*2112 1. HUSBAND AND WIFE. - Where husband and wife entered into a partnership prior to their marriage, while residing in North Dakota, to which each contributed capital in equal amounts and such partnership continued after their marriage, the income and proceeds of the business being invested in other enterprises, the property so acquired belonged one-half to the husband and one-half to the wife and a division between them in 1925 in that proportion was legal, and income from the notes, stocks and bonds set apart to the wife in the partition of property was her separate income and properly taxable to her and not to her husband.
2. The assignment by petitioner of his interest in certain partnerships of which he was a member to his wife did not operate to exclude from his income for the taxable year his distributive share of the partnerships income, in the absence of evidence showing that there was a new partnership agreement and the wife was admitted to the several partnerships involved, as a partner.
*455 Petitioner seeks*2113 redetermination of a deficiency in income tax for 1925 in the sum of $792.44. The petitioner alleges that the deficiency was determined for 1924 and 1925, but the deficiency letter and statement show that the deficiency was for 1925 only. The petition relative to 1924 was dismissed at the hearing. With respect to 1925, petitioner alleges that the respondent erred in including in *456 his income the sum of $8,140.47, which was income of his wife and was correctly reported by her for taxation on her own separate return for that year. Petitioner in his allegations in the petition assumes that the entire deficiency is based on respondent's adding to petitioner's income $8,140.47, reported in the taxable year by petitioner's wife, Caroline Battleson. That assumption is in error. Respondent added to petitioner's income all the income reported by Caroline Battleson in 1925, to wit, $11,067.01.
FINDINGS OF FACT.
From 1909 to 1911 the petitioner was engaged in a mercantile business at Wild Rose, N. Dak., with Ann E. Palmer. In 1911 he sold out his interests at Wild Rose and removed to Hamlet, N. Dak., where he engaged in business in 1912 with his brother, A. W. Battleson, *2114 and Caroline Hensrud, as partners under the firm name of Hamlet Cash Store. Prior to the entry of the petitioner into the firm, it was composed of his brother, A. W. Battleson, and Caroline Hensrud, who had contributed $1,000 and $5,000, respectively, as capital. When petitioner entered the business he contributed $5,000 as his share of the capital. The capital of the partnership then stood: A. W. Battleson, $1,000; Caroline Hensrud, $5,000; and E. W. Battleson, $5,000. The stationery and advertising matter contained the names of the three partners, viz., A. W. Battleson, L. I. Hensrud (Caroline), and E. W. Battleson. Caroline Hensrud was sometimes known as Lena or L. I. Hensrud. It was generally known in the community and by the bank where they did business that Caroline Hensrud was a partner and that she had invested her money therein. A report made to R. G. Dun & Company before petitioner became a partner showed that Caroline Hensrud was a partner. There were no written articles of partnership, but it was agreed orally that they would do business as partners for a profit, and that the share of profits of each partner would be in proportion to his capital investment in the*2115 partnership. In the following year 1913, the petitioner and Caroline Hensrud married, but the business at Hamlet continued as before until 1918, when it was discontinued. The profits of the business were not withdrawn, but were allowed to accumulate. When the business at Hamlet, N. Dak., was discontinued in 1918, the proceeds arising therefrom were used by petitioner in purchasing interests and making capital investments in various mercantile firms, in which he became a partner, namely, Peterson, Battleson, Haagenson Company, Scobey, Mont.; Peterson Company, Shelby, Mont.; Battleson Company, Scobey, Mont.; Peoples Cash Store, Flaxville, Mont.; and Peterson Company, Plentywood, Mont. In addition notes, stocks and bonds, and some *457 land were purchased. In all of the firms above mentioned, the interest of petitioner and wife appeared in his name only, but was paid for from funds derived from their original investment in the Hamlet Store, or profits derived from reinvestments of it.
After the marriage and until 1925, petitioner returned the profits of himself and wife in these various firms as his individual income. About the beginning of 1925, petitioner's wife, fearing*2116 that in case of death their affairs and property rights might become confused, requested an accounting, a partition of their property rights, and a discontinuance of the arrangement which had theretofore existed of carrying everything in petitioner's name. For this purpose an expert accountant, who had formerly been their banker, was employed, who made an investigation of the various investments and found that their value as of January 1, 1925, was $104,000, of which petitioner was entitled to $52,000 and his wife, the former Caroline Hensrud, to $52,000. The wife's share was all the outgrowth of her original investment in the Hamlet Cash Store. In order to effect the division of the property it was agreed that petitioner's wife should take the entire interest of both in Peterson, Battleson & Haagenson Company, Scobey, Mont.; Peterson Mercantile Company, Shelby, Mont.; and Peterson & Company, Plentywood, Mont., and certain notes, stocks and bonds. Petitioner was to have the remaining property of equal value, including their interest in Battleson Company at Scobey, Mont., and Peoples Cash Store, Flaxville, Mont.
