*1544 1. Upon the record, held, that during the taxable year in question petitioners did not operate their seed business in partnership with their minor son.
2. The evidence introduced by the respondent fails to prove that petitioners were guilty of fraud with intent to evade tax.
*284 This proceeding is for the redetermination of deficiencies in income taxes and alleged fraud penalties for the fiscal year ended May 31, 1925, in the respective amounts as follows:
| Petitioner | Deficiency | Penalty |
| Ed Kasch | $5,792.50 | $2,896.25 |
| Theodora Kasch | 5,742.93 | 2,871.47 |
The issues involved in this proceeding are (1) whether petitioners operated their seed business in partnership with their minor son during the fiscal year ended May 31, 1925, and (2) whether any part of the proposed deficiencies is due to fraud with intent to evade tax.
FINDINGS OF FACT.
Petitioners are husband and wife and are each citizens of the United States and residents of San Marcos, Hays County, Texas. *285 Milton Kasch was born October 22, 1907, and is the*1545 son and only child of petitioner, Ed Kasch, by his first wife.
Petitioner, Ed Kasch, has lived in San Marcos since about 1914 and has been engaged continuously in the cotton-breeding business and the sale of cotton seed for planting purposes. The business was first conducted as a partnership between Kasch, George W. Baker, W. S. Galloway and Herman Conrads. It continued for two years when Baker withdrew. It was then conducted as a partnership between Kasch, Galloway and Conrads until 1919 when Galloway withdrew. Kasch and Conrads then operated the business as partners until 1921, when it was incorporated. On November 5, 1923, the stockholders of the corporation passed a resolution to dissolve the corporation, which was done on May 31, 1924. During this ten-year period from 1914 to 1924, the business of the various partnerships and the corporation was conducted under the name of "Ed Kasch." The latter purchased the assets of the corporation and took over its business on June 1, 1924.
At various times between November 5, 1923, and May 31, 1924, Kasch and his wife had oral conversations with Milton (then 16 years of age) in regard to the latter being taken into the business*1546 as a partner on the basis of sharing one-third of the profits and losses as they accrued. The son orally agreed to go into the business on this condition and devote his time and attention to it. At that time Milton was attending school at St. Edwards in Austin, Texas, about 35 miles from his home. He attended this school for about two years. With the exception of the period that he was in school and until about 1929, Milton has devoted all of his time and attention to the seed business originated by his father. During the taxable year in question (fiscal year ended May 31, 1925) Milton was paid $75 per month for the summer months of 1924 and was given a small allowance while attending school.
The books kept for the seed business during the fiscal year ended May 31, 1925, showed a profit from this business of $124,808.94. On page 60 of the journal this entire profit was credited to Ed Kasch, individually, with the following explanation: "To close net profits for year into proprietorship account." Two more entries were then made on page 60 of the journal and one on page 61 and following these three there appeared a second and last entry on page 61, charging Ed Kasch proprietorship*1547 account with two-thirds of the $124,808.94 or $83,205.96, and crediting Milton Kasch with $41,602.98 and Theodora Kasch with $41,602.98, accompanied by the following explanation:
To set up partnership accounts for Mrs. Theodora Kasch and Milton Kasch, as they were taken in as partners May 31, 1924, to share in profits of business. *286 This entry to distribute profits equally among them, as per Profit and Loss Statement, and Income Tax Return May 31, 1925.
After the close of the fiscal year ended May 31, 1925, petitioner, Ed Kasch, talked with his counsel, R. E. McKie, in regard to the filing of income-tax returns for that year. They had previously discussed together the alleged partnership, but on account of Milton's minority, Ed Kasch was not sure whether his son could be a partner. McKie suggested that Kasch go to see some of the internal revenue people at Austin, which he did. He visited the collector's office at Austin and talked with a man there who had an "Information" sign on his desk. After a lengthy conversation this individual told Kasch "You have a perfect right to take anyone in as a partner. You go ahead, and file partnership returns." Kasch then returned*1548 home and consulted Charles E. Boggs, an accountant. He related to Boggs the conversation he had had with McKie and the collector's office, whereupon Boggs said it would be all right to file a partnership return, which Boggs then prepared and filed on July 24, 1925. This return reported a net income of $124,808.94 as belonging one-third to each - Ed Kasch, Mrs. Theodora Kasch and Milton Kasch. Each of the these individuals filed a separate "Individual Income Tax Return" and reported therein $41,602.98 as income from the alleged Ed Kasch partnership.
Prior to the time for filing returns for the next fiscal year, namely, during July, 1926, two internal revenue agents conducted a three-weeks examination of the books and accounts of the business then being carried on by the alleged partnership of Ed Kasch. These agents advised Boggs and Kasch that in their opinion the alleged partnership between petitioners and their minor son did not exist and they so reported to the respondent.
