*196 Decision will be entered under Rule 50.
In 1943, when they were both in the armed service, petitioner and his son, then 18 years old and without business experience, executed a purported partnership agreement covering the ownership and operation of a wholesale drug business which petitioner, as sole owner, had conducted for more than 20 years. Pursuant to the agreement, petitioner was to have a 51 per cent interest and the son 49 per cent. A short time later petitioner had the son give him a demand note in amount of 49 per cent of the net book value of the business, although he did not regard the note as being equal in amount to a fair market price for a 49 per cent interest in the business. No changes of any kind were made in the manner or method of operations. The agreement reserved to petitioner full and complete control of the business and its profits, including the right to accumulate or distribute income and the right at any time to reacquire the 49 per cent interest at book value. The son was barred from selling to anyone else. In all controverted years petitioner was in complete control of the business, while the son had no rights of control, and rendered no service. *197 Held, that petitioner and his son did not at any time during the years herein, in good faith and acting with a business purpose, intend to, and did not, actually join together as partners in the present conduct of a partnership business.
*867 The respondent determined deficiencies of $ 48,433.19, $ 45,340.86, and $ 36,959.77 in the petitioner's income tax for 1943, 1944, and 1945, respectively. The issues presented for determination are (1) whether during the taxable years the petitioner's son, Robert R. Bellamy, was a partner with the petitioner in the conduct of a wholesale drug business carried on under the name of Robert R. Bellamy & Son, and (2) whether the petitioner was entitled to a larger deduction each year for accrued state income tax than was allowed by the respondent.
FINDINGS OF FACT.
The petitioner, a resident of Wilmington, North Carolina, filed his 1943, 1944, and 1945 income tax returns with the collector for the district *868 of North Carolina. The returns were prepared on the accrual basis.
In 1885 the petitioner's father, *198 Robert R. Bellamy, established a retail drug business in Wilmington, North Carolina. The business grew and expanded into the wholesale drug field, operating in eastern North Carolina and Northeastern South Carolina. The father continuously conducted the business until the petitioner's return, about 1919, from service overseas in World War I. At the time of his return the petitioner was about 22 years of age, had attended the University of North Carolina about one and one-half years, and was without business experience. He associated himself with his father in the drug business, which, after about six or eight months, was segregated into its two phases. The petitioner's father gave him the wholesale part of it, which petitioner operated under the name of Robert R. Bellamy & Son.
The business grew under the petitioner's ownership and management, with sales increasing from about $ 100,000 in 1919 to approximately $ 1,000,000 in 1942, and the number of employees increasing from five in 1919 to between 25 and 30 at the end of 1942. In 1942 the business served about 200 customers, consisting mostly of retail druggists and hospitals. The merchandise sold consisted of pharmaceuticals, *199 chemicals, proprietary medicines, drug sundries, cosmetics, school supplies, and a general line of merchandise normally carried and sold in retail drug stores. The following is a statement for the years 1938 through 1942 of the net worth of the business and net earnings before petitioner's drawings and Federal and state income taxes as disclosed by audit reports of the business:
| Net income | ||
| Net worth of | before drawings | |
| Year ended -- | business | and income |
| taxes | ||
| Dec. 31, 1937 | $ 151,101.08 | |
| Dec. 31, 1938 | 166,744.94 | $ 27,242.78 |
| Dec. 31, 1939 | 188,054.61 | 23,900.41 |
| Dec. 31, 1940 | 211,609.06 | 31,243.79 |
| Dec. 31, 1941 | 252,787.96 | 61,728.47 |
| Dec. 31, 1942 | 263,067.65 | 97,073.83 |
The total net income before the petitioner's drawings and income taxes for the years 1938 through 1942 was $ 241,189.28, or an average annual net income for the period of $ 48,237.86.
In the spring of 1941 the petitioner was elected mayor of the city of Wilmington, a city with a population of about 45,000. Thereafter during his tenure of that office he devoted the major portion of his time to the management of the business and affairs of the city. The petitioner continued to serve as mayor*200 until November, 1942, when he entered the United States Army as a commissioned officer.
