Johnston v. Commissioner

J. D. Johnston, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent

Johnston v. Commissioner

Docket No. 109698

United States Tax Court

1944 U.S. Tax Ct. LEXIS 126; 3 T.C. 799;

May 10, 1944, Promulgated

---

Decision will be entered under Rule 50.

A husband transferred to his wife an interest in a partnership business which was being operated by him and his father. For this interest she gave him her demand note which it was contemplated would be paid out of her shares of the profits in a new partnership. Immediately thereafter the new partnership, operating the same kind of business as the old, was, by written agreement, entered into by the husband and wife and other parties, and the wife's interest in the old partnership was carried forward into the new, the assets of the old partnership having been transferred to the new. On the books of the new partnership accounts were set up reflecting the interests of the various partners, as were also drawing accounts for the husband and wife. The husband and wife had authority to write checks against the new partnership's bank account and the wife frequently exercised such authority. At the end of each fiscal year her share of the earnings was credited to the wife on the books of the new partnership. Held, that the wife was a bona fide partner for income tax purposes in the new partnership; held, further, that the shares of the wife in the profits of the new partnership did not constitute taxable income of the husband.

E. C. Orme, Esq., and Lee C. Bradley, Jr., Esq., for the petitioner.

Charles P. Bagley, Esq., for the respondent.

Tyson, Judge. Sternhagen and Hill, JJ., dissent. Harron, J., dissenting. Smith and Opper, JJ., agree with this dissent.

---

TYSON

Respondent determined deficiencies in the income tax of petitioner of $ 466.23 for the year 1938 and $ 4,963.74 for the year 1939. Of these amounts $ 461.63 for 1938 and $ 4,873.53 for the year 1939 are in controversy and result from respondent's determination that petitioner is "subject to income tax on that portion of the net income derived from the business operated under the name of J. D. Johnston, Jr., Co. for the taxable years 1938 and 1939, which was allocated" to petitioner's wife. The real question presented is the bona fides for income tax purposes of a partnership between petitioner and his wife for the operation of a business.

FINDINGS OF FACT.

Petitioner is an individual residing at Brundige, Alabama. His returns for the calendar years 1938 and 1939 were filed with the collector for the district of Alabama.

In 1930 or 1931 petitioner individually began manufacturing and selling peanut butter, and about six months thereafter sold a half interest in the business to his father, A. E. Johnston, so that it could be financed. Father and son continued its operations, as a partnership, under the name of "J. D. Johnston, Jr. Company" until April 1, 1938. Shortly prior to that date petitioner offered to sell his half interest to his brothers and father for an amount of $ 300 a month for 15 years without interest or any down payment. His principal reason for desiring to sell this interest was to be relieved of responsibility. When they wouldn't buy, petitioner's wife said she would buy his interest, but he didn't want her to own all of it. The organization of a new partnership was discussed by petitioner with his father, sister, and six brothers, who were members of the partnership of the Johnston Oil Co., hereinafter mentioned, and with his wife, all of whom agreed that it should be done. The preparation of a new partnership agreement was also discussed with E. B. McDaniel, Jr., a certified public accountant, who drafted the agreement reached as a result of the discussions. No lawyer was consulted in connection with the drafting of the agreement. McDaniel began doing tax work for the old partnership in 1937, preparing its 1936-1937 fiscal year returns. He did not make complete audits of the partnership books, but made only the analysis thereof he considered necessary to prepare the returns. He first prepared petitioner's individual return for the calendar year 1937 and his subsequent returns for 1938, 1939, and 1940.

