*3023 The right of petitioner and wife to report in separate returns the income derived from a partnership in the State of Oregon, in which the petitioner had invested certain funds belonging to himself and wife by virtue of the community property laws of the State of Washington, denied where the evidence does not afford any basis for allocation of the partnership income from capital investment and from personal services of the petitioner and others.
*160 This appeal is for the redetermination of a deficiency in income tax for the year 1923 in the amount of $1,842.79. The question at issue is whether the petitioner and his wife are entitled to file separate returns for the taxable year.
FINDINGS OF FACT.
The petitioner is a resident of the State of Oregon. He was married in that State in 1904. In 1906 the petitioner and his wife moved to the State of Washington. At that time they had practically no money or other property of value.
On moving to the State of Washington the petitioner*3024 began working for the Oakdale Lumber Co. at wages of $3 per day. The Oakdale *161 Lumber Co. was a Washington corporation in which the petitioner's father-in-law, O. S. Moe, owned a one-third interest. In 1907 the petitioner terminated his employment with the Oakdale Lumber Co. and, together with M. R. Rashford and George E. Forcia, organized a corporation known as the Star Lumber Co. to engage in the sawmill and lumber business. The Star Lumber Co. was capitalized at $100,000, not all of which was ever paid in. At that time the petitioner had less than $200 in cash and no other property of material value. To pay for his subscription of stock in the Star Lumber Co. he borrowed $200 from his father-in-law, O. S. Moe, which he later repaid out of his dividends and salary from the company. The petitioner owned a one-third interest in the Star Lumber Co. and held the office of secretary. He received a salary of $5 per day.
The Star Lumber Co. operated until the year 1910, when it was liquidated and the proceeds divided among the stockholders. During its existence the petitioner had received from the company $3,121.45 in wages, $4,473.67 in dividends, and $2,066.67 on*3025 liquidation.
In October, 1910, the petitioner and others organized another corporation under the laws of the State of Washington, known as the Star Mill Co. which took over the equipment of the Star Lumber Co. The stockholders were George E. Forcia, M. R. Rashford, B. T. Anderson, S. Fenning, P. T. Meaney, O. S. Moe, and the petitioner. The petitioner subscribed for and had issued to him stock of the Star Mill Co. of the par value of $7,000, $3,500 of which was his own and $3,500 of which belonged to his father-in-law, O. S. Moe. The petitioner and his wife signed a memorandum stating that they held $3,500 par value of said stock for O. S. Moe. The petitioner paid for his stock at par value out of the wages, salary and dividends which he had received from the Star Lumber Co. in the State of Washington prior to the organization of the Star Mill Co.
The petitioner was secretary of the Star Mill Co. and kept the books of the company. He was paid a salary of $130 per month, except at times when the mill was not operating regularly when he received daily wages instead of the monthly salary.
The Star Mill Co. operated until December, 1921, when it discontinued operations. Its*3026 surplus at December 31, 1921, was $20,371.31. The personal property, consisting mostly of equipment and lumber, was converted into cash in the year 1921. The petitioner and his wife and Forcia and his wife purchased the mill equipment. During *162 the years 1910 to 1922, inclusive, the petitioner received the following wages, salaries, and dividends from the Star Mill Co.:
| Year | Wages and salary | Dividends |
| 1910 | $491.25 | None. |
| 1911 | 1,047.50 | None. |
| 1912 | 1,085.00 | None. |
| 1913 | 953.00 | $3,500.00 |
| 1914 | 689.97 | None. |
| 1915 | 564.17 | 1,400.00 |
| 1916 | 555.00 | None. |
| 1917 | 1,643.70 | None. |
| 1918 | $2,191.30 | $1,750.00 |
| 1919 | 3,000.00 | 1,750.00 |
| 1920 | 3,000.00 | 3,500.00 |
| 1921 | 3,000.00 | 7,000.00 |
| 1922 | 2,800.00 | |
| Total | 18,220.89 | 21,700.00 |
About the first of January, 1922, the petitioner and Forcia went to the State of Oregon to look for some timber land with a view of starting another lumber business. About this time they organized, under a verbal agreement, a copartnership known as Forcia and Larsen. Soon thereafter Forcia and Larsen entered into a contract with the Elmira Lumber Co. for the purchase of certain timber and timber lands. In 1926 the Elmira*3027 Lumber Co. gave to the petitioner and his wife and Forcia and his wife a deed to the property. Forcia and Larsen also entered into a contract with E. B. McLean and I. B. McLean, his wife, for the purchase of certain timber lands. After acquiring the aforesaid timber lands Forcia and Larsen began the construction of a sawmill thereon, which was completed and ready for operation in February, 1923. No income was received from the business prior to February, 1923.
The petitioner's wife did not move to the State of Oregon from the State of Washington until about the middle of the year 1923. The petitioner had consulted with his wife about entering the copartnership with Forcia and entering into the aforesaid agreements.
On entering the aforesaid contract with the Elmira Lumber Co. Forcia and Larsen paid to the Elmira Lumber Co. $10,750 cash and prior to the end of 1923 they paid $12,600 additional. On entering the contract with E. B. McLean and his wife Forcia and Larsen paid to them $2,000 and prior to the end of the year 1923 they paid $2,000 additional.
