*127 Decisions will be entered under Rule 50.
1. Two individuals, engaged for many years in the junk business, signed a partnership agreement in 1928, giving to the wife of each a one-fourth interest. When the husbands began the junk business in a humble way, the wives' doweries in part supplied capital, and the wives also gave assistance by services. As the business expanded into a large and profitable enterprise, the wives were constantly consulted about policy; the husbands deferred to their judgment in business matters; and the wives participated fully and often decisively in important decisions. For 1941 the four spouses successfully contested tax deficiencies which the Commissioner had determined against them by disallowing as excessive a part of the salaries paid by the partnership to family members, and in its report this Court made a finding that the four were conducting business as partners, as alleged by them and admitted by the Commissioner. For 1942 and 1943 the Commissioner determined that the wives were not recognizable as partners for tax purposes. Held:
(1) That the status of the wives as partners recognizable for tax purposes, is not res judicata by virtue*128 of the decision in the prior proceeding, and, as the question was not there put in issue, the Commissioner is not collaterally estopped to raise it here. Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591.
(2) That, on the evidence, the wives are recognizable for tax purposes as members of the partnership.
2. The partnership and the son of a partner in and after 1941 made numerous advances on open account to a corporation organized with an authorized capital of a quarter of a million dollars to erect and operate a steel mill. The corporation issued its shares to the son, the partners, and their wives, and in March 1943, when advances aggregated about three-quarters of a million dollars, entries were made on the books of the partnership and of the son's business crediting $ 187,800 to payment for the shares issued, which were of that par value; about a quarter of a million dollars to payment for corporate bonds issued in that amount; and the remainder was carried on open accounts receivable by the partnership and son and on corresponding open accounts payable by the corporation. Under a contract with RFC the corporation was forbidden to make any payments (except*129 salary) to the stockholders until a $ 700,000 RFC loan should be paid off by it, and the stockholders agreed among themselves that the son, who held one-third of the shares, was to bear one-third of any total losses from the venture and the partnership, two-thirds. The corporation was unsuccessful and in November 1943 the stockholders sold their shares at one cent each and about $ 300,000 of the open accounts was written off as worthless. By contribution from the son the partnership's share of this loss was reduced to about $ 200,000. On the evidence, held, that the advances constituted contributions to capital, and hence the partnership's loss is not deductible as a bad debt.
*44 The Commissioner determined a 1943 income tax deficiency of $ 151,044.45 against Sam Schnitzer; of $ 151,049.05 against Harry J. Wolf, now deceased; and of $ 42,273.99 against the estate of Jennie Wolf, deceased. He determined further that Monte L. Wolf, Blossom M. Goldstein, and Charlotte C. Cohon are liable for the deficiency of Jennie*130 Wolf's estate as transferees of all the estate's assets. The deficiencies determined against Sam Schnitzer and Harry J. Wolf, deceased, resulted from including in the income of each one-fourth of the profits of a partnership, which fourth had been reported by their respective wives as partners. The deficiency against the estate of Jennie Wolf resulted from an alternative determination that she was recognizable as a partner. In all three determinations the distributable shares of partnership profits were increased by disallowance of a bad debt deduction caimed by the partnership on account of the worthlessness of advances made by it to a corporation in which Sam Schnitzer, Harry J. Wolf, and their wives were stockholders. Petitioners contend that the wives were bona fide members of the partnership and recognizable as such for tax purposes; that the partnership's advances to the corporation were loans, not contributions to capital as respondent contends; and that the part of them which became worthless and was written off in 1943 is deductible as a bad debt.
FINDINGS OF FACT.
Sam Schnitzer, petitioner in Docket No. 14208, and Harry J. Wolf, deceased, residents of Portland, Oregon, *131 in 1942 and 1943 prepared their income tax returns for those years on the cash basis and filed them with the collector of internal revenue for the district of Oregon. Harry J. Wolf died on February 6, 1948, and his son, Monte L. Wolf, is executor of his estate, petitioner in Docket No. 14209. Monte L. Wolf is also administrator de bonis non with the will annexed of the estate of Jennie Wolf, deceased, petitioner in Docket No. 14372. Jennie Wolf, wife of Harry J. Wolf, died on April 8, 1945, a resident of Portland, and the owner of property in excess of the deficiencies in tax asserted against her. She filed her income tax returns, prepared on the cash basis, for 1942 and 1943 with the collector of internal revenue for the district of Oregon. Monte L. Wolf, Blossom M. Goldstein, and Charlotte C. Cohon, petitioners in Docket Nos. 14278, 14279, and 14280, *45 also residents of Portland, are children of Harry J. and Jennie Wolf, and received, as distributees of the residue of Jennie Wolf's estate, assets of a fair market value of $ 22,923.09, $ 23,855.57, and $ 24,112.08, respectively. The distribution of these assets left the estate without means to pay taxes, and these petitioners*132 became thereby liable as transferees for any deficiency in tax of the transferor estate to the extent of the value of property received by each.
During the years 1942 and 1943 Sam Schnitzer and Harry J. Wolf were active in the operation of the Alaska Junk Co. (hereinafter called Alaska Junk), a partnership engaged in the business of buying, selling, and generally dealing in junk, pipe, tools, machinery, hardware, scrap, and other metal products at Portland. Its books were kept on an accrual basis, and partnership returns, prepared on that basis, were filed for it in 1942 and 1943 with the collector of internal revenue for the district of Oregon. On these returns Sam Schnitzer and his wife, Rose Schnitzer, and Harry J. Wolf and his wife, Jennie Wolf, were listed as the partners, and a share of profits was reported as distributable to each.
