Middlebrook
v.
Comm'r of Internal Revenue

This case is not covered by Casetext's citator
Tax Court of the United States.Sep 27, 1949
13 T.C. 385 (U.S.T.C. 1949)

Docket No. 13879.

1949-09-27

JOSEPH MIDDLEBROOK, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

J. G. Houston, Esq., and John G. Kish, Esq., for the petitioner. Hobby H. McCall, Esq., for the respondent.


Petitioner as of May 11, 1938, owned 455 shares of the 500 outstanding shares of stock of Metropolitan Buick Co. On July 12, 1938, he made a gift of 199 shares of stock to his wife and on March 8, 1939, he made a further gift of one share to her. The gifts were irrevocable and no condition of any kind was attached to them. On March 15, 1939, the corporation was dissolved and the petitioner, joined by his wife and the other remaining stockholders as the sole owners of the corporate assets, transferred them to a newly organized partnership composed of petitioner, his wife, and the other stockholder. Petitioner's wife rendered important and vital services to the partnership business during the taxable years in question. Petitioner's income tax return for the taxable year 1941 was filed on March 16, 1942, and the notice of deficiency covering the year 1941 was mailed to petitioner on February 18, 1947. In determining the deficiencies, the respondent included in petitioner's taxable income the distributive share of profits of the partnership allocated to his wife. Held, that petitioner's wife, having made a contribution of capital to the partnership of which she was the owner at the time she made it and having rendered vital and important services for the business, and it having been the bona fide intention of the partners to carry on a partnership business, she was a partner for tax purposes; held, further, that since the amount of the partnership income allocated to the petitioner's wife was not includible in petitioner's income for 1941, section 275 (c) of the code is not applicable and the assessement and collection of the 1941 deficiency are barred. J. G. Houston, Esq., and John G. Kish, Esq., for the petitioner. Hobby H. McCall, Esq., for the respondent.

Respondent determined deficiencies in petitioner's income tax for the calendar years 1941, 1944, and 1945 in the respective amounts of $18,894.82, $12,507.94, and $8,703.28, and in the petitioner's income and victory tax for the year 1943 in the amount of $10,773.58. The year 1942 is involved, due to the forgiveness feature of the Current Tax Payment Act of 1943.

The deficiencies are primarily due to the determination by the respondent that the portion of the earnings and profits of the Metropolitan Buick Co., a partnership, reported as distributable to Virginia D. Middlebrook, wife of the petitioner, for the above years is taxable to petitioner. Respondent also determined with respect to 1941 that petitioner omitted from his 1942 reported gross income an amount properly includible therein which was in excess of 25 per cent of the gross income stated in his return and the tax resulting from the inclusion of the alleged omission is properly assessable under section 275 (c) of the Internal Revenue Code. Petitioner, by appropriate assignments of error, contests these adjustments. Two of the issues raised by the pleadings were abandoned and several of the adjustments made by the respondent are not contested.

The questions for our consideration therefore are: (1) Whether petitioner is taxable upon his wife's distributive share of the net income of the Metropolitan Buick Co., which was organized as a partnership under Pennsylvania law, and (2) whether the assessment and collection of the 1941 deficiency are barred by the statute of limitations.

The case was submitted upon a stipulation of facts, exhibits, and oral testimony. The facts stipulated are so found. Other facts are found from the evidence.

FINDINGS OF FACT.

Petitioner is an individual who resides in Pittsburgh, Pennsylvania. The income tax returns of the petitioner for the taxable years here involved were filed with the collector of internal revenue for the twenty-third district of Pennsylvania in Pittsburgh. His returns for these years were prepared on the cash basis.

Petitioner and his associates were engaged in the retail automobile business in Pittsburgh. During the years 1935 to March 15, 1939, the business was operated as a corporation under the name Metropolitan Buick Co. (hereinafter sometimes referred to as a corporation). The principal business of the corporation was selling Buick cars. From March 15, 1939, and during the taxable years here involved the business was operated as a partnership under the same name.

