*299 Decisions will be entered under Rule 50.
1. Held: Petitioner and his wife were bona fide partners in Southern Fireproofing Company during 1942 and 1943.
2. In 1941 Southern Fireproofing Company executed a trust agreement wherein it initiated a bonus and profit sharing plan to benefit certain of its employees. Held, the plan does not qualify as an employees' trust within the meaning of section 165 (a), I. R. C., prior to that section's amendment by the Revenue Act of 1942, and, therefore, company contributions made thereto during 1942 are not deductible under section 23 (p) (1) (A), I. R. C.Held, further, under the trust instrument an employee-beneficiary's beneficial interest in the corpus and income of the trust is not nonforfeitable within the meaning of section 23 (p) (1) (D), I. R. C., and company contributions made to the trust during 1942 and 1943 are not deductible thereunder.
*1111 Respondent determined deficiencies in petitioners' income taxes for 1943 in the amounts of $ 108,159.53 and $ 4,592.78, respectively.
Because of the provisions of the Current Tax Payment Act of 1943 the year 1942 is also involved.
One of the issues raised in the petitions filed has been conceded by the petitioners. There remain two questions for our consideration: (1) Whether the Southern Fireproofing Company constituted a valid partnership between petitioners for income tax purposes during the *1112 calendar years 1942 and 1943. (2) Whether certain payments made*301 by the Southern Fireproofing Company into its bonus and profit sharing plan for the benefit of certain employees are deductible on its and/or petitioners' income tax returns for 1942 and 1943.
Petitioners, with leave of the Court, have amended their petitions to conform with the proof adduced at the trial and now claim an increased amount to be deductible in 1943 by reason of payments into the bonus and profit sharing plan of the Southern Fireproofing Company.
FINDINGS OF FACT.
Petitioners in these consolidated proceedings are Jacob Lichter (hereinafter referred to as petitioner) and Jennie L. Lichter, husband and wife, residing in Cincinnati, Ohio. The pertinent income tax returns for the period here involved were filed with the collector of internal revenue for the first district of Ohio.
Petitioner and his wife organized the Southern Fireproofing Company (hereinafter sometimes referred to as the Company), during the latter part of 1926 in Atlanta, Georgia. Business operations began in January 1927. In the beginning the Company's business was contracting for the furnishing and installation of masonry interior partitions in fireproof buildings. In subsequent years the business*302 changed and is now, and for the past 15 years has been, contracting for brick masonry of all types and the setting of stone in major buildings throughout the United States. A business of this nature requires considerable capital. An assurance of financial responsibility must be given and shown to persons to whom contracts are proposed to be made as well as to those from whom necessary materials are to be purchased. Such a showing is also essential in obtaining the necessary surety bond to guarantee completion of any contract. Sufficient capital is likewise needed to meet current expenses; to pay for materials, labor and service used in connection with the performance of contracts; to finance retained percentages; and to supply collateral for escrow agreements when necessary. At the outset petitioner had no funds of his own with which to finance the business he proposed to found. For this purpose he initially secured $ 5,000 from one who was later to become the Company's general superintendent in the field, in exchange for a 10 per cent interest in the business. Additional requisite funds were obtained from petitioner's father-in-law, H. M. Lempert, of Auburn, Maine. Tentative*303 arrangements to this end had been made with Lempert by petitioner's wife the summer preceding the formation of the Company. Lempert agreed to advance money up to $ 25,000 for the enterprise on condition that his daughter be made a partner therein. After receiving this assurance, petitioner and his wife organized the Company. In fulfilling his agreement, Lempert made small advances from time to time when needed. The *1113 first such advance was in the amount of $ 5,000 and was made some little time after the Company was started when it began financing one of its jobs and needed the cash. This advance was made by check drawn payable to the Company or to petitioner, as were all such advances thereafter.
