27 T.C. 1">*1 The respondent has determined deficiencies in income tax as follows:

The issues presented are: (1) Whether either party1956 U.S. Tax Ct. LEXIS 70">*72 is here collaterally estopped from litigating the validity of a family partnership; (2) if not, whether there existed during the years in question a 27 T.C. 1">*2 valid family partnership, including certain trusts as partners, for Federal income tax purposes; (3) whether (assuming the invalidity of such partnership with respect to said trusts for tax purposes) petitioners are nevertheless entitled to have a proportion of the net profits of the business attributed to the use of the capital of the trusts in the business and not to petitioners herein; and (4) if such allocation is not allowable, whether the partnership is entitled to deduct reasonable amounts paid or credited to said trusts for the use of the capital of said trusts in the partnership business and, if so, the amounts allowable.

FINDINGS OF FACT.

Fred J. Stanback and Thomas M. Stanback, who reside in Salisbury, North Carolina, timely filed individual Federal income tax returns for the years 1943 through 1947 with the then collector of internal revenue for the district of North Carolina. Thomas M. and Ada M. Stanback, and Fred J. and Elizabeth C. Stanback, respectively, timely filed joint Federal income tax returns for the taxable1956 U.S. Tax Ct. LEXIS 70">*73 years 1948 and 1949, likewise with the then collector of internal revenue for the district of North Carolina. Stanback Company, Ltd., a partnership located in Salisbury, timely filed appropriate partnership returns, Form 1065, for the years 1943 through 1949 with the then collector of internal revenue for the district of North Carolina. The Wachovia Bank and Trust Company, co-trustee, timely filed United States fiduciary income tax returns, Form 1041, for the several trusts of Elizabeth C. Stanback, Fred J. Stanback, Jr., Nancy Jean Stanback, Thomas M. Stanback, Ada M. Stanback, and William Charles Stanback, for the years 1943 through 1949 with the then collector of internal revenue for the district of North Carolina.

The facts are stipulated in part and, to the extent so stipulated, are incorporated by reference. Such reference includes (a) the records in two civil actions entitled Thomas M. Stanback v. Charles H. Robertson, Collector (Civil Action No. 433) and Fred J. Stanback v. Charles H. Robertson, Collector (Civil Action No. 434) in the United States District Court for the Middle District of North Carolina, and (b) the record of the proceedings in the Tax 1956 U.S. Tax Ct. LEXIS 70">*74 Court of the United States, reported as Wachovia Bank & Trust Co. (Docket Nos. 1899-1902), a Memorandum Opinion dated June 22, 1944.

The partnership question involved in the two cases of Stanbackv. Robertson above referred to is the same as that raised in the instant case. Said question was decided on the merits adversely to the plaintiffs (petitioners herein) and the decision was affirmed on appeal. The same question was not involved in the case of Wachovia Bank & Trust Co. above referred to.

Fred and Thomas Stanback, who are brothers, first entered into a partnership business (hereinafter sometimes referred to as Stanback) 27 T.C. 1">*3 on February 2, 1924. They have been engaged continuously since that time in the business of manufacturing and selling headache powders. A formal, written agreement was first executed on April 2, 1928, and thereafter amended on September 1, 1930, providing for the payment of a 2 per cent royalty on net sales to Thomas as recompense for the formulas, trade name, and goodwill he contributed to the partnership from the headache powder business he previously operated himself, and an equal division of the remaining profits between the two1956 U.S. Tax Ct. LEXIS 70">*75 partners after deduction for said royalty. It was also provided that in case of the death of either partner the business would thereafter be continued for the joint benefit of the surviving partner and the estate or trustee of the deceased partner in accordance with the other terms of the agreement.

