Comm'r of Internal Revenue

Tax Court of the United States.Jun 23, 1948
10 T.C. 1145 (U.S.T.C. 1948)

Docket Nos. 10856 10857 10858 10859 10860 10861 10862 10863.



Wellman P. Thayer, Esq., H. B. Thompson, Esq., and William C. Stein, Esq., for the petitioners. R. E. Maiden, Jr., Esq., for the respondent.

1. Transfer of interest in established business to minor children contributing no new capital nor any services, held not sufficient to create valid partnership therein for income tax purposes, so as to relieve from tax petitioner-fathers, whose personal services were major income-producing factor, notwithstanding that some services were rendered to business by an employee, selected as ‘nominee‘ for the children by their legal guardians.

2. Partnership interest originating in capital owned prior to marriage, held transformed into community property by agreement of spouses.

3. Interests in business purportedly transferred by parents to children for purposes of creating family partnership, held, on facts, to be subject to valuation for gift tax purposes at amounts insufficient to create gift tax liability. Wellman P. Thayer, Esq., H. B. Thompson, Esq., and William C. Stein, Esq., for the petitioners. R. E. Maiden, Jr., Esq., for the respondent.

In these consolidated proceedings respondent determined deficiencies in income tax, victory tax, and gift tax liability as follows:

+--------------------------------------------------------------+ ¦Docket¦ ¦ ¦ ¦ ¦ +------+---------------+-----+----------------------+----------¦ ¦No. ¦Petitioner ¦Year ¦Tax ¦Deficiency¦ +------+---------------+-----+----------------------+----------¦ ¦ ¦ ¦(1941¦Income tax ¦$7,243.38 ¦ +------+---------------+-----+----------------------+----------¦ ¦10856 ¦Samuel Friedman¦(1943¦Income and victory tax¦51,375.66 ¦ +------+---------------+-----+----------------------+----------¦ ¦ ¦ ¦(1941¦Income tax ¦7,063.09 ¦ +------+---------------+-----+----------------------+----------¦ ¦10857 ¦Solman Friedman¦(1943¦Income and victory tax¦50,050.32 ¦ +------+---------------+-----+----------------------+----------¦ ¦ ¦ ¦(1941¦Income tax ¦1,982.31 ¦ +------+---------------+-----+----------------------+----------¦ ¦10858 ¦Morris Friedman¦(1943¦Income and victory tax¦27,672.80 ¦ +------+---------------+-----+----------------------+----------¦ ¦10859 ¦Libe Friedman ¦1943 ¦Income and victory tax¦1,180.95 ¦ +------+---------------+-----+----------------------+----------¦ ¦10860 ¦Fay Friedman ¦1943 ¦Income and victory tax¦12,956.81 ¦ +------+---------------+-----+----------------------+----------¦ ¦10861 ¦Samuel Friedman¦1942 ¦Gift tax ¦23,400.00 ¦ +------+---------------+-----+----------------------+----------¦ ¦10862 ¦Solman Friedman¦1942 ¦Gift tax ¦23,400.00 ¦ +------+---------------+-----+----------------------+----------¦ ¦10863 ¦Morris Friedman¦1942 ¦Gift tax ¦17,775.00 ¦ +--------------------------------------------------------------+

The questions presented are:

(a) The extent to which the distributive shares of three brothers, Samuel, Solman, and Morris Friedman, in the partnership profits of the Friedman Bag Co., constitute their separate income, rather than community income of those individuals;

(b) The validity for Federal income tax purposes of a partnership, formed on October 1, 1942, purporting to be composed of the three brothers and their minor children;

(c) The source— community or separate property— and value of gifts of partnership interests made on October 1, 1942, by the three brothers to their respective children.

Some of the facts have been stipulated.


The stipulated facts are hereby found accordingly.

Each of the petitioners is an individual and a resident of California. Tax returns for the years involved were filed with the collector for the sixth district of California.

