*786 1. Where husband and wife entered into a partnership agreement to carry on a business theretofore owned and carried on by the husband, the contribution of the wife being made by a charge to the husband's account and a credit to the wife's account set up on the books of the business, and the wife asserted ownership of such interest in the business by placing it in trust and later assigning a part thereof to her daughters, held, the husband made an irrevocable gift of an interest in the business to his wife and a partnership relationship existed thereafter, since she became a co-owner in such business as required by the laws of Pennsylvania. Held, further, the share of the wife in the profits of the partnership did not constitute taxable income of the husband.
2. Where stock became worthless prior to sale made merely to establish a deductible loss, held, cost of stock is deductible as ordinary loss, sale of worthless stock being necessarily fictitious.
*1155 These proceedings, *787 duly consolidated, are for the redetermination of income taxes for the years 1932, 1933, and 1934 in the respective amounts of $5,946.51, $34,686.46, and $7,665.16.
The petitioner waived the issue raised in the pleadings pertaining to the transfer by the respondent to 1932 of a loss in the amount of $3,000 deducted by the petitioner in his 1933 return and the respondent conceded his error in disallowing for 1933 a loss in the amount of $900. Two issues remain to be determined, (1) whether the respondent erred in including in petitioner's income for the taxable years 25 percent of the net income of a business conducted by the petitioner, claimed to be the share to which petitioner's wife was entitled as a copartner; and (2) whether the respondent erred in treating an item in the amount of $43,614.90 deducted by the petitioner in 1933 as a capital net loss instead of an ordinary loss.
FINDINGS OF FACT.
(1) The petitioner is and during the taxable years was a resident of Reading, Pennsylvania. Prior to his marriage to Ella C. Moyer in 1904, he was and ever since has been engaged in the business of manufacturing knit underwear and other knit goods. During the taxable years*788 and thereafter such business was carried on at Ephrata, *1156 Pennsylvania, about twenty miles from Reading. The business was successful and profitable and in the latter part of 1930 was worth about $400,000 to $450,000. Becoming concerned about increasing taxes, the petitioner in the fall of 1930 called upon his tax consultant and accountant in Philadelphia. Among other things they discussed the creation of a partnership between the petitioner and his wife. Thereafter the petitioner gave his wife an interest in such business to the extent of $100,000. This gift was evidenced by a charge in that amount to the account of the petitioner on the books of account of the business and a corresponding credit to the account of his wife therein. Prior to the making of such gift to his wife, her separate estate amounted to about $25,000. After discussing a business partnership arrangement with his wife and after consultation with his attorney at Reading, the petitioner and his wife executed a written agreement under date of January 2, 1931, wherein and whereby they agreed to associate themselves in a partnership under the firm name of "Walter W. Moyer", commencing January 1, 1931, and*789 continuing during the life of both partners. The agreement further provided in part that Ella C. Moyer shall be a silent or special partner, that she "as special partner has contributed the sum of '$100,000' to the capital of 'Walter W. Moyer'", and that she shall be entitled to 25 percent of the yearly profits payable in quarterly installments in the year following that in which earned; that the petitioner shall contribute cash, accounts receivable, equipment, stock, and good will and shall be entitled to 75 percent of the yearly profits; that the losses shall be shared in the same proportion and in the event of a partnership loss for any calendar year the loss shall be deducted from the profits of the following year or years before any further distribution of profits shall be made to Ella C. Moyer; that the right to use the firm name of "Walter W. Moyer" shall be the exclusive property of the petitioner, but in the event of dissolution it shall be considered one of the assets of the partnership; that in the event of dissolution or liquidation, the value of the share of Ella C. Moyer at the time of dissolution shall be $200,000; that at the expiration of the partnership Ella C. Moyer, *790 her heirs, executors, administrators, or assigns, shall receive the sum of $200,000 or its equivalent in property, notes or securities in full payment of her share in the partnership and that the petitioner, his heirs, executors, administrators, or assigns shall receive the balance; that Ella C. Moyer may assign her interest "in this Agreement" subject to the approval of the petitioner, but that in the event of assignment by her the assignee shall have nothing to do with the management of the partnership and that there shall be no duty, responsibility, or liability on the part of the petitioner to the assignee for any acts on his part in exercising control of or *1157 operating the business, except to render an account of profit and loss and settlement in event of dissolution.
