*39 Decision will be entered for the respondent.
1. On January 1, 1943, petitioner and another individual who had been conducting a contracting business as partners entered into an agreement with their wives whereby the latter became equal partners. Appropriate entries were made on the books to reflect this change and petitioner filed a gift tax return reporting the gift of a one-fourth interest in the partnership to his wife. In March 1945 it was decided to discontinue the plan to include the wives in the partnership and entries previously made were reversed. Held, a gift of a one-fourth interest in the partnership was made by petitioner to his wife on January 1, 1943.
2. Value of gift determined.
*783 The Commissioner determined a deficiency in petitioner's gift tax for the year 1943 in the sum of $ 6,602.18. The petitioner seeks a refund of gift tax which he paid for the year 1943 in the amount of $ 942.82. We are presented with two questions:
(1) Did the Commissioner err in determining that *40 petitioner made a gift of a one-fourth interest in the partnership business of Lippert Brothers to his wife?
(2) Did the Commissioner err in determining that the value of the *784 one-fourth interest in Lippert Brothers, a partnership, at the time of the transfer by petitioner to his wife on January 1, 1943, was $ 95,000 rather than $ 49,882.68 as reported?
FINDINGS OF FACT.
About 1920 petitioner and his brother, Eric W. Lippert, became engaged in a general contracting business and conducted it as partners from then until 1942, inclusive, under the trade name and style of Lippert Brothers, with offices at Boone, Iowa. During 1942 or 1943 a branch office was established at Oklahoma City, Oklahoma, due to the expansion of the business of the partnership. This business consisted of construction work under contracts, procured by competitive bidding, primarily for the construction of public sewage projects, public buildings, and various other projects for municipalities and the Federal Government. Lippert Brothers procured these contracts as a result of their own solicitation and bidding. In almost all cases the contracts were let to the lowest bidder who was able to give a performance*41 bond.
During 1942 the members of the partnership were advised by their counsel of tax savings to be achieved by taking the wives of the partners into the business and forming a four-way partnership. Petitioner's counsel drafted a written partnership agreement dated December 31, 1942, to become effective January 1, 1943. By that agreement the partnership was to continue under the established trade name of Lippert Brothers. On January 1, 1943, the partnership capital was divided by entries on the books of the partnership between petitioner, his brother, and each of their respective wives. Capital accounts were set up on the partnership books showing a transfer of one-half of petitioner's investment to his wife and a transfer of one-half of Eric's investment in the business to his wife. The partnership agreement was signed by each of the four prospective partners. Relevant parts of the agreement read as follows:
* * * The said partners have each respectively contributed one-fourth of the capital invested in the said business, and shall be and become equal partners in the assets and liabilities of the said partnership, and that the assets and good will of the business heretofore*42 carried on under said name shall be continued by the parties hereto. * * *
* * * *
4. It is further stipulated by the parties hereto that any and all contracts or jobs in the course of construction uncompleted at the date of the execution of this partnership agreement shall be assumed and completed by this partnership, and each partner shall have and enjoy his share of the profits from such transaction or construction, and shall share equally any and all liability that may result from the completion of such contracts or construction.
5. It is further agreed between the parties hereto that any and all real estate taken in the name of W. H. Lippert and E. W. Lippert shall be held by the said *785 W. H. Lippert and E. W. Lippert as trustees for the use and benefit of this partnership, and shall be considered as fully embraced in the interest owned and held by each of the partners hereto. * * *
Other than the entries in the partnership books and the partnership contract itself, there was no bill of sale or deed executed by petitioner to transfer any property to his wife.
Petitioner and his wife in 1943 filed a joint income tax return.
Petitioner's wife, Linda A. Lippert, on May*43 27, 1944, filed a donee's information return of a gift from her husband for the year 1943, of the value of $ 49,882.68, designated as "50 per cent of the interest of Walter H. Lippert in the net return of the general contracting business operated by W. H. and E. W. Lippert * * *"
On April 13, 1944, the petitioner, residing in Boone, Iowa, filed a gift tax return with the collector of internal revenue for the district of Iowa, in which he reported a gift to his wife, Linda A. Lippert, having a value of $ 49,882.68, but in which the taxable value of the gift was computed to be $ 882.68. In order to correct the errors in this return, on June 2, 1944, he filed an amended gift tax return in which he reported a gift to his wife of 50 per cent of his "interest in the net worth of the general contracting business operated by W. H. and E. W. Lippert, d. b. a., Lippert Brothers consisting of moneys, real estate, stock and bonds, furniture and fixtures, machinery and equipment, and any other assets owned by Lippert Brothers" on January 1, 1943. In this return he corrected the erroneous computations of his original return and reported a gift tax of $ 942.82, which he paid.
The returned value*44 of $ 49,882.68 was computed by petitioner by taking one-fourth of the net worth of Lippert Brothers, $ 199,530.71, as of January 1, 1943. The net worth was computed upon the book value of the tangible assets.
On January 1, 1943, Lippert Brothers had entered into a number of construction contracts, some of them with the Federal Government, in the promotion of war activities. No value was included for these contracts in computing the net worth of the company for the purpose of ascertaining the value of the interests given to the wives of the partners. The petitioner did not assign any value to these construction contracts or to prospective earnings or good will of Lippert Brothers in computing the partnership net worth.
The net income of Lippert Brothers for 1940 to 1944, inclusive, was as follows:
| 1940 | $ 35,119.26 |
| 1941 | 37,315.58 |
| 1942 | 179,736.01 |
| 1943 | 184,063.36 |
| 1944 | loss (22,689.78) |
*786 The Commissioner determined the value of the one-fourth interest of the Lippert Brothers business enterprise transferred by petitioner to his wife on January 1, 1943, to be $ 95,000. In his explanation of his determination of deficiency he says:
The value of $ 95,000.00 included*45 herein for a one-fourth interest in Lippert Brothers, is predicated upon a careful consideration of all factors affecting fair market value, primary weight being accorded the earning capacity of the enterprise, and the net worth of the business.
