dissent">Black, /.,

dissenting: The facts seem to show clearly enough that when the original partnership between petitioner and his wife was formed in January 1937, following a gift which petitioner had made his wife on December 23, 1936, one of the primary motives was to reduce petitioner’s income taxes.

The taxable year which we have before us is the year 1940 and the partnership agreement which was in force for the greater part of that year was the one which petitioner, his wife, and his son made April 1, 1940, and which was substantially similar in form to the earlier partnership agreements which had been entered into for the years 1937, 1938, and 1939. If it be assumed that the same tax-saving motive primarily inspired this latter partnership agreement as it did those which preceded it, that fact standing alone does not make petitioner taxable upon his wife’s share of the partnership income.

“Arrangements within families for the. diversion of income, while not necessarily subject to condemnation because of the close relationship of the parties, are always subject to careful scrutiny and clear and convincing evidence is required to establish their bona fides.” See Harry C. Fisher, 29 B. T. A. 1041; affd., 74 Fed. (2d) 1014. If, when the careful scrutiny above described is exercised in a given case and it is shown that what was done is a mere sham and subterfuge, then it is not recognized for tax purposes and what was done is treated as if it had never been done. Gregory v. Helvering, 293 U. S. 465. On the other hand, if the transaction is real and what it purports to be and is thereafter lived up to, the tax-saving motive does not vitiate it. Chisholm v. Commissioner, 79 Fed. (2d) 14. In the latter case the court said:

* * * In Gregory v. Helvering, supra, * * * the incorporators adopted the usual form for creating business corporations; but their intent, or purpose, was merely to draught the papers, in fact not to create corporations as the court understood that word. That was the purpose which defeated their exemption, not the accompanying purpose to escape taxation; that purpose was legally neutral. Had they really meant to conduct a business by means of the two reorganized companies, they would have escaped whatever other aim they might have had, whether to avoid taxes or to regenerate the world.

So in the light of the foregoing authorities the important inquiry in the instant case is; Was the partnership agreement in force during the taxable year between petitioner, his wife, and his son in the operation of Rock Hill Coca-Cola Bottling Co. a mere artifice and subterfuge, or was it real and substantial? The Commissioner has recognized the partnership as real and substantial in so far as it concerned petitioner and his son, W. M. Mauldin, Jr. He has determined, however, and still contends that the partnership was a mere artifice and a sham in so far as it concerned petitioner’s wife, Mayme W. Mauldin. It seems to me that in the face of the record this latter determination is altogether unwarranted. Despite the Commissioner’s determination that Mayme W. Mauldin “was not, in fact, a member of the partnership for profit sharing purposes,” the findings of fact by the author of the majority opinion show that for the period December 31,1937, through December 31,1943, there were credited to the account of Mrs. Mauldin as her share of the profits during the several years embraced therein credits to the aggregate amount of $98,734.54 and there were debits to an aggregate amount of $76,627.49, leaving a credit balance at the end of the period of $22,107.05. The findings of fact also show that petitioner’s wife has been privileged to spend her withdrawals from the business as she pleases and makes her own investments. Also, at another place in the findings of fact it is said:

Prior to the year 1941 petitioner’s son bought three pieces of real estate with funds of the partnership. In 1941 the new bottling plant of Rock Hill Coca-Cola Bottling Works was built on this real estate and the son conveyed an undivided one-half interest in this real estate to petitioner and an undivided one-fourth interest to petitioner’s wife.

In the face of such facts and others in the record, I do not see how it can be held, as the Commissioner has done, that Mrs. Mauldin was not a member of the partnership for profit-sharing purposes. In my opinion she was a member of it for all purposes. It is true that she did not contribute any services to the partnership, but she did contribute to the partnership the one-fourth interest in and to all of the property and assets of the business of the Rock Hill Coca-Cola Bottling Co. which she had received as a gift from her husband. W. M. Mauldin, Jr., the son, made the same kind of a capital contribution to the partnership as his mother made and the Commissioner has not questioned the validity of that capital contribution. One does not have to contribute services to be a member of a partnership. Many perfectly valid partnerships exist where one or more partners contribute no services at all, their contribution being of capital. See vol. 6, sec. 35.03, Mertens Law of Federal Income Taxation. Cf. Montgomery v. Thomas, 146 Fed. (2d) 76.

The partnership involved in the instant case was not one where the earnings were due to personal services and therefore taxable to him who earned them under the doctrine of Lucas v. Earl, 281 U. S. 111. The majority opinion does say in one place that “In fact we can not tell whether the income of the business was not primarily the product of the personal services and connections of petitioner and possibly of his son, since on this phase of the issue there is no proof.”

The undisputed facts show that the partnership was engaged in the Coca-Cola botting business, with all the extensive plant and equipment required for such a business. To say that a taxpayer in a case of that kind would have to go further and introduce evidence affirmatively showing that his business was not of a personal service character would be going entirely too far, I think, especially when it appears that no such issue was raised by the Commissioner.

As I have already stated, I think the facts show that a valid, legal partnership existed during the taxable year 1940 among petitioner, his wife, and his son and that the partnership agreement has been recognized and fully lived up to by the parties. I see no reason why the Government should disregard it in so far as Mrs. Mauldin is concerned. Sections 181, 182, and 183 of the code prescribe how partnership income shall be taxed, and these provisions of the law afford no justification for the Commissioner to tax petitioner with the part of the partnership income which was credited to Mrs. Mauldin on the partnership books and rightfully belonged to her.

I, therefore, respectfully dissent from the majority opinion.

Aetjndell, Van Fossan, and Leech, JJ., agree with this dissent.

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