Upon her own volition in the early part of August 1931 the petitioner's wife went to the Pennsylvania Trust Co., of Reading, Pennsylvania, for the purpose of having a will drawn. At the suggestion and upon the advice of its assistant trust officer, a trust agreement, in lieu of a will, was executed by her, as grantor, under date of August 21, 1931, with the Pennsylvania Trust Co., as trustee, wherein*791 she assigned to the trustee the above agreement for the benefit of herself, the petitioner, and her two daughters. Such trust agreement provided, among other things, that the income derived from the trust estate, after deducting taxes and expenses, shall be paid quarterly to the grantor so long as she remains the wife or widow of the petitioner, and upon her decease, to the petitioner; and that upon the decease of both of them the corpus and accrued income of the trust shall be paid to the daughters as therein provided; that, anything therein contained to the contrary notwithstanding, the petitioner shall have the right, during his lifetime, to direct the sale or other disposition by the trustee of the whole, or any part of the trust property, and the investment or reinvestment of any cash in the hands of the trustee; that he shall have the right and power at any time and from time to time during his life to revoke the trust or to alter or amend any term or provision thereof in any way and to any extent that may seem to him desirable, except to diminish the compensation of the trustee; and that in the event that the trust agreement is revoked "then the corpus and accrued interest*792 of the within Trust Fund" shall be paid to the petitioner.
In a separate agreement under the same date the petitioner's wife assigned all her right, title, and interest in and to the "co-partnership existing between Walter W. Moyer and myself, together with all monies due or to become due to me thereon" to the trustee. This assignment was consented to and approved by the petitioner in writing under the same date as required by the partnership agreement.
On June 28, 1934, the petitioner revoked the appointment of the Pennsylvania Trust Co. as trustee under the above trust agreement and appointed the City Bank & Trust Co. of Reading as trustee, the former company being then in the process of liquidation.
On or about October 19, 1935, the petitioner revoked the trust agreement. Under date of October 19, 1935, a new agreement was entered into between the petitioner, his wife, and their two daughters, Gertrude M. Rothermel and Helen C. Hiester, wherein and whereby it was agreed that the daughters join the partnership of the petitioner and wife as of October 1, 1935, during the joint lives of the petitioner and the survivor of the daughters, and the petitioner's *1158 *793 wife assigned to each of the daughters one-tenth of her $100,000 interest in the capital of the partnership, or $10,000, which constituted the contributions of the daughters to the partnership, and 2 1/2 percent of the partnership profits (10 percent of 25 percent). Such agreement further provides, among other things, that upon the death of the petitioner's wife before the termination or dissolution of the partnership, her share in the capital thereof shall pass to and become the property of her daughters in equal shares and that her interest in the partnership profits shall cease and the shares of the daughters in the profits shall each be increased by 10 percent; that in the event of her death prior to that of the petitioner, her estate shall have no share, right, title, or interest in the partnership; that the principal charge and management of the business shall be in the hands of the petitioner; that he may at any time sell the firm business and trade name of Walter W. Moyer; that, in the event of such sale prior to the death of his wife, there shall be paid to her out of the proceeds thereof the sum of $80,000 and to the daughters $10,000 each, together with their respective*794 shares of the profits; that, if a sale be made after the death of the wife, her legal representative shall not be entitled to participate in the proceeds of the sale, but the daughters or their respective representatives shall be entitled to $50,000 each instead of $10,000, together with 25 percent of the accrued profits in equal shares; that the profits of the partnership shall be paid to the respective partners in each year following that in which earned; that in the event of losses in any calendar year the losses shall be deducted from the profits of the following year or years before any further distribution of profits shall be made to any partner; and that neither the wife nor the daughters shall assign their respective interest in the partnership without the consent of the petitioner.
The share of the net profits of the business for 1931 and thereafter until the revocation of the trust agreement to which petitioner's wife was entitled under the first agreement was paid to the trustee in installments with checks signed by the petitioner. The trustee distributed such profits to the wife of petitioner, who used the money in the running of the household affairs and investments.
*795 At the time the trust agreement was entered into, the petitioner's wife was in poor health. She became very ill in 1934 and died on April 6, 1936.