Lippert Brothers filed a partnership return of income for the year 1943, in which petitioner and his brother, E. W. Lippert, and their respective spouses were shown as partners.
In March of 1945, after a field examiner of the Bureau of Internal Revenue had examined the 1943 information return of Lippert Brothers and had discussed the subject of family partnerships with the petitioner, the partners decided to discontinue the plan to include their wives in the partnership, and the entries on the books showing a division of capital of W. H. Lippert and E. W. Lippert were reversed, leaving the capital account in the partnership as it was prior to the partnership agreement of December 31, 1942.
OPINION.
Our first question is as to whether or not the acts of the parties connected with the partnership of Lippert Brothers on and about December 31, 1942, resulted in a gift being made by petitioner to his wife of a one-fourth interest in the partnership.
*46 The petitioner contends that he signed no deed and executed no bill of sale and that there was no property subject to manual delivery. He argues that the articles of partnership were simply an expression of intention and that the intended gift was never consummated.
With these contentions of the petitioner we are unable to agree. Petitioner and his wife, with an idea of reducing their income tax burdens, entered into the partnership agreement herein involved. Following the partnership agreement, a division of the partnership capital was made in conformity with that agreement. Both Lippert and his wife reported a gift to the Federal Government and Lippert paid his tax thereon. The partnership filed an information return showing Mrs. Lippert as having a one-fourth interest in the partnership income and, in fact, Lippert and his wife were preparing to file their individual income tax returns for 1944 based upon Mrs. Lippert having received 25 per cent of the partnership income when the petitioner received information that family partnerships were not being recognized for income tax purposes where the members of the family contributed neither capital nor services. The decision of*47 this Court *787 on that point in , had been promulgated on March 3, 1944. Thereupon the petitioner reversed the capital entries made on the partnership books and the affairs of the partnership were readjusted as they had been prior to the agreement of December 31, 1942, with the wives of the partners.
In William H. Gross, 7. T. C. 837, this Court recognized that the mere signing of a partnership agreement, followed by acts in conformity therewith, was sufficient to constitute a taxable gift from one of the partners who allocated to his daughter and her husband 10 per cent each of the income of the partnership where practically all of the partnership capital consisted of good will.
In , the entry on the partnership books of a division of capital by one partner in favor of another partner was held by the Board of Tax Appeals to be a gift from the former to the latter.
It is our conclusion that during the taxable year 1943 the petitioner herein gave his wife a one-fourth interest in the partnership of Lippert Brothers and that she retained that gift until*48 the date in the spring of 1945, when the gift was returned to the petitioner.
Our next question is as to the value of that gift. Petitioner herein returned the value of the gift as one-fourth of the book value of the tangible assets and placed no value on any intangibles which the partnership may have owned consisting of good will, earning capacity, or outstanding contracts. The Commissioner, in determining the deficiency, placed a higher value on the one-fourth interest and stated that he based that value on:
* * * a careful consideration of all factors affecting fair market value, primary weight being accorded the earning capacity of the enterprise, and the net worth of the business.
The petitioner contends that this business had no good will; that the contracts were all procured by personal solicitation of the partners; and that such contracts as the partnership procured were not awarded on personal friendship or the individual standing or reputation of the members of the partnership. In his brief petitioner says "Whether or not Lippert Brothers had performed its work ably and capably on previous jobs aided it not one whit in obtaining the next project."
The petitioner relies*49 upon . In that case the Court held that the partnership good will had no value where the partnership business depended entirely upon the energies and activities of the partnership members, and said:
* * * Its [the partnership] income was derived primarily from personal services, so that different participants with similar abilities, experience, and contacts could have organized a comparable venture and enjoyed a parallel success from their contribution of time, skills, and services.
*788 So far as good will is concerned, we are inclined to support the position of the petitioner herein, from all of the evidence in the record. Nevertheless, if we waive good will as having any value whatsoever in this case, we must give consideration to the Commissioner's determination based upon "the earning capacity of the enterprise" in so far as that was represented by existing contracts at the time that the partnership was formed. These contracts were specifically included in the partnership assets by the partnership agreement.
Petitioner argues against this on the ground that we do not know either the value or the number of*50 these contracts and must speculate on this point. He further argues that construction work is very risky business and that frequently losses are realized where substantial profits are anticipated. During the course of the trial, however, the Commissioner made repeated efforts, on cross-examination, to procure from the petitioner evidence as to the number of contracts and the reasonable anticipation of profits to be derived from these contracts. Such efforts on the part of the Commissioner were not only unsuccessful, but the petitioner himself declined to give any testimony on this point, although such testimony would have had considerable value in measuring the immediate earning capacity of the partnership. The record discloses that in 1943 the partnership actually received earnings in the amount of $ 184,063.36, and, in the absence of all knowledge as to what proportion of those earnings came from contracts in existence on January 1, 1943, or as to what the prospects of profits on contracts in existence on January 1, 1943, were at that time, we accept the Commissioner's valuation based upon earning capacity.
The petitioner argues in his brief as though the burden were on the *51 Commissioner to establish the correctness of his determination. This, of course, is the reverse of the actual situation. The Commissioner's determination of value for earning capacity being $ 180,472, which was less than the actual earnings of the partnership for the year 1943, our conclusion as to the existence of the gift and the value thereof supports the correctness of the Commissioner's determination.
Decision will be entered for the respondent.