*66 Decision will be entered for the respondent.
Family Partnership -- Husband and Wife -- Wife Not Recognized. -- The evidence does not support the petitioner's contention that his wife contributed original capital and, furthermore, a consideration of all of the evidence in the case does not indicate that the other partners really intended to join together with the petitioner's wife for the purpose of carrying on the business as partners.
*540 The Commissioner determined a deficiency of $ 18,251.88 in the petitioner's income tax for 1943. The deficiency is computed with respect to the petitioner's income for the two taxable years 1942 and 1943 according to the provisions of the Current Tax Payment Act of 1943. The only issue for decision is whether the Commissioner erred in determining that the petitioner's wife, Irene B. Barrett, was not recognizable as a partner for tax purposes and that the partnership income credited to her, in accordance with the partnership agreement, is taxable to the petitioner.
FINDINGS OF FACT.
The petitioner and his wife, Irene, *67 were married on May 1, 1920. They have one child, a daughter, born in 1922. The petitioner's income tax returns for 1942 and 1943 were filed with the collector of internal revenue for the district of Rhode Island.
The petitioner has been engaged in the stock brokerage business since 1921. The petitioner, together with George Barrett, Jr., and Wallace L. Mossop, formed the firm of Barrett & Co. in July 1929. He contributed $ 25,000 to the capital of that partnership. The other partners originally contributed no capital. There was no written partnership agreement and the record does not show what their oral agreement was.
The following table shows the amount of income of the partnership for five years ended June 30, 1935, how that income was shared, and the capital accounts of the three partners at the end of the period:
| Income | |||
| 1931 | 1932 | 1933 | |
| Petitioner | $ 13,262.56 | $ 2,824.40 | $ 15,216.77 |
| Mossop | 2,654.36 | 2,824.40 | 15,216.77 |
| George Barrett, Jr | 1,242.28 | 2,824.38 | 15,216.76 |
| Total | 17,159.20 | 8,473.18 | 45,650.30 |
| Income | |||
| Capital | |||
| account, | |||
| 6-30-35 | |||
| 1934 | 1935 | ||
| Petitioner | $ 16,249.15 | $ 16,441.14 | $ 41,514.86 |
| Mossop | 16,249.14 | 16,441.14 | 30,898.64 |
| George Barrett, Jr | 16,249.13 | 16,441.14 | 32,694.03 |
| Total | 48,747.42 | 49,323.42 |
*68 The petitioner asked his partners at some time in 1935 whether they had any objection to Irene Barrett becoming a partner. They indicated that they had no objection. The petitioner, his two old partners, and Irene Barrett entered into a written partnership agreement which was dated July 1, 1935, and provided in part as follows:
*541 6. Capital. The interest of the parties in the capital of the partnership shall be as shown by the balance sheet attached to this agreement and as shown by the books of account subsequent thereto. Undistributed profits shall be credited in equal shares to the interest of each partner in the capital and any losses shall be charged in equal amounts to the interest of each partner in the capital. Each partner shall receive interest at the rate of 6% per year on his or her share in the capital, to be charged as an expense of the business.
7. Salaries. The partners shall be paid such salaries as may be agreed upon, to be charged as an expense of the business.
8. Profits. Each partner shall be entitled to one-fourth of the net profits as shown by the books at the end of each fiscal year.
The record does not show whether that agreement*69 was actually entered into on July 1, 1935, or whether it was entered into later.
The partnership issued its check for $ 35,000 to Irene Barrett on December 28, 1935, and on the same day she delivered her check for that amount to the partnership. There are entries in the partnership books under date of July 1, 1935, debiting the petitioner's capital account with $ 35,000 and crediting a capital account in the name of Irene Barrett with $ 35,000.
The petitioner engaged an attorney on December 28, 1935, who prepared an assignment of one-half of his interest in the partnership as of July 1, 1935, to his wife. The petitioner at that time executed an insurance trust and transferred to it, for the benefit of his wife policies of life insurance on his life. The same attorney who prepared the partnership agreement prepared the assignment and the insurance trust.