As of May 11, 1938, the corporation had outstanding 500 shares of class B stock of a par value of $100 per share and a paid-in capital of $50,000. Originally all of the stock of the corporation was held by General Motors Holding Corporation, which caused the corporation to be organized. From time to time the stock was acquired by the petitioner and Harry E. Brown and by May 11, 1938, they had acquired all of the stock, petitioner owning 455 shares and Brown 45 shares.

Prior to May 11, 1937, the directors of the corporation were the petitioner and two officers of General Motors Holding Corporation; and the officers of the corporation were Joseph Middlebrook, Jr., the petitioner, president, and Harry E. Brown, secretary-treasurer. At the directors' meeting of May 11, 1937, the two representatives of General Motors Holding Corporation resigned as directors and Harry E. Brown and Virginia D. Middlebrook, wife of petitioner, were elected directors. At the meeting of the directors held May 12, 1938, Harry E. Brown resigned as secretary-treasurer and was elected vice president. Virginia D. Middlebrook was elected secretary-treasurer. At the meeting of the directors held May 25, 1938, the salary of Virginia D. Middlebrook as secretary-treasurer was fixed at $400 per month, effective June 1, 1938.

On July 12, 1938, petitioner transferred 199 shares of class B stock of the corporation to his wife, these shares being represented by certificate No. 16. A certificate for these 199 shares was issued in her name and delivered to her. No consideration was paid for this transfer and petitioner filed a gift tax return. On the gift tax return petitioner stated the following as his motive for the transfer: ‘In event of my death she will escape inheritance tax on the above gift.‘ On March 8, 1939, petitioner made a further transfer of one share of stock to his wife without payment of any consideration, this transfer being represented by certificate No. 17. A certificate for this share was issued in her name and delivered to her. No gift tax return was filed for this one share. The transfer of these shares by petitioner to his wife was absolute and unconditional, with intent to vest full, complete, and irrevocable legal ownership of said stock in Virginia D. Middlebrook. Petitioner did not have a power of attorney or any other authority to exercise control or dominion over them and there was no understanding between petitioner and his wife which would in any way limit the wife's absolute ownership. On March 8, 1939, petitioner sold to Harry E. Brown 5 shares of class B stock, increasing his holdings to 50 shares of class B stock.

At the annual meeting of the stockholders of the corporation held December 21, 1938, the petitioner, Harry E. Brown, and petitioner's wife Virginia D. Middlebrook were reelected directors for the ensuing year. At the annual meeting of the directors of the corporation held the same date, petitioner was reelected president, Harry E. Brown was reelected vice president and petitioner's wife was reelected secretary-treasurer. At this meeting the salaries of the officers for the ensuing year were fixed as follows: president, $700 per month; vice president, $450 per month; secretary-treasurer, $400 per month.

As of March 15, 1939, the corporation had issued and outstanding 500 shares of class B stock of the par value of $100 per share or a total par value of $50,000, held as follows: petitioner, 250 shares; petitioner's wife, 200 shares; Harry E. Brown, 50 shares.

On March 15, 1939, the corporation was dissolved, pursuant to the directors' and shareholder's action, and instruments evidencing the dissolution were filed in the Department of State of the Commonwealth of Pennsylvania in accordance with the statutory requirements. A written agreement dated March 15, 1939, was entered into between the corporation and the three stockholders, providing for the liquidation of the corporation and the distribution of its assets to a partnership composed of petitioner, Harry E. Brown, and petitioner's wife. As of March 15, 1939, the net worth of the corporation was $54,540.01.

