*790 Petitioners entered into a partnership agreement with their wives, which provided for the distribution of earnings upon an agreed basis among the four. The income of the partnership was derived from personal services rendered by the petitioners. The petitioners may not relieve themselves of tax liability on their earnings by such an agreement. Lucas v. Earl,281 U.S. 111">281 U.S. 111.
*1081 These duly consolidated proceedings are for the redetermination of deficiencies in income tax of $733.60 - together with a 25 percent delinquency penalty of $183.40 - $24,948.18, and $4,296.99 for the years 1927, 1928, and 1929, respectively, proposed against petitioner Humphreys in Docket Nos. 53324 and 64302, and $11,301.62 and $5,691.78 for the years 1928 and 1929, respectively, proposed against petitioner Day in Docket Nos. 56386 and 64301.
A great number of issues have been pleaded which, due to written stipulations entered into between the parties, need not be set forth herein. Such omitted issues will be disposed of in our treatment of the stipulations*791 entered into; the remaining question for consideration by the Board is whether or not the alleged distributive shares of the petitioners' wives in the earnings of a copartnership, of which they are alleged to have been members, are taxable to the petitioners, as the respondent has held, or to the petitioners' wives, as they contend.
FINDINGS OF FACT.
The petitioners, Adrian C. Humphreys and W. Jule Day, and their respective wives, Caroline G. Humphreys and Phoebe D. Day, orally agreed to form a partnership on or about January 1, 1920, and filed a certificate of "Conducting Business" under the assumed firm name of Humphreys, Day & Co. in the New York County Clerk's office, pursuant to section 440 of the Penal Law (amended by L. 1919, ch. 224), on March 27, 1920, and they thereafter engaged in public accounting, auditing, and income tax work at 15 Park Row, New York, New York.
Mrs. Humphreys and Mrs. Day, who contributed the original capital to the business from their separate and independent funds, $5,000 and $6,000, respectively, were lawyers nor accounts. *1082 Although Mrs. Humphreys procured some business for the firm, neither she nor Mrs. Day was authorized to*792 practice before the Treasury Department in such matters.
Both Humphreys and Day were lawyers, members of the Bar of Kentucky, the former, also being a certified public accountant of the State of North Carolina, was a member of the Bar of the Supreme Court of the United States, admitted in 1923, of the Bar od the State of New York, admitted in January 1924, and the latter was a member of the Bar of the District of Columbia. Both were admitted as attorneys to practice before the Board, the former on September 8, 1924, and the latter on August 29, 1924. In the course of their copartnership they prosecuted some, but comparatively few, suits in the United States District Courts and in the United States Court of Claims but never handled any litigation in the law or equity courts of the State of New York.
Humphreys was an employee of the Bureau of Internal Revenue, Income Tax Unit, until he resigned on January 2, 1920, to enter into the foregoing partnership. The firm first employed an accountant and a stenographer and later, as business grew, other accountants, who were at the time of their employment, employees of the Bureau of Internal Revenue, Income Tax Unit.
The firm of*793 Humphreys, Day & Co. conducted its business as public accountants and auditors, specializing in matters growing out of or involving Federal income tax disputes, under the same firm name until it was later changed as hereinafter shown. Its bank account was kept in said name, as were its services contracted for and performed under powers granted by its clients.
The distributive shares of net income of the firm, as credited upon the books of account thereof, for the period ended December 31, 1920, 1921, and 1922, and the partners' withdrawals for the same period ended in 1921 and 1922, were as follows:
| Distributive Shares | Withdrawals | ||||
| Name | 1920 | 1921 | 1922 | 1921 | 1922 |
| Adrian C. Humphreys | $5,638.57 | $ 36,177.59 | $ 41,654.15 | $ 16,028.31 | $ 33,642.46 |
| W. Jule Day | 5,638.58 | 29,599.85 | 34,180.67 | 16,635.00 | 40,338.57 |
| Caroline G. Humphreys | 5,638.58 | 36,177.58 | 41,654.14 | 5,335.00 | 10,086.72 |
| Phoebe D. Day | 5,638.58 | 29,599.84 | 34,080.67 | 4,100.00 | 9,656.65 |
The undrawn distributive shares of the partners at December 31, 1922, aggregating $167,000, were carried forward to the following year.
