This proceeding involves a deficiency of $10,235.42 in petitioner's income tax for 1941. The only question in issue is whether petitioner's wife was a partner with him in the operation of a jewelry store known as Goodman's Jewelry Store.
FINDINGS OF FACT.
The petitioner is a resident of McKeesport, Pennsylvania. His income tax return for 1941 was filed with the collector of internal revenue for the twenty-third district of Pennsylvania, at Pittsburgh.
In 1921 the petitioner took over a jewelry business formerly operated by his father, agreeing to pay his father $2,500 therefore as the profits from the business would allow. He later paid that amount to his father.
The petitioner was married in 1923. His wife had worked as a clerk in the jewelry store for approximately two months prior to their marriage. She has continued to work in the store until the present time and has devoted all of her working time to the business.
About Christmas 1935 the petitioner suffered a serious automobile accident, which left him permanently crippled. He was hospitalized for two months and was confined to his home for about two more months. During that time his wife managed the store. Petitioner has never fully regained his health. It is necessary for him to be absent from the store for treatment from time to time. He has had to spend many of the winter months in a warmer climate. During all of his absences his wife was in complete charge of the store.
At all times since their marriage petitioner's wife has taken an equal part with him in the management and operation of the business. She was given a power of attorney to sign checks for the firm in 1939. During the taxable year she purchased more than one-half of the merchandise. She often makes trips to Pittsburgh and New York for that purpose. She waits on customers, arranges window displays, marks the merchandise, and takes an active part in passing upon the credit of prospective buyers.
On December 30, 1940, petitioner and his wife entered into a written partnership agreement which provided that the wife was to own 25 percent of the capital employed in the jewelry store business and the petitioner 75 percent, and that the profits and losses were to be shared equally.
At or about the time the partnership agreement was executed petitioner told his wife that he was making her a gift of a one-fourth interest in the business. He filed a gift tax return for 1941 showing a gift to his wife of a 25 percent capital interest in the jewelry store of a value of $17,234.22.
After formation of the partnership the firm maintained a bank account at the First National Bank, McKeesport, Pennsylvania, from which the wife was authorized to withdraw funds. She did not have a separate personal bank account prior to 1942, but opened one in that year. A new set of partnership books was set up by a certified public accountant as of January 1, 1941. These books contained capital accounts for both petitioner and his wife in the respective amounts of $63,702.66 and $21,234.22.
The net profits of the business for 1941, according to the partnership books, were $56,986.36. One-half of that amount was credited to petitioner and one-half to his wife. Petitioner withdrew $15,259.74 from the business during the year. The balance of his share of the earnings was credited to his capital account. His wife did not make any withdrawals during 1941. All of her share of the profits was credited to her capital account. At the close of 1941 petitioner's capital account stood at $76,936.10 and his wife's at $49,727.40.
Petitioner and his wife filed separate returns for 1941, in which each reported one-half of the profits of the jewelry store business. The respondent has determined that all of such profits are taxable to the petitioner.
The Goodman's Jewelry Store business was operated by petitioner and his wife as equal partners in 1941.
OPINION.
SMITH, Judge:
In the recent case of Commissioner v. Tower, 327 U.S. 280, the Supreme Court said:
There can be no question that a wife and husband may, under certain circumstances, become partners for tax, as for other, purposes. If she either invests capital originating with her or substantially contributes to the control and management of the business, or otherwise performs vital additional services, or does all of these things she may be a partner as contemplated by 26 U.S.C. § 181, 182. The Tax Court has recognized that under such circumstances the income belongs to the wife. * * *
The evidence in this case, we think, shows ample support for a business partnership between petitioner and his wife, under the tests laid down by the Supreme Court in the Tower case and in Lusthaus v. Commissioner, 327 U.S. 293. See also Felix Zukaitis, 3 T.C. 814; H. D. Webster, 4 T.C. 1169; and Francis A. Parker, 6 T.C. 974.
The wife here contributed regular and valuable services which were a material factor in the production of the income. This was not a business where the income was attributable primarily to the employment of capital or to the personal services of the petitioner. Cf. William G. Harvey, 6 T.C. 653. We assume that the capital used in the business was all furnished by the petitioner, at least it all originated with him. Commissioner v. Tower, supra. The wife's status as a partner does not depend upon petitioner's alleged gift to her of the one-fourth interest in the business, but rather upon the personal services which she contributed. Her share of the profits of the business is therefore not limited to the amount to which she would be equitably entitled as a return on that portion of the capital. See William F. Fischer, 5 T.C. 507. It can not be said either that all or any more than one-half of the profits are taxable to petitioner as his personal earnings under the rule of Lucas v. Earl, 281 U.S. 111. We have determined that the wife's personal services were ample to support the partnership agreement, and under that agreement she was entitled to receive and did receive one-half of the profits of the business. Petitioner is therefore taxable on only his one-half of such profits.
Reviewed by the Court.
Decision will be entered under Rule 50.
DISNEY, J., dissenting:
In this case, and referring to the wife, there was no "capital originating with her." Commissioner v. Tower, 327 U.S. 280. Her husband gave her a fourth interest in the capital employed. Her services are depended on by the majority to raise her interest in the income to one-half. Assuming that the gift from her husband was proper basis for partnership, the wife as a partner was, by Pennsylvania law, specifically denied any right to remuneration for her services. Purdon's Statutes of Pennsylvania, Title 59, art. 51 (f). She was, as a partner, by general law (in the absence of agreement otherwise, and none appears) required "to devote her time and efforts to a reasonable extent to the partnership business." 47 C. J. 786. She "devoted all of her working time to the business." How much working time that was, nowhere appears. Certainly it is not shown that she devoted more time than the ownership of one-fourth of the business reasonably required. I see in her services to the business nothing to justify paying her not one-fourth, but one-half of the income. The additional one-fourth appears to me to be a gift from the husband, and taxable to him. His gift of only one-fourth of the capital seems logically to preclude any other conclusion. I therefore dissent.
HARRON and OPPER, JJ., agree with this dissent.
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