*205 Decision will be entered for the respondent.
Petitioner developed a business of showing films to the public at Arcade Theatre, Detroit, in rented premises, over a period of ten years. The business and the earnings were due primarily to petitioner's personal services, skill, contacts, and experience. He operated another motion picture theatre in the same way. He agreed with his wife that the earnings of the Arcade Theatre should go to her. In the taxable year she was ill and required to be in her home. She has never contributed any capital to the business. In the taxable year she did not contribute any services nor make any contribution to the control and management of Arcade. She used income from that business for the support of herself and minor child. Held, that petitioner is taxable on the income of Arcade under section 22 (a) of the Internal Revenue Code.
*899 Respondent has included in the income of petitioner, under section 22 (a), the earnings derived from the operation of a cinema theatre known as Arcade Theatre, which gives rise to a deficiency in petitioner's income tax liability in the amount of $ 2,035.15 for the year 1941.
Petitioner filed his return with the collector for the district of Michigan.
FINDINGS OF FACT.
Petitioner is a resident of Detroit. During the taxable year he was married. His wife is Margaret Allen, hereinafter referred to as Mrs. Allen or Mrs. Margaret Allen. Of this marriage there is a daughter who was born in September 1925. In 1941 she was sixteen years old and she lived with her parents. During 1941 petitioner and his wife and daughter resided in a family residence. Petitioner and his wife were estranged in 1941, but no formal, written separation agreement has ever been entered into; they were not divorced. Petitioner used a room and kept his personal belongings in the family *207 residence during 1941. Petitioner's daughter was married in December 1941. She continued to live in the family residence after she was married.
*900 Petitioner's business is the purchasing and booking of motion picture films and the management of the motion picture theatres in which he shows the pictures he has contracted to show. He has been engaged in this business for at least 15 years. At one time he was with Cooperative Pictures, a cooperative association. During 1941 petitioner made contracts with about 30 film companies under which he booked about 300 motion picture films. These films were shown to the public for admission charges in the Arcade Theatre, a theatre attended by colored people, and in the Fine Arts Theatre.
Arcade Theatre is a small low grade theatre for showing films with a seating capacity of about 450 people, and it is located in the colored district of downtown Detroit. It is in a bad neighborhood. The theatre opens late in the afternoon and remains open all night. The theatre premises and all of the equipment therein are owned by Royal Oppenheim, a Detroit lawyer. At one time the property was owned by his father, David Oppenheim. During 1941*208 the tenant of Arcade Theater occupied the premises on a month to month arrangement with Royal Oppenheim. Under the general arrangements, the tenant had the right to use the furniture, fixtures, and equipment in the theatre, including the projection equipment, seats, and screen, all of which were fixtures, as that term is understood in law, and title thereto was in Oppenheim. The rent charged covered everything. In 1938 there was a written lease, the term of which was one year. It expired in April 1939. After April 1939 the premises were rented on a month to month arrangement. The lease was made under petitioner's direction, and he made all the arrangements with Oppenheim thereafter for the occupancy of the Arcade premises. The amount of the rent was changed from time to time. From 1937 through 1941, petitioner made all arrangements with Oppenheim about the rent and renting of Arcade Theatre.
Petitioner began the operation of Arcade Theatre in 1930. His arrangements were made with the then owner, David Oppenheim. Petitioner was to run the theatre and pay rent each week, at the rate of $ 300 monthly.
Petitioner has operated the Fine Arts Theatre in Detroit since 1935.
In petitioner's*209 experience during many years in dealing with film companies he has found that it is necessary to pay for a film whatever the film company asks, and the price varies from time to time, depending upon what the film company thinks an exhibitor can pay. In making contracts the exhibitor has to bargain with the seller of films to rent the films at a price which will allow the theatre to make money. Also, the exhibitor must exercise his judgment in selecting pictures which the people in the neighborhood of the theatre will enjoy seeing. It is the practice to make a contract for one year with a film company covering the renting of a series of films.
*901 Petitioner has contacts with the film companies and the people in that business which he considers valuable.
During 1941, and in prior years, petitioner, only, selected the films to be shown in Arcade Theatre, and he entered into all of the contracts with film companies.
There are two phases involved in obtaining films for use in theatres -- renting the film for a price, and booking the film for showing on certain dates after the film has been released.
