*81 Decision will be entered under Rule 50.
Petitioner Theodore Wilson was a partner of the Hanlon & Wilson Co., a partnership composed of petitioner, his brother, Richard, and his father, A. G. Wilson, from August 1, 1942, to July 5, 1945. The Commissioner, in his determination of the deficiencies, determined that A. G. Wilson was not a partner during the period from January 30, 1943, to July 5, 1945, and, therefore, determined that one-half of the partnership profits during this period was taxable to petitioners. Held, the Commissioner erred in determining that A. G. Wilson was not a bona fide partner of Hanlon & Wilson Co. during the period in controversy.
*409 This proceeding involves deficiencies in income tax for the taxable years 1943 and 1944 in the amounts of $ 10,199.45 and $ 5,091.25, respectively. The amount of $ 10,199.45 for the year 1943 is made up *410 of a deficiency of $ 9,866.93 as set out in the deficiency notice, plus an increased deficiency of $ 332.52 claimed by respondent in his answer*82 to the petition.
The deficiencies as set out in the deficiency notice are due to an adjustment in petitioners' net incomes resulting from respondent's determination that for tax purposes Asbury G. Wilson was not a partner of the Hanlon & Wilson Co. after December 17, 1942, and that therefore one-half of the partnership profits is allocable to petitioners instead of one-third, as claimed in petitioners' returns. By appropriate assignment of error petitioners contest this adjustment. During the proceeding respondent conceded that Asbury G. Wilson was a partner until January 30, 1943, rather than December 17, 1942. Petitioners do not contest respondent's determination that the victory tax credit for 1943 is limited to the statutory maximum of $ 1,100, which results in a further deficiency of $ 332.52 for 1943 because of an erroneous allowance of $ 1,432.52, as shown in the deficiency notice.
FINDINGS OF FACT.
The case was submitted upon a stipulation of facts, depositions, oral testimony and exhibits. The facts so stipulated are found. Other facts are found from the evidence.
Petitioners are individuals residing in San Gabriel, California. Joint income tax returns for the taxable*83 years here involved were filed with the collector of internal revenue for the twenty-third collection district of Pennsylvania at Pittsburgh, Pennsylvania.
During the period August 1, 1942, to July 5, 1945, petitioner Theodore F. Wilson (hereinafter called Theodore) was a member of the partnership of Hanlon & Wilson Co., of Wilkinsburg, Pennsylvania. The partnership articles named three individuals as members of the partnership. Those individuals were Theodore; Asbury G. Wilson (hereinafter called A. G. Wilson), Theodore's father; and John Richard Wilson (hereinafter called Richard), Theodore's brother.
In 1905 A. G. Wilson and M. D. Hanlon founded Hanlon & Wilson Co., a partnership. Hanlon died about June 1932 and about six months later Hanlon & Wilson was organized as a corporation, A. G. Wilson and Mrs. Hanlon each owning one-half of the outstanding stock. In 1933 Richard became associated with the corporation, working at various jobs, beginning as a shop laborer and after a few years transferring to the office. A. G. Wilson gradually turned more responsibility over to Richard and in 1936 Richard was given full charge. A. G. Wilson continued as president of the corporation*84 and participated in the management of the corporation in an advisory capacity.
Early in 1941 when Richard's entrance in the Army was imminent, A. G. Wilson and Richard agreed that Theodore should be brought *411 into Hanlon & Wilson as a replacement for Richard during Richard's term of armed service. It was contemplated that after Richard returned all three of the Wilsons would remain in the firm. At the time plans were being made for Theodore's association with Hanlon & Wilson, Theodore was living in California and was employed as a salesman by the Diversey Corporation of Chicago. From the time Theodore graduated from the School of Business Administration of the University of Pittsburgh until coming with Hanlon & Wilson his experience had been limited to clerical and sales work. Theodore did not have the experience or skill at that time to run Hanlon & Wilson which was engaged in the manufacture of both airplane heaters, a wartime development, and rail bonds, which in peacetime are Hanlon & Wilson's principal product. Theodore joined Hanlon & Wilson in May 1941 and was given the title of superintendent, a position for which he was not qualified by experience and training. *85 Later, he was relieved of his duties as superintendent and assumed the position of secretary-treasurer of the corporation, which he retained until its dissolution on July 31, 1942. On July 5, 1941, Richard entered the Army and the active management of the business was assumed by A. G. Wilson and Theodore.
