Jackson v. Commissioner ( 1952 )

Hugh C. Jackson, Petitioner, v. Commissioner of Internal Revenue, Respondent

Jackson v. Commissioner

Docket No. 21207

United States Tax Court

19 T.C. 133; 1952 U.S. Tax Ct. LEXIS 56;

November 6, 1952, Promulgated

---

Decision will be entered for the respondent.

Family Partnership -- Husband and Wife -- Wife not Recognized. -- The evidence does not establish that the wife of the petitioner, the petitioner, and others intended to enter into a contract of partnership in 1939, or in 1943, by which the petitioner's wife would become a partner in an established partnership of which the petitioner was a member. Accordingly, it is held: That the wife of the petitioner was not a partner in a partnership, in which he was a member, during the taxable years 1943 and 1944, and that the petitioner is taxable on a four-ninths share of the partnership income for 1943 and 1944, none of which is taxable to petitioner's wife.

Bayley Kohlmeier, Esq., and George H. Koster, Esq., for the petitioner.

T. M. Mather, Esq., for the respondent.

Harron, Judge.

---

HARRON

The Commissioner has determined deficiencies in income tax for 1943 and 1944 in the amounts of $ 9,342.01 and $ 5,371.41, respectively. The only issue for decision is whether the Commissioner erred in determining that the petitioner's wife, Ada Jackson, could not be recognized as a partner for tax purposes, and that partnership income credited to her is taxable to the petitioner.

FINDINGS OF FACT.

The petitioner and his wife, Ada Jackson, resided in Syracuse, Kansas, during the taxable years 1943 and 1944. At the time of the trial of this proceeding, they resided in California. They were married in 1936, and their three children were born in 1940, 1941, and 1943.

In 1929, the petitioner's father, Ray Jackson, was vice president and part owner of Thomas Monohan Company of Syracuse, Kansas, which was engaged in the business of dealing in broom corn; and, also, he was a broom corn broker. The petitioner, at one time, was employed by the Monohan Company. Ray Jackson actively engaged in the business of the Monohan Company until 1940, when he then sold his interest in Monohan Company, and engaged in a broom corn brokerage business of his own.

Prior to 1929, the petitioner speculated in wheat and accumulated about $ 1,500. In 1929, he leased wheat farming lands near Syracuse, the rental of which was 25 per cent of the crops raised. The petitioner invested his savings of $ 1,500 in this venture. His father assisted him in his undertaking by loaning funds and helping him obtain the lease, but otherwise he did not participate in the farming operations. In February 1930 the petitioner and his father leased additional land, 2,500 acres southwest of Syracuse, and the petitioner's brother, Ray Jackson, Jr., participated in this venture by giving his time and services; he had very little money. He was killed in the war in Spain in 1938. The farming operations thus undertaken in 1929 and 1930 by the petitioner and his father were continued up to and including the taxable years. The business was financed, in part, through bank loans and loans by Ray Jackson. In 1930, the petitioner established a line of credit with the Valley State Bank in Syracuse, and a bank account in the name of Jackson Brothers was maintained there up to 1945 or 1947. The name of the account was changed to Ray Jackson and Sons after 1947. The amounts of the bank loans varied, depending upon each year's operations. In addition, the petitioner received Department of Agriculture Conservation payments.

By 1940, the petitioner was farming about 7,000 acres of leased wheat lands. During 1940, he went into the business of raising sheep. He purchased 1,378 lambs. He obtained a loan, as an individual, from the Garden City Production Company and used $ 1,500 cash in making this purchase. Petitioner's account with Garden City Production Company remained in his name only until 1943 when the account was changed to the name of Ray Jackson and Sons. Ray Jackson was not acquainted with the sheep raising venture, and the petitioner managed that venture. In 1941, he purchased a band of 1,600 ewes for about $ 12,000, of which amount he paid $ 2,500 in cash. The sheep raising venture was very profitable. In 1942, the petitioner's chief interests were wheat farming and sheep raising. However, an interest in a drug store in Syracuse was purchased in 1942 for $ 3,000.

Prior to 1942, the petitioner did not keep any accounting records for the business operations in which he was engaged. At the end of each year, the petitioner and his father figured how much money the father had advanced during the year and how much was due him. He was repaid his advances of funds.

During the years 1929 up to 1943, there were three or four written partnership agreements under which Ray Jackson, the father, and the petitioner were partners, and petitioner's brother until after his death. The agreements set forth the respective interests of the three partners, the rights, duties, and salaries. From time to time the partnership agreements were modified. The written agreements are no longer in existence. The petitioner sometimes referred to the venture as his "farm account." There was a written partnership agreement under which business was conducted in 1939. Under these agreements, the petitioner, as well as his brother, agreed to carry on farming operations, and petitioner's father was inactive as he had his own business. The interests of the partners were equal. ^{*135 were drafted by the petitioner's father and were quite short. The petitioner's wife, Ada Jackson, was not mentioned in any of the agreements. The venture was known at first as Jackson Brothers, and, later, as Ray Jackson and Sons.}

