*233 Decision will be entered under Rule 50.
1. Petitioners in 1930 purchased as partners a going business in part with money furnished by their wives, one of whom was not repaid. In January 1937 each conveyed to his wife a one-fourth interest in the partnership, and in January 1938 they formed a partnership with the wives. The wives had no income from 1930 to 1936. The partnership activities continued to be managed by the husbands, the wives doing only minor work, generally in the evening at home. Only the petitioners could sign partnership checks. The husbands drew salaries. Held, that the Commissioner did not err in including all partnership income in gross income of petitioners.
2. With a part of the income from the partnership, the wives purchased, as cotenants, a building, which they rented to the partnership. The petitioners never received any of the rental money. Held, the Commissioner erred in including the rentals in the gross income of the petitioners.
*708 These proceedings were consolidated for hearing and involve*234 the following deficiencies in income taxes:
| Abe Schreiber | J. C. Shaprow | |
| Docket No. 3737 | Docket No. 3738 | |
| 1939 | $ 949.36 | $ 959.72 |
| 1940 | 2,627.85 | 2,686.33 |
| 1941 | 9,210.19 | 9,264.19 |
The issues raised by the petitions are whether the petitioners are each taxable on one-fourth, or one-half, of the net income of the partnership known as the Royalite Co. and whether for the taxable years 1940 and 1941 each is taxable on one-half of the income of the B & S Realty Co. By amended answers filed at the hearing, the respondent alleges that the opinions rendered by the Board of Tax Appeals in Docket Nos. 100992 and 100993 are res adjudicata of the first issue. Petitioners filed their returns for the taxable years with the collector for the District of Michigan.
FINDINGS OF FACT.
In 1930 the petitioners, residents of Flint, Michigan, formed a partnership to conduct an electrical supply business in Flint under the name of Royalite Co. and share equally in the profits and losses. They purchased a going business for about $ 15,000, of which $ 10,000 was paid in cash, $ 5,000 by each partner, and the remainder was paid out of profits of the partnership. Of the cash paid by each*235 petitioner, J. C. Shaprow received $ 2,800 from his wife, and Abe Schreiber $ 1,800 from his wife, who is a sister of J. C. Shaprow. Petitioner Shaprow never repaid the money received from his wife.
Prior to 1937 the petitioners, after discussing the subject with their respective wives, decided to transfer one-half of their interest in the partnership to their wives for the purpose of providing them with a partnership interest in the business and a right to participate, as a *709 partner, in winding up the affairs of the partnership in case either petitioner should die.
On January 9, 1937, each petitioner, with the consent of the other by endorsement on the instrument, executed a document reading as follows:
Know All Men by These Presents That the undersigned, for One ($ 1.00) Dollar and other valuable consideration, does hereby convey to * * * [name of wife], her heirs and assigns, absolutely and forever, an undivided one-quarter interest in and to the partnership known as the Royalite Company, the principal place of business of which is at 221 East Kearsley Street, Flint, Michigan; the undersigned being the owner of an undivided one-half interest therein.
The attorney who*236 drafted the assignments was undecided about how to draft papers for a new partnership to include the assignees as partners, and at his request the executed assignments were retained by him until he reached a conclusion.
On January 22, 1938, the petitioners and their respective wives executed an instrument reading as follows:
The following named persons, to-wit: Jack C. Shaprow, Bessye Shaprow, Abe Schreiber, and Shirley Schreiber, having formed a limited partnership, hereby certify as follows:
I. The name of the partnership is the Royalite Company.II. The character of the business is the sale at wholesale of electrical fixtures and equipment.III. The location of the principal place of business is 221 East Kearsley Street, Flint, Michigan.IV. The name and place of residence of each general partner is --
Jack C. Shaprow, 301 W. Paterson Street, Flint, Mich.
Abe Schreiber, 208 West Dewey Street, Flint, Mich.
The name and address of the limited partners [sic] is --
Bessie Shaprow, 301 W. Paterson Street, Flint, Mich.
Shirley Schreiber, 208 West Dewey Street, Flint, Mich.