Under date of January 4, 1923, Adrian C. Humphreys, *794 W. Jule Day, Caroline G. Humphreys, and Phoebe D. Day entered into an agreement, the pertinent provisions of which are as follows:
*1083 WHEREAS, the co-partnership of Humphreys, Day & Company, now known as Humphreys & Day, was originally organized by the parties above named on January 1, 1920, all the cash capital contributed at that time to the co-partnership and for some time thereafter having been advanced by Caroline G. Humphreys and Phoebe D. Day against the work and expert services of Adrian C. Humphreys and W. Jule Day; and
WHEREAS, the co-partnership of Humphreys & Day has existed since the first day of January, 1920, without any written articles of co-partnership and the parties hereto wish to reduce their undertakings and agreements and the terms under which said partnership is conducted to writing and, furthermore, to provide for the management of the business upon the death of any of the partners:
NOW, THEREFORE, THIS AGREEMENT WITNESSETH:
That in consideration of the premises and the mutual promises and agreements hereinafter contained, the parties hereto agree that they are and shall conduct business as co-partners in the business of handling income tax*795 matters and matters of corporate finance and also in the legal and general accounting business, under the firm name and style of HUMPHREYS & DAY, upon the terms and conditions following:
I. The co-partnership heretofore existing formerly under the title of Humphreys, Day & Company and more recently under the title of Humphreys & Day shall be continued for ten years, subject to dissolution, modification or extension by mutual agreement of the parties. II. The parties hereto have heretofore contributed varying amounts of capital to the co-partnership, the amount of all such contributions being correctly shown on the books of account of the firm; the obligation of each party to this agreement, however, as to capital contributions shall be to contribute in equal proportions, the total of such contributions constituting the capital of the firm which shall never be reduced below One Hundred thousand ($100,000.00) dollars. The parties hereto are now and shall be co-partners in all the property of every kind and nature which belongs to and is used in the partnership business or hereafter purchased or acquired with partnership funds or assets in equal proportions.III. All profits*796 and losses arising from said business are to be shared in the following proportions, to wit: Adrian C. Humphreys, twenty-seven and one-half (27 1/2%) percent; W. Jule Day, twenty-two and one-half (22 1/2%) percent; Caroline G. Humphreys, twenty-seven and one half (27 1/2%) percent; and Phoebe D. Day, twenty-two and one-half (22 1/2%) percent. Profits shall be divided annually on the first day of January in each year unless the partners shall agree upon some other time.
Proper books of account of said co-partnership shall be kept and all transactions of the partnership and of any and all of the parties hereto shall be entered in such books and said books shall at all times and from time to time be open for inspection and examination by any of said partners or their representative and upon the order of any of them.
IV. Adrian C. Humphreys and W. Jule Day shall give all of their time and attention to said business and shall use their utmost endeavors to promote the interests of the partnership hereby created.V. Caroline G. Humphreys and Phoebe D. Day shall give such of their time to the partnership business as the duties assigned to them from time to time shall require.
*797 VI. No party to this agreement shall be entitled to receive any money from the partnership hereby created or out of the partnership assets unless the *1084 same be out of profits and unless also each partner receives at the same time the proportionate amount of money to which he or she is entitled.
VII. Neither party shall, without the written consent of the other parties to this agreement, compromise or release debts except upon the full payment thereof, provided however, that settlement of disputes and disputed accounts may be made in the usual course of business to the same extent as has heretofore been done. VIII. Neither party shall, without the written consent of the other parties to this agreement, engage in any unusual transaction or use the firm's name, credit or property for other than partnership purposes, nor sign or endorse any note, obligation or negotiable paper of, or become security for, third persons, or engage in any speculation or knowingly do any act by which the interests of said partnership or any of the parties hereto shall be injured or prejudiced.Provision is then made for the continuation of the business in the case of death of one of*798 the partners and the terms and conditions under which it shall be continued. Upon the termination or dissolution of the partnership the assets were to be divided among the four partners in equal proportions.
No certificate of "Conducting Business" was filed after consummation of the foregoing, as was originally filed. Humphreys was of the opinion that such was not then necessary because the firm no longer employed an assumed name.
