*61 Decision will be entered under Rule 50.
1. Income -- Realization -- Gift Before. -- Former owner of shares held not taxable on gain from liquidation where he made a valid and complete gift of the shares prior to the liquidation.
2. Family Partnership -- Trusts Included. -- The definition of a partnership in section 3797 includes a partnership in which trusts were limited partners and the distributive shares of the trusts are not taxable to the grantor, the general partner, where the trusts contributed valuable property which was an income producing factor.
*521 *62 The Commissioner determined a deficiency of $ 67,327.66 in income tax of the petitioner for 1943. The issues for decision are (1) whether the gain from the liquidation of 670 shares of Clark Linen Co. stock *522 was income of the petitioner for 1942 despite his efforts to give away the shares, and (2) whether income of a partnership, Clark Linen and Equipment Co., for the period November 7, 1942, through April 30, 1943, to the extent that it was distributable to four trusts created by the petitioner, was, nevertheless, taxable income of the petitioner under section 22 (a).
FINDINGS OF FACT.
The petitioner filed his individual return for 1943 with the collector of internal revenue for the first district of Chicago.
The petitioner and his wife, Eva R. Stern, were married in 1914. They have three children, Burton P., born May 13, 1917, Richard J., born March 22, 1922, and Robert A., born March 10, 1926.
The petitioner was for many years the principal stockholder and officer of the Clark Linen Co., an Illinois corporation, engaged in the business of furnishing to hotels, hospitals, schools, and other large institutions supplies such as draperies, linens, furniture, hospital supplies, *63 and related goods. It obtained goods from the manufacturers and sold them to its customers all over the United States. It employed about 17 salesmen.
Nine hundred thirty-eight shares of the stock of the company were outstanding prior to its liquidation in November 1942. Burton P. Stern, who was an officer of the corporation, owned 50 shares, John W. Couden owned 20, Helen Ford Genin owned 15, D. Walton Strange owned 10, and the petitioner owned the remaining 843 shares. All stockholders were employees of the corporation.
The petitioner had spoken many times to his family of his desire that the boys would enter business with him and have an interest in it. Burton, already in the business, had entered the military service of the United States on August 15, 1942. Richard was then at college and Robert was in high school. The petitioner decided in the latter part of 1942 to transfer some of his shares into four separate trusts, dissolve the corporation, and continue the business as a partnership in which the four trusts would have an interest.
His purpose in changing from a corporation to a partnership was to avoid excess profits taxes. He knew his personal taxes would be less*64 if he reduced his interest in the business. He chose to use trusts rather than transfer the interests directly to his wife and children so that he could retain control over the business and also prevent any part of it from getting into the hands of a son's widow in case any son should marry and be killed during the war. His principal purpose in making the three transfers for the benefit of the boys was to give them an inducement to return to and stay in the business after the war and after their educations had been completed. His principal purpose in making a transfer for the benefit of his wife was to recognize the services *523 which she performed for the business and to provide for her support in case he died. The trusts were not created for the purpose of relieving the petitioner of his obligation to support his wife and minor children and expressly provided that he was not to be relieved of those obligations.
He executed four trust instruments dated November 6, 1942, creating four separate trusts known as Theodore D. Stern Trusts A, B, C, and D. The primary beneficiaries of the trusts were -- Trust A, his wife; Trust B, Burton; Trust C, Richard, Trust D, Robert. The*65 petitioner was named trustee of each trust. He transferred 280 shares of stock of Clark Linen Co. to Trust A, 30 shares to Trust B, and 180 shares to each of the Trusts C and D. The trustee was given broad powers, including the power to consent to a dissolution of the corporation and to continue to carry on the business individually, as a co-partner, or as a corporation. The balance of the income, after payment of expenses of the trust, was to be distributed to the beneficiaries, except that in the case of the three boys it could be retained in the trust while they were minors or in the military service. It was not to go to the petitioner in any case. The corpus of Trust A was to be distributed to Eva, after the death of the petitioner, ratably over the period of her life expectancy at that time. The corpus of the trusts for the boys was to be distributed to them after the death of the petitioner, one-fourth as the beneficiary reached the ages of 21, 26, 31, and 36. Each of the trusts could be terminated by the beneficiary with the consent of the petitioner and in that case the entire corpus would go to the beneficiary immediately.
