Opinion
Docket No. 5749.
1946-04-10
ED. DUBINSKY DURWOOD, INDIVIDUALLY AND AS SURVIVING HUSBAND, AND ED. DUBINSKY DURWOOD, EXECUTOR OF THE ESTATE of CELIA D. DURWOOD, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Wm. G. Boatright, Esq., and A. Henry Cuneo, C.P.A., for the petitioners. Gene W. Reardon, Esq., for the respondent.
Petitioner owned and/or operated several moving picture theatres. He entered into ‘operating agreements‘ with his wife, son, and daughter, purporting to distribute among them the profits of the business. His control over the business remained as before, and the wife and children invested no capital originating with them, did not contribute substantially to the management of the business, and performed no vital additional services after the ‘operating agreements.‘ Held, that the Commissioner did not err in including in petitioner's gross income the shares of the income of the business which were credited to the petitioner's wife, son, and daughter. Wm. G. Boatright, Esq., and A. Henry Cuneo, C.P.A., for the petitioners. Gene W. Reardon, Esq., for the respondent.
The Commissioner determined deficiencies in petitioner's income tax of $1,578.33, $3,363.20, $17,442.86, and $42,807.67 for the respective years 1938, 1939, 1940, and 1941. The question involved are whether the amounts of the profits of Durwood-Dubinsky Bros., formerly Dubinsky Bros., allocated in 1938, 1939, 1940, and 1941 to the petitioner's wife, son, and daughter, respectively, are taxable income to him under section 22(a), Revenue Act of 1938 and the Internal Revenue Code, and whether the assessment and collection of the 1938 and 1939 deficiencies are barred.
FINDINGS OF FACT.
The petitioner, Ed. Dubinsky Durwood, is a resident of Kansas City, Missouri. For the years 1938 and 1939 petitioner and his wife, Celia D. Durwood, who died February 24, 1944, filed joint Federal income tax returns in the sixth district of Missouri. Petitioner filed separate income tax returns for 1940 and 1941 in the same district. In 1936 he changed his name from Dubinsky to Dubinsky Durwood. He has three children: A son, Stanley H., born August 5, 1920; a daughter, Marjorie B., born March 15, 1922; and a son Richard, born August 18, 1929.
For about 30 years the petitioner has been engaged in the operation of motion picture theatres. From 1933 to 1937, inclusive, he operated a circuit of 9 to 13 theatres under an ‘Operating Partnership Agreement‘ executed each year by him and his three younger brothers, Barney Dubinsky, Irwin Dubinsky, and H. W. Dubinsky. Under all the agreements the profits and losses resulting from the operation of the theatres were to be shared equally by the four brothers.
The petitioner, his three brothers, and his son Stanley, then 18 years of age, executed an agreement dated January 3, 1938, and captioned ‘Operating Agreement,‘ as follows:
WHEREAS, it is to the mutual advantage of all the undersigned parties, it is hereby agreed by and between Ed Dubinsky Durwood of Kansas City, Mo., Barney Dubinsky of St. Joseph, Mo., Irwin Dubinsky of Leavenworth, Kansas, H. W. Dubinsky of St. Joseph, Mo., Stanley H. Durwood of Kansas City, Mo., to operate Ed Dubinsky Durwood's theatre properties for a period of two years starting Jan. 1, 1938 and ending December 31, 1939, sharing profits or losses in such operation as follows:
From January 1, 1938 to and including December 31, 1938, after deducting the drawing account of each, the share of Ed Dubinsky Durwood is to be twenty percent of such profit or loss; the share of Barney Dubinsky is to be twenty percent of such profit or loss; the share of Irwin Dubinsky is to be twenty percent of such profit or loss; the share of H. W. Dubinsky is to be twenty percent of such profit or loss; the share of Stanley H. Durwood is to be twenty percent of such profit or loss.
