Case Name: Felix Zukaitis, Petitioner, v. Commissioner of Internal Revenue, Respondent
Court: United States Tax Court
Jurisdiction: United States
Decision Date: 1944-05-10
Citations: 3 T.C. 814
Docket Number: Docket No. 43
Parties: Felix Zukaitis, Petitioner, v. Commissioner of Internal Revenue, Respondent.
Judges: Opper, J., agrees with this dissent.
Reporter: Reports of the Tax Court of the United States
Volume: 3
Pages: 814–824

Head Matter:
Felix Zukaitis, Petitioner, v. Commissioner of Internal Revenue, Respondent.
Docket No. 43.
Promulgated May 10, 1944.
Robert Ash, Esq., and Moms M. Berman, G. P. A., for the petitioner.
Melvin iS. Hujfalcer, Esq., for the respondent.

Opinion:
OPINION.
Smith, Judge:
Petitioner contends that he and his wife operated the West Side Beer Co. as equal partners and that each of them is taxable on one-half of the profits of the business for 1939 and 1940. Respondent contends that petitioner operated the business as a sole proprietorship and that the alleged partnership was "a fiction and a sham; that although in form it appeared to be a partnership it was not such in substance, being merely a means by which this petitioner might avoid the payment of income tax on a substantial portion of his income."
We think that the evidence supports petitioner's contentions as to the existence of the partnership from February 14, 1939. There can be no doubt that petitioner and his wife intended by their.agreement of February 14, 1939, to join in the operation of the business of the West Side Beer Co. as equal partners and that each should be entitled to one-half of the profits of the business from the date of the execution of the partnership agreement. Petitioner's wife had taken an active part in the business since its inception in 1931. From a small beginning in that year she and petitioner, working together and with their combined capital, had built up a business of considerable size by 1939. For several years petitioner's wife worked long hours for comparatively small pay. Her duties and responsibilities increased with the growth of the business. During the taxable years 1939 and 1940 and for several prior years she had complete management of the office and performed various important duties. She managed the office while petitioner spent most of his time on outside matters. The evidence shows, we think, that the success of the .business was due as much to her efforts as to those of petitioner. Petitioner's wife testified, and her testimony is uncontradicted, that she furnished $1,500 of the capital upon which the business was begun in. 1931. She thus had a stake in the business from the beginning, apart from her interest as an employee. In Humphreys v. Commissioner, 88 Fed. (2d) 430, the court stressed the importance of the fact that the wives there furnished the original capital, saying in its opinion:
Though the present ease is one where the services of Humphreys and Day contributed to the earnings of the firm, the capital furnished by their wives was what started the business, and this and the additional capital which they later contributed helped to furnish the moneys necessary to conduct it.
Respondent's contention that petitioner obtained the $1,500 from his wife (then Gladys Dauksza) as a loan is not supported by the evidence before us. It does not appear that either of the parties ever treated it as a loan in their dealings with one another or so regarded it. To the contrary the evidence is that petitioner's wife always treated it as a capital contribution to the business.
In Meehan v. Valentine, 145 U. S. 611, 618, the Supreme Court defined a partnership as follows:
The requisites of a partnership are that the parties must have Joined together to carry on a trade or adventure for their common benefit, each contributing property or services, and having a community of interest in the profits. Ward v. Thompson, 22 How. 330, 334.
Here, as pointed out, petitioner and his wife in a very real sense "joined together to carry on a trade or adventure for their common benefit." Here, too, the wife contributed both capital, in a substantial amount, and services commensurate with those contributed by petitioner.
The respondent in his brief does not place any great reliance upon the fact that husband and wife partnerships were not fully recognized under the laws of the State of Michigan prior to 1942. It has been held in a number of cases that, while under the Michigan law the wife can not be held liable upon the contracts of a partnership in which she and her hubsand are partners., the wife is not deprived of her right to a division of the profits from a business which she and her husband operate as a partnership and is not relieved of the obligation to report her share of the income from the business in her individual income tax return. See L. F. Sunlin, 6 B. T. A. 1232; Earle L. Crossman, 10 B. T. A. 248; Albert Kahn, 14 B. T. A. 125; R. E. Wing, 17 B. T. A. 1028; Atwood v. United States, 3 Fed. Supp. 321.
The petitioner claims that his wife was an equal partner in the business of the West Side Beer Co. from January 1,1939. The petitioner's wife testified, however, that she did not think that she was entitled "to any of the earnings of the business prior to the formal execution of the partnership agreement," which was on February 14, 1939. We are of the opinion, therefore, that the petitioner is taxable upon the entire profits of the business to February 14,1939, and to only one-half of the profits during the balance of 1939 and for the calendar year 1940. The profits of the business allocable to the period January 1 to February 14, 1939, are such portion of the profits for the entire calendar year 1939 as the number of days from January 1 to February 14,1939, bears to 365 days.
Reviewed by the Court.
Decision will be entered imder Rule 50.