December 31, 1948. Subsequently, the trustees filed an amended return in the name of the estate for the period January 1 to March 9, 1948, and a claim to recover an alleged overpayment in taxes by it in 1948, amounting to $22,404.01. In addition they filed a return in the name of the trust for the period March 9 to December 31, 1948. Returns for 1949 and 1950 were filed in the name of the trust. The net income reported by the trust and the amounts thereof distributed to the beneficiaries for the taxable years 1948, 1949, and 1950 are as follows:

In an amended answer respondent gave notice of additional deficiencies for the 1950 calendar year. These deficiencies were determined from the fact that an amended income tax return filed by the trust for 1950 reported $6,000 additional income which had not been reported on the original return. Respondent determined that the additional income to the extent of each petitioner's one-third interest therein, viz. $2,000, is includible in each petitioner's total income for 1950.

OPINION.

BRUCE, Judge: Petitioners contend that the Charles M. Moore Trust is a valid trust and is taxable for income tax purposes under section 161 (a) (4) of the Internal Revenue Code of 1939.1

Respondent, however, has not challenged the validity of the trust; but contends rather that even though the trust was created by the decree of the Chancery Court, petitioners were for all intents and purposes its grantors; and, since the income therefrom, to the extent of their respective interests therein, could be accumulated or distributed to them within their discretion, the income is taxable to them under the provisions of sections 22 (a)2 and 167 (a) (1) and (2)3 of the Internal Revenue Code of 1939.

1 SEC. 161. IMPOSITION OF TAX.

(a) APPLICATION OF TAX.-The taxes imposed by this chapter upon individuals shall apply to the income of estates or of any kind of property held in trust, including

(4) Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.

SEC. 22. GROSS INCOME.

(a) GENERAL DEFINITION.-"Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal services (including personal service as an officer or employee of a State, or any political subdivision thereof, or any agency or instrumentality of any one or more of the foregoing), of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or in

We agree that, to the extent of their respective interests therein, the income of the trust is taxable to each of the petitioners under the provisions of section 167 (a) (1) and (2).

Together the petitioners owned the entire assets of the residuary estate of Charles M. Moore, which was transferred to the Charles M. Moore Trust pursuant to the court decree. Although Vida G. Moore was named as defendant in the suit the court decree indicates that the suit was friendly and was instituted with the consent of all concerned. In her answer to the complaint Vida G. Moore expressly joined the complainants William T. and Samuel G. Moore in their prayer that a trust be established out of the residue of the estate. Further, the Chancery Court specifically found that the defendant, Vida G. Moore, was desirous and willing that the trust be created and that its creation was in the interest of all the parties. By consenting and joining in the prayer that the trust be created she, as well as each of the other petitioners, became a joint grantor of the trust. The fact that they chose to ask the Chancery Court to create the trust rather than joining in a written trust agreement does not make them any the less joint grantors of the trust.

By the express provisions of the trust, as proposed by the parties and adopted by the court, W. T. and Sam G. Moore, as trustees, were required to pay Vida G. Moore her share of the income, if any, as she desired or needed it, and they were authorized to accumulate or distribute their respective shares in their discretion. These provisions bring the petitioners within the language of section 167 (a) (1) and (2) in that the income from the trust may be "held or accumulated for future distribution to the grantor" in the discretion of the grantor or any person not having a substantial adverse interest in the disposition of that part of the income. Clearly, no petitioner herein has an adverse interest in the share of income belonging to any other petitioner.

Accordingly we hold that the petitioners, to the extent of their respective interests, are taxable on the income of the trust under

terest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.

SEC. 167. INCOME FOR BENEFIT OF GRANTOR.

(a) Where any part of the income of a trust

(1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or

(2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or

then such part of the net income of the trust shall be included in computing the net income of the grantor.

section 167 (a) (1) and (2) or section 22 (a) of the Internal Revenue Code of 1939. Theodore G. Bayard, 16 T. C. 1345. It may be that petitioners are also liable under section 162 (b) of the Internal Revenue Code of 1939, which provides that income currently distributable to a beneficiary under a trust shall be taxable to that beneficiary whether distributed or not. The income is "currently distributable” within the meaning of this section if the beneficiary has a present right to receive the income under the trust instrument. Freuler v. Helvering, 291 U. S. 35.

Decisions will be entered for the respondent.

MARY FRANCES LEWIS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

A. B. LEWIS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 45576, 45577. Filed December 28, 1954.

The A. B. Lewis Co. reported its income as a partnership, which included petitioners' two minor children, and filed its returns on a fiscal year basis. The final fiscal year of its existence, for which it filed a return, ended July 1, 1947. Petitioners A. B. Lewis (A. B.) and Mary Frances Lewis (Mary) were husband and wife in a community property State, kept no books recording their individual income, and filed separate individual income tax returns for the calendar year 1947 reporting therein a part of the alleged partnership's net income for its final fiscal year ending July 1, 1947. Held, not only were petitioners' two minor children not partners in the business as conducted by respondent, but as contended by petitioners in their alternative assignment of error, neither was Mary a partner in the business. The A. B. Lewis Co. was in fact, a sole proprietorship conducted by A. B. Inasmuch as there was no partnership petitioners must report their community shares of the income from that sole proprietorship on a calendar year basis.

