*237 Decision will be entered under Rule 50.
For 25 years prior to 1942 petitioner operated his own business of selling railway parts and supplies. He, his wife, and his adult son executed a written partnership agreement, to be effective January 1, 1942. Held, petitioner's adult son was a bona fide partner because he performed vital additional services during 1942 and 1943 and his share of partnership net income is not taxable to petitioner; held, further, that petitioner is not taxable on the share of partnership profits allocated to his wife in proportion to their respective capital contributions after deducting the reasonable value of petitioner's services in the taxable years.
*505 Respondent determined a deficiency in petitioner's 1943 income tax in the amount of $ 4,139.13. The deficiency, based in part on adjustments to 1942 income, was computed under the forgiveness features of the Current Tax Payment Act of 1943. Because certain minor adjustments by respondent are not in issue, the sole remaining question is whether a family partnership*238 consisting of petitioner, his wife, and his son, is valid for Federal tax purposes.
FINDINGS OF FACT.
Petitioner is an individual, residing at Kenilworth, Illinois, with an office in Chicago, Illinois. In 1930 he married Lalah A. Jennings, hereinafter referred to as the wife. By a former marriage petitioner had a son, David L. Jennings, Jr., hereinafter referred to as the son, who was born on February 22, 1920. The returns for 1942 and 1943 were filed with the collector of internal revenue for the first district of Illinois.
*506 For ten years prior to 1917 petitioner was employed as a salesman by Johns-Manville Co., in its railroad supply department, railway division. During this tenure of employment petitioner called upon the purchasing agents and other officials of the Pullman Co. and various railroads. In the course of his selling experience he became well acquainted with these railway representatives. In 1917 petitioner went into business for himself. Soon thereafter he personally secured an account with the Pullman Co. whereby he provided electrical repair parts conforming to drawings and samples submitted by the manufacturer. The acquisition of this account by *239 petitioner was largely attributable to the retention of the business friendships developed earlier with the key purchasing officials of Pullman Co.
In 1934 one Kleinhausen, an engineer and former employee of Pullman Co., entered the employ of petitioner. For approximately two and one-half years he redesigned air-conditioning units then in general use on the railroads. The newly designed units consisted of gear boxes, mounted underneath the body of each railway car, which are connected to pulleys on the truck axles by one, two, three or four-belt drives. The mechanism is so geared in ratio that propeller shafts connected with generators of electricity are turned at the proper speeds in order to supply current to the lighting and ventilating or air-conditioning equipment inside the car. The units and replacement parts were manufactured by the Kendall Corporation factory located in Milwaukee, Wisconsin.
Through petitioner's successful salesmanship the air-conditioning unit was specified as standard equipment on Pullman cars and other rolling stock of several railroads, including the Southern Pacific Co. and Union Pacific Railroad Co. In addition, prior to 1942 petitioner acquired*240 numerous accounts for the sale of air-conditioning equipment repair parts, electrical apparatus, and other mechanical devices, including a specially designed lightweight pulley known as the "Jennings Demountable Rim."
Kleinhausen made engineering changes in the drive units from time to time and has personally handled a substantial portion of the sales thereof to the Pullman Co. and its successors since 1934. From 1942 to 1945, Kleinhausen was also employed by Ebaloy Foundries in Rockford, Illinois. Except for week end trips to Chicago and emergency inspections in the railroad yards, Kleinhausen did not work for petitioner during several months of 1942 and part of 1943. Late in 1943 and thereafter he divided his time between the two jobs, spending two or three afternoons a week either in Chicago, where he continued to attend to the Pullman accounts and numerous engineering problems, or traveling for the business.
With respect to the business operating procedure, petitioner and *507 Kleinhausen traveled extensively among the railroad yards and offices located in St. Louis, Kansas City, Houston, New Orleans, and other cities. Through lavish entertainment, quotation of attractive*241 prices and follow-up advertising, they endeavored to have their products specified as standard equipment by the railway officials. Except for occasional emergency telephone calls requesting replacement parts, practically all orders were received at the office by mail. Petitioner purchased and stored an inventory of drive units and various machine parts at the Kendall factory, the year end totals of which varied from $ 8,342.48 to $ 23,925.53 over a period of 10 years. Orders were received at petitioner's office, processed, and in turn relayed to Kendall, who made delivery from the inventory on hand. Billings were then rendered by petitioner. Pursuant to periodic orders from petitioner, depleted inventory items were replenished by the Kendall Corporation, which duly billed petitioner for the additional stock.