From January 1, 1939 to and including December 31, 1939, the share of Ed Dubinsky Durwood is to be thirty-five percent of such profit or loss; the share of Barney Dubinsky is to be twenty percent of such profit or loss; the share of Irwin Dubinsky is to be twenty percent of such profit or loss; the share of H. W. Dubinsky is to be five percent of such profit or loss; the share of Stanley H. Durwood is to be twenty percent of such profit or loss.
Ed Dubinsky Durwood is to be General Manager with full and absolute authority on everything pertaining to the business and the sole custodian of all monies and funds.
It is absolutely understood that no transfer or sale of any Ed Dubinsky Durwood's theatres or theatrical holdings are a part of or to be made a part of this agreement. It is only for the purpose of operating Ed Dubinsky Durwood's theatre properties that this agreement is made.
Under date of January 3, 1940, the petitioner, his three brothers, his son Stanley, and his wife (C. D. Durwood) executed an ‘operating agreement‘ in substantially the same form as above set forth ‘to operate Ed Dubinsky Durwood's theatre properties for a period of one year, starting January 1, 1940, and ending December 31, 1940,‘ except that it did not contain the provisions of the second paragraph in the above agreement pertaining to drawing accounts, and the profits and losses were to be shared as follows:
+---------------------------+ ¦ ¦Percent¦ +-------------------+-------¦ ¦Petitioner ¦35 ¦ +-------------------+-------¦ ¦Barney Dubinsky ¦10 ¦ +-------------------+-------¦ ¦Irwin Dubinsky ¦10 ¦ +-------------------+-------¦ ¦H. W. Dubinsky ¦5 ¦ +-------------------+-------¦ ¦Stanley H. Durwood ¦15 ¦ +-------------------+-------¦ ¦C. D. Durwood ¦25 ¦ +---------------------------+
Under date of January 3, 1941, the petitioner, his three brothers, his son Stanley, his wife, and his daughter (M. B. Durwood), then 19 years of age, entered into an ‘operating agreement‘ in form similar to that entered into on January 3, 1940, ‘to operate Ed Dubinsky Durwood's theatre properties for a period of one year starting January 1, 1941 and ending December 31, 1941, ‘ except that the profits and losses were to be shared thereunder as follows:
+---------------------------+ ¦ ¦Percent¦ +-------------------+-------¦ ¦Petitioner ¦21 ¦ +-------------------+-------¦ ¦Barney Dubinsky ¦10 ¦ +-------------------+-------¦ ¦Irwin Dubinsky ¦10 ¦ +-------------------+-------¦ ¦H. W. Dubinsky ¦5 ¦ +-------------------+-------¦ ¦Stanley H. Durwood ¦18 ¦ +-------------------+-------¦ ¦C. D. Durwood ¦18 ¦ +-------------------+-------¦ ¦M. D. Durwood ¦18 ¦ +---------------------------+
The theatres operated under the foregoing agreements during 1938 to 1941, inclusive, were as follows:
+----------------------------------+ ¦Theatres ¦Location ¦ +---------+------------------------¦ ¦Liberty ¦Kansas City, Missouri ¦ +---------+------------------------¦ ¦Capitol ¦Jefferson City, Missouri¦ +---------+------------------------¦ ¦Jefferson¦Jefferson City, Missouri¦ +---------+------------------------¦ ¦State ¦Jefferson City, Missouri¦ +---------+------------------------¦ ¦Gem ¦Jefferson City, Missouri¦ +---------+------------------------¦ ¦Crystal ¦St. Joseph, Missouri ¦ +---------+------------------------¦ ¦Orpheum ¦St. Joesph, Missouri ¦ +---------+------------------------¦ ¦Electric ¦St. Joesph, Missouri ¦ +---------+------------------------¦ ¦Missouri ¦St. Joesph, Missouri ¦ +---------+------------------------¦ ¦Orpheum ¦Leavenworth, Kansas ¦ +---------+------------------------¦ ¦Lyceum ¦Leavenworth, Kansas ¦ +---------+------------------------¦ ¦Stand ¦Leavenworth, Kansas ¦ +---------+------------------------¦ ¦Hollywood¦Leavenworth, Kansas ¦ +----------------------------------+