The petitioner filed a gift tax return on March 16, 1936, for the calendar year 1935, reporting gifts described as follows:
| Date of | Value at | |
| gift | date of gift | |
| Life insurance policy, Puritan Life #9246 | 12/31/35 | $ 681.42 |
| Life insurance policy, Mutual Benefit #1,337,868 | 12/31/35 | 72.03 |
| Life insurance policy, Equitable Life #3,116,359 | 12/31/35 | 2,719.44 |
| Cash | 35,000.00 | |
| Partnership in Barrett & Co | 7/1/35 | 20,757.43 |
*70 Irene Barrett filed, on March 10, 1936, a return as donee of gifts described exactly as shown in the petitioner's gift tax return.
The petitioner, in 1937, in a letter to the Commissioner relating to his gift tax return for 1935, stated that he had made a gift on July 1, 1935, of one-half of his interest in the partnership, and in his gift tax returns filed for 1941 and 1944 he reported as net gifts for preceding years amounts including the gifts shown on the 1935 return.
The following table shows the total amount and distributive shares of net income of Barrett & Co for the years 1939 to 1943, as reported on partnership information returns: *542
| 1939 | 1940 | 1941 | |
| Petitioner | $ 28,592.54 | $ 23,213.90 | $ 14,224.99 |
| Irene Barrett | 12,854.20 | 7,475.56 | (1,444.58) |
| George Barrett, Jr | 15,619.10 | 10,240.46 | 1,485.68 |
| Wallace Mossop | 16,932.56 | 11,548.60 | 2,921.62 |
| Total | 73,998.40 | 52,478.52 | 17,187.71 |
| 1942 | 1943 | |
| Petitioner | $ 19,124.03 | $ 24,441.00 |
| Irene Barrett | 13,128.42 | 24,328.09 |
| George Barrett, Jr | 16,054.78 | 21,949.07 |
| Wallace Mossop | 17,492.16 | 23,488.97 |
| Total | 65,799.45 | 94,207.13 |
The record does not show how the amounts shown in the *71 above table were determined or what part represents salaries.
The following table shows the total amount credited or debited to Irene's capital account for each fiscal period as her share of the profits or losses of the partnership and the balance in that account as of the end of each fiscal period up through 1943:
| Period ended June 30 -- | Profits | Capital |
| 1936 | $ 38,021.60 | $ 73,021.60 |
| 1937 | 45,523.64 | 111,118.37 |
| 1938 | (9,340.24) | 57,898.79 |
| 1938 | 4,290.29 | 60,389.67 |
| 1939 | 12,854.20 | 69,868.76 |
| 1940 | 7,475.56 | 62,770.65 |
| 1941 | (1,444.58) | 57,596.72 |
| 1942 | 13,128.42 | 65,382.94 |
| 1943 | 24,328.09 | 61,120.59 |
The capital account of Irene up to the end of 1943 contains, inter alia, debits for the following entries: Income tax paid each year on her behalf; a total of $ 408.75 designated "donations" but not otherwise explained; $ 27,300.50 on July 1, 1937, $ 9,483.86 on March 7, 1940, $ 9,146.12 on January 1, 1943, to represent securities distributed by the partnership; $ 2,362.50 on December 7, 1942, representing a transfer to the customer ledger; and $ 5,200 on December 31, 1943, representing salary for that year, with the explanation "Dr. Acct." The account contains numerous*72 other entries, none of which are self-explanatory and none of which were explained. Many of the entries do not represent cash withdrawals by Irene and there is no evidence that any of the entries represent actual withdrawals by her. The active partners decided on three occasions during this period to distribute securities belonging to the partnership. They decided what securities would be taken out of the partnership accounts and charged to the accounts of the individual partners. The accounts of the other three partners have entries under the same dates and in approximately the same amounts as those mentioned above representing distributions of securities to Irene. The record does not show what was actually done with the securities or that Irene ever received any of them or exercised any control over them.
Irene Barrett did not render any services to or participate in any way in the management or operation of the partnership business during the period from July 1, 1935, to the end of 1943.