In July 1942 the corporation purchased Mrs. Hanlon's remaining stock for $ 25,000, Richard having previously purchased $ 1,000 of her stock. A. G. Wilson and Richard then owned all of the outstanding stock of the corporation. On July 16, 1942, Theodore received gifts of 127 1/3 shares and 19 1/3 shares of the corporation's stock from A. G. Wilson and Richard, respectively. These gifts were preliminary to the organization of a partnership composed of A. G. Wilson, Richard, and Theodore, in which each was to have a one-third capital interest and share profits and losses equally. On July 31, 1942, the corporation was dissolved and all assets thereof were on August 1, 1942, transferred to Hanlon & Wilson Co. (the partnership).
On December 17, 1942, the partnership agreement was amended to provide that upon the death of A. G. Wilson, leaving his wife to survive him, his estate would*86 receive three-fifths of the agreed or arbitrated value of his interest in the business, and that his estate would receive two-fifths of such value if his wife predeceased him. This amendment was due to the fact that the life of A. G. Wilson was not then insurable on any sound economic basis, whereas the partnership had applied for and received life insurance policies on the lives of Theodore and Richard in the face amount of $ 50,000 each, of which the partnership was the beneficiary.
On January 30, 1943, Theodore, Richard and A. G. Wilson entered into a supplemental agreement, under the terms of which A. G. Wilson was to withdraw his capital equity of $ 30,000 and continue as a *412 partner in the business without any capital investment therein. This agreement was made because A. G. Wilson wished to settle his estate and to insure that, upon his death, the business would pass to Theodore and Richard without being financially embarrassed by other members of the family. The agreement provided, inter alia, that (1) A. G. Wilson should have a drawing account equal to that of Theodore and Richard; (2) Theodore, Richard and A. G. Wilson should share profits and losses one-third*87 each; upon A. G. Wilson's death the partnership should not terminate, but his right or the right of his estate to demand or receive any moneys whatsoever from the partnership business should be at an end and thereafter Theodore and Richard should share profits and losses 50 per cent each; (3) Theodore and Richard should each have a 50 per cent capital investment in the partnership business; and (4) upon the death of either Theodore or Richard, or both of them, provision would be made to pay A. G. Wilson an income so long as he should live. On February 20, 1943, A. G. Wilson withdrew the $ 30,000 from the partnership and made distribution of it among members of his family, as follows:
| Mrs. A. G. Wilson, wife | $ 6,000 |
| Louise Wilson, daughter | 6,000 |
| William Wilson, son | 6,000 |
| J. Richard Wilson, son | 6,000 |
| Theodore F. Wilson, son | 6,000 |
A. G. Wilson continued to serve the partnership in the same capacity as he had prior to the agreement permitting the withdrawal of his capital. It was the intent of Theodore, Richard, and A. G. Wilson that Hanlon & Wilson Co. should be a bona fide partnership consisting of the three partners as provided by the partnership agreement and its amendments, *88 and there was no intention that A. G. Wilson should cease to be a member of the partnership because of his withdrawal of his capital interest.
A. G. Wilson was in his 80's during the period here involved. However, he was present at the plant almost daily, presided at managerial meetings, and helped formulate the business policy. He signed notes, mortgages, and checks as a partner on behalf of the partnership. He helped design small machinery and tested the quality of the Hanlon & Wilson's product. Occasionally he made a business trip with Theodore. A. G. Wilson did not manage the business actively, but he received the weekly report of the business and was frequently consulted by the management and key personnel, giving advice on matters with which he was particularly familiar on account of his long service and experience in the business.