The Strand Theatre was operated under the ‘operating Agreement‘ during 1938 only under a lease held by petitioner. Petitioner during the taxable years and since about 1932, owned the Jefferson, Lyceum, and Orpheum (Leavenworth, Kansas) Theatres. During the taxable years he also owned the Capitol, State, Crystal, and Hollywood Theatres. The Capitol and Hollywood Theatres were built by him about 1938, being paid for from his accumulated profits. The Gem has been held by petitioner under lease since 1932. He owns the contents, seats, and equipment therein. The Liberty was held under a sublease since about 1932 by the Stanley Hugh Amusement Co.; the Electric was held under lease by petitioner from about 1934 until 1940, when it was bought by the Richard Mark Amusement Co., incorporated March 13, 1940; the Missouri was held under a sublease of a 99-year lease dated January 1, 1926, by petitioner after about 1934 and later in 1940 by Marbet Amusement Co. and by it subleased to petitioner; and the Orpheum (St. Joseph, Missouri) was held under lease by petitioner or O. T. Amusement Co. after about 1934. The equipment in the Liberty Theatre was owned by petitioner, but the equipment in the other theatres was owned by the above named corporations, respectively. All shares except qualifying shares of the above named corporations were owned by petitioner.
Under date of October 1, 1939, an agreement in letter form, addressed to petitioner's son, Stanley H. Durwood, Kansas City, Missouri, was executed by Stanley Hugh Amusement Co. by Ed. D. Durwood, president, and accepted by Stanley H. Durwood, which agreement is as follows:
Starting October 1, 1939, we agree to let you have the exclusive use for any purpose you may desire, the Liberty Theatre Building and its contents located at 1004-06 Main Street, Kansas City, Missouri, on a month to month basis at a rental of $2,192.98 per month plus taxes, upkeep and insurance, with the definite understanding that you or we may cancel this agreement by giving thirty days' notice, each to the other, with no further obligation of any kind or nature on your part at the expiration of such a thirty day notice given to us by you or given to you by us.
The petitioner subleased to his son, Stanley H. Durwood, under date of August 1, 1940, the Missouri Theatre property for a term of ten years beginning August 1, 1940, the sublease providing in part as follows:
The sub-lessee agrees to comply with all of the covenants and agreements on the part of the lessee to be kept and performed under the terms of the underlying lease between Marbet Amusement Co. as lessor and Ed. D. Durwood as lessee, dated August 1, 1940, except the payment of rent, and as to the payment of rent, Stanley H. Durwood, the sub-lessee, agrees to pay to Ed. D. Durwood the sub-lessor, the sum of $2,500 per month and to pay the same on the first day of each month during the said term.
In the event the rent on the underlying lease should be reduced by the landlord, then I agree that your rent will be reduced accordingly.
In the event of the death of the lessee, this lease shall be deemed terminated and cancelled as of the last of the current month during which lessee's death occurs.
Under date of December 30, 1939, an agreement in letter form addressed to his wife was signed by petitioner and accepted by his wife, as follows:
Starting Jan. 1. 1940— I agree to let you have the exclusive use of the Capitol, State, Jefferson and Gem Theatres, Jefferson City, Mo. with all contents and equipment in each of the above theatres— on a month to month basis at a rental of $300.00 per month plus all taxes, upkeep and insurance, with the definite understanding that you or I may cancel this agreement by giving thirty (30) days notice, each to the other.
Should the Gem Theatre get a reduction in rent— such rent reduction is to be passed on to you.
In the event of your death, this lease shall be deemed terminated and cancelled as of the last of the current month during which your death occurs.
