*3 Petitioners were engaged in the manufacture and repair of machinery used in the processing of quartz. P. Reynold Hoffman and his sister, Bertha S. Hoffman, were the sole and equal partners in such business. P. Reynold Hoffman supervised and controlled the production phase of this business while Bertha S. Hoffman supervised the office work and the routine operation of the business. The partnership agreement stated that "P. Reynold Hoffman shall make all partnership contracts and shall have the management of the partnership affairs." P. Reynold Hoffman also owned the majority of the outstanding shares of the P. R. Hoffman Company, a corporation engaged in the processing of quartz crystals. The partnership and said corporation were operated as separate and distinct businesses. The partnership's sales, alone, were not sufficient to subject it to the Renegotiation Act of 1943; but if, as determined by respondent, it and the P. R. Hoffman Company were under common control, then their combined sales were sufficient to bring it within the provisions of the Renegotiation Act.
Held, on the facts herein, that the partnership and the corporation were "under common control" within the*4 meaning of section 403 (c) (6) of the Renegotiation Act; and, therefore, petitioners' profits for the years here in issue are subject to renegotiation.
*570 These consolidated proceedings involve a determination of the respondent, pursuant to the Renegotiation Act of 1943, that petitioner Philip Machine Shop, a partnership composed of P. Reynold Hoffman and his sister, Bertha S. Hoffman, realized excessive profits for the years 1944 and 1945 in the amounts of $ 80,000 and $ 60,000, respectively.
The sole issue to be decided is whether petitioner was "under the control of or controlling or under common control" during the years here in issue with the P. R. Hoffman Company, a Pennsylvania corporation, within the meaning of section 403 (c) (6) of the Renegotiation Act of 1943, as amended. If not, petitioner's total sales, by themselves, were not sufficient to render it subject to the Renegotiation Act.
It is stipulated that if petitioner is held subject to the Renegotiation Act during the years here in issue, then the amount*5 of excessive profits, as determined by respondent, is correct. Some other facts were also stipulated.
FINDINGS OF FACT.
The stipulated facts are so found and are incorporated herein by this reference.
Philip Machine Shop (hereinafter referred to as petitioner) was organized as a partnership on December 31, 1943, by P. Reynold Hoffman and his sister, Bertha S. Hoffman, each having an equal partnership interest. Petitioner's principal activity was the manufacture, sale, and repair of machinery used to cut and process quartz crystals.
Prior to the organization of petitioner, and its predecessor partnership, the P. R. Hoffman Co., P. Reynold Hoffman (hereinafter referred to as Reynold) was employed as a toolmaker and machinist. *571 He became interested in the cutting and processing of quartz crystals and engaged in research in connection with the adaptation of quartz crystals to the field of electronics. In 1938, he left his employment and returned to his home in Carlisle, Pennsylvania. He established a business there, as a sole proprietor, trading under the name of Standard Radio Products Company. His business was located on his father's property and his initial capital was*6 $ 200, obtained with the help of his father and brother-in-law. The business grew and, in August 1941, it moved into a 1-story building of approximately 1,500 square feet which Reynold had erected.
Reynold's sister, Bertha S. Hoffman (hereinafter referred to as Bertha), assisted him, practically from the start, with his bookkeeping and other office details. She was employed at that time as assistant to the Dean of Dickinson College. Bertha is a graduate of a business college and an experienced bookkeeper.
About the end of 1941, Reynold persuaded Bertha to go into partnership with him. They entered into a partnership agreement on December 31, 1941, pursuant to which the partnership was to be known as the P. R. Hoffman Co. Bertha made no capital contribution to the partnership at the time of its organization, and Reynold acquired or contributed all of the original capital. The agreement provided that each was to share equally in the partnership profits and losses. Bertha was to act as bookkeeper and accountant; and Reynold was to devote his full time to the business of the partnership, which was stated to be "the manufacture of machinery for processing of quartz radio crystals*7 and the processing of quartz radio crystals, and the sale thereof, * * *." The initial nature of the business was a machine shop operation, specializing in the design and manufacture of machinery for the processing of quartz.
The outbreak of World War II caused an increase in the use of quartz crystals by the electronics industry. In the latter part of 1942 or early in 1943, the partnership entered into the actual processing of the quartz crystals. The nature of the machine shop operation was distinctly different from that part of the business engaged in the processing of quartz. The partnership maintained separate accounting records for these two phases of its business.
