*86 Decision will be entered under Rule 50.
Decedent was one of two partners who were awarded a contract for the construction of a government housing project early in 1942. Under the contract they were required to furnish bonds in the total amount of $ 1,580,400 and cash working capital in the amount of $ 100,000. To secure the bonds and working capital it was necessary for the partners to obtain credit from a third party who insisted that in addition to the property of the partners the assets of their wives be liable for and exhausted first in the satisfaction of any losses incurred in connection with the project. On June 1, 1942, a new partnership was organized upon the advice of an attorney which included the wives as partners. Thereafter the necessary credit was secured. On January 2, 1943, another partnership was formed including the wives in order to consolidate the assets of the two existing partnerships. Held: That the wives were included in the partnerships organized on June 1, 1942, and January 2, 1943, for valid business reasons and must be recognized as partners in such partnerships for Federal tax purposes.
*327 This proceeding involves a deficiency in income tax for the period January 1, 1943, to November 10, 1943, in the amount of $ 44,531.77. The tax liability of the decedent for 1942 is involved due to the foregiveness feature of the Current Tax Payment Act of 1943.
The sole question is whether the respondent erred in his determination that decedent's wife was not a bona fide partner for Federal tax purposes in two separate partnerships and that the profits distributable *328 to the wife during the taxable years 1942 and 1943 under the partnership agreements were properly taxable to the decedent.
Other alternative issues raised in the petition have been abandoned by the petitioner.
FINDINGS OF FACT.
The decedent George L. Hannaman died on or about November 10, 1943. His estate was thereafter probated in the State of Oregon, and Harriett Hannaman, the petitioner herein, is the duly appointed, qualified, and acting representative of his estate. The individual income tax returns of George Hannaman for the year 1942 and the period January 1, 1943, to November 10, 1943, were*88 filed with the collector of internal revenue for the district of Oregon.
At the time of his marriage to Harriett Hannaman on March 3, 1917, George Hannaman was engaged in the construction business and during the years from 1917 until 1937 was associated with various construction firms operating in California, Oregon, Idaho, and Oklahoma. In 1937, George Hannaman was connected with a company engaged in the construction of a high school in Salem, Oregon, and at that time became acquainted with Edward R. Viesko. On June 1, 1937, George Hannaman and Edward Viesko formed a partnership to engage in the construction business under the name of Viesko & Hannaman, hereinafter sometimes referred to as the original partnership, in which each owned a 50 per cent interest.
The original partnership of Viesko & Hannaman was awarded a contract by the Federal Housing Authority in 1941 for the construction of houses in the stated amount of $ 280,000 in Clackamas Heights, Oregon, which contract was completed in April or May 1942. At or about the time of the completion of the Clackamas Heights job, they were requested by the Federal Housing Authority to bid on a large project near Portland, Oregon, *89 known as Project Oregon 35023.
At the time of this request, it was understood that Project Oregon 35023 would be let on two separate contracts so as to facilitate the furnishing of the required bonds. However, while George Hannaman was preparing his estimates on Project Oregon 35023, the Housing Authority decided that the project was to be consolidated into one large contract to approximate $ 2,000,000.
The original partnership of Viesko & Hannaman thereafter submitted a bid on Project Oregon 35023 in the amount of $ 1,756,000 and on May 16, 1942, was advised that it was the low bidder. On or about May 27, 1942, the contract for the construction of Project Oregon 35023 was let to the original partnership, Viesko & Hannaman, provided it could furnish a performance bond in the amount of $ 878,000, a payment bond in the amount of $ 702,400 and cash working *329 capital in the amount of $ 100,000. The two partners attempted without success to raise the financial backing necessary to obtain the required bonds and working capital. Edward Viesko rejected the suggestion of his wife, Marie, that he contact his brother, Fred Viesko, for financial assistance because the latter had previously*90 refused such a request in respect to another contract. However, Marie Viesko personally approached Fred Viesko and Alta Viesko, his wife, and explained the possibilities of the project and the difficulty the partnership was experiencing in securing financial help. Fred and Alta Viesko evidenced an interest in the proposal and after a conference with Edward Viesko and George Hannaman agreed to assist in financing the project and to solicit further assistance from J. W. Crane and his wife, Lenora Crane. The Cranes were personal friends of Fred and Alta Viesko and had considerable financial standing. Thereafter, J. W. and Lenora Crane agreed to provide working capital in the amount of $ 100,000 for a consideration of $ 20,000.