By the middle 1930's, the Stanback partnership had proved a highly successful business operation. The income being earned by the partners was in excess of their respective personal family needs. Surpluses had been invested in securities and real estate. The two brothers were anxious to find a means of providing financial security for their families, and they believed it to be a propitious time to place their families in such secure financial position. They wanted their families to be free from the hazards of the proprietary medicine business. They also wanted to protect their families against the possible exercise of poor business or investment judgment on their own part. And they were further concerned that the business, which was then doing well, might not continue to do so. The business, then as now, consisted of the manufacture and sale of a single product having limited distribution, 1956 U.S. Tax Ct. LEXIS 70">*76 and was one which could be seriously affected by various governmental acts of Federal or State governments. The partnership had no research or development facilities. Heavy damage suits for personal injury were not uncommon; the field was very competitive; and public acceptance of and demand for a particular headache remedy was changeable. The success of the business depended largely on promotion and continuous public acceptance of the particular product.

At first the Stanback brothers considered making outright gifts of partnership interests to their respective wives and children. They were reluctant, however, to give their wives such complete independence, and because the children were minors such procedure may not have been legal under North Carolina partnership law. Thereafter, they considered incorporating the business. But after seeking the advice of an attorney they became concerned about the impact of franchise taxes that might be imposed in the many States in which Stanback was doing business. After numerous conferences with their attorneys, it was finally decided that their objectives, including those heretofore outlined, and a desire to minimize taxes could best 1956 U.S. Tax Ct. LEXIS 70">*77 be accomplished 27 T.C. 1">*4 by the adoption of a plan which, in part, called for the making of gifts of an interest in the partnership in trust. The transactions hereinafter described were undertaken pursuant to this plan.

On December 21, 1937, the Stanco Realty Company, hereafter referred to as Stanco, was incorporated under the laws of North Carolina. Its authorized capital stock consisted of 3,000 shares without par value. The Stanback brothers and their respective wives each subscribed for 1 share of stock to complete the organization of the corporation and entitle it to begin business. It was planned that Stanco would take over the real estate and investment holdings of Stanback, the partnership.

On December 27, 1937, 16 tracts of real estate and various stocks and bonds, which had theretofore been held by the partnership but which were not then needed in the conduct of that business, were conveyed to Stanco. In exchange therefor, Thomas and Fred each received 600 shares of Stanco's capital stock.

By separate instruments dated December 28, 1937, Thomas transferred to his brother, Fred, and the Wachovia Bank and Trust Company, hereinafter referred to as Wachovia, as trustees, 1956 U.S. Tax Ct. LEXIS 70">*78 for the benefit of Thomas's wife, Ada, and two children, Thomas Jr., age 18, and William C., age 15, 24 per cent of his 50 per cent interest in the partnership, Stanback Company.

The trust instrument executed by Thomas reads in part as follows:

PROPERTY ENTRUSTED

The Grantor, in consideration of one dollar paid to him by the Trustees, receipt of which is hereby acknowledged, has delivered to the Trustees the properties itemized on the sheet attached marked "A" and made a part of this agreement, which, together with other properties that may hereafter be brought within the operation of this agreement, are to be held by the Trustees, or their successors in trust, for the purposes hereinafter set forth.

* * * *

DISTRIBUTIVE PROVISIONS

The trusts herein created and established shall be administered for the benefit of the Grantor's wife and children, and for the benefit of their successors as hereinafter provided and directed. The Trustees shall forthwith divide this trust estate into equal parts or shares and the several equal parts or shares shall be apportioned and administered and disposed of as hereinafter stipulated:

Section 1. At the time of execution of this agreement the1956 U.S. Tax Ct. LEXIS 70">*79 Grantor has a wife, Ada M. Stanback -- and two sons, Thomas M. Stanback, Jr., and William Charles Stanback. If any child or children shall hereafter be born to the Grantor on or before December 31, 1949, then, and in that event, each such child shall, upon birth, be admitted to the class of beneficiaries and shall thenceforth be entitled to share in the trust estate equally with the Grantor's above-named beneficiaries (to-wit: Grantor's wife, Ada M. Stanback, and two sons, Thomas M. Stanback, Jr., and William Charles Stanback), in the same manner and upon the same terms as apply to the Grantor's now living children, and for the accomplishment of that purpose the Trustees are hereby authorized and directed to 27 T.C. 1">*5 diminish proportionately the shares of the other beneficiaries of this trust and to reapportion the trust estate in order to apportion an equal share to each such afterborn child.