*869 When the petitioner became mayor of Wilmington the drug business was operating efficiently under the management of W. W. Gayer, the general manager, who had been employed in the business since 1921 and had built up a good staff of employees. Gayer had complete supervision of all phases of the business and his management continued through all the years here involved and to the present time. Gayer received a salary of $ 8,400 in 1942 and in 1945 he received a salary and bonus totaling approximately $ 17,000.
The petitioner served as an officer in the United States Army from November 30, 1942, until the latter part of January, 1944, at which time he was released and returned to Wilmington. During the petitioner's approximately fourteen months in the service he was stationed, respectively, at Newark, New Jersey, for about four months, St. Louis, Missouri, for five or six months, and at Washington, D. C., for the remainder of the time. During the time the petitioner was in the service he was in Wilmington three times on leave of from three to five days duration. However, while absent *201 from Wilmington, he was in frequent communication by telephone or correspondence with Gayer.
Upon returning to Wilmington in January, 1944, the petitioner left the active management of the drug business to Gayer. He devoted about five or six hours a week to that business and devoted the remainder of his time to the management of his other business and financial affairs and to those of his wife, who had inherited a substantial estate. He was also active in the business of the Wilmington Savings & Trust Co., the largest bank in Wilmington, of which he is a stockholder, director, and a member of its executive, loan, and trust committees. In the course of his business operations it has always been his practice to consider all taxes and, wherever possible, to lessen the tax burden. He prepared his wife's income tax returns, was tax adviser on the trust committee of the Wilmington Savings & Trust Co. and took care of tax matters for the bank.
The petitioner has one child, a son born February 11, 1925, who bears the same name as the petitioner's father, Robert R. Bellamy. Robert entered the University of North Carolina at Chapel Hill, which is about 160 miles from Wilmington, in June, *202 1942, as a student in the School of Commerce. In November, 1942, he enlisted in the V-1 Program of the United States Navy, but remained at the University of North Carolina until July, 1944, studying the specialized subjects required under that program. He was then transferred to the University of Notre Dame for four months, at the end of which time he was commissioned an ensign and sent to Miami, Florida. He was stationed at Miami until January, 1945, when he was assigned to a ship in the Pacific Ocean, on which he served until April, 1946. On May 21, 1946, he was released to inactive duty by the Navy and returned *870 to his home in Wilmington. While Robert was at the University of North Carolina he occasionally went home on week ends. After leaving the University of Notre Dame he was at home on leave for about two weeks before reporting for duty at Miami. Upon leaving Miami he was at home on leave for a few days before reporting for duty in the Pacific. In December, 1945, or early in 1946, he was also at home on a short leave.
The petitioner and his wife have been generous in making gifts of cash, securities, and other property to Robert. They have created trusts for*203 his benefit and he receives the income thereof. He is also the remainderman of certain trusts of which his mother is the life tenant. Under the present wills of the petitioner and his wife the major portion of their estates will pass to Robert.
For some time prior to 1942 Robert had "sort of understood" that at some time he would go into the drug business with the petitioner. During the summer of 1942, when Robert was at home on a vacation from the University of North Carolina, the petitioner discussed the matter with him and told him that he would take him in as a partner in the conduct of the business with a 49 per cent interest. Robert was not told how the matter was to be accomplished, nor were any details discussed as to how it would be arranged. Thereafter and prior to March 23, 1943, no further conversations were had by the petitioner and Robert respecting the matter.
At some time between January 1, 1943, and March of that year the petitioner, while in Newark, telephoned or wrote John A. Stevens, an attorney in Wilmington, that he was desirous of forming a partnership with Robert for the conduct of the drug business, in which petitioner would have a 51 per cent interest*204 and Robert a 49 per cent interest, and requested Stevens to prepare a partnership agreement, to be effective January 1, 1943. When the instrument was ready for signing the petitioner was in Wilmington on leave, but Robert was at the University of North Carolina and it was sent to him for his signature. Robert read the instrument, signed it on March 23, 1943, and returned it to the petitioner at Wilmington. Except for the provision that he was to have a 49 per cent interest in the partnership, none of the terms of the partnership agreement had been discussed with Robert, nor had he previously seen any draft of the agreement.