The notes, bonds and stocks agreed upon were delivered to petitioner's*2117 wife and her name was entered upon the books of the three companies last mentioned in the capital account, instead of petitioner. This settlement was made in January, 1925, as of January 1, 1925, but her name was not substituted for that of petitioner in the capital accounts of the three firms until the latter part of 1925.
For the year 1925 and every subsequent year, petitioner's wife has returned for taxation her share of the profits, whether distributed or not, in the three firms in which she was allotted the interest, which prior to late in the year 1925 stood in the name of her husband E. W. Battleson, and income from the securities she received, and the petitioner has returned income derived from the property allotted to him.
Caroline Battleson, petitioner's wife, reported income for 1925 as follows:
| Interest on bank deposits, corporation's notes | $1,676.46 |
| Income from partnerships: | |
| Peterson, Battleson & Haagenson, Scobey, Mont | 5,016.83 |
| Peterson Mercantile Company, Shelby, Mont | 2,100.44 |
| Peterson & Company, Plentywood, Mont | 1,023.20 |
| Dividends on domestic corporations | 1,250.08 |
| Total | 11,067.01 |
*458 Respondent, in his determination of the*2118 deficiency, increased the income of petitioner by adding to it all the above income reported by petitioner's wife, Caroline Battleson. The following statement shows the computation of the deficiency as determined by respondent:
| 1925 | ||
| Net income reported | $12,140.58 | |
| Add: | ||
| Income reported on wife's return | 11,067.01 | |
| Net income adjusted | 23,207.59 | |
| Computation of Tax | ||
| Net income adjusted | 23,207.59 | |
| Less: | ||
| Dividends | $1,250.08 | |
| Personal exemption | 4,700.00 | |
| 5,950.08 | ||
| Net income subject to normal tax | 17,257.51 | |
| Normal tax at 1 1/2% on $4,000.00 | 60.00 | |
| Normal tax at 3% on $4,000.00 | 120.00 | |
| Normal tax at 5% on $9,257.51 | 462.88 | |
| Surtax on $23,207.59 | 392.46 | |
| Total tax | 1,035.34 | |
| Less: | ||
| 25% credit on earned income | 1.21 | |
| Tax assessable | 1,034.13 | |
| Tax previously assessed | 241.69 | |
| Deficiency in tax | 792.44 |
In making returns for 1925 on Partnership Form 1065, the several firms from which Caroline Battleson reported income named petitioner as being the owner or partner, but neither petitioner nor his wife had anything to do with making those partnership returns. These partnership returns made report of income as follows:
| Calendar year 1925 |
| Peterson Mercantile Co., Shelby, Montana, reported: |
*2119 * * *
| E. W. Battleson - 37 1/2% | $2,100.44 |
| Peterson, Battleson, Haagenson, Scobey, Montana, reported: |
* * *
| E. W. Battleson - 50% | 5,016.83 |
| Peterson Company, Plentywood, Montana, reported: |
* * *
| E. W. Battleson - 17 1/2% | 1,023.20 |
*459 For 1926 and subsequent years these same partnerships reported the distributive share of profits belonging to the interest theretofore standing in the name of E. W. Battleson as belonging to Caroline Battleson.
OPINION.
BLACK: Petitioner makes the following contentions:
That a contract of partnership was entered into between E. W. Battleson, petitioner herein, and Caroline Hensrud, at Hamlet, North Dakota, during the year 1912, as shown by the evidence.
That said partnership continued in full force and effect until dissolved as of January 1, 1925.
That income reported by petitioner to Commissioner of Internal Revenue as being received for the year 1925 was all the income lawfully chargeable to petitioner.
That petitioner only received for his own use and benefit and retained under his control, the amount of income shown upon his personal return of income for the year 1925, *2120 filed with respondent.
That petitioner can only be charged with such income as he actually received for the year 1925 and as disclosed by his personal return of income filed with respondent.
That petitioner can not lawfully be taxed upon the separate income of his wife, which he never received and over which he could not maintain or hold any control and which he never had owned or possessed.