On March 15, 1939, the petitioner, Harry E. Brown, and petitioner's wife, V. D. Middlebrook, executed written articles of copartnership forming an unlimited partnership. In accordance with the laws of Pennsylvania the partnership was registered in the proper public offices. The agreement provided that the partners had paid in to the partnership the property and assets of the corporation which were paid and distributed as a liquidating dividend to them as shareholders of the corporation; that the aforesaid property and assets were contributed by the partners in the following proportions: petitioner, 50 per cent; Virginia D. Middlebrook, 40 per cent; and Harry E. Brown, 10 per cent; that losses were to be borne in the same proportions as the partners' capital contributions; that the net profits of the partnership were to be distributed as follows: petitioner, 45 per cent; V. D. Middlebrook, 33 per cent; and Harry E. Brown, 22 per cent; that the petitioner's wife and Brown should not engage in or undertake any other trade or business without the consent of the petitioner; and that whenever any differences of opinion should arise among the partners as to the action to be taken in any matter relating to the management, operation, and conduct of the business of the partnership, the decision of the petitioner or of the person succeeding to his interest in the partnership should be controlling and binding on all of the partners.

The agreement also recited that contemporaneously with the execution thereof petitioner's wife and Harry E. Brown had granted options to the petitioner to purchase their respective interests in the partnership on stated terms. The options were similar and granted to the petitioner the option to purchase the shares of the other two partners at their book value at the time the option was exercised. It was provided that book value meant the original capital contribution of these parties to the partnership, increased by any additional contribution made and diminished by any losses sustained in the operation of the business, together with the share the partner is entitled to receive of any undistributed profits at the date the option is exercised. In the option given by Brown it was provided that upon the exercise of the option petitioner was required to pay Brown the amount determined to be due in cash within 30 days after the value of Brown's interest had been determined, whereas, in the option given by petitioner's wife it was provided that upon the exercise of the option the petitioner was required to give his wife his promissory note for the amount determined to be due payable one year after the date thereof. The partners were restricted from signing or pledging their interest in the partnership while the option was in effect without consent of the petitioner.

An amendment to the articles dated August 1, 1940, changed the distribution of the profits to the following basis: petitioner, 42 per cent; V. D. Middlebrook, 33 per cent; and Harry E. Brown, 25 per cent. A second amendment, dated June 12, 1941, changed the distribution of profits to the following basis: petitioner, 37 per cent; V. D. Middlebrook, 33 per cent; and Harry E. Brown, 30 per cent. Later, two informal memoranda were executed by the partners again changing the distribution of profits. The one dated March 11, 1942, provided for distribution of profits on the following basis, effective as of March 1, 1942: petitioner, 32 per cent; V. D. Middlebrook, 28 per cent; and Harry E. Brown, 40 per cent. The other, dated November 1, 1945, provided for the distribution of profits on the following basis, effective November 1, 1945: petitioner, 30 per cent; V. D. Middlebrook, 25 per cent; and Harry E. Brown, 45 per cent.

The selling agreement entered into between the Buick Motor Division of the General Motors Sales Corporation and Metropolitan Buick Co. dated October 1, 1944, provided that the agreement was a personal contract and that the contract was entered into because the particular person with whom the seller has dealt is the dealer, or, in case the dealer is a partnership or corporation, because such person has the major financial interest in or the active management of same. The selling agreement entered into on June 29, 1944, also provided that it was a personal contract and was entered into in reliance upon the recognition of petitioner and Harry E. Brown jointly, ‘the Dealer, or partner(s) in the dealership, or representative(s) of the Dealer who actively and substantially participate(s) in the ownership and/or operation of the dealership.‘ The petitioner's wife was never present at the negotiation of any of the selling agreements which were negotiated with the Buick Motor Division. Both of these these agreements were signed by the petitioner and neither was signed by his wife. The Buick Motor Division, however, recognized petitioner's wife as a partner and her respective capital interest in the partnership.

