*62 Decision will be entered for the respondent.
1. In an earlier proceeding between the parties hereto involving the same partnership agreement and an income tax deficiency determined against petitioner for the period July 1 to December 31, 1937, the Board of Tax Appeals held in an unreported Memorandum Findings of Fact and Opinion that the partnership here contended for by petitioner was valid and entered its decision on May 21, 1941, in accordance with such holding. That decision was not appealed and became final. Petitioner contends that such decision is res judicata of the question here involved and operates as collateral estoppel against the instant proceeding. Since the entry of that decision the Supreme Court in the Tower (327 U.S. 280">327 U.S. 280), Lusthaus (327 U.S. 293">327 U.S. 293), and Culbertson (337 U.S. 733">337 U.S. 733) cases has handed down decisions outlining the scope of the pertinent evidence to be considered in resolving the question of the validity of a partnership. Such Supreme Court decisions changed the legal concept, theretofore existing, of the facts essential for the determination of what constitutes*63 a valid family partnership and necessitated a broadening of the scope of inquiry in ascertaining whether or not such facts exist in a given case. Held, such change of concept by the Supreme Court decisions cited operated as a change of the law or concept of the law upon which the decision in the prior proceeding between the parties hereto was based and therefore such prior decision does not operate as collateral estoppel against the instant proceeding. Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591.
2. Held, that the facts in the instant proceeding negative the contention of petitioner that he and his daughters in good faith and acting with a business purpose joined together as partners in the conduct of the business enterprise here involved and that accordingly no valid partnership existed in the years here involved between petitioner and his three daughters in respect of such enterprise.
*1053 This proceeding*64 involves deficiencies in income tax for the calendar years 1944 and 1945 in the respective amounts of $ 24,821.01 and $ 23,839.04. The issues presented are:
1. Did respondent err in determining that petitioner's three daughters were not bona fide partners in the Joe Lynch business for Federal income tax purposes for the years 1944 and 1945 and that the entire net income of the business for those years was includible in petitioner's income?
2. Is the doctrine of res judicata as collateral estoppel applicable to this proceeding?
FINDINGS OF FACT.
All facts which have been stipulated herein are found as facts and are incorporated herein by this reference.
Petitioner Joe Lynch filed his Federal individual income tax returns for the taxable years with the collector of internal revenue for the district of Wisconsin.
Petitioner, an individual residing in Milwaukee, Wisconsin, has been engaged in business in various cities in that state as a retail *1054 merchant of clothing, principally men's, for approximately 44 years. He is one of the leading merchants of Milwaukee.
Petitioner's wife assisted him in establishing his business. For a certain period, she acted as his secretary. *65 For a 2- or 3-year period when petitioner's business had a women's department, she did selling in that department, regularly working 7 hours a day.
In 1937 petitioner's daughter Marjorie was 26 years of age. During that year and until her marriage to Thomas O'Shaughnessy in June 1940 she was employed as an art instructor and lived away from home except during vacation periods. Following her marriage, she lived in Buffalo and Niagara, New York, and Cranford, New Jersey. After her marriage she returned occasionally to Milwaukee for visits. Her husband is employed by a large industrial concern. She has two children.
In 1937 petitioner's daughter Helenjane was 20 years old. She had been attending the University of Minnesota. In the fall of 1937 she enrolled at the National College of Education, Evanston, Illinois, graduating in February 1938. In her college career, she majored in the teaching of pre-kindergarten subjects. For approximately the next 2 years she was employed as a school teacher in Lake Forest, Illinois. In August 1940 she married Robert Riordan and lived in Freeport, Illinois, until the end of 1941. Thereafter she lived in Milwaukee, Wisconsin, until the fall *66 of 1943. She lived in Washington , D. C., late in 1943; in Miami, Florida, for 3 months early in 1944; in New Orleans, Louisiana, from March 1944 to March 1945; in Detroit, Michigan, from April 1945 to the fall of 1945 and thereafter in Milwaukee. Her husband was employed by the Federal Bureau of Investigation and she returned to Milwaukee on vacations and when he was transferred until he found a home at his new post of duty. She has one child.
In 1937 petitioner's daughter Ruth was 18 years old. She had been attending the University of Minnesota, at Minneapolis, Minnesota. In the fall of 1937 she enrolled at Northwestern University, Evanston, Illinois, where she completed two semesters. From the summer of 1938 to March 1939 she attended college in France, returning home because of the outbreak of war. On her return, she enrolled in a business school in Milwaukee, Wisconsin. In the fall of 1939 she reentered Northwestern University, completing one semester. In February 1940 she enrolled at the University of Illinois, Champaign, Illinois, graduating from that school in June 1941. She majored in French during her college career. After her graduation she worked in Champaign*67 and attended business school there until her marriage on June 4, 1942, to John Lawler, who received a Ph. D. degree in chemistry in that year from the University of Illinois. *1055 Since that time she has lived in Westfield, New Jersey. Her husband is employed as a chemist. She has two children.
