*156 Decisions will be entered for the respondent.
Petitioners and their wives were not partners, within the meaning of the Internal Revenue Code, in conducting the business and earning the income of Simons-Michelson Co. during 1941.
*115 The respondent determined deficiencies of $ 2,966.81 and $ 3,053.12 in the income tax of the petitioners, Leonard N. Simons and Lawrence J. Michelson, respectively, for the year 1941.
The sole issue is whether or not a partnership composed of the petitioners and their wives was valid and recognizable for Federal tax purposes.
FINDINGS OF FACT.
The petitioners are individuals residing and having*157 their place of business in Detroit, Michigan. They filed their income tax returns for the taxable year on the cash and calendar year basis, with the collector of internal revenue at Detroit.
The advertising firm of Simons-Michelson Co. was established in January 1929, as a partnership. Shortly thereafter it was incorporated and remained so until 1937, when it again became a partnership. The partnership assets were owned equally by the petitioners and they shared equally in its earnings.
The petitioners have been in the advertising business since 1921. The firm engages in the general advertising business. Its activities are divided between the syndicated service department and the general advertising department. The syndicated department supplies printed advertising matter to several trades, such as jewelry, clothing, furniture and optical. The advertisements are generally printed in newspaper mat form, the customer inserting his name in the space provided therefor. Catalogues and booklets containing the illustrations and suggested advertising phrases are also sent to the customer for his use and adaptation to his peculiar needs. The material is copyrighted. The firm's customers*158 are merchants, advertising agents, and, occasionally, newspapers. During 1941 the firm had approximately 350 customers in the jewelry trade.
The firm sends samples of syndicated catalogues to between 5,000 and 6,000 jewelers. The catalogues are produced several times a year. The firm also prepares advertising announcements for special sales and seasonal campaigns. It sells yearly millions of copies of various forms of advertising matter. It is the largest user of mat paper in Detroit. The firm has a contract with a Chicago company to represent it and to secure advertising contracts from jewelers. The firm pays the company a commission on the accounts so obtained. The margin of profit of the syndicated service varies with the specific accounts and usually is greater than that derived from the regular or general advertising.
The general advertising department handles a customer's account on the usual percentage basis of 15 per cent. The material for the department is produced by employees of the firm, who write radio continuity, do the necessary art work, and otherwise contribute to the *116 operation of the business. The accounts are brought in by copyrighters, or by*159 the partners.
Petitioner Simons handles only one general advertising account and supervises the syndicated material. He does not prepare the copy of that one account, but he approves or suggests changes in it. His time is divided equally between the two departments. Normally, he devotes 75 per cent of his time to the syndicated and 25 per cent to the general advertising work. Petitioner Michelson has charge of the general supervision, management, and contact work on accounts.
Segregated between the two departments of the firm's business, namely, the syndicated service department and the general advertising department, the gross sales, gross profits, and net profits for the period from January 1 to September 30, 1941, were as follows:
| Gross sales | Gross profit | * Net profit | |
| Syndicated service department | $ 124,490.42 | $ 69,383.43 | $ 34,827.04 |
| General advertising department | 355,185.39 | 53,105.36 | 10,566.90 |
On December 31, 1940, the firm had assets of $ 136,965.12, liabilities of $ 59,796.79 (including a bank loan of $ 7,500), and a net worth of $ 77,168.33. *160 Since 1929 it has borrowed money each year to carry on its operations in order to offset the slow payment of its customers and to maintain its own credit for the purchase of advertising space. Uncollectible accounts also compel borrowing.
In 1937 and early in 1938 the petitioners discussed giving to their wives an interest in the partnership business for the purpose of providing financial security for their families. They were advised by attorneys that husband and wife partnerships were not legal in Michigan. In the fall of 1940 they were informed that such partnerships were valid. The discussions were renewed and culminated in the donation of a 25 per cent interest in the partnership by each petitioner to his wife. Each wife was informed that she could do as she pleased with the gift. Her rights and liabilities as a partner were explained fully by the petitioner. The attorney for all four individuals also gave similar advice. The gifts were then made and accepted by the wives. Each wife chose to permit her interest to remain in the business and entered into an agreement to form a partnership composed of the petitioners and their wives.
Accordingly, on January 2, 1941, the*161 petitioners and their wives executed a partnership agreement containing the following pertinent provisions:
1. Said Harriet L. Simons has recently acquired, by gift from said Leonard N. Simons, a one-fourth (1/4) interest in said copartnership business operated under the name of Simons-Michelson Company, of Detroit, Michigan.