Petitioners Samuel, Solman, and Morris Friedman are brothers. Solman is the husband of Libe Friedman, whom he married on September 18, 1927. Morris is the husband of Fay Friedman, whom he married on June 25, 1933. Samuel is the husband of Anne Friedman, whom he married on March 8, 1931.

Samuel and Anne had three children as of October 1, 1942— Ruth, 10 years of age; Albert, 7; and Gerald, 2. Solman and Libe had four children— Ephraim, 12; Annette, 10; Linda, 8; and Beatrice, 6. Morris and Fay had two children—Harvey, 7; and Sandra, 3.

In March 1929 the three brothers, together with their father and another brother, Harry, both deceased prior to 1941, formed a partnership known as the Friedman Bag Co., hereinafter sometimes referred to as the company. Following their father's and Harry's death, the three brothers continued the partnership. Up to 1933 the partnership business consisted of the purchase, renovation, and sale of used bags. Thereafter the business was broadened to include the manufacture and sale of new bags.

The original investments of Samuel, Solman, and Morris in the partnership were as follows:

+------------------+ ¦Samuel¦$34,810.71 ¦ +------+-----------¦ ¦Solman¦31,879.01 ¦ +------+-----------¦ ¦Morris¦6,146.51 ¦ +------------------+

At the time of his marriage in 1931, Samuel's investment in the company amounted to $35,936.80. Morris' investment at the time of his marriage in 1933 amounted to $8,101.07. On the date of Solman's marriage the value of all of his property was not in excess of $30,000. At the time Solman lived in Mexico, but in 1928 he became a resident of California and since then he and his wife have resided in that state. Samuel and Morris and their respective wives have been residents of California since marriage.

At no time since the dates of their respective marriages have Solman, Samuel, or Morris Friedman invested any capital, other than accumulated profits, in the company.

At about the time of their respective marriages, each of the brothers made an oral statement to his wife, reiterated on occasions thereafter, that his property was to be considered henceforth as belonging to both him and his wife. The small amounts of property or cash that each wife had before marriage were also treated as belonging to both husband and wife. Bank accounts of each couple were in their joint names, as were their respective homes.

Each husband and wife from 1933, the first year that tax returns were filed, through the taxable years, filed individual income tax returns and reported the distributable share of the income accruing to the husband from the business and all deductions pertaining thereto on the community basis.

On September 30, 1942, the balances in the investment accounts on the company's books of Samuel, Solman, and Morris Friedman were as follows:

+-------------------+ ¦Samuel¦$268,211.99 ¦ +------+------------¦ ¦Solman¦281,173.38 ¦ +------+------------¦ ¦Morris¦199,717.00 ¦ +-------------------+

As at September 30, 1942, the capital accounts standing in the respective names of Samuel, Solman, and Morris Friedman were each broken down into two accounts, one entitled ‘Fixed Capital‘ and one entitled ‘Excess Capital,‘ the ‘Fixed Capital‘ account being, in each case, credited with the sum of $100,000, and the ‘Excess Capital‘ account being credited as follows:

+-------------------+ ¦Samuel¦$168,211.99 ¦ +------+------------¦ ¦Solman¦181,173.38 ¦ +------+------------¦ ¦Morris¦99,717.00 ¦ +-------------------+

On October 1, 1942, each father addressed two letters to each of his children, setting forth that he was making a gift to the child of a specified percentage of his fixed capital account in the partnership. The percentage to each of Samuel's three children was 13 1/3 per cent; to each of Solman's four children, 10 per cent; to each of Morris' two children, 20 per cent.

The letters were the same, except for differences in percentages and amount of fixed capital. The following are typical, the first being written on the letterhead of the company and the second on a second sheet:

October 1, 1942

Dear Ruth Beverly Friedman:

This is to advise you that I am today hereby making an irrevocable gift to you of 13 1/3 per cent of my fixed capital account No. 151 A, as shown on the books of the partnership business, which business is known as the Friedman Bag Company. I wish to make it clear that your percentage interest is only in my fixed capital account and has nothing to do with the excess capital account No. 151 B, which as of June 30, 1942 is shown on our partnership books in the sum of $110,116.10. I am doing this with the full consent and approval of your mother and my other partners in the Friedman Bag Company.

