*242 Decisions will be entered under Rule 50.
The petitioners executed formal instruments of assignment to trust of portions of their capital interests in a partnership which was engaged in the mercantile business. They named their children as beneficiaries. The then members of the partnership executed formal consents. The petitioners, as majority partners, retained all rights of management and control over the partnership and its business. Partnership profits were to be credited on the books according to the capital interests, as shown by the books. The majority partners had the right to fix salaries of the partners and to determine bonuses to be paid to the partners who were active. The profits remaining after salaries and bonuses were credited to the capital interests. The partnership agreement also provided that only such part of the profits so credited to the capital accounts as agreed to by a majority in value of the partners could be withdrawn. The only function of the trustee was to receive, hold and invest such parts of the profits as were credited to the capital accounts standing in the names of the trusts, as were distributed to him. The petitioners and the other*243 active partners did not in good faith and acting with a business purpose intend to join together with the trustee in the present conduct of the mercantile business carried on by the partnership. Held, that the respondent did not err in determining that the trustee was not a partner and that the income credited to the capital accounts standing in his name was taxable to the petitioners.
*808 The respondent has determined deficiencies in income tax against the petitioners as follows:
| Docket No. | Year | Deficiency | |
| 1945 | $ 25,874.34 | ||
| William D. West | 22734 | 1946 | 18,012.48 |
| 27803 | 1947 | 12,067.02 | |
| 1945 | 25,829.33 | ||
| Maude D. West | 22735 | 1946 | 18,012.48 |
| 27804 | 1947 | 11,710.76 | |
| William D. West and Maude D. West | 27805 | 1948 | 23,075.60 |
| 1945 | 24,354.86 | ||
| Herman O. West | 26417 | 1946 | 16,782.23 |
| 27799 | 1947 | 11,583.78 | |
| 1945 | 24,354.86 | ||
| Gladys T. West | 26418 | 1946 | 16,397.48 |
| 27800 | 1947 | 10,922.15 | |
| Herman O. West and Gladys T. West | 27801 | 1948 | 21,416.10 |
*244 *809 The only issue submitted for decision is whether the respondent erred in determining that only William D. West, Herman O. West, J. A. West, and H. L. Wiggins were bona fide members of West Brothers, a partnership, for the years 1945 through 1948, and accordingly increasing the distributive shares of the petitioners in community of the income of that partnership for the respective years.
FINDINGS OF FACT.
Part of the facts were stipulated and are found accordingly.
William D. West and Maude D. West are husband and wife and are residents of DeRidder, Louisiana. Herman O. West and Gladys T. West are husband and wife and are residents of Minden, Louisiana. For 1945, 1946, and 1947 the petitioners filed their returns on the community basis. For 1948 William D. West and Maude D. West filed a joint return. For the same year Herman O. West and Gladys T. West also filed a joint return. All of the foregoing returns were filed with the collector of internal revenue for the district of Louisiana.
William D. West and Herman O. West have a brother, J. A. West, who resides in El Dorado, Arkansas, and a brother-in-law, H. L. Wiggins, who resides in Mansfield, Louisiana.
On January *245 31, 1936, William D. West, Herman O. West, J. A. West, and H. L. Wiggins organized a partnership domiciled in, and having its principal office in DeRidder, Louisiana, under the firm name of West Brothers. The purpose of the partnership was to acquire the assets and business formerly operated by West Brothers, Incorporated, at that time in liquidation, and engage in the retail mercantile business. Unless sooner dissolved the partnership was to continue for a period of 10 years from February 1, 1936. Each partner was to devote his entire time to the partnership business and, without the consent in writing of all the other partners, was not to engage, either alone or in conjunction with another, in any other trade or business.
Contributions by the partners to the capital of the partnership were as follows:
| William D. West | $ 77,300 |
| Herman O. West | 74,700 |
| J. A. West | 33,900 |
| H. L. Wiggins | 9,800 |
| Total | $ 195,700 |
The partnership agreement provided that in all matters relating to the management of the partnership business, the decision of a majority in value of the partners should be conclusive and binding on all of the partners. The administration of the affairs of the partnership*246 *810 was specifically granted to William D. West and Herman O. West, or either of them, and they, or either of them, were given full power and authority to do all things necessary to carry on the business of the firm. The signing of all contracts, notes and other instruments in writing binding on the partnership was limited to them, or either of them, as was the signing of checks, except as to the latter they, or either of them, might designate the firm's chief bookkeeper to sign checks. None of the other partners were to have the right to act for the partnership or to bind it in any way. The partnership books of account and all letters, papers and documents belonging to the partnership were to be kept at the principal office in DeRidder. Net profits and losses of the partnership, after allowance of bonuses and stated salaries to the partners, were to be credited or debited, as the case might be, to the partners on the basis of the ratio that their respective capital accounts at the beginning of the partnership's accounting year bore to the total of the capital accounts of all partners at the beginning of that year. Prorated annual net profits when credited to the respective*247 partners might be withdrawn by them in cash. No interest was to be allowed partners on credit balances in their capital or personal accounts and no interest was to be charged on debit balances in such accounts. When approved by a majority in value of the partners, any partner might borrow from the firm an amount, or amounts totaling, not in excess of 10 per cent of his capital account at the beginning of the firm's accounting year.
The partnership agreement also provides that no partner, without the previous written consent of the other partners, should assign, pledge, or mortgage his interest in the firm. If any partner desired to sell his interest in the firm, he was required first to offer it to the other partners who were to have the right for a period of 30 days thereafter to purchase such interest at the amount representing the capital account of the selling partner at the beginning of the firm's current accounting year. If the interest were not purchased by the other partners during the prescribed period the selling partner had the liberty of selling it to any one else at the same or a higher price. However, he could not sell at a lesser price than said capital account*248 value until it had been offered to the other partners at such less price and the offer had not been accepted within 30 days thereafter.