Partnership income tax returns, Form 1065, were filed for Ray Jackson and Sons for 1939, 1940, 1941, and 1942. Each return was sworn to and subscribed by the petitioner. The petitioner swore to the correctness of each return and to the facts about the members of the partnership and their respective interests. The wife and daughter of petitioner's father, Ray Jackson, are Nellie and Dorothy Jackson. The petitioner swore to the fact that the members 1939Ray Jackson1/3Ray Jackson, Jr1/3Hugh Jackson1/31940Ray Jackson1/2Hugh Jackson1/21941Ray Jackson and Nellie Jackson4/9Dorothy Jackson1/9Hugh Jackson4/91942Ray Jackson2/9Nellie Jackson2/9Dorothy Jackson1/9Hugh Jackson4/9

Although the petitioner learned on April 1, 1938, that his brother had been lost in action, the brother was reported in the partnership income tax return for 1939 as a partner or member of the venture in 1939. The petitioner's wife, Ada Jackson, was not reported in the partnership returns to be a member of the partnership in any of these years. The petitioner filed a joint income tax return for himself and his wife for the years 1939, 1940, 1941, and 1942.

In the partnership returns for 1939, 1940, 1941, and 1942, the profits of Ray Jackson and Sons were reported as follows:

1939	$ 954.23
1940	5,743.42
1941	31,179.58
1942	67,136.04

The assets of Ray Jackson and Sons in 1941 and 1942 amounted to $ 42,844.07 and $ 54,382.93, and they were as follows:

	1941	1942
Cash in bank	(not shown)	$ 274.78
Seed, feed, coal	$ 800.00	500.00
Sheep	30,000.00	39,518.01
Machinery and equipment	6,244.07	7,551.02
Trucking account	0	527.25
Drug store income	0	277.25
Federal farm payments	5,000.00	3,000.00
Wheat, milo, barley	800.00	0
Granary buildings		2,234.44
Land		50.00
Mineral and oil rights		450.00
	$ 42,844.07	$ 54,382.93

In 1942, the gross receipts of Ray Jackson and Sons from sheep, wool, farm operations, rents, Federal farm payments, and miscellaneous totalled $ 136,545.88; costs and expenses, and inventory at the beginning of the year amounted to $ 120,364.11; inventory at the end of the year was $ 51,973.71; and net farm expense was $ 68,990.40. Gross profit and net income were, respectively, $ 67,555.48 and $ 67,136.04.

In 1942, for the first time, the petitioner opened a simple set of books for the business known as Ray Jackson and Sons, in which he kept records of receipts, expenditures, loans, withdrawals, and so forth, according to the so called synoptic method of accounting. Included in this accounting record was a single "capital" account which showed the balance of capital and accumulated earnings as of January 1, 1942, in the amount of $ 27,489.31. There was no record showing the amount or amounts of original capital contributed or accumulated surplus. The account called "capital" represented or included accumulated earnings. No individual capital accounts were set up as of January 1, 1942, or thereafter, in the names of members of the firm. At the end of 1942, the net capital and assets of Ray Jackson and Sons amounted to $ 75,547.40. (Ex. 17)

At the end of 1933, Ray Jackson and Sons had discharged all of its indebtedness. Wheat farming operations were profitable in 1931, 1932, and 1933. Because of the drought and dust storms, farming operations were poor during the years 1934 to 1937. Profits in 1938 did not exceed $ 2,000. In 1938 and 1939, the petitioner carried on farming operations on 5,000 acres of leased land near Syracuse. In March 1939, Ray Jackson and Sons owned the following equipment: A Case tractor, a Lister, a One-way, an Avery combine, a rod wheater, a drill, a pick-up truck, a Chevrolet automobile, and other miscellaneous equipment. In March 1939 the petitioner and his father acquired for the business a large caterpillar truck, a diesel tractor, and two One-ways to pull behind the tractor. The tractor cost about $ 2,500 on which a down payment of $ 500 was made. During 1939, the bank balances of Ray Jackson and Sons in the Valley State Bank ranged from a low of $ 67.25 in January to a high of $ 2,266.39 in August. During 1939, wheat was selling for 60 and 65 cents a bushel, cash on delivery. Ray Jackson and Sons harvested wheat crops in the autumn of 1939. The Department of Agriculture crop payments for 1939 (received in 1940) amounted to about $ 4,200 which the business received. During 1939, Ray Jackson and Sons purchased about $ 3,700 of farm equipment.

In June 1939 Ada Jackson owned a Ford automobile which she had acquired prior to her marriage to the petitioner in 1936, and the value of the automobile was then about $ 600. The petitioner was in need of a truck to haul grain and he was short of cash. He located a used truck. Ada Jackson was willing to let the petitioner have her 1936 Ford car to turn in as part payment for the used truck. The petitioner told Ada Jackson that he would give her one-half of his interest in the Ray Jackson and Sons partnership if she would turn her car over to him. The petitioner told his father about the arrangement. However, although Ada Jackson turned over her Ford car to the petitioner in June 1939, the petitioner did not make any assignment or conveyance to her of one-half of his one-third interest in the partnership; the existing partnership agreement was not changed so as to make Ada Jackson a member of the partnership; no new written partnership agreement was executed making her a member of the partnership; no bookkeeping entry of any kind was made to show that she had made any contribution of capital to the partnership in 1939; and neither the petitioner nor his father represented to their bank or to any business contacts during 1939, or thereafter, that Ada Jackson was a partner in Ray Jackson and Sons. It was not until 1943 that the petitioner made any assignment to Ada Jackson of any part of his interest in the Ray Jackson and Sons partnership.