Section 2. One equal part or share of the trust estate shall be apportioned to the Grantor's wife, Ada M. Stanback, and the net income available for distribution shall be paid to the said Ada M. Stanback in such amounts and at such intervals as she shall from time to time direct, so long1956 U.S. Tax Ct. LEXIS 70">*80 as she shall continue to be the Grantor's lawful wife or his widow (the remarriage of said Ada M. Stanback after the death of Grantor shall not deprive her of the income from the part or share apportioned to her under this section): Provided That in the event the said Ada M. Stanback shall not direct the distribution of any portion of such net income within a period of twelve months after its receipt by the Trustees, then, and in that event, the portion of such net income as to which she shall not have directed the disposition shall accumulate in the hands of the Trustees and be invested and added to the principal of such part or share of the trust estate. If at any time subsequent to the execution of this agreement the said Ada M. Stanback shall institute or prosecute any suit against the Grantor for divorce or separation, or upon the death of the said Ada M. Stanback, the principal and accumulations of her part or share of this trust estate shall forthwith be transferred to and merged with the parts or shares of the trust estate apportioned to the Grantor's children and shall be administered and disposed of in accordance with the terms and provisions of the trusts herein created1956 U.S. Tax Ct. LEXIS 70">*81 for their benefit.

Section 3. One equal part or share of the trust estate shall be apportioned to each of the Grantor's sons -- Thomas M. Stanback, Jr., and William Charles Stanback -- and during the minority of each son the Trustees are authorized, in the exercise of their sole and uncontrolled discretion, to apply all or any portion of the net income derived from such son's part or share which is available for distribution for his benefit in such manner and at such intervals and in such amounts as the trustees in their discretion shall deem advisable and for the best interests of such sons; or the Trustees may pay all or any portion of such income to the beneficiary's mother, Mrs. Ada M. Stanback, to be by her used and applied for his benefit in such manner as the said Mrs. Ada M. Stanback shall deem advisable and for the best interests of the beneficiary; Provided, However, that if at any time subsequent to the execution of this agreement the said Ada M. Stanback shall institute or prosecute any suit against the Grantor for divorce or separation, or upon the remarriage of the said Ada M. Stanback, then, and in either of such events, the application or distribution of the income1956 U.S. Tax Ct. LEXIS 70">*82 to the Grantor's children shall thereafter vest solely in the Trustees and the said Ada M. Stanback shall not thereafter have any voice in such application or distribution of the income of such parts or shares of this trust estate as shall be apportioned to the Grantor's children. Subject to the foregoing proviso the exercise by the Trustees of the discretion herein conferred upon them shall be conclusive and binding upon everyone interested in the trust estate; and if the Trustees shall elect to pay all or any portion of such income to Ada M. Stanback as aforesaid, her receipt therefor shall fully acquit the Trustees with respect to the income so paid, and in such case the Trustees shall not be under any duty or responsibility whatsoever to see to the application thereof. Mrs. Ada M. Stanback shall not be under any duty or responsibility to account for such income as may be paid to her under the foregoing provision, nor shall she be liable to the beneficiary or to any other person on account thereof. If the full amount of such net income available for distribution shall not be paid or applied for the benefit of said beneficiary as hereinabove authorized, then, and in that 27 T.C. 1">*6 1956 U.S. Tax Ct. LEXIS 70">*83 event, the portion thereof not so paid or applied shall accumulate in the hands of the Trustees and be invested and added to the principal. When such son shall attain the age of twenty-one years the net income thereafter derived from his part or share and currently available for distribution shall thereafter be paid monthly or quarterly to such son until such time as the principal of his part or share shall become distributable in accordance with the provisions set out and contained in Sections 4 and 5 thereunder.