During the period of Kleinhausen's employment, including the taxable years, petitioner paid him a 10 per cent commission on all business from the Pullman Co. and its successors, plus a year end bonus. In addition petitioner paid the 10 per cent commission on sales procured by part time sales representatives located in Baltimore, St. Paul, and San Francisco.
In view of the*242 fact that petitioner was approaching the age of 60, he became concerned in 1941 about perpetuation of his business and consulted his attorney and accountant about the matter. He and his counsel concluded that the conversion of the business to partnership form would best protect his immediate family and would enable his son eventually to take over the business. Accordingly, on December 31, 1941, petitioner, his wife, and his son executed a partnership agreement for the conduct of a railroad supply business under the name of "D. L. Jennings & Company," to commence January 1, 1942. The instrument provided for partnership interests of 50 per cent for petitioner, 25 per cent for his wife, and 25 per cent for his son. Capital investments totaling $ 15,000 were to be payable as follows:
5. The capital of the partnership shall be the sum of Fifteen Thousand Dollars ($ 15,000.00) to be contributed by the partners in the share in which they are hereinbefore declared to be entitled to the capital and property of the partnership excepting as to David L. Jennings, Jr., the son of David L. Jennings. Each partner either has or shall forthwith pay into the said partnership, either directly or*243 to a bank to the credit of said partnership, his aforesaid share of the capital, that is to say, the party of the first part the sum of $ 7,500.00; the party of the second part $ 3,750.00 and for and in behalf of the party of the third part consideration shall be $ 1.00 and the love and affection afforded by the said son, David L. Jennings, Jr., to his father, David L. Jennings. By reason of said love and affection party of the first part agrees to advance for and in behalf of the said party of the third part the sum of $ 3,749.00.
Except for such funds as might be placed in an emergency reserve *508 fund from time to time, net profits were to be distributable among the partners in the above proportions. Provision was made for separate drawing accounts out of which specified amounts could be periodically withdrawn. Paragraph 3 of the agreement specifically provided that "The death or retirement of any partner shall not dissolve the partnership as to the other partners."
Balance sheet entries showing the effect of the change from the sole proprietorship to the partnership form were as follows:
| 12/31/41 | 1/1/42 | ||
| ASSETS | |||
| Current assets: | |||
| Cash -- First Nat. Bank | $ 16,276.25 | $ 16,276.25 | |
| Cash -- petty | 50.00 | 50.00 | |
| Accounts receivable | 6,910.35 | 6,910.35 | |
| Advances | 239.67 | 239.67 | |
| Inventory | 10,084.40 | 10,084.40 | |
| Lalah A. Jennings | 3,750.00 | ||
| Total current assets | 33,560.67 | 37,310.67 | |
| Fixed assets: | |||
| Furniture and fixtures, less depreciation | 343.01 | 343.01 | |
| Patterns and dyes, less depreciation | 1,665.17 | 1,665.17 | |
| Total fixed assets | 2,008.18 | 2,008.18 | |
| Total assets | 35,568.85 | 39,318.85 | |
| LIABILITIES | |||
| Current liabilities: | |||
| Accounts payable | 968.12 | 968.12 | |
| Tax accruals (summarized) | 2,284.09 | 2,284.09 | |
| Total current liabilities | 3,252.21 | 3,252.21 | |
| D. L. Jennings | 21,066.64 | ||
| Capital accounts: | |||
| D. L. Jennings (summarized) | * 32,316.64 | 7,500.00 | |
| Lalah A. Jennings | 3,750.00 | ||
| David L. Jennings, Jr | 3,750.00 | ||
| Total net worth | |||
| Total liabilities and net worth | 35,568.85 | 39,318.85 |
Petitioner's wife invested $ 3,750 of her own funds in the enterprise, none of which was ever received from petitioner. She was neither assigned nor did she ever perform any duties or services for the partnership business. The balance of the capital investment in the amount of $ 11,250 was contributed by petitioner, of which $ 3,750 was advanced on behalf of his son. (The son has not repaid this money to date.)