For your information, up to now I have been receiving 35 per cent of all net profits earned in connection with our business. You in turn shall receive 13 1/3 per cent of my 35 per cent of net profits, or 4 2/3 per cent of the total net profits, which profits are figured after interest is allowed on the excess capital accounts.

Inasmuch as you are a comparatively young child I am notifying you of this gift in writing so that in the future you will have some written evidence of same, as it is my desire to create an estate for you at this time for your own future protection.

With much love, I remain,

Your father,


Dear Ruth Beverly:

As of September 30, 1942, I, together with my two partners in Friedman Bag Company, a partnership, agreed to dissolve said partnership and to enter into a new partnership arrangement, whereby my children and the children of my brothers will become partners with us in this new enterprise.

In making this new arrangement, your mother and I will donate a certain interest in this new business immediately upon the dissolution of the old partnership, which will be evidenced by a fixed capital account in this new partnership showing your interests therein. Your mother and I will in this manner provide for your future, your education and your well-being by making you a member of this business enterprise. Our gift, whatever its value may be according to the books or otherwise, it is agreed by us, is community funds and community assets and is equally given by both of us. The balance of our community interests and whatever separate estate I may have in the partnership, will be included in an excess capital account in my name on the books of the company.

We are informing you of this move by letter, which will be safeguarded for you and which will also be reflected in a guardianship proceeding, which will be instituted immediately to legally safeguard your interests and to proclaim the same to the world.

Sincerely your father.


I concur in the community

gift to my children.


The purpose of the first letter in each case was to make it clear that the donors were not making a gift to the child of any interest in the father's excess capital account.

The purpose of the second letter in each case was to make it clear that the gift was one of community property and that the wife consented to the gift.

In each case the parents intended to make a gift of their community property, and each parent considered that he or she was making an equal gift with his or her spouse.

On April 30, 1943, Samuel, Solman, and Morris Friedman each filed a gift tax return upon which the gifts to the respective children were reported at a value of $40,000. Each of these returns contained a statement of which the following one in the return of Samuel Friedman is typical: ‘The original fixed capital account referred to above is the respective community property of Samuel Friedman and Anne Friedman, his wife.‘

On or about February 23, 1944, amended returns were filed by Samuel, Anne, Solman, Libe, Morris, and Fay Friedman, and on these returns the respective spouses each reported one-half of the value of the gift to his and her children.

Respondent accepted the respective original returns as covering transfers giving rise to Federal gift tax liability, but determined in each case that the value of the gifts was in excess of the returned value. In the cases of Samuel and Solman, respondent increased the returned value in each return to $175,000, and in the case of Morris, to $150,000. On the basis of these increased values, deficiency notices were issued asserting gift tax liabilities against Samuel and Solman in the amounts of $23,400 each and against Morris in the amount of $17,775. Respondent determined in each case that the gifts were made from the separate property of the stated donor and did not involve gifts from his community property.

Each petitioner claims in his petition (1) that the value determined is excessive, and (2) that the subject matter of the gifts was community property.

The net worth of Friedman Bag Co. at the end of each of the years 1929 through 1941, and on September 30, 1942, was as follows:

+-----------------------------------+ ¦1929¦$79,400.27¦1936 ¦$155,032.14¦ +----+----------+-------+-----------¦ ¦1930¦83,296.33 ¦1937 ¦225,142.83 ¦ +----+----------+-------+-----------¦ ¦1931¦81,304.38 ¦1938 ¦255,533.31 ¦ +----+----------+-------+-----------¦ ¦1932¦84,787.09 ¦1939 ¦362,625.84 ¦ +----+----------+-------+-----------¦ ¦1933¦112,757.23¦1940 ¦419,309.79 ¦ +----+----------+-------+-----------¦ ¦1934¦129,174.42¦1941 ¦586,372.35 ¦ +----+----------+-------+-----------¦ ¦1935¦141,468.14¦9/30/42¦749,102.37 ¦ +-----------------------------------+