The plan of forming a partnership was first suggested to the petitioner by his auditors in the latter part of November 1938, when he made a trip to New York to discuss with his auditors various tax matters of the corporation. The auditors suggested the formation of a partnership, which would result in the elimination of some of the corporate returns as well as result in a tax saving. On his return to Pittsburgh the petitioner discussed the matter of the formation of a partnership with his wife and Brown, but no action was taken with regard thereto. In January 1939 petitioner discussed with his attorney and his banker the advisability of forming a partnership. During February 1939 petitioner, his wife, and Brown discussed the matter of the formation of the partnership further with their attorney and at the end of February 1939 their attorney was instructed to arrange to take the necessary action to dissolve the corporation and form a partnership. The petitioner's wife during this period when the formation of the partnership was considered had at first refused and was reluctant to join in the formation of a partnership because of the risk involved and had discussed this problem with her attorney during February 1939. Her objection, in part, was due to the fact that her mother was getting along in years and had a substantial estate which she would inherit, and she felt that she should not jeopardize this inheritance, if it came into her possession, by incurring the risk of a partnership. However, it was pointed out to her that the risks incidental to a partnership could be minimized by carrying additional insurance of various kinds and by careful management of the business, and she finally consented to join in the partnership.

The net earnings of the partnership were paid or credited to the partners in accordance with the partnership articles and their amendments. The share of profits of petitioner's wife was always paid to her by check and all checks were deposited in her separate bank account. The only year involved herein in which her full share of the earnings was not paid was 1941. In that year her share of the earnings was $31,288.84, of which she was paid $14,675. The balance of her 1941 profits was paid to her in June 1942. The reason petitioner's wife was not paid her full share of the earnings in 1941 was that in the operation of the retail automobile business capital was essential and when new cars were available the paid-in capital of $50,000 was inadequate for the operation of the business and thus profits credited to the parties in 1941 were not distributed in full, but were used as working capital. In 1941 the monthly average of undistributed profits retained in the business and used for working capital was $47,090. The petitioner did not receive any of the wife's share of partnership earnings either by payment from the partnership or by payment from his wife. Petitioner did not have a power of attorney to draw on his wife's bank account or have any control over it.

Both petitioner and his wife kept records of moneys received from all sources of disbursements for all purposes. From 1939 to 1945, petitioner's wife received partnership earnings in the amount of $141,715.09 and income from her investments in the amount of $22,816. In this period she paid income taxes of $47,326.95 and invested $95,245 in securities which she owned outright and were registered in her individual name. Some of the moneys distributed to petitioner's wife were used to buy securities, some of which she sold and deposited the amount in her bank account. Some of the moneys deposited in her account were used for household purposes. Petitioner had no power of attorney or control over the securities purchased by his wife and registered in her name.

Petitioner's wife was authorized to, and as a partner did, sign checks drawn on the firm's bank account, the signature of petitioner and either Brown or petitioner's wife being required. Petitioner's wife also signed installment lease-sale contracts of the partnership assigned to the General Motors Acceptance Corporation with the guarantee of payment by the partnership, and transfer title certificates to cars in the Department of Revenue, Pennsylvania, Bureau of Motor Vehicles. She also signed leases and renewals thereof for two buildings used in the operation of the business.

Until 1940 petitioner was fully engaged in the operation of the business of the partnership and was its directing head. In May 1940 he had a serious illness and was advised by his physician that he should spend as little time as possible in Pittsburgh. Thereafter, until the United States entered World War II, he was out of Pittsburgh about six months of the year, and when in Pittsburgh his office work was light. During this period Brown conducted the day-to-day operations of the business. After January 1942, when the partnership was no longer selling new cars until the end of the war, petitioner spent four to six months each year in the office. There was not enough business to keep one partner busy and Brown conducted daily operations and management of the business in accordance with the policies formulated by all three partners.