Net profits of petitioner's business for the 5-year period prior to 1937 were between $ 4,000 and $ 6,000, annually. Net profit of the business for the period from January 1, 1937, to June 30, 1937, was $ 9,800.13, consisting of petitioner's salary of $ 3,750 and remaining net profit of $ 6,050.13.
As of July 1, 1937, petitioner's daughters owned no property. None of them had a source of income, except Marjorie, who used her income as an art instructor for herself.
During 1937 petitioner furnished the support, maintenance, and education of Helenjane, Ruth, and his son, Joe, Jr. He continued to support his son until the latter entered Annapolis in 1942.
In July 1937 petitioner's wife was the owner of a considerable block of stock in a very successful corporation known as the Milwaukee Sanatorium, from which she received dividends.
In 1937 petitioner had a number of conferences with*68 his attorney concerning a purported division of his retail clothing business between himself, his three daughters, and his son, Joe, Jr. His attorney told him that his purpose could be accomplished through the formation of a partnership and advised petitioner that a partnership would reduce income tax. The attorney knew that two of petitioner's daughters were then minors. The attorney recommended against inclusion of petitioner's son, who was then 12 years old, as a partner, stating that in view of the son's age, the partnership might be attacked. Petitioner hoped, however, that his son would succeed him in the business and wanted a provision in the proposed partnership agreement giving his son an option to purchase the interests of his daughters. Petitioner did not intend to have his daughters enter his business because they could not run a retail clothing store and because he believed they would marry or have independent careers based on their educations and abilities. Petitioner's daughters did not participate in the conferences petitioner had with his attorney.
At this time petitioner also discussed with Hart, Schaffner & Marx, his principal supplier of merchandise, and *69 his banker the formation of a purported partnership in the Joe Lynch business. At the suggestion of his banker, a paragraph in a draft of a purported partnership agreement prepared by petitioner's attorney was deleted. Petitioner's daughters did not participate in these discussions nor in any discussions relative to the proposed partnership prior to the time they were called to the office of petitioner's attorney to execute the partnership agreement.
As of July 1, 1937, petitioner and his three daughters executed an instrument prepared by petitioner's attorney which provided, in part, as follows:
*1056 1. The parties hereto have agreed to become copartners in business for the purpose of engaging in the sale of men's clothing, furnishings and hats in the City of Milwaukee under the firm name and style of Joe Lynch. The partnership shall begin as of July 1st, 1937, and shall continue for a period of fifteen years.
2. To that purpose Joe Lynch has agreed to transfer, sell and convey to the partnership all his right, title and interest in and to the present business and the assets thereof, including the good-will and trade name thereof, now carried on by him at No. 230 -- W. Wisconsin*70 Avenue, Milwaukee, subject to the assumption by the partnership of all liabilities of said business. The interest of the various parties in and to such partnership is as follows: Joe Lynch, one-fourth thereof; Marjorie Lynch, one-fourth; Helenjane Lynch, one-fourth; Ruth Lynch, one-fourth. The statement of the business now conducted by Joe Lynch as of July 1st, 1937, shall be the basis for the opening of the books of the partnership.
3. Owing to his long experience in this business, at all times during the continuance of the partnership Joe Lynch shall be the manager of the business and shall have the sole executive control thereof, and he shall fix the compensation to be received by him and other employees of the partnership. From time to time, if any of the other partners shall render services to the partnership, their compensation shall be fixed by Joe Lynch.
4. Proper books of account shall be kept and statements furnished to the partners at yearly intervals. Subject to the control provided in paragraph three, the profits, if any, may be divided among the partners in proportion to their interest in the partnership from time to time. It shall not be necessary that such profits*71 be distributed to the partners. Proper credit may be given on the books of the company or the profits may be retained and used as operating capital of the partnership.
5. During the lifetime of the partners Marjorie Lynch, Helenjane Lynch and Ruth Lynch, and for a period of one year after the death of any of such partners, Joe Lynch shall have the right and option to purchase the interest of any one of such partners at the book value thereof as of July 1st, 1937, which value shall not include any computation of good-will, and shall have a term of five years within which to pay the purchase price without interest.
The exercise of the option to purchase the interest of any of the partners herein during their lifetime shall not terminate the partnership, and the remaining partners agree to execute any agreements necessary to continue the partnership.
6. Marjorie Lynch, Helenjane Lynch and Ruth Lynch hereby covenant and agree that Joe Lynch, Jr. shall have the option at the age of twenty-seven, if their father Joe Lynch shall have died, to purchase their respective interests in the partnership at the book value thereof as of July 1st, 1937, which value shall not include any computation*72 of good-will, and agree that Joe Lynch, Jr. shall have a term of five years within which to pay the purchase price for said interests in equal installments. Each selling partner shall have the right to hold her interest in the partnership as collateral security for the payment of the purchase price by Joe Lynch, Jr.
