partnership was due entirely to the services of Russell Giffen and the apital contributed to the business by him and his wife. Despite insignificant factual distinctions the instant case, in our view, is controlled by Commissioner v. Tower, 327 U. S. 280, and Ralph C. Hitchck, 12 T. C. 22. We are convinced that there was no bona fide intent of petitioners to conduct their farming business in partnership with their children, and therefore we hold that for Federal income tax purposes the children were not members of the partnership during the taxable years in question.

The next question raised by petitioners for our determination is hether any of the income of Russell Giffen & Co. was taxable to Patricia, Michael, Carolyn, and Price, under section 22 (a) of the ode, as the owners of portions of the capital invested in the partnership even though they were not partners for tax purposes. We agree with them that both the services of Russell Giffen and the capital invested in Russell Giffen & Co. were vital factors in the production of its income. Nevertheless, the short answer to petitioners' contention that a portion of this income must be allocated to each child lies in our finding that the purported gifts of property interests in de farming enterprise to the children were incomplete and that petitioners in actuality never relinquished to the children any part of the sets invested in the partnership. We, therefore, reject petitioners' daim under section 22 (a) and hold that the net income of Russell Giffen & Co. was taxable to petitioners in equal parts.

Finally, petitioners argue that, if the partnership relationship between themselves and their children is not recognized for tax purposes and all the farming business income is taxable to them, then respondent ered in computing such income on the basis of the fiscal year of the partnership in accordance with section 188, Internal Revenue Code, ther than on the basis of the calendar year which petitioners have always employed. They contend that the net income earned by Rusell Giffen & Co. from October 15 through December 31, 1941, should be excluded from their income for 1942 and the net income it earned from April 1 to December 31, in both 1942 and 1943, should be excluded from their income for 1943 and 1944, respectively.

In support of this view petitioners first assert that respondent in is notices of deficiency challenged not only the partnership status of the children, but the validity of the limited partnership taxwise. The nguage of these deficiency notices does leave in doubt whether repondent was taxing the income of Russell Giffen & Co. to petitioners is partners, or as tenants in common, but the computation of such me implies the former, for it was based on the partnership fiscal year. The fallacy of this argument is that the phrasing of a notice of deficiency is not the cause of action and does not frame the issues.

ing properties at that time. Investment of these gifts in the partnership stripped the children of all freedom of ownership therein. By the terms of the partnership agreement Russell Giffen had complete command over the disposition of all assets and could do with them as he saw fit. The children had no right to assign their interests. Russell Giffen was entitled to purchase them at any time. He alone had the discretion to accumulate or distribute the income earned thereon. It is true that Ruth Giffen exercised no control over the interests which she transferred to the children, but such transfers were conditioned upon investment of the properties in the partnership where they were completely subject to the control of her husband. All these facts conclusively show that petitioners had no intent to relinquish ownership over the property interests allegedly transferred to the children.

We are aware that limited partners are restricted in the extent of their participation in a partnership, but in the instant case the children contributed nothing of value to the production of partnership income at any time. "To hold that individuals carrying on business in partnership include such persons would violate the first principles of income taxation that income must be taxed to him who earns it." Commissioner v. Culbertson, supra, pp. 739, 740.

Moreover, we find significance in the fact that the young Giffens were unable to presently enjoy the fruits of the partnership in the form of net income during the tax years in question. As noted before, Russell Giffen was given full discretion by the partnership agreement whether to distribute the net profits of Russell Giffen & Co. or keep them in the business. The only net profits distributed to the children from October 15, 1941, through March 31, 1944, were for the payment of taxes on the partnership net income credited to their partnership capital accounts.

Furthermore, there is nothing in the evidence to indicate that petitioners included their children in the partnership for the purpose of advancing the farming business. On the contrary, it affirmatively appears that Russell and Ruth Giffen were aware of the tax benefits arising from this step. Undoubtedly Russell and Ruth Giffen also were motivated by a strong desire to eventually provide independent estates for their young ones, but this was a personal reason and had no relationship to a purpose to advance the business interests of the partnership. We can find no business purpose accomplished by inclusion of the children in the partnership. Formation of the partnership led to no substantial change in the economic relation of members of the Giffen family to the income produced by the farm enterprise. The husband remained in complete charge of all business operations and distribution of profits as before. The income of the

partnership was due entirely to the services of Russell Giffen and the capital contributed to the business by him and his wife. Despite insignificant factual distinctions the instant case, in our view, is controlled by Commissioner v. Tower, 327 U. S. 280, and Ralph C. Hitchcock, 12 T. C. 22. We are convinced that there was no bona fide intent of petitioners to conduct their farming business in partnership with their children, and therefore we hold that for Federal income tax purposes the children were not members of the partnership during the taxable years in question.

The next question raised by petitioners for our determination is whether any of the income of Russell Giffen & Co. was taxable to Patricia, Michael, Carolyn, and Price, under section 22 (a) of the code, as the owners of portions of the capital invested in the partnership even though they were not partners for tax purposes. We agree with them that both the services of Russell Giffen and the capital invested in Russell Giffen & Co. were vital factors in the production of its income. Nevertheless, the short answer to petitioners' contention that a portion of this income must be allocated to each child lies in our finding that the purported gifts of property interests in the farming enterprise to the children were incomplete and that petitioners in actuality never relinquished to the children any part of the assets invested in the partnership. We, therefore, reject petitioners' claim under section 22 (a) and hold that the net income of Russell Giffen & Co. was taxable to petitioners in equal parts.

