*237 Decisions will be entered under Rule 50.
Facts found in an earlier proceeding involving the same partnership, including a finding of a business purpose, stipulated in this proceeding as being correct, held, to justify present finding that the general partners are not taxable on partnership income credited to their wives as limited partners, notwithstanding a contrary result in the earlier proceeding prior to Commissioner v. Culbertson, 337 U.S. 733">337 U.S. 733.
*990 In these consolidated proceedings respondent determined deficiencies in income tax as follows:
| Petitioner | Year | Deficiency |
| Leon Fainblatt | 1946 | $ 25,223.17 |
| 1947 | 13,987.54 | |
| Irving Fainblatt | 1946 | 25,206.98 |
| 1947 | 14,105.35 |
The only remaining issue is whether respondent erred in refusing to recognize petitioners' wives as limited partners of Lee Sportswear Co., and in taxing petitioners for the shares of income credited to the wives.
FINDINGS OF FACT.
Certain facts are stipulated and are hereby found.
Petitioners, who each resided*238 with his wife in Great Neck, New York, filed individual Federal income tax returns with the collector of internal revenue for the third district of New York.
Lee Sportswear Co., a partnership hereafter called Lee, manufactured and sold women's and children's sport clothing and women's work clothing in New York City. Leon established the business in 1929. Shortly thereafter Irving and their sister Margaret associated themselves with Leon, and in 1934 they formally organized a partnership. They duly filed a certificate of conducting business under the assumed name of Lee Sportswear Co.
On January 31, 1939, petitioners and Margaret executed a new partnership agreement which provided, inter alia, that upon any partner's death, his spouse could continue the decedent's partnership interest by leaving the decedent's capital in the business. The spouse, if not employed by the firm, would receive one-half of the decedent's salary.
The partnership business consisted of purchasing, styling, and selling of the products. Styling includes patternmaking and marking. Margaret, formerly an interior decorator, helped style garments, bought trimmings, serviced the making of garments, and supervised*239 their manufacture. The business cut garments and had them assembled by a contracting plant. Leon bought material and sold the manufactured product. Irving bought material, ran the office, and supervised salesmen. All three consulted and joined in business policy matters, have at all times devoted all their time to the business, and have always followed the same division of services between them.
*991 Harry Horowitz entered the needle trade industry in 1911. Prior to 1931 he had been in business for himself, manufacturing children's and women's garments. He qualified as a designer, a patternmaker, a grader, and a marker. On April 1, 1931, Lee's predecessor employed him. He later became its production manager. He helped buy goods for the firm and supervised the cutting and patternmaking. Together with Margaret he dealt with the contractors who assembled the garments. Until his death in 1948 he assumed final charge of the manufacturing process. Valuable to the business from the start, he succeeded other unsatisfactory employees. He contributed substantially to Lee's success.
When Margaret married Horowitz in 1934, the partners offered him a partnership interest. He*240 refused because he felt that some family members would resent his acceptance and family trouble would arise. Therefore, he continued to work as an employee. From 1937 through 1940 he received a weekly salary of $ 65 plus an annual bonus of about $ 2,500. The parties understood that the partners would draw no more than he did.
In 1936 or 1937 Horowitz received employment offers from other manufacturers at a higher salary and a percentage of the profits. Becoming dissatisfied with his arrangement with Lee's predecessor, he discussed the situation with his wife who brought the matter to her brothers' attention. They took no action. Horowitz's dissatisfaction culminated in 1940 when he demanded an interest in the business. Another manufacturer had offered to pay him twice his salary and 20 per cent of the profits of that business. After lengthy discussion the parties agreed that Horowitz should become a partner. Although they suggested a one-fourth interest for him, a one-sixth share satisfied his desire to become a partner.