Wolf and his wife were married at Portland in 1906. Both were born abroad, but the wife had been educated in this country and spoke fluent English. Wolf did not. Her father was engaged in the junk business and employed Wolf as an assistant, but Wolf was unhappy in his work because his handicap exposed him to ridicule. He remained with his father-in-law*133 long enough to know the various metals, and, as his wife was familiar with the junk business, they decided to operate independently. She had brought a dowry of about $ 1,000, and with this Wolf purchased a horse and wagon, and began to collect scrap metal in rural areas on trips that sometimes lasted two weeks or more. This scrap was stored in the basement of their home, and his wife took customers' calls, kept records, and performed those duties of the business which required writing. Schnitzer and his wife were also born abroad. She brought the customary dowry, and Schnitzer began to buy and sell scrap metal also, developing a business in a petty way with his wife's aid. About 1911 Wolf and Schnitzer began working together in the junk business, Wolf contributing his horse and wagon and some machinery and Schnitzer providing about $ 1,000 capital. In February 1912 they and S. Horwitz organized a corporation to engage in the junk business, and one share of $ 1,000 par value was issued to each of the three. Because of differences with Horwitz, the corporation was dissolved the following April. Thereafter Wolf and Schnitzer jointly operated a junk business without any formal*134 agreement, and developed it into a large and profitable enterprise. The two families were on intimate terms during the ensuing years, and there were daily discussions of business problems and policies by the *46 four at one or the other's home or at the business office. In these conferences the wives took an active part, especially Jennie Wolf, whose business acumen was respected by both husbands.
On January 3, 1928, the four spouses entered into a written agreement which recited that the two husbands "in consideration of love and affection * * * desire to admit" the two wives "as co-partners" in the business of buying and selling machinery, iron and iron products, which "S. Schnitzer and H. J. Wolf have heretofore carried on * * * under the names of Alaska Junk Company and Schnitzer-Wolf Machinery Company." It was then agreed that the two husbands "assign, sell and transfer" to their respective wives a one-fourth interest in the business; that the husbands carry on the business in the same manner as before; that active management and control be vested in them; and that they have the exclusive right to enter into contracts, to obligate the partnership on notes, bills, and orders, *135 to sign all checks, and to determine all questions of management and policy. The interest of each partner was fixed as one-fourth; each was to be allowed to draw weekly wages for services, and, after deduction of these wages and other business expenses, the resulting net profits were to be divided equally by the four and losses were to be so borne. The four immediately signed and publicly recorded an assumed name certificate to do business as the Alaska Junk Co. Books were opened, and capital accounts were set up for the four.
Thereafter withdrawals were made by each husband and charged to a drawing account in his name. The husband's withdrawals included money used for household expenses, and the partnership paid directly some domestic bills, the amount being charged to the debtor husband's account. Later a drawing account was set up for each wife, but the wives' drawing accounts were charged only with their income taxes, which the partnership paid, and the wives never made any direct withdrawals. Undrawn profits were left in the business, and at the end of the year the drawing accounts of spouses were consolidated and, if one family had drawn more than the other, the excess*136 was charged to the account of the husband of the excess drawer. Undrawn profits were then credited to capital account. As the two families lived frugally, a substantial amount of profits was accumulated over the years and used in the business. Each husband was paid a salary of $ 10,000 a year for his services in 1938 and thereafter. Constant conferences between the four spouses were continued. The wives kept in close touch with all phases of the business, and no important decision was reached without their participation. Proposals for several new enterprises were dropped because of their opposition, and other ventures were undertaken only after their approval. They rendered vital services to the partnership in 1942, 1943, and preceding *47 years, and their dowries constituted a material capital factor in the original launching of a junk business by each husband.
Prior to 1928 Wolf and wife and Schnitzer and wife did not file separate income tax returns. Since 1928 profits of the business have been reported on partnership returns which indicated one-fourth as the share distributable to each of the four, and each has reported the share on a separate return. A copy of the*137 partnership agreement was furnished an examining revenue agent prior to 1931, and the Commissioner accepted the returns as correctly reporting the partnership's members and interests until 1942. In 1938 and subsequent years the distributable shares were computed to reflect $ 10,000 more for each husband.
Accepting the partnership return, the Commissioner increased the distributable profits reported for 1941 by disallowing as excessive compensation a bonus of $ 10,000 each paid to a son and son-in-law of Schnitzer and to a son and son-in-law of Wolf, who were employed in the business in that year. Schnitzer and wife and Wolf and wife each filed a petition with this Court, Docket Nos. 6262 to 6265, contesting the determined increase in distributable income and the tax thereon which resulted from the change, and assigning as error the Commissioner's disallowance of "certain salaries paid by the Alaska Junk Company." Each petitioner alleged that he was "a member of the partnership of Alaska Junk Company, which said partnership is composed of four individuals, H. J. Wolf, Mrs. J. Wolf, S. Schnitzer and Mrs. R. Schnitzer; each owning a one-fourth interest therein." Respondent admitted*138 the allegation in his answers, and this Court found it as a fact. It also found that the partnership was originally organized in 1911 by Wolf and Schnitzer. After stating that the only issue was the "purely fact question" of "the reasonableness of salaries paid to the four sons and sons-in-law," the Court decided that the amounts paid were reasonable and reversed the Commissioner's determinations by decision entered September 24, 1946.
As Alaska Junk expanded its activities and grew in financial strength, it occasionally made loans or advances to customers in the expectation of maintaining or increasing its trade. These advances were made sometimes when the customer was indebted to it for goods and were charged to his open account. The books indicate such advances aggregating $ 1,600 to M. Turn; $ 4,479.63 to Munce & Pedrante; $ 1,510 to R. Pedrante; $ 2,750 to Emil Nyberg; $ 4,500 to the Marshfield Bargain House; $ 8,000 to the Medford Bargain House, and $ 1,971.08 to various others. All of these customers bought scrap and sold it to Alaska Junk or hauled scrap for Alaska Junk, and most of the advances were repaid by cash or by credit for scrap supplied. Some were not repaid.