Death of a partner was not to dissolve the partnership as to the surviving partners. Upon the death of any partner his capital account as of the date of his death was to be credited with his salary and bonus prorated from the beginning of the partnership's accounting year to the date of death and with his prorated share of net profits, or in case of net loss his capital account was to be debited with his share of the loss for the same period. One-half of the amount so ascertained, *811 with interest thereon at the rate of 6 per cent per annum from date of death, was to be paid by the surviving partners to the deceased partner's heirs or legal representatives within 1 year from the date of death. Upon such payment the surviving partners were to become the owners of one-half of the deceased partner's interest in the firm, in the proportions that they had contributed to the total thus paid to the heirs or legal representatives. As to the other one-half interest of the deceased partner, his heirs or legal representatives had the option, to be*249 exercised in writing to the surviving partners within 90 days from the date of the deceased partner's death, of succeeding to said share as silent partners as from date of death. In event such option was not exercised, payment for such one-half interest was to be made by the surviving partners to the deceased partner's heirs or legal representatives in two equal installments, with interest at 6 per cent per annum from the date of the death of the deceased partner, payable respectively 2 and 3 years from date of death. Upon such payment the surviving partners were to become the owners of such one-half interest of the deceased partner in the proportions that they had contributed to the total so paid to the heirs or legal representatives.
The bankruptcy or insolvency of a partner was not to dissolve the partnership as to the remaining partners. In event of the bankruptcy of a partner his capital account as of the date of his adjudication was to be credited with his salary and bonus prorated from the beginning of the year of insolvency to the date of adjudication and with his prorated share of net profits or in case of net loss his account was to be debited with his share of the loss. *250 The amount so ascertained was to be paid by the remaining partners to the trustee or other legal representative of the bankrupt's estate. Upon such payment the remaining partners were to become the owners of the bankrupt's interest in the partnership in the proportions that they contributed to the sum so paid to the trustee or other legal representative of the bankrupt's estate.
The name of the partnership, West Brothers, was to continue in use and no change was to be made therein as the result of the death or bankruptcy of any partner. On the death, bankruptcy, or the sale of the interest, of any partner, no allowance was to be made to him or his representatives with respect to the value of the good will of the partnership.
If at any time, as a result of losses arising from any source whatever, one-fourth of the entire partnership capital was lost, a majority in value of the partners might require that the partnership be dissolved and wound up as if the partnership had expired by lapse of time.
The partnership agreement provided for the admission of new partners to the firm by agreement of all of the active partners. Such *812 new partners might be active, silent or secret*251 partners, or partners in commendam, as determined by the active partners. The participation in profits and losses by new partners admitted as active partners was to be governed by the terms of the instant partnership agreement. New partners admitted as silent partners or partners in commendam were to be admitted under agreements that their participation should be "on a profit-sharing basis with their credit balances representing liabilities of the partnership, or on a basis that losses as to them shall be limited to their advances." Neither secret partners nor partners in commendam were to have any voice in the management or administration of the partnership business.
The partnership agreement also provided that if at any time during the life of the partnership the partners should deem it necessary or expedient to make any alteration, amendment or addition with respect thereto for the more advantageous or satisfactory management of the partnership business, they might do so by writing under their joint signatures, and that all such alterations, amendments or additions should be adhered to and have the same effect as if they had been originally embodied in and formed *252 a part of the agreement.
At the time West Brothers, Incorporated, was liquidated, some of its employees other than the brothers West and Wiggins owned small amounts of its stock. Upon formation of the partnership, such of those persons as became employees of the partnership and desired to do so, were permitted, without written agreement with respect thereto, to deposit the proceeds received from their stock with the partnership. The sums so deposited were carried on the books of the partnership as liabilities and the employees in question did not become or purport to become members of the partnership. They were allowed a return on the deposits, based on the partnership profits remaining after allowance of salaries and bonuses to the partners, and the amounts so allowed and paid to them were deducted as expenses on the partnership returns, in arriving at the shares of partnership income distributable to the partners.
The partnership engaged in, and has continued to conduct, the business of selling popular priced ladies ready-to-wear, dry goods, shoes, and notions. In 1943 it had a chain of 18 stores, 10 of which were in towns in Louisiana, and the remainder in towns in Arkansas. *253 During the years 1945 through 1948, 2 stores were added.
While the partnership business had been profitable prior to 1939, it increased considerably in that year, due to the establishment of army camps in Louisiana and Arkansas. During 1939 or 1940, William D. West, Herman O. West, and J. A. West began discussing the matter of transferring interests in the partnership to their children.
The partnership continued to operate under the above-mentioned partnership agreement without change until 1943. On January 2, *813 1943, the agreement was amended in certain particulars, among which were the following: The duration of the partnership was fixed at 30 years from February 1, 1936, instead of 10 years, as originally provided. The nature, objects, and purposes of the business were enlarged to include, among other things, the engaging in any lawful business in which a natural person may engage. The provision that each partner was to devote his entire time to the partnership business and was not to engage in any other trade or business without the written consent of all the other partners was changed to provide that each partner was to devote his entire time to the partnership business*254 and was not to engage in any other trade or business to "too great an extent" without the written consent of the other partners. The "majority partners in value" were to determine if a partner was engaging "too much" in other businesses. The provisions relating to the division of profits and losses between the partners were changed so that instead of certain stated salaries the partners were to be allowed the salaries "agreed upon by a majority in value of the partners." The provision that prorated annual net profits when credited to the respective partners might be withdrawn by them in cash was changed to provide that they might "be withdrawn in whole or in part, in cash by each partner, if agreed to by a majority in value of the partners." The provision as to the admission of new partners was amended to provide for the inclusion of "trustees, guardians, tutors and fiduciaries" as persons who might be admitted to the firm as partners by the agreement of all of the active partners.
