*243 On May 1, 1944, H and W formed partnership #1 with A, the brother of H. H and W together owned 95 per cent of the partnership. The partnership was successful in manufacturing a product made possible by a production technique which H had developed. On January 28, 1945, H and W sold all their interest in the partnership to various individuals except 20 per cent which they retained. On February 1, 1945, by agreement between both the new and the old partners, partnership #1 was expressly dissolved and partnership #2 formed to continue the business under the same contracts and processes formerly owned by partnership #1. During the period May 1, 1944, to January 31, 1945, H and W owned a majority of the stock and actually controlled Metal Parts Corporation. The combined sales of Metal Parts Corporation and partnership #1 were in excess of $ 500,000.
On the facts, held:
1. The respondent was correct in renegotiating the profits of partnership #1 and #2 as two separate and distinct business entities. They were not one continuous partnership as maintained by the petitioners.
2. Partnership #1 and Metal Parts Corporation were under common control within the meaning of section 403*244 (c) (6) of the Renegotiation Act. Partnership #2 was not under common control with any other business.
3. On the facts shown of record, salary allowances made by the respondent for the services of H and A are inadequate. The proper amount determined.
4. On the facts of record, the petitioners received excessive profits for the fiscal period May 1, 1944, to January 31, 1945, as herein determined. Partnership #2 is not properly subject to renegotiation.
*893 The respondent by unilateral orders determined that the petitioner, Haas Mold Company, had excessive profits in the amount of $ 112,904 for its fiscal year ended January 31, 1945, and that its successor, Haas Mold Company, had excessive profits in the amount of $ 23,730 for its fiscal year ended January 31, 1946.
The issues presented for our decision are:
(1) Whether the respondent was correct in renegotiating the petitioners for the fiscal periods beginning May 1, 1944, and ending January 31, 1945, and beginning February 1, 1945, and ending January 31, 1946, respectively.
(2) Whether either of the partnerships in question was "under the control of or under common control with" either Metal Parts Corporation or Haas Foundry Company, within the meaning of section 403 (c) (6) of the Renegotiation Act.
(3) What, if anything, is a proper allowance in lieu of salaries for certain of the partners?
FINDINGS OF FACT.
Some of the facts have been stipulated and are found as stipulated.
Petitioner Haas Mold Company was a partnership formed under the laws of Wisconsin and commenced business on May 1, 1944, with its principal place*246 of business in Union Grove, Wisconsin.
The partners of this company, hereinafter referred to as Haas Mold Company #1, and the interest of each of them on the date the partnership commenced business, were as follows: *894
| Per cent | |
| Edward P. Haas | 45 |
| Carolyn Haas | 50 |
| Alvin N. Haas | 5 |
Edward P. Haas, who was the principal organizer and dominant figure in Haas Mold Company #1, was at the time of its organization highly skilled and experienced in the foundry business, in which he had been engaged for many years, both as an officer and director of Metal Parts Corporation and various other companies. At some time in November or December of 1943, he was approached by representatives of the Walker Manufacturing Company, which was then engaged in war work under prime contracts with the United States Navy, relative to the manufacture of certain rings and covers for powder barrels. Pursuant to discussions between Edward P. Haas and the Walker Manufacturing Company, it was decided that the items could best and most economically be manufactured by the use of the permanent mold method of casting, which would eliminate the need for much of the machining necessitated by either the*247 wet or dry sand mold methods then used in the foundry industry for making aluminum castings. The permanent mold method of casting was at that time in experimental stages in the industry and neither Metal Parts Corporation nor any other company with which Edward P. Haas was connected had any facilities for the experimental and developmental work necessary to bring this method to perfection. Edward P. Haas began experiments to perfect the permanent mold method in the middle of January 1944. As a result of these experiments, he succeeded, in the latter part of April, in designing permanent molds to be used in the manufacture of the rings and covers mentioned above. He had the mold manufactured and in April 1944 acquired the premises necessary for the manufacturing of the rings and covers. Haas Mold Company #1 was formed and actually commenced operation on May 1, 1944.
As a result of Edward P. Haas' efforts in perfecting the permanent mold method of casting the rings and covers required by the Walker Manufacturing Company, it was possible to eliminate the use of skilled molders whose services were in great demand during the war. The use of unskilled labor permitted the manufacture*248 of the required items at reduced costs. No price reductions were made by either Haas Mold Company #1 or #2 to the Government with respect to the contracts on which they were engaged during the periods in question.
