Comm'r of Internal Revenue

This case is not covered by Casetext's citator
Tax Court of the United States.May 21, 1946
6 T.C. 1093 (U.S.T.C. 1946)

Docket Nos. 5592 5620 5621 5622 5623 5624.



J. Lee Boothe, C.P.A., and Ethan C. Prewitt, Esq., for the petitioners. Melvin S. Huffaker, Esq., for the respondent.

1. Held, respondent erred in determination of good will as a factor in liquidation of a corporation.

2. Respondent's determination that petitioner did not make bona fide gifts of stock sustained for lack of proof.

3. Held, during the taxable years a bona fide partnership, composed of petitioner, his two adult sons, and another, existed in respect of a tool-manufacturing business, where petitioner contributed capital and services and the others contributed services constituting a substantial factor in the production of the income; held, further, the partnership is not recognized as to petitioenr's wife and two daughters, who contributed no capital and performed only minor services, and petitioner is taxable on the respective shares of income credited to them. J. Lee Boothe, C.P.A., and Ethan C. Prewitt, Esq., for the petitioners. Melvin S. Huffaker, Esq., for the respondent.

The respondent determined deficiencies in income tax for the years 1940 and 1941 as follows:

+-----------------------------------------------------------+ ¦ ¦Deficiency ¦ +------------------------------------+----------------------¦ ¦Petitioner ¦1940 ¦1941 ¦ +------------------------------------+----------+-----------¦ ¦Howard B. Lawton ¦$44,208.93¦$185,763.10¦ +------------------------------------+----------+-----------¦ ¦Norman B. Lawton and Helen S. Lawton¦89.06 ¦ ¦ +------------------------------------+----------+-----------¦ ¦Leonard B. Lawton ¦72.77 ¦ ¦ +------------------------------------+----------+-----------¦ ¦Dorothy K. Whiton ¦38.56 ¦ ¦ +------------------------------------+----------+-----------¦ ¦Vivian Stanley ¦28.77 ¦ ¦ +------------------------------------+----------+-----------¦ ¦William Blakley ¦187.91 ¦ ¦ +-----------------------------------------------------------+

The issues are:

(1) Whether or not taxable income was received in the year 1940 upon the dissolution of Star Cutter Co., a corporation, resulting from the distribution of good will to its stockholders in such dissolution and, if so, in what amount;

(2) Whether or not the gain on the distribution of assets incidental to the dissolution of the corporation is taxable in its entirety to petitioner Howard B. Lawton; and

(3) Whether or not a valid partnership was in existence after September 1, 1940, with respect to the ownership and operation of the Star Cutter Co.


The petitioners are individuals, residing in Detroit, Michigan, or suburbs thereof. With the exception of Norman B. Lawton and Helen S. Lawton, his wife, who filed joint returns for the years in question, the petitioners filed separate income tax returns for the years 1940 and 1941 with the collector of internal revenue at Detroit, Michigan.

Petitioners Norman B. Lawton, Leonard B. Lawton, Dorothy K. Whiton, and Vivian Stanley are children of petitioner Howard B. Lawton and his wife, Lucy M. Lawton. Petitioner William Blakely is not related to the other petitioners. Since the contested issues relate principally to the tax liability of Howard B. Lawton, he alone will be referred to hereinafter as the petitioner.

On February 19, 1927, the Star Cutter Co. (hereinafter called the Corporation) was incorporated under the laws of Michigan, with an authorized capital of 1,000 shares of common stock of a par value of $10 per share. The incorporators and the number of shares subscribed by each were as follows:

+-------------------------------+ ¦Howard B. Lawton ¦290 shares¦ +--------------------+----------¦ ¦J. Frank Burgess ¦190 shares¦ +--------------------+----------¦ ¦Howard G. Pillsbury ¦10 shares ¦ +--------------------+----------¦ ¦Lucy M. Lawton ¦10 shares ¦ +--------------------+----------¦ ¦Gertrude A. Burgess ¦10 shares ¦ +-------------------------------+

In 1929 Blakley purchased 10 shares of stock from Howard G. Pillsbury for $250. The petitioner acquired the remaining stock, except the 10 shares held by his wife. Immediately prior to September 1, 1937, the stock of the corporation was held as follows:

+----------------------------+ ¦Howard B. Lawton ¦980 shares¦ +-----------------+----------¦ ¦Lucy M. Lawton ¦10 shares ¦ +-----------------+----------¦ ¦William Blakley ¦10 shares ¦ +----------------------------+

The corporation was engaged in the manufacture of high speed precision cutting tools. Approximately 95 percent of its products consisted of special tools manufactured according to specifications. The remainder consisted of standard catalogue tools. Between 80 percent and 90 percent of the corporation's sales were made to the Chrysler Corporation and to General Motors.