The petitioner invested in the lands, timber and sawmill equipment of Forcia and Larsen $15,662.21 in cash which had been*3028 derived entirely from the wages, salaries and dividends from the Star Lumber Co. and the Star Mill Co. while the petitioner was a resident of the State of Washington, and $10,000 in cash which the petitioner and his wife had borrowed from O. S. Moe on their joint note.
During the year 1923 the partnership of Forcia and Larsen operated the sawmill and sawed a portion of the timber which they had purchased as aforesaid. The income from the operation of the *163 mill was $51,027.19, after deducting $5,000 salary paid to the petitioner and $5,000 salary paid to Forcia. A partnership return was filed for the year 1923 showing a net income of $51,027.19. In this return it was stated that one-half of the said income belonged to the petitioner and one-half to Forcia.
While residents of the State of Washington, petitioner and his wife were cognizant of the community property laws of that State and they believed, upon taking up their residence in Oregon, that similar community property laws prevailed in that State.
Petitioner and his wife filed separate income-tax returns for the year 1923 upon the so-called community basis in which each reported one-half of their total income*3029 for the taxable year. The Commissioner has required the petitioner to file a single return reporting the entire amount of his distributable earnings of the partnership of Forcia and Larsen.
OPINION.
SMITH: The petitioner now concedes that since the community property laws do not prevail in the State of Oregon the filing of returns for the taxable year 1923 by himself and wife upon the community property basis was unauthorized and erroneous. He contends, however, that one-half of the income derived during the taxable year from the investment of their community property was the separate income of his wife which she was entitled, irrespective of community property laws, to report in a separate return. He contends that he was a trustee for his wife as to her half of the community property which they had accumulated while resident in the State of Washington, and was likewise her trustee for the income from the investment of her property. He further contends that one-half of the petitioner's distributable income of the partnership of Forcia and Larsen, except for the salary of $5,000 which the petitioner received for his personal services, was income to his wife through her investment*3030 in the partnership.
The petitioner on leaving the State of Washington in 1922 invested in the partnership of Forcia and Larsen the sum of $25,662.21 in timber lands and sawmill equipment in the State of Oregon. Of the amount so invested $15,662.21 was cash belonging to the petitioner and his wife jointly and $10,000 was borrowed by the petitioner and his wife from the latter's father, O. S. Moe. There was never any separate agreement between the petitioner and his wife in respect of the investment of their joint property. Both the petitioner and his wife thought that community property laws similar to those of the State of Washington prevailed in the State of Oregon and that the status of their community property would not *164 be changed by their change of residence from the State of Washington to the State of Oregon.
We held in , that the wife's interest in community property under the laws of the State of Washington is regarded as a present vested right. We also held in *3031 , that the removal of property from one State to another does not affect the rights vested therein by the laws under which it was acquired. In the latter case a husband and wife, residents of Oklahoma, filed separate returns for the year 1923, in which each reported one-half of the income received from property acquired while residents of the State of Texas. In the opinion we said:
It accordingly follows that the stock in the Oklahoma banks [which the petitioner owned at the time of marriage] at all times remained his separate property and that upon his removal to the State of Oklahoma the income from said stock was his separate income and properly so returnable.
The remainder of the income is derived from the estate that was built up during the period of residence in Texas, in which State the income from personal property was community income. See .
The principle laid down in the Phillips case is that the vested rights of the parties of the community attached to the income from their separate property as well as to the property itself, notwithstanding that the property*3032 has been removed from the State and that such income may be reported by the parties in separate returns. In the case at bar it is not to be disputed that the petitioner's wife had a vested interest in one-half of the total amount of capital that the petitioner acquired in the State of Washington. This capital was used by the petitioner with the consent of his wife in the partnership which the petitioner formed with Forcia. There is no evidence and no claim made that the petitioner's wife was a member of this partnership. There is nothing to indicate that the situation is different from what it would have been if the petitioner and his wife had always been residents of Oregon and the wife had allowed the petitioner to use in the sawmill business a part of her capital. Under the taxing act a partner is required to account for his pro rata share of the distributable profits of the partnership. This is all that the Commissioner is requiring the petitioner to account for in the instant proceeding.
In support of the claim that the petitioner invested community property and the proceeds of a joint note in the lands, timber, and sawmill plant of Forcia and Larsen, one-half thereof*3033 for himself and the other one-half thereof in trust for his wife, the petitioner relies upon a line of decisions wherein the courts have held that where a husband took money belonging to his wife and purchased real estate therewith the husband was a trustee for his wife. ; ; ; . Those cases are to be sharply differentiated from the present one. In the proceeding at bar it is clear that the community property was invested by the petitioner with the full consent of his wife. Furthermore, the question here is not the right of the wife to claim an interest in the capital invested in the partnership by the petitioner but the right of the petitioner to escape tax liability on a portion of his pro rata share of the profits of the partnership for the year 1923. Presumably those profits were obtained in part from the investment of money and in part from services and skill in the management of the business. No claim is made that the petitioner's wife contributed to any portion of the profit which may be ascribed to the services performed*3034 by the husband. Even if there might be merit in the claim of the petitioner that a part of the profits representing a fair return upon his wife's invested capital was income of the wife, we can not determine what such amount would be. Upon the record the determination of the Commissioner must be and is sustained.
Judgment will be entered for the respondent.