*1442 Upon the record, held, petitioners' wives owned a one-fourth interest each in the brokerage business conducted by their husbands and that respondent erred in determining that such interests owned by the wives were taxable first to petitioners.
*986 These proceedings, which were consolidated for hearing and decision, are for the redetermination of deficiencies in income taxes for the years and in the amounts as set forth in the following schedule:
| Charles Tifft | Lewis E. Tifft | |||
| Calendar year | Docket No. | Deficiency | Docket No. | Deficiency |
| 1922 | 31029 | $7,815.48 | 31030 | $12,339.76 |
| 1923 | 31029 | 1,801.59 | 31030 | 611.82 |
| 1924 | 33464 | 1,502.85 | 33465 | 655.34 |
| 1925 | 33464 | 15,401.53 | 33465 | 15,916.22 |
| 1926 | 42340 | 1,963.99 | 42341 | 2,499.85 |
| 1927 | 45957 | 20,475.87 | 45958 | 19,472.67 |
*987 The principal error assigned in the several petitions is that the respondent erred in including in petitioners' income certain income which belonged to petitioners' wives*1443 by reason of an alleged ownership on the part of the wives of a one-fourth interest each in the brokerage business being conducted by petitioners. The remaining errors assigned in the petitions were waived at the hearing, which leaves a part of the deficiencies not in controversy.
The several petitions were amended at the hearing, however, to raise an alternative issue that, if all the income from the brokerage business be held to belong to petitioners, then the respondent erred in not allowing petitioners credit for the overpayment of taxes made by the partnership on behalf of petitioners' wives.
FINDINGS OF FACT.
Charles and Lewis E. Tifft are brothers, of Springfield, Massachusetts. In July, 1907, they became interested in the business of dealing in securities and were employed on a salary by a firm of brokers known as Jackson & Curtis, of Boston. Jackson & Curtis maintained a branch office in Springfield, of which Lewis was made one of the managers. As such, he ran the office, met the customers and kept the books. He also engaged in buying, selling and distributing local securities. Charles was a bond salesman for the same firm and was on the road most of the time.
*1444 In June, 1910, Lewis married Frances Smyth Blunt. At the time of her marriage she received approximately $40,000 in securities, as her separate property, from her father, Stanhope E. Blunt, by way of gift. The father had made gifts, similar in amount, to two other daughters. Frances kept these securities in her individual safedeposit box, apart from her husband's, and also kept separate and individual records thereof. She still had these securities in the fall of 1914. In 1911 her father also deeded to her, as her separate property, a lot and erected a house on it, as a gift to her.
On June 25, 1913, Charles married Mary Dickinson Gillett of Westfield, Massachusetts. Prior to her marriage, she had received by bequest from an aunt, Mary A. Dickinson, about $10,000 in American Telephone bonds which she thereafter kept in a safe-deposit box in Westfield as her separate property. She had also accumulated about $3,000 in savings accounts in her own name in Westfield banks. The savings were derived from gifts made by her parents and a grandmother, Sarah Dickinson Gillett.
Neither of the husbands ever exercised control or ever had possession or dominion over the property*1445 of their wives. Neither of the wives received, prior or subsequent to marriage, any property from their husbands.
*988 About July 1, 1914, petitioners severed connections with Jackson & Curtis and began a brokerage and investment banking business in Springfield, Massachusetts, under the name of Tifft Brothers.
Together petitioners invested about $25,000 in that business and that amount represented all of their accumulated savings up to that time. They had no property aside from this business.
The stock market closed on July 31, 1914, shortly after the commencement of the World War, and remained closed a few months; business was poor; security prices fell and business was confined to counter trading. By the fall of 1914, petitioners had lost all of their capital in several security transactions. The bulk of it was lost in a trade, whereby they exchanged stock and some $20,000 in American Paper bonds with Joseph Skinner of Holyoke, Massachusetts, for 200 shares of New England Equitable Insurance stock. The insurance company was a new enterprise; the market price of the stock deopped; the company went out of business; the stock became worthless in a very short time, *1446 and it could not be disposed of. None of the capital was ever recovered. The petitioners frequently discussed the business situation with their wives and the latter were acquainted with all developments. There were informal discussions between all of them with reference to failure of the business and the need of more capital, and it became increasingly evident that before the business could go on, additional capital was absolutely necessary.