On May 9, 1940, a lease, dated April 1, 1940, was executed by the Richard Mark Amusement Co., under the terms of which the company leased to petitioner's wife the Electric Theatre property, together with certain outstanding leases covering part of same, for a term of 5 years, commencing April 1, 1940, at a rental of $2,083.33 per month. The lease was terminable upon 60 days written notice and the lessee agreed, among other things, ‘at his own expense, (to) maintain the buildings and improvements upon the demised premises reasonably in as good repair as when received (ordinary wear, tear, acts of God, providential or civil destruction excepted).‘ All taxes and assessments levied or assessed against the real estate and improvements constituting a part of the realty and the building fixtures and improvements thereon were payable by the lessor. This lease was canceled as of midnight December 28, 1940, by an undated statement to that effect written on the lease and signed by Richard Mark Amusement Co. by Ed. Dubinsky Durwood, president, and Celia D. Durwood. Under date of December 23, 1940, the corporation, by petitioner, its president, leased to petitioner's daughter, M. B. Durwood, the Electric Theatre property, together with certain lease covering part of same, for a term of 5 years, commencing December 29, 1940, at a rental payable in monthly installments of $20,000 for the first year, $19,500 for the second and third years each, and $18,500 for the fourth and fifth years each. The provisions as to the maintenance of the property and the payment of taxes thereon were the same as in the preceding lease.
Upon the execution of the above leases by petitioner or his corporations to his son Stanley, his wife, and his daughter, no consideration therefor passed from them to him or his corporations. He filed no gift tax returns in which he reported such leases as gifts to his son, wife, or daughter.
When the above leases were entered into with his son Stanley, his wife, and his daughter, the petitioner expected that there would be no change in the operation and management of such theatres and that he would continue to control and manage them. After such leases were made there was no change in the operation and management of the theatres. Petitioner's wife, son, or daughter never operated or managed any theatre individually.
During the taxable years the main office of Durwood-Dubinsky Bros., was in the Liberty Theatre Building, 1104-6 Main Street, Kansas City, Missouri. The books of account and records of Durwood-Dubinsky Bros., as operated under the operating partnership agreements, were kept by the sister of petitioner, with the aid of two assistants. The books were kept on an accrual basis. No rent was paid to petitioner or charged on such books for the use of the theatres and equipment owned by him, but entries thereon were made for their upkeep, taxes, insurance, and depreciation. Separate bank accounts were maintained in the name of each of the various theatres in the cities wherein they were located. A so-called ‘master‘ account was maintained at the Commerce Trust Co., Kansas City, Missouri, in the name of ‘Durwood-Dubinsky Bros. Theatres.‘ The daily receipts from the various theatres were deposited each day in the bank account of each theatre, and later such funds were transferred to the master bank account. All operating expenses, including rents on theatres held under lease, taxes, repairs, and insurance, were paid through the master account, except small incidental expenses, which were paid through the bank accounts in the names of the theatres. Only the petitioner and his sister had authority to issue checks against the various accounts. Checks were usually and regularly signed by petitioner, and his sister signed checks only in the absence of petitioner.