We do not understand that petitioner, in the above contentions, claims that his wife was a partner in the various business firms mentioned in our findings of fact, other than the original Hamlet Cash Store, until the taxable year 1925, but that the interest in those other firms in which he was a partner was purchased with funds partly hers and that as between themselves they were partners in that interest and that she was owner of one-half of all the property and that the division in January, 1925, was legal. The proof is positive and uncontradicted that petitioner's wife was a partner in the Hamlet Store and that she contributed $5,000 of her own money to its capital before her marriage to petitioner, and that he contributed an equal amount to the same partnership. It is equally clear*2121 that this $10,000 and its accumulations resulting from reinvestments was used by petitioner and invested by him for their joint benefit in the various businesses mentioned.
Compiled Laws of North Dakota for 1913, at section 4410, provides:
Husband or wife may enter into any engagement or transaction with the other or with any other person which the other might if unmarried. The wife, after marriage, has, with respect to property contracts and torts, the same capacity and rights, and is subject to the same liabilities as before marriage, and in all actions by or against her she shall sue and be sued in her own name.
*460 Compiled Laws of North Dakota of 1913, at section 6386, define partnerships as:
The association of two or more persons for the purpose of carrying on business together and dividing its profits between them.
At section 6389:
The property of a partnership consists of all that is contributed to the common stock at the formation of the partnership and all that is subsequently acquired thereby.
At section 6390:
The interest of each member of a partnership extends to every portion of its property.
The Law of Montana, Revised Code 1921. At section*2122 5786:
Either husband or wife may enter any engagement or transaction with the other.
At section 5792:
All property the wife owned before her marriage and that acquired afterwards is her separate property.
At section 5811:
A married woman may make contracts * * * in the same manner, to the same extent, to the like effect, as if she were a single woman.
At section 7981:
Partnership is the association of two or more persons for the purpose of carrying on business together and dividing its profits between them.
At section 7983:
The property of a partnership consists of all that is contributed to the common stock at the formation of the partnership and all that is subsequently acquired thereby.
At section 7984:
The interest of each member of a partnership extends to every portion of its property.
At section 7985:
In the absence of any agreement on the subject the shares of partners in the profit or loss of the business are equal, and the share of each in the partnership property is the value of his original contribution, increased or diminished by his profit or loss.
At section 7988:
Property, whether real or personal, acquired with partnership funds, *2123 is presumed to be partnership property.
At section 8009:
A general partnership is dissolved as to all partners,
* * *
(3) By the death of a partner.
*461 (4) By the transfer to a person, not a partner, of the interest of any partner in the partnership property.
We will first take up the question as to whom the income from the notes, bonds and other securities, set apart to Caroline Battleson in the partition agreement, should be taxable.
In First National Bank of Duluth, Administrator,13 B.T.A. 1096">13 B.T.A. 1096, the taxpayer and his wife combined their resources in 1900, consisting of real estate, notes, mortgages and other securities, into a joint account and the combined resources were used, invested, reinvested and managed by the husband for their joint benefit down to and through the taxable years 1916 and 1917. As sales were made, the proceeds were reinvested for the joint account of the taxpayer and wife and all investments for such joint account were made from the proceeds resulting from sales of the original and added properties or from reinvestments of profits resulting from sales thereof, and all the income involved was produced by such property. *2124 The Board held that so much of the income as resulted from the wife's share of the property was taxable to her and not to her husband, the taxpayer.
In L. F. Sunlin,6 B.T.A. 1232">6 B.T.A. 1232, the taxpayer went into a business partnership with an unmarried woman who contributed $25,000 of her own funds to the capital. Subsequently they married and the business continued as before and proved profitable. The Commissioner sought to include the entire profits of the business in the husband's income on the ground that husband and wife could not be partners in Michigan, but the Board held this was erroneous and held that the wife was entitled to her share of the income and it was taxable to her, even though marriage did dissolve the partnership. Under the authorities above cited, we hold that the income from the notes, stocks and bonds set apart to the wife in the partition of property in 1925 was her separate income and properly taxable to her and not to petitioner.
The next question which we must decide is to whom were the partnership profits in the several partnerships, purported to have been transferred to the wife in the partition, taxable in 1925? If we had before us*2125 the question of taxing the profits of the Hamlet Cash Store, Hamlet, N. Dak., the original partnership entered into between petitioner and Caroline Hensrud, later his wife, it would be clear that the wife was a partner and her share could not be taxed to the petitioner, but we do not have the profits of that partnership before us. Several years prior to the taxable year in question that partnership ceased business. The several partnerships mentioned in our findings of fact, and doing business in Montana, were those in which petitioner was a partner but in which, prior to late in *462 1925, the name of petitioner's wife did not appear. True, the evidence shows that the wife owned a one-half interest in all the property and undoubtedly she would have had the right to demand an accounting from her husband for her part of the income from such property, but that fact did not make her a partner in the several partnerships in which her husband held a partnership interest. It is the contention of petitioner that because there was a partition of property between petitioner and his wife in January, 1925, and she took, among other things, petitioner's interest in the partnerships of*2126 Peterson, Battleson and Haagenson, Scobey, Mont., Peterson Mercantile Company, Shelby, Mont., and Peterson & Company, Plentywood, Mont.; that, therefore, the profits in these firms in 1925 were taxable to petitioner's wife and not to petitioner. But, in considering the merits of this contention, it should be remembered that a partner has no interest in any particular part of partnership property which he can assign to a third person. All that he can assign is his share of the surplus which may remain after the payment of all partnership debts, and, under the laws of the State of Montana, the conveyance by one partner of his share in the partnership property to a third party works an immediate dissolution of the partnership. Section 8009, Revised Code of Montana of 1921, reads:
A general partnership is dissolved as to all partners
* * *
(3) By the death of a partner.