Edward L. Potter, Esq., for the petitioners:

M. Clifton Maxwell, Esq., for the respondent.

SEC. 162. NET INCOME.

The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that

(b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the legatees, heirs, or beneficiaries, but the amount so allowed as a deduction shall be included in computing the net income of the legatees, heirs, or beneficiaries whether distributed to them or not. As used in this subsection, "income which is to be distributed currently" includes income for the taxable year of the estate or trust which, within the taxable year, becomes payable to the legatee, heir, or beneficiary. • •

The Commissioner has determined the following deficiencies in peti. tioners' income taxes for the calendar year 1947:

Docket No. 45576

45577--

Mary Frances Lewis $5, 063. 69 A. B. Lewis 5, 063. 69 The Commissioner's adjustments in net community income which are here in issue as a result of appropriate assignments of error are explained in the statements accompanying the applicable deficiency notices as follows:

(d) It is held for Federal tax purposes that your minor children, Joel Jack Lewis and Gail Lewis, are not to be recognized as members of the alleged partnership of A. B. Lewis Company for the period beginning August 1, 1946 and ending June 30, 1947. Accordingly, the entire income of that entity for that period has been included in your community income for the calendar year 1947.

(f) As of June 30, 1947, the A. B. Lewis Company reduced its closing inventory of 38 used cars from a book cost of $23,072.00 to $14,122.00, or by the amount of $8,950.00. The reduction, not being in accordance with existing regulations, has been restored to taxable income. Your community income for the calendar year 1947 has accordingly been increased by the sum of $8,950.00.

Petitioners contend (a) that for the period in issue A. B. Lewis Co. was a valid partnership for income tax purposes consisting of the marital community of A. B. and Mary Frances Lewis, and their minor children, Gail and Joel Jack Lewis, and (b) that the reduction of the A. B. Lewis Co.'s June 30, 1947, closing inventory by $8,950 was proper. In the alternative, petitioners contend that if the minor children are not recognized as partners then A. B. Lewis Co. was a sole proprietorship conducted by A. B. Lewis and each petitioner's community share of the income from that business must be computed on a calendar (rather than fiscal) year basis. Such a calendar year computation, petitioners contend, results in the conclusion that there are no deficiencies and that they overpaid their income taxes for 1947.

FINDINGS OF FACT.

During all times here material, petitioners Mary Frances Lewis (hereinafter sometimes referred to as Mary) and A. B. Lewis (hereinafter sometimes referred to as A. B.) were husband and wife and resided in Houston, Texas. They filed separate income tax returns for the calendar year 1947 with the collector of internal revenue for the first district of Texas.

Since 1919, A. B. has been engaged in the used car sales and automobile financing business in Houston. He married Mary in 1926. At various times prior to 1943, Mary either sold advertising and real estate in order to obtain money for use in A. B.'s business or per

formed regular duties as A. B.'s collections manager. She also accompanied him on buying trips to New York, aiding in arranging for transportation to Houston of the used cars purchased on those trips. Mary received no salary for any of her services to the business. Rather, A. B. withdrew funds from the business and deposited them in a joint checking account upon which Mary could draw. Petitioners regarded A. B.'s withdrawals, and any profits the business made, as their joint community income.

A. B.'s business was conducted as a sole proprietorship at all times prior to 1943, except for a short period during which he was in partnership with a person not a member of his immediate family. Capital was important in the business but the greater part of it was borrowed, rather than invested, capital.

On December 9, 1940, A. B. opened an account in the business in the names of his two children, Gail and Joel Jack. The account was captioned "Gail, J. J." From time to time he credited sums of money to that account which he stated were saved by him for the children and put into the business in their names. Those sums were invested in the business rather than deposited in a bank because the business needed capital. Although there are a number of debit entries in the account none of the money therein appears to have been withdrawn for the children's benefit and the children did not even know that the account existed. The account showed a balance of $1,324.77 as of January 1, 1943. On that same date there was $17,619.18 balance in an account of the sole proprietorship labeled "A. B. Lewis Net Worth."

In 1943, the following deed of gift was executed:

STATE OF TEXAS

COUNTY OF HARRIS

KNOW ALL MEN BY THESE PRESENTS:

That in answer to my urge and desire to make a substantial gift to my two children, Joel Jack Lewis and Gail Lewis, to insure to some extent their care, education and general economic security, and being further of the opinion that my business known as “A. B. Lewis and Company" has after many years become established and an interest in that business will be a better investment for my children than any other that I might make through the investment of a cash gift to them;

NOW, THEREFORE, for and in consideration of the premises and in consideration of the love and affection I bear toward my two children, Joel Jack Lewis and Gail Lewis, I do hereby grant, give and convey unto each of my said two children, Joel Jack Lewis and Gail Lewis, an equal one-fourth (th) interest in and to my said business, including all property of every kind wherever situated and used by me in connection with said business, this conveyance to be effective as of January 1, 1943.

As a result of this deed of gift, my wife and I will own and retain one-half (2) of the business and my children together one-half (1⁄2), the said Joel Jack owning one-fourth (4th) and the said Gail owning one-fourth (4th).