*668 Under the facts it is held that petitioners made bona fide gifts to their minor children of interests in a partnership and the income derived from such interests is the separate income of each child, as well as the income from other property acquired by the children from investments of their funds and membership in another partnership. The control over the property involved by one parent, one of the donors, was exercised in his capacity as a natural guardian at law. Helvering v. Clifford,309 U.S. 331">309 U.S. 331, is not applicable.
*607 These proceedings were consolidated for hearing and opinion. Respondent determined deficiencies in income tax and has made claim for increases in the deficiencies pursuant to section 272:e) of the Revenue Act of 1936, as follows:
| Docket | Original | Increase | |||
| Petitioner | No. | Year | deficiency | claimed | Total |
| 1934 | $3,079.15 | $584.82 | $3,663.97 | ||
| Justin Potter | 97018 | 1935 | * 4,961.13 | 1,023.52 | 5,984.65 |
| 1936 | 12,190.63 | 722.59 | 12,913.22 | ||
| 1934 | 3,990.46 | 926.49 | 4,916.95 | ||
| Valere Blair Potter | 97019 | 1935 | 5,296.13 | 1,346.11 | 6,642.24 |
| 1936 | 4,560.31 | 661.79 | 5,222.10 |
At the hearing the petitioners abandoned certain issues. The remaining chief questions are whether two minor children of the petitioners became the owners of interest in a partnership under gifts from petitioners of parts of their respective interests in the partnership so as to reduce the liability of petitioners for income tax upon distributions *608 of the partnership from 45 and 30 percent to 25 and 15 percent thereof, and whether Justin Potter is taxable for certain dividends and profits from securities purchased for the children with money distributed by the partnership to the partners. Respondent has determined that petitioners are taxable upon the partnership income and other income alleged to be the separate income of each child.
FINDINGS OF FACT.
Justin Potter and Valere Blair Potter are husband wife. Hereinafter they will be referred to as Potter and Mrs. Potter. During the taxable years they resided in Nashville, Tennessee. Each*670 of them filed separate income tax returns for the taxable years with the collector for the district of Tennessee.
In the taxable years two of petitioners' children were Anne, born in 1921 and Justin, Jr., born in 1927. In 1934 they were 13 and 7 years of age respectively.
1. In 1930 Potter loaned $21,000 to the estate of A. E. Potter, receiving its note and shares of stock as security. The stock was transferred to his name. In 1936 the loan was repaid, with interest in the amount of $1,653.75. The total accrued interest was $3,228.75, of which petitioner was paid $1,575 in 1931 and 1932, being the total dividends he received in those years on the pledged stock. He reported the $1,575 as income in the years of receipt and paid tax thereon. The amount of the interest on the Potter estate note received in 1936 was $1,653.75. Potter reported that amount as interest in his 1936 return. Respondent increased the interest by the amount of $1,575.
2. Prior to January 1, 1934, shares of stock were purchased in the names of Anne and Justin, Jr., with money belonging to each child and saved by each as part of a program to teach them to save. The stocks were issued in their*671 respective names, and the certificates bear no endorsement. They still retained the stock certificates at the time of the hearing. The dates of purchase of the stocks and the dividends paid thereon in the taxable years are as follows:
| ANNE | ||
| Purchased | Paid in 1936 | |
| 1 sh. Godchaux Sugar pfd | 7/29/31 | $26 |
| 1 sh. Am. Tel. & Tel | 10/11/33 | 9 |
| 3 shs. Jacobs Packing Co | 8/31/32 | 30 |
| 10 shs. Commerce Union Bank | 1/30/33 | 10 |
| Total | * 75 |
| JUSTIN, JR. | |||
| Purchased | Paid in 1935 | Paid in 1936 | |
| 3 shs. Jacobs Packing Co | 8/11/32 | $24 | $30 |
| 10 shs. Commerce Union Bank | 1/30/33 | 6 | 10 |
| 1 sh. Godchaux Sugar pfd | 7/29/31 | 26 | |
| Total | 30 | 66 |
*609 Dividends received on the above stocks were not used by either petitioner for his own use or the support of the children. They were invested by Potter for the children in other securities or property in their respective names. The above "miscellaneous stocks" were the property of each child and the dividends*672 paid in 1935 and 1936 were the income of each child and were not the income of Potter. Respondent included the above dividends in Potter's income for the respective years.
