5 T.C. 23">*24 The respondent determined a deficiency in the petitioner's income tax for 1941 in the amount of $ 2,223.52. The only question for determination is whether one-third of the entire 1941 income from an oil and gas business reported by petitioner's daughter as her income was the income of the petitioner.

FINDINGS OF FACT.

The petitioner is a resident of Florence, South Carolina, and filed his income tax return for the year 1941 with the collector for the district of South Carolina.

In 1941 the petitioner's family consisted of himself, his wife, Edith Monroe McEachern, and their only child, a daughter, Edith Monroe McEachern, Jr., who was born in October 1923. Mrs. McEachern owned property of a value of between $ 100,000 and $ 150,000, and her income for 1941 was in excess of $ 13,000, all of which was from rents, with the exception of approximately $ 400 from interest. 1945 U.S. Tax Ct. LEXIS 168">*171 From 1941 the petitioner reported a net income of approximately $ 19,500, derived primarily from certain business enterprises of which he was either the sole owner or in which he owned a part interest.

In 1930 the petitioner and his wife organized a corporation known as Carolina Gas & Oil Co., with petitioner owning one share of stock and his wife the remainder. The corporation engaged in business as distributor in Florence County and in portions of Darlington and Williamsburg Counties, South Carolina, of gasoline and other products of Shell Oil Co. As a distributor the corporation owned all the assets used in its business and bought merchandise from the oil company at one price and sold it to customers at another. The corporation continued in business as distributor until February 15, 1933, at which time Shell Oil Co. purchased the major portion of its operating assets. The corporation continued in existence until 1935, when it was dissolved and its remaining assets, consisting principally of real estate, were distributed to petitioner's wife.

From February 15, 1933, until July 1, 1940, the petitioner, carrying on business as a sole proprietor under the name of Carolina Gas & 1945 U.S. Tax Ct. LEXIS 168">*172 Oil Co., distributed the products of Shell Oil Co. as a commission agent. Shell Oil Co. furnished the property used in the business, furnished the products distributed, carried all the accounts, and, for his services in managing the business, paid petitioner a commission on the volume of business done. During 1939 and until July 1, 1940, the petitioner's commissions amounted to approximately $ 1,000 a month.

In 1940 Shell Oil Co. offered to sell the operating assets of the business to petitioner and to permit him to operate as a wholesale distributor. He purchased the said assets on July 1, 1940, and, continuing under the name Carolina Gas & Oil Co., began operations as a 5 T.C. 23">*25 wholesale distributor of Shell Co. products. The purchase price was approximately $ 41,750. No cash was paid at the time, but as security for payment of the purchase price the petitioner gave the Shell Co. a mortgage on the purchased assets, which consisted principally of the service equipment of approximately thirty stations, storage tanks, and warehouse and office equipment.

The lands and buildings occupied by a majority of the service stations were leased by petitioner from Mrs. McEachern. In some1945 U.S. Tax Ct. LEXIS 168">*173 instances he owned the property occupied. The completely equipped stations were in turn leased by petitioner to operators who conducted a retail business, the petitioner selling them the commodities which they sold to their customers. The rentals payable by petitioner to Mrs. McEachern for station sites amounted to about $ 1,100 a month, or approximately $ 13,000 a year.

During the school year 1940-1941, which was her first year in college, the petitioner's daughter attended Converse College in Spartanburg, South Carolina, where she took a general college course. She had no desire to teach or to do any service work, but expressed a desire to enter business. After discussing the matter with her, his wife, his banker, and his attorney, the petitioner decided that his daughter should become associated with him in the business he was conducting under the name of Carolina Gas & Oil Co. He also discussed the matter with representatives of Shell Oil Co., and they were agreeable to the idea.

