Easley v. Commissioner , 8 T.C. 153 ( 1947 )

W. H. Easley, Petitioner, v. Commissioner of Internal Revenue, Respondent. Margaret A. Easley, Petitioner, v. Commissioner of Internal Revenue, Respondent

Easley v. Commissioner

Docket Nos. 6287, 6288

United States Tax Court

8 T.C. 153; 1947 U.S. Tax Ct. LEXIS 305;

January 27, 1947, Promulgated

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">*305 Decision will be entered for the respondent.

Petitioner W. H. Easley conducted a bottling and sales business under a contract with Seven-Up Co. of St. Louis, as a sole proprietorship. He and his wife purportedly transferred undivided interests in the business to W. H. Easley, as trustee for two minor children. Upon the facts, held, that petitioners failed to make bona fide transfers of part of the business to the two trusts and, consequently, all of the income of the business is taxable to petitioners as community income.

Clyde C. Sherwood, Esq., and John V. Lewis, Esq., for the petitioners.

E. A. Tonjes, Esq., for the respondent.

Harron, Judge.

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HARRON

">*153 Respondent determined deficiencies in income tax for the years and in the amounts as follows:

Petitioner	Docket No.	Year	Deficiency
W. H. Easley	6287	1940	$ 6,378.11
		1941	26,061.55
Margaret A. Easley	6288	1940	6,433.10
		1941	25,985.45

">*306 Petitioners are husband and wife. They report income on the community property basis. The issue presented relates to the income of a business known as Seven-Up Bottling Co. of San Francisco, which is operated by W. H. Easley. The issue relates to the period October 1 to December 31, 1940, and to the entire year of 1941. Respondent has made several adjustments in the income of the Seven-Up Bottling Co. for the full years of 1940 and 1941, increasing the income of the business for each year. Petitioners concede that all of such determinations by the respondent are correct.

On October 1, 1940, petitioners executed two trust agreements, naming a minor son beneficiary of each. Petitioners contend that one-fourth interest in the business of the above company was transferred to each trust. Four individual income tax returns were filed, two in the name of each minor child, petitioner being named as trustee. In each return 25 per cent of the income of the business was reported.

Respondent has determined, under section 22 (a) of the Internal Revenue Code, that for the taxable periods involved all of the income of the bottling business is taxable to petitioners as community income. ">*307 ">*154 The only question is whether all of the income of the bottling business for the taxable periods is taxable to petitioners as community income.

The returns were filed with the collector for the first district of California.

These proceedings have been consolidated.

FINDINGS OF FACT.

W. H. Easley and Margaret A. Easley are husband and wife. They reside in San Francisco. They are the parents of two children, Wayne Hugh Easley, born on October 23, 1935; and Roger Kent Easley, born on February 5, 1937. On October 1, 1940, the children were about 5 and 3 years of age, respectively.

For convenience, W. H. Easley is referred to hereinafter as petitioner.

In 1934 petitioner and his wife owned a small retail liquor business. Petitioner, having become interested in a nonalcoholic drink called "7-Up," asked the owners, the Howdy Co. of St. Louis, Missouri, for the right to make and distribute the drink in the counties of San Francisco and San Mateo. In October 1934 petitioner entered into an informal arrangement with Howdy Co. to bottle and sell 7-Up. In 1935 he disposed of the liquor store. From 1934 until 1936 petitioner had the preparation bottled for him by a bottler and distributed">*308 for him by a distributing agency. During 1936 petitioner began to bottle and distribute the beverage himself. In 1936 he installed a bottling plant. In 1938 he moved the business to a larger plant, which has been occupied ever since. The plant is located in San Francisco.

Between 1934 and 1938 petitioner was given larger territory in which he distributed 7-Up, so that by March of 1938 he had the exclusive dealer distribution in eleven counties and in part of a twelfth county along and near the central coastal area of California. On March 21, 1938, petitioner entered into an agreement more formal than the 1934 agreement with the Seven-Up Co. of St. Louis, under which name the former Howdy Co. was then known. This agreement provided as follows:

We propose to set aside the following described territory for your sale and promotion of 7-Up and to sell no other bottler in said territory as long as you maintain a dealer distribution of not less than 50% of the active dealer outlets in said territory.