*139 *48 Alaska Junk also made very large advances to enterprises in which members of the Wolf and Schnitzer families were interested. Schnitzer's son, Morris, individually operated a scrap business under the assumed name of Schnitzer Steel Products Co. Between July 1936 and March 1948 Alaska Junk made to him cash advances aggregating $ 119,020.99, of which $ 17,517.37 was repaid in cash and the rest in scrap. In 1939 Wolf, Schnitzer, and their wives organized the Central Supply Co. as a wholesale dealer in plumbing and electric goods. The organizers, in payment for its capital stock, placed $ 50,000 to its credit in an account with Alaska Junk, and Alaska Junk thereafter made to it aggregate cash advances of $ 15,500, and also sold it goods. Charges to the account have been paid. In 1939 Wolf, Schnitzer, and their wives and Morris Schnitzer incorporated Industrial Air Products Co. for the manufacture of oxygen and acetylene. Alaska Junk was charged with the amount of the stock subscription. Thereafter it made cash advances aggregating $ 94,427.03, and it sold merchandise to the company. Repayment was made. In 1940 Wolf, Schnitzer, and their wives and one Shea organized *140 the Plumbing & Heating Sales Co. Alaska Junk advanced the money for its capital and made sales to it and purchases from it. In 1941 Alaska Junk and Dulien Steel Products Co. formed the Carlton Coast Railroad Liquidators as a joint venture to acquire and dismantle a logging camp and railroad and to sell the salvaged materials. Alaska Junk advanced $ 27,525 for the venture and acquired a 50 per cent participation, and it has received $ 134,649.94 from it. The partnership kept open accounts with all the persons and firms to whom the above mentioned advances were made, charging to such accounts all cash advanced and merchandise furnished, and crediting them with payments in cash or in goods bought by it.
On June 4, 1941, Morris Schnitzer, son of Sam Schnitzer, organized the Oregon Electric Steel Rolling Mills (hereinafter called Oregon Steel) as an Oregon corporation with an authorized capital of $ 250,000, represented by 2,500 shares of stock of a par value of $ 100 each. Of the authorized shares, subscription was made for 1,878 shares as follows:
| Shares | Par value | |
| Morris Schnitzer | 1,250 | $ 125,100 |
| Sam Schnitzer | 312 1/2 | 31,250 |
| Harry J. Wolf | 312 1/2 | 31,250 |
| Bernard Levin | 1 | 100 |
| Louis Schnitzer | 1 | 100 |
*141 On June 12, 1941, 1 share was issued to each of the 5 subscribers; on August 4, 1 share was issued to L. N. Rosenbaum; and on February *49 10, 1942, 1,251 shares were issued to Morris Schnitzer, 312 1/2 to Sam Schnitzer, and 312 1/2 to Harry J. Wolf. On February 10, 1942, Sam Schnitzer and Wolf surrendered their 312 1/2 share certificates and 4 new certificates for 156 1/4 shares each were issued to each of them and their wives. There were also changes in the holders of one share.
Oregon Steel was organized to erect and operate a rolling mill for the manufacture of steel products. Its stockholders planned to melt down and use scrap metal, which in 1941 was being sold in Portland at $ 1.50 to $ 2 a ton less than in Seattle, and on the basis of engineers' production estimates they expected the earnings eventually to reach $ 50,000 or more a month. Morris Schnitzer, with whom the idea originated, was made president and general manager. He had been engaged for some years in the purchase and sale of new and used iron, steel, tools, and machinery in Portland under the trade name of Schnitzer Steel Products Co., had had considerable experience in salvage enterprises in various*142 parts of the country, and had studied engineering and business administration at the University of Washington. He was active in seeking capital for Oregon Steel, in getting engineering advice and trade information, and in procuring materials and the necessary priorities. He consulted various steel men and jobbers, arranging outlets for prospective products, and made numerous business trips to New York and Washington. He experienced great difficulties in getting the enterprise started, and actual construction of the mill did not begin until November 1942. Sam Schnitzer, the vice president, and Harry J. Wolf, the secretary, also rendered services. The corporation's board of directors was composed of Morris, Sam and Rose Schnitzer, and Harry J. and Jennie Wolf. None of them had had any experience in steel production.
From October 1941 Alaska Junk made numerous advances of cash to Oregon Steel, supplied it with goods of various kinds at cost, and paid bills for it. The amounts of cash advanced, the bills paid, and the value of the goods furnished were charged to its open account with Alaska Junk. As Alaska Junk had less than $ 10,000 cash normally on hand, it often secured bank*143 loans to provide cash advances. Morris Schnitzer likewise advanced cash, paid bills, and supplied goods, and these amounts, together with the expenses of his business trips, were charged to the corporation's account with Schnitzer Steel Products Co. Nearly all of the advances were for plant and equipment, but after operations began $ 9,460 in scrap was furnished by Alaska Junk. All of the foregoing charges were reflected by corresponding credits to the accounts of Alaska Junk and Schnitzer Steel Products Co. on the corporation's books. On November 30, 1942, the corporation's account with Alaska Junk showed a debit balance of $ 299,069.70 and its account with Schnitzer Steel Products Co. a debit balance *50 of $ 138,984.11. On an office memorandum Sam Schnitzer referred to these advances as "contributed capital."
During 1941 Morris Schnitzer made numerous attempts to procure outside capital. In June he besought New York investment banking houses to make a public offering of Oregon Steel's stock, but they declined on the grounds that no proper engineering reports had been submitted and the organizers lacked adequate experience. The Commercial Credit Corporation refused to*144 make a loan because they deemed the $ 250,000 authorized capital too small. For the same reasons the Bank of America refused a loan in November 1941. The Bank of Portland refused a loan in April 1942, despite oral assurances by the corporation's officers that $ 1,000,000 would be invested in the plant and more would be available for working capital. In October 1941 the corporation filed application with the Reconstruction Finance Corporation for a loan of $ 600,000 and employed the engineering firm of MacDonald Bros., Inc., to make a survey and report on the necessary investment and probable operating costs. On this application Morris Schnitzer, signing as president, stated that the corporation proposed to expend $ 550,000 of the proceeds on buildings and equipment and $ 50,000 on raw materials, brick, manganese, scrap, etc. He estimated that the plant would cost $ 890,000, and stated that capital was then $ 187,700, but added: "We expect to increase the capital of this corporation shortly. Additional stock will be taken by S. Schnitzer and J. Wolf to equal that of M. Schnitzer." On the MacDonald report, filed with the RFC on November 10, 1941, cost of the mill and equipment*145 was put at $ 987,035, exclusive of engineering, legal, traveling, and organization expenses. Organization expenses were given as $ 65,000.