V. The terms of the partnership shall exist until dissolved by mutual consent.VI. The amount of property*237 heretofore contributed by each limited partner and the agreed value thereof is Thirteen thousand ($ 13,000.00) Dollars each.
VII. The limited partners are not to make, unless it is hereafter mutually agreed otherwise, additional contributions.VIII. The contribution of each limited partner shall be returned upon the dissolution of the partnership or upon such time as the parties may hereafter agree. It being further understood that each of the four persons herein named is the owner of an undivided one-quarter interest in and to the assets and profits of the business.IX. The share of the profits by way of income which each limited partner shall receive shall be one-quarter of the net profits.X. A limited partner shall not have the right to substitute an assignee as contributor in her place.XI. No additional limited partners shall be admitted.XII. Neither limited partner shall have priority over the other as to contributions by way of income.XIII. In the event of death, retirement, or incompetency of a general partner the partnership shall be dissolved and it's [sic] affairs wound up by the surviving general partner.
*710 XIV. A limited partner may receive property other*238 than cash in return for her contribution if mutually agreed at that time.
The instrument was recorded in the office of the clerk of the Circuit Court of Genesee County, Michigan.
On February 18, 1939, petitioners filed gift tax returns in which each reported a gift on January 9, 1937, to his wife, of a quarter interest in the partnership in the amount of $ 13,915.05. Donees' information returns were filed at the same time by the wives, reporting $ 18,915.05 as the value of the gifts reported by their respective husbands. The difference of $ 5,000 between the amounts reported in the returns was reported as representing the donees' shares of the profits of the partnership in 1937.
Petitioner Schreiber never executed a will. It did not occur to him in January 1937 that he could have bequeathed his interest in the partnership to his wife. Petitioner Shaprow executed a will but canceled it after 1937, partially on account of the transfer he had made to his wife in that year.
The investment account of petitioners and their wives on the books of the partnership show a credit balance on January 1, 1938, of $ 18,915.05. The profits of the partnership for 1938, 1939, 1940, and 1941, *239 after deducting salaries of each of the petitioners in the amounts of $ 35, $ 40 and $ 41 a week in 1939, 1940, and 1941, respectively, were divided equally among petitioners and their respective wives on the books of the partnership. The petitioners and their wives agreed to the increases in salary. In March 1938 the partnership distributed $ 35,000 of its profits, issuing a check in favor of each petitioner for $ 17,500. One check was cashed and the money, together with the other check, which had been certified, was deposited in a safe deposit box of the partnership as an emergency fund. Only petitioners have ever had access to the box. The check was cashed about one year later, and the proceeds were deposited in the safe deposit box. Since then, additional money has been deposited in the safe deposit box. None of the money was removed from the box until February 1941, when petitioner Shaprow removed $ 2,500.
The drawing accounts of petitioners and their respective wives on the books of the partnership were, except for small amounts, charged with the following amounts in 1939, 1940, and 1941:
| 1939 | 1940 | 1941 | |
| J. C. Shaprow | $ 5,000 | ||
| Bessye Shaprow | $ 5,000 | $ 5,000 | 5,000 |
| Abe Schreiber | 5,000 | ||
| Shirley Schreiber | 5,000 | 5,000 | 5,000 |
*240 Bessye Shaprow had no income from any source from 1930 to 1936, inclusive. Shirley Schreiber had no income from any source from *711 1928 to 1936, inclusive. Petitioner Shaprow and his wife had a joint savings account at all times after 1930 or 1931, and a joint checking account after March 1941. The distributions received by petitioner Shaprow and his wife in 1941 from the partnership, were deposited in the joint checking account. As the account needed funds, they transferred money from their joint savings account. Additional deposits aggregating $ 5,000 were made in the account in 1941. Amounts were withdrawn from the account in 1941 to purchase, furnish, and landscape a new home, pay operating expenses thereof, and for other purposes. Petitioner Shaprow gave most of his salary to his wife to pay household expenses. He never told his wife what to do with the money she received from the Royalite Co. or demanded that she use the money for any purpose. Petitioner Schreiber and his wife had a joint savings account until the bank holiday and opened a joint checking account in May 1942. The distribution of $ 5,000 made to Shirley Schreiber in 1941 was placed in an envelope*241 with her name on it and deposited in the safe deposit box of the partnership.