The Counties of San Benito, Santa Cruz, Santa Clara, San Mateo, San Francisco, Marin, Solano, Napa, Sonoma, Lake, Mendocino; also Monterey south to and including King City.

In consideration">*309 of this territory and the bottling privileges of 7-Up, you are to intensively sell 7-Up to the retail trade, give proper publicity to 7-Up on your trucks, other equipment and general advertising, and promote the sale of 7-Up in a business-like way. You are to use such bottles as may receive the okay of ">*155 this Company. You are to identify these bottles with proper labels and proper crowns. You are to bottle no other Lemon or Limes or combination of Lemon or Limes except 7-Up at any time. You are to maintain the prices of other 7-Up bottlers and to make no concession on prices, such as rebates, free goods, etc. You are to collect on delivery a proper deposit. You are to follow the standard directions for making syrup and bottling 7-Up.

There was no other written agreement with the Seven-Up Co. until May 1, 1943. Petitioner operated the business in 1940 and 1941 under the above written agreement and an oral understanding which was as follows: It was generally understood that petitioner was to have the territory for the sale and promotion of 7-Up as long as he and his organization were on the job and diligently promoted sales in accordance with instructions of the Seven-Up">*310 Co. and maintained their prices and bottled no other drink of a similar flavor and maintained a distribution of at least 50 per cent of all the available dealers in the territory. The object was to sell as much of 7-Up as possible. The Seven-Up Co. expected those to whom it gave territorial agreements to be active and diligent in selling the product within the area. The Seven-Up Co. set the prices at which the beverage could be sold. It set forth the methods for manufacturing the beverage out of basic ingredients which it sold to its distributors. It outlined the general sales plan, prepared the advertising material, and supplied sales manuals and all the technical information which is required in the business. All of the distributors followed a uniform pattern in operating their businesses within their territory and used the same advertising material. The distributors bought syrups and extracts from the Seven-Up Co.

Petitioner did not pay the Howdy Co. or the Seven-Up Co. any consideration for the territorial agreements, and prior to October 1, 1940, he did not pay any sum to any individual for the right to operate in any area. Petitioner developed the business of his Seven-Up">*311 Bottling Co. from an original investment of $ 500. From year to year, earnings were retained in the business and invested in plant and equipment. The assets of the business were acquired after petitioner was married.

Petitioner operated the business of Seven-Up Bottling Co. as a sole proprietorship.

On October 1, 1940, two trust agreements were executed by petitioner and his wife, which are referred to hereinafter, under which petitioner was the trustee. As of October 1, 1940, the business had been and was being conducted in the following way, with employees, and after the trust agreements were executed the business was conducted for the 15-month period ended December 31, 1941, in the same way: Petitioner was the director and manager of the business, making all contracts, hiring the employees, and deciding all matters of policy and business ">*156 procedure. He was in control of the business at all times. The business was practically a cash business. Petitioner had developed an efficient system of selling the product, so that in 1940 and 1941 much of the routine operations went on in an automatic way, and petitioner did not need to devote more than one-half of his time to">*312 personally attending to the business. He employed a bookkeeper, who was in charge of the office, assisted by a girl office worker; a route supervisor, who supervised most of the truck-driving salesmen; about 15 truck-driving salesmen; 1 sign painter and sign hanger; and 1 transport truck driver. In the plant, he employed 7 or 8 plant workers who did the work of bottling and preparing the beverage. He engaged an advertising firm to handle radio and newspaper advertising. He carried on an advertising program which comprised painting signs on buildings and hanging up metal 7-Up signs on stores handling the product. The beverage was bottled in San Francisco and distributed by truck throughout the territory. In later years, petitioner had bottling plants in Oakland and Vallejo.