The chief sources of income of this brokerage business are commissions on purchases and sales, profits on underwriting of bond syndicates, and profits on sales of local stocks. Capital is vitally necessary in such a brokerage business in order to carry the large number of customers' marginal accounts, as well as to buy and sell securities, which must be paid for in cash the day following the purchase. No credit is extended. Capital is indispensable for furnishing collateral to secure loans to carry on the business. As the volume increased, larger amounts of capital were needed.
Neither of the petitioners had any capital from which to replenish the depleted business. The result was that both Mary and Frances in the fall of 1914 agreed*1447 to make an investment in the business of $12,750 each. This was practically all of the separate property that Mary possessed, and Frances agreed to make a similar investment in the same amount and at the same time. This would restore the initial capital. They thereupon sold securities and the cash was used to replenish the business capital.
The money in no way represented a gift and was not a loan. No notes or other evidence of indebtedness were ever issued for the money, nor was there any intention to repay. No part of the money was ever repaid in whole or in part, nor has a request for repayment ever been made.
*989 Both Mary and Frances understood clearly that they were making an investment and were each purchasing a one-fourth interest in the business. They were willing to allow their investment to be subject to the risk of the business and understood that they would receive nothing in case of failure and would have redress against no one. They have at all times been regarded as partners in the business, with a one-fourth interest therein, purchased by them on their own account as their separate estate and property. If the business should close, they understood*1448 that they would receive their pro rata one-fourth interest in the liquidation. They also understood that one-fourth of all profits of the business belonged to each of them. Charles and Lewis were to contribute their services to carry the business forward. Charles was the "contact" man, made friendships among the local banks, visited out-of-town customers and conducted the transactions outside of the office. Lewis was in charge of the office detail and transactions handled in the office. This division of the work has continued to date.
The business was carried forward with fair success until the latter part of 1918, when it again fell into financial difficulties. At that time, additional capital was again necessary. Lewis had enlisted in the Army in August, 1917, and was serving in France. He did not return until March, 1919. Charles served in the Army from about August to November, 1918. During 1918, the business was depressed; the stock exchange was closed, and efforts were devoted largely to selling Liberty bonds. Some of the securities had declined in value and capital was necessary for expansion. No distributions had been made from the business.
As a beneficiary*1449 under the will of her father, Ralph D. Gillett, who died in October, 1913, Mary received approximately $42,000 in bonds, about two years after his death. She kept these securities in her own safe-deposit box as her separate property, free from control or dominion by her husband.
In the summer of 1918 Frances had received as additional separate property a bequest of about $50,000 in securities from an aunt, Evelina Blunt. She kept these securities also in her separate safedeposit box and kept a record as to receipts therefrom.
After discussions as to the condition of the business, it was decided that more money was needed to carry on. Mary and Frances thereupon in the latter part of 1918 each made a further investment of $8,250 from her separate property to furnish additional capital for the business. Neither Charles nor Lewis had any outside capital from which they could draw to add to the business.
Both Mary and Frances clearly understood that the money advanced by them was not a loan and received no notes or other evidence of indebtedness, nor did they intend to make a gift of this *990 money. They understood that this money also was subject to the risks of the*1450 business and that if it failed, the money would go with it. No change in the proportions was contemplated or made. The money simply represented and was intended to represent an additional investment in the business, each of their proportions in the capital and profits of the business remaining, as before, at one-fourth of the total.
This proportion was continued throughout the taxable years in question, 1922 to 1927, both inclusive. The arrangements of the parties have never been reduced to writing, but were treated as purely a family matter. No one, other than the parties named, ever had any interest in the business.
No further additions to capital from outside the business have been necessary. Since 1918 the business on the whole has proved successful. But during the recent depression, since 1929, Mary has increased her personal bank balance so as to be in shape to make futher additions to the business capital, if necessary.