Neither petitioner's son, wife, nor daughter contributed any money from outside sources to the business enterprise. Under the ‘operating agreements‘ none of the theatres of theatrical holdings of petitioner were to become a part of the capital of the enterprise and the leases acquired by petitioner's son, wife, and daughter from petitioner and his corporations were not contributed by them to the capital of the enterprise or entered upon its books as such. The books of account contained an account in the name of petitioner and also for each of his brothers, which in the beginning of 1938 contained a credit balance of the amount of profits theretofore accumulated and not withdrawn by each. each year the share of profits and contributions, if any, were credited to each account and withdrawals were debited to each account. Similar accounts were opened for petitioner's son in 1938, for his wife in 1940, and for his daughter in 1941, as follows:
+---------------------------------------------------------+ ¦ ¦ ¦Account of ¦ +-------+----------------+--------------------------------¦ ¦ ¦ ¦Stanley H.¦C. D. Dur-¦M. B. Dur-¦ +-------+----------------+----------+----------+----------¦ ¦ ¦ ¦Durwood ¦wood ¦wood ¦ +-------+----------------+----------+----------+----------¦ ¦1938 ¦ ¦ ¦ ¦ ¦ +-------+----------------+----------+----------+----------¦ ¦Jan. 1 ¦Credit balance ¦ ¦ ¦ ¦ +-------+----------------+----------+----------+----------¦ ¦ ¦Share of: ¦ ¦ ¦ ¦ +-------+----------------+----------+----------+----------¦ ¦ ¦1938 profits ¦$6,397.40 ¦ ¦ ¦ +-------+----------------+----------+----------+----------¦ ¦ ¦1938 withdrawals¦745.00 ¦ ¦ ¦ +-------+----------------+----------+----------+----------¦ ¦1939 ¦ ¦ ¦ ¦ ¦ +-------+----------------+----------+----------+----------¦ ¦Jan. 1 ¦Credit balance ¦6,397.40 ¦ ¦ ¦ +-------+----------------+----------+----------+----------¦ ¦ ¦Share of: ¦ ¦ ¦ ¦ +-------+----------------+----------+----------+----------¦ ¦ ¦1939 profits ¦14,605.03 ¦ ¦ ¦ +-------+----------------+----------+----------+----------¦ ¦ ¦1939 withdrawals¦1,964.05 ¦ ¦ ¦ +-------+----------------+----------+----------+----------¦ ¦1940 ¦ ¦ ¦ ¦ ¦ +-------+----------------+----------+----------+----------¦ ¦Jan. 1 ¦Credit balance ¦19,288.38 ¦ ¦ ¦ +-------+----------------+----------+----------+----------¦ ¦ ¦Share of: ¦ ¦ ¦ ¦ +-------+----------------+----------+----------+----------¦ ¦ ¦1940 profits ¦13,696.10 ¦$22,668.28¦ ¦ +-------+----------------+----------+----------+----------¦ ¦ ¦1940 withdrawals¦2,717.51 ¦ ¦ ¦ +-------+----------------+----------+----------+----------¦ ¦1941 ¦ ¦ ¦ ¦ ¦ +-------+----------------+----------+----------+----------¦ ¦Jan. 1 ¦Credit balance ¦30,171.83 ¦22,668.28 ¦ ¦ +-------+----------------+----------+----------+----------¦ ¦ ¦Share of: ¦ ¦ ¦ ¦ +-------+----------------+----------+----------+----------¦ ¦ ¦1941 profits ¦23,334.88 ¦23,334.88 ¦$23,334.87¦ +-------+----------------+----------+----------+----------¦ ¦ ¦1941 withdrawals¦2,800.81 ¦17,073.67 ¦325.00 ¦ +-------+----------------+----------+----------+----------¦ ¦Dec. 31¦Credit balance ¦50,705.90 ¦28,929.49 ¦23,009.87 ¦ +---------------------------------------------------------+
Petitioner's brothers devoted their entire time to the business when in good health and were managers of theatres in cities other than Kansas City. Approximately 90 to 100 persons were employed in the operation of the various theatres.
The petitioner spent most of his time at the main office in Kansas City. The management of the Liberty Theatre was under his direct supervision. He negotiated for and entered into all contracts with producers of films for the exhibition thereof in the various theatres under the name of Durwood-Dubinsky Bros. (or Dubinsky Bros.) by petitioner. He personally previewed all important pictures prior to rental thereof in a small theatre in Kansas City, in order to determine the percentage of gross receipts to pay as rental, the theatre in which to place them, and the time and particular days for their exhibition. This was done about six months before the pictures were shown at any theatre. Secondary or ‘b‘ pictures were never previewed. He previewed two films on the average of five nights of every week in the year. Since about 1929 his wife, except when ill or absent from the city, accompanied him to the previews. She never previewed a picture without petitioner accompanying her. She had no experience, education, or special training in the motion picture show business other than that she acquired by reason of being petitioner's wife. During 1941 all the household expenses were paid with proceeds withdrawn from her account. After her death petitioner distributed the balance credited to her account on the books to his children. Although she left a will in favor of petitioner, upon the advice of petitioner's attorneys, no probate of it was had.