Under an agreement dated January 2, 1943, the petitioner gave and assigned to Ada Jackson one-half of his interest in the partnership, which was then a four-ninths interest. The execution of the agreement of January 2, 1943, constituted the first assignment and conveyance to Ada Jackson by the petitioner of any part of his interest in the partnership. The conveyance and assignment which the petitioner made to Ada Jackson in 1943 did not make any reference to any prior agreement of any kind, oral or otherwise, and no reference was made to any transaction involving her 1936 Ford car. The assignment in 1943 was made subject to specified "conditions, restrictions, and limitations." The entire written agreement was as follows:

This agreement made and entered into this 2nd day of January, 1943, by and between Hugh C. Jackson, of Syracuse, Kansas, hereinafter called the husband, and Ada Jackson of Syracuse, Kansas, hereinafter called the wife.

Witnesseth, that the parties hereto, being husband and wife, and desiring to make a full, complete and final settlement of their property rights do agree by and between themselves as follows:

The husband does hereby give and grant to the wife an undivided one-half (1/2) interest in and to the four-ninths (4/9) interest which he owns in the partnership named "Ray Jackson and Sons", to be her own separate property and to be subject to the conditions, restrictions and limitations as hereinafter set out.

And the wife does hereby accept an undivided one-half (1/2) interest in the four-ninths (4/9) interest of the husband in said partnership, or a total of two-ninths (2/9) interest in said partnership, in lieu of all rights in and to the property of her husband by reason of the marriage relation, and subject to the conditions as hereinafter set out.

And it is understood and agreed by and between the parties hereto that the two-ninths (2/9) partnership interest herein granted to the wife shall be a property interest only and shall not give to or confer upon the wife any voice, authority or control in the management or supervision of said partnership, it being the purpose and intent of this agreement that the wife shall have an absolute two-ninths (2/9) interest in all the property and assets of the partnership and the right to that portion of the profits therefrom whenever such profits are or may be distributed among the partners. That said interest is in lieu of all rights under and by reason of the marriage relation including the right to support and maintenance and the husband is hereby relieved of the obligation to support and maintain the wife. And it is further agreed that each of the parties hereto shall and do hereby waive the right to inheritance from the other, this agreement being a full, complete and final settlement of all property rights which either of the parties hereto may have by reason of the marriage relation.

After January 2, 1943, an agreement (which had been drafted by the petitioner and his father) was executed by Ray, Dorothy, and Nellie Jackson, and Hugh and Ada Jackson, which is as follows:

PARTNERSHIP AGREEMENT

THIS AGREEMENT made and entered into this 1st day of January, 1943, by and between RAY JACKSON, HUGH C. JACKSON, NELLIE JACKSON and ADA JACKSON, all of Syracuse, Kansas, and DOROTHY L. JACKSON of Chicago, Illinois, Witnesseth:

THAT Whereas the parties hereto are owners of the partnership of RAY JACKSON AND SONS with headquarters at Syracuse, Kansas, and that the ownership of said partnership is vested in the parties hereto as follows:

Ray Jackson owns an undivided 2/9 interest.

Hugh C. Jackson owns an undivided 2/9 interest.

Nellie Jackson owns an undivided 2/9 interest.

Ada Jackson owns an undivided 2/9 interest.

Dorothy L. Jackson owns an undivided 1/9 interest.

IT IS AGREED by and between all the parties hereto that said partnership shall carry on a general farming and livestock business and deal in hay, grain, fruit and vegetables.

IT IS FURTHER AGREED that HUGH C. JACKSON shall be the manager of said partnership business at a salary of $ 200.00 per month plus all personal expenses connected with the business. It is further agreed that in the event that said HUGH C. JACKSON becomes incapacitated to act as such manager or for any reason refuses to act, that said RAY JACKSON shall be [sic] automatically become the manager at same salary and under the same conditions. It is further agreed between all the parties hereto that the management of said partnership will at all times vest in either said HUGH C. JACKSON or said RAY JACKSON unless this contract be changed by approval of all parties hereto and it is further agreed that should any party hereto make disposal of his or her interest in this partnership by sale or gift or otherwise, that the disposal is subject to all the terms and conditions of this contract.

IT IS FURTHER AGREED that the funds of said partnership will be distributed according to the majority vote of the membership of said partnership.

In connection with the execution of the partnership agreement of January 1, 1943, the books of Ray Jackson and Sons were not closed and capital accounts in the names of each of the persons who executed the agreement were not opened, and none existed during 1943, 1944, and 1945. The books of account of Ray Jackson and Sons did not show the contributions of capital to the business by any person.

In 1946, an agent of the Bureau of Internal Revenue made a written audit report dated November 14, 1946, on the income tax returns of the petitioner for 1942, 1943, and 1944, which is the basis of the determinations of the deficiencies for 1943 and 1944 which have given rise to this proceeding. The agent determined that the wives of Ray and Hugh Jackson were not bona fide partners. The agent's report was forwarded to the petitioner under a transmittal letter dated January 10, 1947. The petitioner received the agent's report.

For the first time, individual capital accounts were set up on the books of Ray Jackson and Sons on December 31, 1946, as of January 1, 1946, for the individuals who were claimed to be members of the business venture. The opening of individual capital accounts in 1946 represented the first capital account in the name of the petitioner's wife, Ada Jackson. At no time prior to the time in 1946 when an individual capital account was opened in her name was there a capital account in her name on the books of Ray Jackson and Sons.