A. G. Wilson's one-third share of the net profits of the partnership for the year ended July 31, 1943, as shown by the partnership books, *413 was $ 73,220.45. He withdrew the sum of $ 30,484.97 from the partnership and the balance of his share of the profits, or $ 42,735.48, was credited to his capital and undrawn earnings account.
A. *89 G. Wilson's one-third share of the net profits of the partnership for the year ended July 31, 1944, as shown by the partnership books, was $ 45,734.57, which sum was credited to his capital and undrawn earnings account. He withdrew the sum of $ 76,719.85 from the partnership and that sum was charged to his capital and undrawn earnings account.
A. G. Wilson's one-third share of the net losses of the partnership for the year ended July 31, 1945, as shown by the partnership books, was $ 8,712.42, which sum was charged to his capital and undrawn earnings account. He withdrew the sum of $ 8,521.24 from the partnership, which sum was charged to his capital and undrawn earnings account.
On July 31, 1945, A. G. Wilson had withdrawn from the partnership $ 10,898.51 in excess of the profits to which he was entitled, computed as follows:
| CREDITS | |
| 7/31/43 credit balance | $ 42,735.48 |
| 10/14/43 adjustment of 1942-1943 entries | 3,772.02 |
| 7/31/44 profit Aug. 1943 to July 31, 1944 | 45,734.57 |
| 10/31/44 prior year adjustments | 1,212.93 |
| Total credits | 93,055.00 |
| DEBITS | |
| 1/6/44 renegotiation year 8/1/42 to 7/31/43 | 10,000.00 |
| 10/31/44 transfer of drawing account for year ended July 31, 1944 | 76,719.85 |
| 7/31/45 net loss -- year ended July 31, 1945 | 8,712.42 |
| 7/31/45 drawing account -- year ended July 31, 1945 | 8,521.24 |
| Total debits | 103,953.51 |
| Net debit balance | 10,898.51 |
*90 The partnership filed income tax returns showing income and losses for the fiscal years ended July 31, as follows:
| 1943 (original return) | $ 167,105.52 |
| 1943 (amended return) | 199,397.10 |
| 1944 (original return) | 152,080.95 |
| 1944 (amended return) | 110,495.44 |
| 1945 (original return) | (56,884.20) |
| 1945 (amended return) | (57,238.34) |
| 1945 (amended return) long term capital gain | 3,350.48 |
A. G. Wilson, Richard, and Theodore each reported one-third of the net income of the partnership for the fiscal years ended July 31, 1943, *414 and July 31, 1944. The net loss and long term capital gain for the fiscal year ended July 31, 1945, were reported as follows:
| Long term | ||
| Net loss | capital net | |
| gain | ||
| Asbury G. Wilson | $ 19,079.45 | |
| John Richard Wilson | 21,077.16 | $ 1,675.24 |
| Theodore F. Wilson | 17,081.73 | 1,675.24 |
| Total | 57,238.34 | 3,350.48 |
When Richard returned from the Army in July of 1944 there was considerable friction between him and Theodore, and neither of the brothers was willing to allow the other to have a position of authority. In the spring of 1945 A. G. Wilson used his power to put Richard in the position where he again had command, and on July 5, *91 1945, with the consent of A. G. Wilson, Richard purchased Theodore's interest in the partnership and Theodore retired.
During the period here involved Hanlon & Wilson Co. was a bona fide business partnership consisting of Theodore, Richard, and A. G. Wilson, and each partner was entitled to receive and did receive his one-third of the profits and shared one-third of the losses.
OPINION.
