*26 Decisions will be entered for the respondent.
In computing the percentage of gross income required by section 251, Internal Revenue Code of 1939, relating to income from United States possessions, held, a partner's gross income includes his distributive share of the gross income of the partnership.
*445 *27 In these consolidated proceedings respondent determined deficiencies as follows: *446
| 1941 income | 1943 income and | |
| Petitioner | tax | Victory tax |
| Charles Palda | $ 52.08 | $ 240,546.21 |
| Day Okes | 1 (10.77) | 495,816.32 |
| S. R. Okes | 10.05 | 495,687.36 |
The 1943 deficiencies remain in dispute. The sole issue is whether petitioners properly excluded from gross income their distributive shares of profits from a joint venture as income derived from a trade or business within a United States possession.
FINDINGS OF FACT.
Some facts are stipulated and are hereby found.
Petitioners, United States citizens, engaged as partners in the construction business under the name of Okes Construction Company, hereafter referred to as the Company.
Petitioners each filed Federal income tax returns according to the cash receipts and disbursements method with the collector of internal revenue for the district of Minnesota for the calendar years 1942 and 1943. Each 1943 income tax return contained a Form 1040-E.
The Company maintained its books and filed its partnership information returns, Form 1065, according to the percentage of completion-accrual method*28 of accounting. It filed those returns on a fiscal year basis for the year ended February 28, 1942. Thereafter, the Commissioner of Internal Revenue granted permission to change to the calendar year basis for income tax purposes. To accomplish the change the Company filed a Form 1065 for the period March 1, 1942, to December 31, 1942. Thereafter, it filed its returns on the calendar year basis. The partnership filed its returns with the collector of internal revenue for the district of Minnesota.
As of October 4, 1940, the Washington, D. C., office of the Panama Canal invited bids for the furnishing of all plant, labor, materials, and performance of work required for the excavation of an approach channel, a lock structure, and a drainage canal, and for grading a railroad relocation, all in connection with the construction of a third set of locks on the Atlantic side of the Panama Canal in the Panama Canal Zone, a United States possession.
Martin Wunderlich Company was a partnership, composed of Martin Wunderlich and others, engaged in the construction business.
In 1940, the Company and Martin Wunderlich Company, jointly, hereafter referred to as the joint venture, submitted a *29 bid to do the work. The Company held a 25 per cent interest in the joint venture, Martin Wunderlich Company having 75 per cent. The United States accepted the bid of the joint venture and on January 6, 1941, entered into a contract with them at a price of $ 8,517,100. Subsequent change orders and supplemental agreements changed and *447 enlarged the contract so that the total price exceeded 12 million dollars.
On January 7, 1943, the joint venture contracted with the United States to erect power plant equipment for the Gatun and Miraflores locks in the Canal Zone for $ 146,640. The final amount was $ 168,464.17. On March 30, 1943, the joint venture contracted with the United States to construct and complete access roads to the magazine area at Fort Gulick in the Canal Zone for $ 36,143.90. The final amount was $ 67,531.10. On May 28, 1943, the joint venture contracted with the United States for the treating and blasting of parade grounds for Fort Gulick for $ 16,895. The final amount was $ 16,733.24.
Except for certain work in Nicaragua the joint venture engaged in only the construction work contracted for under the Canal Zone contracts mentioned above. With that exception*30 it performed all work in the Canal Zone.
Immediately upon notification of the acceptance of their bid, S. R. Okes, Palda, and Wunderlich flew to the Canal Zone, arriving January 16, 1941. Wunderlich returned shortly to the United States, but Okes and Palda remained to organize the work. They arranged for housing for the workmen, banking facilities, credit with the area authorities, preparation of an area for shops and equipment, and a place for the workers to eat. As part of this organizational work, they prepared progress charts and attended labor meetings.
They required a large number of skilled laborers because of the extensive use of machinery in the operation. They set up a complete working organization, the office being managed by Kent Taylor, the job operations being directed by Stewart, the job superintendent.
On October 5, 1942, February 15, 1943, and July 1, 1943, the joint venture leased certain equipment to Martin Wunderlich Company for use in Costa Rica. On January 24, 1942, the joint venture leased certain equipment to the United States to be delivered at and for use in construction of France Field in the Canal Zone.
The joint venture commenced operations under *31 the main contract early in 1941 and completed work under the Canal Zone contracts in October 1943. The joint venture finally concluded its business on December 31, 1943.