Petitioner's wife had a desk and telephone at the place of business of the company. Some weeks she would be in the office every day and some weeks two or three half days a week, and such activity continued until about May 1940, when her husband was taken ill. During the period 1942 to 1945, when new cars were not available, petitioner's wife, like himself, was largely concerned only with the general policies of the business and spent but little time in the office. Petitioner's wife was consulted and participated in discussions with respect to the policies of the business, and, in some instances, the partners accepted her views. After petitioner's wife became secretary-treasurer of the corporation, and continuing into the partnership until May of 1940 and shortly thereafter, she handled the advertising for the service department. She was consulted with respect to personnel matters and persuaded her partners to accept her choice of certain key personnel and to accept her views with respect to the treatment of employees, such as providing vacations with pay and Christmas bonuses. When the manufacture of new cars for general civilian use was discontinued by General Motors Corporation due to the war, the petitioner and Brown thought it advisable to discontinue the business, while petitioner's wife, on the other hand, urged that they continue in business. Her views were accepted and her judgment was vindicated by the successful results of operation during the war years. When the other partners were unable to obtain a satisfactory lease for the main building occupied by the partnership, petitioner's wife handled negotiations with the landlord and obtained results that saved the partnership from $3,000 to $4,000 a year. Prior to her marriage petitioner's wife had some business experience, having been employed as a secretary to one of the editors of Cosmopolitan Magazine. She rendered vital and important services to the partnership during the taxable years.

The partnership duly filed partnership returns for the years 1941 to 1945, inclusive, reporting Virginia D. Middlebrook as one of the partners. The distributive shares of the profits of the business as shown by the partnership returns for these years were as follows:

+-----------------------------------------------------------------------------+ ¦ ¦1941 ¦1942 ¦1943 ¦1944 ¦1945 ¦ +----------------------+----------+----------+----------+----------+----------¦ ¦Joseph Middlebrook, Jr¦$38,247.94¦$14,998.74¦$16,825.46¦$19,655.41¦$15,565.69¦ +----------------------+----------+----------+----------+----------+----------¦ ¦Virginia D. ¦31,288.84 ¦13,197.01 ¦14,722.28 ¦17,198.49 ¦13,501.26 ¦ ¦Middlebrook ¦ ¦ ¦ ¦ ¦ ¦ +----------------------+----------+----------+----------+----------+----------¦ ¦Harry E. Brown ¦25,277.91 ¦16,847.07 ¦21,031.83 ¦24,569.27 ¦20,169.40 ¦ +-----------------------------------------------------------------------------+

Petitioner's income tax return for the taxable year 1941 was filed on March 16, 1942, and reported gross income in the amount of $34,751.02. The notice of deficiency covering the years 1941 to 1945 was mailed to petitioner on February 18, 1947. In determining the deficiencies the respondent included in taxable income of petitioner the above distribute share of profits of the partnership allocated to his wife, Virginia D. Middlebrook.

The partnership, Metropolitan Buick Co., consisting of petitioner, Virginia D. Middlebrook, and Harry E. Brown, was formed for a business purpose, with a bona fide intention to conduct business as partners, and was in fact a bona fide partnership during each of the taxable years.

OPINION.

BLACK, Judge:

The principal issue in this proceeding is whether Virginia D. Middlebrook, petitioner's wife, should be recognized in the taxable years 1941 to 1945 as a partner with her husband, the petitioner, and Harry E. Brown in a partnership doing business as Metropolitan Buick Co. Respondent does not dispute that the Metropolitan Buick Co. was operated as a partnership during the taxable years here in question and he has recognized petitioner and Harry E. Brown as partners, but has refused to give recognition to Virginia as a partner and has taxed her interest in the partnership profits to petitioner. The question of whether the partnership here in question is real for income tax purposes depends upon whether the parties, in good faith and acting with a business purpose, intended to join together as partners in the present conduct of the enterprise. Commissioner v. Tower, 327 U.S. 280; Commissioner v. Culbertson, 337 U.S. 733.