Selling was the major element of the 7-Up business, and this was stressed by the Howdy Co. when it first gave a territory to petitioner in October of 1934. The Howdy Co. then advised petitioner: "A sales organization is necessary and this is, as we understand, where you shine."

Petitioner did not pay himself any fixed salary, but withdrew from a drawing account the funds he needed. His wife did not have ">*313 a drawing account in the period in question.

As of October 1, 1940, petitioner owned, in the 7-Up business, a bottling plant and the real estate where it was situated, about 16 automobiles and trucks, and bottling equipment and machinery, all of which had been purchased out of the prior earnings of the business. As of September 30, 1940, there was about $ 88,000 in the bank account of the business. The other assets were valued by petitioner at a total of $ 95,040.73, as follows: Real estate and building, $ 33,450; machinery and equipment, $ 24,520; autos and trucks, $ 11,591; inventories, $ 9,788; furniture and fixtures, $ 500; accounts receivable, $ 14,836.73; notes receivable, $ 355. The total liabilities were $ 12,876.11, consisting of accounts payable, $ 6,153.61, and contracts payable, $ 6,722.50.

On October 1, 1940, petitioner and his wife executed two trust agreements, identical in terms, which are incorporated here in their entirety by reference, one for the benefit of Wayne and the other for the benefit of Roger, under which petitioner was named trustee. Reciting that all of their property was community property and that they desired to create irrevocable trusts and to">*314 convey in trust a portion of their community property for the named beneficiaries, the settlors of the trusts granted to the trustee under each trust an undivided one-fourth ">*157 interest in the business conducted under the name of Seven-Up Bottling Co. of San Francisco, the said business consisting of the following assets and liabilities, according to the two trust agreements:

ASSETS
Real estate and building	$ 33,450.00
Notes receivable	355.00
Accounts receivable	14,836.73
Inventories	9,788.00
Autos and trucks	11,591.00
Furniture and fixtures	500.00
Machinery and equipment	24,520.00
Net current value of assets	95,040.73
LIABILITIES
Accounts payable	6,153.61
Contracts payable	6,722.50
Total liabilities	12,876.11
Net worth	82,164.62
	95,040.73

The trust agreements provided that the trustee was to hold the above property (the undivided interests therein) in trust, subject to the "terms, conditions, powers, and agreements hereinafter set forth." There was no reference to any cash in the business in the schedule of property set forth in the trust agreements. Just prior to October 1, 1940, all of the cash in the bank accounts carried in the name">*315 of Seven-Up Bottling Co. was transferred out of those accounts into a personal account in the name of petitioner W. H. Easley, leaving zero balances in the Seven-Up Co. bank accounts. The total amount of cash thus transferred to petitioner's bank account was $ 88,232.13. The commercial account of Seven-Up Co. was thereafter a depositary for the daily receipts of the business. From $ 50,000 to $ 75,000 cash was needed to operate the business.

On and after October 1, 1940, there were no other agreements or conveyances executed, until August 31, 1943, when a partnership agreement was executed under which petitioner's wife and his two sons became partners with him. However, Form 1065, "Partnership Return of Income," was filed for the last three months of 1940 and the year of 1941 in the name of Seven-Up Bottling Co., in which it was stated that the "Nature of the organization" was a "Joint venture" and that the names of the "partners" were W. H., Margaret, Wayne, and Roger Easley. In these returns one-quarter of the net income of the Seven-Up Bottling Co. for the periods covered was reported to be ">*158 the share of each of the above named persons. No partnership agreement was">*316 executed in 1940 or 1941.

When the trusts were created, the accountant then keeping the books of Seven-Up Co. opened one new capital account under the date of October 1, showing a net balance of $ 82,164.62, which was the same as the amount of net worth shown in the trust agreements of October 1. At the end of 1940, he credited this capital account with the amount of profit he computed for the last three months of 1940, $ 29,425.98, resulting in a total balance of $ 111,590.60. He noted on the ledger sheet the names of the two children, petitioner, and his wife, and the sum of $ 27,897.65 was set forth after each name. The accountant followed the same procedure at the end of 1941. He did not set up separate capital accounts for each person. There was only one drawing account carried on the books, which was in the name of petitioner.