Petitioners' father, Benjamin Fainblatt, who served as arbitrator of family disputes, participated in the prolonged discussions following Horowitz's request. *241 All family members desired to retain Horowitz's services. However, Margaret felt that by transferring to him half of her interest she would lose her equal voice with her brothers in the management of the firm, and that the only solution was for each brother to transfer half of his interest to his wife to equalize the brothers' positions with her own.
The family members finally agreed to establish a partnership composed of petitioners and Margaret as general partners, and of their respective spouses as limited partners. The formation of the partnership was prompted and organized solely by the insistence of Horowitz that he should have a position in the company comparable with those offered to him by other manufacturers. On November 1, 1940, petitioners, Margaret, and their spouses entered into a written agreement *992 creating Lee and filed a certificate of limited partnership with the appropriate county authorities.
The agreement recited that the general partners had conducted the business under the name of Lee Sportswear Co.; that the limited partners would be admitted; and that the capital investment of the old partnership was $ 126,000. The agreement then provided that*242 the new partnership carry on the business under the same name and at the same place; that each general partner assign $ 21,000 to his or her spouse as a limited partner; that each partner be "deemed to have contributed an equal 1/6 share thereof" and receive one-sixth of the net annual profits; that all losses be borne equally but that each limited partner suffer no loss in excess of his capital and be personally liable for no partnership debts; that the general partners devote their entire time to Lee; that the limited partners have no voice in management and no power to bind Lee; and that each general partner receive a minimum annual salary of $ 5,000. Other provisions related to access to the firm's books, retirement or death of a partner, and procedure upon termination. The agreement designated Benjamin as the final arbitrator of disputes among the partners.
The agreement further provided for continuance of Lee until the general partners mutually decide to terminate it; that each limited and general partner be paid his one-sixth share of the profits at the end of each partnership year or whenever the parties agree; that the partnership capital be $ 126,000; that a limited partner*243 not be entitled to draw out or receive back any part of his share of the capital, except that upon dissolution he be entitled to receive his share of remaining capital and his share of any profits then due; and that no partner "mortgage, assign or sell" his partnership interest or enter any agreement by which anyone shall acquire an interest, except with the written consent of all other partners.
Upon execution of the 1940 agreement, the old partnership closed its books and Lee opened its books. No cash passed from petitioners to their spouses. The spouses put no money into Lee under the agreement. The new books showed a capital account of $ 21,000 for each of the six partners. The three general partners conducted the business essentially as they did prior to the agreement.
Each petitioner assigned to his wife one-half of his capital account, conditioned on her leaving that capital interest in the business as long as the general partners' capital remained in the business. This condition tended to preserve an equal share of the profits to each family.
Each petitioner filed a gift tax return reporting a gift of one-sixth interest in the partnership capital. Lee notified its bank*244 of the changes in the partnership status. Aida, Leon's wife, Dorothy, Irving's wife, and Horowitz contributed no additional money.
*993 During Lee's entire existence, its business remained hazardous and speculative, being subject to constant and sudden style changes, overproduction, and weather conditions. The product had to be properly made and completed in time for seasonal sale. Consequently, it required large inventories of materials purchased before the market demand. Capital remained important to Lee from 1940 through 1949. Lee's closing inventories amounted to $ 172,891.64 on October 31, 1946, and $ 138,007.54 on October 31, 1947.
Lee's business remained more or less constant from November 1, 1943, through October 31, 1946. The demand for its products continued steady and less subject to seasonal disparities than during the earlier years.
Lee, which had obtained substantial bank loans in 1941 and 1942, relied on bank credit less often after 1943.
Commencing in 1944 Lee changed its former policy of accumulating earnings largely because of improved financial condition, shrunken working capital requirements caused by wartime production limitations, and Horowitz's dissatisfaction*245 with having his share of the profits withheld.
From 1944 through 1947 the partners withdrew 85 per cent of current earnings. Each petitioner's wife drew amounts substantially equal to her husband's drawings, except for a $ 5,000 salary paid to the latter as general partners.
