The opinion of the court was delivered by: BYERS
In this case the plaintiff seeks a refund of his individual federal income tax for the year 1945, and the correct amount is conceded to be $ 4,106.67 and not the larger sum demanded in the complaint.
The facts are not in dispute, and the controversy turns upon whether the plaintiff and his wife, having created trusts for their two children which resulted in the formation of a partnership between them and the trustee for each child, brought into existence such a partnership as required recognition as such by the Commissioner of Internal Revenue.
The cause has been clearly and fairly presented by both sides, and the court is indebted to counsel for the concise manner in which they have presented their contentions in their respective briefs.
The plaintiff, Abraham Goldberg, and his wife, Shirley, had operated for many years a wholesale business in hotel china in corporate form; in January, 1941 the corporation was liquidated, and the husband and wife continued the business in the form of a partnership, known as Trenton Hotel China Co.
In 1944 their two children, Eugene and Robert, were of the respective ages of 19 and 16; the former was then about to enter military service, and the latter was a student in school or college. The sons lived with their parents who were their sole support.
In December of that year, the Goldbergs, in consultation with their attorney and an accountant, formed the purpose of creating an irrevocable trust for the benefit of each child; that object was embodied in two trust agreements in which Mrs. Goldberg's brother, now deceased, one Horowitz, was named as trustee.
In order to effectuate such purpose, Abraham Goldberg withdrew $ 20,000 from his share of the partnership capital and placed it in the hands of the trustee; Mrs. Goldberg withdrew $ 15,000 and also added $ 5,000 of her personal funds, whereby the trustee came into possession of two sums of $ 20,000 each.
An agreement was entered into creating a new partnership, of which Abraham and Shirley Goldberg and the trustee were the members; the latter contributed the two said separate $ 20,000 funds to the capital of the new partnership.
According to the articles, the partnership term was to continue until December 31, 1950. The Goldbergs could make withdrawals against their capital account provided that the result thereof would be not to diminish their combined capital beyond one and one-half times the two capital accounts of the trustee. In the event of such withdrawals by the Goldbergs, the trustee was empowered to make proportionate withdrawals for each trust account.
Profits were to be distributed according to the percentage of capital of each partner, namely, the trustee for Eugene was entitled to the percentage that his capital at the beginning of the year bore to the total capital of all the partners, and similarly as to Robert.
Abraham Goldberg was to receive 60% of the balance, and Shirley 40%; all profits left in the business were to be credited to the respective capital accounts.
During 1945, the trustee's share of the profits was $ 10,656 as to each trust; Abraham's was approximately $ 41,000, and Shirley's $ 27,000.
The only cash withdrawals by the trustee in 1946 were for the purpose of paying federal and state income taxes and the trustee's commissions. There were other items received by the trustee, namely, interest on a mortgage and interest on United States Government bonds. Those items need not be further identified for present purposes.
Neither beneficiary of the trust rendered any services to the partnership during the year 1945, and the trustee's participation in the business was confined to consultations with the firm's accountant, and with the Goldbergs, concerning the business affairs of the partnership.
Both Abraham Goldberg and Shirley took the same active parts in the conduct of the business as they had for better than twenty years prior to the taxable year in question.
In November, 1945, the trustee organized Shir-Gold Realty Corporation and purchased half of the capital stock for each of the two trusts, namely, $ 1,500 in cash. That corporation purchased from a third unrelated person, the premises in which the business enterprise was conducted; in August of 1946 the trustee purchased an outstanding purchase ...