From the time he finished high school until the corporation was organized, the petitioner had worked for various companies engaged in the manufacture of similar products. His work consisted of the designing of special tools. His last employer was the Clark Cutter Co., of Detroit. In 1927 that corporation sold its physical assets to the Michigan Tool Co. The petitioner received an offer to go with the latter company, but decided instead to start his own business. That portion of the business of Clark Cutter Co. which involved special engineering and designing did not go to the Michigan Tool Co., but followed the petitioner to the Star Cutter Co.

The petitioner was president and general manager of the corporation. During the early days of its activities, he also worked in the machine shop and looked after the sales, the designing, and the purchasing.

The petitioner's son, Norman B. Lawton, started working full time for the corporation in 1936, after receiving an engineering degree from the University of Michigan. He was paid 50 cents per hour at the start, which was raised 5 cents per hour each month for the first 5 months he was there. His work kept him in the shop most of the time. He designed and supervised the erection of a ‘back-off‘ machine, which was more accurate for the work required than any other machine of that type then in use. Occasionally he did what was termed ‘outside work.‘ This consisted of straightening out difficulties experienced by customers in the operation of machines. It was a regular service of the corporation and no separate charge was made therefor. In 1940 Norman was works manager, receiving a salary of $100 per week.

The petitioner's other son, Leonard B. Lawton, began to work full time for the corporation in 1937. He also received a starting wage of 50 cents per hour, which was raised 5 cents per hour each month for the first 5 months. His work at first consisted of running machines and in learning how to operate them. He familiarized himself with the operation of all the machines in the shop. Later he worked outside the shop and was engaged both in selling and in ‘outside work.‘ In 1940 or 1941, when the pressure of war orders eliminated the necessity for outside salesmen, Leonard came back into the shop and took charge of the third shift.

Lucy M. Lawton, wife of the petitioner, started working for the corporation in 1927. Her duties at that time included assigning order numbers to the purchase orders and making out shop order forms and job tickets. She made out the invoices and statements at the end of the month and made the book entries for returned goods. She placed the orders for all materials. She worked six days a week from 1927 to 1931. From 1931 to 1940, she worked five days a week. She continued to work two or three days a week after that in order to help figure the pay roll. She received no salary for her services.

In 1931 the petitioner's daughter, Vivian Stanley, who at that time had just finished high school, began to work in the office. She did general office work of the same type as that performed by her mother. She received a salary of approximately $25 per seek for her services. In 1937, owing to the birth of her child, she ceased to work for the corporation.

Dorothy K. Whiton, the petitioner's other daughter, started to work in the office in 1937. She did all the office work except that Mrs. Lawton continued to come in two or three days a week to help with the pay roll. Mrs. Whiton worked until 1944. She received a salary of $25 per week.

William Blakley was employed by the corporation in 1927. In 1940 he was shop superintendent. He was in charge of manufacturing and had supervision over all the shifts.

On September 1, 1937, the petitioner made transfers of shares of stock of the corporation to the persons named and in the amounts stated, as follows:

+------------------------------+ ¦ ¦Shares ¦ +------------------+-----------¦ ¦Name ¦Transferred¦ +------------------+-----------¦ ¦Lucy M. Lawton ¦400 ¦ +------------------+-----------¦ ¦Norman B. Lawton ¦50 ¦ +------------------+-----------¦ ¦Leonard B. Lawton ¦50 ¦ +------------------+-----------¦ ¦Dorothy K. Whiton ¦50 ¦ +------------------+-----------¦ ¦Vivian Stanley ¦50 ¦ +------------------+-----------¦ ¦William Blakley ¦40 ¦ +------------------------------+

A gift tax return was filed with respect to these transfers, but no tax was paid because of the specific exemption.