At the end of 1942 the capital of each partner in the firm and the percentage such capital was of the total partnership capital were as follows:
| Percentage | ||
| Partner's capital | of total | |
| William D. West | $ 218,058.35 | 39.499 |
| Herman O. West | 210,725.59 | 38.171 |
| J. A. West | 95,628.07 | 17.322 |
| H. L. Wiggins | 27,647.13 | 5.008 |
| Total | $ 552,059.14 | 100 |
*255 On September 27, 1943, William D. West and Maude D. West had the following named children, who were born on the indicated dates:
| Date of birth | |
| William D. West, Jr | February 17, 1925 |
| Glen L. West | June 13, 1927 |
| June L. West | October 16, 1931 |
On the same date, Herman O. West and Gladys T. West had the following named children, who were born on the dates indicated:
| Date of birth | |
| Claude O. West | August 26, 1927 |
| Gloria A. West | October 17, 1941 |
*814 On the same date, September 27, 1943, J. A. West was married, and his wife was Ruby Leonora West. On that date he had five children, namely, J. A. West, Jr., Jacqueline West, Doris O. West, Barbara J. West, and Linda B. West, all of whom were minors at that time.
As of January 1, 1943, but actually on September 27, 1943, William D. West and Maude D. West executed an instrument designated "Act of Donation In Trust" with respect to each of their three children whereby in form an irrevocable trust was created for each child with Pleasant W. West as trustee. Each instrument recited the donation to trust of one-tenth of William D. West's 39.499 per cent interest in the partnership of West Brothers of a stated net asset value*256 of $ 218,058.35, or a 3.9499 per cent interest in the partnership of a stated net asset value of $ 21,805.84. The instruments recited that in accordance with the provisions of the partnership agreement relating to the admission of new partners, the interests thereby donated "shall be held by the TRUSTEE as a partner in commendam." On the same day Herman O. West and Gladys T. West executed similar instruments with respect to their two children whereby in form an irrevocable trust was created for each child, with Pleasant W. West as trustee. Each instrument recited the donation to trust of fifteen one-hundredths of Herman O. West's 38.171 per cent interest in the partnership of West Brothers of a stated net asset value of $ 210,725.59, or a 5.7256 per cent interest in the partnership of a stated net asset value of $ 31,608.84. These instruments also recited that in accordance with the provisions of the partnership agreement respecting the admission of new partners, the interest thereby donated "shall be held by the TRUSTEE as a partner in commendam." Each of the foregoing trust instruments recited that Pleasant W. West (a party to each instrument) "declared that he does by these *257 presents, as TRUSTEE, accept the donation made to him as TRUSTEE; that he acknowledges receipt of the property herein conveyed and accepts the Trust herein created."
Attached to each trust instrument was an affidavit made on September 27, 1943, by the other members of the partnership, wherein said members declared:
That in accordance with the Articles of Co-Partnership of WEST BROTHERS between themselves and [donor], they do by these presents consent to the Donation by [donor] to [trust for name of child] of the interest in the said [donor's] capital account in the Partnership, hereinabove donated in trust and they do by these presents take cognizance of and consent to all of the terms and provisions of said Donation.
At the same time these trusts were executed, J. A. West transferred or purported to transfer to his wife, Ruby Leonora West, a portion of his interest in the partnership, amounting to a 3.4644 per cent interest in the firm. He also executed an instrument transferring or purporting to transfer a .736185 per cent interest in the partnership to each *815 of 5 trusts for the benefit of his respective minor children. Ruby Inez Smith, sister of J. A. West, was named *258 as trustee.
Although H. L. Wiggins had children at the time the foregoing donations were made, he does not appear to have made any change in his interest in the partnership.
Subsequent to the execution of the above instruments the books of the partnership were adjusted to show the following as partners, with the indicated capital interests and percentages of the total partnership capital:
| Partner's | Percentage | |
| capital | of total | |
| William D. West | $ 152,640.83 | 27.6493 |
| Herman O. West | 147,507.91 | 26.7198 |
| J. A. West | 56,181.51 | 10.176675 |
| H. L. Wiggins | 27,647.13 | 5.008 |
| Ruby Leonora West | 19,125.61 | 3.4644 |
| Pleasant W. West, Trustee for: | ||
| William D. West, Jr | 21,805.84 | 3.9499 |
| Glen L. West | 21,805.84 | 3.9499 |
| June L. West | 21,805.84 | 3.9499 |
| Pleasant W. West, Trustee for: | ||
| Claude O. West | 31,608.84 | 5.7256 |
| Gloria A. West | 31,608.84 | 5.7256 |
| Ruby Inez Smith, Trustee for: | ||
| J. A. West, Jr | 4,064.19 | .736185 |
| Jacqueline West | 4,064.19 | .736185 |
| Doris O. West | 4,064.19 | .736185 |
| Linda Beth West | 4,064.19 | .736185 |
| Barbara J. West | 4,064.19 | .736185 |
| Total | $ 552,059.14 | 100 |
The foregoing persons*259 continued to be carried as partners on the partnership books through 1948, with capital interests constituting the same percentages of total partnership capital as shown above. No new capital was brought into the partnership for or on behalf of the above trusts or the children named as beneficiaries thereunder. The only difference in the capital arrangement of the partnership, as shown by the books, was that the capital interests of William D. West, Herman O. West, and J. A. West were reduced by the amounts represented by the gifts and the amounts of the reductions were set up as interests of the trustees.
Gift tax returns for 1943 were filed by William D. West and Herman O. West, in which they reported as gifts to trust for the benefit of their children the amounts shown in the table above. The amounts of the gifts reported were based on a book value of $ 552,059.14 for the partnership at January 1, 1943. Upon the Bureau's audit of these returns, the value of the partnership was increased to $ 730,000 to reflect good will of the partnership in addition to the book value. The *816 value of each gift reported was recomputed on the basis of a value for the partnership of $ *260 730,000 and gift taxes were paid accordingly.
During 1943 through 1948, the partnership had stores located, among other places, in the towns of DeRidder, Mansfield, and Minden, in Louisiana, and in El Dorado, Arkansas. Herman O. West lived in Minden and managed the store there. J. A. West lived in El Dorado and managed the store at that place. H. L. Wiggins lived in Mansfield and managed the store there. These three general partners discharged the functions of the store managers just as nonpartner store managers discharged those functions.