Petitioner's son Stanley graduated from high school in Kansas City in June 1939. In September of that year he entered Harvard and graduated therefrom in 1943 at which time he immediately entered the Army. Stanley had worked around theatres ever since he was twelve years old during his vacation periods. It was the desire of petitioner that his son learn the motion picture business so that he could continue it after petitioner retired. The son was not particularly interested in entering the business, and the petitioner had a difficult time persuading him to do so, but it is his belief now that Stanley will eventually take over the business. The petitioner paid for the education of his son, and prior to 1938 gave him a weekly allowance. After Stanley signed the ‘operating agreement‘ a weekly check of appro ximately $25 was issued to him, upon the direction of petitioner, which was charged to his account as withdrawals.
Petitioner paid for his daughter's education and also paid her a weekly allowance while attending high school and college until she signed the ‘operating agreement‘ after which checks were issued to her upon the direction of petitioner and charged to her account as withdrawals. She performed no services whatever in the operation of the theatres at any time. She is now married and living with her husband at Ogden, Utah, where he is stationed.
Petitioner at all times during the taxable years had complete control of the business. His was the final decision in all important matters connected with the business. All requests for withdrawals were submitted to him and no checks therefor were issued without his approval. The partnership returns indicate that certain amounts were charged on the books as salary or other expense in the operation of the business as follows:
+---------------------------------------------------+ ¦ ¦1938 ¦1939 ¦1940 ¦1941 ¦ +-------------------+-------+-------+-------+-------¦ ¦Ed Dubinsky Durwood¦$19,500¦$19,500¦$19,500¦$19,500¦ +-------------------+-------+-------+-------+-------¦ ¦Barney Dubinsky ¦6,500 ¦6,500 ¦6,500 ¦6,625 ¦ +-------------------+-------+-------+-------+-------¦ ¦Irwin Dubinsky ¦6,500 ¦6,600 ¦7,020 ¦7,395 ¦ +-------------------+-------+-------+-------+-------¦ ¦H. W. Dubinsky ¦5,200 ¦5,200 ¦5,200 ¦5,300 ¦ +-------------------+-------+-------+-------+-------¦ ¦Stanley H. Durwood ¦6,500 ¦6,500 ¦6,500 ¦1,325 ¦ +-------------------+-------+-------+-------+-------¦ ¦M. B. Durwood ¦ ¦ ¦ ¦325 ¦ +-------------------+-------+-------+-------+-------¦ ¦Total ¦44,200 ¦44,300 ¦44,720 ¦40,845 ¦ +---------------------------------------------------+
The percentages of profit distributable to petitioner's brothers under the ‘operating agreement‘ were decreased because petitioner desired to bring his wife and children into the business.
The distributive shares of the profits of the business as shown by the partnership returns for 1938 to 1941, inclusive, of petitioner and his son, wife, and daughter were as follows:
+--------------------------------------------------------+ ¦ ¦1938 ¦1939 ¦1940 ¦1941 ¦ +------------+----------+----------+----------+----------¦ ¦Peitioner ¦$20,171.80¦$25,782.66¦$31,966.09¦$27,377.16¦ +------------+----------+----------+----------+----------¦ ¦His son ¦7,171.80 ¦14,732.95 ¦13,699.75 ¦23,466.15 ¦ +------------+----------+----------+----------+----------¦ ¦His wife ¦ ¦ ¦22,832.92 ¦23,466.15 ¦ +------------+----------+----------+----------+----------¦ ¦His daughter¦ ¦ ¦ ¦23,466.14 ¦ +--------------------------------------------------------+
In joint returns of petitioner and his wife for 1938, filed March 15, 1939, and for 1940, filed March 15, 1940, there was reported gross income of $28,239.24 and $26,050.10, which included his above distributive share of profits for 1938 and 1939 of $20,171.80 and $25,782.66 only. In his separate returns for 1940 and 1941 the petitioner reported gross income of $32,233.53 and $27,666.44, which included his above distributive share of the profits for 1940 and 1941 of $31,966.09 and $27,377.16 only.
