*125 Decisions will be entered under Rule 50.
1. The value of admitted gifts by the taxpayer of interests in a business and its assets, determined as the basis for gift tax.
2. Gifts to a trustee for the taxpayer's children, the corpus and income of which may not be delivered to the children until they arrive at a fixed age, held to be gifts of future interests which precludes the $ 5,000 exclusions.
3. Where a husband made irrevocable gifts of interests in his business to his wife individually and to her as trustee for their three minor children and thereafter the husband entered into an agreement with his wife acting for herself individually and as trustee for her three minor children to conduct the business as a partnership, held, that a legal, valid partnership was created and the net income of the partnership is taxable to the respective partners in proportion to their shares of the net income of the partnership and not all to petitioner under the doctrine of Helvering v. Clifford, 309 U.S. 331">309 U.S. 331.
4. Where each of the trust instruments for the three minor children contained a clause which permitted the trustee "to pay either from corpus*126 or income so much as may be necessary for the support, maintenance and education of said beneficiary," but also contained a provision that this could only be done when and if the settlor of the trust was then presently unable to so properly provide and the evidence showed that at all times pertinent hereto the settlor was amply able to provide for the support, maintenance, and education of his minor children, held, that the net income of the trusts is not taxable to petitioner under the doctrine of Helvering v. Stuart, 317 U.S. 154">317 U.S. 154.
*776 The Commissioner determined deficiencies of $ 27,396.87 and $ 109,749.21 in gift taxes for 1937 and 1939 and of $ 111,944.15 and $ 240,769.56 in income taxes for 1938 and 1939. By an amendment to his answer the Commissioner prayed that the deficiency in gift tax *777 *127 determined for the year 1937 be increased from $ 27,396.87 to $ 29,646.87. As a basis for this increase, the Commissioner alleged that he erred in allowing four exclusions of $ 5,000 each. He contends that the gifts to the three children in 1937 were of future interests and that the three exclusions of $ 5,000 each as to these gifts should be disallowed.
In his determination of the income tax deficiencies against petitioner the Commissioner stated in his deficiency notice as follows concerning the deficiency determined for the year 1938:
Prior to June 30, 1937 you were the owner of the Gelatin Products Company, a sole proprietorship. On June 30, 1937, a gift of 16 2/3 percent interest in the business was made to your wife, Margaret L. Scherer as an individual and three trusts were created by you for your three minor children by the transfer of 16 2/3 percent interest in the business to each trust. Effective as of June 30, 1937, a partnership was formed to carry on the business under the name of Gelatin Products Company with yourself, wife, and three trusts as partners. After deducting salary to yourself, the remaining partnership income was allocated in accordance with the respective*128 interests and reported on the income tax returns filed by yourself, wife, and three trusts.
* * * *
The assignment to your wife and three trusts did not effect any substantial change in so far as dominion and control of the assets of the Gelatin Products were concerned. The business activities continued the same except in the division of income, which is a division of income within a family group.
Therefore it is held that the entire income from the Gelatin Products Company is includible in your Federal income tax return for the taxable year 1938 under Section 22 (a) of the Revenue Act of 1938.
In his determination of the deficiency in income tax for the year 1939 the Commissioner in his deficiency notice stated: "It is held that the entire income from Gelatin Products Company is includible in your Federal income tax return for the taxable year 1939, under section 22 (a) of the Internal Revenue Code."
The issues raised by the pleadings are the value of the gifts made in (1) 1937 and (2) 1939, (3) whether exclusions of $ 5,000 are allowable for each of the three 1937 gifts in trust, and (4) whether the entire income from the Gelatin Products Co. for the fiscal year ended June 30, *129 1938, and the fiscal year ended June 30, 1939, is taxable to petitioner.
FINDINGS OF FACT.
The taxpayer, a resident of Detroit, Michigan, where his income and gift tax returns were filed, is engaged in the manufacture of gelatin capsules and pharmaceutical drugs. He and his wife, Margaret L. Scherer, were married in the early part of 1930. They had three children, Josephine L., Robert P., Jr., and Karla, who on June 30, 1937, were aged about six, four, and one. A fourth child, John Stephen, was born May 25, 1939.
*778 Scherer, a chemical engineer, became interested after leaving college in 1930 in developing a process and machine for the manufacture of soluble sealed gelatin capsules. He first conducted experiments in the basement of his father's home and later in a warehouse. He completed an improved method and machine for encapsulating fluid or semifluid substances and was granted patent numbered 1970396 on August 14, 1934. This is a process of rolling two continuous strips of gelatin between cylindrical die plates and imposing an injection wedge from which filler material is metered out under pressure upon the converging gelatin strips. The injection of the filler material*130 pushes the elastic gelatin inward into the abutting die flanges, the edges of which seal and cut the capsules out of the strips of gelatin as the die plates continue to revolve. Some of the advantages of this process over that then in use were uniformity of product, accuracy of dosage, and economy of filler materials.
Scherer produced the first gelatin capsules on a commercial basis early in 1933. He then went into the business of manufacturing them under the name of "Gelatin Products Company," in a small store owned by his father which he occupied rent-free for a time. He had no money of his own to exploit his process and machine. Later, and until after June 30, 1939, he conducted the business in larger rented quarters. Later, the business went into its own plant.
Efficient and economical operation was dependent upon mass production. Due to lack of capital, Scherer was unable to establish a sales and service organization. The sale or leasing of the machine to retail druggists was not considered feasible. Therefore, Scherer decided to operate the machine, and tried to establish a business of encapsulating filler materials supplied by large drug manufacturers. However, these*131 manufacturers were averse to releasing their raw materials or drugs to an outside processor for an intermediate manufacturing process over which they would have no control. Following the appearance of an advertisement in a drug journal in the latter part of 1933 describing the process of encapsulating medicinal and other substances, several orders were received. Orders increased, and on June 30, 1937, the business was producing about 60 percent of all capsules produced in the country, on June 30, 1939, about 80 to 85 percent, and about 1942 the encapsulating was done for most of the firms in the business. There were no contracts with customers but operation was on an order-to-order basis.
On June 30, 1937, Scherer executed a "Bill of Sale" whereby for $ 1 he transferred to his wife, Margaret L. Scherer:
* * * an undivided one-sixth (1/6) interest in and to the business heretofore conducted by me at 620 East Hancock Avenue, Detroit, Michigan, and known under the assumed name of Gelatin Products Company, and in and to its good will and assets of every name and nature, including all inventories, machinery, *779 equipment, patterns, tools and property, the said second party to*132 have and to hold a one-sixth (1/6) interest therein which said above described goods and chattels belong to party of the first part and are now in his possession at 620 East Hancock Avenue, Detroit, Michigan, To Have And To Hold the same unto the said party of the second part, her heirs, administrators and assigns, Forever. * * *
On the same date he executed a written assignment to his wife of an undivided one-sixth interest in Patent No. 1970396 bearing date of August 14, 1934, which was granted to him for an improvement in methods of and machine for making capsules.