Two days later, March 25, 1943, Robert was in Wilmington and the petitioner requested him to execute a noninterest-bearing demand note in the amount of $ 128,903.15, dated March 25, 1943, and payable to the order of the petitioner, as the purchase price of a 49 per cent interest in the petitioner's drug business as of January 1, 1943. The petitioner also requested Robert to have his mother endorse the note. As requested, Robert executed the note and his mother endorsed it *871 without question. It was not until after Robert had signed the partnership*205 agreement and his father had requested him to sign the note that Robert knew he would be required to give a note with respect to the matter.
The partnership agreement executed between petitioner and Robert reads as follows:
These Articles of Co-partnership made and entered into this the 23 day of March, 1943, by and between Hargrove Bellamy and Robert Rankin Bellamy, both of the County of New Hanover, State of North Carolina.
WITNESSETH:
That the above named and undersigned parties do hereby form a co-partnership for the purpose of carrying on a business of a general wholesale drug business to be a continuation of the wholesale drug business heretofore owned and operated by the said Hargrove Bellamy, one of the parties hereto, for which purpose the undersigned have agreed to the following terms and conditions, to the faithful performance of which they bind themselves each to the other, their heirs, executors and administrators:
1. The name and style of said co-partnership shall be "Robert R. Bellamy & Son", and it shall continue until the mutual consent of the partners to dissolve, subject to the provisions herein set forth.
2. The interest in said business shall be held by the above-named*206 parties in the following proportions, that is to say:
| Hargrove Bellamy | 51% |
| Robert Rankin Bellamy | 49% |
3. Hargrove Bellamy is to have full and complete charge of the operation of said business, and shall have the sole authority to invest funds, purchase equipment, hire and discharge employees in his full discretion, and to in all respects manage the conduct and operation of said business at all times as he may see fit.
4. The net profits arising from the operation of said business shall be divided between the partners in proportion to their respective interests herein set out, but shall be payable only at such times as Hargrove Bellamy may in his discretion designate and he shall have the right within his discretion to permit said net profits, or any part of the same, to accumulate and remain in said business until such time as in his discretion he thinks it proper to pay over the same to said partners in proportion to their respective interests, and all losses incurred, whether from bad debts, depreciation of goods, or any other cause, and all expenses of the business shall be borne by the partners in the following proportions, that is to say:
| Hargrove Bellamy | 51% |
| Robert Rankin Bellamy | 49% |
*207 5. That the said Hargrove Bellamy shall receive for his services for managing said business the sum of not more than Five Thousand ($ 5,000.00) Dollars per month and such sums so drawn shall be charged as an operating expense and deduction made before any division of the profits is made.
6. The said Hargrove Bellamy shall have the right at any time during the existence of this partnership to purchase the interest of the said Robert Rankin Bellamy upon demand at the then book value of such interest in said business, after deducting any obligation which might then be due and owing by the said Robert Rankin Bellamy to the partnership, and upon such purchase and payment *872 as aforesaid the interest of the said Robert Rankin Bellamy in said co-parnership shall immediately cease and determine.
7. The said Robert Rankin Bellamy shall not sell or dispose of his interest in said partnership to any third party, but if the said Robert Rankin Bellamy should desire to dispose of his interest in said partnership and retire therefrom, the right is reserved to the said Hargrove Bellamy to purchase the interest of the said Robert Rankin Bellamy in said partnership at its then book value, less*208 any amount the said Robert Rankin Bellamy may then owe the partnership.
8. In the event of the death of either of said partners the surviving partner shall have the right and option to purchase from the personal representatives of the deceased partner the interest of such deceased partner in said business at its then book value, such right or option to be exercised by the surviving partner within six months from the death of such deceased partner.