The properties of George Hannaman, Edward Viesko, and Fred and Alta Viesko were not of sufficient value to secure both the necessary bonds and working capital. Therefore, the bonding company requested the Cranes to enter into an indemnity agreement securing the bonds. J. W. Crane was under the impression that all that he had agreed to do was to advance $ 100,000 for working capital and objected to this demand, stating that he and his wife would execute an*91 indemnity agreement with the bonding company only if it were agreed that if Project Oregon 35023 resulted in a loss, the property of Edward and Marie Viesko, Fred and Alta Viesko, and George and Harriett Hannaman would first be exhausted in the satisfaction of creditors' claims. At that time, Edward and Marie Viesko, Fred and Alta Viesko, and George and Harriett Hannaman owned property situated in Oregon as tenants by the entirety.
Sometime before June 1, 1942, George Hannaman and Brazier C. Small, an attorney retained by Hannaman to represent the partnership, learned of the Cranes' refusal to sign the indemnity agreement. The formation of a partnership consisting of Edward and Marie Viesko, George and Harriett Hannaman, and Fred and Alta Viesko, hereinafter referred to as the Project Oregon 35023 partnership, was recommended to George Hannaman by Small as being in his opinion the best arrangement for meeting the requirement of the Cranes that all property of the Vieskos and the Hannamans be subject to exhaustion before the assets of the Cranes in the event that any losses were sustained in connection with Project Oregon 35023.
On June 1, 1942, a meeting was held in the offices *92 of the original Viesko & Hannaman partnership, attended by George and Harriett Hannaman, Edward and Marie Viesko, Fred and Alta Viesko, Small, *330 the Cranes, and a representative of the bonding company. At this meeting Crane made known his objection to signing the indemnity agreement with the bonding company and the one condition upon which he would sign. Small informed Crane that he had already drafted a partnership agreement between George and Harriett Hannaman, Edward and Marie Viesko, and Fred and Alta Viesko which would subject the assets of each to the payment of any partnership debts incurred in connection with the Project Oregon 35023 contract and that he also had prepared a collateral agreement between the six partners and the Cranes, providing that all of the partners' assets would be exhausted in satisfaction of losses before the Cranes would be called upon to make good on any partnership losses. The plan suggested by Small was thoroughly discussed and met with the satisfaction of all concerned.
Thereupon, at the meeting of June 1, 1942, the aforementioned partnership agreement was executed, providing in part as follows:
1. That EDWARD R. VIESKO and MARIE VIESKO, *93 his wife, and GEORGE L. HANNAMAN and HARRIETT HANNAMAN, his wife, and FRED VIESKO and ALTA VIESKO, his wife, do hereby enter into a partnership agreement for the purpose of constructing and completing Defense Housing Project Oregon 35023, located in Clackamas County, Oregon, and that said partnership shall be known as VIESKO & HANNAMAN and will terminate and cease upon the full completion of this project.
2. That EDWARD R. VIESKO and GEORGE L. HANNAMAN shall have the sole and exclusive management of the partnership business and shall devote their whole time and attention thereto or as much thereof as is necessary to fully and adequately carry out the terms of this agreement and in consideration of their services they shall with their wives in equal shares have and be entitled to all of the profits from said project excepting the first $ 20,000.
3. * * * that the said FRED VIESKO and ALTA VIESKO, his wife, shall be equally responsible with the other partners for all the liabilities and obligations of the partnership and in the financing of said partnership and for the full and complete performance of the said building project, and that they shal receive the sum of $ 20,000 from the*94 profits of said project as their full compensation for any and all services they may render to said partnership.
At the same time two additional agreements were executed between the Hannamans, the Fred Vieskos, the Edward Vieskos, and J. W. and Lenora Crane. One of these agreements provided that the Cranes were to furnish the U. S. National Bank of Salem, Oregon, with such collateral or credit as the bank deemed necessary to enable the Vieskos and the Hannamans to borrow and have available the sum of $ 100,000 as working capital for Project Oregon 35023. It further provided that in the event of any loss on that project, the assets of the Vieskos and the Hannamans would be first exhausted in satisfaction of such loss before the assets of the Cranes would be called upon for such purposes. The other agreement provided that the Cranes, in consideration for securing bank credit of $ 100,000, would be paid the *331 sum of $ 20,000 on or before the final payment by the Government after completion of Project Oregon 35023.