The partners' respective accounts were credited with $30,000, or an aggregate of $120,000, and their said accounts remained fixed until liquidation of the partnership in the year 1928, when a dividend of the assets was effected, leaving only unfinished cases to be settled, such amounts having then been transferred by journal entry of December 31, 1928, to their respective drawing accounts for withdrawal as the funds were made available.
The business of Humphreys, Day & Co. was taken over and was conducted as theretofore, except in so far as the rights of the parties thereto may have been modified or changed by the instrument in writing aforesaid and except that thereafter all contracts, bank accounts, and powers running to the firm were in the*799 name of Humphreys & Day as were, likewise, all contracts of employment. Profits were annually determined, distributive shares found, based upon the percentages specified in the partnership agreement, and withdrawals were made thereafter as theretofore.
Mrs. Humphreys and Mrs. Day maintained separate bank accounts, with separate banking institutions, from those of their husbands and of the firm.
Litigation arose between the parties, Day and his wife, as plaintiffs on the one hand, and Humphreys and his wife, a defendants on the other, and at a special session of the Supreme Court of the State of New York, under date of October 31, 1932, a referee having been appointed, it was:
*1085 FURTHER ORDERED, that the said referee take an account of all the assets, property and effects of the partnership in whosesoever hands the same were or are, and of the property as to which the receivership herein has been created, and of all other property which has come or shall hereafter come into the hands of said receiver or the parties hereto or any of them; and to take an account of all the dealings and transactions between the plaintiffs and the defendants and each of them as partners*800 as aforesaid, and of all the claims in connection with the partnership held by any of the parties to this action against the other and/or by creditors thereof, and to ascertain and determine the amount due from each of the partners to the other, and to do any and all things which may effectively determine the issues involved herein, and it is
FURTHER ORDERED, that the parties to this action and the said receiver do attend from time to time before said referee as required by the order or summons of said referee with all the books, papers and documents or property of the said partnership or otherwise, and submit to examination under oath touching the same at the request of any of the parties hereto or at the request of the receiver herein; and that any and all testimony given herein may be taken by said referee in any county in the State of New York.
Other litigation, brought by a former employee, growing out of his employment, is now pending in the said court against the petitioners and their respective wives, as copartners.
The stationery of the firm Humphreys, Day & Co. carried the engraved heading "Humphreys, Day & Company, Income Tax Service, - Public Accountants and Auditors" *801 and office addresses, whereas, after January 1923, it merely bore the firm name "Humphreys & Day" and office addresses. A similar change was made in the checks used by the firm. The firm was listed and classified in the telephone directory as "Public Accountants and Auditors." Before moving from its offices at 15 Park Row to 42 Broadway, at some time in 1923, the office door bore the inscription "Humphreys & Day, Income Tax Service, Public Accountants and Auditors" - after moving, the office door merely carried the firm name "Humphreys & Day." In some of the returns filed by the partnership the firm was described as "Tax Counselors."
The employment records of the firm show that it employed 14 accountants, none of whom were lawyers, all but two of whom had been employed at some time by the Bureau of Internal Revenue. It also employed at least 18 other minor employees, 12 or 15 of whom were employed at one time in the New York office.
The four individuals reported their distributive shares of the income in their individual returns for each of the years 1923 to 1929, inclusive, which returns were audited by the respondent and approved with exception of the years involved in these*802 proceedings.
The firm of Humphreys & Day went into liquidation as of January 1, 1928, it being provided that the pending cases were to be completed by Humphreys, as liquidating agent, for which service he was *1086 to receive 15% as compensation, and after the deduction of such compensation the remaining net income was to be distributed to the partners according to the percentages set forth in their agreement of January 4, 1923.
It was stipulated by and between the parties in Docket Nos. 53324 and 64302 that there was no delinquency penalty due for the year 1927; that the petitioner abandoned his claim to a net loss for the year 1926; that the inclusion of the sum of $165 in the petitioner's return for 1927, representing interest received upon bonds of the city of Winston-Salem, North Carolina, was incorrect; that the petitioner sustained a loss of $39,616.75 during the year 1927 in his trade or business of buying and selling securities and that any net loss finally resulting therefrom should be carried forward to the following year; that the petitioner abandoned his claim to an alleged loss of $35,000 for the year 1928; that the disallowance of $72,200 as a loss sustained*803 in 1928 in connection with a joint venture, was improper; that the petitioner was entitled to a deduction of $1,149.34 for labor costs claimed by him in the year 1928 but improperly disallowed by the respondent; that the disallowance of a claimed deduction of $1,000 for 1928 as a contribution to the building fund of the Masonic Lodge was proper; and that the respondent properly disallowed excessive depreciation in the amount of $5,100.43 claimed by the petitioner for 1929 on a certain apartment building.