On October 20, 1943, the joint venture sold used construction equipment to the United States for $ 1,019,801.26, delivered to the purchaser f. o. b. seller's yard, Gatun, Canal Zone. At that time the joint venture had completed its work and no longer needed the equipment. The sale and disposal of equipment conformed to the usual custom and usage of the trade. The joint venture sold the equipment in the Canal Zone because of war conditions, the United States wanted the equipment, and it could not obtain means of transporting it elsewhere. *448 It made no effort to have the joint venture's equipment conveyed back to the United States.
On December 24, 1940, the joint venture opened a bank account with the First National Bank of St. Louis, Missouri, and deposited $ 850,000, consisting of the capital contributions of Martin Wunderlich Company of $ 637,500 and the Company of $ 212,500. It referred to this account as "Special Account."
The joint venture also opened the following bank accounts on the dates indicated: *32
| Name or number of account | Bank | Date opened |
| Special account | Chase National Bank of The City | Apr. 23, 1941 |
| of New York Branch in | ||
| Cristobal, Panama C. Z. | ||
| Account No. 1 equipment | First National Bank in St. Louis, | Jan.7, 1941 |
| account. | Mo. | |
| Account No. 2 travel | First National Bank, St. Paul, | Jan.7, 1941 |
| account. | Minn. | |
| Account No. 3 jobbing | Chase National Bank of The City | Jan.7, 1941 |
| account. | of New York Branch in | |
| Cristobal, Panama C. Z. | ||
| Account No. 4 payroll | Chase National Bank of The City | Jan.7, 1941 |
| account. | of New York Branch in | |
| Cristobal, Panama C. Z. | ||
| Account No. 5 Panama | First National Bank of St. Louis, | Mar. 15, 1941 |
| supply. | Mo. | |
| Account No. 6 rental | First National Bank of St. Louis, | Mar.2, 1943 |
| account. | Mo. |
The joint venture received in the Canal Zone all money paid it on account of the Canal Zone contracts and operations, including rental (except for equipment leased to Martin Wunderlich Company for use in Costa Rica) and sale of equipment. It deposited that money in the special account of the Chase National Bank branch in Cristobal. It utilized this account to pay expenses arising from the performance of the Canal Zone contracts*33 and operations.
From time to time, the joint venture transferred funds from the special accounts in Cristobal and St. Louis to replenish its other bank accounts for operating expenses. It also made some withdrawals directly from the special accounts to pay operating expenses. The joint venture received rental income derived from the Martin Wunderlich leases in the United States which it deposited in the rental account (Account No. 6) in the First National Bank of St. Louis.
A Joint Signature and Surety Agreement and an amended Joint Signature and Surety Agreement embodied the basic restrictions and requirements for withdrawing profits from the operations of the joint venture. The joint venture complied with the restrictions and requirements set forth in the agreements in conducting its business transactions and financial operations.
*449 When it was decided that profits should be distributed Martin Wunderlich corresponded with the representative of the National Surety Corporation at New York, the surety on the bond of the joint venture in connection with the contract. He requested permission to withdraw a specified amount from the special account with either the Chase National*34 Bank or the First National Bank of St. Louis. The representative then transmitted a statement to the surety showing the effect of the requested withdrawal on the joint venture's operations, together with the request for permission to distribute profits. If the representative received approval from the surety for the distribution, he notified Wunderlich.
Upon receipt of this information Wunderlich instructed Taylor, the comptroller of the joint venture at Cristobal, to draw a check upon the special account with either the Chase National Bank or the First National Bank of St. Louis for the amount of the desired withdrawal. Taylor then delivered this check to Wunderlich, wherever he might be, for his signature. Wunderlich, after signing the check, mailed it, usually to St. Paul, for the signature of either S. R. Okes or Day Okes. After Day Okes or S. R. Okes received and signed the check he then mailed it to the surety's representative to be countersigned. The representative then mailed it to the Company if it was payee, at its principal office in St. Paul for endorsement. After the Company received and endorsed certain checks it mailed them to the Chase National Bank at Cristobal, *35 to be used to purchase drafts payable to the Company drawn on the Chase National Bank of New York.
These drafts, equal to the amounts on the checks less the charges for the drafts, were then mailed to the Company in St. Paul and deposited in its bank account at the First National Bank at St. Paul. The Company endorsed and deposited the other checks directly in its bank account in the First National Bank at St. Paul without forwarding to Cristobal for the purchase of drafts.
Each partner of the Company had unrestricted authority to sign checks drawn on the Company bank account at the First National Bank at St. Paul. Checks drawn on the joint venture bank accounts numbered 1 through 6 required the signatures of only a representative of each of the Company and the Martin Wunderlich Company.