During the period after 1930 when petitioner first became interested in Arcade*210 Theatre there was an arrangement with the owners of the property that when new equipment was needed in the business it could be purchased out of the receipts of the theatre. Title to all such property has always been in the owners of the theatre, David or Royal Oppenheim. Except for $ 300 which petitioner put into the business in the beginning, about 1930, petitioner has never put any money of his own into the Arcade Theatre business. Mrs. Margaret Allen has not put any cash or property originating with herself into the business of Arcade Theatre.
Prior to 1941 Mrs. Allen was ill and under a physician's care. She has an enlarged and nervous heart. She began to be ill at the end of 1939. After 1939 she went over to Arcade Theatre once in a while, but very seldom. She is required to retire early under her doctor's orders. He ordered her, in general, to stay at home and get all the rest she could get. During 1941 her routine included taking naps in the afternoon, and she did not do any work. During 1941 her visits to Arcade Theatre were to see a picture from a window in the office.
During 1937, 1938, and 1939 Mrs. Allen did some work at the Arcade Theatre, such as signing checks*211 and depositing money. During this time there was a girl working in the office of the theatre.
During 1941 Mrs. Allen had nothing to do with contracting for and booking pictures, making deposits of money, or keeping the books of Arcade Theatre. She did not render any services in the business. She had nothing to do with rent or renting arrangements of the theatre. She has never had anything to do with contracting for or booking pictures.
During 1941 a niece of Mrs. Allen, Sylvia Manderbach, ran the office of Arcade Theatre. During 1938, 1939, and 1940 Sylvia Manderbach performed the same services. During 1941 she looked after the office of the theatre, took in the money, deposited money in the bank, hired and fired help, and, in general, had complete charge in matters delegated to her. She received a salary in 1941, and in prior years, of at least $ 22 per week.
The running of the projector in the theatre was done by union operators, sent to the theatre by the union.
*902 During 1941 petitioner had an office at Arcade Theatre. He checked over the books of the business. He arranged the daily programs. He had another office in the Fine Arts Theatre.
A checking account was*212 maintained at a bank in the name of Arcade Theatre. During 1941 petitioner and Sylvia Manderbach signed checks drawn on this account. Checks were drawn on this account for payments to Prudential Life Insurance Co. on the family residence, and cash was drawn from the account and paid to Mrs. Allen.
Mrs. Allen received funds from the Arcade Theatre bank account during 1941 which she used for the support of herself and her daughter and for the operation of her home.
The title to the family residence is held jointly. Mrs. Allen did not own any property in her own name in 1941. All property was owned jointly.
On February 24, 1936, Royal Oppenheim organized a corporation in Michigan named Arcade Theatre, Inc. He drew up all the necessary papers, articles, bylaws, and minute book. At that time the theatre was not making sufficient to pay the fixed charges of the property. The corporation was organized primarily for the protection of the mother and father of Oppenheim. His father turned the property over to him because it was a losing proposition and to let him try to make the property do better. Rent was being paid by petitioner on a weekly basis in varying amounts ranging from *213 $ 30 to $ 85 per month. The salary being paid to a projectionist took most of the receipts. The authorized stock consisted of 20 shares of common, $ 100 par value. Oppenheim made his mother, Sarah Oppenheim, a holder of half of the stock, and he agreed that his mother and father would receive $ 100 per month for life out of the theatre. One-half of the stock was issued to Mrs. Allen. The stock was assigned in blank to Royal Oppenheim, who was to act as a trustee under a voting trust agreement and to vote all of the stock. The directors were Oppenheim, Ephraim R. Gomberg, an associate of Oppenheim, and Mrs. Allen. Oppenheim and Gomberg were in control of the corporation. Gomberg was appointed the resident agent of the corporation. Mrs. Allen was named president and treasurer, Oppenheim was named vice president, and Gomberg was named secretary.
At the first meeting of the directors resolutions were adopted appointing petitioner general manager of the corporation at a salary of $ 170 per week, which was to include payment for his services as projectionist, and authorizing the corporation to enter into a lease with Royal Oppenheim of the Arcade Theatre premises for a monthly rental*214 of $ 250 per month. However, such lease was not made in written form.