9. All purchases, sales, transactions, and accounts of said partnership shall be kept in regular books which shall always be opened to the inspection of the partners and their legal representatives, and at least once a year a statement shall be prepared showing the net profits of the partnership for the preceding year for the examination of the partners.
Whereas, A verbal agreement was entered into between the undersigned effective as of January 1, 1943, which verbal agreement contained the provisions and conditions herein set forth, and said co-partnership has actually been in operation under said verbal agreement since January 1, 1943, and which verbal agreement has now been reduced to writing is herein set forth, it is understood and *209 agreed with respect to the payment of the net profits arising from the operation of said co-partnership same shall relate back to the 1st day of January, 1943.
To the faithful performance of this agreement, the undersigned do hereby bind themselves, their heirs, executors, and administrators.
In Witness Whereof, the parties hereto have hereunto set their hands and seals the day and year first above written.
In the absence of instructions on the point and to provide elasticity, Stevens, on his own initiative, included paragraph 5, relating to the amount of the petitioner's compensation, in preparing the agreement.
After execution of the partnership agreement the petitioner informed his attorneys, auditors, bank associates, and Gayer that Robert was a partner in the drug business. Partners' capital accounts for the petitioner and Robert on a 51 per cent and 49 per cent basis, respectively, were set up on the books of the business.
At the time of the execution of the partnership agreement Robert was 18 years of age and had had no business experience or training. He was residing at Chapel Hill and facing possible service at sea. The petitioner knew at the time of the execution of the*210 partnership agreement that Robert could not render any immediate service to the business.
The price to Robert of $ 128,903.15 for a 49 per cent interest in the business represented what the petitioner's accountant informed him was 49 per cent of the net book value of the assets of the business on December 31, 1942. It did not include any amount for good will. The petitioner would not have sold a 49 per cent interest in the business *873 to anyone except Mrs. Bellamy or Robert for $ 128,903.15, because he regarded that price too low for such an interest.
The reason the petitioner did not make a gift to Robert of a 49 per cent interest in the business was that in making gifts to his wife and Robert in the past he had used his entire specific exemption for gift tax purposes and, except for the small exclusion allowable for the particular year, the entire value of a gift of such an interest in the business would have been subject to gift tax.
Robert owned assets, consisting of cash, securities, real estate, and other property, exclusive of any interest in the drug business, of the following aggregate values on the indicated dates:
| Jan. 1, 1943 | $ 23,339.84 |
| Jan. 1, 1944 | 48,001.37 |
| Jan. 1, 1945 | 53,585.63 |
| Jan. 1, 1946 | 68,278.03 |
*211 Aside from such liability as he had on the note or notes given in connection with the transaction with the petitioner respecting a 49 per cent interest in the drug business, Robert's liabilities on the foregoing dates consisted only of liability for currently accruing income taxes.
Robert's income for 1943, 1944, and 1945, before Federal and state income taxes, other than military service pay and not including any amount as income from the drug business, was as follows:
| 1943 | 1944 | 1945 | |
| Trust established by petitioner in December 1941 | $ 633.73 | $ 1,697.94 | $ 1,719.20 |
| Trust established by petitioner's wife in | |||
| December 1941 | 1,048.24 | 2,929.36 | 1,943.56 |
| Securities and other sources | 1,546.50 | 2,389.66 | 2,011.37 |
| Total | 3,228.47 | 7,016.96 | 5,674.13 |
Robert's note of March 25, 1943, was discharged on December 24, 1943, by his payment of $ 8,903.15 in cash and the giving to petitioner of a new noninterest-bearing demand note dated December 24, 1943, for $ 120,000, executed by Robert but not endorsed by Mrs. Bellamy. Of the cash of $ 8,903.15 thus paid, $ 8,900 was borrowed by Robert from the Wilmington Savings & Trust Co. on his sixty-day note, which was collateralized*212 by some of his securities. The $ 8,900 loan was paid by Robert on February 21, 1944, from his own funds.