Section 4. The Grantor, having conveyed to this trust an undivided interest in the copartnership business of Stanback Company, which said interest constitutes the original asset of this trust estate, and having, as in this agreement hereinabove provided, authorized the Trustees to retain this partnership interest as a permanent investment of the trust estate, and having further authorized the Trustees to enter into copartnership agreements and to execute Articles of Copartnership and all other papers, instruments and documents necessary and incident thereto, does hereby expressly stipulate that there shall not be any distribution of any portion of the principal of 1956 U.S. Tax Ct. LEXIS 70">*84 this trust estate to any beneficiary hereunder prior to the date fixed in the Articles of Copartnership of Stanback Company for termination of said partnership -- to-wit: December 31, 1949 -- unless the said partnership, or any successor partnership in which this trust estate shall be interested, shall sooner terminate in the manner provided in its Articles of Copartnership. This provision with respect to the withholding of any distribution of any portion of the principal of this trust estate to any beneficiary hereunder shall apply in respect to all distributions of principal of this trust estate, anything contained elsewhere in this agreement to the contrary notwithstanding.

By like instruments, dated December 28, 1937, Fred transferred to his brother, Thomas, and Wachovia, as co-trustees, for the benefit of Fred's wife, Elizabeth, and two children, Fred Jr., age 8, and Nancy Jean, age 1, 24 per cent of his 50 per cent interest in the partnership.

Neither brother was to receive any compensation for acting as co-trustee on behalf of the other's wife and children.

After the transfer, Fred and Thomas each owned one-half of the remaining interest in the business in his individual capacity.

1956 U.S. Tax Ct. LEXIS 70">*85 On December 30, 1937, Fred and Thomas each gave 75 shares of his stock in Stanco to the trustees under the December 28, 1937, trusts. The stock was valued at $ 100 per share for the purpose of computing the corporate trustees' commissions. The brothers surrendered their original certificates for 600 shares, and 6 stock certificates representing 25 shares each were issued in the names of the trustees, 1 for each beneficiary, and new certificates for 525 shares each were issued in the names of Thomas and Fred, respectively. Thereafter, Thomas and Fred each owned 526 shares; their wives individually owned 1 share each; J. A. Pitts, an employee of Stanback held 1 share; and the remaining shares were held by the trustees.

On December 29, 1937, the two brothers, both individually and as co-trustees with Wachovia, executed a new partnership agreement for a period of 12 years from the date thereof, unless sooner terminated by the death or insanity of one of the brothers. The two brothers 27 T.C. 1">*7 were named as general partners. Each was also named as co-trustee with Wachovia for the benefit of the respective brother's wife and two children, and in that capacity designated as a limited1956 U.S. Tax Ct. LEXIS 70">*86 partner. Each limited partner (the two trustees) was to be entitled to 4 per cent of the profits and to be liable for 4 percent of the losses from the operation of the business, such liability, however, to be limited to the capital contributed by such limited partners. Upon liquidation, the distributive shares of the several partners was to be in proportion to their partnership interests. Any amount advanced to the partnership by any partner in excess of his contribution of capital was to be deemed a loan, on which he would be entitled to interest only. Such excess contribution would not increase the share in the partnership profits.

On December 29, 1937, the general partners and the co-trustees (limited partners) executed a further contract providing for a 2 per cent royalty on net sales of the partnership to be paid to Thomas, the partnership net profits to be computed after deduction of said royalties. It was further recited, inter alia, that the trustees and the Stanback brothers had that day entered into a limited partnership agreement for the purpose of conducting the business of Stanback Company; and that the net profits of the Stanback Company were to be divided and1956 U.S. Tax Ct. LEXIS 70">*87 distributed in the manner and upon the basis set out in the articles of co-partnership executed on December 29, 1937.