The net profits of the company from March 15, 1929, through March 31, 1946, were as follows:

+----------------------------------------------------------------+ ¦3-15-29 to 3-14-30¦$9,119.52¦Year 1938 ¦$65,522.86¦ +------------------+---------+------------------------+----------¦ ¦3-15-30 to 2-28-31¦2,211.51 ¦1939 ¦132,419.40¦ +------------------+---------+------------------------+----------¦ ¦3-1-31 to 12-31-31¦3,165.87 ¦1940 ¦145,546.76¦ +------------------+---------+------------------------+----------¦ ¦Year 1932 ¦9,950.26 ¦1941 ¦224,779.47¦ +------------------+---------+------------------------+----------¦ ¦1933 ¦36,136.00¦1-1-42 to 9-30-42 ¦283,700.60¦ +------------------+---------+------------------------+----------¦ ¦1934 ¦27,933.77¦Fiscal yr. ended 9/30/43¦443,408.75¦ +------------------+---------+------------------------+----------¦ ¦1935 ¦22,800.60¦9/30/44 ¦506,730.84¦ +------------------+---------+------------------------+----------¦ ¦1936 ¦19,218.44¦9/30/45 ¦260,339.28¦ +------------------+---------+------------------------+----------¦ ¦1937 ¦91,972.47¦3/31/46 ¦135,568.37¦ +----------------------------------------------------------------+

The balance sheet of the company as at September 30, 1942, was as follows:

+---------------------------------------------------------------+ ¦ASSETS ¦ +---------------------------------------------------------------¦ ¦Current assets: ¦ ¦ ¦ +---------------------------------------+-----------+-----------¦ ¦Cash on hand and in banks ¦ ¦$10,413.54 ¦ +---------------------------------------------------+-----------¦ ¦Receivables ¦ ¦ +---------------------------------------------------+-----------¦ ¦Accounts—trade* ¦$407,735.64¦ ¦ +---------------------------------------+-----------+-----------¦ ¦Accounts—others ¦6,162.34 ¦ ¦ +---------------------------------------+-----------+-----------¦ ¦Notes receivable ¦12,364.20 ¦ ¦ +---------------------------------------+-----------+-----------¦ ¦Advances to employees and miscellaneous¦8,995.35 ¦ ¦ +---------------------------------------+-----------+-----------¦ ¦Total ¦435,257.53 ¦ ¦ +---------------------------------------+-----------+-----------¦ ¦Less reserve for bad debts ¦22,670.17 ¦ ¦ +---------------------------------------+-----------+-----------¦ ¦ ¦ ¦412,587.36 ¦ +---------------------------------------+-----------+-----------¦ ¦Inventories: ¦ ¦ ¦ +---------------------------------------+-----------+-----------¦ ¦Raw materials ¦$377,840.57¦ ¦ +---------------------------------------+-----------+-----------¦ ¦New bags ¦29,470.42 ¦ ¦ +---------------------------------------+-----------+-----------¦ ¦Used bags ¦36,287.31 ¦ ¦ +---------------------------------------+-----------+-----------¦ ¦Twine and miscellaneous ¦39,805.26 ¦ ¦ +---------------------------------------+-----------+-----------¦ ¦Supplies ¦6,213.40 ¦ ¦ +---------------------------------------+-----------+-----------¦ ¦Goods in transit ¦59,547.02 ¦ ¦ +---------------------------------------+-----------+-----------¦ ¦ ¦ ¦ ¦ +---------------------------------------+-----------+-----------¦ ¦ ¦ ¦$549,163.98¦ +---------------------------------------+-----------+-----------¦ ¦Total current assets ¦ ¦972,164.88 ¦ +---------------------------------------+-----------+-----------¦ ¦Contingent assets: ¦ ¦ ¦ +---------------------------------------+-----------+-----------¦ ¦Insurance claims receivable ¦ ¦59,873.57 ¦ +---------------------------------------------------------------+

FN* Partially pledged to California Bank under general pledge agreement.