In its operations the partnership employed two store superintendents, one for Louisiana and one for Arkansas. They had supervision over the partnership stores in their respective territories and the store managers were directly responsible to them. The general partners, Herman O. West, J. A. West, and H. L. Wiggins, in their capacities as store managers, were subject to the same supervision of their respective superintendents as in the case of nonpartner store managers. The same type of investigations of, and reports on, the stores they managed were made as were made with respect to other stores in the chain. The 3 stores managed by these*261 partners were typical with respect to volume of business done and profits made, of all the stores in the chain. The authority of the superintendents over these three partners as store managers was in the ultimate subject to such controls as the three had as members of the partnership.
Each store manager had a drawing account, sometimes referred to as salary. He also received an additional amount described as bonus. His total compensation, however, was based on the earnings of the store managed by him. The partners, Herman O. West, J. A. West, and H. L. Wiggins, were paid on the same basis as other store managers, except that in 1948, each, along with William D. West, participated in an additional bonus which the four determined for themselves and which was divided among them upon an agreed basis.
In addition to the authority to administer the affairs of the partnership granted to them by the partnership agreement, William D. West and Herman O. West have also had complete control and management of the partnership at all times since its formation by reason of their ownership of combined partnership interests in excess of 50 per cent of total. William D. West was general manager*262 of the partnership and in charge of the principal office at DeRidder, with seven or eight employees, where all the books and records for the various stores were kept. He had the direction and control of the head buyer of merchandise for the chain, and of the two superintendents, who reported directly to him. In the management of the partnership affairs, he consulted with Herman O. West on some matters and on others he did not. The individual stores were operated on a cash basis and the *817 daily receipts, less current expenses for salaries of saleswomen, freight, etc., were deposited in the partnership's account at a local bank and a report made to the principal office. Checks drawn on partnership bank accounts were signed only by William D. West, Herman O. West, and the head buyer, who was formerly the bookkeeper. Although William D. West lived in DeRidder, he did not manage the partnership store there. That store had its own manager, like other stores in the chain. Since about 1938 the general partners have had annual meetings, at which William D. West has made reports to them respecting the operation of the business, and the affairs of the partnership were considered*263 generally. The management, control, and operation of the partnership business continued to be the same after the execution of the trust instruments above, as before, except for the manner in which the net profits were distributed.
For the years 1945, 1946, 1947, and 1948, the partnership filed partnership returns of income showing the net income reported thereon of $ 510,122.66 (and net long-term capital gain of $ 224), $ 430,981.55, $ 321,459.30, and $ 402,129.39, respectively, distributable as follows:
| Ordinary net income | |||
| Capital | |||
| gain | |||
| 1945 | 1946 | ||
| William D. West | $ 61.93 | $ 141,045.34 | $ 120,159.23 |
| Herman O. West | 59.85 | 136,303.75 | 116,266.49 |
| J. A. West | 22.80 | 51,913.53 | 48,474.44 |
| H. L. Wiggins | 11.22 | 25,546.95 | 28,154.63 |
| Ruby Leonora West | 7.76 | 17,672.69 | 13,418.59 |
| Pleasant W. West, Trustee, | |||
| Estate of William D. West, Jr. | |||
| Deceased Mar. 20, 1945 | 8.85 | 20,149.33 | 15,299.08 |
| Glen L West | 8.85 | 20,149.33 | 15,299.08 |
| June L. West | 8.85 | 20,149.33 | 15,299.08 |
| Pleasant W. West, Trustee, | |||
| Claude O. West | 12.82 | 29,207.58 | 22,176.84 |
| Gloria A. West | 12.82 | 29,207.58 | 22,176.84 |
| Ruby Inez Smith, Trustee, | |||
| J. A. West, Jr | 1.65 | 3,755.45 | 2,851.45 |
| Jacqueline West | 1.65 | 3,755.45 | 2,851.45 |
| Doris O. West | 1.65 | 3,755.45 | 2,851.45 |
| Linda B. West | 1.65 | 3,755.45 | 2,851.45 |
| Barbara J. West | 1.65 | 3,755.45 | 2,851.45 |
| Totals | $ 224.00 | $ 510,122.66 | $ 430,981.55 |
| Ordinary net income | ||
| 1947 | 1948 | |
| William D. West | $ 89,230.32 | $ 124,260.88 |
| Herman O. West | 86,869.33 | 117,371.83 |
| J. A. West | 36,593.19 | 51,939.30 |
| H. L. Wiggins | 20,574.55 | 24,918.88 |
| Ruby Leonora West | 10,035.14 | 9,517.00 |
| Pleasant W. West, Trustee, | ||
| Estate of William D. West, Jr. Deceased | ||
| Mar. 20, 1945 | 11,441.46 | 10,850.73 |
| Glen L West | 11,441.46 | 10,850.73 |
| June L. West | 11,441.46 | 10,850.73 |
| Pleasant W. West, Trustee, | ||
| Claude O. West | 16,585.02 | 15,728.73 |
| Gloria A. West | 16,585.02 | 15,728.73 |
| Ruby Inez Smith, Trustee, | ||
| J. A. West, Jr | 2,132.47 | 2,022.37 |
| Jacqueline West | 2,132.47 | 2,022.37 |
| Doris O. West | 2,132.47 | 2,022.37 |
| Linda B. West | 2,132.47 | 2,022.37 |
| Barbara J. West | 2,132.47 | 2,022.37 |
| Totals | $ 321,459.30 | $ 402,129.39 |
Included in the foregoing amounts shown distributable to William D. West, Herman O. West, J. A. West, and H. L. Wiggins for the respective years were the following amounts representing salary and bonus for services rendered to the partnership:
| 1945 | 1946 | |||
| Salary | Bonus | Salary | Bonus | |
| William D. West | $ 3,300 | $ 13,456.02 | $ 3,600 | $ 9,465.76 |
| Herman O. West | 2,100 | 14,656.02 | 2,400 | 10,373.24 |
| J. A. West | 2,100 | 8,044.35 | 2,400 | 6,657.34 |
| H. L. Wiggins | 2,100 | 7,375.29 | 2,400 | 6,357.25 |
| 1947 | 1948 | |||
| Salary | Bonus | Salary | Bonus | |
| William D. West | $ 3,600 | $ 5,540.13 | $ 3,600 | $ 44,705.80 |
| Herman O. West | 2,400 | 7,071.58 | 2,400 | 41,570.16 |
| J. A. West | 2,400 | 4,715.03 | 2,400 | 21,583.07 |
| H. L. Wiggins | 2,400 | 3,668.15 | 2,400 | 8,761.45 |
*818 In accordance with the partnership agreement the salary and bonus allowances were deducted from the partnership net profits before the distribution of profits, as such.