On the same date Scherer executed a bill of sale conveying to his wife, as trustee of three separate trusts for the benefit of his three children, Josephine L., Robert P., Jr., and Karla, an undivided three-sixths interest (one-sixth for each trust) in the business conducted by him and known as the Gelatin Products Co. and in its good will and assets. He also executed an assignment of an undivided one-half interest (one-sixth interest to each trust) in his invention and Patent No. 1970396. He also executed three separate declarations of trust, one for the benefit of each of his three children, respectively, each *133 of which recited the desire and purpose of the settlor:
* * * to give to each of my three children an undivided interest in certain of those patents and a partnership interest in the business developed and to be developed through their exploitation and use, and from the profits derived therefrom to create separate estates for the sole use and benefit of each.
In each trust the wife was named as trustee and Scherer reserved the right to designate and appoint a successor trustee if she should resign, die, or otherwise become incapacitated before the termination of the trust. The trustee was given broad and unlimited powers with respect to the investment of income and, in the event of a dissolution of the partnership or a sale of the business as an entirety, of the proceeds. Each instrument authorized the trustee:
* * * To pay from time to time to the beneficiary from the income of the trust such sums as the Trustee may deem advisable for the beneficiary's personal use and enjoyment, and where the use of trust funds may be necessary because of my then present inability to so properly provide, to pay either from corpus or income so much as may be necessary for the support, maintenance*134 and education of said beneficiary. Any income not currently distributed shall be added to the principal of the trust estate.
Each trust contained a spendthrift clause and provided for termination when the beneficiary reached the age of twenty-five years, at which time the corpus and all accumulated income should be transferred to the beneficiary and he or she should be admitted as a partner in the business at his or her election or that the partnership should be dissolved and the proportionate interest of the beneficiary be paid to him or her on the basis of book values at such times and in such amounts as would then be mutually agreed upon by the beneficiary and the *780 remaining partners. The trustee had the sole and exclusive right and privilege to terminate the trust at any time after the beneficiary had arrived at the age of twenty-one years. Paragraph 7 of each instrument provided:
If the said beneficiary should die before reaching the age of twenty-five years and if, prior thereto, this trust shall not have been terminated as hereinabove provided, then her [or his] beneficial interest in this trust and all its accumulations shall immediately vest in equal portions *135 in the then existing trusts this day created for my remaining children, or in the beneficiaries of any trusts that may have terminated prior thereto as hereinabove provided and the Trustee shall forthwith transfer the same, including the ratable interest in said partnership assets and business, to the Trustees of the said respective trusts this day created for each, or to the beneficiaries of any of the trusts that may have been terminated, and the capital accounts on the books of the partnership shall be made to reflect this transfer of partnership interest.
The declarations of trust also contained a paragraph 8, which provided:
While this agreement makes provision for the possible continuation of the partnership, it is not to be construed as precluding the Trustee from joining in the incorporation of said business, or as circumscribing in any manner the unlimited authority herein granted to the Trustee to manage, control and dispose of the trust estate.
On June 30, 1937, Scherer, as first party, made a written agreement with his wife, as trustee of the separate trusts for their three children as second party, and her individually as third party, to conduct business as a partnership*136 under the assumed name of Gelatin Products Co. This agreement provided that the capital of the business should consist of all the inventory, machinery, equipment, etc., of the business theretofore conducted by Scherer as shown by the balance sheet of June 30, 1937; also, that all of the parties contribute to the said business and the capital thereof the exclusive right to use and exploit for the full unexpired term thereof the patents named and described in the assignments and trust instruments heretofore described. Also, it was provided that the first party, Robert P. Scherer should contribute thereto the exclusive right to use and exploit for the full unexpired terms thereof such other kindred patents then owned by him and theretofore used in the conduct of the business. It was provided that Scherer should have a one-third interest and the second party as trustee a one-sixth interest for each of the three children and the third party a one-sixth interest in the capital, and that the income and profits of the business and patents and all losses should be divided in like proportion; that Scherer should have the "exclusive management" of the business, have charge of the office and*137 keep the books, and have "exclusive charge of all the financial details thereof, including the receiving and collecting of all moneys due the business and the payment of all moneys owing by said business to others, whether in the general conduct of said business or otherwise"; that Scherer was entitled *781 as compensation for his services to 25 percent of the net profits per year, which was to be deducted from the profits before determining the distributable share of each of the parties to the agreement. It was also provided that books of account should be kept and entry made therein of all moneys, goods, effects, debts, sales, purchases, receipts, and payments and all other transactions arising out of the conduct of the business. The books of account, together with all bonds, notes, bills, letters, and other rights belonging to the business, were to be kept at the place where the business was being carried on and were at all times to be open to the examination of the parties thereto. The books were to be kept in the exclusive custody of the first party and all moneys received from all sources through the conduct of the business were to be deposited by the first party in *138 the assumed name of Gelatin Products Co. in the Detroit Savings Bank, the National Bank of Detroit, Michigan, or such other bank or banks as the parties might agree upon, and should be withdrawn therefrom only by check drawn and signed by the first party.
It was provided in this agreement that the fiscal year of the partnership should end on June 30. At the close of each fiscal year an account of stocks, effects, credits, debts, and all transactions of said business should be taken and the true condition thereof as far as possible arrived at, and each of the parties agreed to lend his aid and services to effect this object at such times:
* * * but in the sole discretion of the first party, however, the profits of the business may be distributed in the proportions hereinabove set forth, and such of the profits as, in his sole judgment and discretion, shall be retained in the business and not distributed shall be carried to the respective accounts of the parties; that is to say, one-third (1/3) to the first party, one-sixth (1/6) to each of the separate accounts to be carried in the name of the second party for the benefit of each of the designated trusts, and one-sixth (1/6) to the*139 third party.
It was provided that, in case of the termination of the agreement, there should be a true, just, and final accounting and that all debts should be paid off and discharged and a proportionate distribution made of the remainder among the parties except, however, that:
* * * the exclusive right to the use of the name Gelatin Products Company, or such other name as may have been adopted for the conduct of said business, and the exclusive right or license to use and exploit any of the patents designated or used in connection with the said business for the full unexpired terms thereof, shall vest in the first party free of all claims of any of the other parties, subject, however, to the proper and suitable adjustment therefor in such accounting.
It was also provided that upon the termination by lapse of time of any of the trusts the beneficiary would, at his election, be entitled to continue to participate in his own name in the conduct of said business or to withdraw therefrom, in which event his ratable interest in the business and the profits that may have accumulated from the conduct thereof would be paid to him on the basis of book values.