In May 1943 petitioner engaged a new firm of accountants, and they then opened four separate capital accounts on the books of the Seven-Up Co., in the names of petitioner, his wife, the Roger Easley trust, and the Wayne Easley trust. Also, four separate drawing accounts were then set up for the first time.

On April 4, 1941, petitioner opened separate">*317 savings bank accounts for the trusts with a San Francisco bank. One account was entitled "W. H. Easley, Trustee for Roger K. Easley" and the other account was entitled "W. H. Easley, Trustee for Wayne H. Easley." On October 3, 1941, similar savings bank accounts were opened with another bank. During 1941 petitioner withdrew from Seven-Up Co. an aggregate of $ 18,855.55 for each trust, a total of $ 37,711.10, and deposited the sums withdrawn in the respective savings accounts which had been opened in his name as trustee for each trust. The above amount is exclusive of any taxes paid for the trusts. Since there were no drawing or capital accounts in the company's books for the trusts, these withdrawals were not charged to the trusts on the books, but a memorandum account was kept on the books entitled "Investment Account Trusts." No such withdrawals were made in the last three months of 1940. During 1941 petitioner withdrew from respective savings accounts in his name as trustee $ 2,500 (total $ 5,000) to purchase stock of Pacific Box Co. for the trusts. The certificates were issued in petitioner's name as trustee.

During 1941 petitioner withdrew from Seven-Up Co. through his ">*318 drawing account, $ 23,357.56. During the period, October 1, 1940, to December 31, 1941, the withdrawals of earnings of Seven-Up Co. were less than the earnings. Petitioner's wife did not make any withdrawals from the business.

">*159 When petitioner considered the creation of the trusts, he gave consideration to the effects on income and estate tax of transferring interests in the Seven-Up Co. business to the trusts.

On May 1, 1943, petitioner entered into another territorial agreement with the Seven-Up Co. of St. Louis, which contained the following clause:

7. No 7-Up extract, crowns or finished merchandise are to be sold, loaned or delivered to any other 7-Up bottler without the written permission of The Seven-Up Company, and Buyer shall not directly or indirectly sell or distribute 7-Up in any territory other than hereinbefore described. No contracts will be made with sub-bottlers, agents or distributors or anyone having to do with the bottling or selling of 7-Up without the written permission of The Seven-Up Company. This agreement, or any portion of the territory assigned hereunder may not be sold, assigned or transferred except with the written permission of The Seven-Up">*319 Company.

Petitioner and his wife filed gift tax returns, reporting gifts of property to the two trusts. Respondent determined a deficiency in gift tax upon his holding that the value of the gifts was $ 106,827.40, each. Deficiencies in gift tax were paid by petitioner and his wife in the amount of $ 4,140.92, each.

The trust agreements of October 1, 1940, contain provisions, inter alia, as follows:

Each trust is to continue until the beneficiary is 35 years old; but, in the event of his prior death, the trust will terminate upon his death; provided, however, that, if the settlors are both deceased when the beneficiary becomes 21 years old, the trust shall then terminate. Upon the termination of a trust upon the beneficiary's reaching a certain age, the trust assets are to be distributed to the beneficiary.

The trust agreements do not require the trustee to distribute trust income at any stated time or periodically to the beneficiaries. It is provided, however, that the trustee shall not expend or advance any sums whatsoever for the support, maintenance, education, or other expenses of the beneficiary until he reaches 21 years; and after such age is reached, the trustee may">*320 distribute all or part of the "Trust Estate" to the beneficiary "as he may deem, in his own absolute discretion, shall be for such beneficiary's best interest."

The powers of the trustee are broad. He can sell the property without approval of any court; exchange and reinvest property; hold property in his own name without disclosing his fiduciary capacity; determine what receipts and expenditures are to be charged to principal or income, make distributions of property at values determined by himself; and "generally do all things in relation to the trust funds which the settlors could do if living and this trust had not been executed."