The new partnership agreement, prepared by McDaniel, was executed by Camilla Tatum Johnston and the Johnston Oil Co., by all its members, and by the petitioner on April 1, 1938. It recited that it was made "by and among J. D. Johnston, Jr., Mrs. Camilla Tatum Johnston [petitioner's wife], and Johnston Oil Co., a partnership consisting of A. E. Johnston, J. D. Johnston, Jr., C. D. Johnston, Foy Johnston, Rex Johnston, L. Q. Johnston, J. M. Johnston, Ralph B. Johnston, and Mrs. Odessa Johnston Davis," and provided in material parts as follows:

2. The trade name of the partnership shall be the J. D. Johnston, Jr., Co. [which was the same as that of the prior partnership.] * * *

3. This partnership shall begin business on this day, the first day of April, 1938 * * *

4. The investment of the partners at date of organization, * * * is $ 20,353.26 by J. D. Johnston, Jr., $ 20,353.25 by Mrs. Camilla Tatum Johnston and $ 40,706.51 by Johnston Oil Company as shown by the opening entries in the books of the partnership at April 30, 1938 making a total net worth of $ 81,413.02.

5. The government of this partnership * * * shall be vested in J. D. Johnston, Jr. and A. E. Johnston, and all ordinary business shall be transacted by them.

6. The said J. D. Johnston, Jr. and A. E. Johnston shall keep proper records and files on all transactions made by the firm, which shall be accessable [sic] to all parties to this agreement at any time.

7. All matters of importance, which are not in the ordinary course of business, shall be passed on by all partners. A. E. Johnston, as senior partner of the Johnston Oil Company, will have power to act for the Johnston Oil Company at all times.

8. All salaries of partners rendering service for the partnership shall be agreed upon and passed upon by J. D. Johnston, Jr., and A. E. Johnston. * * *

9. All gains, profits, increases that shall come, grow or arise from or by means of said partnership, after paying salaries set forth in section 8, shall be distributed among the partners in the following proportions, to-wit,

J. D. Johnston, Jr.	25%
Mrs. Camilla Tatum Johnston	25%
Johnston Oil Company	50%

11. * * * All profits or losses from operations of the partnership shall be computed at the end of each fiscal year and charged or credited the various partners as of June 30, each year.

The Johnston Oil Co., designated in the agreement as having a 50 percent interest in the new partnership, was originally owned solely by A. E. Johnston, petitioner's father. However, shortly before the new partnership, J. D. Johnston, Jr. Co., was organized, petitioner's father sold eight-tenths of his interest in the Johnston Oil Co. in equal proportions to his daughter and seven sons, including the petitioner, named in the foregoing agreement, retaining for himself a two-tenths interest.

Petitioner's wife, designated in the agreement as having a 25 percent interest in the new partnership, acquired a 25 percent interest in the old partnership from the petitioner just prior to execution of the new partnership agreement, and acquired same for the purpose of entering the new partnership. She gave petitioner her unsecured, noninterest-bearing demand note, dated April 1, 1938, for $ 20,353.25, in payment therefor. Petitioner and his wife contemplated that this note would be paid out of her share in the profits of the new partnership business.

The new partnership took over all the assets of the old and assumed its liabilities, acquiring no other assets or liabilities.

At the time of giving her note petitioner's wife owned no property other than $ 5,151.50 in a savings account, all but four or five hundred dollars of which had been given her by petitioner in prior years. At the time of acquiring her interest in the old partnership she offered to pay petitioner $ 5,000 on the purchase price out of her savings account, but he preferred to take her note for the amount because he didn't need the money. The price fixed for the 25 percent interest in the old company transferred to the wife was based on the book value of that business on April 1, 1938, without taking into consideration its earnings or good will.

The balance sheet of the new partnership as of April 1, 1938, contained the same assets and liabilities as the balance sheet of the old partnership on that date, and that balance sheet was as follows:

ASSETS
Current:
	Cash in banks		$ 45,802.97
	Accounts receivable		26,741.93
	Inventories		15,696.90
			88,241.80
Fixed assets:
	Real estate	$ 500.00
	Buildings	3,214.74
	Machinery	5,440.61
	Auto and truck equipment	2,775.50
			11,930.85
	Total assets		100,172.65
LIABILITIES
Current:
	Accounts payable		1,000.00
Other liabilities:
	Due to partner -- Johnston Oil Co., a
	partnership		17,759.63
Net worth:
	Investment accounts:
	Johnston Oil Co., a partnership	$ 40,706.51
	J. D. Johnston, Jr	20,353.26
	Camilla Tatum Johnston	20,353.25
			81,413.02
	Total liabilities and net worth		100,172.65