On or subsequent to July 1, 1941, the petitioner submitted certain data to his auditor and requested him to determine, as of July 1, 1941, the book value of the business conducted under the name 1945 U.S. Tax Ct. LEXIS 168">*174 of Carolina Gas & Oil Co. The auditor made the determination and mailed it to petitioner on July 26, 1941. Sometime subsequent to the receipt of the auditor's determination, the petitioner and his daughter executed an instrument reading as follows:

Know All Men by These Presents That I, Dan H. McEachern, of the County of Florence, State of South Carolina, for and in consideration of the sum of Twenty-three Thousand Forty and 00/100 ($ 23,040.00) Dollars to me in hand paid by Edith Monroe McEachern, Jr., of the County of Florence, State of South Carolina, receipt of which is hereby acknowledged, have granted, bargained, sold and released and by these presents do grant, bargain, sell and release unto the said Edith Monroe McEachern, Jr., a two-thirds (2/3) interest in my business known as Carolina Gas & Oil Company, Florence, S. C., including all property of said business and used by me in the operation of said business, except such real estate if any; to have and to hold said Two-thirds (2/3) interest unto the said Edith Monroe McEachern, Jr., forever.

The said Edith Monroe McEachern Jr. and the grantor herein have agreed to continue the operation of said business as a partnership1945 U.S. Tax Ct. LEXIS 168">*175 under the name and style of Carolina Gas & Oil Company, Florence, S. C., with the net profits from said business distributed among the partners in the following proportions, 5 T.C. 23">*26 to-wit: To Dan H. McEachern one third (1/3) and to Edith Monroe McEachern, Jr., two-thirds (2/3).

In Witness Whereof, I have hereunto set my hand and seal this 1st day of July, 1941.

D. H. McEachern (LS)

In the presence of:

Winnie McBride

Edith M. McEachern

I, Edith Monroe McEachern, Jr., do hereby accept the provisions of the above and foregoing bill of sale and agree to the continuation of the business as set forth therein as a partnership.

Edith Monroe McEachern (LS)

In the presence of:

Winnie McBride

Edith M. McEachern

In connection with the execution of the foregoing instrument, the petitioner's daughter signed and gave to him an instrument reading as follows:

$ 23,040.00 Florence, S. C., July 1, 1941.

One Year after date, for value received, I promise to pay to the order of Dan H. McEachern Twenty-three Thousand forty and 00/100 Dollars, at FlorenceS. C., with interest from date and after maturity at the rate of Four (4%) percent, per annum, payable annually, and in case said 1945 U.S. Tax Ct. LEXIS 168">*176 amount is not paid at maturity, I promise to pay all expenses incurred in collecting the same, including ten per cent. thereof for attorney's fee for collection, and attorney's fees for any litigation concerning the said debt.

This is a purchase money note for the purchase of two-thirds (2/3) interest by me from the obligee in the business known as Carolina Gas & Oil Company.

Protest, Demand and Notice of Non-payment Waived.

[Signed] EDITH MONROE McEACHERN, JR.

Edith Monroe McEachern, Jr.

On July 1, 1941, there was a balance of approximately $ 30,000 still owing by petitioner to Shell Oil Co. on the mortgage indebtedness. The last of this indebtedness was paid on May 31, 1943.

After the execution by petitioner and his daughter of the above instruments, the business continued to be conducted under the same name as before, with petitioner alone continuing to manage and direct its affairs. The petitioner's daughter attended Converse College during the school year 1941-1942. She attended the University of South Carolina during the school year 1942-1943. She went there with a view to taking certain courses in commerce which were not given at Converse. Finding that such courses were1945 U.S. Tax Ct. LEXIS 168">*177 not available to her at the university and that she would not be able to graduate from it in the usual four-year period, she returned to Converse in the fall of 1943, graduating in June 1944. The only services shown to have been rendered by her in the business consisted of checking and paying the property taxes at the county courthouse and assisting in taking inventory of station equipment in the summer of 1944.

5 T.C. 23">*27 At the time of the execution of the above note the daughter had no substantial amount of funds, and for payment of the note petitioner looked to the profits of the business and any salary his daughter might earn in the business. The petitioner advanced the money needed by his daughter while away at school, making deposits to the credit of her individual bank account and keeping a book account against her covering such funds. It is not definite whether she ever actually made repayment.