+--------------------------------------------------------+ ¦Fixed assets: ¦ ¦ ¦ ¦ +----------------+----------+---------------+------------¦ ¦ ¦Cost ¦Depr. reserve ¦Book value ¦ +----------------+----------+---------------+------------¦ ¦Land ¦$24,267.67¦ ¦$24,267.67 ¦ +----------------+----------+---------------+------------¦ ¦Buildings ¦97,368.98 ¦$13,785.37 ¦83,583.61 ¦ +----------------+----------+---------------+------------¦ ¦Machinery and ¦ ¦ ¦ ¦ +----------------+----------+---------------+------------¦ ¦equipment ¦104,817.16¦67,174.69 ¦37,642.47 ¦ +----------------+----------+---------------+------------¦ ¦Office furniture¦ ¦ ¦ ¦ +----------------+----------+---------------+------------¦ ¦and fixtures ¦3,558.43 ¦2,081.93 ¦1,476.50 ¦ +----------------+----------+---------------+------------¦ ¦Automobiles and ¦ ¦ ¦ ¦ +----------------+----------+---------------+------------¦ ¦trucks ¦14,869.39 ¦10,282.21 ¦4,587.18 ¦ +----------------+----------+---------------+------------¦ ¦ ¦244,882.63¦93,324.20 ¦ ¦ +--------------------------------------------------------+

+------------------------------------------------------+ ¦Total fixed assets ¦ ¦151,557.43 ¦ +-------------------------------+---------+------------¦ ¦Deferred charges: ¦ ¦ ¦ +-------------------------------+---------+------------¦ ¦Prepaid insurance and bonds ¦$6,090.44¦ ¦ +-------------------------------+---------+------------¦ ¦Prepaid taxes ¦4,143.06 ¦ ¦ +-------------------------------+---------+------------¦ ¦Prepaid interest ¦12.49 ¦ ¦ +-------------------------------+---------+------------¦ ¦Total deferred charges ¦ ¦10,245.99 ¦ +-------------------------------+---------+------------¦ ¦Other assets: ¦ ¦ ¦ +-------------------------------+---------+------------¦ ¦Unused letters of credit—contra¦ ¦216,386.68 ¦ +-------------------------------+---------+------------¦ ¦Total assets ¦ ¦1,410,228.55¦ +------------------------------------------------------+

LIABILITIES Current liabilities: Accounts payable—trade $74,113.20 Accounts payable—others 4,483.66 Accounts payable—employees 19,217.40 Customers' deposits and credit balances 2,456.17 Trade acceptances payable—bank 167,815.77 Note payable—bank 50,000.00 Notes payable—others 10,250.07 Accrued pay roll 2,783.73 Accrued expense 9,101.14 Total current liabilities 340,221.14 Other liabilities: Issued and unused letters of credit—contra $216,386.68 Due to deceased partner's estate 75,358.08 Total other liabilities $291,744.76 Total all liabilities 631,965.90 Deferred credit to income: Unrealized profit on uncollected insurance claims 29,160.28 Net worth: Samuel Friedman-capital 268,211.99 Solman Friedman-capital 281,173.38 Morris Friedman-capital 199,717.00 Total net worth 749,102.37 Total liabilities and net worth 1,410,228.55

An investment counselor and financial analyst, called as a witness by petitioners, was of the opinion that the purported transferred interests were of the fair market value on October 1, 1942, of $84,711 for the interest transferred by Samuel and his wife; the same for the interest transferred by Solman and wife; and $72,609 for the interest transferred by Morris and his wife. The fair market values of these interests on October 1, 1942, were not in excess of the figures stated.

On October 1, 1942, a new partnership agreement was executed by the three brothers and their respective wives, wherein they purported to form a partnership under the same trade name with their minor children. The wives signed in their individual capacity and as guardians for their children. The amounts set up on the books as the fixed capital account of each child were stated in the agreement to represent the child's capital contribution to the new partnership.