Thereafter, J. W. and Lenora Crane executed an indemnity agreement with the bonding company and entered into an agreement of guaranty and deposited collateral *95 with the United States National Bank securing a $ 100,000 loan to the Project Oregon 35023 partnership.
On or after June 1, 1942, the names of Fred and Alta Viesko, Marie Viesko, and Harriett Hannaman were added to the Project Oregon 35023 contract.
Prior to the execution of the partnership agreement of June 1, 1942, Edward Viesko and George Hannaman had no intention of taking either Marie Viesko or Harriett Hannaman, their wives, or Fred and Alta Viesko into the original Viesko & Hannaman partnership, which had been awarded the Project Oregon 35023 contract. No discussion of a partnership arrangement was had by the parties during the course of the negotiations with Fred and Alta Viesko and the Cranes from whom the partnership ultimately secured the necessary financial backing. It was not until the meeting of June 1, 1942, when J. W. Crane objected to signing an indemnity agreement with the bonding company that Edward Viesko, Marie Viesko, Harriet Hannaman and Fred and Alta Viesko were first notified of the attorney's suggestion that a partnership be formed and the matter was discussed and an agreement reached among the parties.
After the execution of the agreement of June 1, 1942, *96 forming the Project Oregon 35023 partnership there was no change in the management or control of the original Viesko & Hannaman partnership, which continued in existence and handled all construction jobs undertaken by Edward Viesko and George Hannaman other than Project Oregon 35023.
Harriet Hannaman did not render any services nor did she directly contribute any money to the Project Oregon 35023 partnership. The only cash withdrawn was to pay her income taxes. A large sum was invested in United States Government bonds and Mrs. Hannaman's capital account was charged with her one-fourth interest therein.
The Project Oregon 35023 partnership filed partnership returns for the taxable years 1942 and 1943 with the collector of internal revenue for the district of Oregon, reporting the following distribution of income:
| 1942 | 1943 | |
| Edward R. Viesko | $ 40,675.65 | $ 32,559.72 |
| Marie Viesko | 40,675.64 | 32,559.73 |
| G. L. Hannaman | 40,675.65 | 32,559.72 |
| Harriett Hannaman | 40,675.64 | 32,559.73 |
| Fred Viesko | 10,000.00 | |
| Alta Viesko | 10,000.00 | |
| Total net income | $ 182,702.58 | $ 130,238.90 |
*332 The books of account of the Project Oregon 35023 partnership were kept and its income tax*97 returns were prepared on the accrual basis.
A new partnership, hereinafter referred to as the new Viesko & Hannaman partnership, was formed on January 2, 1943, by and between Edward and Marie Viesko and George and Harriett Hannaman at the suggestion of the same attorney who handled the formation of the Project Oregon 35023 partnership. By January 2, 1943, Project Oregon 35023 had been substantially completed and Fred and Alta Viesko had been paid the agreed sum of $ 20,000 in return for the use of their credit and had been released as partners in the Project Oregon 35023 partnership. The purpose of forming the new Viesko & Hannaman partnership was to take advantage of these circumstances by merging the materials, machinery, and other assets of the Project Oregon 35023 partnership with the assets of the original Viesko & Hannaman partnership, thereby creating a new partnership with a much greater operating and bonding capacity. This plan was carried out and was evidenced by the partnership agreement dated January 2, 1943, which provided that the new Viesko & Hannaman partnership would assume and take over all contracting projects of the original Viesko & Hannaman partnership, but*98 the new partnership did not take over the completion of Project Oregon 35023. Each of the partners was entitled to receive one-fourth of all partnership profits. Exclusive management was vested in Edward Viesko and George Hannaman, in return for which they were to be paid reasonable salaries.
The management and operation of the new Viesko & Hannaman partnership differed in no material respect from that of the original Viesko & Hannaman partnership. Harriett Hannaman contributed no services to the new Viesko & Hannaman partnership. Withdrawals of cash were made in order to pay her Federal income taxes. Substantial sums were invested in United States Government bonds and Mrs. Hannaman's capital account was charged with 25 per cent of the cost thereof as representing her interest in the bonds. The new Viesko & Hannaman partnership was terminated by the death of George Hannaman on or about November 10, 1943.