*782 On June 30, 1939, Scherer*140 executed a bill of sale, an assignment, and a declaration of trust in one-sixth interest in the business and patents for the benefit of his son, John Stephen, born May 25, 1939, all of which were similar to those executed for the benefit of his three children, except that paragraph 7 of the declaration of trust was as follows:
If the said beneficiary shall die before reaching the age of twenty-five years, and if, prior thereto, this trust shall not have terminated as hereinabove provided, then his beneficial interest in this trust and in all its accumulations shall be divided by the trustee into as many equal portions as there are children of mine then living, and one of such portions shall be paid, assigned, conveyed and transferred to the Trustee under each of the then existing trusts heretofore created for my children in the said partnership assets and business, and one portion to the Trustee under each of the then existing similar trusts that may be created by me or by Margaret L. Scherer for the benefit of any of my children born after the date hereof, provided, however, that one of such portions shall be paid, assigned, conveyed and transferred direct to any surviving child *141 of mine who was the beneficiary of any such trust which shall theretofore have terminated, and one of such portions shall be paid, assigned, conveyed and transferred direct to any surviving child of mine born after the date hereof, for whom no such trust shall have been created. The capital account on the books of the partnership shall be made to reflect any such transfer or transfers of partnership interest.
The intent and purpose of this paragraph is to cause the beneficial interest of any child, dying prior to the termination of the trust of which he is the beneficiary, to immediately vest in equal parts for the benefit of my then surviving children.
Under the same date Scherer and his wife, as trustee for the four children and individually, made an agreement for the conduct of the business similar to the one executed June 30, 1937, except that John Stephen's interest therein was stated to be one-sixth and that of Scherer one-sixth instead of one-third.
Under paragraph 7 of the three 1937 trust instruments, transfer of the corpus and accumulations upon the death of any of the beneficiaries was limited to the "then existing trusts this day [June 30, 1937] created." As Scherer *142 desired that John Stephen should participate equally upon the happening of such contingency, a suit was instituted on or about July 25, 1939, in the Circuit Court of the County of Wayne in Chancery by him against his wife, as trustee of the three 1937 trusts, for the reformation of the three 1937 trust instruments, so that paragraph 7 would read as follows:
If the said beneficiary shall die before reaching the age of twenty-five years, and if, prior thereto, this trust shall not have terminated as hereinabove provided, then his [or her] beneficial interest in this trust and in all its accumulations shall be divided by the trustee into as many equal portions as there are children of mine then living, and one of such portions shall be paid, assigned, conveyed and transferred to the trustee under each of the then existing trusts this day created in the said partnership assets and business, and one portion to the trustee under each of then existing similar trusts that may be created by me or by Margaret L. Scherer for the benefit of any of my children born after the date *783 hereof, provided, however, that one of such portions shall be paid, assigned, conveyed and transferred direct*143 to any surviving child of mine who was the beneficiary of any such trust which shall theretofore have terminated, and one of such portions shall be paid, assigned, conveyed and transferred direct to any surviving child of mine born after the date hereof, for whom no such trust shall have been created. The capital account on the books of the partnership shall be made to reflect any such transfer or transfers of partnership interest.
A guardian ad litem was appointed for the beneficiaries of the three 1937 trusts, with direction to report as to the advisability and propriety of so reforming the instruments. The trustee in her answer admitted all the allegations contained in the bill of complaint. After the guardian ad litem had filed his report recommending the amendment of the trust instruments as requested, and upon motion for the entry of a consent decree, a hearing was had at which Scherer and his attorney testified in substance that the limitation as to the division of the assets of the three trusts, in the event of the death of one of the beneficiaries, to the survivors of the beneficiaries of the 1937 trusts was not in accordance with his original intent as expressed at *144 the time the trust instruments were drafted and that the use of the phrase "this day created" was inadvertent and did not convey Scherer's true intent. Thereupon and on the same day, a consent decree was entered by the court amending paragraph 7 of the three 1937 trusts as prayed.
Prior to the transfers and about February 1937, Scherer first began to discuss making such transfers with a friend, who was a lawyer, and with his wife and later with his attorney. The transfers were made in lieu of a will. Other considerations which prompted Scherer to make the transfers were the growth of the business and its earnings, which were entirely taxable to him as sole proprietor; his ability at that time to pay gift taxes when the business was running well, whereas his death might have a disastrous effect on the business, since the business was short of cash to meet resulting estate taxes; and the protection of the business against claims in the patent, since it was thought that such claims would be more difficult to assert against more than one interest. When Scherer made the transfers in 1937 and 1939, he had no other substantial income-producing property.
On March 31, 1933, a certificate*145 executed by Scherer was filed with the Wayne County clerk, stating that he intended to conduct a business as sole owner under the assumed name of Gelatin Products Co. On January 27, 1938, a certificate executed by him on June 30, 1937, was filed stating that he had discontinued the business theretofore conducted by him as sole owner, but that he would continue such business in association with others. On January 27, 1938, a certificate executed by Scherer, his wife as trustee for the three older children, and her individually, was filed stating that they owned and conducted a business under the assumed name of Gelatin Products Co. On July 25, 1939, a certificate of discontinuance of business under an assumed *784 name, executed by petitioner, his wife as trustee for the three older children, and her individually, on June 30, 1939, and a certificate of conducting a business under an assumed name executed by them, were filed. The bills of sale were filed in the office of the register of deeds for Wayne County. The assignments of interests in the patent were recorded in the United States Patent Office.
On June 30, 1937, the credit balance in the proprietor's investment account*146 in the books of account of the Gelatin Products Co., which represented the book net worth of the business at that time, was $ 103,025.10. As of July 1, 1937, this account was closed out and the amount therein credited to capital accounts for Scherer, his wife individually, and as trustee for each of the three 1937 trusts, as follows: $ 34,341.70 to the capital account of Scherer and $ 17,170.85 each to the capital accounts of the wife and of the wife as trustee for Josephine L., Robert P., Jr., and Karla, respectively. The net profits of $ 249,275.70 for the year ended June 30, 1938, were credited to the capital accounts on the basis of one-third, or $ 83,091.90, to Scherer, and one-sixth, or $ 41,545.95, to each of the other four capital accounts. The net profits of $ 506,507.48 for the year ended June 30, 1939, were credited to the capital accounts on the same basis, $ 168,835.83 to Scherer's capital account and $ 84,417.91 to each of the other four capital accounts.