The net income of the partnership for 1939, 1940, and 1941, was shown in partnership returns filed for those years as distributable in equal amounts to petitioners and their wives, except the amount paid to each petitioner as salary. Statements were made in each return that petitioners devoted full time to the business and that their wives devoted no time to the business. The amount shown in the returns as distributable to petitioners' wives were reported by the wives in their individual returns. In each return the principal occupation or profession was shown as housewife.
The activities of the partnership were at all times managed by petitioners. Their wives took no part in conducting the partnership business. At times when their assistance was necessary the wives checked invoices, posted book entries, typed letters, and did other minor clerical work, generally at home in the evening. The wives of petitioners had no assigned duties in the partnership at any time. Such work as they performed for the partnership was done to be of assistance to their husbands. Only the petitioners were authorized to*242 sign checks for the partnership. The petitioners kept their respective wives informed of the major problems of the partnership and discussed such matters with them.
The business of the partnership required an inventory. The inventory was $ 52,590.10, $ 55,422.54, and $ 80,905.68 at the close of 1939, 1940, and 1941, respectively.
In September 1939 the respective wives of petitioners purchased for $ 20,000, as tenants in common, a parcel of improved real estate, including improvements made, located at 512-516 Clifford Street, in Flint, Michigan, for the purpose of creating an estate for themselves *712 and to rent the property to the partnership under the trade name of B & S Realty Co. after making necessary repairs and alterations. The partnership agreed to rent the premises before it was purchased by petitioners' wives. The down payment on the property and the cost of repairs and remodeling to make it suitable for the business of the partnership were made out of distributions the partnership made to the wives out of its profits. The partnership moved into the premises the early part of 1940. The larger quarters offered by the premises were needed to meet the expanding *243 business of the partnership. No written lease was executed by the partnership for occupancy of the premises. The partnership paid a yearly rental of $ 3,600 for its occupancy of the property. Petitioners had no access to the joint checking account, maintained in the name of B & S Realty Co., in which the payments were deposited. Petitioners never received any of the income from the property for their personal benefit.
In determining deficiencies in income taxes against the petitioners for 1937, the Commissioner included one-half of the profits of the partnership in the income of each petitioner. The partnership return filed for 1937 showed the petitioners and their wives as the partners. The books of the partnership for that year showed only the petitioners as the partners. In petitions filed with the Board of Tax Appeals from deficiency notices as to 1937, each of the petitioners alleged that he was taxable on only one-fourth of the profits of the partnership. Docket Nos. 100992 and 100993. The Board held in a memorandum opinion entered March 18, 1941, that the wives of petitioners were not members of the partnership and sustained the determinations of the Commissioner. *244 The assignments executed on January 9, 1937, and the agreement of January 22, 1938, were part of the record in that proceeding.
In the computation of the deficiencies herein involved the Commissioner included in the income of each of the petitioners for each of the taxable years one-half of the income of Royalite Co., also for 1940 and 1941 one-half of the income disclosed in the return of B & S Realty Co. Royalite Co. reported net income for 1939 of $ 39,663.23; for 1940, $ 48,177.23; and for 1941, $ 77,810.46.
OPINION.
Our problem here is whether the two petitioners are taxable upon all of the income of a partnership, or whether one-half shall be taxed to their wives.