">*160 The trustee is authorized:

To collect the principal of and income from said Trust Property as the same respectively become due and payable, or as expediency may require, and to give true full and legal receipt and discharge thereof * * *.

The Trustee may, at his sole discretion, advance such moneys as he deems necessary or advisable for the protection of the Trust Property, and said Trustee shall have a lien upon said Trust Property prior to the claim or claims of the Beneficiaries or any distributee hereunder, for any and all advances so ">*321 made, together with interest thereon at the rate of six (6) per cent per annum from the date of the advance until repaid.

* * * *

In any case in which the Trustee is required, pursuant to the provisions of this Trust, to divide any Trust Property into parts for the purpose of distribution, the Trustee is authorized and empowered, in the Trustee's sole discretion, to make such distribution in kind or partly in kind and partly in money, and for the accomplishment thereof to make such sales of the Trust Property as the Trustee may deem necessary, upon such terms and conditions as the Trustee shall see fit, and also to determine the relative values of any part or parts of the Trust Property.

In addition to and not in limitation of the foregoing the Trustee may, in his own absolute discretion, invest any part of the Trust Property in real property suitable for residential, agricultural, or grazing purposes; and the Trustee may manage, operate, and work said lands, plant crops, own, buy, and sell livestock, and construct upon said lands such dwellings, buildings, and other improvements as he may deem to be for the best interest of the Beneficiary and for the preservation and security of ">*322 the Trust Estate.

It is also provided that petitioner's wife shall succeed him as trustee if he ceases to serve for any reason.

The trusts are declared to be irrevocable, and they contain the following provision:

No assignment or order by the Beneficiary by way of anticipation of any part of his interest in the Trust herein created shall be valid. The interest of the Beneficiary in the subject matter of the Trust shall not be subject to the claims of his creditors and shall not be subject to attachment, execution, or other legal process or lien brought by or in favor of any creditor or creditors of the Beneficiary, and no allocation or assignment of any interest in the subject matter of this Trust shall be binding upon the Trustee; nor shall anyone who may deal with the Trustee be privileged or required to inquire into the necessity or expediency of any act of said Trustee or of any provisions of this instrument.

The net income of the Seven-Up Bottling Co., as reported in the returns filed on Form 1065 for three months of 1940 and for 1941, before adjustments made later by respondent, was $ 37,008.23 and $ 159,090.59. One-fourth of the net income for the tax periods set forth above">*323 was reported in each of four separate returns for both periods. Respondent has determined that all of the income of the business is taxable to petitioner and his wife as community income. He has determined that "no partnership status existed" between petitioner and the trusts.

">*161 Petitioners did not make bona fide transfers of undivided interests in the business which W. H. Easley conducted under the name of Seven-Up Bottling Co. Their grants under the trusts were restricted to interests in stated property which contributed little to the earning of income of the business. The income was produced primarily by the territory contract and the personal services of W. H. Easley. No interest in the territory contract was given to the trusts.

W. H. Easley retained complete dominion and control over the business and the income thereof. The execution of the trust agreements in 1940 effected no change in his original control.

OPINION.

The general question is whether, under section 22 (a) of the Internal Revenue Code, the entire income of the business known as Seven-Up Bottling Co. of San Francisco is taxable to petitioners. Petitioners contend that one-half of the income is taxable">*324 to two trusts.

Petitioners' contention is founded upon the claim that they conveyed to the trusts one-fourth interests in the business which petitioner W. H. Easley conducted as a sole proprietorship. The first question, therefore, is whether petitioner did effect transfers of interests in the business, the income of which is subject to tax. In the consideration of this question the nature of the business and Easley's relation to it are examined first. The facts relating to transfers of property to the trusts are considered thereafter.