Charles and Lewis at all times conducted the business on behalf of all parties. They, at first, drew a salary of $1,300 each per annum. It was gradually increased thereafter until it reached $9,000 in 1927, and has continued at that figure in*1451 the last few years, beginning with 1927. No salary was paid in 1918.
Lewis and his wife at all times kept a joint bank account in the Union Trust Company of Springfield, in which the entire income of both was deposited, and this account was freely subject to check by each party. From that joint bank account they paid all their personal and household expenses and furnished the support for their daughter. Frances had a separate bank account in the Third National Bank & Trust Company, in which she entered the income from her separate securities, but immediately checked the amounts out of that account into the joint account, the separate account being used by her simply for record purposes.
Charles and his wife kept separate banks accounts, but Charles has at all times paid the living expenses for himself, his wife, and his son.
Up to December 31, 1927, the last taxable year in question, no distributions have ever been made from capital or profits of the business since its inception, with the exception of some bonus stocks received in connection with underwriting or selling security issues of various corporations, which had no market value at the time and later depreciated*1452 or became worthless. No demands for distribution have ever been made.
The wives at all times kept themselves acquainted with the conditions of the business. They have seen the monthly statements regularly. The earnings of the business were added to surplus and were *991 constantly used for expansion of the business. In 1920 a seat on the New York Stock Exchange was purchased for $78,000, and paid for out of earnings of the business.
During the taxable years in question, the equal owners of the brokerage business, the assets, good will, and everything thereunto appertaining, were Lewis E. Tifft, Charles Tifft, Frances Tifft and Mary D. Tifft, and one-fourth of all receipts of the business belonged to each of said parties.
The books of the firm known as Tifft Brothers during the taxable years in question were set up by a bookkeeper from Boston. From the beginning, the books have reflected only one capital account, one surplus account, and one profit and loss account. There was no attempt to divide the capital or to carry accounts for any of the parties interested in the business. The books have always been kept as though the business were a corporate business. *1453 There was no segregation at any time of the items constituting the capital account or of the items constituting the surplus account, nor did these accounts reflect the names or the proportions in which the parties were interested in the business. The profits were carried to a profit and loss account and from there transferred to the one capital account. It was regarded as purely a family affair and the interest of each party was readily ascertainable by a simple division into four equal parts. This manner of keeping books and records has continued unchanged to date.
Partnership information returns were filed for each of the taxable years and showed petitioners and their wives as each having a one-quarter interest in the business. Each of the four individuals filed separate individual income-tax returns for the years 1922 to 1927, inclusive, and reported therein one-fourth of the net income from the brokerage business and also one-fourth of the dividends on stock of domestic corporations which had been received by the firm of Tifft Brothers.
During the years 1922 to 1925, inclusive, interest at the rate of 6 per cent on the amount which stood in the capital account was deducted*1454 from the gross income of the business; during 1922, 50 per cent of such deduction for interest was reported as income by each of the wives in their individual income-tax returns; during 1923, 50 per cent of such deduction for interest was reported as income by petitioner Lewis E. Tifft and 50 per cent by his wife; and during 1924 and 1925, 50 per cent of such deduction for interest was reported as income by each petitioner in his individual income-tax return.
The respondent determined that the only interest deductible from the gross income of the business for the years 1922 to 1927, *992 inclusive, was 6 per cent on the $42,000 invested by the wives. He further determined that all of the net income of the brokerage business and all of the dividends on stock of domestic corporations which had been received by the firm of Tifft Brothers were taxable to petitioners in equal proportions.
The amount of income tax shown on the separate returns of petitioners' wives was paid to the collector of internal revenue for the district of Massachusetts by checks of the firm known as Tifft Brothers and from the income of said firm, as follows:
| Year | Mary Tifft | Frances Tifft |
| 1922 | $4,049.33 | $5,553.64 |
| 1923 | 871.24 | 331.51 |
| 1924 | 446.68 | 149.84 |
| 1925 | 8,815.74 | 11,347.51 |
| 1926 | 1,930.37 | 3,336.61 |
| 1927 | 18,390.34 | 17,453.14 |
*1455 The payments made by the firm were charged to the profit and loss account, and no part thereof was ever recouped from petitioners' wives.
OPINION.