Respondent contends that the parties to the partnership agreement did not intend to carry on business with petitioner's wife as a partner and that petitioner's wife did not invest capital originating with her or substantially contribute to the control and the management of the business, or otherwise perform vital services within the meaning of Commissioner v. Tower, supra, and Lusthaus v. Commissioner, 327 U.S. 293. The respondent, in contending that petitioner's wife did not contribute originating with her within the meaning of the Tower case, maintains that although it was stipulated that the corporation's stock transfer book shows that on July 12, 1938, 199 shares of stock were issued in the name of petitioner's wife, the record shows that these shares were never the subject of a completed gift. He maintains that the petitioner never relinquished complete dominion or control over the subject matter of the gift and thus there was no completed gift within the rationale of Adolph Weil, 31 B.T.A. 899; affd., 82 Fed.(2d) 561; certiorari denied, 299 U.S. 552.

Respondent's contention that petitioner did not divest himself of the dominion and control of the 199 shares of the corporation's stock transferred to his wife on July 12, 1938, is based upon the fact that until March 8, 1939, when he made the additional gift of one share of stock, he was a majority stockholder and, therefore, as a result of his ownership of a majority of the stock he had control of the corporation, including the power to cause it to be dissolved. This argument has no validity in affecting Virginia's ownership of the stock which had been transferred to her. A minority stockholder can own stock just as completely as a majority stockholder. The fact that petitioner, as a majority stockholder, had control of the corporation and might bring about its dissolution without the consent of the other shareholders is not decisive of the question presented for our consideration. That question is whether petitioner retained dominion and control over the 199 shares of stock transferred to his wife which were the subject of the gift. The record shows that the petitioner's transfer of the 199 shares of stock to his wife on July 12, 1938, and the additional share on March 8, 1939, embraced all of the elements of a gift in that the petitioner made a transfer through the actual issuance of new stock certificates to his wife as donee, and the stock was delivered to her. The record shows that he intended to divest himself of the title, dominion, and control of the stock, in praesenti, and that he did so. He filed a gift tax return for the 199 shares, and both petitioner and his wife testified that petitioner had no control whatever over the shares held by his wife. He did not have a power of attorney or any other authority to exercise control or dominion over them and there was no understanding between them which would limit the wife's absolute ownership. We think, therefore, that there was a valid gift within the meaning of Adolph Weil, supra.

Respondent contends that, even if there was a completed gift of the stock, petitioner retained dominion and control of the interest which his wife acquired in the partnership, which would make the transfer ineffective in determining the reality of the partnership. His argument is based upon the fact that the partnership articles provided that petitioner's wife agreed not to dispose of her interest, except to petitioner, and that she gave to petitioner an option to acquire her interest at its book value, so that he could terminate the partnership without his wife's consent. We do not agree with this connection. Partnership is a relationship arising out of contract. The partners may enter into an agreement between themselves with respect to their rights and interests which they deem proper. See Rowley Modern Law of Partnership, secs. 210, 211, and 386. Morgan v. Child, Cole & Co., 47 Utah 417, 426; 155 Pac. 451. The fact that petitioner's wife agreed that she would not dispose of her interest to anyone except petitioner and that petitioner had the option to acquire her interest at will does not affect the validity of the partnership. Brown did the same thing, yet the Commissioner makes no contention that he was not a partner.