*117 2. Said Helen E. Michelson has likewise recently acquired, by gift from said Lawrence J. Michelson a one-fourth (1/4) interest in said business and each copartner now owns an undivided one-fourth (1/4) interest in said business.
3. Said Harriet L. Simons and Helen E. Michelson each agrees to give her advice and counsel and careful consideration to all matters relating to the operation of said business and also to promptly do and perform, to the best of her ability, any and all other work or duties that may be requested of her by said Leonard N. Simons and Lawrence J. Michelson, in connection with the operation and development of said business.
4. It is mutually understood that at the present time, neither Harriet L. Simons nor Helen E. Michelson will be able to give her entire time to said business and that said Leonard N. Simons and Lawrence J. Michelson*162 will continue to give their entire time and best efforts to said business, and therefore, until otherwise mutually agreed by said copartners, it is agreed that the earnings or profits from the operation of said business shall be deemed to have been earned and shall be credited and distributed in the following manner:
| Leonard N. Simons | Thirty per cent (30%) |
| Lawrence J. Michelson | " " " (30%) |
| Harriet L. Simons | Twenty " " (20%) |
| Helen E. Michelson | " " " (20%) |
It was not contemplated that either Mrs. Simons or Mrs. Michelson would perform services for the firm. They never have performed such services. The effect of the formation of the partnership on the Federal income taxes of the petitioners was a factor which induced, to a certain extent, the execution of the partnership agreement.
On February 20, 1941, the petitioners, as members of the partnership, entered into a "business liquidation agreement" which contained the following provisions:
The valuation of each one-fourth interest in the business was fixed at the sum of $ 17,600.00, with a proviso that said basic valuation might be increased or decreased from time to time by mutual agreement of the parties.
*163 On January 3, 1941, new capital accounts were opened on the firm's books, showing the interest of the petitioners and their respective wives in the capital of the partnership. Drawing accounts for each partner were also set up on the books, crediting to each partner his share in the profits and debiting his withdrawals.
For the first fiscal year of the partnership, ending September 30, 1941, petitioner Michelson, Mrs. Simons, and Mrs. Michelson withdrew more than their respective shares, while petitioner Simons withdrew less than his share. Thereupon petitioner Michelson, Mrs. Simons, and Mrs. Michelson executed their notes (which they paid later) covering the amount of their overdrafts and petitioner Simons withdrew the balance due him, thus equalizing their withdrawals. Thereafter the withdrawal accounts were equalized by a similar process of payment. The original firm capital of $ 77,168.33 was maintained intact.
*118 Certain further facts were stipulated. Those material to the issue are as follows:
The net earnings of Simons-Michelson Co. during the nine-month fiscal period of the partnership were $ 43,614.17. The distributive shares in such earnings under the terms*164 of the partnership agreement were as follows:
| Leonard N. Simons | $ 13,084.25 |
| Lawrence J. Michelson | 13,084.26 |
| Harriette L. Simons | 8,722.83 |
| Helen E. Michelson | 8,722.83 |
During the same nine-month period the withdrawals of the four individuals were as follows:
| Leonard N. Simons | $ 13,017.58 |
| Lawrence J. Michelson | 14,275.99 |
| Harriette L. Simons | 11,090.13 |
| Helen E. Michelson | 9,096.76 |
The household and personal expenses of the family of each petitioner for 1941 and for each year thereafter were between $ 14,000 and $ 15,000. The household expenses of the Simons family from January 1 to September 30, 1941, were approximately $ 11,800 and those of the Michelson family approximately $ 11,000. Of such expenses, Mrs. Simons paid approximately $ 7,100 and Mrs. Michelson paid $ 7,200, respectively, out of their withdrawals from the firm and through September 1942 they continued to pay the same respective percentages for household expenses out of their withdrawals from the partnership.
Commencing in March 1942, the payment of household expenses of the Simons family by Harriette L. Simons and of the Michelson family by Helen E. Michelson, was limited to the amount of their respective*165 monthly withdrawals. Such monthly withdrawals were as follows:
| March and April 1942 | $ 600 per month |
| May 1942 to December 1942 | 500 per month |
| January 1943 to September 1944 | 400 per month |
| October 1944 to August 1945 | 500 per month |
The amount of household expenses of the Simons family and of the Michelson family from March 1942 to August 1945 in excess of the aforementioned monthly withdrawals by each wife was paid by the husbands out of their funds. Prior to January 1, 1941, the household expenses of the Simons family were paid by Leonard N. Simons, and the household expenses of the Michelson family were paid by Lawrence J. Michelson.