By the end of 1943, the machine shop part of the business was an established and stable operation. Thereafter, routine decisions relating to technical matters in the machine shop were made by the shop foreman. Reynold gave the foreman technical assistance, when required.
Each partner withdrew in excess of $ 1,000,000 in profits from the partnership during the period 1942-1943.
*572 The manufacture of quartz crystals, in Reynold's opinion, was to be considered as a strictly wartime operation, since he felt*8 that the field would be overcrowded at the end of the war. Near the end of 1943, Reynold and Bertha decided to separate the machine shop and crystal operations of the partnership into two distinct businesses. Accordingly, petitioner was established, as of December 31, 1943, to take over the machine shop operation of the previous partnership, P. R. Hoffman Company.
The partnership agreement pursuant to which petitioner was organized provided that Reynold and Bertha were to be equal partners, but that "P. Reynold Hoffman shall make all partnership contracts and shall have the management of the partnership affairs." In the "fictitious name" certificate which was required to be filed by the partnership, Reynold was designated as the agent of the partnership through whom its business was to be carried on. This document was signed by both Reynold and Bertha.
The crystal-processing phase of the prior partnership was also transferred, as of December 31, 1943, to a new organization. This was a partnership, using the same P. R. Hoffman Co. name as the previous one, but now containing two additional equal partners. These two new partners were employees who were being permitted to acquire*9 a proprietary interest in the crystal-processing operation. This four-way partnership agreement designated Reynold as the managing partner and the other partners were to "perform such duties as he shall assign to them." Reynold's salary was to be substantially larger than that paid to any of the other partners. However, this new partnership arrangement did not work out, and the "four-way partnership" was abrogated on May 1, 1944, 4 months after it had been organized.
The crystal processing operation was taken over on that date by a corporation which was also named the P. R. Hoffman Company (hereinafter referred to as the Corporation). From that date through the balance of the years here in issue, Reynold held from 3,000 to 4,899 of the 5,000 authorized and outstanding shares of the Corporation's capital stock, and was in control of the Corporation. Bertha had a nominal interest in the Corporation during this period. She acted as its secretary and treasurer, and served as a member of its board of directors.
During 1944 and 1945, petitioner and the Corporation both conducted their businesses in the same building. The operational phase of each business was physically separated *10 in that building. However, the office space, office personnel, telephone system, and time *573 clock were used jointly by both. The Corporation maintained a finishing plant at a separate location.
During the years here involved, Reynold devoted most of his time to the crystal processing being done by the Corporation and to another business venture involving the production of tubes for the Sylvania Corporation. Pursuant to a general division of duties, Bertha devoted herself to the office and financial work of both petitioner and the Corporation, and also managed the routine operations of petitioner. Reynold supervised and controlled the work being done by petitioner in its machine shop. All problems arising in the production part of the business were referred to him. The relation between Reynold and Bertha, in the management and operation of petitioner and the Corporation, was an amicable and co-operative one.
The machine shop and crystal-processing operations were each conducted as separate business entities throughout the years here in issue. Separate books of account were maintained and the expenses of facilities and services which were jointly used were carefully allocated*11 to the respective businesses. Prices charged by petitioner for work done and products delivered to the Corporation did not differ from the prices charged by petitioner to other customers for the same work or products.
Set forth below are, in column I, the net sales of petitioner for its calendar years 1944 and 1945; in column II, the portions of such sales derived from contracts and/or subcontracts with the various Government departments named in the Renegotiation Act, as amended; and, in column III, the portions of said amounts in column II which were sold to the Corporation:
| Year | I | II | III |
| 1944 | $ 235,518.83 | $ 221,518.83 | $ 67,604.61 |
| 1945 | 194,660.72 | 177,367.58 | 45,922.77 |
The Corporation had net sales subject to renegotiation, during its calendar years 1944 and 1945, in the approximate amounts of $ 1,375,000 and $ 784,000, respectively. Pursuant to the Renegotiation Act, it entered into bilateral agreements determining the amounts of excessive profits which it had realized on such sales.
Petitioner and the Corporation were under common control, during the years 1944 and 1945, within the meaning of section 403 (c) (6) of the Renegotiation Act of 1943, as amended.
*12 OPINION.