*543 The petitioner did not include in his income for 1942 and 1943 any part of the share of the partnership income credited to Irene Barrett on the partnership books. The Commissioner, *73 in determining the deficiency, added to the petitioner's income the partnership income for 1942 and 1943 credited to Irene Barrett on the books of the partnership. He held that the wife "was not a bona fide partner recognizable as such for tax purposes."
The petitioner, Wallace Mossop, and George Barrett, Jr., did not really and truly intend to join with Irene Barrett for the purpose of carrying on the business as partners, and Irene is not recognizable as a partner for income tax purposes.
OPINION.
The Supreme Court has said that in cases like this all of the surrounding circumstances must be examined in order to determine "whether the partners really and truly intended to join together for the purpose of carrying on a business and sharing in the profits or losses or both." . See also ; . The Court in the Tower case said that a wife could become a partner for tax purposes with her husband "if she either invests capital originating with her or substantially*74 contributes to the control and management of the business, or otherwise performs vital additional services or does all of these things." The petitioner concedes that his wife did not contribute in any degree to the control and management of the business and did not otherwise perform vital services. She took no part in the partnership activities. The petitioner bases his case entirely upon the proposition that his wife contributed $ 35,000 of her own money to the business in 1935 and, therefore, is entitled to her share of the partnership profits in accordance with the partnership agreement dated July 1, 1935, with the result that no part of those profits is taxable to him. The Supreme Court, in the Culbertson case, stated that the "isolation of 'original capital' as an essential of membership in a family partnership also indicates an erroneous reading of the Tower opinion." An effort has been made herein to give consideration not only to the question of whether or not the wife contributed "original capital," but also to all of the various facts and circumstances which might shed any light upon the intent of the parties. However, the petitioner's contention will be discussed*75 first.
He contends that his wife loaned him the proceeds of the sale of her real estate, with the understanding that he would repay her, and he transferred to her in 1935, in settlement of that debt, $ 35,000, which she then invested in a one-fourth interest in the partnership. The *544 evidence in support of this contention is somewhat vague and uncertain at several critical points and also contains contradictions, with the result that the Court has been unable to make a finding that the wife contributed any "original capital" to the business.
The money which the petitioner claims his wife loaned him came from the sale of their home in November 1929. The petitioner purchased a lot in 1925 and built a house on it. He and his wife occupied that house as their home until it was sold in 1928, at which time other land was obtained and a new house was built, which was or was to be their home. There were mortgages on each home, but, aside from the mortgages, the petitioner invested about $ 30,500 of his own money in the properties. He, rather than his wife, was the active person in obtaining the properties, applying for the loans, and building the houses. The second home was *76 to cost about $ 72,000, but not all of that amount had been paid in November 1929. The petitioner had placed the title to each of these homes in his wife's name. He said he did that for the purpose of giving her some security in case something happened to his business, but he also testified that it was his policy to put all of his property, aside from the partnership property, in his wife's name. A partnership, of which the petitioner was a member, had pledged securities belonging to a customer for a debt of the firm and, in November 1929, had to have $ 13,000 immediately to redeem those securities in order to return them to their owner. The petitioner requested his wife to sell their new home in order to obtain the needed funds. The new home was sold and about $ 23,500 was realized from the sale. The petitioner's wife received a check for that amount on November 14, 1929. She immediately turned over $ 13,000 to the petitioner, who contributed it to the capital of the partnership and the partnership used that money to redeem the pledged securities. The wife later transferred the remaining $ 10,500 to the petitioner to enable him to pay off some personal indebtedness. An adjoining*77 lot was sold in 1930 for $ 7,500 and the wife transferred that amount immediately to the petitioner to enable him to pay off additional personal indebtedness. Thus, the petitioner received about $ 31,000 from the proceeds of the sales of property standing in his wife's name, in which properties, beginning in 1928, he had invested about that much of his own money.