The nature of the business: The heart of the business was the grant by the St. Louis company of a sales territory to Easley. He received an exclusive license to sell the product called 7-Up within several counties, which was given under a written contract. Without the contract there could not be any business operations. After the contract was obtained the business depended upon selling the product. The demand for the product had to be created. The beverage had competitors in the class of a bottled soft drink selling for 5 and 10 cents. The demand for 7-Up was a variable that responded to advertising the product and to the efforts of">*325 selling to and supplying retailers. The product was standardized and made up according to ingredients and the formula of the St. Louis company. The product was, for practical purposes, a ready-made item. The St. Louis company had arrangements with the makers of the bottles so that the design was established. The making of the beverage in a bottler's plant was standardized. All of this left as the prime function of the bottler and distributor the work of selling the beverage. The retention of a sales territory by a bottler depended upon his success in selling the product widely and in substantial quantities. Advertising ">*162 was part of the success of sales. Service to retailers was, no doubt, another important factor. And, since the product was sold by retailers to the public, another factor must have been reaching as many retailers in a sales territory as possible. A sales organization plus the contract giving a territory determined the size and existence of the business. In the taxable period, cash of $ 50,000 to $ 75,000 was required to operate the business. Plant and bottling equipment, although required, was utilized in proportion to the volume of sales. It ">*326 follows that the value of physical equipment as a factor in producing income was considerably less than the good will represented by customers, which, in turn, depended upon selling efforts. And, without the contract with the St. Louis company, the physical equipment of the bottling plant was not the prime factor in producing income; and its value would be only its market value.

Easley's relation to the business: Easley was given the sales territory and the license to sell within it because of his ability to sell and to build up a sales organization. He started the business with the small capital of $ 500. He built up a very profitable business having a substantial volume of sales through his personal skill in advertising, selling, and distributing the product. The contract with the St. Louis company was made with him personally. While the matter of assigning the contract did not arise in the taxable period before us, and it appears that the policies of the St. Louis company may not have been clear at that time on this point, it was clearly understood in 1934 that Easley was given a sales area because of his ability to build a sales organization, and in 1943 the St. Louis ">*327 company clearly specified that the territory agreement could not be sold, assigned, or transferred except with its written permission. Easley managed the business, determined its policies, developed the territory, and controlled all of the aspects of the business. He directed the advertising and made the advertising contracts. He operated the business as a sole proprietorship. He was efficient in developing an organization and then directing it so that the business went along in the later years, the years in question, without his constant personal service. His success in developing a good organization reduced his own hours of personal attention. But, nevertheless, he alone managed and directed the business. Without him, the business would not go on. The contract from the St. Louis company was one with him personally. It is unimportant, therefore, that in the taxable period he devoted only half of his time to the business. The business depended upon him and his ability to keep the territory contract with the St. Louis company.

The alleged transfers of interests in the business of two trusts: Easley did not purport to assign any interest in his territory contract to the">*328 trusts, and no mention thereof is made in the trust agreements. ">*163 The trusts received no interest in the territory contract with the St. Louis company under the grant to the trustee of the trusts. The grant to the trustee was limited to an undivided interest in the real estate and plant and other physical equipment which was listed, and in inventories, accounts receivable, and notes receivable of a total stated amount of $ 24,979.73. There is no evidence that any change of record was made in the title to the real estate described in the trust agreements, and the record indicates that no change of record was made. The business required from $ 50,000 to $ 75,000 cash for its operation and had about $ 88,232 in bank before the trust instruments were executed. Easley transferred the cash of the business to a personal account. The trust agreements state that the settlors grant "an undivided one-fourth interest in and to that certain business conducted by the Settlors under the name of Seven Up Bottling Company of San Francisco," and "That said business consists of the following assets and liabilities," namely, the real estate and building, equipment, and notes, accounts and">*329 inventories. Thus the first broad reference to the 7-Up business is at once qualified by the description of what the business consists. When the terms of the trust are scrutinized, it is obvious that petitioners did not make a bona fide grant of interests in the existing business, but made only a grant of an interest in some of the real and personal property which were part of the assets of the business, omitting a transfer of any interest in $ 88,232 of cash and of any interest in the contract which was the heart of the business. In fact, the gross value of the business in operation was far in excess of $ 82,164, the net value referred to in the trust agreements. The value of an established going concern had to include the cash asset, the value of the good will represented by the list of customers in a fairly large area, and the value of the territory contract. Undivided interests in such assets were not transferred to the trusts, and no reference at all was made in the trusts to them.

