*177 Decision will be entered for the respondent.
Prior to August 30, 1937, petitioner owned all but a few shares of stock of a corporation which carried on a business of manufacturing sawmill machinery. Petitioner had been the real operator of the business for ten years. In August of 1937 he decided to dissolve the corporation and transfer the assets and business to a partnership. Five days prior to the dissolution of the corporation, and in anticipation thereof, petitioner transferred some of his stock in the corporation to his wife, and two days prior thereto a partnership agreement was executed under which the wife was to be a limited partner. Thereafter the corporation's assets were transferred to the partnership. The wife did not contribute any services to the business. The business was conducted by petitioner after the changeover to a partnership in the same way as before, except that petitioner was not paid a salary and part of the earnings were credited to a capital account in the wife's name. Held, (1) that there was no bona fide gift of stock to the wife and that she did not contribute capital to the partnership; (2) that there was not a true partnership between*178 petitioner and his wife for the conduct of a business, but a partnership for tax avoidance which can not be recognized.
*397 Respondent determined deficiencies of $ 599.55 and $ 2,758.18 in petitioner's income tax returns for the respective fiscal years ended July 31, 1940, and July 31, 1941. Some of the adjustments are not in controversy here. The issue is whether the amounts of $ 6,661.16 and $ 13,958.57 which were credited in the taxable years to petitioner's wife as her distributive share of the net income of an alleged partnership are taxable to petitioner. In the alternative, respondent contends that the partnership was an association taxable as a corporation.
Petitioner resides in Greenville, Michigan, and filed his returns for the taxable years with the collector for the district of Michigan.
FINDINGS OF FACT.
The R. J. Tower Iron Works, located at Greenville, Michigan, is engaged in the manufacture and sale of sawmill machinery and wood and metal stampings. Petitioner has been actively engaged in the business*179 for the past 28 years and since the death of his father, R. J. Tower, in November 1927, petitioner has assumed the responsibility of carrying on the management and operation of the business. In the taxable years the business had an average of 40 to 60 employees, gross assets of approximately $ 200,000, and an average steel inventory on hand of approximately $ 50,000. The sawmill machinery was marketed through dealers and the stampings were sold directly to manufacturers of refrigerators and stoves.
On September 9, 1933, the business was incorporated under the name of "The R. J. Tower Iron Works, Inc.," hereinafter referred to as the corporation. The outstanding capital stock consisted of 500 shares of a par value of $ 100 per share, of which petitioner received 425 shares, Harvey A. Amidon received 50 shares, and H. J. Lawrance received 25 shares. The bylaws required that the directors hold stock in the corporation and the 3 stockholders were the directors. Petitioner was president, and Amidon was secretary and treasurer. Approximately 6 months after the corporation was organized, in the early part of 1934, petitioner purchased Lawrance's 25 shares of stock and Lawrance severed*180 his connection with the corporation. Immediately after purchasing Lawrance's stock, petitioner made a gift of 5 shares to his wife, *398 Hazel I. Tower, who was made a director and vice president of the corporation. After the gift of 5 shares to his wife, petitioner owned 445 shares, and Amidon owned 50 shares. The ownership of the shares remained the same until August 1937.
A tentative operating statement as of July 31, 1937, showed that the business of the corporation had been successful and that substantial profits had been realized in the year 1937. In July 1937, after having discussed the matter with his wife, petitioner talked with Amidon with regard to the advisability of dissolving the corporation and setting up a partnership. Amidon kept the books of the corporation under petitioner's supervision, and he had worked in the business for a long time. Amidon had no objection to the formation of a partnership and believed that the change would not create any great risk as far as he was personally concerned. Consultations in this respect were also held with petitioner's attorney and his accountant, who took care of petitioner's tax matters. They were all of the opinion*181 that the formation of a partnership would result in tax savings and alleviate the necessity of filing various corporate returns. It was decided that petitioner should transfer stock of the corporation to his wife so that she would be able to contribute a substantial share of the partnership capital.
On August 25, 1937, petitioner transferred to his wife 190 shares of the corporate stock owned by him. The transfer was conditional upon the wife's placing the corporate assets which the shares represented into the new partnership. The transfer was recorded on the corporate books and a new stock certificate was issued and delivered to petitioner's wife. Petitioner filed a gift tax return on March 15, 1938. He reported the 190 shares of stock transferred to his wife at a value of $ 57,114.60 and paid a gift tax of $ 213.44.