The first contract for the Company was entered into on January 25, 1927. Since that time some 800 individual contracts have been executed by the Company. The manner in which the Company was referred to in these contracts varied. In some it was described as "Southern Fireproofing Company, a partnership composed of Jacob Lichter and Jennie Lichter" while in others it was characterized as "Jacob Lichter and Jennie Lichter, d/b/a Southern Fireproofing Company." There were still*304 other contracts in which it was referred to only as "Southern Fireproofing Company." Although the contracts were sometimes signed by both petitioner and his wife as partners, on the greater number of occasions they were signed only by petitioner as co-partner.
For the first six months following formation of the Company, petitioner's wife rendered stenographic services and general office help. In addition she also did the extensions in connection with the estimating done by petitioner. Thereafter the need for her office services gradually diminished and such were limited to rush periods when they were required. In the earlier years of the Company, petitioner's wife went with petitioner on most business trips he made and performed such clerical duties as might be necessary. These included estimation work relative to the estimates which petitioner was in the process of making. During 1942 and 1943 her services were, for the most part, confined to conferring with petitioner upon matters of Company policy.
When the Company was first organized no written partnership agreement was executed. On January 2, 1929, two years after such formation, petitioner and his wife executed the following:
*305 This agreement made this 2nd day of January, 1929 by and between Jacob Lichter of Atlanta, Georgia, party of the first part, and Jennie L. Lichter, party of the second part, witnesseth: --
That for the consideration of the sum of one dollar ($ 1.00) receipt of which is hereby acknowledged, together with love, affection and other considerations, the party of the first part hereby gives, grants, bargains, sells and conveys to the party of the second part the right, title, ownership and interest in and to one-half of all assets, good will and future profits in the Southern Fireproofing Company.
Witness our hands this 2nd day of January of the year 1929, Atlanta, Georgia.
(Signed) Jacob Lichter.
(Signed) Jennie L. Lichter.
(Signed) Wm. R. Phillips, Jr.
(Signed) F. C. T. Cheek,
*1114 Aside from the contracts mentioned above, the Company, throughout its existence, has held itself out to be a partnership and has transacted business and taken action in the names of petitioner and his wife as partners. Various licenses and permits to engage in business have been so issued by several states and municipalities in which it operated. Income tax and other tax returns have been so *306 filed. Contracts providing the Company with coverage for workmen's compensation and public liability have been drawn in the names of petitioner and his wife. The Company was premium-rated thereon as a partnership. Different escrow agreements have been entered into with contractors in which the joint property of petitioner and his wife has been pledged as collateral. Such property has also been used from time to time to secure Company borrowings. The notes in such instances were usually signed by petitioner only. No capital accounts were ever set up in the names of either party. All withdrawals of Company funds were made by petitioner prior to any distribution thereof.
The Company has sued and been sued in various jurisdictions as a partnership. Renegotiation proceedings relative to the Company's 1942 business were brought against petitioner and his wife as partners, and their individual property was placed as collateral for a supersedeas bond in connection therewith. With regard to this action, a private relief bill in which petitioner and his wife were referred to as partners was passed by the Congress.
Various partnership bank accounts were from time to time opened by the*307 Company. Although Jennie Lichter was not an authorized signatory therefor, the applications and signatory authorizations were signed by her along with petitioner as partners.
Petitioner and his wife executed their individual wills in 1945 wherein each referred to himself as a partner in the Company and made certain dispositions to benefit the Company's employees. Each agreed not to change his will without the consent and acquiescence of the other, and authorized the other as executor to carry on the business of the Company and to liquidate his or her interest therein.
In 1932 "Jacob and Jennie L. Lichter, doing business under the name and style of the Southern Fireproofing Company" were parties to an agreement with one Robert Fuerst wherein a co-partnership was formed to do certain construction work as a subcontractor on a project of the State of New York.
A bonus and profit sharing plan for certain employees of the Company was initiated in 1941 by virtue of a trust agreement executed between "Jacob Lichter and Jennie L. Lichter, partners, doing business as Southern Fireproofing Co." and the Central Trust Company of Cincinnati, Ohio, as trustee. Material portions of the agreement*308 are as follows:
* * * *
*1115 I
The Employer hereby makes an initial deposit of $ 9,000.00, which sum, together with any other monies, funds, stocks, bonds, policies, property, etc., which may be deposited with the Trustee, shall be held by the Trustee in trust for the uses and purposes as hereinafter set forth.