Of the total net earnings of the partnership for the years 1943 through 1948, 77.74 per cent has been distributed to the four principal partners, Ruby Leonora West, and the two trustees. The remaining 22.26 per cent has been retained by the partnership as additions to capital. The three West brothers and Wiggins determined the portion of each year's profits that were distributed. The distributions of net profits to, and the addition of undistributed net profits to the various capital accounts, have been made on the same percentage ratio.
On fiduciary income tax returns for each of the years 1945 through 1949, Pleasant W. West, as trustee, and in accordance with the three trust instruments executed by William D. West and Maude W. West, and the two*266 executed by Herman O. West and Gladys T. West, reported as trust income the portions of the partnership net income shown in the partnership returns as distributable to the respective trusts. The income tax shown on each such fiduciary return has been paid.
Pleasant W. West is an uncle of William D. West, Herman O. West, and J. A. West, and lives in DeRidder. He started them out in business and they have continued to the present time to discuss with him important problems arising in their business. He organized the City Savings Bank & Trust Company in DeRidder and was its president from 1928 to 1944. He has been, and is, engaged in the real estate business. From some undisclosed time, until about 1948, he and William D. West were the members of a partnership known as West Realty Company, which owned a real estate subdivision in Lake Charles, Louisiana. About 1948, and after all lots in the subdivision had been sold, that partnership was dissolved. They are also the partners in another real estate enterprise involving certain jointly owned cutover land. Pleasant W. West is also a member of a partnership composed of himself and two of his sons-in-law, which operates three mercantile*267 stores in Texas that sell a line of merchandise similar to that sold by West Brothers. He has attended the annual meetings of West Brothers, but his participation therein has consisted of making a talk on the betterment of the partnership business, after having been asked to do so.
Before she was married, Ruby Inez Smith worked in one of the stores of West Brothers. During the taxable years here, she was a housewife and took no part in the operation of any of the partnership stores and, so far as shown, did not otherwise participate in the conduct of the partnership business.
From about the time they reached 12 years of age, William D., Jr., and Glen, sons of William D. West, and Claude, the son of Herman O. *819 West, worked at stores of West Brothers, after school, on Saturdays, and during school vacations, William D., Jr., and Glen helping with the advertising, distributing circulars, and waiting on customers, and Claude sweeping the store and waiting on customers. Claude was paid the usual rate paid other employees doing similar work. William D., Jr., and Glen were also paid for their services and, so far as appears, at the usual rate paid other employees doing similar*268 work. Neither June, the daughter of William D. West, nor Gloria, the daughter of Herman O. West, ever rendered any service to the partnership. Since 1949, after getting out of the service and finishing school, Glen has been working full time for the partnership and is assistant manager of the store at Magnolia, Arkansas. Since graduating from college in June 1949 Claude has worked full time for the partnership, first as assistant manager of the partnership's Spring Hill store and since about the first of 1951 as assistant manager of its store at Bastrop, Louisiana. June is married and lives in Houston, Texas.
The trust instruments executed by William D. West and Maude D. West, and by Herman O. West and Gladys T. West empowered the trustee to appoint his successor, with such appointment to become effective only upon the approval thereof by the court having jurisdiction of the particular trust. In the event the trustee, without appointing his successor, ceased to be trustee, then the appointment of the successor trustee is to be by the court having jurisdiction.
The trustee was further empowered to receive, hold, manage, and reinvest the trust property and except as otherwise provided*269 was directed to reinvest the net income of the trust so that it would become part of the principal of the trust. While in the administration of the trust the trustee was given all the powers conferred on trustees generally by the law of Louisiana, he was specifically authorized and empowered, among other things: To sell at any time and for such price and on such terms and under such conditions as he sees fit, all or any part of the trust property; to lease all or any part of the trust property, whether it be property originally in trust or later acquired, on such terms and conditions as he sees fit and for periods which might extend beyond the termination of the trust; to invest and reinvest money, property rights, or credits coming into his possession as trustee as he might deem proper and suitable, without being restricted to the class of investments legal for a trustee under the law of Louisiana; to determine whether money or other property coming into his possession should be treated as principal or income, and apportion expenses or losses to principal or income as he might deem just and equitable; and to enter into partnership agreements and form corporations and contribute *270 all or part of the trust property as a part or all of the capital of such partnerships or corporations.
*820 Trust income is to be accumulated and reinvested by the trustee until the respective beneficiaries reach the age of 21 years. After that age is reached, the trustee is to pay to the beneficiary, either out of principal or out of income, or both, an amount to be determined by the trustee which is not to be less than $ 1,200 or more than $ 5,000 per annum. 2 The time or times during the year when such payment is to be made and the amount payable at each time, is to be determined by the trustee. Income from the trust cannot be anticipated, assigned, or encumbered by the beneficiary.
The trust instruments with respect to the sons provided for termination of those trusts when the sons respectively reached 27*271 years of age. The trust instruments with respect to the daughters provided for termination of those trusts at the expiration of the longest period of time permitted by the Trust Estates Act of the State of Louisiana. However, all of the trust instruments provided for an earlier termination, namely, at any time after the beneficiary reached 23 years of age, if in the opinion of the trustee the beneficiary is capable of administering the property then held by the trustee and the court having jurisdiction thereof confirms and authorizes such prior termination. Upon the termination of the respective trusts, the trustee is to deliver the trust property, in the form then existing, to the beneficiary and render a full and complete accounting.