The capital account of each wife amounted to $ 75,864.59 at November 1, 1945, $ 92,402.81 at October 31, 1946, and $ 96,244.21 (Aida's capital account amounted to $ 96,344.22) at October 31, 1947. The average capital accounts of each wife during fiscal 1946 amounted to $ 84,133.70 and during fiscal 1947 to $ 94,323.51 ($ 94,373.52 for Aida).
Petitioners' wives each drew from Lee from 1944 through 1947 approximately $ 38,000 aside from drawings to pay Federal and State income taxes. The wives deposited those drawings in their own bank accounts separate from their husbands' funds, invested in savings banks and Government bonds, and considered the money their own. Petitioners paid household and living expenses of their respective families from 1943 through 1949, although occasionally the wives handled a special household expense.
From 1949 through 1951, Dorothy paid approximately $ 3,200 of "special expenses," *246 a small portion of her household expense. Dorothy used distributions to purchase a house used by herself and her husband. She decorated the house, which cost, including decorations, $ 35,602.29. She purchased furnishings for the house for $ 6,188.29 and paid taxes on the house totaling $ 2,766.29. She advanced to her husband $ 7,072.23 for payment of his State and Federal taxes.
*994 Lee's accountant treated the wives as partners on Lee's books. They occasionally participated in discussions of partnership affairs. They received and had explained to them profit reports. The general partners sought their opinions as to withdrawal of profits and other policy matters. They retained familiarity with Lee and its operation. The wives knew the circumstances behind formation of Lee and the instruments involved, and understood their status as limited partners. They knew of their share of the profits and the extent to which distribution was made. They became familiar with respondent's challenge of their status as partners. They joined in discussion of the question of dissolving Lee after Horowitz's death.
Petitioners' wives did not participate in the management of Lee, the duties*247 of management being lodged in the general partners. Neither wife performed any substantial services for the partnership.
From 1940 until Lee's dissolution in 1949, the general partners each drew an annual salary of $ 5,000. Until his death in 1948 Horowitz also drew an annual salary of $ 5,000. All partners had agreed upon that amount upon formation of Lee. Each petitioner had drawn approximately the same amount from 1937 through 1940.
Horowitz died November 12, 1948. Lee paid out his capital account to his estate. The partners discussed Margaret's position, since thereafter she would receive one-half of the profits distributable to each brother and his wife. The wives agreed that it would be undesirable for Margaret to receive less profits. Petitioners never thought of giving Margaret her husband's share without any other adjustment. The solution the parties arrived at was to equate the interests of each family in Lee's capital by paying out the capital interests of the surviving limited partners. The limited partners agreed to withdraw provided that their capital interests were fully paid for.
The general partners and surviving limited partners executed a dissolution agreement*248 providing for payment for the interests of the limited partners by delivery of promissory notes payable one-half in 6 months and the balance in 2 years, the unpaid portion to bear interest of 3 per cent per year. They determined the amount due to each spouse in payment of her partnership interest to be approximately $ 128,000. They issued notes to evidence $ 100,000 of this debt and set up the balance as loans payable. The wives received payment of the loans payable and interest on the notes according to the terms of the notes. They each received the principal of the notes as follows: December 28, 1950, $ 50,000; December 31, 1951, $ 20,000; March 7, 1952, $ 10,000; October 30, 1952, $ 20,000. The remaining partners deferred payment for the wives' interests because Horowitz's estate had to be paid first, and so much capital could not be withdrawn from *995 the business at once. The general partners continued to operate and manage the business as a partnership among themselves.
As his distributive share, each petitioner reported on his returns for 1941 through 1947, one-sixth of the taxable income of Lee after allowance of salaries to the general partners. Each wife also*249 reported one-sixth as her distributive share.