Stanley H. Durwood filed income tax returns for 1938 to 1941, inclusive, in which he reported gross income in the amount of his distributive share as shown by the partnership returns. In her separate income tax returns for 1940 and 1941 petitioner's wife reported gross income in the amount of her distributive share shown by the partnership returns. In her income tax return for 1941, petitioner's daughter reported gross income the amount of $23,466.14.
The notice of deficiency covering the years 1938 and 1939 was mailed June 28, 1944. Petitioner, his wife, and the Commissioner executed a ‘Consent Fixing Period of Limitation upon Assessment of Income and Profits Tax under Section 275(c) of the Revenue Act of 1938,‘ dated January 6, 1944, and received the same day by the internal revenue agent at St. Louis, Missouri, covering the taxable years 1938 to June 30, 1945.
In determining the deficiencies the Commissioner included in taxable income of petitioner the distributive shares of profits of Durwood-dubinsky Bros. allocated to his son, wife, and daughter as follows:
+-----------------------------------------------------------------------------+ ¦ ¦1938 ¦1939 ¦1940 ¦1941 ¦ +----------------------------------+---------+----------+----------+----------¦ ¦Distributive share of his son ¦$7,171.80¦$14,732.95¦$13,699.75¦$23,466.15¦ +----------------------------------+---------+----------+----------+----------¦ ¦Distributive share of his wife ¦ ¦ ¦22,832.92 ¦23,466.15 ¦ +----------------------------------+---------+----------+----------+----------¦ ¦Distributive share of his daughter¦ ¦ ¦ ¦23,466.14 ¦ +----------------------------------+---------+----------+----------+----------¦ ¦Amount included ¦7,171.80 ¦14,732.95 ¦36,532.67 ¦70,398.44 ¦ +-----------------------------------------------------------------------------+
OPINION.
DISNEY, Judge:
The Commissioner included in the taxable income of petitioner the amounts of profits of Durwood-Dubinsky Bros., formerly Dubinsky Bros., for 1938, 1939, 1940, and 1941, which had been credited on the books of the business to petitioner's wife, son, and daughter, respectively, as partners, upon the ground that the so-called operating agreements entered into among them did not constitute valid and bona fide partnership agreements and that the amounts credited to them, respectively, represented an assignment of petitioner's income and accordingly were taxable to him. Petitioner contends that his wife, son, and daughter were bona fide members of the partnership of Dubinsky Bros., or Durwood-Dubinsky Bros., during the years involved for the reason, among others, that under the law of Missouri a wife, as well as minors, may be members of a partnership. A similar argument was made in Commissioner v. Tower, 327 U.S. 280. In that case a partnership was entered into in Michigan between a husband and his wife and one other, and the Court stated:
* * * But the Tax Court's authority to make a final authoritative finding on the question of fact is not lessened because Michigan might treat the partnership valid for purposes of state law. Thus Michigan could and might decide that the stock-transfer here was sufficient under state law to pass title to the wife, so that in the event of her death it would pass to whatever members of her family would be entitled to receive it under Michigan's law of decent and distribution. But Michigan cannot by its decisions and laws governing questions over which it has final say, also decide issues of federal tax law and and thus hamper the effective enforcement of a valid federal tax levied against earned income.
We therefore hold that the Missouri law relied upon, does not control here.