At all times the petitioner has made withdrawals from the funds of the business. When he opened a set of accounts for the business in 1942, an account was opened entitled "Hugh Jackson." He withdrew in each of the years 1942, 1943, and 1944, respectively, $ 14,365.63, $ 15,727.27, and $ 14,077.67. He was allowed a salary of $ 2,400 in each year, and a bonus of $ 5,000 at the end of 1943. Also, an account entitled "Loans & Exchange" was set up in 1942 in the accounting record of the business. In this account disbursements to Ray Jackson, Nellie Jackson (his wife), and Dorothy Jackson (his daughter), and reimbursements to the business were entered, in the manner of a running account. In 1943 and 1944, for the first time, entries were made in the "Loans & Exchange" account charging Ada Jackson with the amounts of checks of Ray Jackson and Sons.

During 1943 and 1944, checks of Ray Jackson and Sons were issued each month to Ada Jackson for household expenses in amounts ranging from $ 100 to $ 200 each month. The checks so issued amounted to $ 2,525 during 1943, and $ 7,059.02 during 1944. Ada Jackson for the first time filed separate income tax returns for 1944 and 1945, in which she reported as income taxes due for those years, $ 1,158.40 and $ 3,016.65. During 1944, $ 2,500 was paid on her income tax for 1944.

The only persons who could sign checks drawn against the bank account of Ray Jackson and Sons during 1943 and 1944 were the petitioner and Ray Jackson.

The petitioner and Ray Jackson, at all times, exercised complete control over the earnings and funds of Ray Jackson and Sons, and over withdrawals and disbursements. The petitioner's judgment, on the whole, determined the uses which were made of its funds.

When the partnership agreement dated January 1, 1943, was executed, no new capital was contributed to Ray Jackson and Sons; Ada Jackson did not contribute any capital. Ada Jackson did not contribute any personal services to or participate in any substantial way in the conduct of the business of Ray Jackson and Sons during 1943 and 1944, or in any prior year. She did not contribute any capital to Jackson Brothers or Ray Jackson and Sons at any time prior to 1943. There was no change in the operation and management of Ray Jackson and Sons during 1943 and 1944; the business was conducted in the same way as had been done in prior years by the petitioner and Ray Jackson, and in the conduct of the business the petitioner was the active participant.

During 1943 and 1944 the business of Ray Jackson and Sons comprised wheat and grain farming, the raising of sheep and the production of wool, the operation of a telephone system in Syracuse and Johnson, Kansas, and a trucking business. During 1943, Ray Jackson and Sons purchased a ranch in Wallace County of 2,880 acres, and a one-half interest in another ranch of 3,720 acres in Greeley County. The deed to the Greeley County property was taken in the name of Ray Jackson. Also, the Border Telephone Company at Syracuse was purchased for $ 45,000 in cash. There were two pieces of property -- one in Syracuse and one in Johnson -- on which the telephone company buildings were located. One piece of property was purchased in petitioner's name, and the other was purchased in his father's name. Ray Jackson operated and managed the telephone company in 1943 and 1944. In 1943, Ray Jackson and Sons had an interest in a drug store business in Syracuse. The interest was sold in 1943 for about $ 6,600. In 1944, Ray Jackson and Sons invested in a drug store business in Gillette, Wyoming, and began the construction of a grain elevator.

The assets, liabilities, and capital of Ray Jackson and Sons as of January 1, 1943 and 1944, were as follows:

	1943	1944
Assets	$ 75,547.40	$ 106,672.90
Liabilities	0	5,000.00
Capital	75,547.41	101,672.90

The gross receipts, gross profit, and net income of Ray Jackson and Sons for 1943 and 1944 were as follows:

	1943	1944
Gross receipts	$ 216,486.88	$ 171,219.60
Gross profit	71,790.99	62,835.60
Net income	71,145.27	62,835.60

At the end of each year, inventory amounted to $ 45,224.46 and $ 56,517.51.

As of June 9, 1943, the assets, liabilities, and net worth of Ray Jackson and Sons, as set forth in its financial statement to the Valley State Bank of Syracuse, Kansas, were as follows:

ASSETS
Cash	$ 4,000
Livestock and sheep	36,390
Wallace County ranch	27,200
Granaries & machinery	20,000
Wheat and grain	3,500
Interest in drug store	3,500
Trucking business	1,400
Paid up insurance	5,500
War bonds	5,000
Notes receivable	900
	$ 107,390
LIABILITIES
Mortgage on ranch	$ 34,800
Notes	5,000
Accounts payable	500
Total	$ 40,300
Net worth	67,090
	$ 107,390

The development of the business of Ray Jackson and Sons has been due chiefly to the efforts, skill, and management of the petitioner with the assistance of Ray Jackson, bank loans, and Department of Agriculture crop payments. Good weather and favorable market prices have been contributing factors.

During 1939, the petitioner and Ray Jackson were the only living members of the Ray Jackson and Sons partnership, as was reported in the partnership income tax return for that year. The petitioner and Ray Jackson did not truly intend to join with Ada Jackson in 1939 in the present conduct of a partnership business in good faith and with a business purpose. Ada Jackson did not intend to become a partner in 1939; and she did not make a contribution of any capital to the Ray Jackson and Sons partnership in 1939; and she did not have, in 1939 or thereafter, any interest as a partner in the Ray Jackson and Sons partnership, or control over any of its assets or income in 1939, or thereafter.

