*172 Decisions will be entered under Rule 50.
Where there was, in fact, no contribution of capital or services to a partnership by the wives of two partners, the partnership will not be recognized for income tax purposes as including the wives and the income from such partnership is taxable to the husbands.
*1210 These consolidated proceedings involve deficiencies in income tax for the calendar year 1941 in the amount of $ 13,847.03 in the case of petitioner Carl P. Munter and $ 15,612.54 in the case of petitioner Sidney S. Munter. The Federal income tax returns of the petitioners for the taxable year were filed with the collector for the twenty-third *1211 district of Pennsylvania at Pittsburgh, Pennsylvania. The proceedings were submitted upon a stipulation of facts and certain exhibits. The issue submitted in each case is whether the income of two businesses carried on in partnership is that of the two petitioners or whether one-half of such income is taxable in equal proportions to their wives.
FINDINGS OF FACT.
Prior to May 1, 1940, the petitioners*173 were the sole owners and proprietors, as partners, of two laundry businesses in Pittsburgh, Pennsylvania, each having an undivided one-half interest. On that date the partnership assets consisted of land, buildings, and equipment having an adjusted cost basis of $ 272,579, an inventory of $ 11,973, and purchased good will of $ 85,144.
On the aforementioned date the petitioners and their wives entered into a joint agreement providing as follows:
AGREEMENT
Articles of Agreement entered into this 1st day of May, 1940 by and between Sidney S. Munter, Sarah Appel Munter, Carl P. Munter and Roberta Gross Munter, all of the City of Pittsburgh, County of Allegheny, Pennsylvania, Witnesseth:
Whereas, Sidney S. Munter and Carl P. Munter are the sole proprietors and owners of Sweet Clean Damp Wash Laundry (a partnership) located at 1111 Lincoln Avenue, Pittsburgh, Pennsylvania, and are also the sole owners and proprietors of the Perfect Laundries of Pittsburgh (a partnership) located at 128 Lexington Avenue, Pittsburgh, Pennsylvania; each one having an undivided one-half (1/2) interest in all of the assets, real, personal and mixed, of each company; and
Whereas, it is the desire of Sidney S. *174 Munter and Carl P. Munter to admit their wives as equal partners into the partnership of both of the above companies and give to each of them an undivided one-fourth (1/4) interest in each of the companies as of May 1, 1940, Now, Therefore, Witnesseth:
First: Sidney S. Munter, Carl P. Munter, Sarah Appel Munter and Roberta Gross Munter have agreed and do hereby agree to associate themselves as partners under the name of Sweet Clean Damp Wash Laundry and under the name of the Perfect Laundries of Pittsburgh for the purpose of engaging in the operation of a general laundry business and dry cleaning business.
Second: Sidney S. Munter agrees and does hereby set over, give and deliver to Sarah Appel Munter one-half (1/2) of his undivided one-half (1/2) interest in all the assets, real, personal and mixed, to which he has title, both in the Sweet Clean Laundry and in the Perfect Laundries.
Third: Carl P. Munter hereby agrees and does hereby set over, give and deliver to Roberta Gross Munter one-half (1/2) of his undivided one-half (1/2) interest in all the assets, real, personal and mixed, to which he has title, both in the Sweet Clean Damp Wash Laundry and in the Perfect Laundries.
*175 Fourth: It is understood and agreed that each of the parties, to-wit, Sidney S. Munter, Carl P. Munter, Sarah Appel Munter and Roberta Gross Munter, shall have title to an undivided one-fourth (1/4) interest in each of the companies; and the rights and liabilities of each of the partners in the partnerships shall in all respects be equal.
*1212 Fifth: The partnership businesses shall be conducted on the premises at 1111 Lincoln Avenue and at 128 Lexington Avenue, Pittsburgh, Pennsylvania.
Sixth: None of the partners shall during the existence of this partnership give any note or accept or endorse any bill of exchange without the consent of the other partners and none of the partners shall without the consent of the other partners, sell or assign his or her share or interest in the partnerships.