The trust instruments provided that the trustee should maintain proper records of accounts and have an annual audit made, at the expense of the trusts, of the affairs of the trusts by public accountants and the report thereof made available to the respective beneficiaries. The trustee was not required to give bond for the proper performance of his duties and the original trustee, Pleasant W. West, was to receive as compensation for his services *272 in administering the trusts, an amount not in excess of $ 250 per annum from the respective trusts.
Pleasant W. West has maintained, in his own office, the books and records of the trusts created by William D. West and Maude D. West, and by Herman O. West and Gladys T. West. Such books and records have been audited, not by anyone employed by Pleasant W. West, but by the same firm of certified public accountants employed by West Brothers to do its audit work. This firm, when it completed its audit of West Brothers, went to his office and audited the accounts of the trusts. He has permitted that firm to audit the trust accounts because West Brothers employed the firm to do its audit work. At one time Pleasant W. West employed that firm of accountants with respect to his business affairs, but discontinued its *821 services and made other arrangements for his work. He has paid the firm of accountants from funds of the trusts for its audit of the trust accounts.
Pleasant W. West has never loaned any of the money of any of the trusts to William D. West, Herman O. West, or anyone else. A portion of the funds of each of the trusts has been invested in United States Government bonds, *273 a portion deposited in savings accounts in banks, and a portion deposited in checking accounts. In the case of the funds of the trusts for Glen and June, substantial amounts have been invested in real estate in DeRidder and Lake Charles. Before making the above investments in Government bonds, Pleasant W. West discussed the matter with William D. West and Herman O. West; and before investing the funds of the trusts for Glen and June in real estate, he discussed the matter with William D. West because he considered he should. During the taxable years 1945 through 1948, no portion of the funds of the trusts was used for the support of the children of William D. West and Herman O. West. Pleasant W. West has never taken any commissions from any of the trusts.
William D. West, Jr., lost his life in the armed services of the United States on March 20, 1945. He left a will, executed October 19, 1943, in which he named his father, William D. West, as executor, and his sister, June, and his brother, Glen, as beneficiaries of his estate. By his will he bequeathed to them, share and share alike, all of his property and interest in property, including property held in trust for him in the*274 trust created by his parents. By his will he directed that all property held for him in that trust be continued in the same trust, with the exception that June and Glen be substituted for him as beneficiary and with the further exception that the trust be continued until the expiration of the longest time permitted by the Trust Estates Act of the State of Louisiana, with the understanding, however, that the trust might terminate at any time after June or Glen reached the age of 23 years, if in the opinion of the trustee she or he should be capable of administering the property then held by the trustee, and if the court having jurisdiction of the trust confirmed and authorized such prior termination. The estate of William D. West, Jr., was administered by his father, as executor, and the property held for him in the trust at the time of his death has continued to be held in trust.
A Federal estate tax return was filed by the executor of the estate of William D. West, Jr. Included in the gross estate reported therein was an amount representing the trust properties in the trust created for him by his parents. In an audit of the return by the Bureau the value of the gross estate was*275 increased by $ 7,029.49, based on a 3.9499 per cent interest in the good will of West Brothers. Federal estate taxes were paid by the executor on this increased basis.
*822 Capital was an important income-producing factor in the business of West Brothers.
In determining the deficiencies here involved, the respondent determined that during the years 1945 through 1948, only the following named persons were bona fide partners of West Brothers for Federal income tax purposes, and that the profits of the partnership for those years were taxable to them in the following proportions:
| Percentage | |
| Partner | of profits |
| William D. West | 39.499 |
| Herman O. West | 38.171 |
| J. A. West | 17.322 |
| H. L. Wiggins | 5.008 |
William D. West, Herman O. West, J. A. West, and H. L. Wiggins did not in 1943, or at any time thereafter through 1948, in good faith and acting with a business purpose intend to join together with Pleasant W. West, trustee, as partners in the present conduct of the mercantile business carried on under the name of West Brothers.
OPINION.
We have in this case one of those family arrangements which, if given effect, would materially reduce the income tax burden on the William *276 D. West and Herman O. West profits from the operations of the West Brothers partnership, but which, for practical purposes, effected no material change in the partnership or its operations. In short, it was an arrangement whereby the petitioners through their indulgence in certain ritualistic and legalistic formalities sought to spread their own income between themselves and trusts for their children for income tax purpose without any realistic change in the partnership itself. And while it is wholly within the province of a taxpayer to so arrange his affairs within the meaning and spirit of the law that a minimum amount of tax will be required of him, the things done must have substance, if they are to be given the effect desired, and not be merely an arrangement within a family group whereunder the earning of the income actually remains where it was before. Beginning with , a steady procession of such cases has been before the courts.
It is admitted that, in so far as the partnership itself was concerned, no change in its assets or business was intended or resulted from the setting up of the trusts by William D. West*277 and Herman O. West, which are here involved, or the trusts set up by J. A. West. No new capital came into the business and petitioners' counsel, in his opening statement at the time of trial, specifically disavowed any claim of partnership on the basis of participation by the trustee or any of the *823 beneficiaries individually in the management and operation of the business. It is argued, however, that since capital was an important income-producing factor of West Brothers and petitioners William D. West and Herman O. West made formal assignments in trust of certain percentages of their capital interests, and since Pleasant W. West, as trustee, received distributions from partnership profits and held and invested the moneys so received for the benefit of the beneficiaries named in the trusts, he, as trustee, had succeeded to the ownership of the designated capital interests in the partnership, that the ratable shares of partnership income were in truth and in fact his as trustee, and that as such trustee he, and not William D. West and Herman O. West, is taxable thereon.
We are unable to see and understand the arrangement in that light. William D. West and Herman O. West*278 were, and remained, the managers of the partnership and, except in such instances as J. A. West and Wiggins acted with them, made all decisions pertinent thereto. In a realistic sense, the trustee's rights and powers were limited to such moneys as were actually distributed to him. The capital interests were and remained in and subject to the hazards of the business. While purportedly he held legal title to certain undivided capital interests, the trustee had no right of management or control of such interests.