The petitioner and Ray Jackson, in 1943 and 1944, did not intend to join with Ada Jackson, as partners, in the present conduct of the business known as Ray Jackson and Sons, in good faith and with a business purpose; and Ada Jackson did not intend to enter a business partnership as a partner. Ada Jackson, at the beginning of 1943, was not a partner in Ray Jackson and Sons. None of the capital of Ray Jackson and Sons at the beginning of 1943 represented outgrowth of any capital as allegedly contributed in 1939 of Ada Jackson. Ada Jackson did not have control over a two-ninths interest in the partnership known as Ray Jackson and Sons, as a partner during 1943 and 1944. She was not a bona fide partner in the Ray Jackson and Sons partnership in any of the years from 1939 to and including 1944 for purposes of Federal income tax.

OPINION.

The question to be decided is whether the petitioner's wife was a partner in the Ray Jackson and Sons partnership during the taxable years 1943 and 1944, owning a two-ninths interest in the partnership. The issue arises under sections 181, 182, 11, and 22 (a) of the Internal Revenue Code.

The respondent has determined that Ada Jackson was not a partner. The petitioner asserts that she was a partner.

The burden of proof is on the person asserting the existence of a partnership to prove it by competent evidence. Swanson v. Siem, 12 P. 2d 1053 (Calif.); and, generally, stricter proof is required of the existence of a partnership between members of the same family than is required of the existence of a partnership between strangers. Cole v. Cole, 212">286 N. W. 212 (Mich.); Uniform Partnership Act, sec. 7, notes 114, 120, pp. 42, 44, 45. Whether a person is a partner in a partnership is, on the whole, a matter of fact. Townsend v. Appel Sons, Inc., 164 A. 679">164 A. 679 (Md.). In general, "the facts and circumstances of the individual case must control," 40 Am. Jur. 146, sec. 32; and all related circumstances must be considered, Eggelston v. Eggelston, 47 S. E. 2d 243 (N. C.). Intent is a widely accepted test of whether a partnership exists. 40 Am. Jur. 156, sec. 43.

The question is whether, considering all of the facts, "the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise." ^{Commissioner v. Culbertson, 337 U.S. 733.}

The evidence in this proceeding establishes that a business was conducted by a partnership under the names of Jackson Brothers, and, later, Ray Jackson and Sons prior to 1943, and that the petitioner, Hugh, and his father, Ray, were partners in the partnership. There is testimony that written partnership agreements were executed during the period 1929 through 1942, which were drafted by petitioner's father. None of these written agreements were produced in evidence by the petitioner. There is testimony that Ada Jackson never was a party to any written partnership agreement executed prior to 1943. Corroborative of the testimony that, prior to 1943, there were several partnership agreements, in which Ada was not a partner, are the partnership income tax returns for the years 1939, 1940, 1941, and 1942, in which the number of partners, the individuals, and their respective interests were set forth. In each of the above years the number of partners and their respective interests changed, except that in 1941 and 1942 the interest of the petitioner, Hugh Jackson, was stated to be a four-ninths interest. The petitioner, Hugh, swore to the correctness of the partnership returns for the years 1939 through 1942. Ada Jackson was not a partner during the period 1939 through 1942, according to the petitioner's sworn statements set forth in the partnership returns for that period.

"In the typical contract of partnership the parties expressly agree to unite their property and services as coproprietors to carry on a business for a profit and to share the profits and losses in stated proportions." 40 Am. Jur. 145, sec. 32. In this proceeding, since there were written partnership agreements prior to 1943, and since the partnership returns reported the names of the partners, and their proportionate interests, it is difficult to understand how the petitioner can now assert that we should go outside such evidence, testimony about written partnership agreements, and the partnership returns for the years 1939-1942, to find out whether Ada Jackson was a partner prior to 1943. ^{*83 But even if we do so, the conduct of the parties and the facts and circumstances existing, as far as we know, prior to 1943 do not support petitioner's contention that Ada Jackson was a partner prior to 1943. For example, during the period 1939-1942, neither the petitioner nor his father represented to their bank or to any other business contacts that Ada Jackson was a partner; and during this period she did not participate in the profits of the business in which Hugh and Ray Jackson were partners. Since the sharing of profits is evidence of a partnership when the participant is a principal in the business from which the profits are derived, and when the persons who manage the firm business and actually carry on the business do so as agents for the principal or principals, 18 L. R. A. (NS) 1013; 40 Am. Jur. 148, sec. 34; Meehan v. Valentine, 145 U.S. 611">145 U.S. 611, and since Ada Jackson did not share in the profits of the business as a principal, during the period 1939 through 1942, White v. Commissioner, 172 F.2d 629">172 F. 2d 629; cf. Evan v. Quinn, 26 B. T. A. 970. Also, when in 1943, the petitioner entered into a property settlement agreement with Ada Jackson, which is set forth in the Findings of Fact, he undertook to give her an undivided one-half of his four-ninths interest in the partnership named Ray Jackson and Sons. That agreement is evidence that during 1939, 1940, 1941, and 1943, Ada Jackson did not own any interest in the partnership, and that petitioner continued to own his four-ninths interest. Furthermore, when the petitioner opened a set of books for the Ray Jackson and Sons partnership in 1942, for the first time, no entry was made to show that Ada Jackson had contributed any capital to the partnership.}