An agreement dated November 7, 1942, to dissolve*66 the corporation was signed by the petitioner for himself and also as trustee for the four trusts and by the other stockholders or their duly authorized agents.
An agreement of "Distribution, Assignment and Conveyance" dated November 7, 1942, was similarly signed. It purported to distribute pro rata to the stockholders undivided interests in the assets of the corporation subject to its liabilities.
A "limited partnership" agreement dated November 10, 1942, was signed by the petitioner as general partner, by the petitioner as trustee of each of the four trusts as a limited partner, and by or on behalf of the other former stockholders of the corporation as limited partners. It recited that the stockholders of the corporation had considered it to their best interests to dissolve the corporation and continue the operation of the business as a limited partnership. The partnership was to commence on November 7, 1942, and to continue for 10 years, and thereafter from year to year. The name was to be Clark Linen and Equipment Co. The petitioner was required to devote his full time to the business. The agreement provided:
*524 The limited partners shall not take part in the management*67 of the business or transact any business for the partnership and shall have no power to sign for or to bind the firm.
Each partner was to contribute his undivided interest in the assets of the former corporation. No capital was to be withdrawn. The petitioner was to have an annual salary of $ 25,000, and after deducting his salary and salaries fixed for any of the limited partners who might engage in the business, the profits and losses were to be shared in accordance with the capital contributions. The assets were to be divided upon termination in the same ratios. The limited partners could increase their capital contributions after which gains or losses were to be shared in proportion to the combined contributions.
A certificate showing the formation of a limited partnership was filed in the State of Illinois.
An "Assignment, Transfer and Conveyance" dated November 7, 1942, conveying the undivided interests in the assets of the business to the partnership was signed by or on behalf of the parties.
The balance sheet of the corporation as of the date of liquidation showed assets of $ 401,997.80 and net worth of $ 117,975.97. The Commissioner determined the net worth of the *68 corporation at that time to be $ 122,975.85. Capital was an important income producing factor of the business.
The petitioner filed a gift tax return reporting gifts of the stock to the trusts.
Clark Linen and Equipment Co. kept books showing the capital accounts, compensations, distributive shares of earnings after compensations, the drawings, and the balances in the accounts for each of the parties to the partnership agreement. It operated the business from November 7, 1942, to May 6, 1946, when a corporation was formed. It filed a partnership return for the period November 7, 1942, through April 30, 1943.
The petitioner did not report on his return for 1942 any gain from the liquidation of the 670 shares of Clark Linen Co. stock which he transferred to the four trusts.
The petitioner reported on his return for 1943 his distributive share, including salary, of the net income of the partnership as shown on the partnership return. Returns were filed for each of the four trusts for 1943 reporting the distributable share of the net income of each as shown on the partnership return and, except in the case of D, showing a deduction of the entire amount as currently distributable to*69 the beneficiary. Eva, Burton, and Richard filed returns for 1943 reporting income from the trusts.
The trusts maintained no books of account, but the partnership books contained a personal account in the name of each primary beneficiary to which payments made to or on behalf of the beneficiary *525 from trust income were charged. Those accounts showed charges for the payment of income taxes, for an additional tax assessment against the Clark Linen Co., for withdrawals by the beneficiaries for personal use, and some larger charges for investments for the beneficiaries.
Burton was regularly employed by the old corporation at the time he went into the service. Richard and Robert had worked for that corporation during vacations from school and college.
Burton did not work for the partnership during the period November 7, 1942, through April 30, 1943, and the record does not show that Richard or Robert did any work for the partnership during that period.
Eva was never regularly employed in the business but she rendered important services to the business by accompanying the petitioner to conventions at which sales and valuable customer contacts were made partly through her efforts. *70 Some of her funds may have gone into the petitioner's interest in the Clark Linen Co. long prior to 1942.
The Commissioner, in determining the deficiency, held that the petitioner realized a long term capital gain in 1942 upon the liquidation of the 670 shares of capital stock of Clark Linen Co. which he had transferred to the four trusts and that the income of the partnership, Clark Linen and Equipment Co., for the period November 2, 1942, through April 30, 1943, which was reported by the same four trusts, was income of the petitioner for 1943.