As of June 30, 1938, the capital account of the wife individually was charged with drawings of $ 18,000 and as of June 30, 1939, with drawings of $ 58,498.94. Each month an amount of money from the business was *147 deposited to the account of the wife, she used it for the payment of household expenses and for the maintenance, support, and education of the children, and the total was charged to her capital account. At the time Scherer transferred one-sixth interest to her individually she did not understand that she was to pay the household and such other expenses out of her share of the profits. About a year later, in looking over audit reports of the business, she noticed that her share of the profits was less than that of the children. She questioned Scherer about this and was informed by him that "that was the way it was arranged." She acquiesced and that practice was continued. As shown by the books of account of the company, the charges to the drawing account of each of the 1937 trusts during the fiscal year ended June 30, 1939, were as follows:
| 3/14/39 | Collector of Internal Revenue, 1st Inst. 1938 Income Tax | |
| Return | $ 1,771.49 | |
| 6/13/39 | Collector of Internal Revenue, 2nd Inst. 1938 Income Tax | |
| Return | 1,771.49 | |
| 6/17/39 | Purchase of 40 shares -- Old Kent National Bank | 1,080.00 |
| 6/30/39 | Cash Distribution from Gelatin Products Co | 23,333.33 |
| 6/30/39 | Cash Distribution from Gelatin Products Co | 48,542.62 |
| Total | $ 76,498.93 |
*148 *785 The $ 23,333.33 was the first deposit in the bank account of each of the three 1937 trusts, and the $ 48,542.62 was the first deposit in the bank account of each of such trusts with the national bank. On September 8, 1939, $ 22,333.33 was withdrawn by check from each of the trust accounts in the Detroit Bank and turned over to the Gelatin Products Co. as a loan. Subsequently, on November 14, 1941, $ 25,000 was withdrawn from each of the trust accounts and turned over to the company as a loan. No other distributions of the net profits of the Gelatin Products Co. have been made to the three trusts. Except for the deposit of Old Kent National Bank dividends of $ 50 from October 3, 1939, to January 17, 1941, the balance in each of the trust accounts in that bank remained at $ 1,000 from September 8, 1939, to August 31, 1943. No additional deposits have been made in the accounts with the national bank since the first one on June 30, 1939, and the balance in each of them has been $ 857.04 since November 14, 1941. Amounts aggregating $ 22,685.58 have been withdrawn from each such account by check for the payment of Federal income taxes.
Under date of July 1, 1939, Scherer*149 and his wife, individually and as trustee, signed the following writing to the accountant in charge of the books of the business:
This will be your authority to charge each partner with interest on his drawings and to credit each partner interest on his advances to the partnership from July 1, 1939. The interest shall be computed from month to month at the rate of five per cent (5%) per annum on the balance of such drawings or advances at the end of the preceding month but shall be charged or credited to each partner only at the fiscal year end.
In making the interest computation as regards the account of Mr. Robert P. Scherer, allowance is to be made for each month's pro rata share of the salary due him as managing partner. There is no intention that this arrangement shall affect the formal partnership agreement and it will probably be discontinued when the partners' net investments in the Company are more nearly equalized.
As of June 30, 1939, the credit balance in Scherer's capital account was $ 133,271.57 and in each of the capital accounts of the wife individually and the wife as trustee was $ 66,635.78. A capital account was set up for the wife as trustee for John Stephen, *150 and $ 66,635.78 was credited thereto as of July 1, 1939. A new capital account was also set up for Scherer, which as of July 1, 1939, showed a credit balance of $ 66,635.79. No distribution of net profits was made to this trust in 1939, except that the distributive share of profits of $ 97,151.89 was credited to the account as of June 30, 1940. A similar amount was credited as of the same date to the other five capital accounts. No withdrawals were made from the capital account of the John Stephen trust except for the payment of Federal income taxes, purchase of shares of Old Kent National Bank of $ 1,080, and interest on "Loans less Drawings." On October 3, 1939, *786 a bank account was opened with the Detroit Bank for the wife as trustee for John Stephen by the deposit of $ 20 dividends from the bank shares. No other deposits were made to this account except three additional deposits of dividends of $ 10 each.
Scherer's wife had no business experience before June 30, 1937. She usually was with petitioner while he worked in the basement of his father's home and in the warehouse and assisted him in small ways. She accompanied him on his first trip, made for the purpose*151 of interesting a large drug concern in his process, but took no part in the negotiations, which were unsuccessful at the time. She took no part in the affairs of the Gelatin Products Co. except that Scherer discussed his affairs with her at home, as he always did. The company's accountant attended to the bank account deposits and withdrawals of the trusts under the supervision of Scherer and his wife. The only investment made by her as trustee was the purchase of shares of Old Kent National Bank, and in this she consulted with and followed the advice of Scherer. Scherer had sole management and control of the affairs and finances of Gelatin Products Co. before and after the transfers. He determined the portion of the earnings to be credited at the close of the year to the various capital accounts in accordance with the partnership earnings. He also determined the amount of these earnings which were actually to be distributed to each partner and the amounts which were to be retained in the business. This was done in accordance with the partnership agreement. At no time after 1937 was Scherer unable to provide support, maintenance, and education for his children.
Much of the *152 success of the business is attributable to Scherer's ability and in large measure to the development of the vitamin industry. Vitamins A and D, fish liver oil vitamins, were known in 1914. About 1922 and 1923 codliver oil was found to cure children of rickets. By 1932 ascorbic acid, Vitamin C, had been isolated from citrus fruit juices and found to prevent scurvy. In 1935 and 1936 thiamin, or Vitamin B[1], was found to be a preventive of beriberi. In 1937 nicotinic acid, now called niacin, was found to be a cure for pellagra. Riboflavin, Vitamin B[2], was discovered in 1935 and 1940. There are other vitamins, the effect of which has not been established. Synthetic vitamins are cheaper than natural vitamins and their production brought about widespread purchase and consumption. The vitamin industry increased from year to year. Vitamins A and D were at first not stable and tended to deteriorate when exposed to the atmosphere. The soluble elastic capsule was preferred as a form of dosage because it was the only known container in which such vitamins remained stable. Although there were other forms of dosage for oral administration, such as tablets, pills, fluids, powders, *153 *787 and other types of capsules of the telescopic variety, petitioner's capsule had greater appeal as a form of dosage.
Petitioner's business was well established by June 30, 1937, but it was subject to the threat of increased competition in the possible development of a new process of manufacturing capsules and the adoption of such process by drug manufacturers so that they could manufacture capsules in their own plants, as well as the possible development of a dosage form having greater utility and customer appeal. From 1933 to 1937 petitioner's principal enclosure substance was fish liver oils. In June 1937 about 50 percent of the product encapsulated consisted of fish oils, about 20 percent of natural vitamins, about 25 percent of nonvitamin medicinals, and about 1 percent of synthetic vitamins. As of June 30, 1937, about 70 percent to 80 percent and in 1939 about 55 percent to 60 percent of the Scherer business consisted of the encapsulation of materials furnished by customers. The remainder of the business consisted of encapsulating its own materials. In the latter part of 1939 the business began the manufacture on a laboratory scale of various medicinal products to*154 be encapsulated. These were produced on a commercial scale in 1940 and 1941.