(4) By the transfer to a person not a partner, of the interest of any partner in the partnership property.
In the instant case the evidence does not support the contention that there was a dissolution of the several partnerships purported to have been set over to petitioner's wife, nor that there was any*2127 agreement that her name should be substituted during 1925 in the several partnerships as a partner instead of petitioner. On the contrary, the partnership information returns filed by the several partnerships in question for the taxable year negative the idea that there was a dissolution of the then existing partnerships, and they each reported the partnership interest in question in the name of E. W. Battleson. So it seems to us that the situations so far as partnership profits for the taxable year in question are concerned, are not materially different from those in Harris v. Commissioner,11 B.TA. 871. In the latter case Harris executed a deed to his wife purporting to convey a one-fourth interest to her in seven plays being produced by the firm of Cohen & Harris, but we held in that case that what actually passed by the deed of conveyance was the right to share in partnership profits yet to be earned and that no change was made thereby in the status of the partnership of Cohen & Harris and that Harris was still taxable with his full share *463 of the partnership profits. Our decision was affirmed by the *2128 Circuit Court of Appeals, Second Circuit, 39 Fed.(2d) 546.
If the facts in the instant case had shown that at the time of partition of property between petitioner and his wife the other partners in Peterson, Battleson and Haagenson, Scobey, Mont.; Peterson Mercantile Company, Shelby, Mont.; and Peterson & Company, Plentywood, Mont., had agreed that petitioner's wife should become a partner instead of petitioner, and that she did in fact become a partner, then a new partnership would have sprung into existence from that date and the profits accruing to the interest of petitioner's wife would have been taxable to her and not to petitioner, for undoubtedly under the laws of the State of Montana a married woman can be a partner in her own right, but no such agreement is shown to have been made with the other partners.
We think it is clear enough that petitioner's wife owned one-half of all the property, but in T. V. Larsen,14 B.T.A. 160">14 B.T.A. 160, we held that where the husband is partner in a partnership he should return all his distributive share of the partnership profits, even though the wife may be the actual owner of one-half of the property used in the partnership. *2129
The Court of Appeals of the District of Columbia, in affirming our decision in the Larsen case, decided December 1, 1930, said:
In our opinion the Board's decision is correct. It is conceded by appellant that the filing of separate returns by himself and wife for 1923 upon a community property basis was unauthorized and erroneous, since such a basis was not recognized by the laws of Oregon. He contends however that his wife was the owner of one-half of the funds which were contributed as their share of the partnership assets, and that it was understood by and between them that she should remain the owner thereof as before. He claims accordingly that he became a trustee for her as to the one-half of the investment and also one-half of the profits accruing therefrom; and that the one-half thus received by each was properly taxable to each.
We think this argument is untenable. It is true that the wife's interest in the community property is regarded as a present vested right under the laws of the State of Washington, 6 B.T.A. 131">6 B.T.A. 131, and that this interest was not affected by the removal of the parties to the *2130 State of Oregon, 9 B.T.A. 153">9 B.T.A. 153. It is also true that appellant was accountable to his wife under the circumstances for the investment which he was managing for her. Nevertheless appellant's wife was not an actual partner in the firm, for the copartnership consisted of appellant and Forcia alone. And the applicable statute requires that the distributive share of each partner, of the net income of a partnership, shall be included in the individual return of the partner for the taxable year.
From the evidence before us, the earliest that we would be justified in finding that Caroline Battleson became an actual partner in the several firms mentioned herein was in 1926, and 1926 is not before us.
We think respondent committed no error in adding the profits from these several partnerships, which had been reported by petitioner's *464 wife on her separate return, to petitioner's return. Respondent did commit error in adding to petitioner's income the income of Caroline Battleson from notes, bonds and stocks, which we find was her separate income and should be taxes to her separately.