The corporation was completely liquidated on August 28, 1937, and it was dissolved on August 30, 1937. On August 28, 1937, petitioner, his wife, and Amidon executed a limited partnership agreement for the purpose of carrying on the business of the corporation, and all of the assets and liabilities of the corporation were transferred to the partnership.
The partnership*182 agreement provided that the business would be carried on under the firm name of R. J. Tower Iron Works, for a period of 20 years, unless sooner terminated by a decision of a majority in interest of the partnership capital; that petitioner and Amidon would be general partners and petitioner's wife would be a limited partner; that petitioner's contribution to the partnership capital was $ 81,600, his wife's was $ 62,400, and Amidon's was $ 16,000; and that the partners would share profits and losses in proportion to their respective *399 contributions to capital, except that petitioner's wife was not liable for losses in excess of her capital contribution. The agreement further provided, among other things, that the general partners were to have the exclusive voice in the management and control of the business and were authorized to determine the salaries of the general partners; that if a majority of the general partners were unable to agree, a majority of the general partners in capital interest would control; that accounts of the partnership business would be rendered to the partners each year; and that the net profits for each year would be distributed at such times and in*183 such manner as the general partners might determine.
A certificate of limited partnership was filed with the clerk of the Circuit Court of Montcalm County on August 31, 1937. Notification of the liquidation of the corporation and the formation of the partnership was given to those banks with which the corporation had transacted business.
Under the partnership agreement petitioner's share of the partnership profits and losses amounted to 51 percent; his wife's share amounted to 39 percent; and Amidon's share amounted to 10 percent. Amidon had formerly been employed by the corporation as a bookkeeper and he continued to perform similar work for the partnership. In the early part of 1938 his responsibilities and duties increased as a result of an increase in the volume of business. Petitioner and his wife were of the opinion that Amidon was entitled to a larger share in the profits and, accordingly, his share in the profits was increased from 10 percent to 25 percent on September 1, 1938. The shares of petitioner and his wife were proportionately decreased and thereafter petitioner received 42 1/2 percent of the profits and petitioner's wife received 32 1/2 percent. The redistribution*184 of profits was orally agreed upon between the parties, and the original agreement and the certificate of partnership on file with the county clerk were not formally amended. It was also orally agreed that petitioner and Amidon would not withdraw any future salary for their services. The original capital contributions of the parties remained the same.
Partnership accounts were maintained on an accrual basis for the fiscal year ending August 31. Capital accounts were opened on the books of the partnership, showing the amounts contributed by each party. Distributive shares of the profits of the parties were credited either to the capital account or to the drawing account of each individual party. The respective withdrawals of each party were charged to the drawing accounts. The share of profits and the aggregate net *400 withdrawals of each of the parties for the fiscal years ended August 31, 1938, August 31, 1939, and August 31, 1940, were as follows:
| Share of profits credited to individual | |||
| capital or drawing accounts | |||
| Year ended | Year ended | Year ended | |
| 8/31/38 | 8/31/39 | 8/31/40 | |
| Francis E. Tower | $ 2,658.28 | 8,374.32 | $ 17,947.26 |
| Harvey A. Amidon | 521.23 | 4,926.06 | 10,557.21 |
| Hazel I. Tower | 2,032.80 | 6,403.88 | 13,724.38 |
| Withdrawals | |||
| Year ended | Year ended | Year ended | |
| 8/31/38 | 8/31/39 | 8/31/40 | |
| Francis E. Tower | $ 5,394.78 | $ 10,458.38 | $ 4,973.25 |
| Harvey A. Amidon | 938.96 | 4,410.18 | 5,183.08 |
| Hazel I. Tower | 4,311.66 | 2,032.80 | 5,000.00 |
The partnership return for the fiscal year ended August 31, 1938, reported a net income of $ 15,919.85. Of this amount $ 2,273.69 was petitioner's distributive share of income, and $ 7,761.20 was paid to petitioner in salary; $ 445.82 was Amidon's distributive share, and $ 3,700.44 was paid to Amidon in salary; and $ 1,738.70 was Hazel I. Tower's distributive share.
The partnership return for the fiscal year ended August 31, 1939, reported an ordinary net income of $ 20,495.87, of which $ 8,710.74 was petitioner's distributive share and was reported by petitioner in his individual return for the fiscal year ended July 31, 1940; $ 6,661.16 was Hazel I. Tower's distributive share and was reported in her individual return for the calendar year of 1939; and $ 5,123.97 was Amidon's distributive share.
The partnership return for the fiscal year ended August 31, 1940, showed an ordinary net income of $ 42,949.44, of which $ 18,253.51 was petitioner's distributive*186 share and was reported by him in his individual return for the fiscal year ended July 31, 1941; $ 13,958.57 was Hazel I. Tower's distributive share and was reported in her individual return for the calendar year of 1940; and $ 10,737.36 was Amidon's distributive share.