II
The Duties, acts and powers of the Trustee shall be limited to the directions and instructions of an Advisory Board, which shall consist of three (3) members. The membership of such Advisory Board is limited to the employees or retired employees of said Company, who shall hold office until their successor or successors are fuly [sic] designated in writing, unless sooner terminated by death or resignation. All members of the Advisory Board, as well as their successors, shall be appointed by the Employer, the Southern Fireproofing Company. The present members of the Advisory Board are Mrs. O. H. Utz, R. M. Love and E. W. Schaller. Any change in the personnel of the Advisory Board shall be immediately communicated by the Employer to the Trustee by sending to the Trustee signed copies of notices to old member or members as well as signed copies of notices to new*309 member or members and until the Trustee has received written notice of any change in the personnel the Trustee shall be entitled to assume that there has been none and shall be protected as to any action taken in reliance thereon.
III
Any directions or instructions of the Advisory Board to the Trustee concerning the disposition, allotment, investment or distribution of the assets in the hands of the Trustee, or with respect to any other matter, shall be binding upon the Trustee when such directions or instructions shall be transmitted in writing and signed by the Secretary of the Advisory Board. The Trustee shall be under no duty or responsibility to inquire into the acts or omissions of the Advisory Board, and the Trustee shall be relieved from any liability, so long as it follows the written instructions of said Advisory Board.
IV
The Trustee may purchase annuity or life insurance policies on such individuals or group of individuals as the Advisory Board may direct and the Trustee may exercise any of the rights and options guaranteed by any of such contracts or policies or any other contracts or policies included under the terms of this agreement in accordance with the terms of*310 the policy contracts and this agreement, including the right to change the beneficiary to a person or persons who have an insurable interest in the insured life, upon written direction from the Advisory Board requesting such change.
* * * *
V
The Trustee shall accept the legal ownership of such moneys, funds, policies or properties as may be delivered to the Trustee by the Employer or the Advisory Board for the benefit of such individuals as the Advisory Board may direct and subject to the discretion and directions of the Advisory Board.
* * * *
*1116 VIII
In the event that the Employer shall be judicially declared bankrupt or insolvent, or in the event of dissolution, merger or consolidation without provisions being made for the continuance of the Trust, the Trust property is to be distributed or disposed of in accordance with the instructions of the Advisory Board, whereupon this Trust shall terminate.
IX
Notwithstanding anything in this agreement to the contrary, under no circumstances shall any policy or the proceeds thereof, or any other property or assets of this trust revert to the Employer, nor shall the Employer be entitled to exercise any rights or options in regard*311 to said policies, property or assets, or derive any benefits therefrom.
X
Subject to the restrictions imposed in Item IX above, the Employer shall have the right to amend or modify the provisions of this agreement, by instrument or instruments in writing delivered to the Trustee; provided, however, that the duties, powers and liabilities of the Trustee shall not be substantially changed or increased without its written consent.
Petitioner and his wife named the beneficiaries of the plan. From the total of Company employees, at times numbering 400, only a limited number of supervisory personnel were included as such during 1942 and 1943. In accordance with provisions of the trust instrument quoted above, the Advisory Board set up individual accounts for each such employee beneficiary. The records of the Advisory Board show that on December 13, 1942, the sum of $ 8,200 was paid into the plan. Such records further show that additional payments of $ 6,000, each, were made on April 2, 1943, and December 16, 1943, respectively.