The books of Carolina Gas & Oil Co. were not closed as of June 30, but continued without closing until December 31, 1941. At the close of 1941 the profits of the business were computed for the full year at $ 9,486.93, and one-half of that amount was allocated to petitioner as the1945 U.S. Tax Ct. LEXIS 168">*178 profits applicable to the first half of the year and one-third of the other half of the twelve months profits was allocated to him as being the portion of the profits allocable to him for the last half of the year. The actual profits for the period July 1 to December 31, 1941, are not shown. In the above computation of profits no amount was deducted as salary or compensation to the petitioner for his services during the year. A partnership return for 1941, signed by petitioner, was filed for Carolina Gas & Oil Co. showing the above stated profits and allocations. The depreciation schedule of the return showed physical assets at December 31, 1941, as consisting of trucks, station equipment, automobiles, etc., with a cost of $ 37,459.87.

Under date of July 1, 1941, the petitioner's account on the books of Carolina Gas & Oil Co., which was designated "Salary A/c" but in fact was his capital account for the business, was debited with the amount of $ 23,040, with the explanation that the amount was transferred to his daughter. Under the same date an account was set up in her name on the books, and it was credited with the amount of $ 23,040. No debits were made to her account during1945 U.S. Tax Ct. LEXIS 168">*179 1941, but at the end of the year it was credited with $ 3,162.31 as her share of the profits for that year. During 1942 the account was debited with the amounts of $ 241.60 and $ 44.87 on account of payments to the collector of internal revenue and the South Carolina Tax Commission, respectively. At the end of 1942 it was credited with $ 9,233.27 as her share of the profits for that year. During 1943, and through May 1, five debits totaling $ 625 were made to the account. The purpose of these debits is not disclosed. Three debits totaling $ 5,100 were thereafter made, to the end of the year, at which time the account was credited with $ 3,803.02 as her share of the profits for the year.

After the petitioner's account on the books of Carolina Gas & Oil Co. was debited with the amount of $ 23,040, under date of July 1, 1941, the credit balance remaining therein was $ 11,231.72. At the end of 1941 the account was credited with $ 6,324.62 as representing all the profits for the first half of the year and one-third of the profits 5 T.C. 23">*28 for the last half of the year. At the end of 1942 the account was credited with $ 4,616.63 as representing his share of the profits for that year, 1945 U.S. Tax Ct. LEXIS 168">*180 and at the end of 1943 it was credited with $ 1,901.51 as his share of the 1943 profits. Between July 1, 1941, and the end of May 1943 numerous debits were made to petitioner's account for withdrawals. As a consequence, at the latter date the credit balance in the account had been reduced to only $ 1,578.57, indicating that all the profits previously credited to the account and approximately $ 10,000 of his capital as of July 1, 1941, had been withdrawn. The credit balance of the daughter's account at the end of May 1943 was $ 34,524.11.

In March 1943 an internal revenue agent who was making an investigation of petitioner's income tax liability for 1941 questioned the existence of a partnership between the petitioner and his daughter respecting the Carolina Gas & Oil Co. business. About May 3, 1943, the agent informed the petitioner that in making his report he would not treat the arrangement between them as constituting a partnership for tax purposes. At or shortly after that date the petitioner was advised that he had been granted a conference with respect to the matter, and on some undisclosed date he and his accountant did confer with representatives of the Bureau of Internal1945 U.S. Tax Ct. LEXIS 168">*181 Revenue in Columbia, South Carolina.

On June 11, 1943, the petitioner received from his daughter a check for $ 23,040, the face amount of the "purchase money note" set out above. The note was then approximately one year overdue and nothing had been paid on either principal or interest. No amount was ever paid by the daughter as interest.