The RFC was not satisfied with the MacDonald report, and a second was submitted from another engineer, who estimated that the mill would cost $ 1,050,000. On April 2, 1942, the executive committee of the RFC approved the loan, subject to listed conditions. After several changes had been made in the conditions, Sam Schnitzer and Wolf, as partners of Alaska Junk, wrote RFC on December 1, 1942, that cost of the mill might exceed $ 1,200,000 and that Alaska Junk would furnish any necessary money in excess thereof to complete the project if RFC would lend an additional $ 100,000. On December 4, 1942, RFC approved a loan of $ 700,000, having received assurance that there had been no change in the borrower's financial condition and business prospects. Oregon Steel gave to the Federal Reserve Bank of San Francisco its 4 per cent promissory note for that amount, dated December 15, 1942, payable within 5 years by monthly installments of $ 6,500 from May 1, 1943, and by an additional annual payment sufficient to make all payments equal to 50 per cent*146 of the corporation's *51 net earnings for the preceding year. The note was secured by a duly recorded mortgage on the corporation's real estate and the plant to be constructed and equipped and on its personal property with the exception of cash, receivables, raw materials, and inventories. Effective supervisory powers were given to RFC to enforce current compliance with the terms.
By separate agreement Morris, Sam and Rose Schnitzer, and Harry J. and Jennie Wolf individually guaranteed repayment of the note and bound themselves to supply "additional working capital" in amounts deemed satisfactory by RFC as long as any part of the loan should remain unpaid. The corporation bound itself to limit officers' annual salaries for such period to a total of $ 25,000, and to pay in cash no more than $ 15,000. In an instrument of December 29, 1941, the corporation, Morris Schnitzer, and Alaska Junk recited that Morris Schnitzer and Alaska Junk had already contributed $ 138,984.11 and $ 299,069.70, respectively, in the form of cash or property to the corporation; that:
* * * Such contributions by stockholders have, as stated, been as a capital investment, and in no wise as outstanding*147 accounts payable by Borrower, except to the extent that Borrower's debenture notes may be issued for a part of such contributions or capital investment.
And the stockholders agreed that they would receive in payment of "all such capital investments so made" only the common stock or debenture notes of the corporation and the corporation in turn covenanted to make payments in no other way. The corporation further agreed that, as long as any part of the RFC loan should remain unpaid, it would not issue to stockholders any preferred stock or evidence of indebtedness except debentures on a prescribed form "in return for advances made or to be made by them." The prescribed form forbade payment of principal or interest on the debentures until full repayment of the RFC loan. These conditions were observed, but RFC did allow reimbursement for about $ 114,519 of subsequent advances for the purchase of mill equipment.
While the final terms of the RFC loan were being arranged, Wolf expressed dissatisfaction because Morris Schnitzer, holding two-thirds of the corporate stock, had not made a proportionate part of the advances. Costs of the enterprise had already exceeded anticipations, and*148 Morris was financially unable to advance more. The stockholders entered into negotiations among themselves for a more satisfactory distribution of interests. They reached an agreement, and pursuant thereto the corporate directors authorized issuance of debenture bonds for $ 250,000 on terms contemplated by the understanding with RFC. On January 12, 1943, it issued such bonds in an aggregate of $ 249,000 to its stockholders in the following amounts: *52
| Morris Schnitzer | $ 75,000 |
| Sam Schnitzer | 44,000 |
| Rose Schnitzer | 43,000 |
| Harry J. Wolf | 44,000 |
| Jennie Wolf | 43,000 |
These bonds bore 8 per cent interest and were payable within 10 years of issue, but no payment of interest or principal could be made while any balance remained due on the corporation's $ 700,000 note to RFC.
As part of the settlement agreement Morris Schnitzer on March 11, 1943, surrendered 626 of his 1,251 shares of stock. One share was reissued to Monte L. Wolf and the remainder to Sam Schnitzer and wife and Harry J. Wolf and wife, so that the corporation's 1,878 outstanding shares were thereafter held as follows:
| Shares | |
| Morris Schnitzer | 625 |
| Sam Schnitzer | 313 1/2 |
| Rose Schnitzer | 312 1/2 |
| Harry J. Wolf | 313 1/2 |
| Jennie Wolf | 312 1/2 |
| Monte Wolf | 1 |
*149 By entries of March 31, 1943, the corporation charged the open account of Schnitzer Steel Products Co. (Morris Schnitzer) with $ 75,000 for "debentures issued" and with $ 62,500 "to offset bal. of stock subscriptions due against Acc. Pay.," leaving a credit balance of $ 6,638.23 in the account. By entries of the same date it charged Alaska Junk's open account with $ 174,000 "to record debentures issued" and with $ 124,900 "to offset bal. of stock subscriptions due against Acc. Pay.," leaving a balance of $ 315,095.41 in that account. By entries of July 14, 1943, Alaska Junk credited the corporation's account by corresponding amounts, specifying that the shares and bonds had been issued to Sam and Rose Schnitzer and to Harry J. and Jennie Wolf in the amounts above set forth. No other shares were ever issued, although in the beginning the organizers expected to issue more to associate promoters.
In connection with the bond issue and stock transfer Morris Schnitzer orally agreed with Sam and Rose Schnitzer and Harry J. and Jennie Wolf that he would bear one-third of any loss that might result from the total amounts advanced and to be advanced by all five to the corporation, over and*150 above the advances credited to stock subscriptions. They in turn agreed to bear two-thirds of any such loss. Morris Schnitzer and Alaska Junk continued thereafter to make advances, as before, and these advances were credited to their open accounts with the corporation in the same way as before and charged to the corporation's open accounts with them.
In asking for larger releases of the authorized loan, Morris Schnitzer on March 18, 1943, wrote RFC that costs were rising and that the stockholders had "in this job over $ 700,000 of our own money," but *53 "never originally intended to put in over * * * the $ 500,000 we were supposed to put in as our share in the capital investment." In a prior letter of December 23, 1942, he had referred to "additional costs for the extensions and additions" to the plant, suggested in the McKee report to increase production capacity, and requested approval of them.