On January 28, 1945, Edward P. Haas and Carolyn Haas each disposed of all but 10 per cent of his respective interest in the partnership to certain individuals in amounts as follows: *895
| Edward P. Haas to: | Per cent | Carolyn Haas to: | Per cent |
| Alvin N. Haas | 5 | Suelette Brady | 10 |
| Rita Honecker | 10 | Ethylan M. Rice | 10 |
| Ella Coling | 10 | Phillip J. Mares | 1 5 |
| Marguerite Haas | 10 | Germaine Mares | 5 |
| Florence H. Mogensen | 5 | ||
| Elmer Mogensen | 5 |
By the terms of the various sales, a one-tenth interest in the Haas Mold Company #1 sold for a total price of $ 15,000. A cash payment of $ 3,000 was required, *249 together with the execution of notes for $ 12,000, payable $ 2,000 in 3 months, $ 2,000 in 6 months, $ 2,000 in 9 months, and $ 6,000 in 12 months. The seller, Edward P. or Carolyn Haas as the case might be, was to have a lien upon the profits so long as any balance of the purchase price remained unpaid.
On February 1, 1945, the partners entered into a new agreement, which provided in part as follows:
Whereas, it is the desire of the parties hereto to dissolve said partnership agreement of May 1st, 1944 and enter into a new partnership agreement wherein all of the parties hereto will become partners;
* * * *
IT IS HEREBY AGREED:
FIRST: That the partnership agreement dated the 1st day of May, A. D. 1944 wherein Edward P. Haas, Carolyn Haas, and Alvin N. Haas were named as partners be and the same is hereby dissolved.
SECOND: That the parties hereto hereby make a new partnership agreement to take the place of said partnership agreement herein dissolved, subject to the following terms and conditions:
(a) The partnership shall continue the business of the dissolved partnership hereinbefore referred to and shall continue the business of manufacturing, jobbing, selling, retailing*250 and dealing in and with permanent mold castings, machine work, tool work and castings, and generally to conduct a foundry and do such other business as may be germane thereto.
(b) The partnership shall commence on the 1st day of February, A. D. 1945 and shall continue for five (5) years.
(c) The partnership shall be conducted and carried on under the partnership name, style and firm of HAAS MOLD COMPANY.
(d) The place of business of the said partnership shall be in the Village of Union Grove, Wisconsin, or in such other place or places as the partners shall hereafter determine.
(e) The capital of said partnership shall consist of the fixed assets of the Haas Mold Company as they appeared on the books of the company on January 31st, 1945 amounting to Twenty-two Thousand Eight Hundred Fifty-two and 44/100 ($ 22,852.44) Dollars. That each of the parties hereto has contributed and now owns a fractional share of the capital of the partnership, the fractional share of each of the partners having been set forth hereinabove. That a deed to the land and buildings on which the Haas Mold Company is located and a bill *896 of sale for all machinery, equipment and other property constituting*251 the fixed assets of the Haas Mold Company as of January 31st, 194t [sic] were executed and delivered by the former partners, Edward P. Haas, Carolyn Haas and Alvin N. Haas to this partnership, free and clear from any indebtedness, claims, liens or encumbrances.
(f) The business and affairs of the partnership shall be managed and controlled by an executive committee composed of three (3) of the partners elected annually at a meeting of all of the partners. That the executive committee shall consist of the manager of the business of the partnership and two (2) other partners. That the following partners have been elected to the executive committee of the partnership at the first meeting of the partners: Edward P. Haas, Alvin N. Haas and Phillip J. Mares. Edward P. Haas was designated chairman of the committee, Phillip J. Mares as a third member of the committee. That said executive committee so elected shall hold their respective positions until January 31st, 1946, or until such time as the partners shall elect a successor.
The new partnership, hereinafter referred to as Haas Mold Company #2, began business on February 1, 1945, and continued the contracts of its predecessor, *252 Haas Mold Company #1.
During the fiscal year February 1, 1945, to January 31, 1946, profits from Haas Mold Company #2 were distributed to each holder of a one-tenth interest totaling $ 4,467.15. As of December 1945, each of the holders of a one-tenth interest had paid $ 4,500 in liquidation of the $ 12,000 balance owed on the purchase notes, leaving a balance of $ 7,500 unpaid on the purchase notes.
