationship of the parties, their respective abilities and capital contributions, the*193 actual control of income and the purposes for which it is used, and any other facts throwing light on their true intent -- the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise.
All of the facts in the present case have been carefully considered in an effort to determine whether the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise, and from that study the conclusion has been reached that they did not so intend in so far as concerns the participation of the mother and the aunt of the petitioner.
The petitioner realized that tax benefits would flow to her if a part of the income of the business could be taxed to her mother and her aunt, but she says that that motive was not the one which caused her to act. She said she was moved by a desire to give her mother and her aunt something which might support them in case she should die and also she did not want them to feel that they were the objects of her charity while she was taking care of them. The purpose of her reacquisition of her aunt's share is not explained. Nevertheless, it may*194 be assumed that her motives throughout were of the best. Still it does not follow that there was any real intent to carry on the business as partners with these two elderly ladies.
The petitioner described her mother as follows:
*1101 She was just a woman that had a very keen mind, but she was elderly, of course, and after my brother had died she was shocked. She had the shock of losing two sons in a very short while, but she wasn't exactly in failing health. I would say that she had a very good mind. She was elderly, of course.
Emily was then about 74 years of age and she died within a year. There was some question as to whether Blanche was physically able to testify or to submit to the taking of her deposition. She was not called and her deposition was not taken. The petitioner gave the following testimony in regard to her, while explaining why the aunt's withdrawals were placed in the petitioner's account:
Well, Auntie is a very old lady and she has never had any kind of experience, she has never had any checking account, and she asked me if I wouldn't hold the money for her so she could have it when she wanted it and she needed it. She felt that I should take care*195 of things for her.
She later testified that she transacted everything for her Aunt Blanche and in that connection said:
Well, I have to explain Auntie to really answer that question. She is just a little old lady, and she is very, very nervous, and she hasn't ever had any dealings with money and income taxes, and things like that. She didn't understand anything about it. So I would have to explain to her that you have to pay something out of this money, and then I would show her.
Later, referring to the fact that Blanche could not draw on the petitioner's bank account, the petitioner said:
She wouldn't have wanted to. She wouldn't know how to. She wouldn't have understood. She had never drawn a check in her life. She lived with my father and mother from the time she was a little girl.
These two old ladies were the petitioner's mother and her aunt. They were her dependents and she was supporting them. They had no abilities whatsoever to contribute to the business and they had no capital except as the petitioner gave them some. It does not appear that they were able to exercise any actual control of the income of the business to which they might be entitled. Actually, *196 the income from the business was used to pay their doctor's bills, nurse's bills, bills for clothing, and otherwise to maintain and support them. While that use of the money was natural enough, nevertheless, the fact is that it was the same use to which the petitioner would have put her own money in any event. These two frail old ladies had neither the ability nor the strength to participate to any extent in the conduct of the business and they did not participate. Instead, the petitioner assumed all of the responsibilities of the ownership of the business. She described herself on her returns as an executive. She had had some experience in this business although her business experience prior to the death of her husband was limited. She hired a manager, who was paid, apparently, by the partnership. She gave the business all of the supervision and control which was furnished by the owners. *1102 The findings of fact contain other facts which have been carefully considered in arriving at the ultimate conclusion that the old ladies were not real partners in the business and the Commissioner did not err in taxing 63/68 of the income of this business to the petitioner throughout*197 the period here involved.
The petitioner also contends that the Commissioner erred by including her distributable share of the income of the business for the entire calendar year 1945 in her income for that year, since the only partnership tax period ending within the calendar year 1945 was the period which ended on July 2, 1945, when she reacquired her aunt's interest. She and Wagner then entered into a new partnership agreement and, she argues, the first taxable period of a new partnership began on July 2, 1945, that new partnership rightfully chose to use a fiscal year ending March 31, 1946, and no part of the income for that period can be included in her income for 1945. Sec. 188. The acts which the petitioner performed in an effort to divide her interest in the business among herself, her mother, and her aunt were held ineffective for income tax purposes under the first issue. Thus, the mere fact that she reacquired in her own name on July 2, 1945, the interest standing in the name of her aunt would not terminate the period (calendar year) which the recognized and continuing partnership between the petitioner and Wagner was using for income tax purposes. There was no substantial*198 change in the partnership relations between Wagner and the petitioner on July 2, 1945. The agreement which they entered into at that time was not substantially different from the one which had been entered into on April 1, 1941, or from the one entered into on July 6, 1943, bearing in mind that in the latter agreement, as in the other two, the petitioner is regarded as having a 63/68 interest. The case of Rose Mary Hash, 4 T. C. 878, affirmed on other grounds, 152 Fed. (2d) 722, certiorari denied, 328 U.S. 838">328 U.S. 838, is distinguishable because in that case a new separate and distinct partnership was created, with a right to select its own fiscal year.
The petitioner argues further that Wagner was a minor on June 30, 1941, when he received his 5/68 interest in the business from his sister, he formed a legally binding partnership with the petitioner for the first time on July 2, 1945, and, therefore, that new partnership had a right to select its own accounting period. The petitioner and Joan Wagner entered into a partnership agreement on April 1, 1941, and shortly thereafter Joan assigned her interest*199 to her brother. The petitioner knew of that transfer and accepted the arrangement. Wagner was still a minor on July 6, 1943, when he entered into the agreement of that date. However, after he became of age on July 4, 1944, he continued to receive and accept 5/68 of the income of the business during the remainder of 1944 and during the first half of 1945. The *1103 Commissioner has always recognized the partnership between the petitioner and Wagner for tax purposes. The arrangement, so far as the petitioner and Wagner were concerned, was no different after July 2, 1945, from what it had been prior thereto. The agreement of July 2, 1945, was not entered into because Wagner was then of age, whereas he had been a minor when he signed the previous agreement, but was entered into because the petitioner had just reacquired in her own name the interest which she previously had put in her aunt's name. In other words, the agreement of July 2, 1945, was not for the purpose of having Wagner ratify the partnership arrangement, if ratification by him was necessary for tax purposes. He was apparently satisfied with the arrangement when he became of age on July 4, 1944, and at all times*200 thereafter, and if any ratification was necessary he gave it by accepting the benefits which came to him under the partnership agreement.
Decision will be entered for the respondent.