There is only one question for us to decide, which is the composition of the partnership Hanlon & Wilson Co. during the period from January 30, 1943, to July 5, 1945. Although deficiencies have been determined for the taxable years 1943 and 1944 only, the taxable year 1945 is also in controversy because the partnership suffered a net operating loss in 1945, which reduced the partnership's distributable income for 1943 under the carry-back provision of the Internal Revenue Code.
Respondent contends that for tax purposes A. G. Wilson was not a partner of Hanlon & Wilson Co. during the period in controversy and therefore one-half of the profits and losses for this period is taxable to petitioners. Respondent argues that after the agreement of January 30, 1943, under which A. G. Wilson was to withdraw*92 his capital investment, he was no longer a partner because he did not contribute to the control or management of the business, or otherwise perform vital services for Hanlon & Wilson; that any allocation of profits to A. G. Wilson during the period from January 30, 1943, to July 5, 1945, was only a paper reallocation of the income attributable to Theodore and Richard, who were the only bona fide partners of Hanlon & Wilson Co.
*415 We can not agree with respondent, for we have found from a consideration of all the evidence that during the period in controversy Hanlon & Wilson Co. was a bona fide partnership, consisting of Theodore, Richard, and A. G. Wilson.
Hanlon & Wilson was organized as a partnership on July 1, 1942, and consisted of Theodore, Richard, and A. G. Wilson. A. G. Wilson shared in the management and control of the business, rendered other vital services, and shared in the profits and losses. A. G. Wilson did not cease to be a partner after January 30, 1943, when the agreement permitting the withdrawal of his capital interest was signed, nor was it intended by the parties that he should cease to be a member.
In our findings of fact set out above we found that*93 during the period in controversy A. G. Wilson was a part of the management of Hanlon & Wilson and rendered vital services to the business during the period. A. G. Wilson was treated as a partner and actually participated in the affairs of the partnership. A. G. Wilson, though a man of approximately 80 years, was a vital figure in the management of Hanlon & Wilson. He had founded the business in 1905 and the knowledge he had acquired in 38 years was of great value to the partnership. It can hardly be expected that a man of 80 years would perform the routine tasks of management which were delegated to Richard in 1936 and which Theodore performed after Richard's departure for the service. However, A. G. Wilson helped formulate the policies of the business and acted as an advisor to Theodore during this period as he had done to Richard as late as 1941.
In , the Court said:
* * * A partnership is, in other words, an organization for the production of income to which each partner contributes one or both of the ingredients of income -- capital or services. .*94 * * *
To be a partner, then, it is not a prerequisite that one contribute capital to the business. We find that A. G. Wilson was a partner of Hanlon & Wilson from January 30, 1943, to July 5, 1945, on the basis of the services as detailed in our findings of fact which he rendered the business during this period, notwithstanding his capital contribution had been withdrawn.
In the Supreme Court's recent decision in , the Court, among other things, said:
* * * The question is not whether the services or capital contributed by a partner are of sufficient importance to meet some objective standard supposedly established by the Tower case, but whether, considering all the facts -- the agreement, the conduct of the parties in execution of its provisions, their statements, the testimony of disinterested persons, the relationship of the parties, their respective abilities and capital contributions, the actual control of income and the purposes for which it is used, and any other facts throwing light on their true *416 intent -- the parties in good faith and acting with a business purpose intended to join together*95 in the present conduct of the enterprise. * * *
In reaching our decision that A. G. Wilson during the period here in question was a bona fide partner in the partnership of Hanlon & Wilson, we have given consideration to the several factors named by the Supreme Court in the above language. Having reached the conclusion that A. G. Wilson was a bona fide partner in the business, we reverse the Commissioner's determination that petitioner Theodore F. Wilson is taxable on part of the profits which were received by A. G. Wilson. In a recomputation under Rule 50, Theodore should be taxed on only the share of the profits to which he was entitled under the partnership agreement. We do not understand that the amount of the partnership profits during the periods involved is in issue.
Decision will be entered under Rule 50.