In 1941 petitioner became a member of a Chicago syndicate which was organized for the purpose of acquiring oil interests. In order to make investments in oil properties in Louisiana and Texas in that year, petitioner withdrew some money from his business. During 1942 he withdrew considerable funds from the partnership, including $ 21,066.64 which was carried on the balance sheet of January 1, 1942, as a liability. Some of this money was used for additional investment in oil ventures. Under petitioner's advice and guidance, his wife invested money in the same oil interests, using profits of the business which she withdrew from year to year.
*509 Petitioner's son attended Culver Military Academy for*245 two years, after which he completed one year of general college training at Lake Forest Academy. Beginning in 1935, the son worked in his father's office during the summer vacations between school terms, performing miscellaneous clerical duties. Whereas petitioner wanted his son to continue with his college education, the latter preferred to enter and learn the business. Accordingly, in 1939 the son became a full time employee. He learned to type, made the book entries of incoming orders, and handled incoming and outgoing mail. In 1940 he continued the general office duties and accompanied petitioner to the local railroad offices in order to meet the various purchasing agents. In 1941 the son spent considerable time in the office, but extended his business contacts with the railway officials and visited the factory in Milwaukee and local railroad yards and shops to gain a working knowledge of the products sold by the business.
On February 1, 1942, the son entered the military service, from which he was honorably discharged in September 1942. He returned to work, bought a home for his family, and has devoted all his time to "D. L. Jennings & Company" to date. After his discharge, *246 the son made service calls to local railroad shops, maintained the office accounts, and assisted in the entertainment of local buyers. Later, when a girl was employed as a stenographer and bookkeeper, the son prepared purchasing contracts, maintained the inventory records, supervised the office in general, and handled the accounts of the Santa Fe Railroad, the Illinois Central System, and Northwestern Railway. He was authorized to sign checks.
During the taxable years the son independently acquired additional business for the partnership in the nature of flash light, electric lantern, and electrical supply accounts. Shipments of these items were made from the manufacturer's stock, commissions being paid to "D. L. Jennings & Company" on each order. The son has continued to deal personally with the manufacturing companies and the railroads concerning these accounts. In 1943 petitioner did considerable traveling in connection with his oil venture. In subsequent years he has spent approximately one-third of his time on these interests.
The business activity of D. L. Jennings & Co. for the years 1938 to 1944, inclusive, is partially set forth below:
| Year | Gross sales | Commission | Travel | Entertainment | Net income |
| expense | expense | expense | |||
| 1938 | $ 99,105.37 | $ 2,393.63 | $ 1,990.95 | $ 5,284.47 | $ 13,029.89 |
| 1939 | 153,608.77 | 4,273.88 | 2,161.69 | 12,511.17 | 19,970.79 |
| 1940 | 145,315.49 | 5,476.53 | 4,611.18 | 11,588.62 | 20,596.68 |
| 1941 | 237,815.89 | 7,602.25 | 5,817.33 | 10,499.80 | 28,195.95 |
| 1942 | 210,770.18 | 3,019.12 | 5,361.21 | 8,736.00 | 29,730.91 |
| 1943 | 183,459.15 | 2,496.60 | 3,462.82 | 8,679.34 | 31,840.33 |
| 1944 | 308,956.58 | 3,729.23 | 2,678.80 | 11,288.50 | 51,139.58 |
*247 *510 The following table of annual balance sheet entries shows that the bulk of the business assets comprised cash on hand, or in the bank, and inventory.