Prior to the execution of the first agreement and thereafter until she was incapacitated by illness, the petitioner discussed the affairs of the business with his wife. She also modeled some of the garments made when the petitioner brought them home to her. She advised and made suggestions among others as to materials, style of garments, and wrappings. However, there was nothing for her to *1159 do at the mill, her presence there was not required, and the petitioner discussed matters pertaining to the business with her at their home.
The petitioner and his wife made separate returns for the taxable years. The respondent upon recomputation of petitioner's tax liability determined that the partnership between petitioner and his wife was not recognizable for income tax purposes and increased petitioner's reported income from the business in the taxable years in the respective amounts of $22,714.14, $38,089.15, and $18,634.59.
(2) From about 1920 to about 1929 the petitioner acquired 70 shares of the stock of the par*796 value of $100 a share of the Pennsylvania Trust Co., of Reading, Pennsylvania, at an aggregate cost of $43,356.40. About 1930 the petitioner exchanged such 70 shares for 700 shares of the par value of $10 a share and received a 100 percent stock dividend, thereafter holding 1,400 shares of the par value of $10 a share.
Early in March 1933 the Pennsylvania Trust Co. was closed, but later was permitted to operate upon a restricted basis under the Sordoni Act of Pennsylvania. About July 1933 a plan of reorganization was submitted to its stockholders, under which, among other things, its capital of $2,000,000 was to be reduced to $300,000 and the stockholders were required to purchase second preferred stock of the par value of $1,000,000. This plan was not carried out. A second plan was submitted in about November 1933 and thereafter adopted and carried out. Pursuant to such second plan a new bank, the City Bank & Trust Co. of Reading, was organized, which bank assumed liability for approximately 42 percent of the deposits of the old bank upon transfer to it of certain assets of the old bank. The remaining assets of the old bank, considered unacceptable by the new bank, including*797 slow loans, mortgages, real estate, and other non-liquid assets, were placed in a liquidating trust for the benefit of, first, the depositors, second, holders of mortgage trust fund certificates and other creditors of the bank, and, third, the shareholders.
On December 6, 1933, the petitioner sold the 1,400 shares of stock through security auctioneers of Philadelphia, Pennsylvania, at an auction sale for $102. The petitioner paid such auctioneers as expenses of sale a total of $360.40, less the sale price of $102, or $258.40. The 1,400 shares of stock were worthless prior to such sale.
The respondent disallowed the item as an ordinary loss, increased taxable income by adding thereto the amount of $43,614.90, and in the computation of the tax treated such item as a capital net loss.
OPINION.
ARUNDELL: (1) The respondent contends that during the taxable years there was no bona fide partnership existing between the petitioner *1160 and his wife and that there was no effective gift by petitioner to his wife of an interest in the business at Ephrata.
We have held that a married woman in Pennsylvania may enter into a partnership with her husband. *798 ; . The fact that the business is conducted in the name of the husband does not defeat the partnership. , and , and partners may agree to lodge in one partner the sole management of the business. . We have also held that a husband may constitute his wife his partner by giving her an interest in the business. , and An agreement or transaction is not rendered ineffectual merely because entered into or motivated by a purpose to avoid taxes. ; affd., . The question to be determined, therefore, is whether the petitioner actually made a gift to his wife of an interest in the business in the amount of $100,000. If he did make a gift to his wife, she made a contribution to the business and hence had an interest in the partnership. Section 16601, Pa. *799 St. 1920, provides that "A partnership is an association of two or more persons to carry on as co-owners a business for profit."
In ; , a gift is defined as follows:
To make a valid gift inter vivos there must be a clear, satisfactory, and unmistakable intention of the giver to part with and surrender dominion over the subject of the gift with an intention to invest the donee with the right of disposition beyond recall, accompanied by an irrevocable delivery.