7. The members of the partnership, except Joe Lynch, covenant and agree that they shall not have the right or power to sell their interest in the partnership to anyone other than Joe Lynch.
This instrument has never been changed.
The purported partnership agreement had already been prepared and was ready for signature by petitioner's daughters when they came *1057 to the office of his attorney to execute it. The attorney explained to petitioner's daughters at that time the terms of the partnership agreement. This was the first information the daughters had relative to the formation of such a partnership or the terms thereof.
As a part of petitioner's plan relative to retaining the ownership of the Joe Lynch business within his immediate family and to insure the control of its operation within his own hands, he caused to be prepared, simultaneously with the partnership*73 agreement, wills to be executed by his daughters under which the interest of each daughter in such business would pass on her death to petitioner. These wills were executed by petitioner's daughters at the same time they signed the purported partnership agreement. The fee for the preparation of these wills was paid by the Joe Lynch business and no part of it was charged to the drawing account of any daughter. These wills have not been revoked.
Upon execution of the alleged partnership agreement, petitioner notified Hart, Schaffner & Marx, his banker and Dun & Bradstreet that the "Joe Lynch" business was a partnership. Thereafter statements were sent annually to Dun & Bradstreet indicating the business was a partnership and that petitioner's daughters each had a 25 per cent interest in it. The names of petitioner's daughters have never appeared on the letterhead used by the business or in the listing of the business in the local telephone directory.
As of July 1, 1937, an entry was made in the general journal of the Joe Lynch business debiting petitioner's net worth account $ 33,351.49 and crediting one-third of such amount to the net worth accounts of his three daughters, with*74 the explanation that a partnership had been formed between these individuals.
New books of account for the Joe Lynch business were opened as of July 1, 1937, showing a total net worth of $ 44,468.66, and crediting one-fourth thereof to the net worth accounts of petitioner and each of his three daughters, to represent their respective capital accounts in the business. The amount of the credit balances in the net worth or capital accounts of the designated partners has never been changed and such credits in the taxable years 1944 and 1945 are identical with those entered as of July 1, 1937.
Petitioner filed a Federal gift tax return for the year 1937 in which he reported gifts of one-fourth interests in the Joe Lynch business to each of his three daughters.
Petitioner continued to be the sole manager of the Joe Lynch business after the execution of the partnership agreement and continued to operate such business with power and authority as full and complete as if he were the sole proprietor of such business. Petitioner's daughters had little, if any, knowledge of the business and it was petitioner's *1058 belief that they were not suited by experience and training to carry on*75 such business and moreover that the operation of a men's clothing store was a business to which a woman was not adapted. It was petitioner's intention that his daughters should not succeed him in the operation of the Joe Lynch business or participate in any way in the management or formulation of policies of such business. Petitioner had an entree to large clothing manufacturers in the East which made it possible for the business to obtain merchandise during the scarcities existent in the years of the war. As sole manager of the business, he hired and fired its employees, made or controlled its purchases, supervised the pricing of its merchandise, determined its advertising policy, and signed or supervised the signing of all checks issued by the business. He devoted his full time to the business and determined its entire policy. Petitioner's efforts and abilities constituted the principal factor in the success of the business.
Petitioner's daughters never rendered any services to the business prior to the partnership agreement other than occasional assistance which they may have given as sales clerks during sales conducted by the business when they were home from college on vacations*76 and other than occasional assistance given by petitioner's daughter Ruth through odd jobs and stenographic services when she was home from college on vacations. The services rendered by the daughters after July 1, 1937, were of substantially the same type and frequency as those they had performed prior to that date. From July 1, 1937, through the taxable years, petitioner's daughters never made any suggestions as to the operation of the business. They did not participate in the management of the business after they purportedly became partners. During the taxable years they were occupied solely as housewives and devoted no time to the business.
Capital was a factor in the production of the income of the business.
Following the formation of the alleged partnership on July 1, 1937, and through the taxable years, petitioner and his secretary (by his authorization) were the only persons authorized to sign checks drawn on the bank account of the Joe Lynch business, his secretary having authority to sign such checks in amounts as large as $ 10,000. During this period petitioner or his secretary signed all such checks and none of petitioner's three daughters was authorized to sign such*77 checks. Both before and after the execution of the partnership agreement petitioner has always used the Joe Lynch business checking account in connection with his personal affairs. He has never had a personal checking account aside from the bank account of such business.
*1059 During the period from July 1, 1937, up to about 1940, petitioner mailed his three daughters financial statements relating to the Joe Lynch business. After that time and through the taxable years, they were not furnished financial statements for the reason that the daughters did not want their husbands to know of the partnership arrangement, lest it dull the incentive to exert their best efforts to promote their own earning capacity.