| Date | Cash | Inventory | Total assets |
| Jan. 1, 1942 | $ 16,276.25 | $ 10,084.40 | $ 39,318.85 |
| Dec. 31, 1942 | 20,507.21 | 13,886.72 | 40,370.03 |
| Dec. 31, 1943 | 31,205.14 | 11,307.41 | 53,746.36 |
| Dec. 31, 1944 | 45,930.96 | 17,949.36 | 70,324.56 |
| Dec. 31, 1945 | 53,504.65 | 17,642.34 | 80,086.63 |
| Dec. 31, 1946 | 44,177.38 | 23,925.53 | 80,630.71 |
The success of the business was reflected in the personal and capital accounts of petitioner, his wife, and his son as follows: *511
| David L. Jennings | ||||
| Year | Net profit | |||
| Share of | Year end | |||
| profits | Withdrawals | capital account | ||
| 1 $ 7,500.00 | ||||
| 1942 | $ 29,730.90 | $ 14,865.45 | $ 4,013.42 | 18,352.03 |
| 1943 | 31,840.34 | 15,920.17 | 5,601.36 | 28,670.84 |
| 1944 | 51,139.58 | 25,569.79 | 20,290.22 | 33,950.41 |
| 1945 | 83,073.36 | 41,536.68 | 30,575.86 | 44,911.23 |
| 1946 | 27,658.32 | 13,829.16 | 17,158.91 | 41,581.48 |
| Total | 223,442.50 | 111,721.25 | 77,639.77 | 2 34,081.48 |
| David L. Jennings, Jr. | ||||
| Year | Net profit | |||
| Share of | Year end | |||
| profits | Withdrawals | capital account | ||
| 1 $ 3,750.00 | ||||
| 1942 | $ 29,730.90 | $ 7,432.73 | $ 4,866.04 | 6,316.69 |
| 1943 | 31,840.34 | 7,960.08 | 5,154.70 | 9,122.07 |
| 1944 | 51,139.58 | 12,784.90 | 11,965.88 | 9,941.09 |
| 1945 | 83,073.36 | 20,768.34 | 16,421.56 | 14,287.87 |
| 1946 | 27,658.32 | 6,914.58 | 13,167.49 | 8,034.96 |
| Total | 223,442.50 | 55,860.63 | 51,575.67 | 2 4,284.96 |
| Lalah A. Jennings | ||||
| Year | Net profit | |||
| Share of | Year end | |||
| profits | Withdrawals | capital account | ||
| 1 $ 3,750.00 | ||||
| 1942 | $ 29,730.90 | $ 7,432.73 | $ 600.00 | 10,582.73 |
| 1943 | 31,840.34 | 7,960.08 | 6,591.63 | 11,951.18 |
| 1944 | 51,139.58 | 12,784.89 | 9,992.91 | 14,743.16 |
| 1945 | 83,073.36 | 20,768.34 | 18,001.58 | 17,509.92 |
| 1946 | 27,658.32 | 6,914.58 | 4,988.34 | 19,436.16 |
| Total | 223,442.50 | 55,860.62 | 40,174.46 | 2 15,686.16 |
*512 Partnership income tax returns, Form 1065, were filed for both 1942 and 1943. In his individual income tax returns duly filed for the taxable years 1942 and 1943, petitioner reported as income one-half of the ordinary net income of the partnership for those years, as stated in schedule J of the partnership returns. In determining the deficiency, respondent held all the net income of "David L. Jennings & Company" in 1942 and 1943, less one-quarter thereof allowed in each year to the son for services rendered, to be taxable to petitioner.
The reasonable value of petitioner's services was $ 15,000 for each of the two taxable years here involved. *249 Petitioner's son contributed vital additional services to the business in 1942 and 1943 as a bona fide partner. Petitioner's wife contributed capital originating with her to the partnership.
OPINION.
Petitioner contends that the partnership, consisting of himself, his wife, and his son, is valid for income tax purposes because it meets the tests established in the now familiar cases of , and . The Supreme Court stated in the Tower case that a family partnership is entitled to recognition tax-wise if each member "invests capital originating with her [or him] or substantially contributes to the control and management of the business, or otherwise performs vital additional services, or does all of these things * * *." Respondent argues that an effort to reduce petitioner's income taxes, rather than a bona fide business purpose, prompted the conduct of business in partnership form, and, because the earnings were fully attributable to the personal services of petitioner, they should be taxed to him.
Petitioner urges that his son was a genuine*250 partner because of substantial services performed during the taxable years. He makes no serious contention with respect to the contribution of independent capital or participation in the management of the business.
We think the recognition of the son as a partner is clearly warranted. There is more substance behind his entry into the partnership than a mere plan to effect tax savings through the reallocation of family income. Prior to 1942, petitioner had spent about 25 years supplying railway repair parts and had succeeded in developing a thriving business. At the early age of 15 years his son began working in the office. After one year of general college training he expressed a desire to enter the business, left school, and became a full time employee in 1939, when only 19 years of age. Petitioner wanted his son to share in the business and eventually take full charge, and to that end conducted an extended training program over several *513 years. From 1939 to 1941 the son devoted his full time and energy to his work, under the direction of petitioner, learning to type, making book entries, handling the mail, gaining technical knowledge of the mechanical devices on sale, *251 and meeting local railroad purchasing agents. Petitioner's advance in years and his newly acquired interest in oil ventures culminated in a written partnership agreement effective January 1, 1942. It is difficult to conceive a more natural motive for the transfer of a one-fourth interest to the son at this time.