The following schedule shows the number of machines used, average number of employees, production in number of capsules, and net sales from 1933 to 1941:
| Average | ||||
| Year | Machines | employees | Capsules | Net sales |
| 1933 | 1 | 7,119,720 | $ 5,521.37 | |
| 1934 | 2 | 18 | 120,018,202 | 98,832.00 |
| 1935 | 6 | 56 | 354,342,273 | 313,492.49 |
| 1936 | 6 | 67 | 501,392,880 | 512,787.45 |
| 1937 | 13 | 103 | 830,725,390 | 955,369.77 |
| 1938 | 10 | 136 | 831,010,290 | 1,214,744.95 |
| 1939 | 12 | 172 | 1,253,043,940 | 2,236,842.99 |
| 1940 | 12 | 203 | 1,264,186,900 | 2,971,741.08 |
| 1941 | 18 | 277 | 1,689,064,686 | 4,569,348.79 |
The net profits of the business as shown by the books of account from 1933 to 1941 were as follows:
| Calendar year | Net profits |
| 1933 | $ 1,323.17 |
| 1934 | 25,307.03 |
| 1935 | 113,646.08 |
| 1936 | 145,585.57 |
| Six months ended June 30, 1937 | 88,912.08 |
| Fiscal year ended June 30, 1938 | 249,275.70 |
| " " " " " 1939 | 506,507.48 |
| " " " " " 1940 | 582,911.33 |
| " " " " " 1941 | 675,652.96 |
*788 In arriving at net profits a salary of $ 24,000 a year for Scherer was included in "Selling, General and Administrative*155 Expenses" for the 6-month period ended June 30, 1937, and the fiscal years ended June 30, 1938 and 1939, and $ 40,000 for 1940 and 1941.
The assets and liabilities of the business as shown by its balance sheets as of June 30, 1937 and 1939, were as follows:
| June 30, 1937 | June 30, 1939 | ||
| ASSETS | |||
| Cash | $ 19,242.90 | $ 54,436.14 | |
| Accounts and notes receivable (less reserve | |||
| for bad debts and discounts) | 44,555.45 | 90,803.01 | |
| Inventories | 49,106.20 | 168,800.02 | |
| Deposits on purchase commitments | 10,000.00 | ||
| Prepaid insurance, etc | 4,093.39 | 7,324.86 | |
| Advances: | |||
| Gelatin Products, Limited (Canada) | 25,518.36 | ||
| Gelatin Products, Limited (England) | 3,503.00 | 9,829.82 | |
| Machinery, equipment, etc. (less reserves | |||
| for depreciation | 71,134.31 | 97,893.94 | |
| Patents (less reserves for amortization) | 45,999.73 | 40,007.02 | |
| Total | 237,634.98 | 504,613.17 | |
| LIABILITIES | |||
| Trade and other accounts payable | 23,926.17 | 40,559.85 | |
| Loans and other indebtedness | 37,346.10 | 32,860.00 | |
| Due employees | 42,375.96 | 20,278.73 | |
| Unpaid 1936 Federal income tax (proprietor) | 28,686.33 | ||
| Accrued liabilities, payroll, social | |||
| security tax, insurance, etc | 2,275.32 | 11,099.90 | |
| Proprietor's investment account (net worth) | 103,025.10 | ||
| Partners' investment accounts (net worth) | 399,814.69 | ||
| Total | 237,634.98 | 504,613.17 |
*156 The fair market value on June 30, 1937, of the four-sixths interest in the business of the Gelatin Products Co. transferred by Scherer on that date as gifts to his wife and to his wife as trustee for the benefit of his then three minor children was $ 275,000.
The fair market value on June 30, 1939, of the one-sixth interest in the business of Gelatin Products Co. transferred by Scherer on that date as a gift to his wife as trustee for John Stephen Scherer was $ 254,191.
The transfers in 1937 by Scherer to his wife as trustee for his three children were gifts of future interests.
Partnership returns were filed in the name of Gelatin Products Co. for the fiscal years ended June 30, 1938 and 1939, disclosing a net income of $ 272,442.33 and $ 531,081.78, respectively. Individual income tax returns for the calendar years 1938 and 1939 were filed by Scherer and his wife and by the latter as trustee for each of the three trusts created by Scherer on June 30, 1937, in each of which was reported the proportionate part of the net income of Gelatin Products Co. as shown by the partnership returns. By reason of adjustments not here in controversy the Commissioner increased the net income as*157 reported in the partnership return for the fiscal years 1938 and 1939 to $ 283,991.43 and $ 542,168.78, respectively.
*789 On June 30, 1937, Robert P. Scherer made irrevocable gifts to his wife, Margaret L. Scherer, individually, and to his three minor children, Josephine, Robert, and Karla, in trust, in the amounts mentioned in our findings. On June 30, 1939, he made an irrevocable gift in trust to his minor child, John Stephen, in the amount mentioned in our findings. The partnership agreement entered into June 30, 1937, between Scherer and his wife Margaret for herself individually and as trustee for her three minor children created a legal, valid partnership between them, with Scherer owning a two-sixths interest and each of the other partners owning a one-sixth interest. The partnership agreement entered into June 30, 1939, between Scherer and his wife Margaret for herself individually and as trustee for her four minor children created a legal, valid partnership between them, with each of the partners owning a one-sixth interest therein.
The earnings of the partnership allocable to the respective partners under the terms of the partnership agreements were the income of*158 the respective partners to whom allocable.
OPINION.
Although these three cases were tried together, as suggested by both parties, they present different issues. The earliest case, Docket 107150, involves a 1937 gift tax and arises from the Commissioner's increase of the value of the gifts above the valuation used by the taxpayer in his return. Both parties agree that completed gifts were made. The only dispute in Docket 107150 is as to the value of the gifts which were made and whether the gifts to the minor children were of future interest in property, as raised by respondent in his amended answer. That docket requires consideration of but two issues: (1) The proper valuation of the gifts to the wife and in trust for the three children, and (2) whether the gifts in trust for the children were gifts of future interests precluding the $ 5,000 statutory exclusions. The next case filed was Docket 109825, and this involves only the question whether for the purpose of Scherer's income tax for 1938 and 1939 the income of the subject of the four undisputed gifts of 1937 may be attributed to Scherer and included in his gross income. The last case, Docket 809, so designated in the new*159 numbering of dockets after the name of this Court had been changed, involves only a question of valuation of the gift made in 1939 in trust for the newly born child, both parties agreeing that a valid, completed gift was made. As to 1939, therefore, both the question of taxing the income of the property to Scherer and the question of the valuation of the admitted gift made to the child are involved.
*790 We shall consider first the valuation of the gifts which it is agreed that Scherer made in 1937 and 1939. After we have considered and arrived at our conclusions as to the valuation of the gifts, we shall then consider the question as to whether Scherer is taxable on the entire income of the Gelatin Products Co. for the fiscal years ended June 30, 1938, and June 30, 1939, notwithstanding the completed gifts which he had made to his wife and minor children in 1937.
The Commissioner determined the gift tax deficiency for 1937 by raising the aggregate figure of valuation of four-sixths interest in the business from $ 179,083.40, used by the taxpayer in his gift tax return, to $ 373,866.67. In the taxpayer's brief he argues for a valuation of $ 230,887.36. The Commissioner in*160 his brief now "submits that the weight of the evidence supports the value of $ 275,000 as * * * the fair market value of the four-sixths interest in the business of the Gelatin Products Company on June 30, 1937."