In 1938 the petitioner and his wife each transferred 25 shares of stock to each of their 4 children. In 1939 the petitioner transferred 8 shares to each of his children and 8 shares to Blakley. In the same year Mrs. Lawton transferred 32 shares to each of the children and a like amount to Blakley. In 1940 the petitioner transferred 10 shares to each of his children and 10 shares to Blakley. No gift tax returns were filed with respect to the transfers made in 1938, 1939, and 1940. In making the transfers the petitioner was motivated in part by tax-saving reasons.

The transfers were all made in an informal manner. The petitioner, as president, and Mrs. Lawton, as secretary, made the transfers on the stock record books. The old certificates were canceled and new ones issued. The canceled stubs and vouchers were placed in the minute book. Revenue stamps were affixed to the new certificates. The new certificates were not given to the purported donees, but were kept in the office safe.

On August 31, 1940, the stock of the corporation was listed on the corporation's books as follows:

+---------------------------------------------------------+ ¦Howard B. Lawton ¦150 shares¦Dorothy K. Whiton¦150 shares¦ +-----------------+----------+-----------------+----------¦ ¦Lucy M. Lawton ¦150 shares¦Vivian Stanley ¦150 shares¦ +-----------------+----------+-----------------+----------¦ ¦Norman B. Lawton ¦150 shares¦William Blakley ¦100 shares¦ +-----------------+----------+-----------------+----------¦ ¦Leonard B. Lawton¦150 shares¦ ¦ ¦ +---------------------------------------------------------+

No dividends were ever paid or declared on the stock during the existence of the corporation.

In 1940 the petitioner discussed with other businessmen the possibility that a saving in taxes would result from conducting the business as a partnership. He learned that if the business had been conducted as a partnership in 1939 there would have been a tax saving of $22,000 in that year. Because of this fact chiefly, and because he was of the opinion that the members of the family would work harder and would consider themselves as a part of the business if they were made partners, he decided to dissolve the corporation and form a partnership.

On August 31, 1940, the corporation was dissolved. The assets of the corporation were appraised at that time at their book value and no allowance was made for good will. On October 9, 1940, the petitioner, Lucy M. Lawton, Norman B. Lawton, Leonard B. Lawton, Dorothy K. Whiton, Vivian Stanley, and William Blakley executed an instrument denominated ‘Articles of CoPartnership,‘ the material provisions of which follows:

1. The name of this copartnership is Star Cutter Company.

2. The place of business is 10040 Freeland Avenue, Detroit, Michigan.

3. The members thereof are:

+------------------------------------+ ¦Howard B. Lawton ¦Dorothy K. Lawton ¦ +-----------------+------------------¦ ¦Lucy M. Lawton ¦Vivian M. Stanley ¦ +-----------------+------------------¦ ¦Norman B. Lawton ¦William G. Blakley¦ +-----------------+------------------¦ ¦Leonard B. Lawton¦ ¦ +------------------------------------+

4. The interest of each member in said copartnership is as follows:

+--------------------------------------------+ ¦Howard B. Lawton ¦15%¦Dorothy K. Lawton ¦15%¦ +-----------------+---+------------------+---¦ ¦Lucy M. Lawton ¦15%¦Vivian M. Stanley ¦15%¦ +-----------------+---+------------------+---¦ ¦Norman B. Lawton ¦15%¦William G. Blakley¦10%¦ +-----------------+---+------------------+---¦ ¦Leonard B. Lawton¦15%¦ ¦ ¦ +--------------------------------------------+

5. The capital consists of all assets of the former Star Cutter Company, a Michigan Corporation, which was engaged in business at the same place, recently dissolved, which assets, subject to outstanding obligations, have been deeded and assigned by it to this copartnership.

7. Profit and losses shall be shared in accordance with the various holdings of the members and division thereof shall be made annually.

8. All funds shall be deposited in the Wabeek State Bank of Detroit, Fisher Building, in the copartnership name. Checks upon these funds shall be signed either by Howard B. Lawton, Lucy M. Lawton, Norman B. Lawton or William G. Blakley. All other papers such as contracts, notes, etc., whereby the partnership may be bound, shall be signed by any two members of the partnership.

12. On the severance of a partner's connection with the copartnership by his voluntary retirement, death, bankruptcy or otherwise, his interest therein shall be determined by the book value thereof as it appears on the books of the company, and there shall be no allowance for good will.