On the other contentions presented:
In the Tower case, when it was before us, 3 T.C. 396, we pointed out lack of contribution of services by the wife, the continuity of petitioner's former control over the business, and the contribution by the wife only of what had been received from her husband; and we concluded that there was no true partnership which should be recognized. The Supreme Court, reversing the Circuit Court which had not agreed with our views, said: ‘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.‘ The Court goes on to point out the lack of real change in economic relation of husband and wife to the income, the continuing control by husband; the lack of contribution of services by the wife; and the lack of new capital in the business; and concludes that there was mere ‘paper reallocation of income among the family members.‘
We cited the Tower case in O. William Lowry, 3 T.C. 730, where we held that husbands were taxable upon income of a partnership arrangement to which wives contributed only the proceeds of what was transferred to them by the husbands the wives did not participate in the business, and the petitioners continued in control. See also Frank J. Lorenz, 3 T.C. 746; affd., 148 Fed.(2d) 527 (also citing the Tower case), wherein a business formerly the sole proprietorship of a husband was converted, it was contended, into a partnership to which the wife contributed no services, knew nothing about the business, and in effect contributed only the gift from her husband of an interest. It was held that the husband was taxable upon the entire ‘partnership‘ income; Doll v. Commissioner, 149 Fed.(2d) 239; certiorari denied, 326 U.S. 725; A. R. Losh, 1 T.C. 1019; Jacob DeKorse, 5 T.C. 94.
We think it would serve no useful purpose to discuss the cases cited by both parties or the details of facts as disclosed by the record. Suffice it to say, that in our opinion the evidence shows that petitioner and his son, wife, and daughter did not intend to carry on business as a partnership. The giving of the leases and subleases by petitioner to the members of his family and the execution of the operating agreements made no material changes in the operation of the business. The control of petitioner over the business and property was as complete after the execution of the agreements as it had been before. The wife invested no capital originating with her nor did she contribute substantially to the control and management of the business or otherwise perform vital additional services after the execution of the operating agreement. The same applies to the son and daughter. The petitioner, despite the claimed partnership, actually created the right to receive and enjoy the benefit on the income so as to make it taxable to him. The action of the respondent including in petitioner's taxable income the amounts credited to the wife, son, and daughter for the taxable years is approved.
The next question to be considered is whether the assessment and collection of the deficiencies for 1938 and 1939 are barred.
The respondent alleged in his answer and the petitioner admitted in his reply that petitioner and his wife duly executed a ‘Consent Fixing Period of Limitation upon Assessment of Income and Profits Tax under Section 275(c) of the Revenue Act of 1938‘ covering the taxable year 1938 and extending the time to June 30, 1945. More than 25 percent of the amount stated had been omitted from gross income, making application section 275(c) of the code, providing for assessment within five years from date of return— which was filed March 15, 1939. The evidence shows that such waiver was dated and received on January 6, 1944. The notice of deficiency covering 1938 and 1939 was mailed June 28, 1944. Hence the limitation period as extended had not expired when the notice of deficiency was issued. Consequently assessment and collection of the deficiency for 1938 is not barred.
As to the year 1939, the respondent affirmatively alleged that there was omitted from the reported gross income for 1939 the amount of $14,732.95 properly includible therein, which amount was in excess of 25 percent of the gross income stated in the return, and that therefore the five-year limitation period under Section 275(c) of the Revenue Act of 1938 was applicable. Section 275(c) is as follows:
(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 be begun without assessment, at any time within 5 years after the return was filed.
The amount of $14,732.95 credited to the son on the books of Dubinsky Bros. was not included in the gross income reported in the joint return of petitioner and his wife for 1939 and it is in excess of 25 percent of $26,050.10, the gross income reported in such return. Since we have held that such amount was properly includible in petitioner's gross income for 1939, section 275(c) is applicable and the assessment and collection of the 1939 deficiency is not barred. O'Brien, v. Commissioner, 149 Fed.(2d) 456; Meurer Steel Barrel Co. v. Commissioner, 144 Fed.(2d) 282; and Estate of C. P. Hale, 1 T.C. 121.
Reviewed by the Court.
Decision will be entered for the respondent.