The partnership returns of income of the Joe Lynch business, petitioner's individual income tax returns and those of his daughters, for the taxable years were all prepared by the same accountant whose office was in Milwaukee. The accountant's fee for this service was charged to an expense account of the business. The returns of petitioner's daughters were sent to them, along with checks drawn on the bank account of the business for the tax shown due, for filing with the*78 appropriate collector of internal revenue. The amounts so paid were charged to the respective drawing accounts of the daughters in the business.
Net profits per books of the Joe Lynch business from July 1, 1937, to December 31, 1945, were as follows:
| Petitioner's | Balance of | Total net | |
| Period | salary | net profit | profit |
| 7/1/37-12/31/37 | $ 4,050 | $ 6,826.88 | $ 10,876.88 |
| 1938 | 4,350 | 6,616.16 | 10,966.16 |
| 1939 | 3,900 | 5,156.83 | 9,056.83 |
| 1940 | 3,900 | 10,073.20 | 13,973.20 |
| 1941 | 3,900 | 20,012.63 | 23,912.63 |
| 1942 | 3,975 | 23,431.77 | 27,406.77 |
| 1943 | 3,900 | 41,259.90 | 45,159.90 |
| 1944 | 3,900 | 48,490.05 | 52,390.05 |
| 1945 | 3,900 | 47,763.56 | 51,663.56 |
| Totals | $ 35,775 | $ 209,630.98 | $ 245,405.98 |
Petitioner thought it would be best not to increase his salary beyond what it had been in the early years of the purported partnership lest such increase effect an adverse change in what he was advised was collateral estoppel against the instant proceeding inherent in the decision of the Board of Tax Appeals in a prior proceeding in Docket No. 102149.
Net profits per books of the Joe Lynch business, after allowance for petitioner's salary, for the period from July 1, 1937, to December 31, *79 1945, were credited one-fourth to petitioner and each of his three daughters. Petitioner's daughters were thus credited with total net profits for this period as follows: Marjorie, $ 52,407.75; Helenjane, $ 52,407.74; Ruth, $ 52,407.72.
*1060 Drawings were charged to petitioner's three daughters on the books of the Joe Lynch business as follows:
| Period | Marjorie | Helenjane | Ruth |
| 1938 | $ 1,106.98 | $ 1,956.60 | $ 3,347.88 |
| 1939 | 611.19 | 928.71 | 1,444.70 |
| 1940 | 6,198.95 | 6,109.34 | 5,705.07 |
| 1941 | 6,796.93 | 6,403.87 | 4,577.58 |
| 1942 | 1,422.58 | 1,449.42 | 4,422.67 |
| 1943 | 11,409.73 | 4,220.95 | 7,679.30 |
| 1944 | 11,117.62 | 19,419.55 | 14,257.36 |
| 1945 | 7,565.09 | 3,803.94 | 10,147.50 |
| Totals | $ 46,229.07 | $ 44,292.38 | $ 51,582.06 |
No drawings were charged to petitioner's three daughters during the period from July 1, 1937, to December 31, 1937.
From the proceeds of the withdrawals by the daughters from their accounts therein United States bonds were purchased in relatively large amounts for and in the name of Joe Lynch, Jr., and petitioner's wife, as will appear from a tabulation of such purchases hereinafter set forth.
At a time not disclosed by the record after the formation of *80 the alleged partnership, it was understood between petitioner and his daughters that Joe, Jr., would share in the income of the business and that petitioner's daughters "would be a big help to him" in that respect.
Beginning in 1938, there were charges to the drawing accounts of petitioner's daughters on the books of the Joe Lynch business. Prior to July 1, 1937, petitioner had provided for his daughters' financial needs. He would have borne their expenses up until the time they married even if they had not been his alleged partners.
A substantial part of the payments made by the Joe Lynch business and charged to the accounts of the daughters were for items of clothing purchased by the daughters at stores where petitioner's wife had charge accounts. Petitioner paid the bills received from such stores with checks drawn on the bank account of the Joe Lynch business. The drawing account of each of petitioner's daughters was charged with her share of these checks for the items she had purchased. Ruth did not have a charge account at any time during the period from July 1, 1937, through the taxable years. There is no evidence that petitioner's other daughters had charge accounts during*81 this period.
The charges for education represented checks drawn by the petitioner on the bank account of the Joe Lynch business in payment for bills for two of his daughters from colleges and for bills for one of his *1061 daughters from a sorority. Petitioner would have given these daughters a college education even if they had not been his purported partners.
In 1940 there were charges to the drawing accounts of petitioner's daughters Marjorie and Helenjane, respectively, for two checks drawn on the bank account of the Joe Lynch business in the amount of $ 1,000 each, one payable to Marjorie and one payable to Helenjane, these checks being received by them on the occasion of their weddings. In 1942 there was a charge to the drawing account of petitioner's daughter Ruth for a check drawn on the bank account of the business payable to her in the amount of $ 1,000, this check being received by her at the time of her wedding. Each of petitioner's daughters told her husband that the check received by her was a gift from petitioner.