Respondent determined deficiencies against petitioners and Margaret for 1941 and 1943, based upon nonrecognition of their spouses as partners. In consolidated proceedings involving calendar years, which included Lee's fiscal years ended October 31, 1941, and October 31, 1943, the Tax Court of the United States, after a hearing on March 3, 1947, decided on June 12, 1947, Tax Court Memorandum Opinion, Docket Nos. 9730-2, that petitioners were each taxable upon the partnership income attributed to their wives but that Horowitz should be recognized as a partner. The Court of Appeals for the Second Circuit affirmed the decision per curiam on February 15, 1949, . The United States Supreme Court denied, on June 27, 1949, petitions for certiorari, , filed by petitioners. They mailed petitions for rehearing, to be filed within 15 days after denial of certiorari, to the Clerk of the Supreme Court who received them July 13, 1949, and refused to file the petitions. The Supreme Court, on October 10, 1949, denied motions for leave to file the petitions. .*250
On December 29, 1954, after the mailing of the notices of deficiency and the filing of the instant petitions for redetermination, petitioners paid the director of internal revenue for the upper district of Manhattan the following sums, as partial payment of the proposed deficiencies for 1946 and 1947, and of interest on the proposed deficiencies:
| Petitioner | Payments | 1946 | 1947 |
| Irving | Deficiencies | $ 10,243.46 | $ 6,483.64 |
| Interest | 4,995.71 | 2,828.37 | |
| Leon | Deficiencies | 10,061.20 | 6,348.56 |
| Interest | 4,910.96 | 2,773.67 |
Petitioners and their wives, acting in good faith and with a business purpose, intended to join together in the present conduct of the enterprise as partners.
OPINION.
When this same partnership was before the Tax Court for prior years, it was held not to be valid for Federal income tax purposes on the authority of the Tower1 and Lusthaus2 cases, which were then the last word from the Supreme Court on the subject. *996 Horowitz was held to be a valid partner as having contributed vital additional services. But as the law then stood it is impossible to quarrel with the previous conclusion that the wives of the present petitioners contributed*251 no vital or managerial services and no capital originating with them. The result that the partnership should not be recognized was well-nigh automatic. That this decision was affirmed per curiam in open court, , certioari denied , is hence no cause for surprise.
Although the record in the prior proceeding is before us and, in fact, becomes by agreement a part of the present evidence, and although the issue was raised by his original answer, respondent now expressly disclaims any reliance on res judicata or collateral estoppel. 3 He says, with respect to the previous proceeding, only that "respondent finds it inconceivable to believe that the Supreme Court would have denied certiorari had it believed Fainblatt to be contrary to the spirit*252 and purpose of Culbertson. For that reason, the decision in the prior Fainblatt case should have high persuasive value." 4
We are forced to differ. No inference from a denial of certiorari can be drawn as to the*253 correctness of the decision below.
The denial of a writ of certiorari imports no expression of opinion upon the merits of the case, as the bar has been told many times. * * * [.]
It remains only to consider the circumstances of this controversy on its own merits, but in the light of the principles propounded by , and the cases which subsequently apply them.
We are required by that authority to determine whether the present arrangement resulted in the carrying on of the business with the participation of the wives "in good faith" and for "a business purpose." While the absence of vital services, managerial participation, and original capital is said to place upon petitioners a "heavy burden" of persuading us of this fact, , this burden may be discharged by showing that "notwithstanding the lack of these elements some other evidence exists from which the *997 requisite intent and business purpose may be gathered." ,*254 affd. (C. A. 4) .
The purpose for which this venture was organized had, on this record, an unimpeachable business objective. Horowitz was admitted because otherwise the business was in danger of losing his concededly important, if not indispensable, talents. That his participation is to be recognized as valid results not only from the evidence in the prior proceeding and here but is, in fact, not now resisted by respondent.
But according to the stipulated evidence, the entry of petitioners' wives at the same time was a prerequisite to this result. This is an inescapable fact not merely because there was testimony to that effect in this proceeding as well as in the prior one, but even more conclusively because the earlier Memorandum Opinion in the Tax Court found that:
All members of the family were anxious to retain Horowitz' services. However, Margaret Horowitz felt that by transferring to him half of her interest she would not have an equal voice with her brothers in the management of the company and that the only solution to the problem was for them to turn over half of their interests to their wives, in order to equalize the positions*255 of all three petitioners [the present petitioners and Margaret].
