12 T.C. 1076">*1076 The Commissioner determined a deficiency of $ 9,813.01 in income tax of the petitioner for the calendar year 1944. The only issue for decision is whether the Commissioner erred in taxing to the petitioner 40 per cent of the income of a partnership to which his wife was entitled under the partnership agreement.

12 T.C. 1076">*1077 FINDINGS OF FACT.

The petitioner is an individual whose return for 1944 was filed with the collector of internal revenue for the first district of Pennsylvania.

Charlotte H. Merz is the wife of the petitioner. They were married in 1930. They have two children, one born in 1937 and the other one born in 1941. The petitioner and his wife lived for a time with his wife's1949 U.S. Tax Ct. LEXIS 161">*162 mother, and thereafter his wife's mother lived with them in their house in Philadelphia. The mother-in-law kept the house and cared for the children. The wife at no time occupied herself with household duties.

The petitioner had been a foreign buyer for a firm engaged in the manufacture and importation of leather goods. That firm was liquidated in 1931, and in 1932 the petitioner, assisted by his wife, went into business for himself, importing and jobbing leather novelties. He and his wife invested in the business $ 1,000 which they had saved. She had been employed part of the time prior to 1932. The petitioner shortly thereafter formed a partnership with his brother, who contributed $ 1,000 but took no part in the business. That arrangement continued for five or six years. Thereafter, the petitioner operated the business as a sole proprietorship until he incorporated it in 1940.

The corporation had 250 shares of stock outstanding, 5 of which were issued to the petitioner's wife and 195 of which were issued to the petitioner. The wife was an officer in the corporation. The wife invested $ 1,349.93 of her own money in the business in 1943. Most of that money was used, together1949 U.S. Tax Ct. LEXIS 161">*163 with money belonging to the petitioner, to purchase stock from another stockholder. The petitioner, shortly before the dissolution of the corporation, had sufficient shares transferred to his wife to give her a 40 per cent interest in the corporation. He thereafter held a 50 per cent interest in the corporation and Herbert W. Baumann held a 10 per cent interest. The corporation was dissolved in the spring of 1943.

The petitioner, his wife, and Herbert W. Baumann entered into a written partnership agreement on May 31, 1943, and transferred to the partnership thus formed their interests in the assets which had formerly belonged to the corporation. The partnership was to continue until dissolved by mutual consent. It was to operate under the name of F. O. Merz & Co., and was to carry on the same business which had been conducted previously by the corporation. The profits and losses were to be shared 50 per cent by the petitioner, 40 per cent by his wife, and 10 per cent by Baumann, after deducting salaries of $ 12,000 for the petitioner, $ 1,000 for his wife, and $ 5,000 for Baumann. Thereafter the three carried on the business as partners. Appropriate books were kept to show1949 U.S. Tax Ct. LEXIS 161">*164 the interests of the three. The name of the partnership was duly registered with the proper authorities in Pennsylvania. 12 T.C. 1076">*1078 Manufacturing had become one of the most important parts of the business by the time the partnership was formed and it continued to be during the taxable year.

The petitioner's wife gave her full time and attention to the business from the time it was formed by her husband in 1932 up to the time of the trial in this proceeding, except for several months on the two occasions when her children were born. She was familiar with and took an active part in all phases of the business. She was as important as, if not more important than, her husband in selling the goods for the partnership. She was the principal designer of new items to be manufactured. She participated in all important decisions of the partnership and was in a large part responsible for its success during the taxable year and in other years. She contributed vital services to the business of the partnership. The partnership was a genuine partnership entered into and operated during the taxable year for business purposes and the petitioner's wife was in every sense a member of the partnership1949 U.S. Tax Ct. LEXIS 161">*165 during that year.

The Commissioner, in determining the deficiency, added to the income of the petitioner, as reported on his return, $ 14,498.01 representing the wife's share of the distributable income of the partnership for 1944.

OPINION.

The Commissioner has refused to recognize the petitioner's wife as a real partner in the business of F. O. Merz & Co. The evidence is overwhelming in the petitioner's favor. The separate capital of the wife which she contributed to this business was not large, but neither was that contributed by the petitioner. The wife contributed services to the business from the time it was started in 1932 up through the taxable year and later. She devoted all of her working time to it. The business started in a small way and for many years she and her husband were the only persons engaged in the conduct of the business. She did not demand or receive a share of the profits, but she was responsible for a large part of the earnings of the business. Much of the credit for the increase and development of the business must go to her. She bought goods, she sold goods all over the United States, she was sought out by customers, she designed new items which 1949 U.S. Tax Ct. LEXIS 161">*166 were important to the success of the business, she worked in the office and in the plant, and she participated in all important decisions made by the firm. She did not directly purchase the 40 per cent of the stock of the corporation which stood in her name at the time the corporation was dissolved, but she had earned that share in the business and she contributed it to the partnership. She did everything that the other partners did in the business and to an equal or greater degree. The other two partners testified that the so-called 12 T.C. 1076">*1079 salary arrangement was in no sense a recognition of the wife's value to the business, but was given her largely to compensate her for expenditures which she made on behalf of the business.

Decision will be entered for the petitioner.