Although Hazel I. Tower was vice president and a director of the corporation after the withdrawal of Lawrance, and attended the directors' and stockholders' meetings, she did not render any independent services to the corporation, nor was she actively interested or engaged in the business. In matters pertaining to the business she relied on her husband's judgment. The last return filed by the corporation, for the fiscal year ended August 31, 1937, reported compensation of $ 11,511.20 paid to petitioner for services rendered as president, and $ 5,450.44 paid to Amidon as secretary and treasurer. Petitioner's wife did not receive any salary from the corporation. She did not render any services to the partnership nor did she receive any salary.
Prior to the partnership agreement, petitioner gave his wife a regular allowance of approximately $ 75 a week for household expenses. After the formation of the partnership*187 and throughout the taxable *401 years petitioner continued to give his wife an allowance of $ 75 a week for household expenses and for her support, although she paid for some of her own clothes. Petitioner also paid the expenses of a daughter in college. Petitioner's wife had a savings account and a checking account, and she deposited some of the money that she withdrew from the partnership in these accounts and some of it in the form of cash in her box in a safe at home. Since the bank holiday in 1933 petitioner has kept all of his money and papers in this same safe, although he used a separate box. Both parties had the combination to the safe. During the year 1940 petitioner and his wife built and furnished a cottage at Baldwin Lake, petitioner contributing approximately $ 2,000 and his wife contributing $ 3,000. During that year petitioner's wife also repaid petitioner the sum of $ 1,403.88, which represented expenditures made by petitioner for his wife's income tax and certain other expenses. They bought a $ 100 war bond each month and each contributed one-half of the purchase price.
Petitioner performed the same services for the partnership as he had previously performed*188 for the corporation. He did not receive any salary from the partnership after Amidon's share in the profits was increased on September 1, 1938. The partnership carried on the same business formerly carried on by the corporation and had the same customers.
The gift of 190 shares of the corporate stock of the R. J. Tower Iron Works, Inc., made by petitioner to his wife in 1937 was not valid and complete in that the wife did not gain full dominion and control over the shares. Petitioner's wife was not a bona fide partner in the business during the taxable years.
OPINION.
The only question for determination is whether petitioner is taxable upon his wife's distributive share of the net income of the R. J. Tower Iron Works, which was organized as a limited partnership under Michigan law. Under the partnership agreement, petitioner is a general partner and his wife is a limited partner.
Petitioner contends that his wife contributed 39 percent of the assets of the former corporation to the capital of the partnership and that she is a bona fide member of the partnership, entitled to receive a fixed share of its net income, based upon her capital contribution. He argues that the source*189 of her capital contribution and the fact that she rendered no services to the partnership are immaterial to the determination of the question.
Respondent contends that the wife was not a bona fide member of the partnership, in that the partnership was not formed for any purpose *402 other than minimizing petitioner's tax. He points out that the wife knew nothing of the business and contributed no services to the business. His argument is that, for Federal tax purposes, the gift of corporate stock by petitioner to his wife was unreal and a sham, and wholly ineffective to relieve petitioner from tax liability on the partnership income reported by the wife.
Petitioner concedes that his wife knew nothing of business matters and in that respect relied entirely upon him. He admits that she knew very little about the business of the R. J. Tower Iron Works and that she contributed no services to that company. He also admits that the change from the corporate structure to the partnership was made largely for tax purposes, and that his gift of corporate stock to his wife was made to determine her interest in the partnership.
It is well settled that transactions between husband and *190 wife whereby tax is minimized are subject to rigid scrutiny, "for the temptation to escape the higher surtax brackets by an apportionment of income inside the family is a strong one." . Family arrangements resulting in the reallocation of income within the family unit should require clear and convincing evidence to support their bona fides, and the testimony of the participants in the transaction must clearly establish that the particular transaction is genuine and made in good faith. ; affd., .
A careful analysis of the testimony of this proceeding leads us to the conclusion that petitioner did not make a valid gift of the corporate stock to his wife in that he did not absolutely and irrevocably divest himself of the title, dominion, and control of the subject of the gift. The essential elements of a bona fide gift inter vivos are: (1) A donor competent to make the gift; (2) a donee capable of taking the gift; (3) a clear and unmistakable intention on the part of the donor to absolutely*191 and irrevocably divest himself of the title, dominion, and control of the subject matter of the gift, in praesenti; (4) the irrevocable transfer of the present legal title and of the dominion and control of the entire gift to the donee, so that the donor can exercise no further act of dominion or control over it; (5) a delivery by the donor to the donee of the subject of the gift or of the most effectual means of commanding the dominion of it; (6) acceptance of the gift by the donee; , and authorities there cited. Cf. ; ; affd., ; certiorari denied, .