The trustee had no say as to what portion of the partnership profits accruing to the capital interests he was supposed to own could be drawn down by him. Under the partnership agreement, the power of decision as to the distribution of partnership profits was in "a majority in value of the partners," who were, and at all times continued to be, William D. West and Herman O. West, although the evidence does show that J. A. West and Wiggins were allowed to participate, and did participate, in determining at the end of the year the portion of the year's profits which actually were distributed. At this point, a comparison of the original partnership agreement with the agreement*279 as changed preliminary to the setting up of the trusts here is, we think, not without significance. By the terms of the original partnership agreement, the partnership profits at the end of the year were to be credited to the various partnership capital accounts, as shown by the books, and when so credited, each partner was at liberty to withdraw in cash the entire amount of such profits from the partnership. Preliminary to the setting up of the trusts herein, however, that provision of the partnership agreement was changed so that thereafter the partnership profits so credited to the capital accounts could be withdrawn only to the extent "agreed to by a majority in value of the partners," and such majority in value, as noted above, continued to be in William D. West and Herman O. West. A change was also made in the partnership *824 agreement with respect to the partners' salaries so that instead of fixed salaries stated therein, the partners thereafter were to be allowed the salaries "agreed upon by a majority in value of the partners." In addition to the amounts received as "salaries," the brothers West and Wiggins were to receive bonuses, to be fixed by the "majority in*280 value of the partners," which bonuses were to be charged against the profits for the year; and in 1948 they determined an additional bonus for themselves and divided it among themselves on the basis agreed upon. The profits available for credit to the capital accounts, as shown by the books, were such as remained after salaries and bonuses to the brothers West and Wiggins had been fixed by "the majority in value of the partners" or, as actually occurred with respect to the special bonus in 1948, by the majority partners with J. A. West and Wiggins.
The arrangement here is in substance comparable to those which existed in , affirming ; ; , affirming ; and , affirmed , and we think that what the courts said in those cases indicates the correct decision in the instant case. See also ,*281 affirming a Memorandum Opinion of this Court, and , affirming a Memorandum Opinion of this Court.
Claiming that Pleasant W. West, as trustee, was a partner in commendam, under Louisiana law, the petitioners seek to avoid the impact of the above cases and the reasoning therein. Under the Revised Civil Code of Louisiana, 3 a partnership in commendam is formed *825 by a contract whereby one individual agrees to furnish another or others money or property for use in a business in return for a share in the profits "in the proportion determined by the contract," his liability for losses and expenses being limited to the amount of money or property furnished. Such a partner is somewhat comparable to a limited or special partner under the laws of other states. See . Under Article 2845 of the Louisiana Code, a partnership in commendam must be made in writing and must be recorded; otherwise the partner in commendam will be considered as a common partner and will be subject to all responsibilities toward third*282 persons that would attach to any other partner, in the business for which he made his advances. The form and substance of the contract and the requirement with respect to its registry are set forth in Article 2846, and provide that "the contract must express the amount furnished, or to be furnished, by the partner in commendam, the portion of profits he is to receive and of the expenses and losses he is to bear. It must state whether it has been received, and whether in goods, money, or how otherwise * * *. It must be signed by the parties in the presence of one or more witnesses, and shall be recorded in full by the officer authorized to record mortgages in the place where the principal business of the partnership is carried on. If it be a commercial partnership, and consists of several houses or establishments, in different parts of the State, such recording shall be made in each of such places." Commercial partnerships are defined by Article 2825 of the Louisiana Code, and include such partnerships as are formed "for the purchase of any personal property, and the sale thereof, either in the same state or changed by manufacture."
*283 In their briefs, the parties have devoted considerable space to arguments as to whether the requirements, under Louisiana law, for the setting up of a partnership in commendam were met. The respondent takes the position, first, that the trustee was not a partner in any capacity. With respect to the claim that the trustee was a partner in commendam, he points to the provision in Article 2845 of the Louisiana Code, to the effect that a contract creating such a partnership "must be in writing, and must be recorded," and to the matter which, under Article 2846, must be specifically set forth in such written contract. Calling attention to the fact that in the instant case no formal written contract containing such matter was ever reduced to writing and signed by the parties, he argues that there could have been no partnership in commendam, since the statutory prerequisites for such a partnership have not been met. Noting that in the case of a commercial partnership, which has several houses or establishments in different parts of the state, the contract must be recorded in each of *826 such places, he observes that in the instant case recording of the contract would*284 have been required in approximately 18 different places, which, however, was not done and could not have been done, there being no such written contract. Arguing to the contrary, it is the contention of the petitioners that the partnership agreement as revised in 1943, preliminary to the setting up of the trusts herein, together with the subsequent formal written assignments to trust, plus the affidavits of consent by the brothers West and Wiggins, 4 satisfied the requirements of Louisiana law both with respect to form and substance of the contract, that Pleasant W. West, as trustee did become a partner in commendam, and that their claim that the income here in question was taxable to him, as trustee, is accordingly established.
The respondent also argues that even though a partnership in commendam be assumed, the purpose of the grants*285 as testified to by the petitioners, namely, that the mercantile business was a hazardous business and by the grants made they planned to protect the interests of their several children therefrom, could be served only as to that portion of the profits actually paid over to the trustee, the capital interests and a substantial portion of the profits being left in the business and subject to its hazards; but, as previously argued, there having been no written agreement of partnership in commendam, and therefore no recording of such an agreement, the trustee, pursuant to the provisions of Article 2845 of the Louisiana Code, would, if a partner at all, have to be considered a common partner, subject to all the responsibilities toward third persons that would attach to any of the other partners, and not even the profits actually distributed to the trustee would have been removed from the hazards of the partnership business.
