TAXATION -FAMILY PARTNERSHIPS-CAPITAL ORIGINATING WITH THE WIFE

In 1937 petitioner, P, gave his wife and sister each $2500 worth of stock in X Corporation. In 1940 he and A formed a partnership unrelated to the business of X corporation. Later in the year they decided to incorporate this partnership. Meanwhile, P desired to obtain all of the stock of X in order to take advantage of an opportunity to sell it to other interests at a substantial profit. His wife and sister gave him their shares in X for his promise to give them shares in the new corporation formed from the partnership of P and A. A, who had objected to incorporation, finally persuaded P to continue the business as a partnership. P\u27s wife and sister were each given an 11 per cent interest in the partnership in lieu of the stock they had been promised. This was the actual percentage of their respective monetary contributions. A devoted all of his time to the business and P, his wife, and his sister took no active part in its affairs. In 1941, P reported 28 per cent of the profits as income and the wife and sister 11 per cent each. The commission determined a deficiency, maintaining that P and not his wife and sister should pay the tax on the 22 per cent of the profits they had reported. Held, taxpayer was taxable on only 28 per cent, the other 22 per cent representing capital contributions originating with the, wife and sister. S. E. Boozer, 1947 P-H Tax Court Memo. Dec. 47248