The new partnership agreement provided in part as follows:

(8) WORKING CAPITAL RESERVE FUNDS

The general partners shall have and are hereby given sole authority to determine whether any part of the annual profits are needed as additional working capital or whether any part of such annual profits should be withheld for the purpose of making any improvements, alterations or additions to the plant or whether any part of such profits should be withheld to defray the cost of expansion of the business or of developing new territory. Such decision shall vest solely in the general partners hereinabove named and said general partners may in any year determine that all or any part of the profits for that year or the preceding year (such determination, however, to be made prior to date hereinafter fixed for division and distribution of net profits for the preceding year) are needed for the purposes hereinabove stated, and their decision shall be binding upon all parties in any way interested in this agreement.

Such amount of profits as the said general partners determine to1956 U.S. Tax Ct. LEXIS 70">*88 be needed in the business shall be retained in the business and not distributed to the several partners and shall be credited to an appropriate account on the books of the copartnership -- such account may be designated as "Reserve for Working Capital", "Reserve for Expansion" or any other appropriate designation selected by the general partners.

Such reserves shall be in addition to the reserves to be regularly maintained by the partnership and representing possible bad debt losses, depreciation on the properties and assets of the copartnership, and other reserves accustomarily carried by like business enterprises.

All of the reserve funds, by whatever name called, may be invested in such manner and in such securities and properties as the general partners may from 27 T.C. 1">*8 time to time determine. And such reserves may be increased or diminished in such manner and in such amounts as the said general partners may from time to time determine.

* * * *

The special partners shall not be entitled to withdraw any part of the net profits of the business (except as provided in Item II below) unless the general partners determine that the condition of the business warrants a distribution to1956 U.S. Tax Ct. LEXIS 70">*89 all partners.

* * * *

(12) DUTIES OF THE PARTNERS

Each general partner shall:

(a) Diligently attend to the business of the partnership and devote his whole time and attention thereto.

(b) Punctually pay his separate debts and indemnify the other partners and the assets of the firm against the same and all expenses on account thereof.

(c) Forthwith pay all monies, checks, negotiable instruments and other properties and assets received by him on account of the firm into the treasury of the firm or into the bank for the account of the firm.

(d) Be just and faithful to the other partners and at all times give to such other partners full information and truthful explanation of all matters relating to the affairs of the partnership and afford every assistance in his power in carrying on the business for the mutual advantage of all the partners.

The two general partners shall:

(a) Have complete management and control of the business of the copartnership.

(b) Have the deciding vote with respect to all programs for expansion, development of new territory, withdrawing from territory determined by them to be unprofitable, enlarging, altering and improving the plant and its equipment, 1956 U.S. Tax Ct. LEXIS 70">*90 building new factories and plants, and the like.

(c) Have complete control over the properties and assets of the copartnership, and shall determine the type and character of investments to be made with surplus funds of the copartnership.

(d) Have the deciding vote as to the amounts to be held in various reserve funds and the amounts to be distributed from time to time to the several partners out of the net profits of the copartnership.

(e) All deeds, bills of sale and contracts shall be executed in the name of the partnership by the two general partners and unless specifically required by law such instruments shall not be executed by the special partners.

The special partners shall:

(a) Have no voice in the management and operation of the business of the copartnership.

(b) Advise with the general partners when requested so to do and shall give to the general partners the benefit of their experience and judgment in all matters pertaining to the welfare and successful operation of the copartnership business -- Provided, However, said special partners shall not have the right to act in any manner which would have the effect of, or which might result in, making them general partners1956 U.S. Tax Ct. LEXIS 70">*91 of said partnership. * * *