Profits and losses were to be shared in the following percentages:

+-------------------------------------+ ¦ ¦Per cent ¦ ¦Per cent ¦ +------+----------+--------+----------¦ ¦Samuel¦21. ¦Ephraim ¦3.5 ¦ +------+----------+--------+----------¦ ¦Solman¦21. ¦Annette ¦3.5 ¦ +------+----------+--------+----------¦ ¦Morris¦18. ¦Linda ¦3.5 ¦ +------+----------+--------+----------¦ ¦Albert¦4.666 ¦Beatrice¦3.5 ¦ +------+----------+--------+----------¦ ¦Ruth ¦4.666 ¦Harvey ¦6. ¦ +------+----------+--------+----------¦ ¦Gerald¦4.666 ¦Sandra ¦6. ¦ +-------------------------------------+

The agreement also provided that the profits or losses should be credited or charged to the excess capital account of each partner, but, if there was no excess account, then the charge or credit should be made to the respective fixed capital accounts.

The agreement further stated that the excess capital account could be withdrawn by any of the partners at any time on 60 days' written notice, but none of the parties could otherwise dispose of any of his or her interest in the partnership without the written consent of the other partners first had and obtained, and each partner desiring to sell was required to accept the offer of the others if the then book value of the interest to be sold was offered, exclusive of the good will.

Section 10 of the agreement provided:

It is further understood and agreed that the minor partners, through their respective guardians, will, during the period of disability of said minor partners, by written direction, designate a single representative of their collective interests, who is hereby given general authority to act in the place and stead of said guardians and who will be active generally in the operations of the partnership business. It is agreed that said nominee is to receive a salary to be paid by said partnership, which is to be considered as a business expense; provided, however, that said nominee is to primarily safeguard the legal and fiscal interests of said minor partners. The guardians agree to be bound by the acts and conduct of said nominee and to report his operations periodically to the Court. The designation of such nominee is not to be a derogation to any extent of the lawful rights, duties and obligations of said guardians to their wards or to said partnership, as provided by law.

Paragraph 6 of the agreement provided that the senior partners were to draw salaries, to be charged on the books as a business expense, in the following amounts: Samuel and Solman, $75 per week each, and Morris, $65 per week. The provision for these salaries, no previous salaries having been drawn by the brothers, was to operate as an offset to the salary to be paid the nominee.

The agreement carried certain additional provisions which in substance were as follows: At least $40,000 insurance would be carried on each of the lives of Samuel, Solman, and Morris, and the premiums would be paid on the policy of the insured by the other two brothers and charged to their respective accounts in the business. The beneficiaries in each policy were to be the wife and/or children of the insured. Upon the death of any of the brothers, his widow and/or children were to receive the life insurance, plus any interest the deceased had in the business in excess of the amount of the insurance, excluding his proportionate interest in the good will. In consideration of these provisions, the respective wives agreed ‘to follow the provisions of this agreement and accept same and be bound by same in lieu of any claims they may have either under the laws of inheritance of the State of California, or under the community property law of this State, or otherwise.‘ These provisions were to be inoperative in case the partnership should be terminated or dissolved by other than the death of any of the brothers.

Each of the wives, having theretofore been appointed guardian for her minor children by action of the state court, joined in the appointment of George Gordon, an attorney, as the nominee under the terms of the partnership agreement of October 1, 1942.

Gordon had shared office space with J. Robert Arkush, attorney for the company, as a result of which he became acquainted with Samuel Friedman. He was approached by Friedman with reference to undertaking the duties of nominee and consented to such employment, for which he received, on the average, about $70 weekly. He was also permitted to carry on the private practice of law. He joined the company in November 1942, and his compensation was thereafter deducted as a business expense.

Gordon had no previous experience in the bag business. As he became more familiar with the business, he assumed more duties, assisting in office management and matters involving the interpretation of government regulations and preparation of government forms. His presence relieved Samuel of some of the detail work he previously had performed. Samuel was generally in charge of financial matters, purchases, and approval of credits. Solman was in charge of the plant and production. Morris handled local sales. Out of state sales were handled by employees, after Harry's death. Gordon attended the daily meetings of the three brothers and expressed his opinion on policy matters, which on one occasion was adopted.