During the years 1942 to 1945, inclusive, there were charges to the drawing accounts of petitioner's daughters for checks drawn on the bank account*82 of the Joe Lynch business payable to them or their husbands and received by the payees at or near Christmas as follows:
| Period | Marjorie | Helenjane | Ruth |
| 1942 | $ 200 | $ 200 | $ 530 |
| 1943 | 500 | 500 | 500 |
| 1944 | 1,000 | 1,000 | 1,000 |
| 1945 | 1,000 | 1,000 | 100 |
| Totals | $ 2,700 | $ 2,700 | $ 2,130 |
Each of petitioner's daughters told her husband that the checks received by her or him were gifts from petitioner.
During the years 1943 to 1945, inclusive, there were charges to the drawing accounts of petitioner's daughters for checks drawn on the bank account of the Joe Lynch business payable to their husbands or children, and received by the payees at or near the birthdays of the payees. The checks payable to the husbands were all for $ 50. The checks payable to the children were all for $ 25. Each of petitioner's daughters told her husband that the checks received by him or their child or children were gifts from petitioner.
There were charges of $ 150 each to the drawing accounts of petitioner and his daughters for a check in the amount of $ 600 drawn on the bank account of the Joe Lynch business on May 12, 1943, in payment for a family lot in a cemetery.
Of the charges to *83 the drawing accounts of petitioner's daughters during the years 1938 to 1945, inclusive, $ 30,518.05 were for Federal and state income taxes on their purported shares of the income of the Joe Lynch business.
*1062 Of the charges to the drawing account of petitioner's daughter Ruth, $ 3,500 was for a check in that amount dated September 31, 1945, drawn by petitioner on the bank account of the Joe Lynch business payable to her. She used this check to make the down payment on a home purchased for $ 13,500. Her husband has been paying the balance of the purchase price with his own funds. Ruth told her husband that the $ 3,500 was a gift from petitioner.
Petitioner had blanket authority from his daughters to invest their purported shares of the income of the Joe Lynch business according to his own judgment.
There were charges to the drawing accounts of petitioner's daughters totaling $ 53,600 in connection with purchases of government bonds by petitioner. The following tabulation indicates the date of the checks drawn on the bank account of the Joe Lynch business to make these purchases, the daughter whose drawing account was charged, the cost of the bonds, the date of issuance*84 of the bonds, the face amount of the bonds, and the payees:
| Drawing account | Amount | Cost of | |
| Date of check | charged | of charge | bond |
| 3/22/40 | Marjorie | $ 3,750 | $ 3,750 |
| 3/22/40 | Helenjane | 3,750 | 3,750 |
| 3/22/40 | Ruth | 3,750 | 3,750 |
| 12/16/41 | Marjorie | 5,000 | 3,750 |
| 12/16/41 | Helenjane | 5,000 | 3,750 |
| 12/16/41 | Ruth | 1,200 | 3,700 |
| 4/23/43 | Marjorie | 3,500 | 3,750 |
| 4/23/43 | Marjorie | 3,500 | 3,700 |
| 5/5/43 | Marjorie | 500 | |
| 9/4/43 | Ruth | 1,700 | 3,700 |
| 9/4/43 | Ruth | 2,000 | |
| 1/26/44 | Helenjane | 5,000 | 3,750 |
| 5/25/44 | Ruth | 3,500 | 3,700 |
| 6/2/44 | Ruth | 250 | 74 |
| 12/2/44 | Helenjane | 3,700 | 3,700 |
| 5/23/45 | Marjorie | 3,750 | 3,750 |
| 5/23/45 | Ruth | 3,750 | 3,750 |
| Totals | $ 53,600 | $ 52,324 |
| Date of | Face | ||
| Date of check | issuance | amount | Payee |
| of bond | of bond | ||
| 3/22/40 | 3/23/40 | $ 5,000 | Marjorie or petitioner's |
| wife. | |||
| 3/22/40 | 3/23/40 | 5,000 | Helenjane or petitioner's |
| wife. | |||
| 3/22/40 | 3/23/40 | 5,000 | Ruth or Joe, Jr. |
| 12/16/41 | 12/22/41 | 5,000 | Joe, Jr. or petitioner's |
| 12/16/41 | 1/2/42 | 5,000 | wife. |
| 12/16/41 | 1/8/42 | 5,000 | |
| 4/23/43 | |||
| 4/23/43 | 5/5/43 | 5,000 | Joe, Jr. |
| 5/5/43 | 5/25/43 | 5,000 | |
| 9/4/43 | |||
| 9/4/43 | 10/7/43 | 5,000 | Joe, Jr. |
| 1/26/44 | 1/31/44 | 5,000 | Joe, Jr. |
| 5/25/44 | 8/28/44 | 5,000 | Joe, Jr. |
| 6/2/44 | 8/28/44 | 100 | Joe, Jr. |
| 12/2/44 | 12/26/44 | 5,000 | Joe, Jr. |
| 5/23/45 | 5/29/45 | 5,000 | Joe, Jr. or petitioner's |
| 5/23/45 | 5/29/45 | 5,000 | wife. |
| Totals | $ 70,100 |
*85 The bonds in the foregoing tabulation were placed by petitioner in the safe deposit box of his wife, where they have remained.