3. In 1919 Potter organized a business under the trade name of the Nashville Coal Co. Mrs. Potter contributed some of her own property to the business in 1921, including $10,000 in bonds. Among others interested in the business were Potter's father, A. E. Potter, who died in 1930, and his brother, Edward Potter. The business was carried on as a partnership under an oral agreement and there has never been a written articles of partnership. The Nashville Coal Co., hereinafter called the partnership, continued in business until June 30, 1936, when it was dissolved. On, or before, June 30, 1936, the Nashville Coal Co., a corporation, was organized. It is referred to hereinafter as the corporation. Most of the assets of the partnership were transferred to the corporation, which gave its stock and notes in exchange to the then members of the partnership. On or about June 30, 1936, another partnership was formed under the name of the Potter-Wilson Co., the members of which were the same persons who were the*673 members of the partnership, the Nashville Coal Co., and their proportionate interests in Potter-Wilson were the same as in the partnership on June 30, 1936. See infra. The balance of the property of the old partnership which had not been transferred to the corporation was transferred to the Potter-Wilson Co. Later in 1936 the persons who were the partners in the Potter-Wilson Co. contributed to it 520 shares of the Dawson Daylight Coal Co. preferred stock and a larger number of shares of the common stock which they had purchased in 1935 and 1936. The Potter-Wilson Co. was in business from July 1, 1936, until the end of 1939, being dissolved in January 1940. The Potter-Wilson Co. is referred to hereinafter by its entire name.
On and after December 31, 1930, which was after the death of A. E. Potter, the members of the partnership and their respective *610 interests were as follows: Mrs. Potter, 45 percent; Potter, 30 percent; E. E. Wilson, 20 percent; and Mrs. A. E. Potter, 5 percent. The active partners were Potter and Wilson, and they were the only ones who drew salary, their salaries being $250 a month, each. Mrs. Potter assited in the business in securing accounts*674 and she often accompanied Potter on trips to secure business.
Beginning in 1932 and during 1933 petitioners discussed between themselves and with all of the other partners and with the attorney for the partnership, Charles G. Blackard, their proposal that they give to two of their children, Anne and Justin, Jr., substantial portions of their respective interests in the partnership. This proposal was prompted by petitioners' desire to create an estate for each child for his own protection. Potter's father's estate was much smaller than it was believed it would be, and Potter believed he should take steps to build up an estate for the children as a protection against possible losses. Their respective interests in the partnership were the most valuable assets of the petitioners. The proposal was the subject of protracted discussion at the homes and offices of all of the members of the partnership and its attorney, all the persons being extremely friendly. Late in 1933 Potter decided to make an irrevocable gift to Anne of a 15 percent interest in the partnership out of his 30 percent interest, and Mrs. Potter decided to make an irrevocable gift to Justin, Jr., of a 20 percent interest*675 in the partnership out of her 45 percent interest. They consulted their attorney and he advised that such gifts could be made to the minor children, that they could become partners, and that the gifts need not be made by formal written instrument, trust, or otherwise. Petitioners asked all of the other members of the partnership if they would consent to the children's membership in the partnership and they all gave their individual consents in December of 1933. At the same time, E. E. Wilson decided to give his wife Mrs. E. E. Wilson, a 15 percent interest in the partnership out of his 20 percent interest and all of the other partners consented. It was decided that all of the above gifts of partnership interests would be made on January 1, 1934. The attorneys advised that the gifts could be made and effected, after obtaining consent of all partners, by transfers of the proposed interests on the books of the partnership to accounts of the new partners, charging the interest of each donor with the portion transferred.
Shortly after January 1, 1940, Potter instructed orally and by a written memorandum the partnership's bookkeeper, N. W. Moore, who was also the secretary and treasurer*676 of the partnership, to open an ownership or capital account in the name of each child and to charge his capital account and Mrs. Potter's capital account, respectively, with 15 percent and 20 percent of their respective interests, and to credit the respective new capital accounts of Anne and Justin, *611 Jr., with such percentage interests in the partnership. Wilson gave Moore like instructions to effect a transfer of a 15 percent interest to a new capital account in the name of Mrs. Wilson. The books of the partnership were kept on a semicorporate basis, the capital being $10,000, which was allocated on the books to the four partners (as they were on December 31, 1933) in proportion to their respective percentage interests. Mrs. Potter's capital account showed her interest to be $4,500 and Potter's was $3,000. Moore carried out the instructions during January of 1934, making the entries as of January 1, 1934, and thereafter the capital accounts of petitioners and the two children stood credited as follows: Mrs. Potter, 25 percent, $2,500; Potter, 15 percent, $1,500; Justin, Jr., 20 percent, $2,000; Anne, 15 percent, $1,500. The children were told by Mrs. Potter that the*677 gifts were being made to them. From January 1, 1934, the two minor children were regarded by all the partners as members of the partnership.
It was the intention of Potter and Mrs. Potter to make irrevocable gifts of 15 percent and 20 percent interests in the partnership to Anne and Justin, Jr.
Petitioners filed gift tax returns stating in each return that they had made the gift to each child "unconditionally and irrevocably" of the 15 percent and 20 percent undivided interests in the assets, good will, business, and profits of the partnership. The 20 percent interest was valued at $49,956.15 and the 15 percent interest was valued at $44,967.11. The Commissioner determined deficiencies in the amounts of the gift taxes.