The books of the business for the fiscal year ended May 31, 1926, showed a loss instead of a profit, but no part of this loss was charged on the books to Milton. The reason for not charging Milton with*1549 any of the loss was due in part, at least, to the discussions had with the revenue agents during the month of July, 1926.
On May 31, 1930, the business conducted under the name of "Ed Kasch" since 1914 was again incorporated, this time under the name of "Ed Kasch, Inc." The preamble to the charter recited that "Ed Kasch, Mrs. Theodora Kasch, and Fred Hartung, all citizens of the County of Hays and State of Texas, under and by virtue of the laws of this state, do hereby voluntarily associate ourselves together for the purpose of forming a private corporation * * *." The corporation was to exist for fifty years and its directors were to be the same three individuals mentioned in the preamble. The amount of its capital stock was to be $50,000 par value divided into 500 shares of *287 $100 each. An affidavit by petitioners and Hartung attached to the charter stated that "All subscriptions were paid in cash" and also stated that the names of the parties subscribing to the capital stock together with the amounts subscribed and paid were as follows:
| Name | Amount subscribed | Amount paid |
| Ed Kasch | $16,700 | $16,700 |
| Mrs. Theodora Kasch | 16,600 | 16,600 |
| Milton Kasch | 16,600 | 16,600 |
| Fred Hartung | 100 | 100 |
*1550 The stock of Ed Kasch, Inc., was not issued until November 20, 1930. At the time of this hearing held November 22, 1930, Milton's certificate was still in possession of his father.
The alleged partnership between petitioners and Milton was never recorded under the laws of Texas.
On September 27, 1930, petitioner Ed Kasch and Milton signed a trust agreement which they later acknowledged before a notary public on November 15, 1930. This "agreement, contract and declaration of trust" provided among other things as follows:
WHEREAS, heretofore, on or prior to June 1, 1924, the said Ed Kasch, in consideration of the love and affection for his said son, the said Milton Kasch, gave to the said Milton Kasch a one-third interest in the cottonseed selling business then conducted by the said Ed Kasch at San Marcos, in Hays County, Texas, under the name of Ed Kasch, upon the oral understanding and agreement that profits and proceeds of the said business, and the capital that the said Milton Kasch was entitled to by virtue of said gift, would not be withdrawn by him, the said Milton Kasch, who was then a minor, but would remain in the possession of and under the control of the said*1551 Ed Kasch, would later account to the said Milton Kasch therefor, and it is further understood, by and between the said Milton Kasch and Ed Kasch that any proceeds earned by said business, and to which the said Milton Kasch might become entitled, were to remain in possession of the said Ed Kasch, and to be handled and invested by him as he might deem best, for the benefit of the said Milton Kasch, and
WHEREAS, the said business having been conducted as a partnership from June 1, 1924, until June 1st, 1930, and during the life of said partnership, the net earnings of said business to which the said Milton Kasch became entitled under the aforesaid transaction with his said father Ed Kasch, amounted to $83,378.46, of which amount the said Milton Kasch has drawn and expended the sum of $3,460.00, leaving a balance of the said earnings, amounting to $79,918.46, in the hands of the said Ed Kasch under the terms of the oral understanding heretofore mentioned, and
WHEREAS, the said Milton Kasch is now of full age and is married, it is desired by him, the said Milton Kasch, and the said Ed Kasch, to reduce to writing the understanding between them, and to make same more definite, and to, *1552 by the terms of this contract and agreement declare the status of the said fund now in the hands of said Ed Kasch.
*288 The said "agreement, contract and declaration of trust" further provided "that the said sum of $79,918.46 shall be and constitute a trust fund to remain in the possession and control of the said Ed Kasch as trustee, until the said Milton Kasch shall reach the age of forty years." During this time the father had the "right to handle, control and invest the said fund" in such manner as he deemed best, and "the title to said fund, and the title to any property purchased therewith, shall remain in Ed Kasch, and he shall not be liable for any losses that may be sustained, so long as he in good faith handles and manages said trust estate to the best of his ability." The agreement further provided that if Milton should die prior to the termination of the trust, and leave a child or children surviving him, then the trust should inure to the benefit of the surviving child or children and continue for them until Milton would have reached the age of forty years had he lived. If, however, Milton should die during the life of the trust without issue, then the father*1553 as trustee was to pay the surviving wife the sum of $1,000 per year for a period of ten years, and the remainder of said trust estate was to revert to the father. The trust was irrevocable and could not be terminated "except by an instrument in writing expressly revoking same." The instrument further provided that:
The said Milton Kasch, by the execution of this agreement, expressly confirms the oral agreement heretofore had and hereinabove mentioned between him, and his father Ed Kasch, and evidences hereby his intention to create the trust above outlined, and to give to the said Ed Kasch the powers and authority herein mentioned, as well as all power and authority necessarily and properly incidental to the carrying out of the terms of this agreement, and the execution of the trust here confirmed and created.