In the light of the testimony of petitioner and his wife, the evidence indicates that petitioner did not intend making a gift of the stock; that he did not intend to divest himself of such title, dominion, and *403 control of the stock as was necessary to constitute a good and valid gift thereof, in praesenti; and that the transfer*192 was not such that the entire dominion and control of the gift was in the wife.
Petitioner testified that the subject of the gift to his wife was 190 shares of the corporate stock owned by him. He further testified that a certificate of this stock was delivered to his wife and that the transfer was noted on the stock record book of the corporation. He then testified that the reason for the gift was the "changeover" to the partnership and that the corporate assets were transferred directly from the corporation to the partnership. The testimony of petitioner's wife, on the other hand, was confused and at times contradictory. She first testified that the stock of the corporation was given to her with the understanding that it was going to be put back in the partnership. She then testified that the subject of the gift was not stock in the corporation, but an interest in the partnership; that no stock certificate was delivered to her, but that her interest in the business was "just credited to me on the books." Subsequently, she testified that petitioner gave her a typewritten certificate for 190 shares of the corporate stock, and that she retained the certificate for three days until*193 the partnership was formed, whereupon she returned it to her husband.
Under these circumstances, it is our opinion that petitioner did not relinquish control of his stock nor did petitioner's wife gain control over any of it at any time. There was no unconditional gift of the stock to her, since she could only use it in one way, namely, to place the corporate assets which the stock represented into the partnership. Petitioner never intended that his wife should have the 190 shares of stock to do with absolutely as she pleased. Upon the dissolution of the corporation, she was not free to sell or otherwise dispose of her share of the corporate assets. As a matter of fact, she never received her proportionate share of the assets, but they were all transferred directly to the partnership.
We think the principle underlying the decision in ; affirmed in , is applicable to the situation here. The question in that case related to the legal effect of a gift of a $ 400,000 bank check made by a taxpayer to his wife pursuant to a plan whereby the funds*194 were made the corpus of a trust and immediately loaned to the husband upon his unsecured interest-bearing note. The taxpayer paid interest on the note and claimed a deduction from income for the same on his return. The Circuit Court of Appeals held that there was no bona fide gift by the taxpayer to his wife, and said:
Counsel for the petitioner asserts that the transactions above described resulted in the following legal relations: Mr. Johnson made an absolute and unconditional gift of $ 400,000 to his wife; with her own property she set up a trust having a capital of $ 400,000; the trustee loaned this sum to Mr. Johnson upon his demand *404 note bearing interest, and he paid such interest to the trustee in 1931. If such were indeed the legal relations of the parties, it would follow as of course that the taxpayer should be allowed the claimed deduction, for it is too well settled to require discussion that legal transactions cannot be upset merely because the parties have entered into them for the purpose of minimizing or avoiding taxes which might otherwise accrue. * * * Despite such purpose, the question is always whether the transaction under scrutiny is in reality what*195 it appears to be in form. * * *
But there is a fallacy in the petitioner's contention, and it lies in the premise that he made an absolute and unconditional gift of $ 400,000 to his wife, and that her money set up the funded trust. There was an agreement between them that the money he made available to her was to be used in only one way; she was to pass it to the trustee upon terms which bound the trustee to return it to him upon request. Everything was done at the same time and as part of one transaction. Not for an instant did Mr. Johnson lose control of his "gift", nor did Mrs. Johnson or the trustee have possession of it free from a duty to return it to him. * * *
See also Guaranty Trust Co. ( ; affd., ; ; affd., ; ; affd., ; certiorari denied, ; ;*196 affd., ; ; affd., ; certiorari denied, .
Here, the transfer of the corporate stock by petitioner to his wife was more fanciful than actual, since there was no purpose to transfer the stock to her apart from the agreed plan that the gift would determine her interest in the partnership. The gift, however, was not an absolute and unconditional one. Its purpose and intent was not to vest absolute dominion over the shares in the wife, since she had no untrammeled freedom in their disposition and they were not subject to her own control and desires.
In view of the fact that the gift of the corporate stock by petitioner to his wife was not valid and complete, it follows that she made no capital contribution to the partnership, and, since she admittedly rendered no services, it must be held that she was not a bona fide partner.