After the new partnership was formed, the everyday operations of the business continued in practically the same fashion as had the operation of the old partnership, except that petitioner devoted considerably less time to the new partnership than he had devoted to the old partnership, to which latter he had devoted 100 percent of his time, and except in certain other respects as hereinafter indicated. After April 1, 1938, and throughout that year he devoted about 65 to 75 percent of his time to the new partnership and during 1939 about 25 percent. During 1938 petitioner was in Florida on vacation from June to September. He spent the first eight months of 1939 in Florida building a summer home.

In the manufacture of peanut butter it was usual for the new partnership to purchase peanuts almost daily in carload lots. When the market was favorable, they would buy 50 carloads at a time. The plant consumed from one to two cars of shelled peanuts daily. About 250 tons of shelled peanuts and 6 to 10 cars of peanut butter jars were kept on hand at all times. The finished peanut butter was usually delivered to the purchasers by truck, for which purpose the firm used 8 trucks.

Petitioner's father did the greatest part of the buying for the new partnership, the petitioner buying only about 5 percent during the taxable years. Petitioner's brother, C. D. Johnston, had charge of the office of the new partnership, supervising the bookkeeping and collections, and also acted as sales manager. Another brother, J. M. Johnston, looked after the firm's delivery trucks and hired the drivers for them. Another brother, L. Q. Johnston, was in charge of the power plant and machinery, and another brother, Ralph, assisted in the office with the books. These, all partners in the Johnston Oil Co., were the only members of the family that worked for the partnership. Petitioner's wife has never, at any time, rendered any services in connection with the business. Her occupation was that of housewife. She has never worked otherwise or earned any money, and had no business experience.

When the new partnership was formed McDaniel, who had prepared the agreement, directed the bookkeeper to set up investment accounts for the different members of the firm, giving him certain entries for doing so. These entries were obtained from the closing balance sheet of the old firm. He also directed the bookkeeper to keep all withdrawal and investment accounts of the various partners separately. These directions were given pursuant to instructions from members of the new partnership. The new partnership books under the heading, "Investment Account Mrs. Camilla Tatum Johnston" show a credit entry under date "4-1-1938" of $ 20,353.25.

In the new partnership petitioner and his wife had drawing accounts. The bookkeeper was instructed to charge the wife's withdrawals to her drawing account and petitioner's withdrawals to his drawing account unless it was clearly indicated on a check that they should be charged otherwise. Under date of June 30, 1938, the sum of $ 2,206.60 was credited to the wife's drawing account as her share of the profits of the business from April 1 to June 30, 1938. Under date of July 15, 1938, this sum was transferred to petitioner's drawing account. Under date of June 30, 1939, the drawing account of the wife was credited with $ 20,017.50 as her share of the profits of the business for the fiscal year ended June 30, 1939. Under date of July 1, 1939, and as of June 30, 1939, this sum was transferred to petitioner's drawing account. As of June 30, 1939, upon instructions of petitioner and his wife, McDaniel, the accountant, entered a credit of $ 20,017.50 on the note for $ 20,353.25 executed by petitioner's wife and given petitioner for the wife's interest in the old partnership. No further payments or credits have been made on the note and none has been requested. Under date of June 30, 1940, the drawing account of the wife was credited with $ 10,220.36 as her share of the profits for the fiscal year ended June 30, 1940, and on June 30, 1941, she was credited with $ 8,488.78 as her share of the profits for the fiscal year ended on that date.

Prior to the formation of the new partnership petitioner's wife drew no checks on the old partnership account. After the formation of the new partnership those authorized to write checks on the new partnership's bank account were A. E. Johnston, C. D. Johnston, Ralph Johnston, and petitioner and his wife.