The new Viesko & Hannaman partnership filed its partnership return for the taxable year 1943 with the collector of internal revenue for the district of Oregon disclosing the following distributions of income:
| Edward R. Viesko (salary) | $ 4,650.00 |
| Edward R. Viesko | 12,404.37 |
| Marie B. Viesko | 12,404.37 |
| George L. Hannaman (salary) | 4,650.00 |
| George L. Hannaman | 12,404.37 |
| Harriett Hannaman | 12,404.37 |
| Total income | $ 58,917.48 |
*99 *333 In her individual income tax returns for the taxable years 1942 and 1943 filed with the collector of internal revenue for the district of Oregon, Harriett Hannaman reported partnership income in the following amounts:
| 1942 | 1943 | |
| Project 35023 Partnership | $ 40,675.64 | $ 32,559.73 |
| New Viesko & Hannaman Partnership | 12,404.37 | |
| Total | $ 40,675.64 | $ 44,964.10 |
In the notice of deficiency, respondent determined that Harriett Hannaman was not a bona fide partner in either the Project Oregon 35023 partnership formed on June 1, 1942, or the new Viesko & Hannaman partnership formed on January 2, 1943, and therefore included in the gross income of the decedent for 1942 and the period from January 1 to November 10, 1943, the income distributable to Harriet Hannaman under the partnership agreements and reported by her in her income tax returns for 1942 and 1943.
Harriett Hannaman was a bona fide partner in the Project Oregon 35023 partnership formed on June 1, 1942, and in the new Viesko & Hannaman partnership formed on January 2, 1943.
OPINION.
The basic question to be resolved in determining the validity of a partnership for Federal tax purposes is whether from all*100 material facts and circumstances it appears that the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise, having agreed that the services or capital to be contributed presently by each is of such value to the partnership that the contributor should participate in the distribution of the profits or whether the partnership arrangement was merely an artificial device designed and executed primarily for the purpose of tax avoidance.
The salient facts surrounding the formation of the Project Oregon 35023 partnership may be summarized as follows: Edward Viesko and George Hannaman, partners in a construction business, were awarded a contract for Project Oregon 35023 in May 1942, and immediately found themselves in need of credit for the purpose of obtaining the required bonds and working capital. The two partners were unable to obtain the necessary credit until Marie Viesko, the wife of Edward Viesko, contacted the Fred Vieskos. Thereafter the partners obtained the promise of financial assistance from the Fred Vieskos and through them an offer from the J. W. Cranes to provide the partnership with a credit of $ 100,000*101 for working capital. It was agreed that the Fred Vieskos and the Cranes would each receive the sum of *334 $ 20,000 in consideration of the extension of credit. At this point in the negotiations Edward Viesko and George Hannaman had no intention of bringing their wives or anyone else into the original Viesko & Hannaman partnership.
There remained the problem of securing the performance and payment bonds required by the Government. The bonding company refused to furnish such bonds unless the Cranes would enter into an agreement to indemnify the bonding company against any loss the company might incur on the bonds issued in connection with Project Oregon 35023. J. W. Crane refused to sign such an indemnity agreement unless an agreement could be had that all of the property of Edward and Marie Viesko, Fred and Alta Viesko, and George and Harriett Hannaman would be subject to and exhausted in satisfaction of any losses sustained by the partnership before recourse could be had against the assets of the Cranes for such purposes.
It appears that George Hannaman and the attorney for the partnership had been advised shortly before the meeting of June 1, 1942, of J. W. Crane's intention*102 to require as a condition of signing the indemnity agreement that all the property of the partners' wives be made responsible for any partnership losses. To meet this demand the attorney suggested the formation of a partnership which would include the Fred Vieskos and the wives of George Hannaman and Edward Viesko and to that end prepared a partnership agreement. At the meeting of June 1, 1942, Crane formally advised the parties of his terms for signing the indemnity agreement. Following a full discussion of the entire matter by the Hannamans, the Edward Vieskos, the Fred Vieskos, the Cranes, a representative of the bonding company, and the attorney for the partnership, the partnership agreement previously prepared by the attorney was thereupon executed between Edward and Marie Viesko, Fred and Alta Viesko, and George and Harriett Hannaman. All of the parties to the partnership agreement, including Harriett Hannaman, signed the instrument with full knowledge of the fact that they were entering into a partnership.