In the minutes of the organization meeting it was stated that Sarah Oppenheim and Margaret Allen had offered to sell to the corporation, *903 in consideration for the issuance of 20 shares of stock, "Equity in projectors, lamps and sound equipment for theatre premises * * *"
Margaret Allen, petitioner's wife, did not own individually any equity in any projectors, lamps, sound equipment, or any other property in the Arcade Theatre premises in 1936, or at any time. She did not contribute any property or cash to the above corporation or pay anything over to the corporation in consideration for any stock issued to her. The statement in the minutes quoted above was merely a formal statement for the corporate records in so far as it referred to any equity in property as being owned by Mrs. Margaret Allen. Mrs. Margaret Allen was merely a nominal stockholder of the above corporation. The corporation did not earn any profits during its existence, and Mrs. Allen did not receive any dividends or distributions of any kind as a stockholder.
On December 31, 1936, the stockholders adopted a resolution to dissolve the*215 corporation, effective January 1, 1937. At a meeting held on December 31, 1936, the secretary reported that after payment to petitioner of $ 9,200 as his salary for 1936 and after payment of unemployment compensation taxes of $ 167.82 there would remain $ 108.53 to pay the expenses of dissolution. The corporation was dissolved, as provided. Upon dissolution, Mrs. Margaret Allen received no property or cash from the corporation.
After the Arcade Theatre, Inc., corporation was dissolved, a certificate of conducting business under an assumed name was filed for Mrs. Margaret Allen, on March 22, 1937, in which it was stated that Margaret Allen was conducting a business under the name of Arcade Theatre.
During 1941 petitioner and Mrs. Allen were separated, although they both resided in the family residence. They had an oral agreement that each person was at liberty to go his separate way. Petitioner agreed that his wife should receive all the earnings of Arcade Theatre, and she agreed that petitioner need not give her any other income. During 1941 petitioner did not provide his wife with any other income. As part of the oral understanding, petitioner and his wife executed a written*216 agreement on January 2, 1941. The agreement was to remain in effect for 5 years but it could be terminated upon 60 days notice by either party. The agreement provided, inter alia, that petitioner would book pictures to be shown in the Arcade Theatre, and that he would receive $ 500 per annum for this service.
On the same date set forth above, January 2, 1941, Mrs. Margaret Allen entered into a written agreement with her niece, Sylvia Manderbach. The agreement states, inter alia, that Mrs. Allen "employs" Sylvia as manager of the Arcade Theatre for one year at a salary of $ 22 per week.
*904 During the year 1941 the total receipts of the business conducted at the Arcade Theatre consisted of $ 39,218.10, total expenses were $ 30,552.04, and net profit was $ 8,666.06, as shown by the income tax return. The chief expenses were as set forth below:
| Wages | $ 10,975.74 |
| Rent | 4,320.00 |
| Film rental | 7,216.17 |
| Light and power | 1,283.02 |
| Heat | 284.01 |
| Advertising | 846.83 |
| Film pick up | 125.26 |
| Management fee * | 500.00 |
| Supplies | $ 890.41 |
| Repairs | 369.30 |
| Screen service | 294.99 |
| Newspaper | 315.65 |
| Advertising | |
| Bookkeeping fees | 520.00 |
| R. C. A. service | 455.43 |
| Telephone | 194.88 |
*217 The gross receipts, expenses, and net income, as set forth above, of Arcade Theatre for 1941 were reported in the individual income tax return of Mrs. Margaret Allen for 1941. The only income reported on her return was the net earnings of Arcade Theatre for 1941, in the amount of $ 8,666.06.
Petitioner filed a separate return for 1941. In his return he reported as his income the net income of the Fine Arts Theatre in the amount of $ 6,364.03, $ 500 from Arcade Theatre, and $ 1,931.09 rents from real property, or a total gross income $ 8,795.12.
The gross receipts of the Fine Arts Theatre, the expenses, and the net earnings as shown in the return of petitioner for 1941 were as follows: Gross receipts, $ 50,767.72; expenses, $ 44,403.69; net earnings, $ 6,364.03.
The operation of the Arcade Theatre has been carried on by petitioner since 1930 under various arrangements with the owners. The operation of the theatre, as a business activity, required only the expenditure of personal efforts. Except for the year during which the corporation was in existence, petitioner has been primarily responsible for the operation of the theatre as a business conducted for profit, including the year*218 1941. Although in 1935 petitioner undertook the operation of another theatre, Fine Arts, he continued to carry on all of the essential work in connection with the operation of the Arcade Theatre from 1935 through 1941. The essential work consisted of making the renting arrangements with the owners of the property, contracting for films and booking them, making up the daily schedules for running off the pictures, and arranging for the daily management of the theatre and its office.