The petitioner asserts that his wife, Ada, actually contributed her personal property to the Ray Jackson and Sons partnership in 1939, a 1936 used car having a value of about $ 600, and he asserts, also, that circumstances existed at the time which established that the partnership was in financial distress, needing equipment but lacking cash or credit. The petitioner relies upon testimony of members of his family to corroborate these assertions, that of his wife and his father. Even if we accept such testimony as establishing as fact that Ada Jackson had a used car and that it was traded in for a used truck which was used by the partnership, the entire record in this proceeding leaves us in great doubt about the contention that she intended to or actually did contribute her property, the car, to the partnership in payment for a partnership interest therein in 1939. Furthermore, the tenor of the evidence does not confirm petitioner's picture of dire financial distress in 1939. During 1939, the partnership purchased about $ 3,700 of farm equipment. It had wheat crops planted which were harvested in the autumn of 1939, and it was entitled to receive Department of Agriculture crop payments. The petitioner testified in this proceeding (Tr. pp. 23, 24, 25) that bank credit was available when crops were growing; that his father, Ray Jackson, made loans to the partnership; and that he signed notes for buying machinery and equipment, and then the partnership "would pay out on it." At least, there are conflicts between petitioner's testimony that in desperation he prevailed upon his wife, in 1939, to turn over her car in trade for a truck, having no other way of getting that item of equipment -- the truck -- and his testimony that his father endorsed notes for equipment which the partnership paid when it sold its crops, and the testimony that the partnership had crops which were harvested in the autumn of 1939, and that the partnership was able to buy about $ 3,700 of equipment in 1939. The actuality of the alleged circumstances is made doubtful by testimony from which an inference can be drawn that the partnership was not in such strained circumstances that it could not have purchased the used truck without Ada's aid in turning in her used car for the truck. We are not persuaded that the testimony about a transaction involving a trade-in of Ada's used car for a used truck in 1939, is entitled to substantial weight in determining whether in 1939 she made a capital contribution to the partnership with the intent of becoming a partner, and in payment for a partnership interest. See Kingana Co. v. Beall, 42 App. D. C. 487; Beak v. Finkenbiner, 12 App. D. C. 23; Balestrieri & Co. v. Commissioner, 177 F. 2d 867; Rand v. Helvering, 77 F. 2d 450; Quock Ting v. United States, 140 U.S. 417">140 U.S. 417; Carmack v. Commissioner, 183 F. 2d 1; William B. Cruise, 12 T. C. 1059; Ben R. Meyer, 45 B. T. A. 228; Evan v. Quinn, supra.Testimony to the effect that in 1939, Ada made a capital contribution to the partnership for an interest therein is self-serving; and in view of the facts discussed above, i. e., the absence of any reference to her in agreements or partnership returns as a partner, the assertion that she intended, in 1939, to become a partner and to contribute capital for an interest in the partnership is doubtful, improbable, and unconvincing.

On all of the record, it has been found as a fact, therefore, that Ada Jackson did not make a contribution of any capital to Ray Jackson and Sons partnership in 1939, and that in 1939 she did not intend to become a partner.

We come now to the events which occurred in 1943, namely the execution of the property settlement agreement by the petitioner and Ada, and the execution of another so called partnership agreement which recited that Ada Jackson owned an undivided two-ninths interest in the partnership of Ray Jackson and Sons. On brief, the petitioner argues, in part, as follows: "The agreements executed in 1943 were for the purpose of reducing the oral agreements to writing and specifically setting forth in writing the interests of the partners. The written agreement executed by petitioner and his wife in 1943 was of broader scope than their oral agreement of 1939 but it was based upon the original consideration and was so intended and understood by the parties. There may be some doubt with regard to the exact legal classification of the interest of Ada Jackson during the interval between the contribution of the car and the execution of the written agreement, but there can be no doubt the parties understood that Ada Jackson had an interest in the partnership and its earnings and accumulations during that period." In the above argument the petitioner refers to an oral agreement he made in 1939 that he would give Ada one-half of his interest in the partnership of Ray Jackson and Sons; and, as we understand it, "consideration" refers to the Ford car owned by Ada.

The petitioner in this proceeding relies, inter alia, upon Weizer v. Commissioner, 165 F. 2d 772; and Felix Zukaitus, 3 T. C. 814, but the facts here distinguish this proceeding from those cases. As we understand petitioner's entire contention and argument, he makes the assertion that Ada became a partner in 1939 by contributing capital to the partnership, her car, but that he delayed, and his father delayed, until 1943, giving formal recognition to her membership in the partnership, and then, in 1943, in recognition of her 1939 contribution, they formally recognized her as a partner in the so called written partnership agreement of January 1, 1943. ^{*147 should be considered relating to an oral agreement of petitioner in 1939.}