The $ 23,040 used in making the payment to petitioner on June 11, 1943, was provided by a rather complicated series of deposits or withdrawals, or both, from and in the bank accounts of petitioner, his daughter, Mrs. McEachern, the Carolina Gas & Oil Co. and the Carolina Rubber Co., an enterprise in which the petitioner, his wife, and their daughter claimed to be partners. As found above, the credit balance in petitioner's capital account on the books of Carolina Gas & Oil Co. had been reduced to $ 1,578.57, reflecting an excess of withdrawals over credits since July 1, 1941, of approximately $ 10,000, while the books of Carolina Rubber Co. reflected withdrawals by him during 1942 totaling $ 11,416.34, which had been charged against his capital account in that company. There was owing to Mrs. McEachern by the Carolina Gas & Oil Co., and credited1945 U.S. Tax Ct. LEXIS 168">*182 to her on its books, $ 18,021.25 representing monthly rentals of approximately $ 1,100 payable to her on the service station sites which she had leased to the business. On June 8, 1943, the petitioner had a balance of $ 3,066.32 in his regular bank account and $ 1,506.48 in a special bank account. 5 T.C. 23">*29 The daughter had a balance in her bank account of $ 90.40, Mrs. McEachern a balance of $ 3,963.89, and the Carolina Gas & Oil Co. a balance of $ 13,730.93. On June 8 the petitioner borrowed $ 10,000 from the bank, and that amount, less $ 4 for stamps, or $ 9,996, was deposited in his regular bank account. The following day he transferred $ 1,387.68 from his special bank account, and on the same day, June 9, transferred $ 14,200 to the bank account of Carolina Gas & Oil Co. Also on June 9, the Carolina Gas & Oil Co. issued its check to Mrs. McEachern for $ 15,000, charging her account with that amount, and on the same date the $ 15,000 so drawn, together with $ 5,000 drawn by her from the Carolina Rubber Co., was deposited in her account. On June 10 Mrs. McEachern issued her check for $ 23,000 to her daughter, receiving at the same time her daughter's note for the same amount, 1945 U.S. Tax Ct. LEXIS 168">*183 due one year after date and bearing interest at the rate of 3 percent per annum. On the same day the daughter drew her check for $ 23,040 in favor of the petitioner, which amount the petitioner deposited in his bank account. On the following day, June 11, he retransferred to his special bank account the amount of $ 1,387.68 which had been transferred therefrom two days before. On June 12 he drew his check for $ 11,416.34 in favor of Carolina Rubber Co., which represented the total of the 1942 charges against his capital account on the books of that company. On the same date he deposited $ 2,700 in his bank account, the source of the money not being shown. On June 15 he transferred $ 2,000 each to the accounts of Mrs. McEachern and his daughter. The $ 2,000 transferred to Mrs. McEachern was for her use in paying Federal income taxes, and was treated as a loan to her. The treatment of the $ 2,000 transferred to his daughter is not shown. On June 26 he drew $ 10,020.80 from his bank account in repayment of the loan from the bank under date of June 8.

On June 3, 1944, Mrs. McEachern received a payment of $ 6,500 on the principal of the above $ 23,000 note which she had previously1945 U.S. Tax Ct. LEXIS 168">*184 received from her daughter under date of June 10, 1943. The Carolina Gas & Oil Co. was sold to the Shell Oil Co. as of June 1, 1944, for $ 90,000, and on June 14, 1944, the daughter, using part of the proceeds of the sale paid to Mrs. McEachern the $ 16,500 balance due on the principal of the note. On June 21, 1944, she paid $ 611 as interest.

Of the $ 90,000 received from Shell Oil Co. on the sale of Carolina Gas & Oil Co., $ 30,000 was credited to the petitioner's account and $ 60,000 to the account of his daughter.

Of the $ 9,486.93 computed as the profits of the Carolina Gas & Oil Co. for the full year 1941, the petitioner reported two-thirds thereof, or $ 6,324.62, as his income, while his daughter reported one-third, or $ 3,162.31, as her income, the said $ 3,162.31 being treated by them as 5 T.C. 23">*30 two-thirds of the profits of the Carolina Gas & Oil Co. for the second six months of the year. In determining the deficiency in controversy, the respondent determined that the entire income from the business for the year was taxable to petitioner, and accordingly increased his income from that source by $ 3,162.31.