After April 1, 1938, petitioner's wife began writing checks against the partnership banking account whenever she needed money for those household expenses not paid by petitioner or to pay her Federal and state income taxes. Between April 1, 1938, and December 31, 1940, her checks totaled $ 5,275.82, of which $ 2,222.36 was for household expenses and $ 3,053 was for her taxes. Of those checks a total of $ 1,420.40 was drawn between May 1, 1938, and December 31, 1939, a period within the tax years here involved, of which $ 1,289.60 was for household expenses and $ 120.80 for the wife's taxes. None of such checks was charged to her separate drawing account when issued, but was charged either to petitioner's separate drawing account or to their joint drawing account, hereinafter mentioned. Under date of December 31, 1940, the amount of such checks drawn by petitioner's wife and so charged was transferred to her separate drawing account in the sum of $ 5,275.82. This was around the time when the firm's books were examined by an agent of the collector of internal revenue. Petitioner had no agreement with his wife to pay household expenses. Prior to April 1, 1938, the wife would get money from the office of the old company to pay some of such expenses, charging the others, which would be paid by petitioner. After April 1, 1938, and only when petitioner was absent, his wife would write checks against the partnership's bank account in payment of some of such expenses, but petitioner paid most of the household expenses. Between April 1, 1938, and June 30, 1940, there was no balance in the separate drawing account of petitioner's wife against which her checks could be charged, the intervening credits to her account of $ 2,206.60 on June 30, 1938, and $ 20,017.50 on June 30, 1939, having been transferred to petitioner's drawing account.

The ledger sheets of the drawing account opened April 1, 1938, in petitioner's name continued to be so designated as the drawing account of petitioner alone until the ledger sheet opening with an entry dated "5/30/1939" was started, which sheet was headed, "J. D. Johnston, Jr. and wife, Drawing a/c." The wife's name was included in the heading of all subsequent ledger sheets until that opening with an entry of October 23, 1941. Thereafter, the account was again in the sole name of petitioner. During all of that period petitioner's wife continued to have her separate drawing account on the books, to which account alone her share of the firm profits was credited.

On July 10, 1939, petitioner bought $ 10,000 maturity value series E Government bonds for his wife at a cost of $ 7,500. Of the purchase price, $ 5,000 was paid by his wife's personal check drawn against her personal savings account and the balance of $ 2,500 was by a check drawn on the partnership bank account by petitioner, with a notation thereon of "For Mrs. J. D. J. Bonds." This check was apparently charged to the joint drawing account.

Balance sheets of the partnership, J. D. Johnston, Jr. Co., prepared by the accountant McDaniel showed net worth of the partnership and the interests of the partners therein as follows:

	Investment account
Date	Johnston		Camilla Tatum
	Oil Co., a	J. D. Johnston, Jr.	Johnston	Net worth
	partnership
Apr. 1, 1938	$ 40,706.51	$ 20,353.26	$ 20,353.25	$ 81,413.02
June 30, 1938	52,041.30	20,932.50	22,559.85	95,533.65
June 30, 1939	59,822.47	36,997.21	20,353.25	117,172.93

In May or June of 1942 petitioner filed a gift tax return showing a gift to his wife, Camilla Tatum Johnston, on April 1, 1938, of $ 44,109.88. The return recited that on April 1, 1938, petitioner sold his wife one-half of his interest in the old business of J. D. Johnston, Jr. Co. for her note for $ 20,353.25, which price was determined by the book value of the net assets of that company; that because the peanut butter business was very speculative and volume depended upon price and not good will and because the sale represented a transfer for an adequate consideration in money's worth, it was the opinion of the owners of the old business that no good will existed, and, for that reason, petitioner had made no gift tax return for 1938; that upon examination by an examining officer it was contended that the book value of the assets was not the correct valuation, but that a valuation should be placed upon good will; that petitioner did not agree with the examining officer, but a compromise was effected by which the petitioner agreed to make the gift tax return based upon averaging the book value and the valuation computed by capitalizing the earnings at 10 percent; that it was further agreed that petitioner should be credited with the amount of the note for $ 20,353.25 received in consideration of the transfer, since the major portion of the note had been paid; that the valuation of the property for gift tax purposes was computed in accordance with the compromise, although petitioner did not admit that a gift was made.

