*3891 The earnings of the wife of petitioner were separate property by oral agreement between husband and wife under sections 158, 159, and 160 of the Civil Code of California, and she filed a separate income-tax return. Held, that respondent erred in adding the wife's earnings to the income reported by petitioner.
*1345 These proceedings result from determinations by respondent of deficiencies amounting as follows: for 1920, $7,139.52; for 1921, $14,216.76; for 1922, $16,056.73; for 1923, $14,579.45.
Petitioner alleges error with respect to one issue, common to all of the years, that the separate income of Alice K. Busche, the wife of petitioner, has been included in the net income of petitioner on the ground that it is community income.
Upon motion by petitioner the appeals were consolidated for purposes of hearing and decision.
FINDINGS OF FACT.
Petitioner is an individual, a citizen of California, and resides at Oakland.
Petitioner and Alice K. Busche were married in 1897 at St. Louis. In 1903 petitioner*3892 and his wife established a small bakery in St. Louis. Petitioner continued to hold his position as a salesman for a wholesale commission house and he worked evenings on the products of the bakery. The wife was general manager of the bakery. In 1913 they moved to San Francisco, and a bakery known as the "Grandma Cookie Co." was established at San Francisco by petitioner as sole proprietor. His wife occupied herself in the duties of housewife and in the care of their daughter, a schoolgirl. Later, his wife attended night school, studying bookkeeping, shorthand and other subjects which would enable her to fill a position in an office. The bakery was moved to Oakland, and subsequently, in about 1919, the family took up its residence in Oakland. In the latter part of 1919, Mrs. Busche was desirous of going to work so that she might have an income of her own, and this led to discussions between husband and wife resulting in the proposition from petitioner that if his wife would go to work in the bakery bubsiness he would give her a one-half interest in the profits, the proceeds to be her own separate *1346 property to do with as she pleased. Mrs. Busche then started to work*3893 for the bakery and has been employed there ever since, working at least 10 hours a day and often at night or on Sunday. She worked in the factory when needed, did most of the buying, and was in charge of the office, the books of account, the salesmen, and the deliverymen. Petitioner subsequently opened a store at Los Angeles, in which his wife was not directly interested. An employee, a baker, was taken from Oakland to Los Angeles and given an interest in the profits from the Los Angeles business.
On the books of the Grandma Cookie Co., the personal account of Mrs. Busche was credited with the following amounts, described on the books as "salary."
| December 31, 1920 | $19,391.38 |
| December 31, 1921 | 31,629.73 |
| December 31, 1922 | 36,436.35 |
| December 31, 1923 | 40,611.46 |
She was not charged in this account with any withdrawals during the years 1920, 1921, and 1922, with the exception of income taxes paid for her in 1921 and 1922. She withdrew various sums in 1023 and 1924. By December 13, 1924, she had withdrawn all of the above credits. She maintained a separate bank account and treated the proceeds as her own separate property. The family expenses were paid*3894 by the husband and he has never received one cent of his wife's earnings. Mrs. Busche filed separate income-tax returns for the years 1920 to 1923, inclusive, and reported therein the income she received from the baking company.
OPINION.
TRUSSELL: Petitioner and his wife, residents of California, filed separate income-tax returns for the taxable years. Respondent has added to the income of petitioner the earnings of his wife which were derived from the bakery they conducted at Oakland, Calif. Respondent offered no evidence in support of his action and relies upon . The presumption that the earnings are community property is rebuttable, however, and under sections 158, 159, and 160 of the Civil Code of California, husband and wife have the right to alter their legal relations as to property. ; ; ; *3895 ; ; ; and . The record supports the contention of petitioner that such an alteration of their relations did in fact occur. It is in evidence, and uncontroverted, that husband and wife agreed orally to the employment of the wife in the bakery at Oakland previously conducted solely *1347 by the husband, and that the wife's compensation, which was to be one-half of the profits from the Oakland bakery, was to be her own separate property to do with as she chose. The earnings of the wife were large but we entertain no doubt of her experience and capabilities and are satisfied she fully earned what she received. The agreement was strictly observed and the wife enjoyed exclusive and undisturbed control of her earnings. It follows that her earnings were her separate income and property. Cf. ; *3896 ; and .
For all of the taxable years the wife of petitioner filed separate returns. In our opinion the earnings of the wife received as compensation for her services to the bakery at Oakland may not be added to the income of the petitioner for the purposes of income tax.
Reviewed by the Board.
Judgment will be rendered upon 15 days' notice, under Rule 50.