In December, 1944, while Robert was in Miami, the petitioner made arrangements with the Wilmington Savings & Trust Co. for a loan of $ 120,000 to Robert on his note which was sent to him to sign and which was endorsed by Mrs. Bellamy. Robert's note to the petitioner dated December 24, 1943, for $ 120,000, was discharged on December 28, 1944, with the proceeds of a bank loan which was made on the same day of Robert's demand note bearing the same date. The latter note of Robert's for $ 120,000 was paid by the petitioner on *874 January 10, 1945, and Robert, while at home on leave, executed a non-interest-bearing note dated January 25, 1945, for $ 120,000, payable to the petitioner. The purpose of the petitioner in having Robert obtain the foregoing bank loan was to assist the petitioner in reducing his state intangible property tax, as the cash was not subject to that tax in the petitioner's hands, but a note would have been.
While Robert was on duty in the Pacific, the petitioner held a power of attorney from him. In May, 1945, the petitioner withdrew $ 31,720 from the*213 funds of the drug business, to be used for the payment of Robert's income taxes, but the money was not used for that purpose because the petitioner learned that the taxes did not have to be paid until Robert's return from the service. The funds thus withdrawn were deposited in Robert's bank account. They remained there until in November, 1945, when the petitioner withdrew $ 30,000 thereof and applied that amount as a partial payment on Robert's note dated January 25, 1945, then held by the petitioner, thereby reducing the balance due on the note to $ 90,000. The $ 90,000 balance was paid on December 31, 1946. That payment was composed of funds from the following sources: $ 55,000 borrowed by Robert from the Wilmington Savings & Trust Co. on his demand note for $ 55,000, dated December 31, 1946, and endorsed by Mrs. Bellamy; $ 26,000 advanced to Robert by Mrs. Bellamy; and $ 9,000 from Robert's own bank account. Included in Robert's bank account from which the $ 9,000 was withdrawn was $ 1,720 representing the excess of the amount withdrawn from the drug business in May, 1945, over the $ 30,000 thereof applied in November, 1945, by the petitioner on Robert's note for $ 120,000*214 dated January 25, 1945, and an amount of $ 5,200 withdrawn by Robert from the drug business as 1946 salary and deposited by him in the bank on December 30, 1946.
Robert's note of December 31, 1946, to the Wilmington Savings & Trust Co. for $ 55,000 was partially paid on January 10, 1947, by a payment on that date of $ 30,000 which was composed of $ 10,000 advanced to Robert by Mrs. Bellamy and $ 20,000 withdrawn by him from the drug business. The remaining $ 25,000 due on the note was paid on January 17, 1947, by funds advanced to Robert by the petitioner. For the advances of $ 26,000 and $ 10,000 made by Mrs. Bellamy to Robert on December 31, 1946, and January 10, 1947, respectively, he gave her his demand note for $ 36,000, dated January 10, 1947.
For the $ 25,000 advanced to him by the petitioner on January 17, 1947, to complete payment of the note of December 31, 1946, to the Wilmington Savings & Trust Co. for $ 55,000, Robert gave petitioner a note which was paid by Robert on October 31, 1947. Mrs. Bellamy advanced to Robert the $ 25,000 used for making that payment and *875 Robert gave her his demand note for that amount, dated October 30, 1947. The notes given by Robert*215 to Mrs. Bellamy for her advances of $ 26,000 on December 31, 1946, $ 10,000 on January 10, 1947, and $ 25,000 on October 30, 1947, had not been paid at the time of the hearing in this proceeding.
The net result of the foregoing transactions with respect to the various notes was that the payment thereof represented the following shifting of funds.
| From funds of: | |
| Robert | $ 10,983.15 |
| The drug business | 56,920.00 |
| Mrs. Bellamy | 61,000.00 |
| To the petitioner | 128,903.15 |
While Robert's first note to the petitioner, the demand note of March 25, 1943, for $ 128,903.15, did not provide for interest prior to maturity, the petitioner required him to pay $ 4,122.30 as interest thereon from the date thereof until its discharge on December 24, 1943, or at the rate of approximately 3 1/2 per cent per annum. The foregoing interest was reported by petitioner in his 1943 return. The petitioner did not require Robert to pay interest on any subsequent notes.