* * * *

27 T.C. 1">*9 (22) RE-ALLOCATION OF HOLDINGS OF LIMITED PARTNERS

As stated in Section 4 of this indenture, the limited partners herein acquired their several interests in this partnership as a result of transfers in trust made by the general partners to Wachovia Bank and Trust Company, as Trustee for the wives and children of the said general partners -- to-wit: Thomas M. Stanback and Fred J. Stanback. The trust agreements executed in connection with such transfers provide for re-allocation of principal in the event any children are born to Thomas M. Stanback or Fred J. Stanback after date of execution of said trust agreement. Specific recognition is given to such provision in said trust agreement and it is specifically agreed by all parties hereto that in the event a child is hereafter born to Fred J. Stanback, the interests in this partnership hereinbefore specified as belonging to Wachovia Bank and Trust Company and Thomas M. Stanback, as Trustees for Elizabeth C. Stanback, Fred J. Stanback, Jr., and Nancy Jean Stanback shall thereupon be redistributed so as to place such afterborn child on a basis of equality as to the trust res with the said Elizabeth1956 U.S. Tax Ct. LEXIS 70">*92 C. Stanback, Fred J. Stanback, Jr., and Nancy Jean Stanback. And the same is true with respect to any afterborn child of Thomas M. Stanback. And it is further understood and agreed by all parties hereto that the Trustees for such afterborn child shall, immediately after such re-allocation of the trust res, by the execution of an appropriate instrument, signify their acceptance of the terms and provisions of these articles of copartnership and their agreement to be and remain bound thereby. Such re-allocation of the interest of any limited partner shall not, however, serve either to reduce or increase the aggregate total liability or the aggregate total share in the profits of the several limited partners hereinabove set forth -- to-wit: a twenty-four (24%) per cent interest in this partnership -- nor shall same reduce, increase, or in any way affect the interests and/or the liabilities of the two general partners.

The general partners were each entitled to draw $ 1,500 per month, any amounts so withdrawn to be charged first against his share of the profits for the current fiscal year. An annual audit was to be made and examined and agreed to by all partners after which each partner1956 U.S. Tax Ct. LEXIS 70">*93 was entitled to draw out his share of the profits for the preceding fiscal year, less amounts set aside for reserve accounts. Otherwise, the limited partners were not entitled to withdraw profits unless the general partners determined that the condition of the business warranted a distribution to all partners.

Subsequently, by instruments dated December 31, 1938, Fred and Thomas each transferred to the other and Wachovia, as co-trustees, an additional 6 per cent interest in the partnership business for the benefit of their respective wives and children. Thereafter, Fred and Thomas each continued to own one-half of the remaining interest in the business in his individual capacity.

The total original capital of the partnership was stated in the partnership documents at a book value of $ 125,000. Of this amount the share of the trusts was stated as 24 per cent, or $ 30,000 per the books. In 1938, the Stanback brothers gave the trusts an additional 12 per cent interest in the business enterprise. This likewise was turned over to the business and was valued at $ 15,000 on the books of the business. The general partners contributed 76 per cent, or 27 T.C. 1">*10 $ 95,000, in 1937, but their1956 U.S. Tax Ct. LEXIS 70">*94 contribution was reduced in 1938 to 64 per cent by reason of their gifts to the trusts of the additional 12 per cent interest.

The Commissioner of Internal Revenue raised the valuation of the interest of the several trusts for gift tax purposes for the year 1937 to $ 15,000 for each 4 per cent interest, or $ 90,000 for the total trust interests of 24 per cent. For the year 1938, the Commissioner valued the total 12 per cent gift interest at $ 54,000. A settlement was made on the basis of these higher valuations for gift tax purposes and the deficiencies attributable thereto were paid by petitioners.

In addition to the capital of the several trusts used in the business as heretofore outlined, the trusts further made available a total amount of $ 43,194.48 up to the beginning of the period of years here in issue by way of transfers from the drawing accounts of the trusts to their surplus accounts on the books of the business. No further transfers were made during the years here in issue.