Day Okes and S. R. Okes each had a 40 per cent interest and C. H. Palda had a 20 per cent interest in the profits and losses of the Company for the fiscal year ended February 28, 1942, and in all income received by the Company from the joint venture regardless of year. After February 28, 1942, the three partners shared equally income from sources other than the joint venture.
During the fiscal *36 year ended February 28, 1942, the Company received gross income from construction projects within the United *450 States and Canada amounting to $ 658,350.14, including miscellaneous receipts of $ 8,200.71. For the period ended December 31, 1942, the gross income from projects within the United States and Canada amounted to $ 381,891.57, including miscellaneous receipts of $ 13,277.10. For the calendar year 1943, such gross income amounted to $ 160,278.55, including miscellaneous receipts of $ 8,294.94. All three petitioners actively participated in the United States and Canadian projects engaged in by the Company from 1941 through 1943. Except for the time actually spent in the Canal Zone from 1941 through 1943, each petitioner devoted most of his time either to working on local projects or to vacationing. Palda was on the Alaska Highway in 1942 and 1943.
The following shows the time spent by petitioners on their trips to the Canal Zone, including the dates that each left and returned to St. Paul:
| Date of return | ||
| Date of leaving St. Paul | Trip made by | to St. Paul |
| Jan. 14, 1941 | S. R. Okes | Feb. 25, 1941 |
| Jan. 14, 1941 | C. H. Palda | May15, 1941 |
| Mar. 15, 1941 | Day Okes | May1, 1941 |
| July 22, 1941 | Day Okes | Aug. 4, 1941 |
| Feb. 24, 1942 | C. H. Palda | May16, 1942 |
| May18, 1943 | S. R. Okes | June 12, 1943 |
*37 Estimated travel time for each round trip between St. Paul and the Canal Zone, taken by each petitioner from 1941 through 1943, was 6 days. Assuming 6 days' travel time, during 1941 Palda, Day Okes, and S. R. Okes spent no more than 115 days, 44 days, and 36 days, respectively, in the Canal Zone. Allowing for travel time, during 1942 Palda spent no more than 76 days in the Canal Zone and neither Day Okes nor S. R. Okes was there during the year. Allowing for travel time, during 1943 S. R. Okes spent 19 days in the Canal Zone and neither Day Okes nor Palda was there during the year.
The joint venture maintained its books and filed Forms 1065 with the collector of internal revenue for the district of Maryland at Baltimore according to the percentage of completion-accrual method. Its first fiscal year ended January 31, 1942. It received permission from the Commissioner of Internal Revenue to change from the fiscal year to the calendar year basis of reporting. To accomplish this it filed a Form 1065 for the period February 1, 1942, to December 31, 1942. Thereafter the joint venture filed its returns on the calendar year basis.
It is stipulated that:
a computation of the 80% *38 and 50% requirements of Section 251 * * * on the basis that the proportionate share of gross income of the joint venture and * * * of the * * * Company * * * is considered to be the gross income of each of the petitioners * * * indicates that * * * petitioners fail to meet the 80% requirement * * *
* * * *
*451 all petitioners herein meet the 50% requirement * * *
It is further stipulated that:
under the theory that only each petitioner-partner's distributive share of the joint venture's net income and the * * * Company's net income forms a part of the gross income * * * petitioners meet the percentage requirements * * * based upon the inclusion in possession income of long-term capital gain from the sales of equipment by the joint venture. * * *
Day Okes and S. R. Okes met the 80 per cent requirement for both 1942 and 1943, but Palda met that requirement only for 1942,
assuming * * * that the distributable share of joint venture net income, excluding capital gains from the sales of equipment by the joint venture, and the distributable share of partnership net income is considered to be gross income to the individual partners. * * *
Each petitioner derived less than *39 80 per cent of his gross income for the applicable part of the 3-year periods immediately preceding the close of 1942 and 1943 from the active conduct of a trade or business within a possession of the United States, namely, the Canal Zone.
OPINION.
Although the operations in the Panama Canal Zone giving rise to the income in controversy were conducted by not one but three partnerships, or more precisely by a joint venture composed of two other partnerships, it is not that factor that poses the problem before us. One of those partnerships also conducted business in the United States. And because the net income of that partnership from its domestic business was presumably a smaller proportion of its gross than that of the Canal Zone joint venture, petitioners can concededly succeed here in keeping their Canal Zone income above 80 per cent 1 and hence in eliminating that income under section 251, Internal Revenue Code of 1939, only if they are permitted to disregard the partnership gross income and treat their distributive share of partnership *452 net income as the constituent part of their personal "gross income." The first question, accordingly, is whether the term gross income*40 as used in section 251 was intended to be applied in the case of a partner by considering his share of gross partnership income or of net.