The petitioner, with some leading from his attorney, referred to those transactions as loans from his wife. He was asked by that attorney to give the substance of any conversation he had had with his wife at or about the time the money was turned over to him, and he replied, "That is so many years ago, the only recollection I have was that in the talks I expected to pay the money back." His attorney *545 then said, "I am going to ask you once more about that, Mr. Barrett. Will you please tell us, as best you can, the substance of what you told Mrs. Barrett about those various loans and the repayment, if there was any talk about them?" His answer was, "When I was financially able I would repay the loans." They had no notes or other written evidence of any indebtedness existing between them. There is no evidence that*78 the wife ever requested the petitioner to repay her any money or to give her an interest in the partnership. Were these home properties in the name of the wife for her benefit, for his, or for mere convenience? Were his statements in 1929 sufficient to create a debt? A debt must be certain and payable unconditionally. Cf. , affirming ; ; ; .
It is not clear whether the new partnership agreement was actually entered into on or about July 1, 1935, at the time the fiscal year of the old three-man partnership terminated, or whether it was entered into in the latter part of December 1935. It is clear, however, that shortly after December 1935, when these events were probably clearer in the petitioner's mind than they are now, he reported that he had made a gift of $ 35,000 to his wife and had made her a gift of one-half of his capital interest in the partnership. *79 He reaffirmed that position on several subsequent occasions. The position taken by him in his gift tax returns, and subsequently affirmed, that the transfers to his wife in 1935 were gifts, is inconsistent with his present contention that he owed his wife at least $ 31,000 and was merely repaying her. He says now that his reporting the transfers as a gift was due to confusion and stupidity on his part and he has filed a claim for refund of those taxes. The petitioner apparently was not in position to give his wife a one-fourth interest in the proposed new partnership and retain a one-fourth interest for himself, since he was receiving only one-third of the profits in the existing partnership. It is difficult to understand why his partners were willing to have him bring in his wife, which meant that they would take a smaller share of the profits. Apparently no new capital was needed. Certainly none was brought in by the change.
The record as a whole leaves real doubt as to what happened and does not justify a finding that the petitioner ever owed his wife anything or a finding that she contributed any capital originating with her to the partnership. This destroys the whole *80 foundation of the petitioner's case as he presented it.
The Court has considered other circumstances, including the fact that the Commissioner apparently recognized this partnership as *546 valid for tax purposes for about six years. The evidence shows that the old partnership had been increasingly successful for several years up to and including 1935, and the saving of taxes to the petitioner is the only obvious benefit that the petitioner might have expected in taking in his wife as a partner. Her share of the earnings under the agreement for the fiscal year ended June 30, 1936, was $ 38,021.60, or substantially more than the amount of capital which she is supposed to have contributed, the contribution of which is said to entitle her to a share of the earnings. It is not easy to assume that mere capital could earn so much (cf. ) or that any such arrangement would have been made except for some ulterior purpose. The record does not show the extent to which capital was an income-producing factor in the business.
The Court has also considered the extent, if any, to which the wife actually controlled or enjoyed profits*81 of the partnership credited to her account, and, here again, the record is not clear. She had no other income and the payment by the partnership of income taxes on her allotted share of partnership income is not very significant. The wife was on the stand and evinced almost no knowledge of the affairs of the partnership. She did not testify that she had ever exercised her own initiative in any way in connection with funds standing in her name on the books of the partnership or had ever withdrawn any money or securities to use as she saw fit. There is some evidence to indicate that her husband decided to make and made a gift to their daughter of some of the securities charged to the wife's account without his wife knowing very much, if anything, about the gift. Also, there is evidence that $ 5,200 was credited to her account at the end of 1943 as salary, although she did absolutely nothing to earn any salary. These and other circumstances suggest that the petitioner used his wife's name in transactions without any real interest or participation on her part. Of course, the credits to her account are not significant if others actually earned all of the income. .*82
The evidence as a whole indicates that the petitioner and the other two active partners, using the capital in the business prior to July 1, 1935, and earnings thereafter left in the business, earned the income; the wife made no contribution of capital or services to the business; the wife exercised no control over any of the amounts or securities credited to her on the books of the partnership; and no part of the income of the business for 1942 or 1943 should be recognized as taxable to the wife.
Decision will be entered for the respondent.