Marjorie and Ruth filed donor Federal gift tax returns for 1943 and Helenjane and Ruth filed donor Federal gift tax returns for 1944 with respect to the bonds purchased for Joe Lynch, Jr., with proceeds of checks charged to their drawing accounts. In this connection, Joe, Jr., filed donee Federal gift tax returns for 1943 and 1944. None of petitioner's daughters informed her husband of the bonds purchased with her alleged share of the income of the Joe Lynch business and no husband had any knowledge of these purchases.
*1063 There were charges to the drawing accounts of petitioner's daughters totaling $ 15,000 for the following three checks petitioner drew on the bank account of the Joe Lynch business in order to establish a so-called "emergency fund" for each of his daughters, a fund "suggested" to his daughters by petitioner:
| Date | Payee | Amount |
| Feb. 28, 1944 | Marjorie | $ 5,000 |
| May 25, 1944 | Helenjane | 5,000 |
| May 25, 1944 | Ruth | 5,000 |
These checks were endorsed by the payees and petitioner. He cashed them obtaining for each check two $ 1,000*86 and six $ 500 bills. He put the proceeds of each check in a separate sealed envelope on the outside of which was written, among other things, the name of one of his daughters. He placed each envelope in the safe-deposit box of his wife, where it has remained. He never discussed with any of his daughters depositing the "emergency fund" in a bank account of her own. Under his authority from them, he placed the money in the safe-deposit box and merely advised them of this action. None of petitioner's daughters informed her husband of her so-called "emergency fund" and no husband had any knowledge of it.
Petitioner and his wife were the only persons authorized to enter her safe-deposit box. Petitioner's daughter Helenjane has entered this safe-deposit box. There is no evidence that his other daughters ever entered it. At the time of the hearing, it contained, in addition to the bonds and cash previously mentioned, an envelope in which were certain government bonds belonging to Helenjane, her husband, and her daughter, and another envelope holding approximately $ 57 belonging to Marjorie.
None of petitioner's three daughters has ever had a personal bank account or a safe-deposit*87 box.
From the time of her marriage and through the taxable years, neither petitioner nor any of his daughters wanted her husband to know of the purported partnership in the Joe Lynch business. One of the reasons why petitioner stopped in 1940 sending his daughters financial statements relating to the business was that he feared such statements might be seen by their husbands. Whenever the business was mentioned in the presence of a husband, neither petitioner nor any of his daughters talked of the purported partnership. Neither of the daughters' husbands had knowledge of the wills executed by the daughters simultaneously with the signing of the partnership agreement.
*1064 In its partnership returns of income for the taxable years 1944 and 1945, the Joe Lynch business reported net income distributable as follows:
| Distributive share | |||||
| Year | Net | ||||
| income | |||||
| Petitioner | Marjorie | Helenjane | Ruth | ||
| 1944 | $ 52,850.77 | $ 16,137.70 | $ 12,237.69 | $ 12,237.69 | $ 12,237.69 |
| 1945 | 52,412.46 | 16,028.11 | 12,128.12 | 12,128.12 | 12,128.11 |
The petitioner and his daughters, in their Federal income tax returns for the years 1944 and 1945, reported the above distributive shares*88 of the income of the Joe Lynch business.
In his notice of deficiency, respondent determined that the entire net income of the Joe Lynch business for the years 1944 and 1945, as adjusted, was includible in petitioner's taxable income for those years.
No business purpose was served or intended to be served by petitioner and his daughters in executing the partnership agreement. They did not intend to join together in good faith and acting with a business purpose to conduct as partners the Joe Lynch business enterprise.
On January 19, 1940, the Commissioner sent petitioner a notice of deficiency in which he determined that the entire income of the Joe Lynch business, for the period from July 1 to December 31, 1937, covered by the same partnership agreement as is herein involved, was includible in petitioner's income for the reason that the purported partnership was not recognizable for Federal income tax purposes. Petitioner thereupon duly filed a petition with the Board of Tax Appeals. In its opinion the Board held that the Commissioner had erred in disregarding the partnership. Joe Lynch, Docket No. 102149, B. T. A. Memorandum Opinion, April 17, 1941. In so holding, the Board*89 stated:
The petitioner had the right to give each of his daughters an interest in his business and the partnership agreement was not rendered invalid because of the designation of petitioner as the manager thereafter having sole executive control of the business or because of the restriction of the rights of several of the partners to dispose of their capital interest in the partnership, except to petitioner and his son. ). The partnership agreement, the setting up of the capital accounts of each of the four partners on July 1, 1937, and the subsequent entries of debits and credits on their respective accounts on the partnership books sufficiently evidenced petitioner's completed gift to each of his three daughters and their ownership of a one-fourth interest in the clothing business and property from which the income here in question was produced. The partnership agreement was executed by the parties thereto and a valid partnership between petitioner *1065 and his three daughters was formed on July 1, 1937. ;*90 ), reversing ; ), reversing ; ), reversing ; and authorities cited therein; ; and .