* * * The issue is who earned the income and that issue depends on whether this husband and wife really intended to carry on business as a partnership. Those issues cannot be decided simply by looking at a single step in a complicated transaction. To decide who worked for, otherwise created or controlled the income, *713 all steps in the process of earning the profits must be taken into consideration. [, citing *245
Upon the facts found as above, was partnership income taxable only to the husbands? Though the wives had let the husbands have some money when the business was purchased in 1930, no showing is made that such fact was considered to give them any interest in the business, and as to Schreiber it may have been repaid. We therefore consider such moneys of no material effect here. That the husbands in January 1937 each gave his wife an interest in the business is not controlling. In , the Supreme Court found it unnecessary to decide whether or not a gift (of corporate stock on condition that corporate assets represented thereby be placed in a partnership) was conditional and therefore incomplete, saying, as above quoted, that the issue was who earned the income, that depending on whether there was real intention to carry on business as a partnership, and that all steps must be considered. We have carefully examined the steps taken and facts involved here, and, in our opinion, there was not in the arrangement involved the reality which is required for taxation of income therefrom to the wives. That compliance with the Michigan*246 law of partnership is not conclusive is specifically held in the Tower case, also involving an alleged partnership in Michigan. Here, as we concluded in that case when it was before us, the husbands continued to manage and control the business as before the partnership, the wives making no material contribution of services, and the capital contribution did not originate with the wives. Here, as in ; affd., , which was affirmed in , the wives were not permitted to draw checks on the partnership account, and the bill of sale covering an interest in the business, for a consideration furnished by the husband, was not different in result from the outright conveyance of the partnership interests here involved. We there held that the "partnership" income was that of the husband. We do not think that the wives had the requisite "command of the taxpayer over the income which is the concern of the tax laws," as said in the Tower case. This case does not differ in essentials from such cases as ;*247 ; or , wherein income was ascribed to the husbands. No provision of the contract provides that the wives should bear losses. Their contributions were to be returned to them upon dissolution. We conclude and hold that the Commissioner did not err in including all of the partnership income in the gross income of the petitioners.
*714 Upon brief respondent insists that the reasons given by him for taxing the net income of the partnership to petitioners apply with equal force to the net income of the B & S Realty Co. He argues that partnership funds were used to purchase the building and that the income therefrom was the income of the petitioners and/or the Royalite Co. The building was purchased by the wives of petitioners in their own names with money distributed to them as their distributive share of the profits of the Royalite Co., and the income from the building was retained for their own use and benefit. Petitioners' wives received profits of the Royalite Co. as partners thereof without any strings attached to the use of the money. *248 They invested it in a building for which the partnership had need and leased at a rental, the reasonableness of which is not being questioned by the respondent. The income from the property is no more taxable to petitioners than would be the income from any other property the wives could have purchased with the money.
We do not find reason to tax petitioners with the income from the property. The wives had received as their own, with the consent of their husbands, the money with which that property was purchased. It was, as we have held, the income of the husbands, but in substance it was given to the wives, and we may not say that property purchased therewith or the income therefrom belongs to the husbands merely because they were taxable. Very recently, in , we sustained the respondent's contention that income of a husband from stock in wife's name constituted a gift to his wife. The money here involved was distributed by the partnership to the wives. Even had it been distributed to the husbands, instead of the wives, and invested by them in property, income from the property would not be partnership income unless*249 the property was held as a part of the partnership business. The partnership business here was "sale at wholesale of electrical fixtures and equipment," not real estate, and a building purchased with distributed partnership income would not, without articles of partnership covering such building, be a partnership asset, or its income partnership income. The fact here is one step farther removed from partnership income from the rents on the building, for the purchase money had been distributed to, and had become the property of, the wives. In our opinion, the income from property owned by the wives, though purchased with moneys held income to their husbands, was not income to the husbands. We so hold.
The above conclusion renders it unnecessary to pass upon the question of res adjudicata because of the rulings of the Board of Tax Appeals in Docket Nos. 100992 and 100993.
Decision will be entered under Rule 50.
*715 Hill, J., dissenting: I agree with the majority that the partnership income belongs, and is taxable, to petitioners. I do not agree with the majority that the partnership is entitled to deduct the amount of rental paid petitioners' wives on property*250 which they purchased with distributions to them of partnership funds.
The majority holds that the wives of petitioners were not members of the partnership and that accordingly they were not entitled to share in the partnership income. The distributions to the wives with which they purchased the rental property were made to them on the theory that they were entitled as members of the partnership to share in the partnership income. It is not contended that such distributions were otherwise made. Certainly, the distributions were not made as gifts to the wives. It, therefore, appears that the rental property was purchased with partnership funds and was accordingly partnership property. The partnership is not entitled, for tax purposes, to deduct rentals for the use of its own property.