In the early part of 1936 it was determined to incorporate the business of the partnership. The decision was made prior to the raising of any question by the Commissioner respecting the gifts of partnership interests to the children. The attorney for the partnership advised that a bill should be filed in the Chancery Court in Nashville by the corporation and the adult members of the partnership and that the court should be asked to refer to a master the*678 matter of determining the interests of the minors in the partnership and to determine whether it was to the best interests of the minors that the proposed transfer of partnership assets to the corporation should be made. Such bill was filed on June 25, 1936. The two children were named defendants. The bill set forth the names and interests of the partners, and that the children were partners having 4/20 and 3/20 interests; that the corporation had authorized capital stock of 100,000 shares of common stock of one dollar par value per share; that the corporation was authorized to enter into a contract with the partnership for the purchase of certain of its assets and assumption of its liabilities for a consideration of the issuance of all of its stock and the giving of its interest-bearing notes in the aggregate *612 sum of $200,000 to the partners in the same proportion as their partnership interests; that the adult partners had accepted the offer; and that it was to the best interests of the minor partners to have the offer accepted for them. On July 6, 1936, a guardian ad litem was appointed for the minor defendants. The court ordered that the matter be referred to*679 the master to hear proof and to report to the court the interests of the minor defendants in the partnership, and whether or not it was to the best interests of the minors that the proposed transfer of assets should be made from the partnership to the corporation. After a hearing, the master made his report to the court, reporting that the interests of Justin, Jr., and Anne in the partnership were 4/20 and 3/20, respectively, and that said interests had been given to them by Potter and Mrs. Potter, and that it was to the best interests of the children that the contract of purchase be approved by the court.
The court's decree of July 17, 1936, made reference to the contract of June 30, 1936, which had been entered into by the corporation and the partnership, through all of its adult members, and held that the contract was especially the minor defendants, Justin Potter, Jr. and Anne Potter. The court, by its decree, ratified the contract, ordered the corporation to issue 20,000 shares of its capital stock and its note for $40,000 to Justin, Jr., and 15,000 shares of stock and its note for $30,000 to Anne, the notes being due in 10 years and bearing 6 percent interest, and appointed*680 Potter trustee for the two children for the purpose of receiving the interest on the notes and the dividends on the stock, directing Potter to report to the court at the next term what interest or dividends, if any, had come into his hands. Potter was required to take out bond in the amount of $1,000. The court recognized the tw0 children as members of the partnership in the recitation in the decree. The court retained jurisdiction over the cause before it for all matters incident to the handling of the interests and properties of the minor defendants by the trustee. Potter has continued to act as trustee under the decree ever since his appointment.
The bill filed with the Chancery Court was limited to the matters set forth above which comprised future receipts from the corporation paid on its stock and notes to the children. It did not refer to or relate in any way to any moneys or properties of the children paid to them by the partnership prior thereto or to any other property or interests of the minors. The court appears to have been satisfied that petitioners had made the separate gifts of the respective interests in the partnership to the children. The effect of the*681 decree was approval of the contract of June 30, 1936, between the partnership and the corporation for and on behalf of the minor children as members of the partnership, and, concurrently, affirmance of the children's *613 ownership individually of stock and notes of the corporation issued to them in exchange for their proportionate undivided interests in such partnership property as was transferred to the corporation.
Thereafter the transfers to the corporation were made in accordance with the June 30, 1936, agreement, and it issued its stock and notes in exchange, and the children received the stock and notes as above stated. The stock of the corporation was issued as follows: Justin, Jr., 20,000 shares; Anne, 15,000 shares; Potter, 15,000 shares; Mrs. Potter, 25,000 shares; E. E. Wilson, 5,000 shares; Mrs. Wilson, 15,000 shares; and Mrs. A. E. Potter, 5,000 shares. Potter reveived and held the stock certificates and notes made in the names of each child.
The remaining assets of the partnership were transferred to the Potter-Wilson Co. Potter agreed to the formation of this new partnership and to the transfers of property to it for and on behalf of the children, as*682 their natural guardian and trustee, although the transfer of assets to the Potter-Wilson Co. was not presented to the Chancery Court for approval.
Whenever distributions were made of the partnership earnings, they were made in accordance with the proportionate interests of the partners. In the taxable years the earnings of the partnership were as follows: 1934, $93,993.26; 1935, $119,527.12; and 1936, $63,303.31. The total distributions to the seven partners were as follows: 1934, $20,000; 1935, $81,500; and 1936, $20,000. The difference was left in the undivided profits account.