Construction work on the mill began in November 1942, but building materials were hard to obtain; new machinery was scarce; priorities could not be procured for some requirements; and second-hand equipment and materials had to be used in part. Prices steadily increased. The mill*151 was finally completed in June 1943 at a cost of $ 1,400,000, and the melting of scrap into ingot started soon thereafter. About the same time Morris Schnitzer entered the military service, and his brother, Manuel Schnitzer, who had been employed by the corporation since the preceding January, took charge. Manuel was not familiar with steel manufacture; two engineers, successively engaged as managers, proved unsatisfactory; and competent personnel and operators were difficult to find. Manuel made vigorous efforts, however, and rolling operations were begun late in August. But the machinery did not function properly; production was so far behind schedule that many large orders were canceled by customers, principally the United States Government; creditors pressed for the payment of bills; there was a lack of ready cash; and a serious financial crisis developed. In June 1943 the corporation began to get some relatively small loans from banks, secured by its steel inventory and warehouse receipts for scrap. By November 26 these amounted to $ 149,499.71.
The stockholders again tried unsuccessfully to interest outsiders to take a participating interest, and approached the United States*152 Steel Co., Bethlehem Steel Co., Republic Steel Co., Henry Kaiser, and others. But in November 1943 they ceased operations, and on November 26 they decided to withdraw from the enterprise entirely and to sell all their shares to Kenneth E. Hall and A. M. Mears for one cent a share. Before so doing, they had the corporation give to Schnitzer Steel Products Co. its promissory note for $ 26,829.28 and to Alaska Junk its promissory note for $ 427,843.87. The amounts of these notes were equal to the respective credit balances shown on that date in the payees' open accounts with the corporation, but as later computed such balances were in fact $ 26,493.77 and $ 428,132.13, respectively. That of Alaska Junk reflected the following aggregate debits and credits:
| Debits | |
| Cash advanced | $ 327,870.23 |
| Bills paid | 166,340.16 |
| Goods furnished | 347,341.62 |
| Total | 841,552.01 |
| Credits | |
| Stock | $ 124,900.00 |
| Bonds | 174,000.00 |
| Repayments | 114,519.88 |
| Total | 413,419.88 |
*54 Immediately after the sale the purchasers elected new officers and directors, Mears becoming president. Pursuant to a resolution of the new directors and with the consent of RFC, the corporation gave*153 to Morris, Sam and Rose Schnitzer, and Harry J. and Jennie Wolf its 6 per cent note for $ 249,000, payable in annual installments of $ 24,900 beginning June 1, 1954, and secured by a second mortgage on the corporation's property. It also gave to them its 6 per cent note for $ 151,000, payable in annual installments of $ 15,100 beginning June 1, 1954, and secured by a third mortgage on its property. In consideration of these notes the payees surrendered to the corporation the debenture bonds for $ 249,000 and the newly made promissory notes for $ 26,829.28 and $ 427,843.87.
By accepting the $ 151,000 note in exchange for the two newly made promissory notes, the five former stockholders of Oregon Steel failed to recover $ 303,625.90 of the total shown due from the corporation for their advances on open account, which at the time showed credit balances aggregating $ 454,625.90. Pursuant to his agreement, Morris Schnitzer made reimbursement to the other four in the amount of $ 83,581.20 in order to reduce their loss to two-thirds of the total. This settlement was effected by a charge of that amount to Morris on the books of Alaska Junk and by his later delivery of second mortgage *154 notes on account thereof to Alaska Junk. The charge of $ 83,581.20 was explained in the journal as follows:
To charge Morris Schnitzer with 1/2 of total loss in steel mill deal. Total investment and a/c of A. J. Co. 727,032.13; total of Morris Schnitzer 163,993.77 or 891,325.90 for both -- Total payment by mrtge 400,000. Total loss 491,325.90. Morris' share of loss 1/3 or 163,775.30. His investment and a/c of 163,993.77 less his interest in two mtge notes of $ 83,799.67 results in loss of 80,194.10 on the amount he expended plus 83,581.20 due us.
Alaska Junk then charged off $ 202,350.60 on its accounts with the corporation as a bad debt.
On October 3, 1943, the corporation's books indicated an operating loss to date of $ 59,562.91. There were small operating losses in 1944 and 1945. For 1946 the books indicate a profit of $ 278,196.85 before taxes. By 1947 corporate surplus exceeded a million dollars. Since November 26, 1943, and to the present time Oregon Steel has purchased large quantities of scrap from Alaska Junk.
Alaska Junk's partnership return for 1942 disclosed net profits of $ 236,123.45, of which $ 64,030.86 was reported as the distributable share of Sam Schnitzer; *155 a like amount as the share of Harry J. Wolf; and $ 54,030.86 as the distributable shares of each of their wives. Each of the four included such share in the income reported on his individual income tax return for 1942. Alaska Junk's partnership return for 1943 disclosed net profits of $ 246,055.71, of which $ 66,513.92 was reported *55 as the distributable shares of Sam Schnitzer and Harry J. Wolf and $ 56,513.93 as the distributable shares of their wives. Each of the four included such share in the income reported on his individual income and victory tax return for 1943.
In computing the incomes of Sam Schnitzer and Harry J. Wolf for 1942 and 1943, the Commissioner denied recognition to the wives as partners for tax purposes, and included half of the partnership's net profits in the income of each of them. On the partnership's return for 1943 a deduction of $ 202,350.60 was claimed as a bad debt, represented by Alaska Junk's open account with the corporation. The Commissioner disallowed this deduction. In the event that his failure to recognize Jennie Wolf as a partner should not be sustained, the Commissioner also determined a 1943 deficiency against her estate, computed*156 to reflect her claimed share in the partnership income as recomputed by him. The Commissioner further determined that Monte L. Wolf, Blossom M. Goldstein, and Charlotte C. Cohon are liable for Jennie Wolf's tax deficiency as transferees of her estate.
OPINION.
After the Commissioner had recognized for many years that Rose Schnitzer and Jennie Wolf were members of the partnership conducting business under the style of Alaska Junk Co., he determined that for tax purposes only their husbands, Sam Schnitzer and Harry J. Wolf, should be deemed partners in 1942 and 1943. He defends that determination by the argument that the wives contributed no capital, rendered no services, and exercised no control over the business; that the agreement of 1928, by which the husbands purported to transfer a one-fourth interest to each wife, represents an attempt to divide income among family members; and that the attempt was devoid of substance, reflected no bona fide intent to form a partnership with the wives, and should be ignored.