J. D. Johnston, Jr. Co. was a bona fide partnership for income tax purposes during the taxable years and the wife of petitioner had a 25 percent interest therein.

OPINION.

Without explanation as to the basis for his determination, respondent "held" that petitioner was subject to income tax on that portion of the net income of J. D. Johnston, Jr. Co. "which was allocated to" his "wife, Mrs. Camilla Tatum Johnston."

On brief, respondent contends that petitioner's wife was not a bona fide partner in the firm for the purposes of the Federal income tax, and that the income therefrom attributed to her was taxable to petitioner. His basis for such contention is the assertion that the sole purpose of the wife's "purported entry into the business" was tax avoidance; that the "simulated sale" of petitioner's one-fourth interest in the old partnership's assets to his wife was for an inadequate price payable from the profits of the new business; and that she contributed no services to either the old or the new business.

For some years petitioner and his father had been equal partners in the business of manufacturing peanut butter. Some months prior to April 1, 1938, he unsuccessfully sought to sell his entire interest to his father and brothers. At about the same time the father took his daughter and seven sons in as partners in his theretofore individually operated business known as the Johnston Oil Co. The formation of a new peanut butter partnership was then discussed and agreed upon, in which petitioner and his wife would each have a one-fourth interest, and the Johnston Oil Co. would have a half interest. Prior to formation of the new partnership petitioner's wife gave him her note for $ 20,353.25 for half of his interest in the old partnership after offering to pay him $ 5,000 cash thereon. The note was paid on June 30, 1939, out of the profits of the wife's share of the new business, with the exception of $ 335.75. The amount of the note was one-fourth the book value of the old business on April 1, 1938. On that date, the new partnership agreement was executed by petitioner, his six brothers, his sister, and his father, as members of the partnership of Johnston Oil Co., and petitioner's wife. This agreement specified the amount invested in the new partnership by each member, and the investment of petitioner was stated as $ 20,353.25 and that of his wife as an equal amount. These amounts added to the specified $ 40,706.51 investment by the Johnston Oil Co. were stated as "making a total net worth of $ 81,413.02." It was further provided that the profits should be divided "among the partners" in the proportions of 25 percent each to petitioner and his wife, and 50 percent to the Johnston Oil Co. The assets and liabilities of the old partnership were then taken over by the new. Under the same date a separate investment account for each of the members was opened in the firm books, that for petitioner's wife showing a credit balance entry of $ 20,353.25. Drawing accounts were set up on the books of the company for petitioner and his wife and at the end of each fiscal year each of those accounts was credited with the respective shares of petitioner and his wife in the profits of the business for that year. Petitioner's wife was at all times authorized to draw checks against the partnership's bank account and did so on various occasions, the amounts of such checks being charged to her drawing account. Under the partnership agreement petitioner had no power to divert from his wife her share in the profits of the new business.

By the new partnership a joint enterprise, or economic unit, was created differing essentially from the old partnership in that in the old partnership A. E. Johnston had a 50 percent interest as an individual while in the new partnership that individual interest was superseded by the interest of Johnston Oil Co., a partnership in which A. E. Johnston and his daughter and seven sons, including petitioner, were partners.

In view of the enumerated facts and other facts of record, we are of the opinion and so hold, that, as we have found to be a fact, petitioner's wife was a partner in the bona fide partnership of J. D. Johnston, Jr. Co. Cf. ; ; ; ; ; ; ; ; ; and . Whether that interest was acquired at an inadequate price because acquired for less than its fair value is not determinative. If it was for less than that value, then the fact that to such extent her interest in the old firm might be a gift does not control the issue before us. ;;;;;; and

There is no dispute that under the laws of the State of Alabama husband and wife are authorized to be partners in any lawful business. ; ; .

