*178 Decision will be entered under Rule 50.
At the time of his death, March 6, 1947, the decedent was a member of a partnership which had and employed capital and exhaustible tangible property in the conduct of its business. The partnership agreement in effect at the time of the decedent's death gave the surviving partner the right to continue the business theretofore carried on by the partnership, using all the assets of the partnership and the funds invested and employed therein, including the decedent's share of the partnership capital funds and assets, until the end of the stated term of the partnership and provided that decedent's estate should share equally with the surviving partner in the profits and losses of the business as thus continued. Pursuant to the terms of the partnership agreement, the surviving partner continued the business to May 2, 1950, the end of the term provided for in the agreement, and paid to decedent's estate one-half of the profits derived from the business during that period. Respondent determined a value of $ 45,000 for the estate's right to receive such share of the income from the business and included that amount in decedent's gross estate, *179 and an estate tax was paid with respect thereto. The respondent determined that the right so valued was not of a type on account of which allowances for exhaustion properly could be made and in determining the estate's distributable net income for 1948, 1949, and 1950, disallowed deductions taken on account of exhaustion of the right. Held, that the right in question was of a character with respect to which exhaustion allowances were deductible; that the respondent erred in disallowing the deductions taken by the estate and increasing accordingly the petitioner's shares of distributable net income for the taxable years in controversy.
*343 The respondent has determined deficiencies of *180 $ 6,215.27, $ 3,333.83, and $ 1,475.76 in the petitioner's income tax for 1948, 1949, and 1950, respectively. The only issue for determination is the correctness of the respondent's action in disallowing certain deductions for exhaustion taken for 1948, 1949, and 1950 by an estate of which the petitioner was sole beneficiary and accordingly increasing the amounts of her distributable income from the estate for such years. All other issues were conceded by petitioner at the hearing.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found accordingly.
The petitioner, a resident of Lancaster, Pennsylvania, is the widow of Charles M. Howell, who died intestate on March 6, 1947. She was the administratrix and sole beneficiary of his estate and in each of the years 1948 through 1950 all of the net income of the estate was distributed to petitioner, as sole beneficiary. The petitioner's individual income tax returns for 1948 through 1950 were filed with the collector of internal revenue for the first district of Pennsylvania.
Prior to October 1, 1942, Howell Theatre Corporation, all the stock of which was owned equally by Charles M. Howell, sometimes hereinafter referred*181 to as the decedent, and Charles F. Widmyer, operated a motion picture theatre known as Colonial Theatre, in leased premises comprising the rear portion of Nos. 166, 168, 170, and 172 North Queen *344 Street, Lancaster, Pennsylvania. At a meeting of the stockholders on September 30, 1942, a resolution was adopted providing for the dissolution of the corporation and the transfer to a partnership about to be formed by decedent and Widmyer, at a sum equal to their book value as of that date, of the furniture and fixtures, leasehold improvements, and photophone installation at the Colonial Theatre owned by the corporation. The resolution further provided for the assignment to the proposed partnership of the lease on the premises on which the Colonial Theatre was operated, subject to the assumption by such partnership of all the corporation's obligations under the lease.
On October 1, 1942, the decedent and Widmyer entered into an agreement creating a partnership to conduct business under the firm name of "The Howell Theatre" and to carry on at the Colonial Theatre the business theretofore conducted thereat by Howell Theatre Corporation. The agreement provided that the capital of*182 the partnership should be contributed in equal shares by the individual partners in the amounts they deemed necessary and recited a consideration of $ 9,599.52 for the lease on the Colonial Theatre premises and the interest of the corporation in all the furniture and fixtures and the photophone in the Colonial Theatre that day transferred by the corporation to the partnership. The agreement also provided that the profits and losses of the partnership were to be divided equally between the partners, and that the partnership should begin October 2, 1942, and end May 2, 1945. Respecting the effect of the death of either partner upon the partnership business, the agreement provided as follows:
10. In the event of the death of either partner, the survivor shall have the right to continue the business on his own account, using all the assets of the partnership and the funds invested and employed therein, including the deceased partner's share of the partnership capital funds and assets until the end of the term of the partnership, and thereafter wind up the partnership, all of which, however, shall be done under the supervision of John E. Malone, Esq., or in case of his death by G. T. *183 Hambright, Esq.