LOVE: The principal question to be determined in these proceedings is whether petitioners are taxable on the entire net income of the brokerage business, or on only one-half of such net income. Petitioners contend that the other one-half of such net income is taxable to their wives, on the ground that each of the wives owned a one-fourth interest in the business.
The respondent contends that under the laws of the Commonwealth of Massachusetts husbands and wives can not be partners in a business; that the understanding had between petitioners and their wives amounted to nothing more than an assignment by each petitioner of one-half of his share of future partnership profits to his wife; and that his determination that all of the profits are taxable first to petitioners finds support in ; and .
We think the undisputed facts in these proceedings are governed by our decision in *1456 ; and the decision of the United States Circuit Court of Appeals for the First Circuit in . Both these cases involved husbands and wives in Massachusetts.
In the MacPherson case a business was being conducted by a father and son, each owning a 50 per cent interest in the enterprise. In the latter part of 1921 two employees each acquired an interest. *993 About the same time the father gave the son's wife a 20 per cent interest and thereafter there was an oral understanding that the business should be conducted with respective interests as follows:
| Per cent | |
| Isaac MacPherson (father) | 20 |
| Warren MacPherson (son) | 30 |
| Elizabeth MacPherson (son's wife) | 20 |
| George H. Rockwell (employee) | 20 |
| Ernest W. Dunbar (employee) | 10 |
The respondent determined that the son was taxable on both his and his wife's interest. We held in that case that the evidence showed very clearly that the wife owned a 20 per cent interest in the business; that under the laws and decisions of Massachusetts the husband's control over his wife's property had been reduced to*1457 a minimum; and as the son (the petitioner) only owned 30 per cent in the business he was taxable only on that proportion of the profits.
In , a husband and wife were engaged in business together in Massachusetts. Prior to her marriage the wife had inherited the business from her father. Later she made a transfer to her husband. We found () that she had transferred all of the business to her husband and that the latter was taxable on all of the income therefrom. The Circuit Court found that she had reserved 25 per cent of the profits for herself, and said:
* * * It is no part of the duty of this court to determine what legal rights, if any, Hamilton acquired in his wife's property and business from their invalid agreement and his partial payment. For present purposes it is enough to hold that the 25 per cent of the 1922 profits, now taxed as the husband's, never passed, or was intended to pass, to the petitioner.
This conclusion plainly establishes that if the wife has an interest, the fact that her husband also has an interest in the same business will not operate to make the wife's income his*1458 income for tax purposes. For similar holdings see ; ; ; ; ; and .
It is true, as stated in our findings, that during the first four years in question the business was charged with an interest deduction of 6 per cent on the "capital account." If this charge had been limited to a percentage on only the amounts paid in by the wives instead of the entire capital account, and had been equally reported by the wives as income, it might appear as if the parties had treated the amounts paid in as loans. Notwithstanding the unexplained and apparently unexplainable actions on the part of petitioners in deducting *994 the 6 per cent interest on the capital account for the years 1922 to 1925, inclusive, the undisputed testimony of all the parties involved clearly substantiates the fact that the wives did not lend the money to their respective husbands, or the partnership, but furnished it as a capital investment.
*1459 The facts in the E. W. Battleson case, supra, are substantially different from the facts in the instant proceedings. There, although joint funds were used, it was the husband who actually purchased the interest in the partnerships there in question, and we held the husband taxable on the income from such partnerships. Here it was the wives, who with their own separate funds, purchased for themselves individually an interest in their husbands' business. The case is, therefore, not in point.
Neither did petitioners attempt to assign to their wives "one-half of the profits which shall come to" them as was the case in In the instant proceedings both husbands and both wives unreservedly testified that it was the plain understanding between the four of them that the wives were purchasing a one-fourth interest each in the brokerage business, and that each of them was thereby entitled to a one-fourth interest in the profits. The husbands had lost their original capital and without additional capital they could not have continued the business. The arrangement with their wives was made in the utmost good faith on the part of all*1460 concerned.
In view of the foregoing, we hold that the respondent erred in including in petitioners' income that which belonged to their wives. It thus becomes unnecessary to decide the additional issue raised at the hearing.
Judgment will be entered under Rule 50.