The evidence, in our opinion, supports the valuation now proposed by the Commissioner and we have, therefore, found as a fact that the value of the gifts on June 30, 1937, was $ 275,000. The evidence upon which this finding rests has been fully set forth in the findings. Opinions of several witnesses based upon different reasoning reached various conclusions as to the value of the gifts; those of the petitioner's witnesses being $ 179,136.20, $ 200,000, and $ 269,333.33, and that of the respondent's witness being $ 275,000. The valuation of $ 230,887.36 urged by the petitioner is the average of these four. We think, however, that on the date in question the past experience of the business and its prospects for the immediate and the unknown future would have prompted any willing and able buyer to pay at least as much as $ 275,000 for a four-sixths interest in the business and that, knowing all the facts, the seller would have taken no less as a price. Neither the risks*161 of the vitamin industry, of potential competition, of possible patent litigation, nor of the possible discontinuance of Scherer's association with the business were such as to require a lower appraisal than has been found, while, on the other hand, the trend of earnings and the expansion of the business were great enough to inspire a high degree of hope and expectation. The balance sheet, to be sure, showed net worth of only $ 103,025.10 as of June 30, 1937, but the business was growing rapidly, and no account was given to good will or to the earning capacity of the patent and process. We have, therefore, found a higher value for the business than that reached by any of the petitioner's witnesses, and have adopted the figure of $ 275,000 testified to by respondent's witness. We think such value is well supported by the evidence.
2. The gift made in trust to Scherer's infant son on June 30, 1939, was of a one-sixth interest in the business. In his gift tax return *791 for 1939 Scherer reported this gift at a value of $ 66,635.78. The Commissioner in determining the deficiency raised this valuation to $ 627,801.28. The three witnesses for petitioner testified that in their*162 opinion the value was $ 74,286.27, $ 200,000, and $ 254,191, and respondent's witness testified to a value of $ 220,000. In his brief petitioner seeks a valuation of $ 187,119.32, which is the average of these four figures, and respondent asks a valuation of $ 254,191, which is the highest figure testified to for petitioner.
Upon the evidence, which is substantially set forth in the findings, we have found as a fact that the value of the one-sixth interest covered by this gift was $ 254,191, as requested by the respondent. This is, in our opinion, the lowest figure that a willing buyer and a willing seller would agree upon as a fair price on June 30, 1939, for the subject of the gift. It takes into consideration the progress of the business subsequent to the date of the earlier gifts, the continually expanding earnings, and the reasonable prospects for the foreseeable future, and does not omit consideration of the risks and possibilities which would affect value.
3. The Commissioner by affirmative answer contends that the deficiency in 1937 gift tax was inadequately determined in that exclusions of $ 5,000 each were allowed in respect of the three gifts in trust to the children, *163 despite the fact that they were gifts of future interests. The petitioner in his brief makes no argument that these three gifts were not of future interests. Therefore, we take it that he has abandoned any contention to the contrary. The beneficiary of each trust was not entitled to the enjoyment of either the principal or the income unless and until he became twenty-five or, in the discretion of the trustee, he became twenty-one. There was also the trustee's power in her discretion to apply income to the beneficiary's personal use and enjoyment if necessary because of Scherer's inability to provide for support, maintenance, and education, a contingency which did not occur. By reason of these provisions, the gifts are within the class of future interests. United States v. Pelzer, 312 U.S. 399">312 U.S. 399; Commissioner v. Gardner, 127 Fed. (2d) 929. The exclusion of $ 5,000 as to each of the three trusts was erroneous.
4. The next and final question which we have to decide is whether the entire income of the business of the Gelatin Products Co. for the fiscal year ended June 30, 1938, and June 30, 1939, is taxable to petitioner. *164 The amounts of income are not in dispute. The Commissioner has made some upward adjustments of the net income of Gelatin Products Co. as reported in the partnership returns filed for the two fiscal years above stated. Petitioner concedes the correctness of these adjustments and, therefore, they do not present any issue for our decision. We may say at this point that no fiscal year following *792 the admission into the partnership of petitioner's minor son, John Stephen, born in 1939, is involved in this proceeding. Only the income of the partnership for the fiscal years ended June 30, 1938, and June 30, 1939, are involved.
The petitioner argues, first, that the Commissioner, having elected to treat the gifts which petitioner made to his wife and three minor children on June 30, 1937, as valid, completed gifts, has in effect abandoned his position that the income of Gelatin Products Co. for the fiscal years ending June 30, 1938, and June 30, 1939, is all taxable to petitioner. In presenting this proposition in his brief the petitioner, after discussing the fact that respondent had introduced the testimony of a witness who based his valuations upon the premise that completed*165 gifts had been made, states as follows: "Thus, when the time came when the Commissioner was compelled to make a choice of positions, he chose to contend that the entire ownership of the four-sixths and the one-sixth was transferred. In so doing, he abandoned the only premise upon which he could claim an income tax." We do not agree that, because the Commissioner takes contrary positions such as petitioner points out, it must be held that he has abandoned one or the other of his positions. It is not infrequent in tax cases that both the taxpayer and the Commissioner take inconsistent positions, and this is not improper if the inconsistent positions are properly pleaded. Petitioner points out nothing in the pleadings which would prevent the Commissioner from taking inconsistent positions in the matters complained of, even if it be assumed he has done so. Nor do we agree with petitioner that, because a donor has made a gift of property so that a valid gift tax can be imposed, he is necessarily relieved from paying income tax on the income which the property earns. In the instant case we do not find it necessary to go that far.
In Commissioner v. Estate of Beck, 129 Fed. (2d) 243,*166 the court held subject to the gift tax the full value of the securities and insurance policies transferred by the grantor to the trustees under an irrevocable trust which provided that the net income should be used to pay the premiums due on insurance policies on the life of the grantor. It requires no discussion, of course, to demonstrate that the instant case is not like the Beck case. While we would not go so far as to hold that, because a donor has made a gift of property so that a valid gift tax can be imposed he is necessarily relieved from paying income tax on the income which the property earns, we do hold in the instant case, where Scherer made gifts so complete that the Commissioner's own expert witness testified as to valuation of the gifts upon the basis that completed gifts had been made and that Mrs. Scherer and the three minor children were the owners of respective interests in the business and entitled to shares of its annual net income, and these gifts *793 have been used as their capital contributions to the partnership, the entire income of the partnership is not taxable to Scherer.
We, therefore, think that the issue as to whether the income of Gelatin*167 Products Co. for the fiscal years ended June 30, 1938, and June 30, 1939, is all taxable to petitioner depends upon whether after petitioner made the gifts in 1937 to his wife and three minor children, a valid, legal partnership was formed between petitioner and his wife, acting for herself as an individual and as trustee for her three minor children. A partnership is defined by section 1001 (a) (3) of the Revenue Act of 1936, printed in the margin. 1 The same definition is carried in the Internal Revenue Code, section 3797 (a) (2). There is a line of cases which holds that a husband whose earnings are from personal services such as attorney fees, accounting fees, insurance commissions, or engineering fees may not make his wife a partner and have his personal service earnings taxed as partnership income. Among the cases are Mead v. Commissioner, 131 Fed. (2d) 323; Schroder v. Commissioner, 134 Fed. (2d) 346; Earp v. Jones, 131 Fed. (2d) 292; Tinkoff v. Commissioner, 120 Fed. (2d) 564, affirming Board of Tax Appeals memorandum opinion; Thomas M. McIntyre, 37 B. T. A. 812;*168 Harry C. Fisher, 29 B. T. A. 1041; affd., 74 Fed. (2d) 1014.
