Averbuch v. Commissioner , 12 T.C. 32 ( 1949 )

Sam Averbuch, Petitioner, v. Commissioner of Internal Revenue, Respondent

Averbuch v. Commissioner

Docket No. 9349

United States Tax Court

12 T.C. 32; 1949 U.S. Tax Ct. LEXIS 297;

January 25, 1949, Promulgated

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Decision will be entered for the petitioner.

Income -- Family Partnership -- Vital Services. -- Where a wife contributed vital services to a business and her husband did not, due to illness, the partnership between them is recognized for income tax purposes.

George E. H. Goodner, Esq., for the petitioner.

S. Earl Heilman, Esq., for the respondent.

Murdock, Judge.

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MURDOCK

The Commissioner determined a deficiency of $ 6,162.81 in income tax for the calendar year 1941. The only issue for decision is whether the Commissioner erred in adding to the income reported by the petitioner $ 15,242.53 representing one-half of the income from the Peoples Store claimed and reported by the wife of the petitioner as her income.

FINDINGS OF FACT.

The petitioner is an individual. His income tax return for 1941 was filed with the collector of internal revenue for the district of Tennessee.

The petitioner for a number of years prior to 1941 conducted a business in Knoxville as a sole proprietorship. The business was known as the Peoples Store. The principal merchandise sold was men's and women's ready to wear clothing and accessories.

The petitioner was stricken with a critical illness several years prior to 1941. That illness and the continued efforts which he made to recover from it seriously interfered with his conduct of his business. There were long periods when he was not able to attend to his business at all and at most other times he was able to give only a part of his time to his business. His wife, Ada, had actively engaged in, and was familiar with, all phases of the business. They had no children. Ada was required, during the illness of the petitioner, to take charge of and manage the business on his behalf. She received no salary.

The petitioner and his wife at the beginning of 1941 agreed orally that from January 1, 1941, they would conduct the Peoples Store as a partnership in which each would have an equal share. Their agreement was generally known. Ada contributed $ 4,398.45 to the capital of the partnership. That contribution was not necessary in the business. The remainder of the partnership property was contributed by the petitioner. The contribution of capital by the petitioner was about fifteen times as valuable as the amount contributed by his wife.

The petitioner on January 1, 1941, signed an instrument, drawn and witnessed by an attorney, which was as follows:

In consideration of One ($ 1.00) Dollar and the love and affection I hold for my dear wife, Ada Averbusch, I hereby sell, transfer and assign to the said Ada Averbusch, one-half of all my interest in the People's Store of Knoxville, Tennessee, and the assets owned by said People's Store. I make this instrument for the purpose of making Ada Averbusch my partner in said business on an equal basis with me in order to share and share alike in any profits arising from said business.

The petitioner was able to give little of his time to the affairs of the Peoples Store during 1941 due to illness. His wife actually managed and operated the store during that year. She performed all executive duties except for a few performed by the petitioner. She bought and sold merchandise, had charge of all personnel matters, made decisions on credit applications, signed all checks, and did all of the things necessary in the conduct of the business. She gave her full time and attention to the business during that year. The petitioner and his wife were bona fide equal partners in the operation of the Peoples Store business during 1941.

The petitioner reported one-half of the income from the Peoples Store on his income tax return for 1941 and his wife reported the other one-half on her income tax return for that year. The Commissioner in determining the deficiency included all of the income from the Peoples Store in the taxable income of the petitioner.

OPINION.

The Commissioner erred in failing to recognize the valid equal partnership which existed between the petitioner and his wife during the year 1941. The parties honestly intended to carry on and actually carried on a real partnership business during 1941. The petitioner gave his wife a large part of her one-half interest in the business. She made a small contribution of capital to the business, which contribution became a part of the partnership assets on January 1, 1941, whereas previously it had represented a debt owed to the wife by the petitioner. However, the capital contribution is not nearly as important in this case as are the vital services rendered by the wife in conducting the business during 1941. Those services which she rendered were far more important than those rendered by the husband. The income earned during the year must be attributed in large part to her services. It is not detrimental to the petitioner's case that she rendered similar services in prior years for which she received no compensation.

Decision will be entered for the petitioner.