On October 2, 1944, the decedent and Widmyer entered into another agreement whereby they extended the term of the partnership for a period of 5 years or from May 2, 1945, to May 2, 1950, upon the same terms and conditions as contained in the agreement of October 1, 1942, except that paragraph 10 of said agreement was amended to read as follows:
10. In the event of the death of either partner during the term of the partnership, such partnership shall not be deemed to be dissolved thereby, and in the event of the death of Charles M. Howell, the surviving partner shall have the right to continue the partnership, using all the assets of the partnership and the funds invested and employed therein, including the deceased partner's share of the partnership capital funds and assets until the end of the term of the partnership, *345 and thereafter wind up the partnership; and in the event of the death of Charles F. Widmyer, one of the partners, his personal representative shall immediately succeed to his interest in the partnership and stand in his place in respect to the conduct of the business and his share and profits in the business of the partnership during the remainder*184 of the term of the partnership; and such personal representative shall have the same rights and powers and shall be subject to the same duties and liabilities as the said Charles F. Widmyer would have possessed and would have been subject to but for his death; all of which partnership matters shall be done under the supervision of G. T. Hambright, Esq.
From October 2, 1942, until the decedent's death on March 6, 1947, the decedent and Widmyer operated the Colonial Theatre in accordance with the terms of their agreements of October 1, 1942, and October 2, 1944. From the time of the decedent's death until May 2, 1950, Widmyer, alone and without any services from the decedent's estate, operated the theatre in accordance with the agreement of October 2, 1944, employing in such operation all the capital and assets owned by the partnership at the time of the decedent's death. Partnership net income for the period October 1, 1942, to December 31, 1946, was as follows:
| Year ended Dec. 31 | Amount |
| Oct. 1 to Dec. 31, 1942 | $ 14,656.67 |
| 1943 | 40,337.12 |
| 1944 | 40,452.45 |
| 1945 | 50,673.14 |
| 1946 | 60,731.16 |
In accordance with the terms of the partnership agreement of October 2, 1944, Widmyer, *185 from the net profits of his operation of the theatre, paid the decedent's estate $ 23,143.99, $ 20,504.43, and $ 7,415.77 during 1948, 1949, and 1950, respectively.
At the close of December 31, 1946, the partnership capital amounted to $ 4,556.30 and the partnership assets consisted of cash of $ 115 and leasehold improvements and photophone in the amount of $ 4,441.30.
On March 3, 1945, the partnership entered into a lease on the Colonial Theatre premises which was for a term of 5 years, beginning May 1, 1945, and ending April 30, 1950, and which provided for the payment by the partnership of a rental of $ 1,000 a month, plus all taxes, water rent, insurance on the property, and necessary repairs to maintain the premises in good repair and condition. In addition the lease required the partnership to expend from its own funds during the term of the lease and approximately ratably a total of about $ 10,000 to make the following improvements to the theatre building: Replace the floor on the first floor of the auditorium with a heavy floor, equip ventilating system with a more effective type of exhaust, enlarge men's and ladies' retiring rooms, and install therein additional toilet facilities.
*186 *346 Subsequently, and on May 17, 1945, the decedent and Widmyer each acquired an undivided one-sixth interest in the premises at Nos. 166 and 168 North Queen Street which were a portion of the premises occupied by the Colonial Theatre. On May 25, 1945, each acquired an additional undivided one-sixth interest in the premises at Nos. 166 and 168 North Queen Street. Thereafter, and on June 21, 1945, decedent and the petitioner herein granted options to Widmyer to acquire the undivided one-third interest the decedent thus had acquired in the premises at Nos. 166 and 168 North Queen Street.
The partnership on September 24, 1945, entered into a lease with the decedent and Widmyer covering their respective undivided one-third interests in the premises at Nos. 166 and 168 North Queen Street which comprised the southern half of the premises occupied by the Colonial Theatre. This lease was of a like tenor as that which the partnership had entered into on March 3, 1945, with respect to the Colonial Theatre premises. On the date of the decedent's death the partnership was in possession of the Colonial Theatre premises under the two leases.
Subsequent to the decedent's death, Widmyer*187 exercised the options to acquire the decedent's undivided one-third interest in the premises at Nos. 166 and 168 North Queen Street and on February 1, 1949, petitioner conveyed such interest to Widmyer for a total consideration of $ 26,430.27.