During 1941 petitioner was the responsible operator of the business of Arcade Theatre. The office manager, Sylvia Manderbach, was an employee. Mrs. Margaret Allen did not perform any services in the business in 1941. She was not the responsible operator of the business. The earnings of the Arcade Theatre business in 1941 were due *905 to personal services of an essential nature which were rendered by petitioner in a business which he had developed over a period of ten years.
OPINION.
Respondent determined that the net income derived from the operation of Arcade Theatre in 1941 was $ 9,166.06. Petitioner does not contest any adjustments made in determining that amount to be the net earnings of*219 the business. Respondent included all of the above sum in the income of petitioner upon his determination that such income was taxable to petitioner under section 22 (a) of the Internal Revenue Code.
Petitioner alleges on brief that Margaret Allen, his wife, conducted the business of Arcade Theatre personally from 1937 until 1940, when she became ill; that she conducted the business in 1941 through an alleged manager of her own, Sylvia Manderbach; and that over a period of years she had invested in the business the profits of the business; and, finally, that petitioner made no contribution to the business in 1941 "except the simple booking of pictures for which services he received the sum of $ 500." The above argument of petitioner leads him to contend that none of the net income of the theatre in question in 1941 is taxable to him.
Petitioner, on brief, asks this Court to reverse respondent's determination solely upon the evidence adduced at the trial. He advances no argument of law and cites no authority in law to support his contention that he is not taxable on the income in question. The facts of record are contrary to the allegations made on brief, as set forth above.
The*220 question is controlled by the cardinal rules of the law of Federal income taxation that income is taxable to the person who earns the income, Lucas v. Earl, 281 U.S. 111">281 U.S. 111; Burnet v. Leininger, 285 U.S. 136">285 U.S. 136; and that he who enjoys the economic benefit of income is taxable thereon, Helvering v. Horst, 311 U.S. 112">311 U.S. 112; Helvering v. Eubank, 311 U.S. 122">311 U.S. 122.
The income in question was derived from a business in 1941 which depended solely upon the application of personal skill and personal attention. Such personal skill and attention was given by petitioner. The business had been developed over a period of ten years after 1930 by petitioner, who is experienced in the business activity of contracting for films, booking them, and showing them to the public. Even when Royal Oppenheim formed a corporation of Arcade Theatre in 1936, which had a corporate life of one year, petitioner continued to negotiate and execute all business contracts for the purchase and booking of the films which were shown in the theatre. His services and efforts have continued uninterrupted*221 since 1930 in the business of Arcade Theatre.
*906 From the evidence of record, we can only conclude that the operation of a motion picture theatre requires personal skill if any profit is to be derived. The essential service of obtaining the films is prerequisite to making money from showing the films. Also, equipment of a suitable kind must be selected, and a theatre must be suitable for the clientele. The Oppenheim family permitted petitioner to use part of the receipts from the business to purchase needed equipment, i. e., they did not supply certain needed equipment and furnishings during the ten-year period by the use of any funds other than the earnings of the theatre. The record shows that petitioner arranged for such purchases of equipment in years prior to 1941, title going to the Oppenheims, no doubt because equipment and furnishings became fixtures in the theatre. Whether or not such use of receipts of the theatre in earlier years affected the amount of the rent paid for the theatre is not shown by the record, but keeping up the equipment was a part of operating the business, and petitioner attended to such vital matters. Furthermore, he made the arrangements*222 with the owners for renting the theatre and he worked out with them the amounts of rent to be paid, excepting, perhaps, in the year of 1936, when the corporation existed, and the arrangements for keeping the theatre equipped. He did all of these things in 1941. The manner in which the expenditures for purchasing equipment in years prior to 1941 was taken care of in the income tax returns filed for those years by petitioner is not shown by the record in this case.
Petitioner advanced no money of his own in building up the business, except $ 300 in 1930. He has so testified. His testimony indicates that he did not consider any of the receipts of the business in the earlier years which were used to replace outworn fixtures and equipment as his own money. And so, careful consideration of the evidence leads to the conclusion that in 1941 and before the profits of the Arcade Theatre were due primarily to the personal services and skill of petitioner. It has been held in cases involving much the same question as is presented here, that the earnings of a business which is carried on by the application of personal service and skill are taxable, under section 22 (a), to the person whose*223 services and skill are employed in the business. See Earp v. Jones, 131 Fed. (2d) 292; Schroder v. Commissioner, 134 Fed. (2d) 346; Mead v. Commissioner, 131 Fed. (2d) 323; Francis Doll, 2 T.C. 267">2 T. C. 267; affd., 149 Fed. (2d) 239; certiorari denied, 326 U.S. 725">326 U.S. 725; Frank J. Lorenz, 3 T. C. 746; affd., 148 Fed. (2d) 527; certiorari denied, U.S. (Mar. 5, 1946); M. M. Argo, 3 T. C. 1120; affd., 150 Fed. (2d) 67; certiorari denied, 326 U.S. 762">326 U.S. 762.