There was a real intention on the part of all of the parties to the agreement of November 10, 1942, including the four trusts, to join together in carrying on the business as partners.
The stipulations of facts filed by the parties are incorporated herein by this reference.
OPINION.
The first question is whether the petitioner made gifts of 670 shares of Clark Linen Co. stock. The petitioner intended to make gifts of the shares and he actually transferred them to the four trusts. The trusts received certificates for the shares. The gifts were permanent, with no interest retained by the petitioner. All of the elements of a completed gift*71 were present. There was no reason why he could not give those shares to the trusts. He did every important thing that could be done to give the shares to the trusts. A person may make a complete and valid gift to a trust of which that person is the trustee. Richard H. Oakley, 24 B. T. A. 1082. He may give shares of stock, if he chooses, rather than a share of the assets of a corporation in liquidation. Apt v. Birmingham, 89 Fed. Supp. 361; Frederick O. Merz, 1076">12 T. C. 1076; Davis B. Thornton, 5 T. C. 116. There was no subterfuge or sham about what he did. Yet the Commissioner takes the position that he did not make gifts of the shares but continued to be *526 the owner of those shares and, as owner, received the liquidating distributions on those shares. If justification for that attitude is to be found, it must be in the fact that the petitioner's plan, at the time he made the transfers of the shares, was to liquidate the corporation and continue the business as a partnership. But what is there in that plan which gives the Commissioner the right*72 to tax the petitioner as if he had retained the shares through the liquidation when the facts clearly show that he did not do that but instead gave them away before the liquidation? The existence of a plan to form a partnership does not vitiate the gifts. M. A. Reeb, 8 B. T. A. 759; Richard H. Oakley, supra;Apt v. Birmingham, supra;Joseph Middlebrook, Jr., 13 T. C. 385; Edward A. Theurkauf, 13 T. C. 529; Frederick O. Merz, supra;Kent v. Commissioner, 170 Fed. (2d) 131; Davis B. Thornton, supra.This case is not like that of Howard Cook, 5 T. C. 908, in which there was no transfer of shares before the liquidation, but merely a letter to two minor sons stating that a gift was being made and another letter to an agent of the corporation advising it to pay the liquidating distributions to the sons. The father there, in the meanwhile, had continued to vote the shares. Here the gifts of the shares were complete*73 and the father, thereafter, never exercised any dominion or control over the shares, except in his fiduciary capacity as trustee. Nor is this case like J. L. McInerney, 29 B. T. A. 1, affd., 82 Fed. (2d) 665, in which a corporation was introduced into the transactions for the sole purpose of avoiding tax. The Commissioner erred in holding that the petitioner realized gain from the liquidating distributions on those particular shares.
The next question is whether the trusts are to be recognized as valid partners for Federal income tax purposes. The Commissioner has not disregarded the partnership completely but has recognized, in addition to the petitioner, all of the other four stockholders of the predecessor corporation, including Burton. He has refused to recognize that the four trusts were valid partners for Federal income tax purposes and has held that the income distributable to them under the so-called partnership agreement is taxable instead to the petitioner under section 22 (a).
The petitioner did not attempt in November 1942 to give his wife or sons shares of stock of the corporation or any immediate direct interest*74 in the partnership. His wife had rendered valuable services to the business for many years and apparently continued to render those services during the taxable period involved herein. Her money may have gone into the business but the evidence of that is not clear. Burton was already in the business and the two younger boys had also contributed services to the business for several years. The latter services were necessarily of no great importance except to show that *527 the boys were interested in, and learning about, the business. There could be little doubt of the petitioner's right to take his wife and his three sons into the business as partners under such circumstances. Isaac Blumberg, 11 T.C. 663">11 T. C. 663.