The formation of the new partnership was motivated by the savings that could be effected in income taxes and by the desire to create estates for the minor children. There was no business purpose for the formation of the partnership, and it was turned into a corporation in 1946.

The partnership was a well managed business, and one in which the services of the three brothers were a predominantly more important income-producing factor than capital.

The income of the business for the years 1941, 1942, and 1943 was the community property of each of the three brothers and their respective wives.

The purported partnership of the petitioners and their minor children, so far as the children are concerned, was not a valid partnership for income tax purposes.



OPPER, Judge:

For simplicity the issue relating to the validity of the partnership with petitioners' children will first be considered. This would be a mere routine case for application of the Tower and Lusthaus principle were it not for an ingenious device strenuously advanced by petitioners as an element controlling in the opposite direction. The children obviously contributed no new capital originating with them; they rendered no services, vital, managerial, or otherwise, to the partnership. But services of some sort were rendered to the business by an individual who was selected as ‘nominee‘ of the children's interest and who was thereupon constituted a participant to some extent in the activities and operations of the enterprise itself. It is the services rendered by this nominee to which petitioners point as the distinguishing feature.

Commissioner v. Tower, 327 U.S. 280; Lusthaus v. Commissioner, 327 U.S. 293.

Even, however, without the case of Wade E. Moore, 7 T.C. 1250, the contention so advanced by petitioners appears untenable. In one aspect, the nominee was acting as a mere individual not to any extent participating in the profits of the partnership, contributing his services and receiving in exchange a salary as a partnership employee. In another aspect, he was the warden of the minors' interest— the protector, at least theoretically, of the property which they individually, as distinguished from the partnership as a whole, had acquired. It will not do to look too closely at this conception, since the spectacle of a total stranger appointed by the parents, protecting from despoilment on the part of these same parents property voluntarily given by them to their children, is not what one might term an excessively obvious illustration of the reality with which matters of taxation are supposedly treated. See Paul G. Greene, 7 T.C. 142, 150.

But assuming the transaction to have been in reality everything that its superficial description would make it, nevertheless the services rendered by the nominee in protecting the interests of the children against the possible actions of their copartners were services rendered to the children themselves, or to their benefactors, and not in any sense to the partnership or its business. For such services the interests supposedly residing in the minors are entitled to no credit under the vital or managerial services test of the Tower and Lusthaus cases.

An identical result was reached in Wade E. Moore, supra. In that case an employee named Charles F. Moore, ‘who was experienced in the business as the office manager for the partnership, but was not a partner and not related to any of the partners, agreed to accept the trusteeship for the two sons,‘ aged twelve and nine years, to whom had been made ‘a gift of one-half share of * * * (their father's) capital account‘ in a then existing partnership. ‘After the transfer in trust Charles F. Moore, in his capacity as trustee, signed contracts as a partner whenever necessary and discussed the partnership business.‘ In concluding that no valid partnership had been thus established so as to relieve the father of the tax liability on his full distributive share in the partnership income, we were ‘of the opinion that by such acts those parties (including the trustee) did not substantially contribute 'to the control and management of the business, or otherwise perform vital additional services' to the partnership business.‘ The business continued to operate here, as it did there, without a substantial or significant change as far as control and management were concerned. W. M. Mauldin, 5 T.C. 743; affd. (C.C.A., 4th Cir.), 155 Fed.(2d) 666. Neither the nominee's services contributed as a paid employee of the business nor his participation, as a representative of the children, in its control and management attained the significance necessary to that contribution of managerial or vital additional services called for by the doctrine of the Tower and Lusthaus cases. The conclusion must be that no partnership existed as far as the share of the children is concerned.