On May 21, 1941, the Board entered its decision pursuant to the foregoing opinion. That decision was not appealed by the Commissioner and became final in due course.
OPINION.
The first question for decision is -- does res judicata or collateral estoppel apply to the instant proceeding by reason of our decision in the earlier case of Joe Lynch, Docket No. 102149, in which we held that the agreement involved herein constituted a valid partnership between petitioner and*91 his three daughters? Our decision in the earlier proceeding referred to was entered May 21, 1941. Our holding in that proceeding followed closely and was largely based upon , affirming a decision of the Board of Tax Appeals in which we upheld the validity of a family partnership on facts strikingly parallel to those in the instant proceeding.
Under the doctrine of the Olds case, a family partnership had to be recognized for Federal income tax purposes where a gift of capital interest in the business had been made. Since the date of that decision there have been handed down by the Supreme Court decisions in the cases of ; ; , outlining the scope of pertinent evidence to be considered in resolving the question of validity of a partnership. The decisions in the Supreme Court cases cited have altered the legal concept of the facts essential for the determination*92 of what constitutes a valid family partnership and have necessitated a broadening of the scope of inquiry in ascertaining whether or not such facts exist in a given case. This change in the law or the concept of the law has to a large extent rendered obsolete the legal concept upon which the Olds case was decided and upon which our decision in Docket No. 102149, supra, was based.
Because of the change of such legal concept in reference to pertinent facts to be considered in determining whether or not a family partnership exists, we think that the principle of res judicata or collateral estoppel does not apply to the instant proceeding. This holding is amply supported by the opinion of the Supreme Court in . Cf. .
*1066 The second question for decision is whether under the agreement of partnership and the supplementary evidence in the proceeding a valid partnership existed in the years 1944 and 1945 between petitioner and his three daughters to carry on the Joe Lynch business.
In general terms a partnership may be defined as "an association*93 of two or more persons to carry on as co-partners a business for profit."
In the instant proceeding the basic agreement and the supplementary evidence disclose the following factual situation:
Petitioner and his three daughters were not associated to carry on the Joe Lynch business but the business was to be carried on solely by petitioner as he had previously carried it on as a sole proprietorship.
The amount of the capital account credited to each daughter as a partner was unchangeably fixed in the partnership agreement at the dollar value so credited, to wit, $ 11,117.16
Petitioner had the power and authority to increase the capital of the business by the provision of paragraph 4 of the agreement that "the profits may be retained and used as operating capital of the business," but the value of the individual interests of the daughters in the capital of the business would not thereby be increased. 1
There were distributions of profits of the business but the agreement*94 imposed no obligation or duty on petitioner in his sole and absolute power of the management of the business either (a) to distribute any of the profits to the daughters or (b) to credit any of such profits to them on the books of the business. 2
The partnership agreement recited that the term of the partnership was 15 years from July 1, 1937, but under paragraph 5 of such agreement petitioner had the right and power to eliminate either or all of the daughters from the alleged partnership by purchasing their interests in the capital of the business at the price of the initial credit thereof to them. He could exercise this right and power at any time during her life or within 1 year after the death of a daughter. He could, therefore, terminate the partnership or change the personnel thereof at any time he chose by such purchase or purchases. Thus petitioner could at any time reacquire the capital interests of his daughters in the business and either retain the ownership*95 thereof in himself, turn it over to his son, Joe, Jr., or make any other disposition of it as he might elect. In the transaction of such reacquisition the daughters would receive nothing for the value of the good will of the business or for the increment to the capital of the business by reason of the retention of the profits for use as operating capital therein.
*1067 In the event of petitioner's death it was provided in the agreement that his son, Joe, Jr., upon arriving at the age of 27 years had the right the purchase the interests of the daughters in the capital account of the business on the same terms and at the same price as the contract provided for such purchase by petitioner.
Under an arrangement or understanding, aliunde the partnership agreement, between petitioner and his daughters, petitioner's son, Joe, Jr., was a participant in the profits of the business through gifts thereof by the daughters in amounts totaling more than sufficient to enable him to purchase therewith all of the capital account interests of the three daughters.
Petitioner had no individual bank account but used the Joe Lynch business bank account for his personal affairs and use. Neither*96 of the daughters had any authority to so use such account or otherwise to draw thereon. Such moneys as the daughters received from the profits of the business or from the business bank account were so received wholly at the will of petitioner through checks issued by petitioner or at his direction by his secretary.