It was stipulated between the parties in Docket Nos. 56386 and 64301 that the petitioner sustained a loss of $37,463.10 in connection with his trade or business of developing a certain system for fuel economy. It was also stipulated, in all four docket numbers, that office expense of $5,184.51 should be deducted from the income of Humphreys & Day in the determination of petitioners' distributive shares of the firm's profits for 1928 and that the said sum, to wit, $5,184.51, should be added to its income for the year 1929 in determining their distributive shares of profits for that year.
OPINION.
MORRIS: The sole remaining question pertains to whether or not the alleged distributive*804 shares of the petitioners' wives in the earnings of the copartnership of Humphreys & Day, of which, it is contended, they were members, are taxable to the petitioners.
The respondent, in the notice of deficiency, cites as his authority for transferring the wives' distributive share of the partnership profits to the husbands' income, , and . In neither or those proceedings was it contended that the partner's wife was a *1087 member of the partnership. In the former a subpartnership agreement was involved and in the latter a trust instrument relating to the husband's distributive share of his partnership profits. The questions presented and the facts are clearly distinguishable from the instant proceeding.
The petitioners contend that there was a partnership during the taxable years of which the wives were members and that therefore each partner was taxable on his or her distributive share of the profits as apportioned in the partnership agreement. They point to the original contribution of capital by their wives and their further contribution under the written agreement*805 of January 4, 1923, and to the other factors indicative of the wives' membership in the partnership. These arguments would be persuasive of the ultimate conclusion contended for by the petitioners if we were considering the taxability of the distributive shares of a trading partnership the income from which is dependent upon the use of capital. The picture here presented, however, is that of a partnership deriving its income from personal service. Whether that service was of a legal or accounting nature, a question upon which the parties disagree, it is admitted that the petitioners' wives were not qualified along either line nor is it contended that they rendered any such service. Our question is to determine whether, under such circumstances, the petitioners can relieve themselves of the payment of tax on a portion of their income attributable to perrsonal service through the medium of a partnership agreement with their wives. The problem as thus presented has not been specifically ruled on by the courts but a number of decisions point the way.
The Supreme Court in *806 , stated:
* * * There is no doubt that the statute could tax salaries to those who earned them and provide that the tax could not be escaped by anticipatory arrangements and contracts however skilfully devised to prevent the salary when paid from vesting even for a second in the man who earned it. That seems to us the import of the statute before us and we think that no distinction can be taken according to the motives leading to the arrangement by which the fruits are attributed to a different tree from that on which they grew.
The rule of that case is that earned incomes are taxed to and must be paid by those who earn them, not to those whom the earners are under contract to pay the income. . In the course of its opinion the court, in the latter case, said:
It [] establishes once for all that no device of arrangement, be it ever so shrewdly and cunningly contrived, can make future earnings taxable to any but the real earner of them, can make future income from profits taxable to any but the owner of the right or title*807 from which the income springs. * * *
*1088 The court in , used the following language:
The Supreme Court has definitely determined that Congress has the power to tax the earner of income therefor, irrespective of whether it is paid to some one else [citations deleted]. Our only question is, therefore, has Congress manifested such an intention in the statutes here applicable.
The "earner" of income is one whose personal efforts have produced it; who owns property which produced it or a combination of the two. Decisions of the Supreme Court have declared that the income statutes require taxation to the earner in each of the three above sources of income where the income was actually realized but never came to beneficial enjoyment by the earner.
See also .
The controlling principles underlying the above decisions are equally applicable to the instant proceedings. The amounts which the respondent has added to the petitioners' income were earned through their personal services. They may not relieve themselves of tax liability thereon by an agreement*808 that their wives shall share equally in said earnings, even though such contract is binding as between themselves. The respondent's determination in this respect is approved.
The parties in recomputing the deficiencies herein shall give effect to the stipulated adjustments.
Reviewed by the Board.
Judgment will be entered under Rule 50.
TURNER dissents.