*41 It has frequently been said that a partnership is not a taxable entity and has its place in the scheme of taxation solely for income computation and reporting for tax purposes. Randolph Products Co. v. Manning, (C. A. 3) 176 F. 2d 190. It has resulted from this that generally speaking the partnership is not considered to have any income for tax purposes but that the share of the partnership's transactions is in each case attributable proportionately to the respective partners. "The general rule is that an individual partner is deemed to own a share interest in the gross income of the partnership." Harry Landau, 21 T. C. 414, 421. A partner's share of capital gains and losses is to be treated by him as though it is his own, Mae E. Townend, 27 T.C. 99">27 T. C. 99, see Neuberger v. Commissioner, 311 U.S. 83">311 U.S. 83; a partner's share of gambling gains can be offset by him against other gambling losses, Jennings v. Commissioner, (C. A. 5) 110 F.2d 945">110 F. 2d 945, reversing a Memorandum Opinion of the Board of Tax Appeals filed July 25, 1939, certiorari*42 denied 311 U.S. 704">311 U.S. 704; income which is tax exempt to a partnership is exempt in the hands of the partner, Howard S. Young, 16 B. T. A. 1428, affirmed on another issue sub nom. Elam v. Commissioner, (C. A. 7) 45 F.2d 337">45 F. 2d 337; a dividend deductible from the gross income of a partnership is proportionately deductible from that of the partner, United States v. Coulby, (N. D., Ohio) 251 F. 982">251 F. 982, affirmed per curiam (C. A. 6) 258 F. 27">258 F. 27; payments made to a partnership by a partner for services are proportionately not taxable to him as his income, Benjamin v. Hoey, (C. A. 2) 139 F.2d 945">139 F. 2d 945; and payments to a partnership, of which a nonresident was a member, are taxable to him although from sources outside the United States because paid by the United States notwithstanding that the actual payment was made through the partnership, Leif J. Sverdrup, 14 T.C. 859">14 T. C. 859; while at the same time a nonresident alien partner may consider as nontaxable his share of partnership business from sources*43 without the United States in spite of the fact that the partnership transacts business here, Craik v. United States, (Ct. Cl.) 31 F. Supp. 132">31 F. Supp. 132. Even where partnership gross income is not considered the individual's gross income for purposes of the 25 per cent statute of limitations provisions of section 275, the instant situation was carefully distinguished. L. Glenn Switzer, 20 T. C. 759, remanded by stipulation (C. A. 9, Sept. 17, 1954); cf. Jack Rose, 24 T. C. 755, 768. Petitioners *453 rely on Markham v. United States, (S. D., Cal., June 23, 1953) 45 A. F. T. R. 1143, 53-2U. S. T. C. par. 9462, unreported officially, but the present question was apparently not involved there and clearly was not discussed nor decided. 2
*44 If the literal language of the statute 3*45 is followed, the partner's share of the partnership's net income is to be included in computing his individual net income. 4 That, of course, makes no contribution in determining how he should compute his gross income. But the logical inference from section 183 5 is that his share of the partnership's gross, e. g., Harry Landau, supra;Neuberger v. Commissioner, supra at p. 89, less his share of the partnership's deductions, e. g., United States v. Coulby, supra;Lord Forres, 25 B. T. A. 154; W. J. Burns et al., 12 B. T. A. 1209, will be his share of the partnership's net.
*46 There is no evidence that Congress intended the term "gross income" to be construed differently in applying the provisions of section 251 to a partnership than would be the case in the great majority of the situations mentioned. On the contrary, the purpose of the 80 per cent provision was evidently "to apply this special procedure only to persons practically all of whose business is done outside the United States*454 * * *." 6 See John W. Haussermann, 23 B. T. A. 378, affd. (C. A., D. C.) 63 F.2d 124">63 F. 2d 124, certiorari denied 289 U.S. 729">289 U.S. 729. For this objective the ratio of the gross income or gross business, rather than net income or profit, was thought to be a more reliable test and it is easy to see why this might be so. A person doing a comparatively small business in the possessions with a very high profit margin compared to his domestic transactions might otherwise qualify under the section notwithstanding that he actually did more gross business in the United States than in the possession.
*47 Congress was careful to employ the gross income concept and we are powerless to modify it by use of the net income approach. If these petitioners had been doing business as individual sole proprietors in the United States there would be no question that the statute would be ineffective to exclude this income. That the form of organization adopted was a partnership, which as we have seen calls for tax treatment of the partners as individuals, cannot in our view justify any different result.