It is obvious that petitioner did not intend that his daughters should suceed him in carrying on the Joe Lynch business or join with him, or have any participation in, the operation thereof, but that it was his hope, plan, and purpose that his son, Joe, Jr., upon arriving at mature age, should succeed him therein.
It is also apparent from the partnership agreement and other evidence herein that all that the daughters could of enforceable right obtain from the gifts of capital interests in the business was the value of such gifts in the amounts fixed in the agreement and then only upon the purchase of such interests either by petitioner or by his son, Joe, Jr. The initiative for such purchase lay with petitioner and/or his son and the daughters had no authority to sell their individual interests to any person other than petitioner or his son.
Petitioner had the business*97 so completely under his power and control that the daughters could not have received any income from the profits thereof except upon his decision to give it to them.
We deem it unnecessary to comment more specifically or at greater length on the facts found herein. Suffice it to say that all of the facts found are supported by the evidence and are so correlated in the formulation of a factual picture as to impel us to reach the conclusions specifically set forth above.
We have considered all the facts in evidence, the partnership agreement, the conduct of the parties in execution of its provisions, their statements, the testimony of all witnesses, the relationship of the parties, their respective abilities and capital contributions, the actual *1068 control and the power of control of the income, the purposes for which it was used, and all other facts in evidence which might throw light on the true intent of the parties, and have concluded therefrom that petitioner and his daughters did not in good faith and acting with a business purpose join or intend to join together in the conduct of the Joe Lynch business enterprise.
We hold therefore that no valid partnership existed in*98 the years 1944 and 1945 between petitioner and his three daughters and that the entire net income from such business in those years is taxable to petitioner.
Decision will be entered for the respondent.
LeMire, J., dissenting: I disagree with the majority opinion on the res judicata issue and respectfully submit my dissent herein.
The identical issue of the validity of the partnership was before the Board of Tax Appeals in the proceeding of Joe Lynch, Docket No. 102149 (Memorandum Opinion, April 17, 1941), with respect to the year 1937, the first year of the agreement's operation. There has been no change in the controlling facts since that time. In the earlier proceeding the Board held the partnership to be valid, stating:
In the instant case no bad faith has been charged nor shown to have existed in connection with the organization of the partnership. The purpose and intention of the parties, as shown by the record, establishes that the agreement of July 1, 1937, was in fact a bona fide agreement between petitioner and his three daughters, whereby he was to give to each of them an interest in his business and the assets thereof; the four of them as co-partners*99 were to carry on the men's clothing business for profit; the four of them were to have equal capital interests in the business at the start thereof on July 1, 1937; and, also, the four of them were to have equal distributive shares of the net profits derived from that business.
* * * The partnership agreement, the setting up of the capital accounts of each of the four partners on July 1, 1937, and the subsequent entries of debits and credits on their respective accounts on the partnership books sufficiently evidenced petitioner's completed gift to each of his three daughters and their ownership of a one-fourth interest in the clothing business and property from which the income here in question was produced. * * *
This decision was not appealed by the Commissioner and became final in due course.
The respondent takes the position, relying upon , that the doctrine of res judicata is not applicable here because the law has been changed by decisions of the United States Supreme Court in ; ;*100 and , decided subsequently to our decision in the prior proceeding. He states in his brief:
Respondent contends that the legal principles relating to family partnerships developed in ;; and Lusthaus v. Commissioner [supra] * * * have made plain the error of the Board's conclusion in the earlier proceeding. These cases altered the law governing the validity of family partnerships for tax purposes. Therefore the doctrine of collateral estoppel is inapplicable in the instant proceeding. * * *
The majority opinion sustains respondent's contention.
On the facts in this case, I do not believe that the rule of the Sunnen case is susceptible of the broad application urged by the respondent. The Court made it plain in its opinion in the Sunnen case that the doctrine of res judicata, or equitable estoppel, precluded the reopening of an essential question of fact, once litigated and determined. It said:
Of course, where a *101 question of fact essential to the judgment is actually litigated and determined in the first tax proceeding, the parties are bound by that determination in a subsequent proceeding even though the cause of action is different. See . * * *
Even under the new tests which the Supreme Court's subsequent decisions are said to have established, one of the essential facts to be determined, along with the question of the validity of the gift of an alleged partnership interest, is the true intent of the parties; that is, "whether, considering all the facts * * * the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise."
We determined in the prior proceeding that there was a valid gift by the petitioner of capital interests in the business to his daughters and that the parties in good faith intended to carry on the business as equal partners. Since, under the rule of the Sunnen case, we are not at liberty to reopen our inquiry as to those facts, the ultimate question of*102 the validity of the partnership is likewise foreclosed. We should therefore sustain the petitioner on the res judicata issue.