The evidence in this case shows clearly that the wife of petitioner did not have the knowledge and skill to perform the essential services in the business in question which produce a profitable result in such *907 business. Prior to 1940 she helped in small ways about the theatre in depositing money in the bank and writing checks, but such services were so minor, if not clerical, that it is an unreasonable argument*224 that she has at any time conducted the business of Arcade Theatre. It is observed that a certificate of conducting business under an assumed name was filed on March 22, 1937, in the name of petitioner's wife, but the filing thereof is not proof that she was, in fact, conducting the business or was, even prior to 1941, the person who "earned" the income of the business. An employee, Sylvia Manderbach, was known to Royal Oppenheim, a witness, to have been the person who was always "on the job" in the office of the theatre in 1938, 1939, 1940, and 1941. Petitioner admits that in 1940 and 1941 the poor health of his wife confined her to her home most of the time and prevented her from engaging in work.
Time is not a large factor in the operation of the business in question, in the essential matters of arranging programs and obtaining films from day to day and week to week, according to petitioner's testimony. Once established, the business runs along in a somewhat automatic way. Thus in 1941 petitioner devoted only a few hours a day to the important work of both the Fine Arts Theatre and the Arcade Theatre. The running of the office, which has been referred to as "management," in*225 the testimony and in the findings of fact, can be and was left to a competent employee at the Arcade Theatre. And so it is not determinative, in petitioner's favor, that petitioner needed to, and actually did, devote only a few hours each day to the essential phases of the conduct of the business in question.
The determinative factor is that the wife of petitioner, alleged to have operated and conducted the business, as the manager and entrepreneur, did not devote any time in the taxable year to the business, and that she had not devoted any vital skill or capital or managerial services to the business in prior years. She had not developed the business. Petitioner did. See Commissioner v. Tower, 327 U.S. 280">327 U.S. 280, wherein the Supreme Court speaks of the tests to be applied to determine whether or not a wife has been engaged in a business so as to be regarded as the earner and owner of income. Those tests are said to be (1) the investment of capital originating with her; (2) substantial contribution to the control and management of the business; (3) the performance of vital additional services. Applying these standards to this case, it is concluded*226 that the facts do not support a finding that the wife of petitioner was engaged in the business in question in 1941.
Petitioner could not "give" the business in question, which he had established, to his wife any more than he could endow her with his skill or attribute his activities to her. The only way that the wife of petitioner could operate and conduct the business in question, as is claimed, *908 was for her to actually devote her own skill and services to the business, services of the kind required, and of the essential kind. Petitioner's contentions lack merit, because no reasonable view of the facts can support them, and the fallacy thereof is found in what is said above. The formal execution of the documents dated January 2, 1941, do not metamorphose the real facts into the facts which are necessary to support the result claimed by petitioner. They are self-serving, particularly in their texts, containing statements which represent conclusions which can not be recognized in the determination of the issue to be decided here. They are not controlling of the question.
Petitioner was legally obligated to support his wife and minor child in 1941, even though*227 there were marital disaffections. The earnings of the Arcade business were used for the support of his wife and child, for the purchase of the family residence, and for the operation of the family home, in which he had his residence, such as it was. His legal obligations were discharged by such use of the income of the business and, since he was thereby benefited, he enjoyed the income and he is taxable upon it. Whatever other uses were made of other parts of the income in question amounted to gifts from petitioner to his wife. The substance of his arrangement was none other than to assign his income to his wife. Such allocation of income within the family group does not relieve petitioner of tax liability. Furthermore, there is no evidence that, despite the arrangement, petitioner could not still exercise control of the income and take it himself.
It is held that petitioner is taxable on the income of Arcade Theatre in 1941. Respondent's determination is sustained. See Ed. Dubinsky Durwood, 6 T. C. 682.
Decision will be entered for the respondent.
Footnotes
*. The sum which was paid to petitioner under the agreement of January 2, 1941.↩