OPINION.

The only question is whether that portion of income from1945 U.S. Tax Ct. LEXIS 168">*185 the operation of the Carolina Gas & Oil Co. reported by petitioner's daughter as her income was the income of the petitioner, for Federal income tax purposes. It is the contention of the petitioner that from July 1, 1941, the Carolina Gas & Oil Co. was a partnership, in which he had a one-third interest and his daughter a two-thirds interest, and that the income was computed and reported on that basis, and was correctly and properly reported.

This is another of those cases involving the dealings within a family group, where there are so many considerations not usually present in normal arm's length business transactions between persons not so related that it is quite difficult to determine and find the reality or actuality of the transaction. In most instances the cases are of those of a husband or father claiming that his wife or minor child has become a partner and that a designated portion of the profits from a business theretofore wholly his own should now be taxed to his wife or minor child. The wife or child who yesterday had nothing to contribute or risk in the business is today, according to the claim, a person of substance, an investor in the business, and taxable on a1945 U.S. Tax Ct. LEXIS 168">*186 designated portion of the income therefrom. In most instances this transition to something from nothing has taken the form of a gift, or an arrangement whereby the husband or father is to continue to take the profits or a substantial portion thereof not as profits, but as the selling price of the designated interest in the business or its assets. Where the evidence has been such as to show that the transactions were what they purported to be, namely, gifts or sales, not mere formalities, the claims of partnership have been allowed. ; ; ; ; ; . In other cases, where the evidence has disclosed the transactions as formalities without substance, the claims of partnership and the division of income for income tax purposes have been denied. ; ;1945 U.S. Tax Ct. LEXIS 168">*187 ; ; ; . We have also that line of cases wherein the operations producing the income are personal service in character and the husband or father has undertaken to avoid the application of the rule in , 5 T.C. 23">*31 by indulging in partnership formalities, and in such cases it has been consistently held that anticipatory family arrangements, even though in partnership form, can not defeat taxation of the income to him who earns it. ; ; ; .

While the proof in the instant case leaves much to be desired, there can be no doubt, we think, that the business conducted was essentially a wholesale selling operation or that petitioner1945 U.S. Tax Ct. LEXIS 168">*188 and the services rendered by him were prime factors in its operation and in the production of income. The services rendered by petitioner's daughter during the taxable year were of no consequence, nor does it appear that it was intended that she would render any services of any moment, at least for a period of years. The proof here does not supply any basis for determining what portion of the income, if any, should be attributed to the use of capital. It is also noted that some of the capital used was his personally owned real estate, and it does not appear that he charged or received any rent thereon. From February 15, 1933, to July 1, 1940, the petitioner, individually and using the name Carolina Gas & Oil Co., had operated the same business as commission agent for the Shell Oil Co., the Shell Oil Co. then owning the distributing equipment. His compensation or profits were in the form of commissions on sales made. We are not advised whether the volume of sales during the taxable year, and particularly during the last six months of the year, was greater or less than the volume for comparable periods when petitioner was operating as commission agent for Shell, nor whether the1945 U.S. Tax Ct. LEXIS 168">*189 margin of profit on the business done was greater or less. We do know, however, that, for the selling and managerial services rendered by the petitioner to Shell, petitioner did receive approximately $ 12,000 per year in commissions during the latter part of that operation, while during 1941 the profits, without excluding or deducting any amount to cover the earnings attributable to the personal services rendered by the petitioner, were only $ 9,486.93 for the entire year. It is thus apparent that if the earnings of petitioner for similar services in the earlier periods are indicative of the amount earned by him in the 1941 operation, the allowance thereof would leave no profits for distribution to the daughter, even if the petitioner's claim of partnership be allowed. See . In that case the facts shown of record were substantially parallel to the facts in this case, and we were there unable to conclude, as the petitioner argued we should, that a partnership, rather than the petitioner, was the earner of the income. Such being the record, we held that the rule in , as 1945 U.S. Tax Ct. LEXIS 168">*190 applied in ,, and , was controlling, and that the entire income was taxable to the petitioner. Similarly, we are unable to say 5 T.C. 23">*54 in the instant case that the petitioner was not the earner of the Carolina Gas & Oil income reported by his daughter as her income, and, as a consequence, we can not say that the respondent erred in taxing it to him. See also , and . In view of the conclusion reached, it becomes unnecessary to determine whether petitioner's daughter acquired by purchase, as of July 1, 1941, a two-thirds interest in the physical assets of Carolina Gas & Oil Co. Cf.

