*4025 The Commissioner's determination, that two organizations were associations within the meaning of section 1 of the Revenue Act of 1918, rather than partnerships, reversed.
*878 This is a proceeding for the redetermination of deficiencies in income and profits taxes for the calendar years 1919 and 1920, in the respective amounts of $25,395.93 and $14,300.71. The petition alleges that the Commissioner has erroneously added to the income of the petitioner corporation for each of the years the net income of two partnerships, namely, the Utica Motor Co., Used Car Department, and the Utica Motor Car Co., Wholesale Department.
FINDINGS OF FACT.
The petitioner was incorporated under the laws of New York, in 1905, and has its principal office in Utica, N.Y.
On June 17, 1918, the persons hereafter named as contributors entered into an agreement to become copartners under the name of the Utica Motor Car Co., Used Car Department, to engage only in the business of buying and selling used and secondhand automobiles and trucks in the City of Utica, N.Y., for*4026 the period of three years, unless the agreement was terminated sooner, as therein provided. The agreement provided in part as follows:
II - For that end and purpose the said Francis P. Miller has contributed the sum of One hundred thirty ($130.00) Dollars, the said Edward J. Otis the sum of One hundred forty ($140.00) Dollars, the said Joseph M. Welsenbach the sum of Twenty ($20.00) Dollars, the said Fred W. Dygert the sum of Ten ($10.00) Dollars, the said Nels C. Nelson the sum of Ten ($10.00) Dollars, the said William H. Peattie the sum of Ten ($10.00) Dollars, the said Mary A. Roberts the sum of Five ($5.00) Dollars and the said Henry F. Miller the sum of Ten ($10.00) Dollars, the capital so formed to be used and employed in the conduct of said business for their mutual benefit and advantage.
* * *
IV - The parties hereto will bear, pay and discharge all the expenses and charges incurred in the conduct and management of said business and share the profits and bear the losses in the same proportion as they have contributed to the capital of the partnership.
* * *
VI - The said Francis P. Miller and Edward J. Otis shall be the general managers of the business of the partnership*4027 and shall have sole authority to incur any obligation or make any contract for the partnership, but said Miller *879 and Otis shall have power to designate any one of the members of the copartnership to sign, endorse for collection or discount any and all notes, checks or other negotiable instruments that may be required during the continuance of the partnership business.
* * *
VII - The partnership may be dissolved at any time by said Francis P. Miller and Edward J. Otis, or either of them, by giving to each of the other partners ten days' notice in writing of intention to terminate this agreement, in which event the interest of each of the parties hereto in the assets and property of said copartnership, including its good will, may be purchased by said Miller and Otis at the value of such interest as shown by the books of said copartnership, no allowance being made for good will.
This partnership duly filed in the office of the County Clerk of Oneida County, New York, on June 25, 1918, a certificate to do business under an assumed name, pursuant to the law of the State of New York.
On June 2, 1919, the persons hereafter named as contributors entered into an agreement*4028 to become copartners under the name of the Utica Motor Car Co., Wholesale Department, to engage only in the business of buying and selling Cadillac automobiles at wholesale for the period of two years and seven months, unless the agreement was terminated sooner as therein provided. The agreement provided in part as follows:
II - For that end and purpose the said Francis P. Miller has contributed the sum of Two hundred thirty ( $230) Dollars, the said Edward J. Otis the sum of Two hundred thirty ( $230) Dollars, the said Joseph N. Welsenbach the sum of Twenty ($20.00) Dollars, the said William H. Peattie the sum of Ten ($10.00) Dollars and the said Mary A. Roberts the sum of Ten ($10.00) Dollars, the capital so formed to be used and employed in the conduct of said business and for their mutual benefit and advantage.
* * *
IV - The parties hereto will bear, pay and discharge all the expenses and charges incurred in the conduct and management of said business and share the profits and bear the losses in the same proportion as they have contributed to the capital of the partnership.
* * *
VI - The said Francis P. Miller and Edward J. Otis shall be the general managers of the*4029 business of the partnership and shall have sole authority to incur any obligation or make any contract for the partnership, but said Miller and Otis shall have power to designate any one of the members of the copartnership to sign, endorse for collection or discount any and all notes, checks or other negotiable instruments that may be required during the continuance of the partnership business.
* * *
VIII - The partnership may be dissolved at any time by said Francis P. Miller and Edward J. Otis, or either of them, by giving to each of the other partners ten days notice in writing of intention to terminate this agreement, in which event the interest of each of the parties hereto in the assets and property of said copartnership, including its good will, may be purchased by said Miller and Otis at the value of such interest as shown by the books of said copartnership, no allowance being made for good will.
