*1059 On June 1, 1932, the petitioner and his wife entered into a written agreement called "Articles of Copartnership", for the alleged purpose of "buying, selling, exchanging and dealing in stocks, bonds and other securities." The partnership was to continue to December 31, 1937, unless terminated at an earlier date. It was dissolved on July 12, 1935. The articles of copartnership provided that the petitioner should contribute the capital, which consisted of 5,000 shares of the capital stock of a corporation of which petitioner was president. Throughout the existence of the partnership these shares of stock stood in the name of the petitioner. The only income of the partnership was the dividends received upon this stock, which were imediately turned over to the petitioner's wife. All of the income of the partnership up to $25,000 a year was to belong to the wife. This was far in excess of the dividends received upon the 5,000 shares of stock. The wife contributed no capital, labor, or services to the partnership. The partnership transacted no business during its existence. Held, that the alleged partnership was not a partnership within the meaning of section 181 of the Revenue*1060 Act of 1932 and that the petitioner is liable to income tax upon the dividends paid upon shares of stock standing in his name.
*283 This proceeding is for the redetermination of a deficiency in income tax for 1932 in the amount of $3,476.95. The petition alleges that the respondent erred in including in the petitioner's gross income an *284 amount of $10,000 representing income from the partnership of R. S. Eaton & Co., which was not received by and did not belong to the petitioner.
FINDINGS OF FACT.
The petitioner is a resident of Norwich, New York, and is the president of the Norwich Pharmacal Co.
During 1932 petitioner was married and lived with his wife, Mildred C. Eaton, at Norwich. Prior to June 1, 1932, Mildred C. Eaton's separate estate was negligible and her yearly income was less than $100. On June 1, 1932, the petitioner and his wife entered into a written agreement called "Articles of Copartnership", which provided in part as follows:
THIS AGREEMENT, made the 1st day of June, 1932, by and between ROBERT S. EATON, party*1061 of the first part; and MILDRED C. EATON, party of the second part, both of the City of Norwich, County of Chenango, and State of New York,
WITNESSETH:
WHEREAS, the parties from time to time prior to the date hereof have had joint property interests and have individually and/or jointly made investments in securities; and
WHEREAS, the parties desire to create a partnership to engage in the business of buying, selling, exchanging and dealing in stocks, bonds and other securities, and in the making of investments generally;
Now, THEREFORE, in consideration of the premises and of the mutual covenants hereinafter contained, and the mutual benefits which the parties expect to derive therefrom, the parties hereto agree that from and after the date hereof, they will be and become copartners in business upon the terms and conditions hereinafter stated:
FIRST: The name of the partnership shall be "R. S. Eaton & Company."
SECOND: The business to be carried on by the said partnership is that of buying, selling, exchanging and dealing in stocks, bonds and other securities and the making of investments generally in real or personal property, and such other business as shall be from time*1062 to time mutually agreed upon.
THIRD: The principal office of the partnership shall be located in the City of Norwich, County of Chenango and State of New York.
FOURTH: The party of the first part shall contribute to the capital of the partnership the property described in Schedule "A" annexed hereto and made a part of this agreement. It is settled and agreed that the property listed in said schedule has a fair actual value as therein set forth and the amount stated therein as the capital contribution is fixed as the agreed value at which the same is contributed to the capital of the partnership. It is hereby agreed that the managing partner may allow the said property or any other property hereafter owned by the firm, to stand in the name or names in which they now stand registered, or may have the same transferred to the name of the partnership and so registered, or may have the same registered in so-called street name or in the name of a nominee, or that he may so far as possible take and hold the same in unregistered form.
Upon the expiration of the term of the partnership or any extension of such term, the said capital contribution and any other capital contribution*1063 of any partner shall be returned to the partner who contributed the same, either in cash or in kind, or partly in cash and partly in kind, in the sole discretion of the managing partner.
*285 FIFTH: The party of the first part shall be the managing partner of the said partnership and as such shall be in general charge of the conduct of its business. In the investment of the funds of the partnership, the managing partner shall be vested with full power and authority in the course of conducting the business of the firm to incur such liabilities and make such investments and reinvestments as he may deem to be for the best interest of the firm, and may invest its property or loan its property or credit upon such terms and conditions as to him shall seem to be for the best interest of the firm; provided, however, that the capital funds of the partnership shall not be loaned to any partner except upon interest-bearing negotiable promissory notes.
All of the net income of the partnership was to be paid to the wife up to $25,000 in each fiscal year. The net income above $25,000 up to $50,000 was to be paid to the petitioner and all of the distributable net income in excess of*1064 that amount was to be divided 90 percent to the petitioner and 10 percent to the petitioner's wife. The alleged partnership agreement further provided:
SEVENTH: Proper books of account of the transactions of the partnership business shall be kept in the place of business. Each partner shall cause to be entered into such books a just and true account of all dealings with, by or for the account of the said firm, showing in detail the business, receipts and expenditures of the firm.
EIGHTH: All money and funds of the partnership shall be deposited in the name of the firm in such bank or banks as may be determined upon by the managing partner, and shall be drawn out and disbursed by check drawn in the name of the partnership and signed by either the managing partner or such authorized agent of the firm as may be designated by the managing partner.