Decision will be entered under Rule 50.

Black, concurring in result only: If we assume that a partnership existed between petitioner and his daughter, Edith, by virtue of the bill of sale and partnership agreement of July 1, 1941, as I do, then I do not agree with1945 U.S. Tax Ct. LEXIS 168">*191 the view expressed in the majority opinion that this is a failure of proof case as to petitioner being the earner of the income and, therefore, the Commissioner must be sustained in his determination that the earnings of the business of the Carolina Gas & Oil Co. were the "personal service" earnings of D. H. McEachern and were, on that account, taxable entirely to him. That such is the holding of the majority opinion there seems to be no doubt, as will be seen from the following quotation taken from it. The majority opinion after citing M. M. Argo, 3 T.C. 1120, says:

* * * In that case the facts shown of record were substantially parallel to the facts in this case, and we were there unable to conclude, as the petitioner argued we should, that a partnership, rather than the petitioner, was the earner of the income. Such being the record, we held that the rule in , as applied in ,, and , was controlling, and that the 1945 U.S. Tax Ct. LEXIS 168">*192 entire income was taxable to the petitioner. Similarly, we are unable to say in the instant case that the petitioner was not the earner of the Carolina Gas & Oil income reported by his daughter as her income, and, as a consequence, we can not say that the respondent erred in taxing it to him. See also , and . In view of the conclusion reached, it becomes unnecessary to determine whether petitioner's daughter acquired by purchase, as of July 1, 1941, a two-thirds interest in the physical assets of Carolina Gas & Oil Co. Cf.

I do not agree that the earnings of the business known as Carolina Gas & Oil Co. were "personal service" earnings as that term is commonly and ordinarily understood. See . The business of Carolina Gas & Oil Co. was that of wholesale distributor of the products of the Shell Oil Co. and the assets with which it operated its business were purchased from Shell at a cost of $ 41,750 and "consisted principally of the service equipment of approximately1945 U.S. Tax Ct. LEXIS 168">*193 thirty stations, storage tanks, and warehouses and 5 T.C. 23">*33 office equipment." The above facts are taken from the findings of fact which precede the majority opinion and it seems to me that they altogether negative the idea that the earnings of such a business can be correctly described as "personal service" earnings, and brought within the ambit of such cases as Lucas v. Earl, Earp v. Jones, Mead v. Commissioner, and Schroder v. Commissioner. I do not wish to be understood as subscribing to any such view. Nor do I think the case of , relied upon in the majority opinion, has any application to the facts of the instant case.

I do concur in the result reached in the majority opinion, but on one ground only. It is undisputed that up until July 1, 1941, the business was conducted as a sole proprietorship by the petitioner, D. H. McEachern. Clearly, during that period all of the profits of the business were his and taxable to him. It is the allegation of petitioner that on July 1, 1941, the business was changed into a partnership between himself and his daughter, Edith. If it be assumed that such is the case, it 1945 U.S. Tax Ct. LEXIS 168">*194 was petitioner's burden of proof to show what the income of the partnership was during the period July 1 to December 31, 1941. This, the petitioner has not done. The findings of fact say: "The actual profits for the period July 1 to December 31, 1941, are not shown." Instead of a proper showing in this respect, petitioner has used a method of allocation based on time. No facts are in the record, so far as I can see, which would justify a method of allocation based on time instead of making a proper showing of actual income of the partnership, as was petitioner's burden. Because of this failure of proof, and this only, I concur in the result reached in the majority opinion.