13. Any partner who shall be desirous of selling his share and interest in the business shall have the liberty to do so and shall in such case first offer such share and interest to the other partners, equal amounts to each partner, at the book value as the same appears on the books of the firm, and if the other partners shall not within one calendar month accept such offer, then the selling partner shall be at liberty to sell his share and interest to any other person or persons at the same or a higher price, but shall not sell the same to any other person at less price unless and until it shall have been offered to the other partners for the time being at such less price and such last mentioned offer shall not have been accepted within one calendar month. In case of purchase, the partner or partners purchasing the share of the retiring partner, shall be allowed to pay for same in twelve equal monthly payments— the first falling due thirty days from date of agreement to purchase.

14. The severance of a partners' connection with the firm, either by death, voluntary retirement, bankruptcy or otherwise, shall not dissolve this copartnership.

15. Between the partners, there shall be no benefit of survivorship and the executors and administrators of each partner who shall die, shall become entitled to his share as part of his personal estate, and in case of bankruptcy of any partner, his interest shall be considered personal property.

16. The decision of a majority in value shall control on questions of management, matters of dispute and amendment of articles of copartnership.

17. The term of existence of this copartnership shall be thirty years.

18. Upon the final dissolution of the partnership, the assets remaining after all liabilities have been taken care of, shall be divided in accordance with the respective holdings of the members.

Other than their purported shares in the assets of the corporation, nothing was contributed to the business by the parties to the contract at the time of its execution.

A quitclaim deed and a bill of sale were executed, transferring all the real and personal property, respectively, of Star Cutter Co., a corporation, to Star Cutter Co., a copartnership. The bank with which the corporation had done business was advised that the corporation had been dissolved and a partnership formed. The bank account was put in the name of Star Cutter Co., a partnership. Contracts with the War and Treasury Departments entered into after the execution of the articles of copartnership were made in the name of ‘Star Cutter Company, Partnership.‘ Other customers of the business were informed of the change in the form of operation.

The dissolution of the corporation and the creation of the partnership brought no new capital into the business and effected no change in the manner of carrying on the business except that in lieu of salaries the purported partners drew sums as they needed them against the expected profits for the year.

During the taxable years in question, and prior thereto, the household expenses of the petitioner and his wife were paid by Mrs. Lawton out of a joint checking account which was used by both the petitioner and Mrs. Lawton.

In 1940 all the children of petitioner had reached the age of 21.

In their respective returns for 1940, each of the petitioners reported a net long term capital gain upon liquidation of the corporation. In computing the value of the assets received, nothing was included on account of good will. The respondent determined that the total value of the net assets received on liquidation included good will in the amount of $174,038. He further determined that the petitioner, Howard B. Lawton, was taxable on the entire gain realized on liquidation of the corporation.

Partnership returns were filed for the fiscal years ended August 31, 1941, and August 31, 1942. These returns disclosed ‘partners' shares of income‘ and total income, as follows:

+---------------------------------------+ ¦ ¦Income ¦ +-----------------+---------------------¦ ¦Partner ¦9-1-40 to ¦9-1-41 to ¦ +-----------------+----------+----------¦ ¦ ¦8-31-41 ¦8-31-42 ¦ +-----------------+----------+----------¦ ¦Howard B. Lawton ¦$33,446.94¦$98,755.41¦ +-----------------+----------+----------¦ ¦Lucy M. Lawton ¦33,446.94 ¦98,755.43 ¦ +-----------------+----------+----------¦ ¦Norman B. Lawton ¦33,446.94 ¦98,755.43 ¦ +-----------------+----------+----------¦ ¦Leonard B. Lawton¦33,446.94 ¦98,755.43 ¦ +-----------------+----------+----------¦ ¦Dorothy K. Lawton¦33,446.94 ¦98,755.43 ¦ +-----------------+----------+----------¦ ¦Vivian Stanley ¦33,446.94 ¦98,755.43 ¦ +-----------------+----------+----------¦ ¦William Blakley ¦22,297.99 ¦65,836.95 ¦ +-----------------+----------+----------¦ ¦Total ¦222,979.63¦658,369.51¦ +---------------------------------------+

The respondent determined that the petitioner, Howard B. Lawton, was taxable upon the entire net income of the business under section 22(a) of the Internal Revenue Code. In the notice of deficiency the respondent made adjustments for salaries to Norman B. Lawton and Leonard B. Lawton at the annual rate of $5,400; to Dorothy K. Whiton and Vivian Stanley at the annual rate of $2,400; and to William Blakley at the annual rate of $12,000. No allowance for salary was made with respect to Lucy M. Lawton.