(1) Petitioners contend that the wives' status as recognizable partners is res judicata and may not now be challenged. They cite this Court's opinion in their prior*157 proceeding involving partnership income for 1941, and argue that the decision in their favor is conclusive of the issue here raised. Admitting, as they must, that the only error assigned related to the reasonableness of salaries which the Commissioner had disallowed as a deduction in the computation of partnership profits for 1941, they insist that the Court's finding of an existing partnership comprising the wives "was not merely collateral or incidental, but was material," because the decision reached could not have been rendered without deciding that particular matter, and hence such matter was "properly within the issue controverted." *56 ; .
We are unable to accept this view. In the prior proceeding the wives' status as partners was admitted by respondent, not controverted. And, while the prior finding, based on the admission, is res judicata as to the parties' tax liability for 1941, , the present proceeding, involving tax liability*158 for subsequent years, is based upon a different cause or demand. Under such circumstances the Supreme Court held in , that:
* * * the prior judgment acts as a collateral estoppel only as to those matters in the second proceeding which were actually presented and determined in the first suit. * * *
* * * *
* * * If the legal matters determined in the earlier case differ from those raised in the second case, collateral estoppel has no bearing on the situation. See . * * *
Since the wives' status as partners was not placed in issue in the prior proceeding, it was not judicially determined. This is no less true because the uncontested finding was reflected in a computation of tax deficiencies under the decision rendered. ; ; ; . Accordingly, *159 we hold that recognition of the wives as partners in this proceeding is not res judicata, and the doctrine of collateral estoppel does not preclude a determination of that issue on its merits now.
(2) As an alternative to their plea of res judicata, petitioners contend that the evidence affirmatively establishes a genuine and recognizable intention of the husbands and wives to conduct the Alaska Junk Co.'s business as a partnership, and that they have overcome the respondent's contrary determination. They argue on brief that a partnership of the four was formed when the Schnitzers "managed to scrape together the $ 1000.00" (which was 1911); later that "the partnership in fact dates from 1912 or 1913. The evidence of the exact date is conflicting"; that the wives initially contributed capital, small in amount but important at that time; that the instrument of 1928 merely recognized a preexisting oral partnership agreement; that Jennie Wolf, being proficient in English and better educated, gave valuable aid to the business at the beginning and that both wives rendered services and exercised control by virtue of the husband's deference to their judgment; and that both were *160 constantly consulted about business decisions and policy. Such participation, they conclude, meets every test which the Supreme Court considered pertinent *57 in determining the bona fides of a family partnership in .
While petitioners' witnesses testified that a partnership of the four had existed since 1911, their statements are contradicted by their documentary evidence. Indeed, the allegations of the petitions are to the contrary, for in them it is asserted that Sam Schnitzer and Harry J. Wolf engaged in a joint venture in 1911 and organized the Alaska Junk Co. as a corporation in 1912 with Horwitz, and upon its dissolution two months later Schnitzer and Wolf took over the assets and "entered into an oral partnership agreement." No mention is made of their wives, and prior to 1928 the wives filed no separate income tax returns. None of the four alleged partners testified, but their own understanding of their business relationship prior to 1928 is obvious from the language of the written agreement which all signed. In this they recite that the husbands "desire to admit" the wives as co-partners in*161 the business which "S. Schnitzer and H. J. Wolf have heretofore carried on." Such language not merely fails to recognize a preexisting partnership with the wives, it affirmatively refutes the witnesses' testimony that there was one. If a partnership of the four existed at all, it must have been created by the written agreement of 1928.
The recitations and provisions of that agreement disclose that the husbands transferred the two one-fourth interests "in consideration of love and affection." Petitioners do not assert that they contributed any capital then, but insist that in 1911 Schnitzer and Wolf were enabled to launch their business venture with marriage dowries, and these dowries, they contend, constituted a capital contribution by the wives.
In many prior decisions holding a wife recognizable as a partner for tax purposes, substantial weight has been given to very small amounts of capital contributed by her towards the development of the husband's business from humble beginnings, ; ;*162 ; , even though she was not made a partner until later. ; ; . Of necessity the evidence about the funds with which Wolf and Schnitzer began their independent operations is not detailed and precise. Harry J. and Jennie Wolf are deceased; Sam Schnitzer, being aged and ill, did not testify on advice of a physician. But an outline of the beginnings was given by sons, who knew it as a matter of family history, which testimony was received without objection from respondent. Both husbands at *58 the time of their marriage in 1906 were poor, uneducated immigrants. Their wives brought each a dowry, said to be about $ 1,000, and aided each in starting business as an independent junk dealer in a humble way. Monte L. Wolf stated in general terms that the wives' dowries, at least in part, supplied the requisite capital, *163 and attendant circumstances are very persuasive that this was so.
Respondent urges the technical objections that this fact is not established by competent evidence; that, if true, it is wholly immaterial because of the short lived corporation of 1912, which issued shares only to the husbands and the ensuing partnership which was between them alone; and that absence of any agreement that the wives be partners is fatal. While such an agreement is necessary, , the requirement is adequately met by the subsequent instrument of 1928, and, as is patent from the above cited cases, preceding capital contributions may properly be considered in deciding whether or not wives are partners recognizable for tax purposes by virtue of it. Perhaps standing alone, these early contributions would not be entitled to decisive weight. But they fit significantly into the accumulation of evidence that from the beginning and through the taxable years the wives took more interest in their husbands' business than may be regarded as a normal incident of the marital relation.
We have often rejected arguments that a wife is entitled to recognition as *164 a partner because her domestic frugality, clerical aid, interest in business matters, and home discussions influenced and assisted her husband in business operations. ; ; ; ; affd. (C. C. A., 6th Cir.), ; see also . But we are persuaded by the evidence before us here that the wives' participation in Alaska Junk greatly exceeded in extent and in degree of business character the services considered in such cases as those cited. Jennie Wolf, in particular, and her better education and business acumen, appears to have exerted decisive influence over business discussions, not only at the humble beginning when her husband was very dependent upon her, but increasingly over the years. Morris Schnitzer and Monte L. Wolf both testified that Wolf was dominated by her. The husbands took the wives with them on *165 trips to investigate distant ventures for the benefit of the wives' opinions, and the wives' disapproval normally ended their interest in these projects.