Reviewed by the Board.
Judgment will be entered under Rule 50.
PHILLIPS, dissenting: There is no doubt that the present decision is in accord with the decisions cited. Despite such decisions, I have never been able to understand why one who is a partner must report as his income the full amount of his distributive share of the partnership earnings, despite the existence of an enforceable agreement under which he holds all or part of his partnership interest as a trustee for another, or where there is a subpartnership agreement. The tax is imposed only upon the income of the person taxed, not upon income which he collects for another, because the property from which it is derived is in his name.
The cases in which one attempts to assign to another, without consideration, income to arise in the future, whether from a partnership interest or from other property, or reserves the right to revoke an assignment of an income-producing asset (Ormsby M. Mitchel,1 B.T.A. 143">1 B.T.A. 143; affd., Mitchel v. Bowers, 15 Fed.(2d) 287) do not seem in point. In the first case the gift of future income is unexecuted, and incomplete until the income is received and paid over, and the unexecuted gift is revocable*2132 at will. In the second case, the income is likewise in the control of him who earns it. But where, as here, there is a valuable consideration and an enforceable claim to the earnings of the partnership, there is no reason or authority for requiring the ostensible recipient to return as his income that which belongs to another. See also Poe v. Seaborn,282 U.S. 101">282 U.S. 101.
McMAHON agrees with this dissent.
LOVE, dissenting: I can not agree with the decision reached on the last point in this case. I think that it is contrary to substantive law as such law exists in the State where these property rights are located and by which laws the property rights therein involved are controlled. It may be pointed out in passing that the Federal Government has never assumed the prerogative and does not possess the constitutional right to determine the property rights existing in any of the States. It is the State laws that control such rights.
*465 In the instant case the bona fides of the partition contract between the husband and wife is not questioned. It is conceded that as a result of that partition contract between the husband and wife the three businesses*2133 taken over by the wife thereafter belonged to her as her separate property, she being the owner by fee simple title of the corpus or invested capital of those businesses, as well as of the profits flowing from them. In other words, the profits earned in those businesses, to the extent of the interest therein theretofore held by the husband, were hers, as and when the profits were earned, and never after that partition did any of those assets, property or income belong to the husband. If that be true, and I know of no ground upon which that proposition may be challenged, then there is no authority in law for taxing the husband on the income of the wife.
The Sixteenth Amendment to the Constitution never was intended to tax and does not authorize the taxing of one person on another person's income; neither does the statute or any section thereof require that such be done. It has been urged that the peculiar wording of the statute, section 218(a) of the Revenue Act of 1924 (and corresponding sections of other acts) requires that the distributive share of the profits of the partnership shall be taxed to the partners. Section 218 above cited does not impose any tax on any one. *2134 Section 210 imposes the tax on individuals. Section 230 imposes the tax on corporations and other sections impose tax on other entities. Partnerships come in the chapter that deals with individuals. The purpose of section 218 was, and is, to prescribe that partnerships as such shall pay no tax, and to prescribe that the tax due on the profits earned by the partnership business shall be paid by the owners of the business in their individual capacity.
While the statute does prescribe that "there shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for taxable year," the burden of that clause is to prescribe that such income shall be taxed to its owner for the year in which it is earned whether distributed or not. The word "partner" is used as synonymous with and with no other force and effect than "owner." If the statute be construed so as to tax the husband with that income, when the wife is the owner of the income, a meaning is given to that statute that renders it clearly unconstitutional. It is not within the constitutional power of Congress to give or impute title*2135 to that income first to the husband after distribution, when the substantive law of the State of its situs places title thereto at all times in the wife.
TRUSSELL and MATTHEWS agree with this dissent.
*466 MURDOCK dissenting: Although I agree that the result reached in the prevailing opinion in the first question there decided is correct, I do not agree that the issue can be decided solely on the authority of the two cases there cited. Those two cases are not parallel cases, for the petitioners therein resided in States where there was no community property.
The next question considered in the prevailing opinion has not been adequately disposed of. The findings of fact do not make clear exactly what happened in January, 1925. It is found that at that time "it was agreed that petitioner's wife should take the entire interest of both in" three partnerships. It should be decided, if possible, whether or not the petitioner transferred his interest in these partnerships to his wife at that time. If he did, then under section 8009 of the Revised Code of Montana of 1921 the various partnerships were immediately dissolved. Thereafter, the petitioner was no longer entitled*2136 to a distributive share of the net income of any of these former partnerships. I do not see that it makes any difference when the wife's name was substituted for that of the petitioner in the capital accounts of the three firms.
MATTHEWS agrees with this dissent.