Of the number of employee-beneficiaries during 1942 and 1943 that have subsequently terminated their employment with the Company, three have made partial withdrawals*312 of the accounts established for them under the plan, and three have left the entire profits of such accounts in trust undisturbed. Another employee, Herbert L. Pullen, who was sales engineer of the Company from 1940 until his death in 1945, had been employed under a contract calling for the payment of a bonus to him each year in addition to the annual salary for which he contracted. The amount of such bonus had been fixed at a certain approximate percentage of gross profits conditioned on the vicissitudes of the business. Pursuant to the provisions of this agreement, the amount of bonus called for in 1942 was $ 6,000. The wage stabilization unit of the Bureau of Internal Revenue disallowed payment of any amount in excess of $ 1,500. Thereupon $ 1,500 was directly paid Pullen and bonds with a face value of $ 6,000 costing $ 4,514 were deposited to his credit in the bonus and profit sharing plan. This payment to his account was made on April 9, 1943. Upon his death his *1117 estate made demand for the payment of Pullen's share in the plan. This demand was refused and suit was brought to compel payment thereof. The action is still pending and Pullen's share of the trust*313 corpus has not as yet been paid.
Petitioners were bona fide partners in Southern Fireproofing Company during the taxable years.
OPINION.
Two issues are presented in these proceedings. The first relates to the subject of a family partnership -- specifically, whether petitioner and his wife were partners in the Southern Fireproofing Company during the taxable years 1942 and 1943. The law is clear that it is possible for a husband and wife to form a valid partnership which is recognizable for tax purposes. Commissioner v. Tower, 327 U.S. 280">327 U.S. 280; Lusthaus v. Commissioner, 327 U.S. 293">327 U.S. 293. The real test of such validity has been stated by the Supreme Court to be "* * * not whether the services or capital contributed by a partner are of sufficient importance to meet some objective standard * * *, but whether, considering all the facts * * * the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise. * * *" Commissioner v. Culbertson, 337 U.S. 733">337 U.S. 733.
Both petitioner and his wife have testified that from the beginning of *314 the Company there existed between them an oral agreement whereby they were to share the profits equally. We have no reason to question the truthfulness of the statements. Respondent argues that the instrument executed in 1929 would have been unnecessary had the previous agreement in fact existed. Perhaps the written agreement added nothing to the legality of the arrangement as a partnership. It is at least corroborative of their intent. When we consider all the facts surrounding the inception of the Company, together with the conduct of the parties throughout the subsequent years, we can readily accept petitioner's explanation that the 1929 instrument was but an unskillful attempt to acknowledge in writing the pre-existing arrangement. When the Company was formed in 1926 the thought of tax benefits was not a dominating motive. If it be said that the agreement was belated it should also be said that it did not detract from the partnership history or status.
On the record of fact, circumstance and concurrent action, we conclude that the intention of petitioner and his wife from the beginning was that a partnership should exist between them.
Accordingly, respondent is reversed *315 as to this issue.
There remains for our consideration the issue involving the bonus and profit sharing plan initiated by the Company in 1941 to benefit *1118 certain of its employees. Respondent has disallowed the deduction of payments made thereto by the Company during the taxable years 1942 and 1943.
With regard to the payments made in 1942, the claim for the deduction in controversy is based upon the provisions of section 23 (p) (1) (A) and (D), Internal Revenue Code. 1*316 The applicability of section 23 (p) (1) (A) is grounded upon petitioner's premise that the plan qualifies as an employees' trust within the meaning of section 165 (a), I. R. C., 2 prior to its amendment by the Revenue Act of 1942. 3 Petitioner admits that the plan did not so qualify during the year 1943, and claims deductibility of the amounts contributed thereto during that year under section 23 (p) (1) (D), supra.
First to be considered is petitioner's position that the plan was a qualified employee's trust during 1942. So to qualify under the applicable provisions of the law in force at that*317 time, there must be no way under the trust instrument for any part of the corpus or income of the trust to be diverted to any use other than the exclusive benefit of the employee-beneficiaries "* * * at any time prior to the satisfaction of all liabilities with respect to employees under the trust, * * *." Section 165, supra.
*1119 We turn then to the trust instrument in question. Under its provisions, the powers and duties of the trustee are sharply limited. The trustee can perform no act nor exercise any powers except under the directions and instructions of an Advisory Board. Apparently, members of the Board may be appointed and removed at the uncontrolled whim of the employer, there being no term of office prescribed. The only limitation is that an individual member shall hold office until his successor is appointed.