Further facts are found from the record as follows:
The question of the payment of such household expenses by Mrs. Simons was discussed between her and her husband shortly after the establishment of the new partnership in January 1942. Mrs. *119 Simons raised the question and advised her husband that she would like to share some of that responsibility with her own money and pay some of the household bills.
A day or so after this discussion between Simons and Mrs. Simons both petitioners and their wives were together, and the Simonses *166 were discussing the manner in which they intended to share the expenses of their cost of living. At this meeting Mrs. Michelson proposed to her husband that she do the same thing. The payment of these expenses by the wives was not in any sense a condition of the gifts. There had been no discussion whatsoever about the payment of such expenses at the time of the making of the gifts. Each wife had been advised by her husband, and also by their attorney, that the money arising out of their ownership in the partnership was theirs and that "there were no strings attached to it." Each knew that legally she was under no obligation to pay any part of the household expenses unless she wanted to.
In his notice of deficiency in each case the Commissioner included in each petitioner's taxable income the 20 per cent distributable income of the partnership reported by the petitioner's wife and determined that "50 per cent of the net income of the Simons Michelson Company for the period January 1, to September 30, 1941 is taxable to you under section 22 (a) of the Internal Revenue Code."
OPINION.
The partnership arrangement fashioned by the petitioners follows very closely the pattern delineated*167 in Commissioner v. Tower, 327 U.S. 280">327 U.S. 280 and proscribed by the decision in that case. There the Court stated:
There can be no question that a wife and husband may, under certain circumstances, become partners for tax, as for other, purposes. If she either invests capital originating with her or substantially contributes to the control and management of the business, or otherwise performs vital additional services, or does all of these things she may be a partner as contemplated by 26 U. S. C. §§ 181, 182. The Tax Court has recognized that under such circumstances the income belongs to the wife. * * * But when she does not share in the management and control of the business, contributes no vital additional service, and where the husband purports in some way to have given her a partnership interest, the Tax Court may properly take these circumstances into consideration in determining whether the partnership is real within the meaning of the federal revenue laws.
* * * *
Judged by the actual result achieved, the Tax Court was justified in finding that the partnership here brought about no real change in the economic*168 relation of the husband and his wife to the income in question. Before the partnership the husband managed, controlled, and did a good deal of the work involved in running the business, and he had funds at his disposal which he either used *120 in the business or expended for family purposes. The wife did not contribute her services to the business and received money from her husband for her own and family expenses. After the partnership was formed the husband continued to control and manage the business exactly as he had before. The wife again took no part in the management or operation of the business. If it be said that as a limited partner she could not share in the management without becoming a general partner the result is the same. No capital not available for use in the business before was brought into the business as a result of the formation of the partnership. And the wife drew on income which the partnership books attributed to her only for purposes of buying and paying for the type of things she had bought for herself, home and family before the partnership was formed. Consequently, the result of the partnership was a mere paper reallocation of income among*169 the family members. The actualities of their relation to the income did not change. * * *
We see very little difference in the factual basis and no difference in principle between the cases at bar and the Tower case. Here the wives invested no capital originating with them, made no contributions to the control or management of the business, and performed no "vital additional service" to the firm. After the partnership was formed the petitioners continued to control and manage the business, in which their wives had no voice and of which they had very little knowledge. The amounts withdrawn by the wives were used largely for household expenses, thus relieving their husbands of the burdens which were normally theirs. See John Lang, 7 T. C. 6; Floyd D. Akers, 6 T. C. 693; Fred W. Ewing, 5 T. C. 1020; W. M. Mauldin, 5 T. C. 743; affd., 155 Fed. (2d) 666. See also Leonard W. Greenberg, 5 T. C. 732; Earp v. Jones, 131 Fed. (2d) 292; certiorari denied, 318 U.S. 764">318 U.S. 764.*170
Therefore, for Federal income tax purposes no valid partnership was formed on January 2, 1941, and one-half of the net income of the Simons-Michelson Co. for 1941 is taxable to each petitioner.
Decisions will be entered for the respondent.
Footnotes
*. Net profit figures shown are before the deduction for partnership contributions in the amount of $ 3,192.63↩