As the result of negotiations looking toward the sale of Haas Mold Company #2 to the J. R. Watkins Company, Edward P. and Carolyn Haas decided in December 1945 to reduce the amounts due and owing to them from each purchaser of a 10 per cent interest in Haas Mold Company #1 from $ 15,000 to $ 10,000. This decision was the result of discussions initiated by the various purchasers and was premised upon the possibility of selling Haas Mold Company, an eventuality which would have precluded any further payment of the profits of that company to the various purchasers.
Before sale negotiations were completed and as a result thereof, Haas Mold Company #2 was incorporated and stock distributed to each of the partners according to his proportionate interest.
Pursuant to continuing negotiations*253 looking toward the sale of the business, Edward P. Haas canceled the $ 2,500 due and owing to him from each of the purchasers of a 10 per cent interest in consideration of a transfer to him by each of them of stock in the newly formed corporation in an equivalent amount. The stockholders of the newly organized corporation sold their stock to the J. R. Watkins Company. For the stock so sold, each stockholder who had had a 10 per cent interest in the predecessor partnership received $ 10,000 from the Watkins Company, thereby realizing a profit of $ 6,967.15 on a net investment of $ 3,032.85.
*897 Metal Parts Corporation, a Wisconsin corporation, with its principal place of business at Racine, Wisconsin, was in existence during 1944 and 1945, and the owners and holders of all of the outstanding stock during the period from January 1, 1944, to January 31, 1946, were as follows:
| Shares | |
| Edward P. and Carolyn Haas, jointly | 241 |
| Carolyn Haas, individually | 1 |
| Ervin Coling | 54 |
| Rita Honecker | 2 |
| Norbert Haas | 10 |
| Total shares outstanding | 308 |
The directors and officers of Metal Parts Corporation during the period from January 1, 1944, to January 31, 1946, were as follows: *254
| Edward P. Haas | Director | President |
| Carolyn Haas | Director | Vice president |
| Ervin Coling | Director | Treasurer and plant |
| manager | ||
| Norbert Haas | Director | Secretary |
| Rita Honecker | Director |
Haas Foundry Company, formerly Armstrong Foundry Company, a Wisconsin corporation, was acquired by the present owners by purchase of all of the outstanding capital stock of the Armstrong Foundry Company in September 1944, and the owners and holders of said stock from September 1944 to January 31, 1946, were as follows:
| Shares | |
| Edward P. and Carolyn Haas, jointly | 485 |
| Edward P. Haas, individually | 5 |
| Carolyn Haas, individually | 5 |
| Ervin Coling | 90 |
| Charles Zinnen | 90 |
| Leo Martin | 75 |
| Norbert Haas | 75 |
| Rita Honecker | 75 |
| Total shares outstanding | 900 |
The directors and officers of Haas Foundry Company during the said period from September 1944 to January 31, 1946, were as follows:
| Edward P. Haas | Director | President |
| Carolyn Haas | Director | Vice president |
| Ervin Coling | Director | |
| Charles Zinnen | Director | Secretary-treasurer and |
| general manager | ||
| Leo Martin | Director | Foundry superintendent |
| Norbert Haas | Director | |
| Rita Honecker | Director |
*898 Relationships by blood and marriage between the *255 Haas family were as follows: Edward P. Haas and Carolyn Haas were husband and wife; Alvin N. Haas and Norbert Haas were brothers of Edward P. Haas; Marguerite W. Haas was the wife of Norbert Haas.
Germaine Mares, Phillip J. Mares, Ethylan M. Rice, Suelette R. Brady, Elmer Mogensen, Florence H. Mogensen, Rita A. Honecker, Ella Coling, Charles Zinnen, Leo Martin, and Ervin Coling were in no way related to Edward P. Haas and Carolyn Haas by blood or marriage.
Alvin N. Haas, Germaine Mares, Phillip J. Mares, Ethylan M. Rice, Suelette R. Brady, Elmer Mogensen, Florence H. Mogensen, and Ella Coling were not stockholders, directors, or officers of Metal Parts Corporation or Haas Foundry Company during the period from May 1, 1944, to January 31, 1946. Phillip J. Mares and Germaine Mares were husband and wife, Elmer Mogensen and Florence H. Mogensen were husband and wife, and Ervin Coling and Ella Coling were husband and wife.
Charles Zinnen and Leo Martin were not stockholders, directors, or officers of Metal Parts Corporation, or partners of Haas Mold Company #1 and #2 during the period from May 1, 1944, to January 31, 1946.