Also, while Easley purported to take into the existing business his two minor sons, through the instrumentality of two trusts of which he was the trustee, he did not make any agreement under which">*330 his personal control over the business and the earnings of the business was restricted in any way. For example, he did not restrict his power to use the earnings of the business in any way he saw fit; he had unlimited right to withdraw the earnings of the business through his personal drawing account in any amount; his withdrawals were not limited to a salary for his services. Under the trust agreements, the trustee was empowered to do all things in relation to the "trust fund" that would be done if the trust agreements had not been executed. For respective periods of 30 and 32 years, the trustee did not have to distribute any trust income to a beneficiary. The trustee could collect">*164 the trust income "as expediency may require." Taking together these factors, the absence of any restriction of Easley's control over the income of the business and of his power to withdraw or use such income as he saw fit, plus the power given to him in the trusts to deal with the "trust fund" in the same way that he could if no trusts were created, plus his discretion to collect income for the trust or not as "expediency" might indicate, plus the absence of the right of the trust beneficiaries">*331 to receive any income from the trusts until they were 35 years old, it can be concluded, only, that the creation of the trusts did not bring about any change in the relation of Easley to his established business, and did not bring about any change in the economic status of Easley or his wife.

According to the adjustments made by the respondent, the earnings of the business for the entire year 1940 were $ 140,483, and for 1941, $ 171,723. The earnings for the last three months of 1940 were $ 39,544. These earnings were from sales and they were the result of sales efforts and of the territory contract. The property described in the grant clause of the trusts did not produce these large earnings. The facts must inevitably take us to consideration of the doctrine of Lucas v. Earl, 281 U.S. 111">281 U.S. 111, and Burnet v. Leininger, 285 U.S. 136">285 U.S. 136, upon which respondent relies. Income is taxable to the person who earns it. Here, the insulation of a corporate entity does not surround Easley or the business he conducted. And he did not, in the trusts or by any agreement apart from the trusts, insulate himself from the entity of">*332 the business in any way; as, for example, by limiting his control over earnings to a fixed salary and by appointing some stranger to his enterprise as trustee for his minor children. No capital accounts were opened for the trusts, although such alone would not change the situation. The conclusion is that petitioner could not have a split personality for tax purposes, having the status of a coadventurer with himself in conducting a personal service business for himself as a taxpayer, and for trusts as taxable entities. The income of his business was not attributable in substantial part to property in which Easley could assign undivided interests in trust to his children.

Taking into consideration the nature of the business involved, the relation of the territory contract to the business, and the relation of Easley to the business, it is concluded that petitioners did not make bona fide transfers of undivided interests in the business, an established and going concern, to the trusts. At the most, petitioners made transfers only of interests in the plant, the bottling equipment, and some accounts receivable which were of little importance because most of the product was sold ">*333 for cash. We hold that the grants in the trusts were ineffective to transfer interests in the business to the ">*165 minor children in trust. The question relates to taxation of the income of the business. Since interests in the business were not effectively transferred to the trusts, the entire income of the business for the years 1940 and 1941 is taxable to petitioners. The creation of the trusts was no more than an abortive attempt to make the minor sons of petitioners joint venturers with them in the conduct of a business which was a personal enterprise of Easley. Such attempt had no business purpose; it was an arangement by which the income of a successful business was to be reallocated within the family group. That which was done can not be given effect for purposes of the income tax.

Petitioners point out that they filed gift tax returns in 1940 and paid deficiencies in gift tax. The fact that respondent took the position that gift tax was due and the fact that gift tax was paid does not relieve petitioners from their liability for income tax on the income of the business itself. If the respondent has taken inconsistent positions with respect to the gift tax and the">*334 income tax liability of petitioners under the facts in these proceedings, that alone can not be determinative of the question at issue here.

Respondent's determination is sustained.

Decision will be entered for the respondent.