The several members of the family finally agreed to establish a partnership composed of the petitioners as general partners and of their respective spouses as special or limited partners. The formation of the partnership was prompted and organized solely by the insistence of Horowitz * * * [Emphasis added.]
And it is stipulated here that "[the] Findings of Fact as set forth in [the Opinion in the prior proceeding] are agreed upon as being a true and correct statement of facts." It is hence inadmissible for respondent to argue, as he does, "that this could not be the reason for the formation of the limited partnership, because under the terms of the agreement the limited partners had no voice or control in the management of the business * * *. So that explanation is spurious in nature." We have accordingly included in our present Findings of Fact a statement of the business purpose similar to that stipulated to be the correct one.
The partnership having been organized for a purpose necessarily embedded in the whole operation of the business, and presumably having been continued for that same purpose, we can only look*256 to the surrounding circumstances for evidence of petitioners' good faith. For this we are admonished in , to look at "[1] the agreement, [2] the conduct of the parties in execution of its provisions, [3] their statements, [4] the testimony of disinterested persons, [5] the relationship of the parties, [6] their respective abilities and [7] capital contributions, [8] the actual control of income and [9] the purposes for which it is used * * *."
*998 Nothing appears in the present record to cast doubt upon the bona fides of the arrangement. Since the existence of a business purpose is postulated, it is not sufficient that the wives took no part in the conduct or management of the business in view of the limited partnership form. , affirmed per curiam (C. A. 9) . Nor is it important that the "gift" to the wives left them no freedom to withdraw it from the business, no control over the declaration of profits, and no power to terminate the partnership. ,*257 affirmed per curiam (C. A. 9) . And this is not such a case, regarding the gift of the partnership interest as a capital contribution by the wives, as would permit us to say that capital was not an important income-producing factor. , affd. (C. A. 7) ; . We have found to the contrary, as was done on the previous record.
Apparently the wives did, in fact, participate in the profits and probably were entitled to do so periodically under the provision of the agreement which calls for the division of profits at the end of each fiscal year. In the prior proceeding we found that: "All partnership profits have been credited equally to the six partners. The amounts received by Aida Fainblatt and Dorothy Fainblatt were deposited by them in their own separate bank accounts. They have made their own separate investments. Their husbands have furnished all the money for the household expenses." While there is some evidence here that several investments of a family nature*258 were made by the wives, there is none that this was forced upon them or that they could on this account be said to have been deprived of the control over the partnership income which the previous proceeding demonstrates that they had. , reversing .
We are accordingly unable to discern any respect in which an examination of the considerations described in Culbertson would justify the failure to recognize this partnership. Certainly its termination within a year after Horowitz's death and the consequent removal of the cause for its formation is, if anything, a reinforcement of the evidence of a business purpose. As respondent says, "In effect the general partners went back to the same partnership relationship as existed prior to the agreement of November 1, 1940." While this is a circumstance not before the Court in the earlier proceeding, we are unable to see in it anything detrimental to petitioners' position. We have accordingly made our ultimate finding in petitioners' favor.
Decisions will be entered under Rule 50.
Footnotes
1. .↩
2. .↩
3. It is true that at one point respondent's brief contains the statement: "This determination was made by the Court in the prior proceedings, and, as has been argued in I, supra, would appear to be a final determination not subject to relitigation. However, if collateral estoppel is not applicable here * * *." But there is no "I, supra↩"; the brief was filed with some eight pages apparently deleted from the original draft; and we take it that the fact is that this statement was retained through inadvertence and does not affect respondent's affirmative renunciation of the argument based upon collateral estoppel.
4. Certiorari was denied, , on the same day that , was decided.↩