Part of the total sum distributed to the partners in 1935, i.e., $40,000 distributed to them in August, was used by the seven individuals to purchase 500 shares of preferred and some common stock of the Dawson Daylight Coal Co., each person owning the same proportion of the block of stock as his proportionate interests in the partnership. In 1936, 20 additional shares of preferred stock were purchased. The certificates were issued in the name of stock was so held to permit voting as a unit. The stock was not an asset of the partnership. The stock was so held by Potter for the purchasers thereof*683 until the fall of 1936, when those who had furnished the purchase price contributed all of the stock to Potter-Wilson Co. In 1936 the Dawson Daylight Co. paid a dividend on the preferred stock and a check for $5,200 was issued by Dawson payable to "Justin Potter, agent." The proceeds were distributed to the seven persons who purchased the stock, proportionately, Justin, Jr., receiving 20 percent, or $1,040, and Anne receiving 15 percent, or $780. :See tables of all distributions to the children, infra. ) In 1939, shortly before the PotterWilson partnership was dissolved, the certificates in the name of Potter, agent, were surrendered to be split up and new certificates were issued to and in the names of the seven persons who purchased *614 the stock originally, in accordance with their respective interests, 20 percent and 15 percent of the stock being issued by certificates in the names, respectively, of Justin, Jr., and Anne. There were issued new certificates of preferred and common stock of the Dawson Daylight Co. as follows, in their respective names: to Anne, 78 shares of preferred and 170 shares of common; to Justin, Jr., 104 shares of preferred and 226 shares of*684 common. Those certificates still stand in their names, unendorsed.
The profits of the Potter-Wilson Co. for 1936 were about $32,000, which was credited to the undivided profits account. No distributions were made to the members of this partnership during 1936.
The Potter-Wilson partnership was dissolved in January of 1940. Not all of its assets were distributed to the partners, but a substantial portion was sold to the corporation, for which the corporation executed seven demand notes aggregating $40,000 to the seven partners in amounts proportionate to their interests. A note for $8,000 or 20 percent was made to Justin, Jr., and a note for $6,000 or 15 percent was made to Anne.
In 1934, 1935, and 1936, there were distributed to the two children :Potter receiving the checks and depositing them in his bank account) earnings from the partnership, interest from the corporation on its notes, dividends on of the children), and dividends on stocks purchased for the children after January 1, 1934, with proceeds from distributions from the partnership. Of the total amounts distributed by the partnership in the taxable years, Justin, Jr., received 20 percent and Anne received*685 15 percent. With the proceeds securities were purchased for the children in their respective names. Also, their state and Federal income taxes were paid. In 1935 Potter purchased 500 shares of Godchaux Sugar B stock for Justin, Jr., out of the distributions to him for $3,737.50, and he sold the 500 shares in 1936 for $14,179.05 at a profit of $10,441.55. :In the return of Justin, Jr., and in the deficiency notice to Potter the profit is shown as $10,441.45, a difference of 10 cents.) In 1936 Anne and Justin, Jr., under the direction of Potter, took out two policies of life insurance on the life of Potter, in the face amount of $15,000 each payable to themselves as beneficiaries. At the time of the hearing the policies were still in existence. The premiums on the policies in 1936 were paid out of the funds which had been distributed to the children.
The books of the partnership recorded the amounts distributed to the children at various times as interest and distributions of profits. All payments by the partnership to the children were made by checks of the partnership made payable to each child, and canceled checks show all the payments which were made. No regular set of*686 books was kept for the children, but the partnership books constituted a *615 partial record of their of receipts and disbursements. The notebooks bore the name of each child. Potter made the entries in the notebooks, himself.
The receipts from various sources and the disbursements thereof were as follows:
| ANNE | ||||
| Receipts | Total | Disbursements | Total | |
| 1934 15% partnership | 1935 Fed. income tax--------- | $555.67 | ||
| distribution------- | $3,000 | State income tax-------- | 15.09 | |
| 1935 15% partnership | 1936 Fed. income tax--------- | 1,193.67 | ||
| distribution------- | 12,225 | State income tax-------- | 17.77 | |
| --------- | ||||
| 1936 15% partnership | 1,782.20 | |||
| distribution------- | 3,000 | --------- | ||
| ------- | 1935 200 shs. Tex. Gulf Sul-- | 6,330.00 | ||
| 18,225 | 1935 2 shs. Com. Union------- | 40.00 | ||
| 1936 Int. on | 1935, 1936 4/20 sh. | |||
| note of corp------- | 900 | Dawson-Daylight stk---- | 6,219.13 | |
| 1936 200 shs. Carter | ||||
| 1936 Div. Dawson- | Shoe stock-------------- | 2,000.00 | ||
| Daylight stock----- | 780 | --------- | ||
| 14,589.13 | ||||
| 1934, 1935, 1936, | --------- | |||
| div. on misc. stock * -- | 144 | 1936 Prem. 15M. ins---------- | 448.65 | |
| --------- | ||||
| 16,819.98 | ||||
| 1-1-37 Uninvested | ||||
| cash balance---------- | 3,229.02 | |||
| ---------------------------------------------------------------------------- | ||||
| Total | 20,049 | 20,049.00 |
| JUSTIN, JR. | |||
| Receipts | Total | Disbursements | Total |
| 1934 20% partnership | 1935 Fed. income tax---- | $898.79 | |
| distribution------- | $4,000 | State income tax--- | 19.52 |
| 1935 20% partnership | |||
| distribution------- | 16,300 | 1936 Fed. income tax---- | 1,960.26 |