Whether the legal formalities governing the creation of a partnership in commendam, under Louisiana law, have been complied with, as the petitioners contend, or have not been complied with, as argued by the respondent, we find it unnecessary to decide. While *286 a partner in commendam, as in the case of a limited partner, does not normally, and possibly may not be permitted to, participate actively in the management of the business and the absence of such participation is not, of itself, a bar to the allowance of a claim of partnership, neither does the fact that the alleged partnership is denominated a limited partnership or a partnership in commendam, where the claim, as here, is based on capital participation alone, require the allowance of the partnership claim. In short, there is no more magic in the terms "limited partnership" or "partnership in commendam" than in the term "partnership" standing alone. In either instance, *827 there must be substance and reality in the arrangement. , and The parties "in good faith and acting with a business purpose" must have intended that Pleasant W. West, as trustee, should join as a partner, whether limited, in commendam, or general, "in the present conduct of the enterprise," and whether the parties really intended that Pleasant W. West should join with*287 them as a partner in the carrying on of the mercantile business of West Brothers, "is a question of fact," to be determined from the evidence in the case. . And while the claim of partnership does not automatically fail where the claim rests solely on the venturing of capital donated between members of a family, such situations do invite careful scrutiny to determine whether the parties "really and truly" intended to join together as partners in the conduct of the particular business. "Mere legal title to capital acquired by gift is alone insufficient." . For the purposes here, such changes as occurred were superficial. West Brothers, its assets and its business, were not changed. There was no intention that Pleasant W. West, trustee, should have or exercise rights of management or control over the capital interests, legal title to which were conveyed, or purportedly conveyed, to him. In so far as the partnership, its operations, and its profits were concerned, the trustee's only participation was that of receiving so much of *288 the profits as the brothers West and Wiggins should decide to distribute and pay over to him. The evidence convinces us that nothing more was intended. By the formalities indulged in, the petitioners merely provided themselves with a new backdrop for the distribution of the profits which they themselves realized from the operations of West Brothers, in such manner and at such times as they desired, just as they were at liberty to do before. From the evidence, we have concluded and found as a fact that it was not intended that in the years here involved Pleasant W. West, trustee, should, in good faith and acting with a business purpose, 5 join as a partner with the brothers West and Wiggins in the present conduct of the business of West Brothers and he did not participate as a partner in the present conduct of the business. "The dominant purpose of the revenue laws is the taxation of income to those who earn or otherwise create the right to receive it and enjoy the benefit of it when paid." .
*289 In , and , promulgated July 3, 1952, we concluded and found that the general partners did intend to join as partners with the trustees in *828 the present conduct of the enterprise. In the Sultan case, however, and after pointing out that "The Supreme Court has advised that family partnership cases are essentially factual," we said that "As such, previously decided cases are not particularly helpful." There, as here, we found our guide in the pronouncements of the Supreme Court, at page 741 of its opinion in , to the effect that the question of whether a "family partnership is real for income-tax purposes depends upon 'whether the partners really and truly intended to join together for the purpose of carrying on business and sharing in the profits or losses or both. And their intention in this respect is a question of fact * * *.'" While there are some points of similarity between the Stern and Sultan cases on the one hand and the instant case on the other, there are likewise*290 points of dissimilarity, and, after seeing and hearing the witnesses in the instant cases and after reviewing and considering their testimony and other evidence of record, we have found that the intention to join with the trustee as a partner in the present conduct of the enterprise, which was found to exist in the Stern and Sultan cases, was lacking here. See and compare , and Sall v. Smith, an unreported case.
We conclude and hold that the respondent did not err in determining that Pleasant W. West, as trustee, was not a partner in West Brothers during the taxable years involved.
While other issues were raised by the petitioners in their pleadings, only one issue was submitted for decision. We will regard the other issues as having been abandoned.
Decisions will be entered under Rule 50.
Black, J., dissenting: I respectfully dissent from the majority opinion on the authority of Commissioner v. Culbertson, 337 U.S. 733">337 U.S. 733. See also the recent decision of the Sixth Circuit in Henslee v. Whitson, 200 F. 2d 528.*291
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: Maude D. West, William D. West and Maude D. West, Herman O. West, Gladys T. West, and Herman O. West and Gladys T. West.↩
2. Glen L. West became 21 in June 1948, and Claude O. West became 21 in August of 1948. The record does not show whether in 1948 or subsequent years they received from the trust the payments specified.↩
3. Art. 2839. Partnership in Commendam is formed by a contract, by which one person or partnership agrees to furnish another person or partnership a certain amount, either in property or money, to be employed by the person or partnership to whom it is furnished, in his or their own name or firm, on condition of receiving a share in the profits, in the proportion determined by the contract, and of being liable to losses and expenses to the amount furnished and no more.
* * * *
Art. 2841. Profits and Losses. The proportion of profits to be received by the partner in commendam, may be regulated by the covenant of the parties, as may also, with respect to each other, the proportion of losses and expenses to be borne by each of the partners; but, as respects third persons, the whole sum furnished, or agreed to be furnished by such partner, is liable for the debts of the partnership.
* * * *
Art. 2845. Writing and Recording of Articles. Partnership in commendam must be made in writing, and must be recorded in the manner hereinafter directed, or otherwise the partner in commendam will be considered as a common partner in the concern, and will be subject to all the responsibilities toward third persons that would attach to any of the other partners, in the business for which he made his advance.
* * * *
Art. 2846. Form, Contents and Registry of Articles. -- The contract must express the amount furnished, or agreed to be furnished, by the partner in commendam↩, the proportion of profits he is to receive and of the expenses and losses he is to bear. It must state whether it has been received, and whether in goods, money, or how otherwise; and if not received, it must contain a stipulation to pay or deliver it. It must be signed by the parties in the presence of one or more witnesses, and shall be recorded in full by the officer authorized to record mortgages in the place where the principal business of the partnership is carried on. If it be a commercial partnership, and consists of several houses or establishments, in different parts of the State, such recording shall be made in each of such places.
4. Whether or not the trust instruments and affidavits of consent were recorded in all places where stores were located, the record does show that they were recorded at DeRidder.↩
5. On cross-examination, W. D. West testified that he didn't "know if there was any" business purpose served by the arrangement involved herein.↩