Moreover, the son's status as a partner is supported by ample proof of substantial services in the taxable years. He handled the office records alone until a competent bookkeeper was hired, after which he supervised the general office operation. He was also authorized to sign checks without the counter-signature of the petitioner. This relief from the pressure of burdensome though necessary paper work enabled the petitioner to travel on behalf of the business and his other independent interests. Furthermore, in addition to handling some of the smaller railroad accounts for inventoried replacement parts, the son on his own initiative secured new accounts on other equipment items.
Respondent has seen fit to allow one-fourth of the net income for 1942 and 1943 as compensation for the son's services in those years, even though he was in the military service for 7 1/2 months*252 in 1942. It seems to us that this takes much of the force from his argument that these same services are "of an inconsequential nature."
On the facts presented, we conclude that petitioner's adult son performed vital additional services for the business in 1942 and 1943 and therefore was entitled to one-fourth of the partnership net income as a bona fide partner.
With respect to petitioner's wife, no contention is made nor any evidence offered of her participation in the management of the business affairs or the performance of vital additional services. Petitioner seeks to establish her status as a valid partner solely by virtue of the contribution of independent capital.
The written agreement provided for partnership capital totaling $ 15,000, of which $ 3,750 was to be contributed by petitioner's wife for a 25 per cent interest in the business. This amount, consisting of her own money, acquired from a source other than her husband, was duly invested at the inception of the new business arrangement.
However, the nature of the enterprise herein is such that personal services rather than capital are the primary factor in the production of income. In essence, the business consists*253 of a specialized merchandising trade, in connection with which an inventory, comprised of specially designed railway supply parts, is maintained. This stock of goods is relatively small in relation to gross sales, but is subject to a *514 rapid turnover. The success of the business has been largely attributable to the confidence and friendship of key railway officials established by petitioner over a period of years, through wide travel, much entertainment, and diligent selling efforts.
The facts of this proceeding are similar in many respects to those we considered in . In each case it was necessary to decide whether a wife was in partnership with her husband for Federal tax purposes. In both cases the wives made no substantial contributions to the management and control of the enterprise, nor otherwise performed vital additional services. In both cases, however, they did invest approximately one-fourth of the contributed capital, using their own personal funds. Moreover, the annual income of each business was primarily due to personal efforts and services rather than the use of capital.
In these circumstances, *254 we are unable to say that the agreement between petitioner and his wife can conclusively fix their respective tax liabilities any more so than in the Canfield case, supra. Although the partnership agreement herein made no provision for salaries of the family members, petitioner's counsel concedes that an allowance of compensation for services rendered by petitioner and his son should be made before division of the remaining net profits. Despite this concession, petitioner has offered no evidence bearing directly on the amount of reasonable compensation. Thus, we are left to determine the remuneration for services as best we can from the evidence of record.
We have found that petitioner is entitled to $ 15,000 as compensation for his services in each of the years 1942 and 1943. We recognize the fact that some of the business accounts were attributable to petitioner's son and that some of the business originated with his salesmen, to whom a commission of 10 per cent was paid on sales made by them. Morever, some of the business came as a result of advertising and other intangible factors. The fact remains, however, that petitioner was the directing head of the business *255 during the taxable years and a large portion of sales was attributable to his efforts and solicitation, his son being absent during part of 1942 in the military service and his engineering employee likewise being away. In short, the burden of securing business was largely dependent on petitioner's own efforts in the taxable years.
We have already concluded that the vital services rendered by petitioner's son, coupled with the respondent's allowance of compensation for these services, justify a holding that petitioner's son is entitled to one-fourth of the partnership net income earned in 1942 and 1943. In view of these facts, we think that his shares of income, $ 7,432.73 in 1942, and $ 7,960.08 in 1943, may be taken as compensation *515 for services rendered and his distributive share of net profits as a partner.
It follows that the net profits remaining after the allowance of petitioner's remuneration for services and his son's share of net income should be divided between petitioner and his wife in a ratio of 2 to 1, which reflects their relative contributions of business capital. Consequently, we hold that the compensation for petitioner's services, as determined above, *256 and his distributive share of net profits, to be calculated in a recomputation, are taxable to him in the years here involved.
Decision will be entered under Rule 50.