At the time of the execution of the partnership agreement by the petitioner and Robert and Robert's execution of his first note to the petitioner, the drug business was in good financial condition and not in need of additional*216 funds. It was not intended by the petitioner that the proceeds of the note would be put into the business, nor has any part of them ever been put into it.
Although the petitioner was in frequent communication with Gayer during the petitioner's absence from Wilmington while in the service in 1943 and until the petitioner's return in January, 1944, and the petitioner thereafter devoted about five or six hours a week to the business, there is nothing to show that Robert, at any time prior to his release from the Navy and his return to Wilmington in May, 1946, rendered any service whatever to the business or in any way participated in its affairs. The petitioner withdrew from the business the amounts of $ 10,000, $ 10,000, and $ 15,000 as his salary for 1943, 1944, and 1945, respectively. Robert withdrew from the business as salary in each of the years 1943 and 1944 an amount of $ 585, which was deposited in his bank account. The funds with which Robert's 1943, 1944, and 1945 income taxes were paid were withdrawn from the business. Aside from the amounts withdrawn as salary for 1943 and 1944, Robert made no withdrawals from the business during 1943 through 1945 for his personal expenses.
*217 The assets employed in the drug business included certain real *876 estate. After the execution of the partnership agreement between petitioner and Robert, the petitioner did not execute a conveyance to Robert of any part of or interest in such real estate. Certain Government bonds and a savings account which formed part of the assets of the business continued to be carried in the name of the petitioner. Additional Government bonds purchased with business funds during 1944 and 1945 were issued in the petitioner's name.
Immediately upon Robert's return to Wilmington in May, 1946, after leaving the naval service the petitioner, being of the opinion that the partnership agreement of March 23, 1943, was not fair to Robert in some respects, had a discussion with Robert about amending the agreement and on May 23, 1946, they executed a supplemental partnership agreement. The supplemental agreement eliminated from paragraph 3 the provisions which had given the petitioner full and complete managerial charge of the business; eliminated paragraph 5, which had provided for a salary to the petitioner of not to exceed $ 5,000 a month for his services in managing the business; eliminated*218 paragraph 6, which had given the petitioner the right at any time upon his demand to purchase Robert's interest; eliminated paragraph 7, which had prohibited Robert from selling his interest to a third party and reserved the right to petitioner to purchase it; and eliminated from paragraph 4 the provisions which placed in the petitioner the right to designate when a distribution of net profits should be payable and the further right to have the net profits retained in the business until such time as he, in his discretion, might think proper to distribute them.
Upon his return to Wilmington in May, 1946, Robert began working with the drug business. He started working at the bottom in every department, as he wanted to learn as much about it as he could and as fast as possible. He also devoted some time to the bookkeeping portion of the business to acquaint himself with its financial operations. He consulted with Gayer, the manager, on business policies and at times the two consulted with the petitioner about them. Robert continued to devote substantially his full working time to the business, with the exception of about six weeks each year, when he took a course in the School of*219 Commerce at the University of North Carolina. In one year he spent approximately three months there.
On July 1, 1948, the drug business was incorporated. The petitioner is president: Robert is vice president and treasurer; and Gayer is vice president and general manager. There are eleven stockholders.
Partnership returns under the name of Robert R. Bellamy & Son were executed by the petitioner and filed for the drug business for 1943, 1944, and 1945, showing net incomes of $ 123,229.60, $ 117,640.78, and $ 107,023.31, respectively, and showing the petitioner's distributive *877 interest therein as 51 per cent and Robert's as 49 per cent. The petitioner and Robert in their income tax returns for the respective years reported income from the business on the basis that it was conducted as a partnership during those years.
In determining the deficiencies in controversy the respondent determined that Robert R. Bellamy & Son was not a partnership recognizable for income tax purposes and that the entire net income of the drug business for 1943, 1944, and 1945, respectively, was taxable to the petitioner for those years.