Respondent further contends that, even though there was a completed gift of the stock to petitioner's wife, the subsequent contribution of the liquidated property did not constitute a contribution of capital originating with her within the meaning of the Tower case, supra. We think the facts in the instant case are distinguishable from those present in the Tower case. In that case Tower transferred 190 shares of the corporation's stock to his wife on the condition that she place the corporate assets represented by these shares into the new partnership business. There was no such condition attached to the gift in the instant case. The record shows that when the petitioner made a gift to his wife of the 199 shares of the corporation's stock in July 1938 no condition whatever was attached to the gift and that it was his intention to make a complete and irrevocable gift to her. Moreover, in the Tower case the stock was given to the wife after it was decided to dissolve the corporation and form a partnership, and three days after the stock was transferred the corporation was liquidated and the partnership formed. In the instant proceeding, when the gift of 199 shares of stock was made on July 12, 1938, there was no thought or plan of forming a partnership. The idea of forming a partnership was first suggested to petitioner by his auditors in the latter part of November 1938, when petitioner made a trip to New York to discuss with them various corporate tax matters, at which time they advised him that the dissolution of the corporation and the formation of a partnership would eliminate the necessity of filing various corporate returns as well as result in tax saving. On his return to Pittsburgh the matter was discussed with his wife and Brown, the other stockholders, but no action was taken. Petitioner's wife was reluctant to enter the partnership as she expected to inherit a substantial estate and did not wish to jeopardize it by incurring the risks of a partnership. However, after being assured that many of the risks incidental to a partnership could be minimized by carrying additional insurance and by careful management, she consented to join in the partnership and on March 15, 1939, the corporation was dissolved and the partnership formed.

On these facts, when the petitioner, joined by his wife and Brown, transferred to the new partnership the property and assets of the corporation which they had received as a liquidating dividend, Virginia D. Middlebrook made a contribution of capital to the partnership which belonged to her and she became a partner and was the owner of the interest which it was agreed she would have in the partnership agreement. The Supreme Court pointed out in Commissioner v. Culbertson, supra:

* * * The Tax Court's isolation of ‘original capital‘ as an essential of membership in a family partnership also indicates an erroneous reading of the Tower opinion. We did not say that the donee of an intra-family gift could never become a partner through investment of capital in the family partnership, any more than we said that all family trusts are invalid for tax purposes in Helvering v. Clifford, supra. The facts may indicate, on the contrary, that the amount thus contributed and the income therefrom should be considered the property of the donee for tax, as well as general law, purposes. * * *

Also, it had previously stated therein:

* * * If, upon a consideration of all the facts, it is found that the partners joined together in good faith to conduct a business, having agreed that the services or capital to be contributed presently by each is of such value to the partnership that the contributor should participate in the distribution of profits, that is sufficient. * * *

We conclude from all the evidence that the parties joined together in good faith to conduct a business as partners and that a bona fide partnership was established. We conclude from the evidence that not only did Virginia contribute capital which belonged to her, but also that she rendered vital and important services to the partnership. She was a woman of considerable business knowledge and experience and during the taxable years gave freely of this knowledge and experience to the business. The nature of her services to the partnership is detailed to some extent in our findings of fact and need not be repeated here. We hold, therefore, under the rationale of the Culbertson case, that Virginia D. Middlebrook should be considered as a partner in the partnership of Metropolitan Buick Co. See O. H. Delchamps, 13 T.C. 281.

The next question to be considered is whether the assessment and the collection of the deficiency for 1941 are barred by the statute of limitations. The applicable statute is set out in the margin. The record shows that petitioner's return for 1941 was filed on March 16, 1942, and the notice of deficiency was mailed to petitioner on February 8, 1947, more than three years and less than five years after the return was filed. Petitioner is his return for 1941 reported gross income of $34,751.02 and the partnership return filed for 1941 disclosed that the earnings allocated to his wife were $31,288.84. Respondent contends that there was omitted from petitioner's gross income for 1941 the above amount of $31,288.84 which was properly includible therein, which amount was in excess of 25 per cent of the gross income reported in petitioner's return, and that, therefore, the five-year limitation period under section 275 (c) of the code was applicable. Since we have held that the partnership profits allocable to the wife in 1941 in the amount of $31,288.84 were not includible in petitioner's gross income for 1941, section 275 (c) is not applicable and the assessment and collection of the 1941 deficiency is barred. Cf. C. A. Reis, 1 T.C. 9.

SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION.(a) GENERAL RULE.— The amount of income taxes imposed by this chapter shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period.(c) OMISSION FROM GROSS INCOME.— If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within five years after the return was filed.

Decision will be entered under Rule 50.