The Advisory Board has full control over the disposition, allotment, investment or distribution of trust assets. It has authority to direct a change in beneficiaries. Furthermore, upon the happening of certain contingencies, the trust is to terminate and its corpus be distributed or disposed of in any manner directed by the Board.
The trustor has reserved*318 the right to alter, modify, or amend the provisions of the trust agreement. The only restriction to which this right is subject is a provision that under no circumstances shall any part of the trust assets revert to the employer. No standards are set up to establish eligibility for benefits. In fact, there is no reference in the body of the trust instrument to any employees, individually or as a class. At one place the instrument provides "The Trustee may purchase annuity or life insurance policies on such individuals or group of individuals as the Advisory Board may direct * * *." (Emphasis added.) While it might possibly be assumed that this provision has reference to employees, there is nothing specific upon which to base such an assumption. Nothing requires any benefits to be distributed to any employee or retired employee. "* * * Such an arrangement whereby an employer retains the power to 'sprinkle its beneficiencies' among a selected segment of its employees through the medium of a trust which it creates, does not satisfy the provisions of section 165, supra, * * *." South Texas Commercial National Bank of Houston, 7 T. C. 764, affd. *319 162 F. 2d 462. Therefore, the payments made to the fund during 1942 may not be deducted under section 23 (p) (1) (A), supra.
Turning to the question of deductibility of the amounts contributed in both 1942 and 1943 under section 23 (p) (1) (D), supra, it is to be noted that this section provides for the deduction of such payments if, at the time they are made, the employees' beneficial interests under the plan are nonforfeitable. Such provision has been construed to mean that "* * * an employee's beneficial interest in the contribution is non-forfeitable within the meaning of * * * 23 (p) (1) (D) at the time the contribution is made if there is no contingency under the plan which may cause the employee to lose his rights in the contribution. * * *" See Regulations 111, section 29.165-7.
*1120 What we have said above regarding the trust instrument is equally apposite here. Under certain fortuitous circumstances the trust assets may be disposed of or distributed in any manner that the Advisory Board, in its discretion, prescribes. This provision furnishes just such a contingency as is above described, albeit implied. For aught in the record*320 before us, no enforceable beneficial interest is granted to anyone.
The foregoing also applies to the amount deposited to Pullen's credit in the plan in 1943. In addition, the evidence indicates that such amount has never been paid to Pullen or to his estate, and that its payment is now being contested.
Accordingly, respondent is sustained as to this issue.
Decisions will be entered under Rule 50.
Footnotes
1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * * *
(p) Contributions of an Employer to an Employees' Trust or Annuity Plan and Compensation under a Deferred-Payment Plan. --
(1) General rule. -- If contributions are paid by an employer to or under a stock bonus, pension, profit-sharing, or annuity plan, or if compensation is paid or accrued on account of any employee under a plan deferring the receipt of such compensation, such contributions or compensation shall not be deductible under subsection (a) but shall be deductible, if deductible under subsection (a) without regard to this subsection, under this subsection but only to the following extent:
(A) In the taxable year when paid, if the contributions are paid into a pension trust, and if such taxable year ends within or with a taxable year of the trust for which the trust is exempt under section 165 (a), in an amount determined as follows:
* * * *
(D) In the taxable year when paid, if the plan is not one included in paragraphs (A), (B), or (C), if the employees' rights to or derived from such employer's contribution or such compensation are nonforfeitable at the time the contribution or compensation is paid.↩
2. SEC. 165. EMPLOYEES' TRUSTS.
(a) Exemption from Tax. -- A trust forming part of a stock bonus, pension, or profit-sharing plan of an employer for the exclusive benefit of some or all of his employees
(1) if contributions are made to the trust by such employer, or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, and
(2) if under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with respect to employees under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees,↩
shall not be taxable under Section 161, * * *.3. See section 162 (d) of the Revenue Act of 1942 as to the effective dates and taxable years under such amendments.↩