*880 This partnership duly filed in the office of the County Clerk of Oneida County, New York, on July 1, 1919, a certificate to do business under an assumed name, pursuant to the law of the State of New York.
The following table shows the interests of the various*4030 individuals in the three organizations on a percentage basis on the dates the partnerships were formed.
| Used car department | Corporation, June 17, 1918 | Corporation, June 2, 1919 | Wholesale department | |
| Per cent | Per cent | Per cent | Per cent | |
| Francis P. Miller | 38.8 | 42 | 44 | 46 |
| Edward J. Otis | 41.8 | 44 | 46 | 46 |
| Alice C. Miller | 2 | 2 | ||
| Joseph M. Welsenbach | 5.96 | 2 | 4 | 4 |
| Fred W. Dygert | 2.98 | 2 | ||
| Nels C. Nelson | 2.98 | 2 | ||
| Alice O. Frisby | 2 | |||
| William H. Peattie | 2.98 | 2 | 2 | 2 |
| Mary A. Roberts | 1.49 | 2 | 2 | 2 |
| Henry F. Miller | 2.98 | |||
| 100 | 100 | 100 | 100 |
Alice O. Frisby sold her stock September 16, 1918. Nels C. Nelson sold his stock August 16, 1918. Fred W. Dygert sold his stock September 3, 1918. The stock was purchased, one-third by Edward J. Otis, one-third by Francis P. Miller and one-third by Joseph M. Welsenbach. There were no other changes of stockholdings during 1919 and 1920. When Nelson and Dygert sold their stock in the Utica Motor Car Co., their original contributions to the partnership known as the Utica Motor Car Co., Used Car Department, were returned to them, but the business of this partnership was continued in just*4031 the same way as theretofore, except that these two men no longer had a share in it.
Henry F. Miller is the father of Francis P. Miller. Alice C. Miller is the wife of Francis P. Miller. Edward J. Otis was president of the Utica Motor Car Co. Francis P. Miller was treasurer of the Utica Motor Car Co. Joseph M. Welsenbach was treasurer of the Otis Motor Sales Co. The Utica Motor Car Co., the Utica Motor Car Co., Used Car Department, and the Utica Motor Car Co., Wholesale Department, were all located on the same floor of the same building, and the Utica Motor Car Co., Used Car Department, and the Utica Motor Car Co., Wholesale Department, when they were organized, took over space proviously used by the Utica Motor Car Co. for its used car and wholesale departments. The new organizations paid no rent to the corporation. The supplies of all three organizations were kept in the common storeroom, but were separately accounted for. A few employees, such as bookkeepers and supply clerks did work *881 for all three organizations and the payment of their salary was amicably allocated to the three organizations by bookkeeping entries.
Since its organization in 1905, the Utica*4032 Motor Car Co. has dealt in Cadillac automobiles. Under its contract with the Cadillac Motor Car Co., it distributed cars wholesale to subdealers in a territory roughly described as central new York and one county in Pennsylvania, and sold cars retail in Utica, N.Y., and surrounding territory not more than twenty miles therefrom.
The Utica Motor Car Co., Used Car Department, sold used cars which it purchased from Utica Motor Car Co. and Otis Motor Sales Co., the latter a closely associated company which represented the Reo factory and was housed in the other end of the same building which the Utica Motor Car Co. used.
After June 17, 1918, and particularly during the taxable years, under the name of the Utica Motor Car Co., Used Car Department, as distinguished from the corporation, a separate salesroom, a separate sales organization under a separate manager, a separate bank account, and separate books of account were maintained. Separate supplies were purchased and used in the name of the Utica Motor Car Co., Used Car Department, although they were kept in the same room as the supplies of the corporation. Business was conducted under the name of the Utica Motor Car Co., Used*4033 Car Department.
The comparative profits and losses of the Utica Motor Car Co., Used Car Department, for the years 1918 to 1923, were as follows:
| Year | Profit | Loss |
| 1918 | $762.63 | |
| 1919 | 43,370.46 | |
| 1920 | 3,548.91 | |
| 1921 | $28,092.69 | |
| 1922 | 14,273.32 | |
| 1923 | $2,774.82 |
The business of the Utica Motor Car Co., Used Car Department, was not carried on in the same manner as it had been before by the Utica Motor Car Co., petitioner, in that, beside its separate organization, the Used Car Department had a separate manager and bought used cars from Otis Motor Sales Co.