| 1936 20% partnership | State income tax--- | 25.02 | |
| distribution------- | 4,000 | --------- | |
| --------- | 2,903.59 | ||
| 24,300.00 | --------- | ||
| 1936 Int. on note | 1935 500 shs. Godchaux | ||
| of corporation----- | 1,200.00 | Sugar A------------ | 9,000.00 |
| 1936 Proceeds sale 500 | 1935 500 shs. Godchaux | ||
| shs. Godchaux B---- | 14,179.05 | Sugar B------------ | 3,737.50 |
| 1936 Div. 500 | 1935 2 shs. Com. Union-- | 40.00 | |
| shs. Godchaux A---- | 500.00 | 1935, 1936 4/20 sh. | |
| 1936 Div. Dawson- | Dawson-Daylight stk | 8,292.18 | |
| Daylight stock----- | 1,040.00 | 1936 350 shs. | |
| 1934, 1935, 1936 div. | Apex Oil pfd------- | 7,890.00 | |
| on misc. stock * --- | 126.00 | 1936 1,750 shs. | |
| Apex Oil com------- | 875.00 | ||
| --------- | |||
| 29,834.68 | |||
| --------- | |||
| 1936 Prem. 15M. ins----- | 448.65 | ||
| --------- | |||
| 33,186.92 | |||
| 1-1-37 Uninvested | |||
| cash balance | 8,158.13 | ||
| --------------------------------------------------------------------- | |||
| Total | 41,345.05 | Total | 41,345.05 |
During the taxable years Potter had a bank account in his own name at the Commerce Union Bank. He was the only person who could draw on the account. The balance in his bank account averaged between seven and ten thousand dollars. Potter deposited in this account all partnership and corporation distributions to Mrs. Potter and all moneys of the two children. In 1938 or 1939 after agents of the Bureau of Internal Revenue questioned the ownership of income reported as the income of each of the children, Potter opened three separate bank accounts in the names of Mrs. Potter, *616 Anne, and Justin, Jr., naming himself of the children.
During the taxable years Potter had a safe deposit box in his own name. He was the only person who had a key to the box.
Mrs. Potter had an account in her name at the Commerce Union Bank. Deposits in that account represented transfers of funds from Potter's account. Whenever her account balance ran under $100, a transfer of $500 would be made to her account from Potter's account. Mrs. Potter paid the bills for running the house by checks drawn on this account.
All payments to the children, *689 dividends, interest, partnership earnings, and proceeds from the sale of stocks, were received by Potter. Mrs. Potter did not receive any of them. He endorsed the checks in the name of whichever child was named the payee's name with "J.P." or "Justin Potter" underneath.
All securities purchassed for the children out of the various payments to them were issued in their respective names and were held by Potter in his safe deposit box. The only exception was in the instance of the Dawson Daylight stocks which stood in the name of the purchase price, until 1939.
The payments to the children, as set forth in the schedule above, were invested for them by Potter, used to pay their taxes, and used to purchase the insurance. The balances of January 1, 1937, were used to pay taxes for the children and to purchase securities in their names.
The only sale of any security purchased for either child was the sale of 500 shares of Godchaux Sugar B stock in November of 1936. The certificate was in the name of Justin, Jr., and Potter endorsed it by writing
Neither Potter nor Mrs. Potter ever used for their own purposes or for the support of the two children any of the distributions to*690 them of partnership earnings, interest, dividends, or proceeds from the sale of the Godchaux B stock. All of such receipts were applied as is shown in the above schedules and as already stated. After the taxable years, the Potter-Wilson Co. made its first distributions of earnings in 1939. Neither of the petitioners used any of these distributions for their own purposes or for the support of the children.
Seasonably, there were filed in the name and on bahalf of Anne and Justin, Jr., Federal and state income tax returns for each of the taxable years. In the Federal return filed for each child there were reported for the year of receipt or of earning the interest and dividend payments, profit from the sale of the Godchaux B stock, their respective 20 percent and 15 percent shares of the earnings of the partnership, any dividends received by the partnership on stock which it owned, *617 and, for 1936, their shares of the earnings of the Potter-Wilson Co. The partnership and Potter-Wilson Co. filed returns, Form 1065, "Partnership Returns of Income" showing inter alia the names of the partners and their respective interests, including Anne, 15 percent, and Justin, Jr. *691 , 20 percent. Petitioners did not report in their separate returns for the taxable years any of the income reported in the returns filed for each child.
In determining the deficiency for each taxable year the respondent charged 45 percent of the earnings of the partnership and of dividends on stock owned by the partnership against Mrs. Potter's income by including in her income the 20 percent of such income which had been reported as the income of Justin, Jr., in his separate returns; and, likewise, Potter was charged 30 percent by adding to his income the 15 percent of such income which had been reported as the income of Anne in her separate returns. The same was done with respect to the total divident of $5,200 paid in 1936 on the Dawson Daylight stock, and the earnings realized by the Potter-Wilson Co. in 1936. Respondent added to Potter's income for 1936, $1,200 and $900 interest paid by the corporation on its notes to Justin, Jr., and Anne, dividends on stocks Sugar A stock in the name of Justin, Jr., and 80 percent of the profit from the sale of the Godchaux B stock, $10,441.45, which had been reported in the return of Justin, Jr. The respondent added to Potter's income*692 for 1935 dividends on the "miscellaneous stocks" owned by Justin, Jr., which had been reported in his return.