However, he did not attempt to do that. Instead, he made the transfers to trusts of which he was trustee and kept the beneficiaries, as such, out of the business. He retained entire control in himself but that is of no particular significance since limited partners normally have no part in the control or management of the business. This was a limited partnership under the laws of Illinois. The substantial salary payable to the petitioner*75 was recognition of the fact that he would render valuable services as a general partner, whereas no services would be rendered by or on behalf of the trusts. Cf. Greenberger v. Commissioner, 177 Fed. (2d) 990, in which the Court of Appeals recognized trusts in a family partnership conducting what the Tax Court thought was a personel service business of the husband and father. Yet the petitioner here could not absorb all or limit distributive partnership income. The other four individual partners, former stockholders, were paid salaries for their services. Burton received a salary although he was away at war. Capital was an important income producing factor of this business. The agreed net value of the property contributed by the trusts, as set forth in the certificate required by the law of Illinois, was $ 35,215.60 for Trust A, $ 3,733.10 for Trust B, and $ 22,638.60 each for Trusts C and D. The earnings, after salaries, were shared in proportion to capital contributions. A substantial economic change took place in which the petitioner gave up, and the beneficiaries indirectly acquired an interest in, the business. There was real intent*76 to carry on the business as partners. The distributive shares of partnership income belonging to the trust did not benefit the petitioner. Insufficient reason exists, under the circumstances of this case, for the Commissioner to disregard the trusts as limited partners and tax their distributive shares of the income of the partnership to the petitioner.
The question of whether trusts can be valid partners for Federal income tax purposes has been discussed at length in a recent opinion by Judge Graven in Hanson v. Birmingham, 92 Fed. Supp. 33. He first considered the question of whether a trust, trustee, or beneficiary of a trust could be a partner at common law and came to the conclusion that no such partnership relation was known in any field of the common law. He then concluded that a trust can not be a valid member of a partnership for Federal income tax purposes since the statutes, the legislative history, and the decisions of the Supreme Court do not indicate any intention to expand the definition of a partnership to include one attempting to qualify as a real partnership but failing because it was invalid under state law.
*528 This *77 Court is unable to agree with Judge Graven that a trustee can not be a valid member of a partnership for Federal income tax purposes. Section 3797 (a) (2), I. R. C., defined a partnership to include "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 title, a trust or estate or a corporation." A married woman can not be a partner under the law of some states and yet she would be recognized as a partner with her husband under the above definition for Federal income tax purposes if, for example, they conducted a women's hat shop in which the wife was even more important than the husband, and had a "partnership agreement" under which her interest was 60 per cent. See also L. F. Sunlin, 6 B. T. A. 1232, in which partners married in a state where a married woman could not be a partner. See also Dolores Crabb, 41 B. T. A. 686, reversed on other points, 119 Fed. (2d) 772, 121 Fed. (2d) 1015. The Commissioner not infrequently*78 recognizes a trust as a valid partner. See Ethel Holmshaw Fickert, 15 T. C. 344. A trust's distributive share of the net income of a partnership would have to be included in its gross income in many cases, if for no other reason than that there would be no one else to which the income could be lawfully taxed. Cf. E. C. Ellery, 4 T. C. 407, 413. The Fickert case, supra, is one example, and others can easily be imagined, including a case where trust corpus was used to buy a building to be managed by another under a so-called partnership agreement in which the manager was to receive a salary and a portion of the profits and the trust was to receive interest on its contribution and a share of the profits. If not a partnership under state law, it may still be a joint venture and thus a partnership for present purposes. Cf. Isaac W. Frank Trust of 1927, 44 B. T. A. 934. Thus, even if a trust could not be a partner under common law, and even though the enlarged definition of a partnership now appearing in section 3797 may not have been for the express purpose of covering such a situation, *79 nevertheless, it should be used and it has been used for that purpose. Thomas v. Feldman, 158 Fed. (2d) 488; Thompson v. Riggs, 175 Fed. (2d) 81; Robert P. Scherer, 3 T. C. 776; Western Construction Co., 14 T. C. 453; M. A. Reeb, supra;Richard H. Oakley, supra;Charles E. Ives, 29 B. T. A. 822; Armstrong v. Commissioner, 143 Fed. (2d) 700; Maiatico v. Commissioner, 183 Fed. (2d) 836; Rose v. Commissioner, 65 Fed. (2d) 616; Greenberger v. Commissioner, supra.
Decision will be entered under Rule 50.