The Utica Motor Car Co., Wholesale Department, operated under a contract from the Cadillac Motor Car Co., dated January 2, 1920. The wholesale business consisted of supervising the sales of cars through subdealers in the territory outside of the 20-mile radius which comprised the retail district. It required but little capital, clerical help and supervision.
The Utica Motor Car Co., Wholesale Department, as distinguished from the Utica Motor Car Co., had a separate bank account, issued *882 checks separately, paid its bills separately and had separate books of account.
The earnings of*4034 the Utica Motor Car Co., Wholesale Department, consisted simply in the difference between the subdealer's discount and the distributor's discount, which the partnership received and for the period in question were as follows:
| 1919, profit | $20,250.02 |
| 1920, profit | 32,397.74 |
| 1921, profit | 4,379.78 |
Separate tax returns were prepared by the petitioner, Utica Motor Car Co., and by Utica Motor Car Co., Used Car Department, and Utica Motor Car Co., Wholesale Department, the two latter on partnership forms.
The parties agree that the net incomes to be attributed to the three organizations for the two years in question are as follows:
| 1919 | 1920 | |
| Utica Motor Car Co | $20,536.07 | $11,667.24 |
| Utica Motor Car Co., Used Car Department | 43,370.46 | 3,548.91 |
| Utica Motor Car Co., Wholesale Department | 20,250.02 | 32,397.74 |
| Total | 84,156.55 | 47,613.89 |
For the year 1919, the Commissioner determined that the petitioner's net income was $84,156.55 and that for the year 1920, it was $47,613.89.
OPINION.
MURDOCK: The Commissioner denies that the two alleged partnerships were partnerships and contends that they were associations, within the meaning of section*4035 1 of the Revenue Act of 1918, whose income he properly consolidated with the income of the corporation. We can not be certain of his reason for his action. He seems to deny the existence of the alleged partnerships, but it may be possible, though he has never so stated, that he merely denies that the partnerships are taxable as such under the Revenue Act and claims, on the contrary, that even though they are partnerships in New York, still they are taxable as associations on the authority of , and .
Two partnerships were undoubtedly formed, one on June 17, 1918, known as the Utica Motor Car Co., Used Car Department, and one on June 2, 1919, known as the Utica Motor Car Co., Wholesale Department.
The stock of the corporation was not owned by the same individuals in the same proportions as were the original interests in the partnerships. *883 In addition, Henry F. Miller owned no stock in the corporation, but was a partner in the Utica Motor Car Co., Used Car Department, while Alice C. Miller owned stock, but was not a partner in either partnership. Alice*4036 O. Frisby, at one time a stockholder, was never a partner.
The Utica Motor Car Co., Wholesale Department, continued its existence without any change until the close of the taxable years before us. The Commissioner does not raise the question that even if it did exist it had no contract with the Cadillac Motor Car Co. until 1920, and therefore could not have earned any income in 1919. On the contrary, he concedes that certain net income should be attributed for each year to the organization known as the Utica Motor Car Co., Wholesale Department.
The original contributions of two of the partners in the Utica Motor Car Co., Used Car Department, were returned to them in 1918, shortly after the formation of the partnership, and the two men withdrew therefrom. It will be noted that this partnership was to continue for a period of three years, unless the agreement was terminated sooner, as therein provided. The agreement made no provision for such a withdrawal as actually took place. It is not necessary to decide whether or not this worked a dissolution of the partnership under the New York law. The evidence indicates that after these two men withdrew, the remaining members of*4037 the former partnership continued the business without any change except that the two who retired, of course, had no interest in the business thereafter. The remaining individuals acted at all times as if they were partners.
From the evidence we are convinced that they intended to carry on the business as partners and that there was, in fact, a partnership during both of the taxable years, whether, under the law of New York State, it was the old partnership continuing, or a new partnership created by the conduct of the parties taking the place of the old. Here again the Commissioner concedes that a certain net income for each year should be attributed to the organization known as the Utica Motor Car Co., Used Car Department.
The evidence indicates that these organizations were ordinary partnerships which did not more nearly resemble in form and effectiveness any other kind of organization, such as an association, included under section 1 of the Revenue Act of 1918, within the meaning of the term "corporation." Our decision must therefore be for the petitioner.
Judgment will be entered in accordance with the foregoing opinion on notice of 15 days, under Rule 50.