We think that the property settlement agreement of January 2, 1943, is clear and unambiguous, and that it must be considered in this proceeding as sufficient according to its terms. It states the consideration given by Ada for one-half of petitioner's four-ninths interest in the Ray Jackson and Sons partnership, namely, that such interest is "in lieu of all her rights in and to the property of her husband by reason of the marriage relation." We cannot agree to petitioner's argument that we should go outside the terms of the property settlement agreement and find as a fact that a used, 1936 Ford car owned by Ada Jackson was the consideration received by petitioner from her one-half of his four-ninths interest in the partnership. *91 The last paragraph of the agreement, which we need not re-quote here, clearly provides that the two-ninths of petitioner's four-ninths interest in the partnership given to Ada," shall be a property interest only," giving Ada only a two-ninths interest in the property of the partnership and a two-ninths interest in the profits, whenever such profits are distributed; and that the interest is in lieu of all rights under the marriage relation, including the right to support and maintenance, and the right of inheritance. We conclude that in entering into the property settlement agreement in 1943, Ada did not intend to become a partner, and that the property settlement agreement did not make Ada Jackson a partner in the Ray Jackson and Sons partnership. Mitchel v. Bowers, 15 F. 2d 287; Burnet v. Leininger, 285 U.S. 136">285 U.S. 136; Floyd D. Akers, 6 T. C. 693; Simmons v. Commissioner, 164 F. 2d 220; W. Stanley Barrett, 13 T. C. 539, affd. 185 F.2d 150">185 F. 2d 150.

Having rejected petitioner's contention that, in fact, Ada was a partner during the period 1939 through 1942, the foundation of his argument regarding the effect of the property settlement agreement and the so called partnership agreement, both executed in 1943, collapses. But apart from that, if petitioner were relying solely upon the 1943 agreements, and he relies upon them to a large extent, we must recognize certain tests, namely, that the mere fact that an agreement gives another person the right to share in the profits of a partnership does not create a partnership, or make the other person a partner. Fenwick v. Unemployment Compensation Commission, 44 A. 2d 172 (N. J.); and the sharing of partnership profits must be as a principal, Meehan v. Valentine, supra.Under the property settlement agreement, Ada was to share in the profits of the firm, when distributed, in lieu of support and maintenance. In the Uniform Partnership Act, section 7, it is stated that no inference is to be drawn from sharing in profits that the person so sharing is a partner, if payment of a share of profits is an annuity to a widow of a deceased husband, and we think that the principle applies here, where a sharing of profits by a wife is in lieu of support by a husband.

Moreover, the acceptance by another of part of the interest of a partner in a partnership does not establish, prima facie, that said person is a partner, for he may accept the interest without any intention of becoming a partner. Parchen v. Anderson, 5 P. 588 (Mont.). Again, all the facts and circumstances must be examined to determine the intent of the petitioner and Ada in executing the property settlement agreement in 1943. We have examined all of the evidence bearing upon such circumstances and intent, and the evidence shows as follows: That in connection with the 1943 agreements, no capital account was opened on the books of the partnership in Ada's name; and none existed in 1944 and 1945; that in 1943 and 1944, Ada did not have any control over a two-ninths share of the undistributed earnings of the partnership as a principal; that she did not receive two-ninths of the partnership earnings in 1943 and 1944; that the petitioner drew from partnership earnings in 1943 and 1944, $ 15,727.27, and $ 14,077.67, whereas checks of the partnership issued to Ada totalled in 1943 and 1944, only $ 2,525 and $ 7,059.02, respectively; and that petitioner and Ray Jackson exercised control in 1943 and 1944 over the earnings, and over the withdrawals and disbursements of partnership earnings.

Ada Jackson testified briefly in this proceeding. Her testimony is not that of a person who in good faith and with a business purpose intended to join with her husband and father-in-law in the present conduct of the business of Ray Jackson and Sons in 1939, 1943, or 1944. In line with her husband's contention in this proceeding, she says that she became a partner in the business in 1939, but throughout her testimony she demonstrated that she did not have any real understanding of what was involved in the conduct of the various business ventures carried on by the firm from 1939 through the taxable years; that she did not participate genuinely in the firm's business affairs; and that her husband, the petitioner, dominated and conducted the business and exercised complete control over its properties and earnings. With respect to the earnings of the business, her testimony shows that she did not regard any fixed percentage or part as her own, but regarded the matter of sharing in the earnings as wholly within the discretion of her husband and father-in-law whose judgment she trusted as "fair." She did not question the provision in the property settlement agreement which she signed in January 1943, by which she gave up her right to receive support from her husband; she did not give thought to the differences between the terms of that agreement and the alleged oral agreement in 1939. She simply agreed, in 1943, to what her husband's attorney and her husband told her was desired by them, and she was told by her husband's attorney that the agreement of January 1943, meant that one-half of her husband's interest in the business was hers. She did not understand, nor was she told, as far as we know, that if she were to become an actual partner, she would be liable for part of the losses, if any, of the business. At least, in the absence of any testimony in the entire record about the obligation to share losses in some ways, we must deduce that she was not told about the liability of a real partner in a partnership business for a share of losses.

Ada Jackson testified that the 1943 agreement was the only one the attorney of the petitioner ever drafted for her signature, and that the agreement was discussed for the first time in 1941, also, that she never had her own bank account until sometime around 1942 (but she could not recollect definitely and clearly in what year her bank account was opened). She testified, with respect to payments of earnings of the business to her, that she had not received any distributions except for the payments of her 1943 and 1944 income taxes, and of distributions to her for household expenses, and that it was understood that she was to receive a monthly allowance for household expenses which she and her husband were to share as equally as possible. Her understanding was expressed in the following way: "We were all getting living expenses from it [Ray Jackson and Sons]." She did not know, however, the amounts of the taxes reported in her individual income tax returns for 1943 and 1944. She testified that she could not sign any checks drawn on Ray Jackson and Sons' bank account -- only her husband and father-in-law could sign checks -- and that after her bank account was opened (she was not sure about the year) her husband had her monthly allowances for household expenses deposited in her account; and that if she wanted any money, she must ask her husband. On this point she testified: "I have no right to draw on the account [bank account of the business]. If I want money my husband transfers it from the partnership to my account."