Petitioners call for application of the rule that remedial statutes are to be liberally construed in favor of the taxpayer. Assuming that principle were to be employed here, it supplies no adequate answer. What would be a liberal construction in favor of these petitioners might do equivalent damage to another taxpayer whose situation was the reverse of this one. If in another case the gross income of the Canal Zone partnership were greater than four times the gross income of the domestic business but the net were less, the very construction now invited by petitioners would eliminate the possibility of any relief under section 251.
Since we think petitioners, accordingly, failed to conform to*48 the 80 per cent requirement of section 251, it becomes unnecessary to consider to what extent they might or might not be able to show that the other conditions of that section have been fulfilled.
For the reasons stated, we think the deficiency was correctly determined.
Decisions will be entered for the respondent.
Footnotes
1. Overassessment allowed.↩
1. SEC. 251. INCOME FROM SOURCES WITHIN POSSESSIONS OF UNITED STATES.
(a) General Rule. -- In the case of citizens of the United States or domestic corporations, satisfying the following conditions, gross income means only gross income from sources within the United States --
(1) If 80 per centum or more of the gross income of such citizen or domestic corporation (computed without the benefit of this section), for the three-year period immediately preceding the close of the taxable year (or for such part of such period immediately preceding the close of such taxable year as may be applicable) was derived from sources within a possession of the United States; and
* * * *
(3) If, in case of such citizen, 50 per centum or more of his gross income (computed without the benefit of this section) for such period or such part thereof was derived from the active conduct of a trade or business within a possession of the United States either on his own account or as an employee or agent of another.
(b) Amounts Received in United States. -- Notwithstanding the provisions of subsection (a) there shall be included in gross income all amounts received by such citizens or corporations within the United States, whether derived from sources within or without the United States.↩
2. In Estate of R. L. Langer, 16 T.C. 41">16 T. C. 41, affirmed per curiam (C. A. 9) 194 F. 2d 288↩, also relied on by petitioners, respondent conceded the present issue under section 107. It was apparently not litigated and certainly not decided.
3. SEC. 182. TAX OF PARTNERS.
In computing the net income of each partner, he shall include, whether or not distribution is made to him --
(a) As part of his gains and losses from sales or exchanges of capital assets held for not more than 6 months, his distributive share of the gains and losses of the partnership from sales or exchanges of capital assets held for not more than 6 months.
(b) As part of his gains and losses from sales or exchanges of capital assets held for more than 6 months, his distributive share of the gains and losses of the partnership from sales or exchanges of capital assets held for more than 6 months.
(c) His distributive share of the ordinary net income or the ordinary net loss of the partnership, computed as provided in section 183 (b).↩
4. Petitioners in their brief, no doubt through inadvertence, appear to read into the statute a phrase that is not there. They say:
When it comes to the imposition of the tax, the tax law, instead of levying a tax on the partnership as such, transfers to each partner his share of the partnership "net income" to be included in his "gross income↩" for the purpose of determining his "net taxable income." [Emphasis added.]
The emphasized words do not, of course, appear anywhere in section 182.5. SEC. 183. COMPUTATION OF PARTNERSHIP INCOME.
(a) General Rule. -- The net income of the partnership shall be computed in the same manner and on the same basis as in the case of an individual, except as provided in subsections (b) and (c).
(b) Segregation of Items. --
(1) Capital gains and losses. -- There shall be segregated the gains and losses from sales or exchanges of capital assets.
(2) Ordinary net income or loss. -- After excluding all items of gain and loss from sales or exchanges of capital assets, there shall be computed --
(A) An ordinary net income which shall consist of the excess of the gross income over the deductions; or
(B) An ordinary net loss which shall consist of the excess of the deductions over the gross income.↩
6. Senator Walsh: Why 80 per cent instead of 60 or 90 per cent?
Dr. Adams [Treasury tax adviser]: In order, Senator, to apply this special procedure only to persons practically all of whose business is done outside the United States, an American corporation, if it is doing practically all of its business in China, will pay taxes to us only on the income derived from sources within the United States; on the other hand, an American corporation which has only casual business abroad or which does 10 per cent of its business abroad will pay taxes on all its income derived from the foreign country, but will be given a credit for the income and profit taxes it pays in the foreign country.
[Hearings before Senate Committee on Finance on H. R. 8245 (Internal Revenue Bill of 1921), 67th Cong., 1st Sess.]↩