At the hearing respondent made claim for increases in the deficiencies in each taxable year due to adjustments made in the income of the partnership in each taxable year. Such adjustments, increasing partnership income in each year, resulted from disallowance of various deductions and did not result from failure to report any income. The amounts of the increases in the deficiencies in the income tax liability of each petitioner in each year, as claimed by the respondent, are computed on the basis of respondent's determination that Mrs. Potter is liable for tax upon 45 percent of the partnership income, and that Potter is taxable upon 30 percent thereof.
In 1934 Potter and Mrs. Potter made valid, irrevocable gifts of interests in the partnership, Nashville Coal Co., to each child, 15 percent to Anne and 20 percent to Justin, Jr. The adult members of the partnership gave their consent to admitting each child to the partnership and, thereafter, they were members of the partnership. After January 1, 1934, Anne and Justin, Jr., owned interests in the partnership and had*693 a right to share in the profits and surplus. The earnings of the partnership allocable to their interests in the taxable years were the income, respectively, of Anne and Justin, Jr. On and after *618 June 30, 1936, Anne and Justin, Jr., were the owners of the stock and notes of the corporation, the Nashville Coal Co., which were issued to them in exchange for assets of the partnership in which they owned an interest. Also, Anne and Justin, Jr., were members of the partnership, Potter-Wilson Co. Also each child owned the preferred and common stock of the Dawson Daylight Coal Co. in proportion to his contribution to the purchase price thereof. The interest paid to each child on the notes of the Nashville Coal Co., the corporation, during the year 1936, was the separate income of each child, as were, also, the earnings of the Potter-Wilson Co., for 1936, the 1936 dividends of the Dawson Daylight Coal Co. stock, and dividends on stocks owned by the Nashville Coal Co. partnership in the taxable years.
Justin, Jr., owned 500 shares of Godchaux Sugar A and 500 shares of Godchaux Sugar B stock purchased for him out of his funds in The dividends on the A stock were the separate*694 income of Justin, Jr., and the capital gain realized upon the sale of the B stock was his income.
At all times during the taxable years petitioners were the natural guardians of their children under the law of Tennessee.
OPINION.
HARRON: (1) In determining the deficiency for 1936 of Potter, respondent added $3,228.75 to income as interest received by petitioner on the note of A. E. Potter estate. In his brief respondent abandoned this item. The facts, as found, show that Potter received interest on the Potter estate note in 1936 in the amount of $1,653.75, only, which he included in income in his return. Respondent erred in adding $1,575 1 to Potter's income in 1936 as interest received. That amount was received and reported as income by Potter in his returns for 1931 and 1932.
*695 :2) In determining the deficiencies for 1935 and 1936 of Potter, respondent increased his income by $30 for dividends received in 1935 :dividends of Anne reported in her return), and increased his income in 1936 by $76 2 and $66, dividends of Anne and Justin, Jr., respectively, reported in their returns. Respondent has not referred to these three adjustments in his brief, and, apparently, has abandoned them. The facts, as found, show that the miscellaneous stocks on which these dividends were paid were the property of each child, purchased with their money, the certificates standing unendorsed in their respective names. These dividends were the income of each child and were *619 not Potter's income. Respondent erred in adding the above amounts to Potter's income in 1935 and 1936.
:3) The main question in each proceeding is whether or not valid gifts were made to each child in 1934 of interests in the Nashville Coal Co. partnership so that the children acquired present property rights, and the income and other property derived therefrom were the separate property and income*696 of each child.
The respondent's argument in his brief is devoted to the broad aspects of the question. He argues that the dominion and control exercised by Potter over all the income and property alleged to have become the property of the children was such that the gifts, if any were effectively made, did not bring about any substantial change in the economic interests of the donors after the alleged gifts were made. Respondent's position is that the circumstances here require application of the rationale of .
Before discussing the validity of respondent's broad argument, consideration must be given first to the narrower question of whether or not valid gifts of interests in the partnership were made to the children.