It has been held that ownership and control over profits while they remain undistributed constitutes one test of whether a person is a partner. Sutton v. Schaff, 104 Kan. 282">104 Kan. 282; 178 P. 418">178 P. 418. The evidence in this proceeding shows that Ada Jackson never had, in 1943 and 1944, or prior thereto, any control over her alleged share of partnership earnings.

The agreement dated January 1, 1943, is entitled "Partnership Agreement," but it must be read with the property settlement agreement dated January 2, 1943. As proof of the contention of the petitioner that Ada Jackson was a partner in 1943 and 1944, it falls far short of supporting that contention. It is a self-serving document. It does not follow the form of a typical partnership agreement. It does not provide, for example, that the parties shall carry on a business as coproprietors, or that they will share the profits and losses in stated proportions. If the terms of a contract do not constitute a partnership, none will be declared, even though the parties, in words, call the arrangement one. Guthrie v. Foster, 76 S. W. (2d) 927 (Ky.).

Upon all of the evidence, it has been found as a fact that Ada Jackson, Ray and Hugh Jackson, in 1943 and 1944, did not intend to join together as partners in the conduct of the business known as Ray Jackson and Sons.

It has been found as a fact, also, that none of the capital of Ray Jackson and Sons at the beginning of 1943 represented outgrowth of any capital allegedly contributed in 1939 by Ada. ^{*99 In considering the evidence before us, we have not based our conclusions or ultimate findings of fact upon any single factor, but have considered all the circumstances and facts. Commissioner v. Culbertson, supra. As the trier of the facts, we have carefully considered all of the evidence to ascertain the intent with which the parties acted. We have, also, considered the conduct of the parties during the period throughout which Ada Jackson is said to have been, truly, a partner.}

The respondent's determination is sustained.

Decision will be entered for the respondent.

---

Footnotes

• 1. Transcript, pp. 40, 41, 47.↩

• 2. Tr. p. 209. The Commissioner does not recognize the daughter of Ray Jackson, Dorothy Jackson, as a member of a partnership, and he has questioned whether his wife, Nellie, was a member of a partnership.↩

• 3. In the Culbertson↩ case, the Supreme Court enumerated the following factors as ones to be considered in considering all the facts: (1) The agreement; (2) the conduct of the parties in executing the provisions of the agreement; (3) their statements; (4) the testimony of disinterested persons; (5) the relationship of the parties; (6) their respective abilities and capital contributions; (7) the actual control of income and the purposes for which it is used; and (8) any other factors throwing light on "their true intent."

• 4. The petitioner admits that "There may be some doubt with regard to the exact legal classification of the interest of Ada Jackson during the interval" from 1939 until 1943, but since he bases his contention almost wholly on the claim that Ada Jackson contributed capital to the business of Ray Jackson and Sons in 1939, we must, therefore, start analysis of all of the circumstances, the intent, the conduct of the parties, the general evidence by considering what was actually done during the interval 1939-1942.↩

• 5. The evidence is not clear that Ada Jackson received, as a partner, any of the earnings of the business during 1939-1942, unless the payment of living and household expenses is relied upon.↩

• 6. The net earnings of Ray Jackson and Sons increased during 1941 and 1942 to amounts very much larger than earnings in 1940, which were, roughly, about $ 5,700. Earnings in 1941 and 1942, were, roughly, $ 31,000 and $ 67,000. The petitioner undertook a new venture in 1940, sheep raising, when, with a personal loan from Garden City Production Company, he purchased 1,378 lambs; and in 1941, he bought a band of 1,600 ewes for $ 12,000. The sheep raising venture was very profitable. In 1941 and 1942, the sheep were valued by petitioner, among assets of the partnership, at $ 30,000 and $ 39,518.01, respectively. In 1942, gross receipts were $ 136,545.88; gross profit was $ 67,555.48; net profit was $ 67,136.04. An unavoidable inference from such facts and circumstances is that by 1943, the partnership profits were in an amount which may have made the petitioner tax conscious.↩

• 7. At this point, the petitioner's contention becomes confused. If part of the consideration moving from Ada, for the property settlement agreement, was the 1936 Ford car she turned in, in 1939, then it follows that she turned the car over to the petitioner rather than to the partnership as a capital contribution, so that in 1943 the property settlement agreement was executed for the reason, inter alia↩, that the petitioner wanted to repay his wife for giving her car to him.

• 8. The petitioner attempts to bring this proceeding within the holdings of the Weizer and Zukaitus, supra↩, cases, and similar authorities. The petitioner and his father began the Ray Jackson and Sons business in 1929, ten years before the incident of a trade-in of Ada's used car for a truck. Ray Jackson was able to and did give the petitioner continuous financial assistance. Petitioner took up the sheep raising business on his own. It is impossible under the evidence in this proceeding to attribute with any reasonable degree of accuracy any of the capital of the partnership in 1943 to outgrowth from one item, a used truck, for which Ada's used car was given, in 1939, in part payment.