It is undisputed that the other members of the partnership consented to petitioner's wife becoming a member thereof, since they signed the partnership agreement and continued to operate the business thereunder. Cf. ; ;.

There is no evidence showing that the purpose of the wife's joining the new firm was one of minimizing petitioner's taxes, but even if such were the case it would not be determinative where, as here, there was a bona fide association of persons to carry on business as a partnership. , and cases cited therein, and , and cases cited therein. Where a wife owns a capital interest in the partnership it is immaterial that the wife contributed no services to the firm. ;; ; ;;;The rule is well stated in the latter case, where we said:

* * * Each of the petitioners gave to his wife one-half of his capital in the business. From that time on each of the petitioners had capital invested in the business. It is immaterial that they furnished no services to the partnership and received no salaries from the partnership. If the petitioners furnishing the services were willing that the other members of the partnership furnish no services yet share equally with them in the profits of the business, there is no provision of law to prevent them from doing so. Although proof that persons claiming to be members of a partnership furnished no capital and contributed no services to the partnership might tend to prove that no partnership agreement was entered into, proof of such facts becomes immaterial when all members of the partnership agree that a partnership contract was entered into.

Also on the matter of services rendered, it may be noted that while petitioner had devoted 100 percent of his time to the old partnership's business, he devoted only about 65 to 75 percent of his time to the new business during 1938 and only about 25 percent of his time in 1939. Most of the work other than the actual mill work was apparently being performed by his father and four brothers, all of whom had an interest in the new partnership. Such situation under all the circumstances affords no basis for attributing the wife's share of the partnership profits to petitioner on the theory that it was income earned by him through the rendition of his personal services. One might equally well question the extent to which petitioner had "earned" his own reported share of the income, giving due weight to the contributions of his father and brothers to the ultimate profit resulting.

Unlike ; ; and , relied on by respondent, this was not an arrangement between only a husband and wife to engage in an exclusively or predominantly personal service business, the income from which was due entirely to the husband's personal efforts. Manifestly, the income of petitioner's wife was an attribute of and flowed from her capital interest in the business rather than from the efforts and energy expended by petitioner in the taxable years. The cited cases are also otherwise distinguished on their facts. The facts here are more like those in , and

In the Kell case the wife and children of the taxpayer, as an inducement for executing their notes for the purchase of certain properties which the taxpayer desired them to purchase, were told by the taxpayer that he would transfer to them his interest in a partnership, holding mineral lands and leases, from which they could expect to derive sufficient funds to pay the purchase notes. Under these circumstances the notes were executed by the wife and children, the transfer of the taxpayer's interest in the partnership was made to them, and moneys derived from the partnership were used in discharge of the purchase notes. There the wife and children not only acquired the property for which the purchase notes were given, but they also acquired, by reason of the giving of their notes, an interest in the partnership from the proceeds of which it was expected, when the notes were given, that they would be paid -- as they were. The court held that the transfer made by the taxpayer was bona fide and he was not taxable with the profits realized from the shares of his wife and children in the business.

In the Olds case the taxpayer, engaged in the dock and timber business, sold, under a written agreement, an interest in that business to each of his three daughters, each executing therefor her demand note for $ 400,000 without interest. It was agreed that the taxpayer should conduct the business and that the daughters should withdraw from the profits only such amount as the taxpayer saw fit. Entries were made on the books showing the interests, as transferred to the daughters, and the daughters were charged on the books with their withdrawals, with the result that at the close of each year the books showed net balances in favor of the daughters. The court held the partnership to be bona fide and the father not taxable with the profits realized on the interests of the daughters in the partnership.