The business of both Metal Parts Corporation and the Haas Foundry*256 Company was separate and distinct from each other and from the business of both Haas Mold Company #1 and #2. No contracts or subcontracts were jointly performed by Haas Mold Company #1 and #2 and Haas Foundry Company and/or Metal Parts Corporation, and no subcontracts were let between any of them. Plants, tools, and labor force of each of the four companies were separate and distinct from each of the other companies and each was operated as a separate and distinct entity.
Haas Mold Company #1 and Metal Parts Corporation were under common control of Edward P. and Carolyn Haas.
Haas Mold Company #2 was not under common control with either Metal Parts Corporation or Haas Foundry Company.
During the period May 1, 1944, to January 31, 1945, Edward P. Haas did not draw any amount with respect to salary. For the same period, Alvin N. Haas drew $ 125 per week for his services as general manager. This amount was in addition to his right to a share of the profits. A reasonable salary allowance for the services of Edward P. Haas and Alvin N. Haas rendered to Haas Mold Company #1 during the period May 1, 1944, to January 31, 1945, is $ 30,000. Carolyn Haas during that period exercised only*257 the functions of an owner, and not those of an employee.
Haas Mold Company #1 realized excessive profits in the amount of $ 92,904 for its fiscal year ended January 31, 1945.
*899 OPINION.
The principal issue for our decision is whether either Haas Mold Company #1 or Haas Mold Company #2, or both of them, were under the control of or controlling or under common control with either Metal Parts Corporation or Haas Foundry Company within the meaning of section 403 (c) (6) of the Renegotiation Act. 2 However, for reasons of convenience, we dispose first of an argument put forth by the petitioners on brief. The petitioners contend that Haas Mold Company #1 and Haas Mold Company #2 were in fact one continuous partnership, with fiscal years beginning on May 1, 1944 and 1945, and ending on April 30, 1945 and 1946. They argue that the agreements of January 28 and February 1, 1945, provided only for the admission of new partners and the continuation of the partnership, and cite us to the authority contained in Callahan v. War Contracts Price Adjst. Board, 13 T. C. 355, to support the proposition that the respondent exceeded its authority in determining*258 that the petitioners had excessive profits for either of the two periods here in question. The facts of that case, insofar as they are here material, were as follows: A new partner was admitted to the Die Engraving Company on April 1, 1944, and another as of June 1, 1944. The War Contracts Price Adjustment Board determined that the admission of the new partners caused the dissolution of the partnership upon the admission of each. From this premise, it treated the periods January 1 to March 31, 1944, and April 1 to May 31, 1944, as the partnership's fiscal years and renegotiated the profits of the partnership for each period accordingly. Relying upon the Uniform Partnership Act as effective in the State of Michigan, we held that the entrance of a new partner with the consent of the old did not dissolve the partnership and held that the War Contracts Price Adjustment Board had no authority to renegotiate the profits of the taxpapers for either of the two periods there in question because those periods were not the fiscal years of the taxpayers as defined in section 403 (a) (8) of the Renegotiation Act.
*259 The facts in the instant case differ materially from those in the Callahan case. An examination of the partnership agreement entered into by the partners of Haas Mold Company #2 on February 1, 1945, reveals that it was the intention of the partners to make a new partnership *900 agreement. They provided specifically in the new agreement that the partnership created by the agreement dated May 1, 1944, be dissolved. The Uniform Partnership Act as in force in the State of Wisconsin provides that a cause of dissolution shall be the expressed will of the partners. Wis. Stats. (1951), sec. 123.26 (1) (c). Therefore, while it is true, as the petitioners argue, that the admission of the new partners on January 28, 1945, or January 31, 1945, whenever the event in fact took place, did not work a dissolution of the partnership, nevertheless the expressed intention of the partners, both new and old, to dissolve the partnership and to enter into a new agreement, the terms of which differed in many material respects from those of the old one, did constitute a dissolution ending the existence of Haas Mold Company #1. Since Haas Mold Company #1 existed for only 9 months and came to*260 an end on February 1, 1945, it becomes obvious that the petitioners' contention that respondent should have renegotiated Haas Mold Company for the 12-month period ended April 30, 1945, cannot be sustained. Cf. Glenfield Machine & Tool Co. v. W. C. P. A. B., 16 T. C. 27. We therefore sustain the respondent with respect to this issue.
