Before BIGGS, ALBERT LEE STEPHENS, and KALODNER, Circuit Judges.
Two petitions for review of two decisions of the Tax Court have been consolidated here. The single question presented is whether the petitioners are liable for deficiencies in income taxes assessed against them by the Commissioner. The Tax Court upheld the Commissioner's determination that petitioner, Morris Eisenberg, owed $6,671.58 and $18,891.32 for 1940 and 1941 respectively, and petitioner Herman Schaeffer owed $6,540.51 and $18,936.08 for the same years. 5 T.C. 856.
The factual background is as follows:
Petitioners Eisenberg and Schaeffer entered into an oral partnership agreement on January 1, 1937, for the conduct of a retail establishment under the name of "Bailey's Furniture Company."
Prior thereto, sometime in 1930, Schaeffer had established four separate savings accounts for each of his children in his name as trustee.*fn1 These funds were withdrawn by Schaeffer between 1937 and 1939 and used by him in the partnership business.*fn2
On December 30, 1939, the petitioners executed written articles of co-partnership. Under this agreement, among other things, the partnership was to continue from year to year; the petitioners were to have an equal share in the business, and were to draw an agreed salary; and payment of the respective shares of the profits was to be made only if and when the parties so determined.*fn3
Three days later, on January 2, 1940, petitioner Eisenberg created three separate, irrevocable, written trusts for the benefit of his three children, transferring to himself as trustee of each trust a percentage of his interest in the partnership business: to Leon he gave 20%; to Estelle, 15%; and to Libby, 15%. On the same day, petitioner Schaeffer executed four separate, irrevocable, written trusts for the benefit of his four children, transferring tovhim self as trustee of each trust a percentage of his interest in the partnership business; to Raymond, Alfred and Harold he gave 14% each, and to Toby, 8%.*fn4 Federal gift tax returns were filed by the petitioners in which they reported the gifts in trust for the benefit of their children.
As of January 1, 1940, capital accounts were set up on the books of Bailey's Furniture Company for each of the trusts.*fn5 The bank with which the firm did business was furnished a copy of the financial statements showing the trusts' interest in the business, and, in addition, a fictitious name certificate was filed with the proper state authorities.
The seven trusts were identical, except for the name of the beneficiary and the amount of the gift.
Specifically it was provided, among other things, that income should be accumulated until the beneficiary attained the age of forty years, or thirty years if the original trustee died; at such time, the trust fund would be payable to the beneficiary, but the latter could elect to become an active partner in Bailey's Furniture Company to the extent of the amount of the fund; however, the partners or surviving partners had an exclusive right to determine whether or not the beneficiary would be admitted to the partnership, and there were special provisions relating to the time for and interest on the payment of the fund in the event that the partners refused admission or the beneficiary refused to enter the partnership business; also, the beneficiary could elect to retain an inactive interest in the business. The trustee was authorized, in the exercise of his sole discretion, to expend for or pay to the beneficiary any part of the trust fund prior to his attaining the age of thirty or forty years, as the case may be; to invest the principal of the trust without regard to "legal investments"; to exercise any right to subscribe for stocks and bonds or other allotments received by reason of investments held in trust, or sell such right for such price as may seem best to him; to join in or become a party to any agreement, reorganization, merger, readjustment or foreclosure proceeding; and to pledge any of the trust fund as collateral security for loans or for use in the management and operation of Bailey's Furniture Company. In the event of the death of the beneficiary before he attained the age of distribution it was provided that the fund should be divided into as many shares as there were children of the beneficiary living at the time of his death, and continued as the subject of the trust with directions to the trustee to accumulate the income for their benefit until such time as the original beneficiary would have reached the age of distribution; then to pay over the fund to them under the conditions it was payable to the original beneficiary. In the event that the beneficiary died unmarried, or married but without issue, the trust fund would become part of the respective trusts established for the settlor,s other children, who were specifically named.
Having established the trusts, on the next day, January 3, 1940, petitioners Eisenberg and Schaeffer, individually and as trustees of each of the trusts, executed an "Addenda to Articles of Co-Partnership Agreement".*fn6 This, in effect, purported to make the various trusts members of the partnership of Bailey's Furniture Company and subjected the trusts to the partnership agreement.
During the years 1940 and 1941 no services were rendered by any of the petitioners' children for Bailey's Furniture Company, except by Raymond Schaeffer during the period from June to December, 1941. For these services Raymond received $40.00 a week from the business.
No distributions of either income or corpus were made by the petitioners as partners or as trustees during 1940 and 1941 except for the payment of income taxes in behalf of the various trusts. Petitioners, as trustees, filed income tax returns for 1940 and 1941 in behalf of the trusts, reporting the income of Bailey's Furniture Company which was credited to the respective capital accounts of the trusts on the books of the company. Partnership returns were filed by ...