Although petitioner's wife drew checks during a certain period on the firm's account after she entered the partnership, respondent dwells on the fact that for a period of time such checks were not charged against her separate drawing account, but against that of petitioner. For part of that period, however, the checks were charged to an account designated on the books as the drawing account of petitioner "and wife" and subsequently all such checks charged to the petitioner's drawing account and to the joint account were transferred as a charge against the wife's individual drawing account. The bookkeeper had been instructed to charge all her checks to her drawing account unless the check bore a notation to the contrary. As to failure of the bookkeeper to make the charges to the wife's drawing account, we think that what was said in ; appeal dismissed, , is apposite:

* * * We think such may reasonably be accounted for, however, when the partnership is viewed in the light of the business and family relationship existing between the parties as shown by the record. * * * The partnership was somewhat in the nature of a two-family business arrangement, Parker and his wife and mother-in-law on the one side and Brown and his wife on the other, the two men continuing actively to carry on the business, the women partners being satisfied to have their interests looked after by the men. This character of partnership we think largely accounts for the manner in which the business was conducted and book entries made with respect to the business.

The respondent calls attention to the fact that for the period from May 1, 1938, through December 31, 1940, withdrawals from the firm were used in the amount of $ 2,222.36 for household expenses and says that this evidences dominion and control of petitioner over the profits of the firm. We thing that this fact is of little, if any, significance, since the wife had no agreement with petitioner that she should make such expenditures and since she had a right to expend her funds in any manner she saw fit. In this connection it may be noted that such withdrawals were made only when petitioner was absent.

We hold that petitioner was not taxable with the amounts to which his wife was entitled as her shares of the profits of the J. D. Johnston, Jr. Co. and that the Commissioner was in error in including such amounts in petitioner's income.

Decision will be entered under Rule 50.

HARRON

Harron, J., dissenting: We have recognized a wife as a person carrying on a business under a partnership with her husband where she has contributed capital or property and services, or where she has acquired the ownership of property in the business. Albert G. Dickinson, 23 B. T. A. 1212; Clara B. Parker, Executrix, 30 B. T. A. 1231;Walter W. Mayer, 35 B. T. A. 1155. The decision of the question in each case is largely dependent upon the particular facts. In this case, there is room for difference of opinion upon the real situation which the facts present, and I do not agree with the views of the majority on what the facts here show.

The fact question is, I believe, whether or not the wife of petitioner acquired complete title to a one-quarter interest in the business, including its assets. By complete title, for income tax purposes, is meant complete dominion and control, or, the entire economic interest in property which produces income. ; ; ; . A taxpayer-member of a partnership may not escape liability for tax upon partnership business earnings through a mere assignment of the future earnings. ; ;; certiorari denied, ; ; certiorari denied, .

In considering the facts in this case, the situation as it existed before the agents of the Bureau of Internal Revenue investigated the arrangement should control, and little weight should be given to the situation as it was modified after the investigation pursuant to corrective steps. The situation for this Court to examine is the one which the parties created in the first instance. It is reasonable to presume that they would have continued everything in status quo but for the investigation of revenue agents. The tax years are 1938 and 1939. During the taxable period the wife had a separate drawing account, as petitioner had, but there was also a joint drawing account in the names of petitioner and his wife. The wife's share of firm profits alone was credited to her separate drawing account. But a withdrawal of $ 2,500 was charged to the joint drawing account, which was drawn and used by petitioner in 1939 to purchase some Government bonds for the wife. Also, during the taxable period the wife withdrew by checks signed by her various amounts for household expenses and for her income tax but, originally, these withdrawals were charged either to petitioner's separate drawing account or to the joint drawing account. Apparently, this was done because there were no balances of credits to the wife's separate drawing account, all credits to the wife's account having been transferred to credit the petitioner's drawing account. The facts as set forth in the findings of fact do not show how the credits were made to the joint drawing account, or the source of such credits, or how the joint drawing account was made to balance or offset the separate drawing accounts of petitioner and of his wife, even though bookkeeping rules necessitate some debit and credit entries from the separate accounts to the joint accounts. The portion of the firm's profits which were at first credited to the wife's separate drawing account passed over to petitioner under the theory that the wife was making payment to the husband for the purchase of one-half of his one-half interest in the business. Unless there was a bona fide sale to the wife, it would have to be held that the wife did not receive and had no control over the earnings at first credited to her. All withdrawals by the wife to pay household expenses would be in fact the use of income to discharge the husband's obligation of family support. The withdrawal by the husband of a sum to purchase bonds for his wife would be more in the class of a gift of income of petitioner to his wife. The facts, such as they are, indicate that petitioner had complete control of the share of the partnership income attributed to the wife; and such interpretation would surely be necessary if there was no bona fide sale of an interest to the wife.