We find no merit in the respondent's contention that the Project Oregon 35023 partnership was a device for tax avoidance. The facts we have recited above demonstrate*103 the existence of a very real and urgent business purpose for bringing the wives into the partnership. The bonding company required an indemnity agreement from the Cranes and J. W. Crane in turn was adamant in his demand that it be agreed that the assets of Harriett Hannaman, Marie Viesko, and the Fred Vieskos, in addition to the assets of the original partners, be first exhausted in satisfaction of any partnership losses. We cannot ignore the fact that it was not until this demand was met by bringing the wives into the partnership that the way was cleared *335 for the partnership to obtain the necessary bonds and working capital.
The fact that some arrangement other than a partnership might possibly have been made in order to subject the assets of Harriett Hannaman to any losses incurred in the operation of the Project Oregon 35023 partnership is of no consequence in the present proceeding. The partnership was formed upon the advice of a qualified attorney upon whom the parties had a clear right to rely for advice, and the attorney's suggestion that a partnership be formed was accepted by the parties in good faith as the best means of obtaining the necessary credit. In ,*104 which involved a factual situation strikingly similar to that of the instant case, we stated:
The purpose in forming the partnership was the reasonable and necessary one of securing substantial loans from the banks in order to make the current financial position of the business more secure and to protect the credit standing of the business. Although other means might have been employed to accomplish this purpose, the partners in good faith believed that the formation of the partnership was the most advantageous one for the business. The accomplishment of this purpose is a fact which may not be disregarded. ; certiorari denied, .
Respondent places great emphasis upon the testimony of Harriett Hannaman to the effect that she signed the partnership agreement on her husband's recommendation in order "to help him" and "so they could get this job, be able to build the job."
While it is true that Harriett Hannaman's reason for joining the partnership was admittedly to help her husband secure the necessary credits and otherwise meet the Government's requirements in connection*105 with the contract, the real question for our decision is whether Harriett Hannaman and the other parties to the agreement actually intended her to be a partner in the business. We are of the opinion that the parties so intended to join together as partners in the conduct of the Project Oregon 35023 partnership, for the purpose of obtaining the credit of the Cranes, and with the belief that a partnership was a necessary and appropriate means of accomplishing their purpose.
By virtue of entering the Project Oregon 35023 partnership Harriett Hannaman subjected to the risks of the business all of the property she then owned and any she might thereafter acquire so long as she remained a partner. Although her present contribution of credit may have been modest in amount, it was all that she possessed and, more important, it served to remove the last obstacle to the successful conclusion of negotiations with the Cranes.
In our judgment the Project Oregon 35023 partnership was a bona fide partnership entered into for genuine business purposes requiring the recognition of Harriett Hannaman therein as a partner for Federal tax purposes. Therefore, the respondent erred in including the profits*106 credited to Harriett Hannaman by the Project Oregon 35023 partnership *336 during the taxable years 1942 and 1943 in the income of the decedent, George Hannaman, for such years.
On January 2, 1943, a new partnership was formed which represented a merger of the assets accumulated by the Project Oregon 35023 partnership with those of the original Viesko & Hannaman partnership, the purpose of which was to create a single business enterprise with greater capacity for handling larger contracts. This consolidation was made possible with the payment of $ 20,000 to the Fred Vieskos and their elimination as partners from the Project Oregon 35023 partnership.
Having already held herein that Harriett Hannaman was a bona fide partner in the Project Oregon 35023 partnership there can be no doubt that the transfer of her interest in that partnership constituted a substantial contribution of capital to the new partnership. There is no reason to believe that she regarded the transfer of her interest to the new partnership as either a loan or gift. In our opinion the partnership agreement of January 2, 1943, was merely a new declaration by the parties of their intention to continue to conduct*107 their contracting business as partners.
Therefore, we are of the opinion that the respondent likewise erred in his determination that Harriett Hannaman was not a bona fide partner in the new Viesko & Hannaman partnership and that the profits credited to her by that partnership during the taxable year 1943 were taxable in that year to the decedent.
Decision will be entered under Rule 50.