The petitioner as administratrix filed a Federal estate tax return on behalf of the estate of the decedent in which was reported a total gross estate of approximately $ 63,000, no net estate, and no Federal estate tax liability. In this return the petitioner did not include as an asset of the estate any interest with respect to the partnership or the leaseholds on the premises occupied by the Colonial Theatre. Thereafter, in September 1948, the respondent determined that the "Value of the decedent's interest in Colonial Theatre Business" was $ 45,000 and increased by $ 45,000 the amount of miscellaneous property reported by petitioner. This adjustment was explained by respondent as follows:
This item is adjusted in accordance with the net worth of the business based on a consideration of the adjusted value of the assets, earnings and other relevant factors.
The estate tax of $ 3,145.25, determined by respondent as a result of the adjustment, *188 subsequently was agreed to and paid by petitioner as administratrix of the estate of the decedent.
The decedent's interest in the Colonial Theatre business terminated on May 2, 1950. After that date Widmyer, as sole proprietor, operated the business under a new lease arrangement which he individually had negotiated with the other owners of the theatre premises.
*347 In the original fiduciary income tax returns filed for the estate of the decedent for the years 1948, 1949, and 1950, the amounts paid by Widmyer to the estate during the respective years, pursuant to the partnership agreement of October 2, 1944, were reported as income of the estate and no deduction was taken for exhaustion of the above-mentioned interest of the decedent which was valued by respondent at $ 45,000. Petitioner, as sole beneficiary of the decedent's estate, reported in her individual income tax returns for 1948, 1949, and 1950, as income received from the estate the amounts shown in the fiduciary income tax returns as distributable to her for the respective years. Subsequently, amended fiduciary income tax returns for the years 1948, 1949, and 1950 were filed for the estate in which income was reported*189 in the amounts shown in the original returns for the respective years. However, deductions of $ 14,210.52, $ 14,210.52, and $ 4,736.86 were taken for 1948, 1949, and 1950, respectively, for "Depreciation of contract" for the respective years representing pro rata portions of the amount of $ 45,000 determined by respondent as the value of decedent's interest in the Colonial Theatre business. As a result, the petitioner's shares of distributable income of the estate for the respective years accordingly were shown in amounts as reduced by the deductions taken. On the basis of the amended fiduciary income tax returns filed for the estate, the petitioner filed claims for refund of her individual income tax paid for 1948, 1949, and 1950. The respondent allowed the claims and the refunds were made to petitioner. Subsequently, the respondent determined the deficiencies in controversy, explaining his action in part as follows in the notice of deficiency:
Erroneous deductions of $ 14,210.52, $ 14,210.52 and $ 4,736.86 from distributable income of the Estate of Charles W. Howell, Deceased, for the respective years 1948, 1949, and 1950 were allowed in a previous audit in determining your*190 distributable net income from said fiduciary for those years. It is held that no part of the basis of the interest in the partnership trading under the name of "The Howell Theatre" owned by the Estate of Charles W. Howell, Deceased, is deductible in determining the distributable income of the Estate of Charles W. Howell, Deceased.
OPINION.
The petitioner takes the position that the respondent having determined that the value of the decedent's interest in The Howell Theatre partnership business was $ 45,000, that amount became the basis of such interest for the purpose of deductions for exhaustion; and that respondent erred in determining that no part of such basis was deductible by the decedent's estate in determining the distributable net income of the estate and in accordingly disallowing the deductions of $ 14,210.52, $ 14,210.52, and $ 4,736.86 taken by the *348 estate for 1948, 1949, and 1950, respectively, on account of exhaustion of such interest, and previously allowed in determining her distributable net income from the estate for such years. The respondent takes the position that the decedent's interest in the partnership was not "the type of asset" with respect to*191 which an allowance for exhaustion properly can be made.
The parties are in agreement, and properly so, that the portion of the profits of the business paid by Widmyer to the decedent's estate during the years in controversy was not income to Widmyer but was income to the decedent's estate. . Furthermore, there is no controversy between them as to the propriety of the respondent's action in including in the decedent's gross estate his interest in the partnership. Each party has proceeded herein on the premise that such action was correct and proper. We too will proceed likewise.
Aside from the respondent's reliance on the holding in , affd. , we are unable to ascertain from his brief or from the record as a whole the reasons upon which he relies in support of his position that the interest in controversy was not "the type of asset" on account of which an allowance for exhaustion is proper.