The partnership was to continue until December 31, 1937, unless terminated at an earlier date. The partnership was actually disolved on July 12, 1935.
Schedule "A" attached to the partnership agreement provided in part:
Annexed to and made a part of a certain agreement dated June 1, 1932. Being the contribution of Robert S. Eaton*1065 to the capital of the partnership formed by and under the terms of the said agreement.
Five Thousand (5,000) shares of the capital stock of The Norwich Pharmacal Company, evidenced by the following certificates:
* * *
the agreed value of the said shares being Sixty Dollars ($60.00) each, a total of Three Hundred Thousand Dollars ($300,000.00).
During the calendar year 1932 and subsequent to June 1, 1932, $10,000 in dividends on the 5,000 shares of Norwich Pharmacal Co. stock, constituting the capital of the alleged partnership, was paid to "R. S. Eaton & Co." The petitioner, for the partnership, drew checks against the bank account of the partnership by which he transferred to Mildred C. Eaton the $10,000 in question. During the year 1932 the petitioner borrowed from his wife a part of the $10,000 *286 paid over to her, but during the year repaid the amount, with interest. The distribution of the $10,000, as shown by the wife's books of account for 1932, was as follows:
| Life insurance | $5,128.70 | ||
| Gifts | 114.50 | ||
| Taxes | |||
| Mildred C. Eaton (personal) | 1,415.99 | ||
| Vacations | 137.85 | ||
| Household expense | 2,960.44 | ||
| Cash balance in bank 12/31/32 | $288.52 | ||
| Less: | |||
| Int. received | $69.33 | ||
| Deposits (other) | 26.67 | ||
| 96.00 | |||
| 192.52 | |||
| Total recd. from R. S. Eaton & Co | $9,950.00 |
*1066 Mildred C. Eaton did not contribute any capital, labor or other services to the alleged partnership, R. S. Eaton & Company, during the entire year 1932, nor at any other time. [So stipulated.]
Throughout the existence of the alleged partnership the books of account of R. S. Eaton & Co. show the receipt of the dividends on the 5,000 shares of Norwich Pharmacal Co. and the disbursement of them to Mildren C. Eaton. The alleged partnership never bought or sold any securities and never transacted any business aside from that indicated above. After the termination of the partnership, on July 12, 1935, the dividends on the 5,000 shares of stock constituting the capital of the alleged partnership were paid to the petitioner.
OPINION.
SMITH: The sole question presented by this proceeding is whether the petitioner is liable to income tax upon the dividends paid upon 5,000 shares of the capital stock of the Norwich Pharmacal Co. standing in his name. The petitioner contends that, by reason of the fact that he entered into the agreement with his wife on June 1, 1932, by which she was to receive all of the income of the partnership up to $25,000 per year, and inasmuch as the dividends*1067 on the 5,000 shares set aside for the alleged partnership amounted in 1932 to less than $25,000, he is not liable to income tax in respect of them.
All of the income tax acts from the Revenue Act of 1913 have provided that partnerships shall not be subject to income tax as entities but that the members of the partnership shall account annually for their shares of the net earnings of the partnership. In , the Supreme Court said: "The term partnership as used in these sections obviously refers only to ordinary partnerships." In section 181 of the Revenue Act of *287 1932, it is stated: "Individuals carrying on business in partnership shall be liable to income tax only in their individual capacity."
* * * The requisites of a partnership are that the parties must have joined together to carry on a trade or adventure for their common benefit, each contributing property or services, and having a community of interest in the profits. * * * [, quoted in *1068
See also ; affd., ; .
Was the alleged partnership of R. S. Eaton & Co. an "ordinary" partnership within the meaning of the applicable income tax act? We are of the opinion that it was not. The wife contributed no property, labor, or services to the alleged partnership. The petitioner was to receive no part of the income unless the income in any year exceeded $25,000, which was far in excess of the amount actually received. The petitioner, therefore, did not have any interest in the profits actually realized. Furthermore, the alleged partnership carried on no business whatever during its life. It was never seriously expected that it would. The arrangement was merely one by which a part of the petitioner's income was to be made available to the wife for the payment of expenses, the principal part of which was the husband's expenses.
In *1069 , it was said:
But taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed - the actual benefit for which the tax is paid. * * * Still speaking with reference to taxation, if a man disposes of a fund in such a way that another is allowed to enjoy the income which it is in the power of the first to appropriate it does not matter whether the permission is given by assent or by failure to express dissent. * * *
Although R. S. Eaton & Co. was in form a partnership, it was not such in substance. It was only a means by which the petitioner might avoid the payment of income tax on a portion of his income, which was to be used in the major part for his own benefit. In , it was held that a partnership existed between the taxpayer and his wife. In that case, however, the wife contributed the original capital for the partnership and the partnership was clearly engaged in the carrying on of a business. We are of the opinion that, in any case where a partnership exists within the contemplation*1070 of the taxing statute, the partner must either contribute capital or services to the partnership and must have a community of interest in the profits. Such was not the case here.
The respondent did not err in taxing to the petitioner the dividends paid upon the 5,000 shares of Norwich Pharmacal Co. stock which constituted the capital of the alleged partnership.
Judgment will be entered for the respondent.