The said Ed Kasch, as the original donor, executes this instrument for the purpose of confirming the original agreements and understanding heretofore had with the said Milton Kasch, for the purpose of recognizing the trust already in existence, and creating the trust evidenced hereby, and for the additional purpose of accepting the terms hereof as trustee.
The respondent*1554 determined that the total income from the seed business during the fiscal year ended May 31, 1931, belonged to petitioners Ed Kasch and wife, as community income, and that no partnership existed between such petitioners and their minor son. The respondent further determined that the proposed deficiencies were due to fraud with intent to evade tax.
There was no partnership between petitioners and their minor son during the fiscal year ended May 31, 1925. The proposed deficiencies were not due to fraud with intent to evade tax.
OPINION.
LOVE: The issues, stated elsewhere, are briefly whether a partnership existed and whether any part of the deficiencies is due to fraud.
*289 There was some discussion in the briefs as to whether in any event a minor could become a member of a partnership in the State of Texas, and also whether the alleged partnership was one between petitioners as representing one combined two-thirds interest and Milton as representing a one-third interest, or whether it was a partnership between the three members of the family with each member representing a separate one-third interest.
We do not question the proposition that a minor may become*1555 a member of a partnership in Texas. The law of partnerships is largely embraced in the law of contracts. And it is now well established in Texas, as well as in most other jurisdictions, that a minor's contract is not void, but voidable only at the instance of the minor; and, if not so avoided, it is binding upon the other contracting parties. ; ; and . The Texas courts have also held that a parent may emancipate his child during minority by permitting the minor to engage in business for himself, or by contracting to pay him compensation for his services. See ; ; and . In the latter case the wife of a deceased minor son sued her husband's father to settle a partnership alleged to have existed between her deceased husband and his father. In the opinion the court said:
Should the suit be continued as one solely to settle the partnership, and the evidence be the same as here presented, *1556 we think the question as to whether appellant (the minor's father) had emancipated his son, would be unimportant, and need not be submitted to the jury. If appellant actually formed a partnership with his minor son, we see no reason why he would not be bound by such agreement.
As to whether the alleged partnership consisted of two or three separate interests, it is our opinion that Milton was not a partner with his parents on either basis. The conversations he had were largely with his father, although some of them were in the presence of his stepmother. It is our opinion after a careful study of all the evidence that the father never intended, at least during the taxable year here in questin, to permit Milton to exercise any of the ordinary rights and incidents of ownership over his alleged one-third interest in the profits. Those rights and incidents were retained very much by the father. Although it can not be disputed that after the execution of the trust instrument in 1930 Milton had an equitable interest, if not a legal title, to an undivided interest of the value of approximately $80,000 in all the property held by Ed Kasch in his own name, yet, to all the property involved*1557 in that *290 trust estate, Ed Kasch held the record title, and retained complete management and control over such property until the year 1947, in which year Milton is to reach his fortieth birthday. In view of the evidence and what we have said in (in effect affirmed by the Seventh Circuit on November 11, 1930, ); and , we do not think that for the purposes of section 218 of the Revenue Act of 1926 a partnership existed between petitioners and their minor son during the fiscal year ended May 31, 1925.
It does not follow, however, that petitioners were guilty of fraud. Section 275(b) of the Revenue Act of 1926 provides:
If any part of any deficiency is due to fraud with intent to evade tax, then 50 per centum of the total amount of the deficiency (in addition to such deficiency) shall be so assessed, collected, and paid, in lieu of the 50 per centum addition to the tax provided in section 3176 of the Revised Statutes, as amended.
Section 601 of the Revenue Act of 1928 provides in part as follows:
In any proceeding involving the issue whether the petitioner*1558 has been guilty of fraud with intent to evade tax, where no hearing has been held before the enactment of the Revenue Act of 1928, the burden of proof in respect of such issue shall be upon the Commissioner.
The hearing in the instant proceeding was held after the enactment of the Revenue Act of 1928. In assuming the burden the respondent offered the testimony of two internal revenue agents who for about three weeks during July, 1926, were examining the books of account and records kept by petitioners in connection with the seed business. The substance of their testimony was that the books "had been kept with comparative accuracy"; that they had never seen Milton about the place of business; and that if the entry on page 61 of the journal charging Kasch with two-thirds of the profits for the taxable year and crediting Mrs. Kasch and Milton with one-third each was recorded on the books at the time of the examination, the agents did not see the entry. Although we have found from the evidence that the alleged partnership did not exist, the evidence fails to show that the attempt to form the partnership and the reporting of the income on that basis was due to fraud with intent to*1559 evade tax. The penalites proposed by the respondent are, therefore, disallowed.
Judgment for deficiencies of $5,792.50 and $5,742.93 against Ed Kasch and Theodora Kasch, respectively, will be entered.