In the Tinkoff case Tinkoff, who was a lawyer and accountant, undertook to make his wife and minor son partners in his law and accounting practice, the earnings from which were clearly personal service earnings. The court held that no valid partnership had been created and among other things said:
* * * Looking at the substance of the partnership transactions and disregarding mere form, it is obvious that the two partnerships had no business functions. Neither the *169 wife nor the infant son contributed either capital, services or anything of value to the partnerships. The partnerships were merely patent devices "to exalt artifice above reality." Gregory v. Helvering, 293 U.S. 465">293 U.S. 465. * * *
While it is true that there is this line of cases holding that a husband and father whose earnings are from personal services can not make his wife and minor children partners where they contribute neither capital nor services, there is also a line of cases which hold with equal clarity that a husband and father engaged in a mercantile or manufacturing business can make his wife and/or minor children partners in the business by making bona fide gifts to them of an interest in the business assets and then entering into a partnership agreement with them *794 they contributing to the business as their part of the capital the interests given to them by him. Some of these cases are Millard D. Olds, 15 B. T. A. 560; affd., 60 Fed. (2d) 252; Richard H. Oakley, 24 B. T. A. 1082; Walter W. Moyer, 35 B. T. A. 1155;*170 and Justin Potter, 47 B. T. A. 607, and there are many others. See J. D. Johnston, Jr., 3 T. C. 799 and cases therein cited. In Walter W. Moyer, supra, we said:
* * * The question to be determined, therefore, is whether the petitioner actually made a gift to his wife of an interest in the business in the amount of $ 100,000. If he did make a gift to his wife, she made a contribution to the business and hence had an interest in the partnership. * * *
In the instant case no issue is raised that Scherer did not make valid, completed gifts to his wife individually and to his minor children in trust.
Respondent in his brief concedes that the facts in Richard H. Oakley, supra, were analogous to the facts of the instant case. In that case on December 31, 1922, Richard H. Oakley executed an assignment of certain properties to Beatriz Oakley, individually, to Beatriz Oakley as trustee for Barbara Oakley, a minor, and to Beatriz Oakley, trustee for Jean Oakley, a minor. The assignment was delivered to and accepted by Beatriz Oakley, individually and as trustee, on*171 December 31, 1922. On this same date articles of copartnership were entered into by and between Richard H. Oakley, Beatriz Oakley, individually and Beatriz Oakley, as trustee for Barbara Oakley and Jean Oakley, minors, under the name of "Oakley Paint Manufacturing Company." We held that a valid, legal partnership was created among Richard H. Oakley and his wife and two minor children and that the taxpayer was not taxable on that part of the income of the partnership which belonged to the wife and the two minor children.
As we have already stated, the respondent concedes that the facts in the Oakley case are somewhat analogous to the facts of the instant case. He does not dispute that a valid, legal partnership was formed on June 30, 1937, by Scherer and his wife acting for herself individually and as trustee for her three minor children. In fact, as we understand his position stated in the deficiency notice, at the hearing, and in his brief, he concedes that a valid, legal partnership was formed. He does argue, however, that the rule which we applied as to the taxability of the income of the partnership in the Oakley case should not be applied in the instant case because*172 the Oakley case was decided prior to Helvering v. Clifford, 309 U.S. 331">309 U.S. 331, and that under the doctrine of the Clifford case all the income of the partnership, Gelatin Products Co., should be taxed to Scherer because of the large measure of control over the property and income of the partnership which he exercised under the terms of the declarations of trust, the partnership agreement, and other related instruments executed June *795 30, 1937. We can not agree with that contention. The statute itself prescribes how partnership income shall be taxed. Section 181, I. R. C., provides: "Individuals carrying on business in partnership shall be liable for income tax only in their individual capacity." We do not believe there is any reason to say that the Supreme Court's decision in Helvering v. Clifford, supra, overrules the long line of cases we have cited above and should be extended so far as to set aside the well established method of taxing partnership income to the respective partners and taxing it all to one partner because as managing partner he exercises a large measure of control over the partnership*173 business. While it is true that under the terms of the partnership agreement Scherer, as managing partner, did exercise a large measure of control over the partnership business and had the sole discretion to determine whether the profits of the partnership of any particular year should be distributed to the respective partners or whether such profits should be retained in the partnership business, this discretion did not make him the owner of the shares of income which belonged to the other partners. Any income not distributed had to be credited to the capital accounts of the respective partners and accounted for as such in a final distribution of the partnership assets. It is clear, for example, that Scherer would have no legal authority to appropriate to his own personal use and pay his own income tax with the share of partnership earnings which belonged to the wife individually and to her as trustee for the minor children. It is also clear that if the entire income of the partnership is to be taxed to Scherer as the Commissioner has determined, then the income tax due thereon will considerably exceed the share of the partnership income which belongs to Scherer. We do not*174 think that Helvering v. Clifford, supra, is authority for such a result.
We have already passed upon what we regard as essentially the same issue as we have in the instant case, in the case of Justin Potter, supra. In that case Justin Potter and Valere Blair Potter were members of a partnership operating a retail coal business. They decided they wished to give their two minor children, one aged thirteen years and the other seven years, interests in the business and make them partners thereof. They did so and we held that a valid, legal partnership was created. The Commissioner's position in that case was stated by us in our opinion as follows:
The respondent's argument in his brief is devoted to the broad aspects of the question. He argues that the dominion and control exercised by Potter over all the income and property alleged to have become the property of the children was such that the gifts, if any were effectively made, did not bring about any substantial change in the economic interests of the donors after the alleged gifts were made. Respondent's position is that the circumstances here require application*175 of the rationale of Helvering v. Clifford, 309 U.S. 331">309 U.S. 331.
*796 We may say that we understand respondent's position in the instant case to be precisely what it is stated to have been in the Potter case. We ruled against respondent's contention in the Potter case and ruled that the two minor children were members of the partnership and that their share of the partnership income was taxable to them and not to the parents, who had made gifts to them of interests in property which formed the basis of their capital contributions to the partnership. In so holding, among other things, we said:
* * * Our appraisal of the facts leads to the conclusion that petitioners made irrevocable gifts of the interests in the partnership without retention of any power to revest the property or the income in themselves. With respect to all of the items of income involved -- partnership distributions and earnings, interest, dividends, and capital gains -- the rule which applies here is that tax liability on income attaches to ownership of the property producing the income. The rule of the Clifford case is not applicable here. Blair v. Commissioner,*176 supra; Julius E. Lilienfeld, 35 B. T. A. 391. [Emphasis supplied.]