Seventh: (a). It is understood and agreed between the parties that in the event of the death of Sarah Appel Munter, leaving to survive her husband, Sidney S. Munter, then he shall succeed to her undivided one-fourth (1/4) interest and he shall assume all the debts and obligations of Sarah Appel Munter in the partnership.
(b). In the event of the death of Roberta Gross Munter, *176 leaving to survive her husband, Carl P. Munter, then he shall succeed to her entire undivided one-fourth (1/4) interest and he shall assume all the debts and obligations of Roberta Gross Munter in the partnership.
(c). In the event of the death of Sidney S. Munter, the surviving partners shall succeed to his undivided one-fourth (1/4) interest in both partnerships share and share alike; and it is further understood and agreed that Carl P. Munter shall have the privilege and right of buying the entire interest of Sarah Appel Munter in both partnerships at the book value; which book value shall not include good will; and further that Carl P. Munter shall have five (5) years in which to pay the purchase price of said interest to Sarah Appel Munter and Sarah Appel Munter agrees to sell all of her interest at the book value price.
(d). In the event of the death of Carl P. Munter, the surviving partners shall succeed to his undivided one-fourth (1/4) interest in both partnerships share and share alike; and it is further understood that Sidney S. Munter shall have the privilege and right of buying the entire interest of Roberta Gross Munter in both partnerships at the book value; which book*177 value shall not include good will; and it is further understood that Sidney S. Munter shall have five (5) years in which to pay the purchase price of said interest to Roberta Gross Munter and Roberta Gross Munter agrees to sell all of her interest at book value price.
Eighth: All salaries for services rendered by any of the partners shall be fixed and determined by Sidney S. Munter and Carl P. Munter and all net profits of the partnerships after payment of all expenses shall belong to the partners in equal share.
Ninth: Each partner shall at all times pay and discharge his separate and private debts whether present or future and indemnify therefrom and from all actions, proceedings, costs and demands, the partnership property and the other partners.
Tenth: Proper books of account shall be kept of all matters, transactions relating to the said businesses as are usually entered in books of account and said books of account, together with all papers and documents belonging to the partnerships, shall be kept at the place of the business of the partnership and each partner shall at all times have free access to and the right to inspect said books.
Eleventh: (a). None of*178 the partners shall without the consent of the others enter into any bond or become bail, endorsee or surety for any person or cause anything to be done whereby the partnership property may be seized or attached.
(b). None of the partners shall without the consent of the others assign or charge his share in the assets or profits of the partnership.
Twelfth: The rights and obligations created by this agreement shall extend to all the heirs, executors and administrators of all the parties hereto.
Following the execution of the above agreement the petitioners and their wives registered under the Fictitious Names Act of Pennsylvania. *1213 The petitioners each filed for the year 1940 gift tax returns reporting in each instance a gift of a one-fourth interest in the two partnerships at a valuation of $ 54,464.24. Each petitioner took an exclusion of $ 4,000 and a specific exemption of $ 40,000 and each return computed a gift tax due of $ 180.32. Whether such tax was paid in either instance is not disclosed.
Two months after the execution of the agreement set out above deeds were executed by petitioners and their wives conveying to a straw man the real estate used in the two *179 partnerships, and reconveyance was immediately made by such grantee to petitioners and their wives of the same property, by which it was provided that each petitioner and his respective wife was vested with an estate by the entireties in one-half of the conveyed property.
After the execution by petitioners and their wives of the agreement of May 1, 1940, the petitioners' wives contributed no services to the two businesses and the activities of those businesses were thereafter conducted by petitioners in the same manner as theretofore.
OPINION.
It is petitioners' sole contention that by the agreement entered into on May 1, 1940, each made a complete gift of a one-fourth interest in the assets and business of the partnership business to his wife and by the same instrument their wives entered into partnership with them, contributing thereto, in each case, the one-fourth interest which had been coincidentally so received by them under the contract.
Respondent, on the other hand, argues that by the transaction no completed gift of any interest in the assets of the partnership was effected, that the wives therefore contributed no capital to the alleged new partnerships, and that consequently*180 such alleged new partnerships are not to be recognized for tax purposes and the income in question is taxable to petitioners. We agree with respondent.