Petitioner's sales during each of the years here in issue were less than the jurisdictional minimum of $ 500,000 required *574 by section 403 (c) (6) of the Renegotiation Act of 1943 1 before excessive profits can be renegotiated. The sole issue before us is whether petitioner was under the control of, or under common control with, the P. R. Hoffman Company, thus permitting their combined sales to be used to bring petitioner within the provisions of the Act.
*13 The respondent's principal contention is that petitioner and the Corporation were both under the actual control 2 of Reynold. The parties have stipulated that Reynold exercised control over the Corporation. The crux of the matter, therefore, is whether Reynold also exercised control over petitioner's activities as well, even though only an equal partner in petitioner with respect to profits and losses. See Lowell Wool By-Prod. Co. v. War Cont. Price Adj. Bd., 14 T.C. 1398">14 T.C. 1398 (1950), affd. 89 U.S. App. D.C. 281">89 U.S. App. D.C. 281, 192 F.2d 405">192 F.2d 405 (C. A., D. C., 1951).
*14 The issue of control is one of fact, the determination of which depends upon all the facts and circumstances of record. Warner v. War Contracts Price Adjst. Board, 14 T.C. 1320">14 T.C. 1320 (1950). Upon the record before us, we have found as a fact that petitioner and the Corporation were under common control. Although both appear to have been operated as separate and distinct business entities and the evidence does not indicate that Reynold used his control to intermingle or integrate their activities, nevertheless, the evidence does establish that he controlled the activities of the petitioner as well as those of the Corporation.
Under the partnership agreement which governed petitioner's activities during the years here in issue, Reynold and Bertha shared equally in petitioner's profits and losses. However, the agreement had specific provisions as to the responsibility for the management of the business, placing all such authority in the hands of Reynold. Furthermore, in the fictitious name certificate which the partnership was required to file, Bertha certified that Reynold was the agent *575 through whom the business of the petitioner was to be*15 carried on. The provisions in these documents cannot be lightly disregarded despite the self-serving testimony of Bertha and Reynold that they were not followed in the actual operation of the business. We are convinced that, although Bertha may have exercised supervisory authority over petitioner's routine activities, the ultimate authority was in Reynold, pursuant to the provisions of their partnership agreement.
Testimony of three individuals who were employed by petitioner during the years in issue, although meager, is significant. Two men who were employed in the production department stated that they looked to Bertha for decisions on office matters, and to Reynold for decisions on technical and production problems. The testimony of a third employee, the comptroller, is even more important. His work was in a sphere in which Bertha claimed complete authority. Despite this, he stated that, in the event of a conflict between Bertha and Reynold, he looked to Reynold for the ultimate decision.
Undoubtedly, relations between Bertha and Reynold were harmonious and conflicts were few, if any. Also, petitioner's business seems to have reached a stage, during these years, when its*16 routine activities could be managed by Bertha with a minimal demand upon Reynold's time and supervision. But the statute refers to "control" and not to management or the division of profits. On the basis of the partnership agreement's provision for control and the record as a whole, we hold that petitioner and the Corporation were under common control during the years 1944 and 1945 within the meaning of section 403 (c) (6).
Petitioner argues that, in addition to common control, we must find that the two business entities in issue were created with an intent to avoid profit renegotiation. However, section 403 (c) (6) does not speak in terms of intent. When common control exists, then the profits of all business entities under such control may be renegotiated so long as the aggregate of their sales is $ 500,000 or more. There is no mandate in the Act requiring us to determine why the separate business entities were organized or why contracts were allocated by those in control to one business or the other. Nor is the fact that the business entities engage in different types of business important. Moening v. War Contracts Price Adjustment Board, 14 T.C. 589">14 T.C. 589 (1950).*17 The percentage of proprietorship interest in the various business entities may vary, but so long as actual control over each exists, then the common control test has been met.
An order will be entered in accordance herewith.
Footnotes
1. The pertinent provisions of section 403 (c) (6) are as follows:
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, * * * 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 * * *. If such fiscal year is a fractional part of twelve months, the $ 500,000 amount * * * shall be reduced to the same fractional part thereof for the purposes of this paragraph.↩
2. The Regulations as set out in the Renegotiation Manuals for fiscal years ending after June 30, 1943, define "control" as follows:
348.4 Tests of "Control." In determining whether the contractor controls or is controlled by or under common control with another person, the following principles should be followed:
* * * *
(5) Other cases↩: Actual control is a question of fact. Whenever it is believed that actual control exists even though the foregoing conditions are not fulfilled, the matter may be determined by the Department or Service conducting the renegotiation.