Before ALBERT LEE STEPHENS, MARIS and MCLAUGHLIN, Circuit Judges.
MCLAUGHLIN, Circuit Judge.
The question in this case is whether a real partnership, within the meaning of the federal revenue laws, existed between the taxpayer and his wife. The Tax Court held that it did not.
Petitioner and his wife were married in 1919. He was then a bench hand employed in the jewelry trade. His rate of pay was 65 an hour. He testified that he "* * never made enough money to carry a home along." Mrs. Ardolina had worked in a factory prior to her marriage and she continued with that employment until 1924. She had a baby that year and remained home thereafter. Though she was forced to give up her outside job, she kept on with her income producing efforts. For about eight years after that she took in boarders and for a time not specified "* * * also strung beads as home work." In May, 1929, the taxpayer, Charles Dietz, for whom Ardolina had been working, and two other men, Messrs. Molcham and Knothe, went into business together in Irvington, Essex County, New Jersey. Initially a corporation was formed, the name of which was Admak Manufacturing Company. In about seven or eight months Dietz bought out Molcham and Knothe and he and Ardolina continued the business. They dissolved the corporation and formed a partnership under a written agreement dated August 15, 1934. The same business name was retained. Ardolina paid $500 into the original venture as his share of the capital. In his testimony he makes the source of this money very clear. Asked where it came from he answered: "When I worked for Mr. Dietz I never made enough money to carry a home along. I only made 65 cents an hour, and Mrs. Ardolina took in boarders. On top of that she did some other work outside. She used to string beads for the jewelry trade, stores, and that was moneys that she made doing part time work. She saved that money and gave me the $500 to go into this business."
Asked who contributed the money, he replied, "My wife." Mrs. Ardolina testified that she ran what was virtually a boarding house for about eight years. She said that with the money she thus earned she paid the rent and "* * * kept the house going, and I tried to save a little bit out of it." She stated that no part of the $500 came from her husband. Ardolina leaves no doubt but that it was the $500 which gave him his start. He said: "* * if it had not been for her help I never would have been able to go into business, and never had any money."
The August 15, 1934, agreement between Dietz and the taxpayer was the first of three partnership agreements entered into by Ardolina. Mr. Dietz died November 9, 1936. On November 30, 1936, the taxpayer and the executors of the Dietz will entered into the second partnership agreement, consented to by Mrs. Dietz and her daughter, the residuary legatees and beneficiaries under the will of Charles Dietz.
This arrangement continued until the Spring of 1939, when complications arose with Mrs. Dietz and her daughter, who were, for practical purposes, Ardolina's partners. Because of this, the taxpayer wished to dissolve the partnership. His reasons were, as he testified, that, "* * these two women were of no help to me in business at all. All they were looking for was money, traveling all over the country, spending it faster than I could make it for them. The final blow came when they wanted me to advance them money before profits were made, and I thought right there it was time for me to quit." Ardolina called in the executors and legatees and told them he wished to dissolve the partnership. He "gave them preference" to buy him out, "* * * and if they did not want to buy me out, I was to buy them out" at book value. After consideration the Dietz' decided to sell and Ardolina purchased their interest for around $33,000.*fn1
Immediately thereafter, on June 1, 1939, he formed the third partnership, which was with his wife. The agreement was in writing and almost identical in its terms with the original agreement with Charles Dietz. It recited that Mrs. Ardolina had purchased a half interest in the business for $33,145.54, as evidenced by her promissory note of the same date. The articles provided that Ardolina was to devote himself entirely to the business and be "* * * in direct charge of the operation and management of the ordinary business of the said copartnership;" that Mrs. Ardolina "shall in such manner as is possible, use her power and skill for the interest and advantage of said copartnership, but she shall not be required to devote any time or attendance to the business thereof, nor shall she receive any salary therefrom." Both parties were to have free access to the books and accounts of the business with half yearly reports and a complete yearly audit; Ardolina was to receive $10,000 a year salary; the net profits were to be apportioned and divided equally at least once every six months with losses to be borne by the partners in equal proportions; all checks required the signature of the taxpayer only; consent of both partners was necessary to any extraordinary business transactions of the co-partnership; on termination of the partnership all partnership property was to be equally divided between the parties.*fn2
Petitioner testified that Mrs. Ardolina paid for her partnership interest with the $33,000 he had given her. He reported the gift upon a donor's return. The note given by Mrs. Ardolina was in evidence.It is marked, "Paid, July 31, 1939." Petitioner said that it had been paid by the money which he gave his wife. While perhaps of no great importance here, it is well to note that the evidence shows that various banks, insurance companies and the New Jersey Unemployment Compensation Commission were notified of the new partnership in due course and that a certificate of the new trade name was filed in the Essex County Court House, Newark, New Jersey. With regard to his reasons for bringing his wife into the business as a partner, petitioner said: "First, it was my wife that helped me, by taking in these boarders, and doing this extra work, and gave me this $500 to put up to go into this business; then, next, I felt it was time for me to show my appreciation and make her a partner in this thing, in this new company. I had seen how the two women had spent all these sums of money, and I did not want the same thing to happen to my wife because I had felt that if I would take her into this business and show her the mechanics of the business, that if anything would have happened to me that she could have carried on and be independent herself."
He stated that this was his own idea and was not to avoid or evade income taxes. The Bureau, after auditing the gift, added to the cash a fifty per cent good will interest of $56,731.77 and this the petitioner accepted and paid.
The taxpayer, his wife and the company bookkeeper testified that since June 1, 1939, Mrs. Ardolina has been credited with and paid one-half the company's profits. Mrs. Ardolina said that she used part of such funds to pay her income taxes, help relatives and take care of personal expenses. The balance she invested. Her returns for the critical years of 1943 and 1944 show investment income of $4,072.92 and $5,226.25 respectively. "In 1943 revenue agents examined petitioner's returns for the years 1940 and 1941 and included in petitioner's income all the profits of the company.After protest, petitioner's returns were accepted as filed."*fn3 In July, 1946, the assets of the business were sold for $675,000. Petitioner stated that his wife received her share of the purchase price.
The Admak Company made radio tube parts to customers' specifications. As Ardolina said, "The customer would submit a specification and we would have to bid on the job, and if the bid was qualified we would get the job and then the tool makers would put them in the power presses and we would stamp out these stampings." According to him that kind of enterprise could have been operated by any other owner. It was not a personal service proposition but highly competitive.
The Tax Court held that "* * * petitioner's wife contributed neither outside capital nor services to the business; that she took no part in its direction; that the domination over the business exercised by petitioner appears to have continued after the gift to the wife in unchanged completeness; and that the income in question was the product of petitioner's services and the capital already in the business and under his complete control * * *. In addition, we are unable to find from the record that the wife actually received or could have received any of the proceeds of the business except at the will of petitioner. * * * Under all the circumstances, cf. Commissioner of Internal Revenue v. Culbertson, 337 U.S. 733, 69 S. Ct. 1210, 93 L. Ed. 1659, we conclude that petitioner was essentially a sole proprietor before and after the gift, * * *, and, as set forth in our ultimate finding of fact, that he did not actually intend to join with his wife as a partner in the operation of the business from which the income was derived."
We have no quarrel with the legal principle presented in the Tax Court's ultimate finding of fact. It is the law that the existence of a family partnership for tax purposes is determined by the answer to the question of whether the parties had the bona fide intent "* * * to join together as partners". Commissioner of Internal Revenue v. Culbertson, supra, 337 U.S. at page 743, 69 S. Ct. at page 1215. That intention in that respect is ...