The facts are not disputed. The evidence offered by the petitioners is not contradicted or even questioned by respondent. The petitioners have presented evidence which is as complete as it could be. The problem is one of examining all of the evidence and determining the legal effect. Read in its entirety, the record does not reveal any plan or effort on the part of the petitioners to circumvent the burden*697 of taxation. Scrutiny of the facts means no more here than setting forth the facts, which has been done fully in the findings of fact. They are not repeated here. The facts show that the petitioners intended to make irrevocable gifts of a part of their respective interests in the partnership to the children. Advice of competent counsel was sought and followed so that the disability of the donees, residing in their infancy, would be met, and would not later raise any question as to the effectiveness of the gifts. The gifts were made orally, each child being told of the gift. The petitioners had the right to transfer all or part of their interests in the partnership to third parties without working a dissolution of the partnership under the Uniform Partnership Act, which has been adopted by Tennessee :Michie's Tennessee Code of 1932, par. 7841-7882; Modern Law of Partnership, Scott Rowley, par. 552), and the minor children could become members of the partnership. ; *698 ; Lindley on Partnerships, par. 74; Rowley on Partnerships, supra, par. 188. All of the partners consented to and agreed orally that the two children could become members of the partnership, and permanent entries in the permanent books of the partnership capital *620 account were made showing the transfers of the interests from the petitioners to the children as of January 1, 1934, the entries being made during January. Gift tax returns were filed and gift tax was paid upon the gifts. Thereafter, the children were regarded as partners and they shared in the partnership earnings. No record was made with any state or county official of a change in the membership of the partnership because such record is not required by Tennessee law. See . When it was decided to form the corporation and transfer partnership property to it, a bill was filed in the Chancery Court to adjudicate the property rights of the minors in the partnership property, as well as to protect their interests, and the court ratified and approved the contract between the partnership and the corporation*699 for the children, noting that the partnership was composed of the children as well as the adult partners by naming all of the persons as members of the partnership.
It is essential to the validity of a gift that the donor not only have a manifest intention to make the gift, but that the subject matter of the gift, or something symbolic thereof, be delivered to the donee, or someone acting for the donee, so that the thing given is put definitely and irrevocably beyond the ownership and control of the donor. There can be no doubt here of the clear intent of the petitioners to make the gifts, irrevocably, in view of the ample record on the point. Nor does the record leave doubt on the points of delivery and acceptance. A definite agreement was made by and between all of the partners that the two children should become partners, and petitioners agreed to this in the dual capacity of partnership members, for themselves, and of natural guardians at law, for the children. The children were told that they were to become members of the partnership. Entries were made in the partnership capital accounts under written directions from Potter. The subject matter of the gifts was intangible. *700 The method of effecting technical all of the circumstances. It is concluded that the donors took substantial steps in carrying out a verbal conveyance of personal property, effective to vest title in each child. Tatum v. Jamison, 2 Humph. 298; Voltz v. Treadway & Marlatt, 59 Fed.:2d) 643; ; ;; ; ; .
The cumulative effect of all of the evidence is that valid and irrevocable gifts of partnership interests were made to the children on January 1, 1934, and that the children were, thereafter, members of the partnership.
The factor of the dominion and control exercised by Potter over all of the moneys, notes, and stocks which thereafter came to the children, as well as his investment and reinvestment of moneys, is not *621 overlooked. The element of Potter's control does not weigh against petitioner's case in so far as the making of effective gifts, in praesenti,*701 is concerned. The evidence is clear that none of the money or property derived from the gifts to the children and which went to them by checks, notes, and securities, made in their respective names, was ever used by petitioners for their own uses or for the support of the children. Mrs. Potter did not exercise any control over the property or income of the children. Potter managed all of the business and financial matters of and for his wife and children. But his control over the fruits of the gifts to the children was that of their natural guardian at law. Under the statutes of Tennessee the parents are the natural guardians of their children. Tennessee Code of 1932, sec. 8463. As such, they are equally charged with their care, education, support, and also with the of their estates. making a gift to an infant, thereafter handles the receipt of proceeds and manages the property for the child, such conduct by the adult donor with respect to property given to a minor is entirely consistent with the making of an effective gift in jurisdictions where the parent is the natural guardian at law of the donee. The parent holds as natural guardian and the possession is the infant's. *702 ; ; . Potter handled all moneys and other property for the children in such way that the propriety of his conduct is not and can not be questioned. Records were kept by him of all receipts and disbursements on behalf of the children. Under all the facts here, it is not material that he did not open separate bank accounts in the names of the children. While such procedure would have eliminated some of respondent's questioning of the status of the matter, in general, Potter's counsel advised Potter that the procedure of depositing proceeds from checks made payable to the children :and all were so made) in his own bank account was all right. Potter regarded this account as a temporary resting place for all of the children's money until he could invest it for them. There was no misuse by Potter of this procedure, nor of his broad powers of control, as guardian. All that petitioner did in exercising dominion and control over the fruits of the gifts of partnership interests to the children is consistent with the view that the partnership interests*703 and all money and property resulting therefrom belonged to the children.
The following cases cited by respondent are distinguishable under the facts of each case and, further, the rationale of these cases does not apply to these proceedings under their distinct facts: ; Weil v. Commissioner, 82 Fed.:2d) 561; certiorari denied, (where, among other distinguishing *622 facts, the father was not the guardian of his children under the law of Alabama); ; ; ; ; Shoenberg v. Commissioner, 77 Fed.:2d) 446; ; ; Hellebush v. Commissioner, 65 Fed.:2d) 902.