On such a background the wives' failure to keep regular office hours, to have express authority to act for the partnership, or to hold separate funds loses its normal significance. Negotiations on important transactions and decisions about new ventures were made not at the office, *59 but at a partner's home, with full participation of the wives. While as a bookkeeping matter the wives made no withdrawals of their credited shares of partnership income, in fact they took what they pleased, having their bills sent for payment by the partnership. And their participation in the undertaking of new ventures, in which the four and sometimes others had a share, was in effect a withdrawal by them of funds for investments in which they acquired a separate proprietary interest.
We find that the wives did contribute capital to the business in the beginning and that, after being made partners in 1928, they rendered vital services and participated in control and management to a degree which entitled them to recognition as partners for tax*166 purposes. The Commissioner's determination to the contrary is accordingly reversed.
(3) Petitioners assign error in respondent's disallowance of $ 202,350.60 as a bad debt deduction from the partnership's profits for 1943. This amount is the difference between Alaska Junk's total advances to Oregon Steel, aggregating $ 841,552.01, and total credits against such advances on the open account. The credits consist of $ 124,900 for stock, $ 174,000 for bonds, $ 114,519.88 for repayments; $ 142,200.33, allocated part of the $ 151,000 note of the purchasers; and $ 83,581.20 reimbursed by Morris under his guaranty agreement limiting loss. Although the disallowance does not plainly appear in any of the deficiency notices, which show merely an addition of partnership profits to the individual incomes of Sam Schnitzer and Harry J. and Jennie Wolf, all parties agreed in argument and brief that the $ 202,350.60 was claimed as a bad debt deduction on the partnership return and that its disallowance is reflected in the determinations here in controversy. At the hearing respondent's counsel stated without contradiction that the Commissioner had treated the amount as a capital loss, and on brief*167 contends that it should be so treated. We shall accept the parties' premises in considering the issue raised.
Petitioners argue that Alaska Junk's advances, over and above those applied on the books to payment for capital stock and bonds, constituted a loan to Oregon Steel, made as an incident of the partnership's business of financing customers, and that the unrecovered portion of this loan, or $ 202,350.60, remaining after sale of Oregon Steel's shares and the ensuing settlements in 1943, became worthless and was written off, and, it is deductible as a bad debt. Respondent argues to the contrary that the advances were investments in permanent assets of a new enterprise which required the full amount as capital; that the character of the advances as risk investment is indicated by the corporation's agreement not to make any payments to stockholders until the RFC loan should be fully discharged and by the stockholders' agreement among themselves that any losses resulting *60 be borne by them in proportion to their holdings of corporate shares. Respondent also contends that, even under the view that debts did result from the advances, they were not business debts, for Alaska*168 Junk's occasional financial aid to customers and advances to other enterprises which the Schnitzer and Wolf families formed did not constitute a business.
Whether a stockholder's advance of funds to his corporation is to be deemed a capital contribution or a loan is not a new question. It has arisen tax-wise in issues involving, as here, the proper treatment of unrecovered advances as a bad debt or as a capital loss deduction, ; ; ; ; ; affd. (C. C. A., 2d Cir.), ; ; ; ; affd. (C. C. A., 9th Cir.), other*169 point, , and in issues involving a corporation's right to deduct amounts paid on such advances under the guise of interest, ; ; ; ; affd. (C. C. A., 3d Cir.), ; 1432 ; affd. (C. C. A., 2d Cir.), ; ; affd. (C. C. A., 7th Cir.), . In ; ; and ,*170 a like issue was presented after exchanges of bonds for preferred shares, and the same question has arisen in bankruptcy proceedings. ; .
This question is one of fact. And in deciding whether or not a debtor-creditor relation resulted from advances, the parties' true intent is relevant, ; ;. Bookkeeping, form, and the parties' expressions of intent or character, the expectation of repayment, the relation of advances to stockholdings, and the adequacy of the corporate capital previously invested are among circumstances properly to be considered, for the parties' formal designations of the advances are not conclusive, , but must yield to "facts which even indirectly may *171 give rise to *61 inferences contradicting" them. See also As the Supreme Court said, however, in :
* * * There is no one characteristic, * * * which can be said to be decisive in the determination of whether the obligations are risk investments in the corporations or debts. So called stock certificates may be authorized by corporations which are really debts and promises to pay may be executed which have incidents of stock. * * *
Viewing the complex history of Oregon Steel's organization and development, we are of opinion that the circumstances under which Alaska Junk made the advances require the conclusion that they were paid in as risk capital, not as a loan. The stockholders had every reason to believe as early as October 1941, when Alaska Junk began to charge advances to the corporation's open account with it, that the authorized capital of $ 250,000 (and a fortiori the $ 187,800 par value of shares eventually issued) was only a fraction of the minimum requirements*172 for construction of a steel mill. For this very reason the corporation was unable to procure commercial loans. Cost of the mill was estimated at $ 987,035 in the MacDonald report of November 1941, which Morris Schnitzer submitted to the RFC; at $ 1,050,000 in the second report submitted to the RFC; and at $ 1,200,000 in the letter of Schnitzer and Wolf addressed to the RFC on December 1, 1942, on requesting approval of a $ 700,000 loan. At that time the open account advances of Morris Schnitzer and Alaska Junk were already greatly in excess of $ 187,800, the par value of issued stock, which petitioners would treat as the maximum capital invested, and in March 1943, when that amount was credited to the discharge of stock subscriptions, additional advances of $ 249,000 were applied by credits to the purchase of corporate bonds, and even then there remained a balance of $ 315,095.41 due Alaska Junk on the open account. The mill, however, was not ready for operation until June, and Alaska Junk continued to make large advances, so that by November 26, 1943, their total from the beginning aggregated over $ 800,000. Substantially all, with the possible exception of $ 9,460 in iron scrap, *173 had apparently been invested in the corporation's organization and plant, a permanent asset. Advances for such a purpose are by their very nature placed at the risk of the business, and if, as here, business operations have not even begun, we fail to perceive any warrant for distinguishing a part of the advances on open account, avowedly credited to stock investment, from the remaining advances, which were made, recorded, and used in exactly the same way.