The first issue is whether or not there should be included in the value of the assets distributed on liquidation of the corporation an amount representing the value of good will and, if so, in what amount.

In computing the value of the assets at the time of dissolution the officers of the corporation did not include any amount representing good will. In his notice of deficiency the respondent determined that the corporation possessed good will, the value of which he computed according to the capitalization of earnings method. This method has received approval in several cases. See Otis Steel Co., 6 B.T.A. 358; Schilling Grain Co., 8 B.T.A. 1048; Kaltenbach & Stephens, Inc., 12 B.T.A. 1009. Application of this method, according to the respondent's contention, shows that as of August 31, 1940, the good will of the Star Cutter Co. had a value of $174,038, computed as follows:

+--------------------------------------------------------------------+ ¦Period, 12-31-35 to 8-31-40 ¦ ¦ ¦ +----------------------------------------------+----------+----------¦ ¦Average net earnings ¦ ¦$31,477.39¦ +----------------------------------------------+----------+----------¦ ¦Average capital and surplus ¦$67,145.13¦ ¦ +----------------------------------------------+----------+----------¦ ¦8 percent return on above ¦ ¦5,371.61 ¦ +----------------------------------------------+----------+----------¦ ¦Earnings attributable to intangible assets ¦ ¦26,105.78 ¦ +----------------------------------------------+----------+----------¦ ¦Capitalized at 15 percent (value of good will)¦ ¦174,038.00¦ +--------------------------------------------------------------------+

The petitioner contends that the corporation had no ascertainable good will at the date of its dissolution. He asserts that the excess earning power of the corporation was due not to good will, but to the skill and ability of the petitioner, of Norman and Leonard Lawton, and of Blakley. In the alternative, he contends that if good will did attach to the corporation, the value placed thereon by the respondent is excessive.

Good will as a concept embraces many elements. No precise definition can be formulated. It is not necessarily confined to a name. It may also attach to a particular location where the business is transacted, or to a list of customers, or to other elements of value in the business as a going concern. Cf. C. C. Wyman & Co., 8 B.T.A. 408. However, good will does not attach to a business or a profession, the success of which depends solely on the personal skill, ability, integrity, or other personal characteristics of the owner, D. K. MacDonald, 3 T.C. 720. As was said in Providence Mill Supply Co., 2 B.T.A. 791; ‘Ability, skill, experience, acquaintanceship or other personal characteristics or qualifications do not constitute good-will as an item of property.‘

In the instant case, we think there can be little doubt that the success of the business depended almost entirely on the ability and personal qualifications of the individuals named. Ninety-five percent or more of the corporation's activities consisted in the designing and manufacture of special tools. The petitioner had a long experience in this type of work. Prior to the formation of the corporation he had been employed by several other companies as a designer of such tools. His personal reputation in the trade is shown by the fact that when he organized the corporation he retained the business of his former employer relating to the production of special tools.

The business of the Star Cutter Co., both before and after the dissolution of the corporation, required a high degree of personal skill and ability. One of the petitioner's witnesses, a representative of Pontiac Division of General Motors, testified that, in many cases before the design for a tool was made, petitioner was called in and his opinion obtained. In addition, the Lawtons, on many occasions, were called upon to rectify any difficulty experienced in the operation of the tools installed by the corporation, or those of other manufacturers. No charge was made for this service. It is thus clear that the personal qualifications and ability of the Lawtons constituted the important factor in securing customers and producing the income of the corporation. One witness, the general tool supervisor of Chrysler-Dodge, testified, ‘* * * as far as I am concerned, without the Lawtons I do not know anything about the Star Cutter Company.‘

We are satisfied from the evidence that nothing is attributable to good will in the sense in which that term is used in the decided cases. It follows that the respondent erred in this phase of his determination.

The second issue is whether or not the petitioner is taxable on the entire gain realized on the distribution of the assets of the corporation at the time of its dissolution. The respondent contends that prior to the purported gifts of stock the petitioner was the sole stockholder of the corporation; that the transfers of stock did not constitute completed valid gifts; that, consequently, the petitioner continued to be the sole stockholder of the corporation up to the time of its dissolution and is taxable on the entire gain incident thereto.