The second issue for our decision is whether Haas Mold Company #1 or #2, or both of them, were under common control with Metal Parts Corporation. 3 The issue of control presents a question of fact to be determined in the light of all of the circumstances surrounding the case. Lowell Wool By-Prod. Co. v. War Cont. Price Adj. Bd., 14 T.C. 1398">14 T. C. 1398. As we have found, Edward P. and Carolyn Haas owned 95 per cent of Haas Mold Company #1, together with 242 of the 308 outstanding shares of Metal Parts Corporation. Consideration of these and the other facts presented of record have led us to the conclusion that Haas Mold Company #1 and Metal Parts Corporation were under the control of Edward P. and Carolyn Haas.
*261 We reach this conclusion despite the fact that both companies appear to have been operated as separate and distinct business entities and that Edward and Carolyn Haas did not use their control to intermingle or integrate the business activities carried on by the two companies. The absence of these factors is relied upon by petitioners to defeat a finding that the two businesses were under common control. However, the absence of a joint operation has been held insufficient to defeat a finding of common control in the face of actual control represented by more than 50 per cent of the ownership of two or more concerns. Pechtel v. United States, 18 T. C. 851. If control in fact exists, the profits of all of the business entities operated under such control may be renegotiated so long as the aggregate of their sales is $ 500,000. Hoffman v. United States, 23 T. C. 569.
*901 With respect to Haas Mold Company #2, the story is different. As a result of sales of their interests, Edward P. and Carolyn Haas were left with only 20 per cent of ownership in Haas Mold Company #2. Upon the conclusion of these sales and*262 the execution of the new partnership agreement, actual control passed to the executive committee provided for in the new agreement. Common control over Haas Mold Company #2 and any other company never existed. The respondent's determination with respect to Haas Mold Company #2 is without authority, and is rejected.
Since the total renegotiable sale of Metal Parts Corporation and Haas Mold Company #1 exceeded $ 500,000, the profits of Haas Mold Company #1 are subject to renegotiation, which brings us to the final issue to be decided. Section 403 (a) (4) (B) of the Renegotiation Act provides for recognition of deductions allowed for income tax purposes in renegotiating profits subject thereto, and, while a partnership is not allowed any deductions for income tax purposes on account of compensation to active partners, it has been recognized, and we have held in many cases, that an allowance should be made in an amount sufficient to provide reasonable compensation for services actually rendered by them, e. g., Pechtel v. United States, supra. The respondent in making his determination with respect to Haas Mold Company #1 allowed $ 10,000 for partners' *263 salaries. We must agree with the petitioners that this amount is inadequate. The success of Haas Mold Company #1 was to a substantial extent attributable to the services rendered by Edward P. Haas. The permanent mold method used in the business and on which the success of the operation was dependent, was developed by him. As for Alvin N. Haas, he actually received $ 125 per week for his services. This amount was not intended to reimburse him fully for the value of his services. For these and other reasons, we have found that a reasonable salary allowance for the services rendered by Edward P. Haas and Alvin N. Haas to Haas Mold Company #1 during the period May 1, 1944, to January 31, 1945, is $ 30,000.
Orders will be entered in accordance herewith.
Footnotes
1. The interest of Phillip Mares and Germaine Mares and the interest of Florence H. Mogensen and Elmer Mogensen will be regarded as single units of ownership for the purpose of convenience in discussion.↩
2. Sec. 403 (c) (6). This subsection shall be applicable to all contracts and subcontracts, to the extent of amounts received or accrued thereunder in any fiscal year ending after June 30, 1943, whether such contracts or subcontracts were made on, prior to, or after the date of the enactment of the Revenue Act of 1943, and whether or not such contracts or subcontracts contain the provisions required under subsection (b), unless * * * (B) the aggregate of the amounts received or accrued in such fiscal year by the contractor or subcontractor and all persons under the control of or controlling or under common control with the contractor or subcontractor, under contracts with the Departments and subcontracts * * * do not exceed $ 500,000 and under subcontracts described in subsection (a) (5) (B) do not exceed $ 25,000 for such fiscal year. If such fiscal year is a fractional part of twelve months, the $ 500,000 amount and the $ 25,000 amount shall be reduced to the same fractional part thereof for the purposes of this paragraph.↩
3. Respondent makes the same allegation of common control with respect to Haas Foundry Company, but in taking the view of the case which we have, it becomes unnecessary that we consider that company.↩