The Commissioner not only did not petition for review in the Potter case, he published his acquiescence therein in 1942 -- 2 C. B. 15.
As we have already stated in the instant case, we have held that Scherer made valid, completed gifts on June 30, 1937, to his wife and three minor children of interests in the business of the Gelatin Products Co., theretofore conducted as a sole proprietorship. Immediately thereafter a valid partnership was formed between Scherer and his wife acting for herself individually and as trustee for her three minor children, with interests in the partnership thereafter owned as follows: Scherer, two-sixths; Margaret L. Scherer, one-sixth; and Margaret L. Scherer as trustee for each of the minor children, one-sixth for each minor. This being so, we think the rule of the Potter case must be applied here, which, as we have quoted it above, was "the rule which applies here is that tax liability on income attaches to ownership of the property producing the income." Scherer should only be taxed on his two-sixths of the net income*177 of the partnership of Gelatin Products Co. for the two taxable years in question, and the Commissioner's determination that he should be taxed with all of it under section 22 (a) is not sustained.
We do not think our holding in this respect is contrary to our holding in O. William Lowry, 3 T. C. 730, and Frank J. Lorenz, 3 T. C. 746, as expressed in the majority opinions. The basis of those decisions was that no completed gifts had been made by the husbands of the capital contributions which the wives purportedly contributed to the partnership business. In the Lowry case, for example, our ultimate finding of fact at the conclusion of our general findings was as follows:
Petitioners did not relinquish dominion and control over any part of the assets of the corporation by reason of the gifts of stock in the corporation to their wives, and, consequently, the wives did not contribute any property to the capital of the partnership.
*797 The majority having held in the Lowry and Lorenz cases that no completed gifts were made to the wives and that consequently they made no capital contributions to the partnership, *178 we think the instant case is distinguishable in that view from the two above mentioned cases.
We think that Murphy Shannon Armstrong, 1008">1 T. C. 1008, now on review by the Tenth Circuit, is distinguishable on substantially the same grounds as just above stated. In the Armstrong case, after making detailed findings of fact from the evidence, we made at their conclusion the following ultimate finding of fact:
Petitioner remained in control of the trust property, and in substance the owner thereof, and retained direct and indirect benefits from income. [Emphasis supplied.]
whereas in the instant case at the conclusion of our general findings of fact we have made the following ultimate findings of fact:
On June 30, 1937, Robert P. Scherer made irrevocable gifts to his wife, Margaret L. Scherer, and to his three minor children, Josephine, Robert and Karla, in the amounts mentioned in our findings. * * * The partnership agreement entered into June 30, 1937, between Scherer and his wife Margaret for herself individually and as trustee for her three minor children created a legal, valid partnership between them, with Scherer owning a two-sixths interest*179 and each of the other partners owning a one-sixth interest. * * *
The earnings of the partnership allocable to the respective partners under the terms of the partnership agreements were the income of the respective partners to whom allocable.
The burden of respondent's argument, as we understand it in his brief, is that not to apply the doctrine of Helvering v. Clifford, supra, in these family partnership cases, even where capital is one of the substantial income producing factors, is to recognize an arrangement within the family group for the division of income in accordance with the will and discretion of the donor, and is to open up a door for tax avoidance. If it be true that these family partnership cases, where an admitted bona fide, completed gift has been made and a legal partnership has been created, open a door for tax avoidance, it is a door which has long been open because, as we have endeavored to point out, there are many cases which have sustained the validity of such partnerships created under facts similar to the ones we have here and have taxed the income accordingly. If the door is to be closed, it must be closed by legislation, *180 which is a matter addressed to the judgment of Congress and not to us. We have no powers of legislation. We do not feel that it is our function to change what we regard as existing law by an unwarranted extension of the doctrine of Helvering v.Clifford.
As an alternative respondent contends that the entire income of Gelatin Products Co. should be taxed to petitioner under the doctrine of Helvering v. Stuart, 317 U.S. 154">317 U.S. 154. We think this contention must *798 be denied. In petitioner's gift of a one-sixth interest in the business to his wife, he imposed no restrictions as to how she should spend her part of the partnership income distributed to her. It is true that the facts show that the household expenses of the Scherer family were paid out of her part of the partnership income. When this fact was brought to Mrs. Scherer's attention, she acquiesced therein. We know of no rule of law which would make a wife's income taxable to her husband merely because it is expended voluntarily, by agreement between herself and her husband, for household expenses of the family.
As to the taxability of the minor children's share of the income of*181 the partnership to Scherer under Helvering v. Stuart, supra, respondent relies upon the following clause, which is contained in each of the trust instruments:
To pay from time to time to the beneficiary from the income of the trust such sums as the Trustee may deem advisable for the beneficiary's personal use and enjoyment, and where the use of trust funds may be necessary because of my then present inability to so properly provide, to pay either from corpus or income so much as may be necessary for the support, maintenance and education of said beneficiary. Any income not currently distributed shall be added to the principal of the trust estate.
It will be noted that in the language above quoted from the trust instruments the trustee is not given the broad power as existed in the Stuart case "to apply so much of said income for his education, support, and maintenance, as to them shall seem advisable."
In the instant case the trustee is empowered to use the income of the trusts for the support, maintenance, and education of the minor beneficiaries only in situations where the settlor, Scherer, is unable to so properly provide. The testimony*182 in the instant case was to the effect that at all times pertinent hereto Scherer was amply able to provide for the support, education, and maintenance of his minor children and that none of the income of the trusts has ever been used by the trustee for such purposes. This being the state of the proof, we think Helvering v. Stuart, supra, is not applicable. Cf. Commissioner v. Katz, 139 Fed. (2d) 107.
Decisions will be entered under Rule 50.
Sternhagen, J., dissenting in Docket No. 109825: The determination of deficiencies in income tax for 1938 and 1939 should, in my opinion, not be reversed. The transfers to Mrs. Scherer and in trust for the children and the agreement of partnership effected but a redistribution of Scherer's income within the family group while he *799 retained complete power and control over it and over the business and properties by which it was produced. The case is therefore within the rationale of the Clifford case. After signing the papers, nothing of substance was done in derogation of Scherer's ownership. The business was still operated by him and under*183 his "exclusive management," and the distribution or retention of income was entirely at his discretion. Except for the two amounts deposited in the wife's bank account and used for household expenses and maintenance of the children, no income was in fact distributed. To hold that for the purpose of section 22 (a) Scherer was not the owner of the property or the income as he had been before is as untenable as the Supreme Court said it would have been in the Clifford case, and fits the language of that opinion -- "To hold otherwise would be to treat the wife as a complete stranger; to let mere formalism obscure the normal consequences of family solidarity; and to force concepts of ownership to be fashioned out of legal niceties which may have little or no significance in such household arrangements."
Footnotes
1. SEC. 1001. DEFINITIONS.
* * * *
(a) (3) The term "partnership" includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this Act, a trust or estate or a corporation; and the term "partner" includes a member in such a syndicate, group, pool, joint venture, or organization.↩