It is to be noted that prior to September 1, 1937, the petitioner was the record holder of 980 shares. Of the remaining 20 shares, 10 were held by Mrs. Lawton and 10 by Blakley. The respondent argues that these were mere qualifying shares which did not, in any way, lessen the petitioner's complete ownership of the corporation.

With respect to the 10 shares held by Blakley, we do not think it can be said that they were mere ‘qualifying‘ shares, nor that the petitioner was taxable on the gain applicable thereto. Blakley was not an original incorporator or director of the corporation. He was first employed in 1927, some two months after the corporation had been organized. He purchased the 10 shares in 1929 from one of the original incorporators for the sum of $250. There is no suggestion that they were acquired otherwise than in an arm's length transaction. Consequently, we hold that the gain relating thereto is taxable to Blakley.

We think, however, that the respondent must be sustained in his contention with respect to the 10 shares of which Mrs. Lawton was the record holder. She was one of the incorporators of the corporation and the shares were issued to her at the time of its organization. There is no evidence that Mrs. Lawton paid any consideration for these shares and no evidence that she exercised dominion or control over them. Such evidence as there is in the record tends to support the respondent's contention that they were mere qualifying shares and, in the absence of sufficient competent evidence to the contrary, he must be sustained.

Whether or not the remainder of the gain on liquidation is taxable in toto to the petitioner depends on whether or not he made valid completed gifts of stock in 1937, 1938, 1939, and 1940.

A valid gift includes the following essential elements: (1) A donor competent to make the gift; (2) a donee capable of taking the gift; (3) a clear and unmistakable intention on the part of the donor absolutely and irrevocably to divest himself of the title, dominion, and control of the subject matter of the gift in praesenti; (4) the irrevocable transfer of the present legal title and of the dominion and control of the entire gift to the donee so that the donor can exercise no further act of dominion or control over it; (5) a delivery by the donor to the donee of the subject of the gift or of the most effectual means of commanding the dominion of it; and (6) acceptance of the gift by the donee. Adolph Weil, 31 B.T.A. 899, and cases cited therein.

We do not think the evidence in the instant case is sufficient to support the petitioner's contention that valid, bona fide gifts of stock were made. The evidence consisted entirely of oral testimony, due to the loss of the books and records in 1942 or 1943. There is thus no direct evidence that the transfers of the certificates were made on the corporation's record books. The petitioner testified that he and Mrs. Lawton, as president and secretary of the corporation, respectively, canceled the old certificates and issued the new ones. This was done at the annual meetings, but he did not recall whether or not the purported donees were present at the time. It is undisputed that the stock certificates were not given to the supposed donees, but were kept in the company's safe. Blakley testified that he never saw the shares that were supposedly given to him.

There are other factors indicating that the petitioner never relinquished the dominion and control of the subject of the gifts. There is no evidence that the purported donees ever exercised their voting rights on the stock. No dividends were paid, although the business was growing rapidly. We deem significant also the manner in which Mrs. Lawton's ‘gifts‘ paralleled those of her husband. Her ‘gifts‘ were complementary to those of the petitioner and were designed to equalize the holdings of each member of the family. The conclusion we are compelled to draw from this is that Mrs. Lawton never had an unfettered dominion over the shares purportedly given to her, but was completely amenable to the petitioner's wishes in the matter of their disposition. The petitioner was president and general manager of the corporation prior to the time of the alleged gifts. There is nothing in the record to indicate that his control of the corporation was any the less after they had been made. In Coffey v. Commissioner, 141 Fed.(2d) 204, the court said:

* * * It is the general rule that in order to complete a gift the donor must do everything reasonably permitted by the nature of the property and the circumstances of the transaction in parting with all the incidences of ownership. Continued possession, dominion and control over the subject matter of the gift and the fruits thereof afford ample basis for the taxation of the income to the donor. * * *

Here the evidence fails to show that the petitioner part with the complete dominion and control of the subject matter of the gifts. Lacking such evidence, we must sustain the respondent.

The last issue is whether or not a valid partnership existed after September 1, 1940, with respect to the ownership and operation of the Star Cutter Co.