The petitioner and Robert did not, at any time during the taxable*220 years 1943 through 1945, in good faith and acting with a business purpose, intend to join together as partners in the present conduct of the drug business.
OPINION.
The primary issue is whether Robert, petitioner's son, should be recognized in the taxable years 1943 through 1945 as a partner with petitioner in the wholesale drug business conducted under the name of Robert R. Bellamy & Son.
That Robert was not in reality a partner is in our opinion clearly shown by the facts, and little discussion of the issue is indicated or required. The so-called partnership agreement was signed by Robert while a student at the University of North Carolina in March, 1943. He was then 18 years of age and had been enlisted in the V-1 Program of the United States Navy since the preceding November. He had "sort of understood" that at some time he would go into the drug business with his father, but so far as the record shows he had otherwise given very little, if any, thought or time and attention to the business. Sometime in 1942, while at home from the university, the petitioner told him he would make him a partner with a 49 per cent interest, but did not tell him how the matter was to be accomplished, *221 and, except for the amount of the interest he was to have, none of the details of the arrangement were ever shown to or discussed with him prior to March, 1943, when the agreement herein was sent to him for his signature. So far as appears, Robert raised no questions and made no inquiries, but merely signed the agreement as drawn and returned it to petitioner. Thereafter he generally did whatever petitioner suggested or told him to do. He did not participate in the operation of the business and it seems clear that it was not intended that he should participate.
As for the petitioner, the instrument itself indicates rather definitely that he had no thought or intention of relinquishing any of his control over the business or its assets. He was to continue to have full and complete charge of the operation. He was to have the sole authority *878 to invest funds, purchase equipment, hire and discharge employees, and in all respects the right and power to manage the conduct and operation of the business as he saw fit. The profits were distributable only in his discretion. He was to have the right to reacquire the 49 per cent interest at any time upon demand at the then book*222 value, whereas Robert was not free to sell or dispose of his interest to anyone except the petitioner. Unlike petitioner, however, it does not appear that Robert had any right to require petitioner to reacquire the said interest. It is true that there were some formalities designed to indicate the purchase of an interest in the business by Robert from petitioner, but the record also shows that the $ 128,903.15 fixed as the price was not what petitioner would have regarded as a fair market price for a 49 per cent interest in the business. It did not include any amount for good will and petitioner regarded it as being too low. He would not have sold to an outsider at such a price. Further, he required Robert to execute the note instead of indulging in the formality of a gift because his specific gift tax exemption had already been absorbed and, except for the exemption or exclusion allowable for the particular year, the full amount of the gift would have been taxable to him. Later on the details of the financing were arranged by petitioner largely to suit his own interest and his own convenience. Robert had little to do with it.
There is some argument or suggestion that the terms*223 of the instrument were worked out by the attorney who drew it, but the only provision the attorney assumed full responsibility for was the provision fixing the compensation petitioner was to receive as managing partner, and that provision would have permitted petitioner to draw as salary amounts substantially in excess of the net profits shown for any year prior to 1941. There is also some suggestion or argument that the lack of participation by Robert in the management of the business during the years is of no importance because the business generally was being managed quite satisfactorily by Gayer, to the end that the petitioner himself was required to devote very little time or attention to the business. Be that as it may, the terms of the agreement did retain for petitioner full and complete control over the business, and it is not without significance that, when Robert did actually return from his war service in the navy and did actually begin to work in the business, a completely new and revised agreement was drawn and executed and the sweeping controls retained by petitioner in the 1943 agreement were eliminated.
On the facts herein, we think it clear and have concluded that*224 "the parties in good faith and acting with a business purpose" did not intend to join and did not actually join "together in the present conduct of the enterprise." . *879 See also , and . , relied on by petitioner, is not the same as this case.
The respondent concedes that in the event his determination as to the primary issue is sustained, the petitioner will be entitled to deductions for additional state income taxes which will result from such determination. Having sustained the respondent on the primary issue his concession will be given effect in a recomputation of the deficiencies.
Decision will be entered under Rule 50.