The situation involving the respective wives is, however, radically different. The parties' residence in a community property state and the conclusion that the partnership income was attributable principally to the personal services of the husbands leaves in controversy only the comparatively small portion of the partnership income, whatever that may be, which might be determined to be the product of the relatively insignificant original capital contributed to the business by the husbands before their marriage. Accepting the testimony that a community interest was in each case bestowed upon the wives, an unchallenged aspect of the record incorporated as a fact in our findings, and proceeding upon the principle exemplified by an array of authority that neither writing nor consideration is necessary to support such a transfer, the disposition of even this minor phase of the controversy presents no difficulty. The unavoidable conclusion is that all of the partnership income was that of the respective communities, and that the petitioner husbands are chargeable with only their community interest therein.

Kenney v. Kenney, 30 Pac.(2d) 398; Estate of Joe Crail, 46 B.T.A. 658.


The consequence of this result on the gift tax issue is that only a corresponding proportion of the gift was that of the respective husbands. The interest in the business transferred to the children was in fact limited to the capital accounts standing in the names of the petitioner husbands, and the terms of the agreement are adequate evidence that the parties intended the gifts to be restricted to the interests held by the marital communities, a conclusion entirely consistent with the necessary assumption that, on the least favorable interpretation, most of the partnership capital necessarily consisted of community property, resulting as it did preponderantly from the post-marital personal services of the husbands.

The consequent fractional portion of each gift deriving from the petitioner-husbands, coupled with the control over its subject matter which they each retained through their domination of the partnership, and even more securely by the continuing option necessarily retained to deprive the partnership of its principal value by the discontinuance of their own services, cf. Lucas v. Earl, 281 U.S. 111, have led us to value the gifts as set forth in our findings. Cf. Willoughby H. Rothrock, 7 T.C. 848, with William H. Gross, 7 T.C. 837. The very factors of parental interest and business control which have determined our disposition of the partnership issue are considerations tending to diminish the monetary worth of the gifts in terms of the impersonal pecuniary standards of the market place. The values thus determined, falling as they do within the permitted exclusions and exemptions, eliminate the deficiencies on this phase of the controversy.

Assuming a value for the community interests of Samuel and Solman of $84,711, and of Morris of $72,609, and gross gifts by the respective husbands and wives of $42,355.50 in the one case and $36,304.50 in the other, exclusions based on the number of donees and apparently accepted by all parties reduce the net gifts to $30,355.50, $26,355.50, and $28,304.50. All petitioners assign as error respondent's failure to credit them with the full portion of the $40,000 exemption to which they were all entitled, thus effectively allocating to these gifts whatever share of the exemptions may be required to offset them. Since none of the net gifts at their maximum value exceeds $40,000 or will exhaust the exemption thus applied, no gift tax deficiency could be found on any valuation of the gifts within the range established by our findings, and any more specific figure announced by this opinion could be no more than dictum.

We accordingly find it unnecessary to decide that the gifts were ‘bona fide‘ or ‘completed‘ for purposes of determining a gift tax deficiency under the asserted remnant of authority of Robert P. Scherer, 3 T.C. 776. But see J. M. Henson, 10 T.C. 491. There was not here, as in the Scherer case, any testimony advanced by respondent's witnesses that the gifts were of so great a value that their uncontrolled transfer must be assumed.

Nor do we think it possible to ascribe to the capital interests, originating as they did with the parents, a value upon which some return to the children must be assumed. Cf. Claire L. Canfield, 7 T.C. 944. Although, as petitioners point out, respondent's determination of the gift tax deficiency indicates his assumption that some property interest was created in the children, petitioners deny the value attributed to it by respondent, and on this point our conclusion supports them. ‘Petitioners (in their brief) concede that, if the partnership agreement merely gave the minor partners the right to receive future income if, as and when earned by the efforts of the senior partners, such future income would clearly remain taxable to them * * * .‘ As we have already concluded, so great was the proportion of the income attributable to personal services and so doubtful was the present right of the children to the control or withdrawal of any part of their interest in the business that we are not prepared to attribute any of the partnership income to a contribution of capital by the children under any theory. It follows that the income tax deficiencies must be approved, except as to the community property issue, and the gift tax deficiencies overruled.

Decisions will be entered under Rule 50.