The petitioner contends that a valid partnership was in existence, composed of the petitioner, Lucy M. Lawton, Norman B. Lawton, Leonard B. Laton, Dorothy K. Whiton, and Vivian Stanley, each having a 15 percent interest therein, and William Blakley, having a 10 percent interest therein. The respondent contends that there was no partnership; that the business was owned solely by the petitioner during the taxable years; and that the income therefrom is taxable to him in its entirety.

With respect to the interests in the partnership purportedly owned by Lucy M. Lawton, Dorothy K. Whiton, and Vivian Stanley, we think the case clearly comes within the rationale of Commissioner v. Tower, 327 U.S. 280, and Lusthaus v. Commissioner, 327 U.S. 293. In the Tower case, the 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. Sec. 181, 182. * * * But when she does not share in the management and control of the business, contributes no vital additional service, and where the husband purports in some way to have given her a partnership interest, The Tax Court may properly take these circumstances into consideration in determining whether the partnership is real within the meaning of the federal revenue laws.

Here the individuals named contributed nothing to the capital of the business. Their supposed contributions consisted solely of their respective shares in the corporate assets as represented by the stock purportedly given to them. As we have held above, however, no completed gifts of stock were ever made by the petitioner, who continued to own and control the corporation to the time of its dissolution. There is no evidence that the petitioner's wife or daughters in any way participated in the management or control of the business. No more is there evidence of those ‘vital additional services‘ characterized as essential by the Supreme Court.

Lucy M. Lawton rendered greater services to the corporation than to the partnership. During the taxable years she worked only three days a week, helping to make up the pay roll. Vivian Stanley worked for the corporation from 1931 to 1937. She did no work after that time and performed no services for the partnership. Dorothy K. Whiton worked in the office during the taxable years doing general office and clerical work. Her work for the partnership was of the same type as that performed for the corporation and for which she had received a salary of $25 per week. The services performed by her, as well as those by Mrs. Lawton, were obviously a negligible factor in the production of income. See M. M. Argo, 3 T.C. 1120. We conclude, therefore, that the respondent did not err in taxing to the petitioner the shares of the income credited to his wife and daughters. Cf. Lowry v. Commissioner, 154 Fed.(2d) 448.

We think a different answer is called for, however, with regard to the shares of the income credited to the petitioner's sons and to William Blakley. The evidence shows that these individuals worked steadily for the business for many years, the youngest, Leonard B., coming in in 1937. Norman Lawton started to work for the corporation in 1936, after completing an engineering course at the University of Michigan. His work kept him in the shop most of the time. He developed a specialized machine which was more accurate than any of its kind in existence at that time. Occasionally he did ‘outside work,‘ which called for highly developed skill and ability. In 1940 he was works manager of the entire shop.

The petitioner's other son, Leonard, began his activities by familiarizing himself with the operation of all of the machines in the shop. Later he was engaged in selling and in performing ‘outside work.‘ During the taxable years, when the pressure of war orders had eliminated the need for outside salesmen, Leonard was again in the shop, where he had charge of the third shift.

In addition to his services, Blakley made a small contribution to the capital of the business represented by his shares of stock in the corporation. Although the petitioner's sons contributed no capital to the business this, of course, does not prevent their being partners if their services contributed substantially to the production of the income. See Meehan v. Valentine, 145 U.S. 611. As the Court said in the Tower case, supra:

* * * The question here is not simply who actually owned a share of the capital attributed to the wife on the partnership books. A person may be taxed on profits earned from property, where he neither owns nor controls it. Lucas v. Earle, supra. The issue is who earned the income and that issue depends on whether this husband and wife really intended to carry on business as a partnership. Those issues cannot be decided simply by looking at a single step in a complicated transaction. To decide who worked for, otherwise created or controlled the income, all steps in the process of earning the profits must be taken into consideration. * * *

We think the evidence here amply shows that the services of Norman and Leonard Lawton and of William Blakley substantially contributed to the production of the income of the business and that these individuals and the petitioner ‘really intended‘ to carry on the business as a partnership. Consequently, we hold that they are taxable upon the shares of income credited to them and that the respondent erred in taxing these amounts to the petitioner. Cf. Estate of Frank G. Ennis, Sr., 4 T.C. 1096.

It appears from the record that a part of the income of the business for the year 1941 is subject to renegotiation. Any adjustment which may be necessary because of this can be made in the recomputation.

Decisions will be entered under Rule 50.

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