In the Taylor case, the decedent at the time of his death was a member of a partnership engaged in the insurance underwriting*192 business in which it represented insurance companies pursuant to contracts with them. Such representation was revocable by the insurance companies upon 90 days' notice. The personal services and contacts of the partners were the basis of the retention of the representation of such insurance companies. Capital and tangible assets were of no importance in the creation and retention of the partnership business. By virtue of a partnership contract in effect at the time of the decedent's death, his estate was given an option to become an inactive member of a new partnership with the surviving members of decedent's partnership for a stated term. The decedent's estate exercised the option, became a member of a new partnership, and shared in the net income thereof. Having found that the partnership of which the decedent was a member was a personal service enterprise which required no capital or tangible property and to which none of the partners had contributed capital, and being unable to find that the right held by the estate constituted a capital asset which it received from the decedent, the Court relying on ,*193 concluded that the estate was not entitled to deduct allowances for exhaustion with respect to the right.
In the Bull case, the decedent at the time of his death was a member of a partnership engaged in the business of shipbrokers. The enterprise *349 required no capital, none was ever invested by the partners, and no tangible property was involved in the partnership transactions. The partnership agreement in effect at the time of the decedent's death provided that in the event of the death of a partner, the survivors should continue the business for 1 year subsequent to his death and his estate should receive the same interests or participate in the losses to the same extent as the deceased partner would if living, or his estate at its option could withdraw his interest from the firm within 30 days after the probate of the will and all adjustments of profits or losses should be made as of the date of such withdrawal. The estate did not exercise the option to withdraw. The business continued to be conducted, and the profits thereof distributed, as contemplated by the agreement. Among the questions presented were whether it was proper for a value to be placed on the right*194 of continuance of the partnership relation inuring to the decedent's estate and include such value as a part of the corpus of the decedent's estate, and whether it was proper to include the amount received pursuant to such right as income of the estate. Stressing the fact that the partners had contributed no capital to the business and owned no tangible property connected therewith, the Supreme Court held that in the circumstances presented it was not permissible to place a value on the right inuring to the decedent's estate and include such value in the corpus of the estate and that no estate tax was due with respect to the portion of the partnership profits arising subsequent to decedent's death and paid to his estate. However, such portion of partnership profits was held to be income to the estate and taxable as such.
The Howell Theatre partnership involved in the instant case required the use of capital. Both the decedent and Widmyer had made investments in the enterprise at the time the partnership was formed and continued to have investments therein at the time of decedent's death. After the decedent's death his investment was continued in the enterprise and at the risks*195 of the business. The partnership also had made investments in tangible property used in connection with the business. This property was represented by leasehold improvements to the theatre premises which the partnership made pursuant to the requirements of its lease of March 3, 1945. At the expiration of the lease these improvements passed to the then owners of the theatre premises. By determining a value of $ 45,000 for decedent's interest in the Colonial Theatre business based "on a consideration of the adjusted value of the assets, earnings and other relevant factors," respondent gave recognition to the fact that the partnership had and employed capital and had invested in and used the foregoing property in the conduct of its business. Prior to, and at the time of decedent's death, the decedent and Widmyer each individually owned undivided *350 one-third interests in the theatre premises used under lease in the conduct of the partnership business. Decedent's interest in those premises continued to be used in the business after his death, first as an asset of his estate and then as an asset of Widmyer after its sale by petitioner to Widmyer on February 1, 1949, for $ *196 26,430.27. Considering the foregoing in connection with the factual situations presented in the Bull case and the Taylor case, it is apparent that the instant case involves a factual situation materially different from that presented in either of them. Because of such difference, it is our opinion that the holdings in those cases are not applicable or determinative here. Accordingly, we conclude that the decedent's interest in the theatre business was an asset of a type with respect to which an allowance for exhaustion is proper.
The right of decedent's estate to share in the profits of the theatre business clearly was a valuable asset. The life of that asset was definitely limited to the period beginning with the decedent's death on March 6, 1947, and ending on May 2, 1950. For estate tax purposes the respondent has determined the value of the asset at $ 45,000. In the absence of evidence to the contrary, such value is deemed to have been its fair market value at the time of its acquisition by the estate and its basis for the purpose of exhaustion allowances. ; Regs. 111, sec. 29.113 (a) (5).
In*197 accordance with the foregoing, we find that the respondent erred in disallowing to the estate of the decedent the deductions taken for 1948, 1949, and 1950 on account of exhaustion of the interest in question, and increasing accordingly the amounts of the petitioner's distributable shares of net income from the estate for the respective years.
Decision will be entered under Rule 50.