The facts relating to control over and use of income dovetail with the facts relating to the purported transfer of an interest in the business to the wife. The facts relating thereto are not clear-cut. There was an alleged sale of a one-quarter interest for about $ 20,300. Petitioner had the burden of clearly proving that he transferred part of his interest to his wife by a sale, by a gift, or by a hybrid sale and gift. Petitioner apparently failed to meet this burden of proof, as far as the findings of fact show. Revenue agents questioned whether the alleged sale was for an adequate consideration. Petitioner, to settle the matter, filed a gift tax return, but did not admit that a gift of any portion of the one-quarter interest was made. Petitioner appears to have rested his case in this Court upon the theory that he sold part of his interest to his wife. The majority opinion does not make this clear. But the record leaves a strong doubt in the matter of whether there was a bona fide sale. There was no evidence of a sale other than oral testimony. There was no bill of sale or any documentary evidence upon which the wife could establish her title. There is no clear evidence that there was a sale for adequate consideration. It appears that the conclusion reached above that there was a sale is based entirely upon self-serving statements, which are not satisfactory proof. See . The evidence on the point is much weaker in this case than in , one of the authorities upon which the majority view relies. In the Kell case, there was the combined evidence of a bona fide transfer of an interest found in a written document, a letter from the donor-husband, and the use of income for the benefit of the donees, separate and apart from the donor, showing that the donees in reality received the income produced by the interest given to them. Such facts are not present here. The record here seems to support the conclusion that there was no bona fide sale of an interest in the business by petitioner to his wife. If such finding of fact were made, and I believe the record requires such finding of fact, then the evidence that petitioner received substantially all of the earnings attributed to the wife's alleged interest destroys every vestige of petitioner's contentions.

Or, if the theory of a sale of an interest is abandoned, what evidence is there of a gift of an interest? Absolutely none, for there was no donative intent and the wife did not receive dominion and control over the fruits of a property interest, to wit, the income produced.

In conclusion, giving consideration to the question within the scope of the considerations in the majority report, I would hold that the facts did not show that there was a transfer of an interest to the wife making income allocable to such interest taxable to her rather than to petitioner.

But I would examine closely the evidence in other respects. Has petitioner proved that the income in question was produced by property, assuming, arguendo, that an interest in property had been transferred to the wife? Even though the business employs some physical assets, if the earnings of the business are due primarily to the personal efforts of petitioner and the others, excepting the wife, who rendered no services, then I would question that the wife was carrying on a business with her husband within the purview of section 181 of the Internal Revenue Code. The income of the business here very largely depends upon the skill in buying the product which is processed or manufactured. Capital in the form of money is required. Did the wife in reality contribute to such capital? The majority report does not show any of the facts within this realm of inquiry. Whether or not the Mead and Earp cases would control here, in principle, depends upon the facts relating to the manner in which the income is produced. In cases involving marital partnerships, I believe the burden of proof upon the petitioner extends to proving that the income in question is produced by property and not by personal efforts, where the wife is not contributing any services and the husband's contentions are based upon the theory that the wife has contributed capital to the business. If the "interest" of the wife amounts to no more than the husband's assignment of future earnings, there should not be allowed a shifting of tax liability, because of the established rule that earnings are taxable only to the person who earns. It appears that petitioner has not produced evidence to show conclusively that the arrangement was not a mere assignment of future earnings to the wife.