Whether or not the donees in these proceedings became members of the partnership, or owners of interests in the partnership, or both, is a matter of local*704 law. . Respondent has not cited any law to controvert the recognition to be given to the decree of the Chancery Court at Nashville dated July 17, 1936. The court found that the children were members of the partnership under the gifts from their parents, incorporating the master's report of July 16, 1936, in the decree. The court ordered the corporation to deliver its promissory notes to each child and appointed Potter their trustee to receive interest on the notes. Under that decree, there can be no holding other than that the interest paid on the notes to the children in 1936 was their income, and that the notes were their property. Clearly, respondent erred in adding the interest to Potter's income in 1936.
Whether or not the decree of the Chancery Court is dispositive of the matter of whether valid gifts of the partnership interests were made in 1934 to the children, so that the same force is to be given here to the holding of a state court, as was done in the Blair case, we need not decide, in view of all the other evidence which supports a holding for the petitioners on the point. However, we give much weight to*705 that decree as evidence of the donative intent of petitioners and their conduct with respect to the subject matter of the gifts after making the gifts.
There remains the question to which respondent's chief argument is addressed, namely whether or not the rule of , applies here. Respondent's argument is that the petitioners did not part with the substantial attributes of ownership over the property :the partnership interest), essential to nontaxability under section 22:a), because of the control exercised by Potter over all receipts of money and his power to invest and reinvest proceeds and manage the property involved, and because he deposited all receipts of money in his own bank account. In other words, was the whole situation such that for purposes of taxation petitioners continued to be the owners of the property given to their children so that income derived from the property was the income of each petitioner under section 22(a) of the pertinent revenue acts? In the Clifford case it was not the fact alone that the taxpayer's wife was the beneficiary of a short term trust, that there was a family relationship, *706 *623 which dictated the conclusion reached by the Supreme Court; rather there were combinated powers over income of a trust retained by the donor which so diluted the economic consequences of the gift in trust that the donee, in reality, received no certain thing, and the donor retained the status of owner of the property for all practical purposes. respects the same after the trust was created, as before
In this case the donors did not make gifts with strings attached. No powers were reserved as conditions of the gifts. The gifts effected a substantial reduction in the property of each petitioner, and real changes in ownership of the subject matter of the gifts. The control which Potter exercised was not self-prescribed. Rather it was imposed upon him by law. He was a natural guardian at law of each child. When the children attain their majority, Potter's control ends. The kind of dominion and control over property given to an infant which is exercised by a natural guardian at law differs from the kind of dominion and control with which the Court was concerned in the Clifford case. Under the facts neither petitioner remained the owner of the partnership interests*707 after the gifts were made, giving consideration to the broad provisions of section 22:a). The management by Potter as a guardian at law of the minors was not a retention of command over income incident to ownership. There seems to be no statutory basis for treating the income as that of the grantors under section 22:a) merely because one donor managed all income and property for minors incapable of performing that function. Commissioner v. Branch, 114 Fed:2d) 985; Jones v. Norris, 122 Fed:2d) 6. Our appraisal of the facts leads to the conclusion that petitioners made irrevocable gifts of the interests in the partnership without retention of any power to revest the property or the income in themselves. With respect to all of the items of income involved - partnership distributions and earnings, interest, dividends, and capital gains - the rule which applies here is that tax liability on income attaches to ownership of the property producing the income. The rule of the Clifford case is not applicable here. *708 ;.
It is held that petitioners are not taxable for the income derived from the interests in the partnership given to the children. Determination of the main question disposes of all the other adjustments made by the respondent involved in the issues before the Board. The children of petitioners owned the Nashville Coal Co. notes issued to them, the proportion of the preferred and common stock of Dawson Daylight stock purchased with their funds, and other securities in which their funds were invested, and they were members of the Potter-Wilson partnership. Petitioners are not taxable on the interest, dividends, *624 earnings, and profits in question. The findings of fact cover these items in detail.
Respondent's determinations are reversed.
Because of stipulations relating to increases in the amounts of the earnings of the Nashville Coal Co. partnership in various years, it appears that recomputations under Rule 50 may be necessary. Accordingly,
Decisions will be entered under Rule 50.
Footnotes
*. The statement attached to the notice of deficiency shows the correct computation of the deficiency to be $4,961.13. The 90-day letter contains a typographical error in stating that the deficiency for 1935 is $4,061.13. ↩
*. $75 is the correct amount of the dividends paid in 1936 on these stocks. In the notice of deficiency the total amount is stated to be $76, which is error in the amount of $1. ↩
*. : Includes $69 for 1934 and 1935 not in issue.) ↩
*. : Includes $30 in 1934 not in issue.) ↩
1. In the recomputation under Bule 50 attention should be given to error in the computation in the deficiency notice where it appears that total interest involved in 1936 is $6,228.75. The correct amount is $7,281.93, consisting of $900 on Potter's note from the coal corporation; and $1,053.18 from Edward Potter, neither of which is in dispute; and $2,100 on the children's notes from the corporation; and $3,228.75 on the Potter estate note. ↩
2. The correct amount of Anne's dividends in 1935 from the miscellaneous stocks is $75. ↩