The evidence here convinces us that the petitioner made a gift to his wife of an interest in the business to the extent of $100,000. Not only was the gift evidenced by the book entry, but also by the statement in the first partnership agreement that the wife had contributed to the partnership the sum of $100,000. Thereafter the wife asserted her ownership of such interest by placing it in trust. Under the laws of Pennsylvania assignment by a partner of his interest does not of itself dissolve the partnership. Sec. 16622, Pa. St. 1920. 1 Her interest in the partnership was again recognized in the second partnership agreement, wherein she again*800 asserted ownership thereof by *1161 assigning a part of such interest to her daughters. The profits to which she was entitled as a partner were received by her. The petitioner did not reacquire any part of such interest or any of the profits therefrom. The assistant trust officer, whom the petitioner's wife consulted about the drafting of a will, testified in substance that the trust agreement was determined upon at his suggestion as a means to prevent, in the event of her death, the tying up of her estate in the courts and to avoid probate expenses; that the revocation provision was inserted in the agreement merely to permit a change in the agreement if necessary; and that, upon being informed by him that she could place the power of revocation in herself, her husband, or anyone else, she stated that she desired her husband to exercise the power rather than herself because she was in very poor health and felt that her husband would outlive her and she preferred to have him look after the children's interest. Although the petitioner revoked the trust, he did not reacquire her interest but at the time her ownership of such interest was acknowledged in the second partnership*801 agreement. Upon all the evidence we are of the opinion that the petitioner made an irrevocable gift to his wife of an interest in his business at Ephrata to the extent of $100,000 and that the partnership existed between them. We, therefore, conclude that the wife's share in the profits of the partnership did not constitute income to the petitioner during the taxable years and that the respondent erred in including such profits in the taxable income of the petitioner.
*802 , wherein the court held that no irrevocable gift had been made, is distinguishable on the facts. Therein the husband gave his wife certain securities which he owned, with the understanding that she would simultaneously create a trust for the benefit of their children. The trust agreement therein provided, among other things, that in the event of the death of the wife, whether children survived or not, the entire trust estate should be paid over to the taxpayer and that he could revoke the trust upon written notice of his intention to revoke given to his wife. There was no such understanding here; the creation of the trust was the voluntary act of the wife.
(2) The petitioner contends that he sustained an ordinary loss to the extent of the cost of the 1,400 shares of Pennsylvania Trust Co. stock in 1933, due to the stock becoming worthless in that year.
The petitioner testified that he was informed by various directors of the bank shortly after the bank closed in March 1933 that the stock was then worthless. That the petitioner was correctly informed is borne out by the data set forth in the reorganization plans*803 submitted to the stockholders. It appears therefrom that the total assets of the bank had a value in 1933 of about $7,460,000; and that it agreed to transfer about $3,102,000 of such assets to the new bank, leaving *1162 about $4,357,000 of such assets to the old bank to be liquidated. Out of such assets the old bank was required to pay the expense of liquidation, a loan of $700,000 made to it by the Reconstruction Finance Corporation as an aid to effecting the reorganization, and about 58 percent of its deposits, aggregating about $4,297,000. In addition there were some trustees' mortgage participation certificates outstanding and other liabilities referred to in amounts not shown, all of which were payable prior to any distribution to stockholders. Unless the assets could be liquidated in amounts substantially in excess of their then value, the deposits and loan alone far exceeded the value of the assets, leaving nothing for other creditors and stockholders. A "loss may become complete enough for deduction without the taxpayer's establishing that there is no possibility of an eventual recoupment." *804 . While the sale of the stock at auction at the end of 1933 was a bona fide sale in the sense that it was an actual and not an accommodation sale, it was a futile and expensive gesture, unnecessary to establish the loss, since the stock was worthless prior thereto. . "In such cases a sale is necessarily fictitious; it establishes nothing * * *." ; certiorari denied, . See ; affd., ; ; ; ; ; .
The petitioner is entitled to a deduction in 1933 of the amount of $43,356.40 as an ordinary loss.
Decision will be entered under Rule 50.
Footnotes
1. SECTION 16622. Assignment of Partner's Interest. - (1) A conveyance by a partner of his interest in the partnership does not of itself dissolve the partnership, nor, as against the other partners in the absence of agreement, entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any information or account of partnership transactions, or to inspect the partnership books; but it merely entitles the assignee to receive, in accordance with his contract, the profits to which the assigning partner would otherwise be entitled.
(2) In case of a dissolution of the partnership, the assignee is entitled to receive his assignor's interest and may require an account from the date only of the last account agreed to by all the partners. ↩