Petitioners argue that large operation profits were reasonably anticipated and if they had been earned the corporation could have repaid its other loans, which had priority, and also that part of the advances *62 from Alaska Junk which had not been credited to stock purchase. In support they stress the mill's substantial earnings in recent years and the unexpected difficulties which they encountered in erecting it. This argument lacks persuasive force. Even if the corporation had paid off the balance in its open account with Alaska Junk from earnings, such payment would have still partaken of the character of dividend distributions on risked capital invested in the plant. A corporation's financial structure in which a wholly*174 inadequate part of the investment is attributed to stock while the bulk is represented by bonds or other evidence of indebtedness to stockholders is lacking in the substance necessary for recognition for tax purposes, and must be interpreted in accordance with realities. Cf. ;; 1432 The testimony of petitioners' witnesses, especially Morris Schnitzer, that the shareholders never intended to invest more than $ 187,800 in stock is intelligible only as showing an agreement about mere form.
But even form itself was not consistently observed. From incorporation on June 4, 1941, until sale of the shares on November 26, 1943, Alaska Junk and Morris Schnitzer made the advances on open accounts as funds were needed by Oregon Steel and were available or procurable by them. No advance, whether by cash payment, materials supplied, or discharge of the corporation's bills and obligations, was specifically designated as made in satisfaction of a stock subscription, in payment for bonds, or as a loan. Throughout the whole period the*175 advances were simply charged to open accounts receivable on the books of Morris Schnitzer and Alaska Junk and credited to open accounts payable on the corporation's books, and, except for formal qualifying shares, no stock was even issued until February 10, 1942, and no record of payment for that was made until March 31, 1943. By the latter date the RFC loan had been approved; Wolf had objected to risking any more of Alaska Junk's funds in the enterprise; and a compromise agreement had been reached, basically changing stock ownership so that Morris Schnitzer would hold a third interest instead of a half and the other four, a two-thirds interest instead of a half. Then for the first time payments for shares, as redistributed, were indicated on the books of Morris and of Alaska Junk by credits to the corporation's open accounts with them in the par value amounts of the shares, not as issued, but as redistributed, to the several shareholders, and at the same time credits were made as recording payment for $ 249,000 in bonds simultaneously issued. There still remained over $ 300,000 in the open account of Alaska Junk, which is reflected in the ultimate balance that petitioners now *176 seek to characterize as a loan. On the corporation's own books corresponding *63 entries were not made until July 14, 1943. And while, as petitioners' witnesses testified, the delay may have been due to the neglect of a bookkeeper, we can not but share the bookkeeper's probable feeling that the entries made little difference anyhow because the advances were all of the same character and could be distributed as desired among accounts for capital contributed, bonds issued, and loans payable.
But any substantive effect that the parties' allocation of the advances among these three types of accounts might have is emasculated by their loan contracts and the agreement among themselves. So long as any part of the $ 700,000 RFC loan remained unpaid, the corporation could not make payments on any account to the stockholders except $ 15,000 annually as salaries; and inventory and like assets, not covered by the RFC mortgage, were pledged to secure bank loans. Obviously in apprehension of losses, all five stockholders agreed that Morris Schnitzer should bear one-third and Alaska Junk two-thirds of total losses that might be sustained. Thus the proportion of risk fixed by the relative*177 stockholdings was projected to cover all the advances, and in the final settlement Morris paid Alaska Junk $ 83,581.20 to reduce the partnership losses to two-thirds of the total lost. The mere existence of such an agreement is incompatible with testimony that repayment of the advances was anticipated or with their characterization as loans. The stockholder had in view a nice matching of losses to the proportion of his corporate shareholding. Such a limitation is an incident of stock ownership, not of the debtor-creditor relation.
The closing entries, moreover, on the open account with Alaska Junk, recording the final settlement with Morris, refer to "total investment and a/c" and disclose that in computation of the amount due from Morris, the loss was computed on the basis of the total advances of Morris and Alaska Junk from the beginning, not the amounts in open account remaining after credits for stock subscriptions and bonds. In this and other written notations, the parties or their bookkeepers have made statements consistent only with the view that the advances were capital contributions. We feel that such characterizations in book entries, resolutions, applications, and*178 contracts are not ordinarily entitled to great weight in deciding such a question as that before us. But, if, as here, they are numerous and consistent, and one is followed by a computation of "Total loss," in which all advances, whether attributed to stock, bonds, or loans, are indiscriminately grouped for arriving at a settlement among stockholders in the same proportion as their shareholdings, we must deem them a considered expression of the parties' own view.
Petitioners advert to repayments of $ 114,519.88 on the account as supporting its loan character, but however significant this fact might *64 normally be, the release of corporate funds to Alaska Junk, contrary to the RFC loan contract, was a special favor designed to aid Alaska Junk in desperate financial straits. And while the evidence does not set forth the details of such releases, it does show that Alaska Junk was unable to make advances for essential equipment or materials needed in mill construction and that RFC acted out of necessity. In substance, it did no more than release a part of the $ 700,000 loan for a specific purchase for the steel mill, but through Alaska Junk.
We are of opinion that all of the *179 advances were contributions to capital and that the ensuing worthlessness of a part thereof was not a bad debt. This conclusion makes it unnecessary to consider other contentions relative to business character of the alleged loan and its worthlessness.
Decisions will be entered under Rule 50.
Footnotes
*. Proceedings of the following petitioners are consolidated herewith: Estate of Harry J. Wolf, Deceased, by Monte L. Wolf, the Executor of said Estate; Monte L. Wolf; Blossom M. Goldstein; Charlotte C. Cohon; and Estate of Jennie Wolf, Deceased, by Monte L. Wolf, Administrator de bonis non with the will annexed of said Estate.↩