Since it is stipulated that the wives furnished no services to the partnership, its recognition for Federal income tax purposes, in so far as the wives are concerned, depends on whether they contributed capital. The fact of this contribution turns here on whether the petitioners actually effected completed gifts of interests in partnership assets to their wives by the agreement of May 1, 1940.
It is true the petitioners and their wives registered as a partnership under the Fictitious Names Act of the Legislature of Pennsylvania (Act of June 28, 1917), by virtue of which the property of the wives as well as that of the husbands became liable for the debts of the partnership business. This fact did not help in any way the credit of the business, since, in this record, there is nothing to indicate that either of the wives had any property other than that purportedly given to them in the agreement of May 1, 1940. As such "gift" was an indispensable *1214 part of the agreement, it was thus subject to the obligation that it be left*181 in the partnership business. The agreement specifically provided that petitioners alone could fix their compensation from the business and hence to a great extent the amount of the net income for distribution. And there is no evidence that any such income was ever distributed to the wives nor, if distributed, whether it was used as their income. In fact, it is not even revealed whether "proper books of account" of the so-called partnership were ever kept as the agreement provided. Either petitioner, under the agreement, could prevent the sale or assignment, during the life of his wife, of the interest he allegedly gave to her. And, at her death, neither wife had a right of testamentary disposition of the property. It was provided that the husband should succeed to the interest of his wife upon her death, but there was no corresponding provision entitling the wife to the husband's share if he predeceased her. Such wife would receive only a one-third interest in the husband's share and the surviving petitioner was given a right, in that event, to purchase at book value, excluding any value for good will, not only her one-third interest in the husband's share, but her one-fourth*182 interest in the partnership business. We are not impressed with the argument of petitioners that the effect of these provisions contradicting the actuality and completeness of the alleged gifts is answered by the fact that their wives had a right to dissolve the partnership and force a distribution to each of them of one-fourth of the partnership assets. The premise for this argument is that there is no specific term fixed in the agreement for the duration of the partnership. It is true that no such period measured by months or years is provided. But the agreement evidences to us an intention that the partnership shall exist at least until the death of one of the petitioners or one of their wives. We can not reconcile the existence of a right on the part of the wife to force a distribution of partnership assets to her in the face of the fact that the only right she had, if any, was the enjoyment of such right during her life and which reverted to her husband, the donor, at her death.
When scrutinized carefully and as a whole, in its present setting, as it must be, the agreement of May 1, 1940, convinces us that neither petitioner intended to nor did effectuate a valid, completed*183 gift of any interest in the assets of the business. ; ; . We have noted the opinion of the Sixth Circuit on April 2, 1945, , reversing our decision in , where we held as incomplete for tax purposes a gift of stock by a husband to his wife on condition that the corporation be liquidated and the distributive share of the wife be contributed to a partnership organized by the former stockholders to carry on the business, the wife to be a limited partner without voice in *1215 the management. But the situation there was different. The gift to the wife was absolute. No reversionary interest was retained, as here, by the husband. In fact, the court in its opinion in the Tower case differentiated it from , on the ground that in the latter case such an interest was retained by the donor.
The petitioners rely*184 upon our decisions in ; ; and . We think the facts in each of those cases are distinguishable from those in the present proceedings. In all three of the cited cases the transfers by gift possessed an actuality and substance which are here lacking.
We think that the effect of the agreement of May 1, 1940, was at most not more than a mere assignment by petitioners to their wives of a portion of their respective shares of the income of the partnership business. By such action they do not relieve themselves of the liability for tax on the income so assigned. . Respondent's action in taxing the income of the business to the two petitioners in equal proportions is sustained.
These petitioners are the petitioners in consolidated proceedings entered at Docket Nos. 1162 and 1163, which ask redetermination of deficiencies for the year 1940. Certain concessions have been made and the parties have stipulated that the present deficiencies *185 are to be adjusted on final computation in accordance with such concessions and our decision of the main issue raised in each of those other proceedings. Effect will be given thereunto upon recomputation.
Decisions will be entered under Rule 50.
Footnotes
1. This report has been superseded by report of May 16, 1945, 5 T. C. 39.↩