It should also be noted that the dissolution of the corporation and the subsequent formation of the partnership fulfilled no business purpose other than the savings of*197 tax to petitioner. The change did not add any new capital to the business. As a matter of fact, the company was long established, in good financial condition, and did not need additional capital. Since the death of petitioner's father in 1927, the business had been directed and managed solely by petitioner. In large measure, the success of the business was due to his personal efforts and ability. Under the corporate form of doing business, petitioner was president and general manager of the corporation and owned approximately 90 percent of the stock. Amidon kept the books of the company and worked under petitioner's supervision. After the partnership *405 was formed petitioner and Amidon became general partners, but petitioner still continued to control and actively direct the affairs of the company. Petitioner still owned 90 percent of the business. After the formation of the partnership, the business had the same capital, the same assets, the same liabilities, the same management, the same plant, the same customers, the same employees, and the same name. In , the Court disregarded a transfer of assets*198 which was made without a business purpose and solely to reduce tax liability. In that case, the Court held that the Government may look at actualities, and, upon a determination that the form employed for doing business or carrying out the challenged tax event was unreal or a sham, it may disregard the effect of the fiction. In , the Court reiterated the same rule, holding that, while a taxpayer was free to voluntarily choose any organization for the conduct of his business, the Government was not required to acquiesce in that election if in fact that method of doing business was unreal. In , the Court, in holding that a device to break up one economic unit into two or more would not be conclusive on the Government under the income tax law, said:
* * * For where the head of the household has income in excess of normal needs, it may well make but little difference to him (except income-tax-wise) where portions of that income are routed -- so long as it stays in the family group.
In ,*199 the Court pointed out that taxation is a practical matter, dependent not upon "attenuated subtleties," but rather upon practical considerations. It was held that one vested with the right to receive income did not escape the tax by any kind of anticipatory arrangement, however skillfully devised, by which he procures payment of it to another. In , the Court said:
* * * The dominate purpose of the revenue laws is the taxation of income to those who earn it or otherwise create the right to receive it. * * *
At the time the partnership was first contemplated, petitioner discussed the arrangements with his wife before consulting Amidon. Petitioner testified that Amidon did not object to the contemplated partnership, since "he wasn't in position to object because I have done quite a little for Mr. Amidon." He also testified that Amidon knew he was not taking a great risk in entering the partnership. There can be little doubt that for all practical purposes, the business of the R. J. Tower Iron Works was petitioner's business both before and after the partnership was organized. After the first year of the partnership*200 neither petitioner nor Amidon drew any salary from the business, although both devoted their full time and energy to the business. The sole compensation of each was his distributive share *406 of the net income. As a result of the arrangements, petitioner's wife received a full share of the partnership income even though she contributed neither time nor service to the business. This arrangement was unusual and unreal, especially in view of her limited liability.
The only record of withdrawals by the partners are for the fiscal years 1938, 1939, and 1940. During these years petitioner's wife withdrew substantial amounts from the partnership. During this period she maintained a savings account and a checking account, and the balance of the withdrawals was placed in cash in a safe maintained in her home to which petitioner had access. Respondent attempted to subpoena the records of the checking account, but was unable to do so because the wife testified that the checks were destroyed by her at the end of each year. However, the record indicates that for the taxable year 1940 she withdrew $ 5,000 from the business. Of this amount, the sum of $ 1,403.88 was paid by the wife*201 to petitioner for expenditures which he had made in paying his wife's income tax and various other expenses. During that year she expended $ 3,000 toward the purchase and furnishing of a summer cottage used by her family. Petitioner contributed approximately $ 2,000 toward this purchase. Petitioner and his wife also purchased war bonds monthly, each contributing 50 percent toward the purchase price. We think that these purchases toward which the wife made substantial contributions were those usually assumed by a husband for the welfare of his family, and that the withdrawals by the wife from the partnership were merely for the reallocation of income within the family to be used for the benefit of the family.
In this proceeding, petitioner's wife made no actual contribution to the capital of the partnership, contributed no services, had no voice in the conduct of the business, and received a portion of the profits, not as a partner, but only by reason of her marital relationship. See , certiorari denied, ; ;*202 certiorari denied, ; ; . Under the facts it is held that there was no real partnership between petitioner and his wife for the conduct of a business enterprise and that petitioner was the person who earned the income which was credited to the wife's account. Therefore petitioner is taxable on the income attributed to the wife. Respondent's determination is sustained.
In view of the foregoing, it is unnecessary to consider respondent's alternative contention. Accordingly,
Decision will be entered for the respondent.