Finally, petitioners argue that, if the partnership relationship between themselves and their children is not recognized for tax purposes and all the farming business income is taxable to them, then respondent erred in computing such income on the basis of the fiscal year of the partnership in accordance with section 188, Internal Revenue Code, rather than on the basis of the calendar year which petitioners have always employed. They contend that the net income earned by Russell Giffen & Co. from October 15 through December 31, 1941, should be excluded from their income for 1942 and the net income it earned from April 1 to December 31, in both 1942 and 1943, should be excluded from their income for 1943 and 1944, respectively.

In support of this view petitioners first assert that respondent in his notices of deficiency challenged not only the partnership status of the children, but the validity of the limited partnership taxwise. The language of these deficiency notices does leave in doubt whether respondent was taxing the income of Russell Giffen & Co. to petitioners as partners, or as tenants in common, but the computation of such income implies the former, for it was based on the partnership fiscal year. The fallacy of this argument is that the phrasing of a notice of deficiency is not the cause of action and does not frame the issues.

Dorothy Whitney Elmhirst, 41 B. T. A. 348, 356; Andrew Geller, 9 T. C. 484, 491. At the hearing and on brief respondent expressly concedes the partnership existing between Russell and Ruth Giffen in the conduct of Russell Giffen & Co.

In support of their contention Russell Giffen and Ruth Giffen next argue that they intended to go into partnership with their four children, and not just between themselves. If it is held that they were not in partnership with their four minors, then, they contend, that there was no partnership at all; and, hence, there was no partnership fiscal year upon the basis of which to compute their income from the farming business.

It is true that if we had held that Russell Giffen & Co. was not to be recognized by us for tax purposes, then the provisions of section 188 would have no application and the income reported on a partnership basis would have to be adjusted to the calendar year basis used by each of the petitioners. But respondent did not challenge the validity of the partnership of Russell Giffen & Co. for tax purposes. He recognized it to the extent of petitioners, but gave no recognition to the partnership status of the four children therein. Necessarily, our determination in this case was limited to whether the young Giffens were bona fide members of the partnership. It follows that the partnership was still in existence taxwise. Therefore, the provisions of section 188 apply and we uphold respondent's computation of petitioners' income from the farming business based on the fiscal year which was elected by Russell Giffen & Co. in keeping its books and filing its returns.

Decisions will be entered for respondent.

W. A. DALLMEYER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 19588. Promulgated June 27, 1950.

Prior to December 17, 1941, petitioner made unsecured loans to Cole Motor Service, Inc., totaling $17,561.33. Prior also to that date the Exchange National Bank, of which petitioner was president, loaned Cole Motor Service a total of $27,511.38. On that date Cole Motor Service filed a petition for reorganization under chapter X of the Bankruptcy Laws of the United States. On May 11, 1942, petitioner acquired the unsecured notes of Cole Motor Service held by the Exchange National Bank in exchange for collateral he had previously put up to guarantee their payment. On October 28, 1943, Cole Motor Service was adjudicated bankrupt. On May 23, 1944, the referee in bankruptcy issued an order stating unsecured creditors would receive nothing. On the facts, held:

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(1) Petitioner was not entitled under section 23 (k) (1) to a business bad debt deduction in 1944 on the notes he acquired from the bank, because they were not business debts.

(2) Petitioner was entitled under section 23 (k) (4) to deduct $1,000 of a nonbusiness bad debt loss suffered in 1944 due to the worthlessness of the loans he personally made to Cole Motor Service. (3) Petitioner was entitled under section 117 (e) to a deduction of $1,000 in 1945 as a capital loss carry-over of the unused portion of the nonbusiness bad debt loss he suffered in the prior year.

Elmer B. Hodges, Esq., for the petitioner.

Marvin E. Hagen, Esq., for the respondent.

Respondent determined deficiencies in the income tax of petitioner for the calendar years 1944 and 1945 in the respective amounts of 2961.92 and $186.79. In his petition petitioner denied the existence of a deficiency as to 1944 and claimed an overpayment of $388.52 as 1945. At the hearing petitioner abandoned a claimed deduction for bad debt in 1945 in the amount of $500, thus reducing the overpayment claimed in that year to $203.52.

Three questions are presented for our determination in this proceeding:

(1) Was petitioner entitled under section 23 (k) (1) to a business bad debt deduction of $9,233.53 in 1944 on the notes of Cole Motor Service, Inc., he acquired from the Exchange National Bank in 1942? (2) Was petitioner entitled under section 23 (k) (4) to deduct $1,000 of an alleged nonbusiness bad debt loss suffered in 1944 on loans be personally made to Cole Motor Service totaling $17,561.33?

(3) Was petitioner entitled under section 117 (e) to a deduction of $1,000 in 1945 as a capital loss carry-over of the unused portion of the alleged nonbusiness bad debt loss suffered in the prior year?

FINDINGS OF FACT.

Part of the facts were stipulated and are so found.

Petitioner is an individual, residing in Jefferson City, Missouri. He filed his income tax returns for the calendar years 1944 and 1945 with the collector of internal revenue for the sixth district of Missouri. During the taxable years involved and for many years prior thereto petitioner was president and a director of the Exchange National Bank of Jefferson City, Missouri. He owned 509 of the 3,000 outstanding shares of the bank's stock. For his services as president of the bank be received approximately $6,000 annually during 1942, 1943, and 1944. In the period from October 29, 1986, to December 17, 1941, petitioner personally loaned to Cole Motor Service, Inc. (sometimes hereinafter referred to as Cole Motor), either under that name or under its previ tus name of Commerce Cartage Co., a total of $17,561.33, such unse