We find that the capital of the several trusts used in the Stanback business during the years here in issue was in the total amount of $ 187,194.48, and that a reasonable amount to be paid for the1956 U.S. Tax Ct. LEXIS 70">*95 use thereof for each of the years in question is 10 per cent of said total. A total sum in excess of $ 18,719.45 was paid or credited to the accounts of said trusts by the partnership for each of the years in question.

The partnership books were kept, and partnership income tax returns were filed for each of the years in question, on the accrual basis.

The credit balance in each trust drawing account was $ 22,546.91 on January 1, 1943, and $ 33,368.23 on December 31, 1949.

OPINION.

The first question which we must answer is whether either party is collaterally estopped from here litigating the issue of the validity for Federal income tax purposes of the Stanbacks' family partnership for the years 1943-1949 insofar as it concerns the trusts as partners. The question arises in unusual circumstances. Petitioners urge that a prior decision of this Court (Wachovia Bank & Trust Co., Tax Court Memorandum, Docket Nos. 1899-1902, filed June 22, 1944) represents a previous consideration of the precise issue here before us and that such decision in favor of the petitioners estops the respondent from here and now asserting the invalidity of the family partnership in the years before us. 1956 U.S. Tax Ct. LEXIS 70">*96 Respondent, on the other hand, urges that the decision in Stanback v. Robertson (M. D., N. C., 1949), affd. (C. A. 4, 1950) 183 F.2d 889, certiorari denied 340 U.S. 904">340 U.S. 904, holding that for the year 1941 the Stanbacks' family partnership was not valid for Federal tax purposes (insofar as it included the 27 T.C. 1">*11 trustees as partners) collaterally estops the petitioners from here asserting the validity of such partnership for those later years before us.

The issue presented in the earlier Tax Court proceeding was whether the Stanback brothers as grantors of the several family trusts were taxable on the income of such trusts for the years 1938 and 1939. We held that they were not, stating:

we again are called upon to apply what is familiarly known as the doctrine of Helvering v. Clifford, 309 U.S. 331">309 U.S. 331. * * *

* * * *

The Clifford case has become a prolific source of litigation, as is evidenced by the many cases in which the application of its rationale has been sought and contested. Efforts to extend the doctrine to less compelling situations have not met with uniform1956 U.S. Tax Ct. LEXIS 70">*97 success. The retention of some degree of control by the grantor of a family trust does not require that the trust income necessarily be considered, for tax purposes, that of the grantor. * * * The Clifford doctrine merely demands that in such instances special scrutiny be given the terms of the trusts and all the circumstances attendant upon its creation and operation "lest what is in reality but one economic unit be multiplied by devices which, though valid under State law, are not conclusive insofar as section 22 (a) is concerned." * * *

* * * We can conclude only that the application of the Clifford doctrine is not called for by reason of the terms of the trusts involved here. * * *

* * * Respondent, however, argues that the Clifford doctrine should be applied because of the petitioners' control of the Stanback Company, partnership interests which constituted the principal asset of the trusts and the sole source of the income with which we are here concerned. * * *

* * * *

the argument is premised on complete and absolute control over the income and assets of the partnership in the hands of petitioners. But the facts do not warrant a finding that they had1956 U.S. Tax Ct. LEXIS 70">*98 such control. Petitioners were simply the managing partners in a limited partnership. As such they had the powers and duties commonly appertaining thereto. They operated the business, directed policy, made determinations respecting the need for reserves, and, by reason of such powers, to an extent controlled the amounts distributed to the limited partners each year. However, the existence of these powers did not give them the very substantial control required to invoke the application of the Clifford doctrine. [Emphasis supplied.]

* * * *

We conclude and hold that petitioners in Docket Nos. 1901 and 1902 are not taxable on the income of the trusts respectively created by them by reason of section 22 (a) of the Revenue Act of 1938 and the Internal Revenue Code.

Respondent's further contention in that case, based on application of section 167 (a), was also rejected.

As here, petitioners, at the time of the District Court proceeding in respect of the taxable year 1941, advanced the contention that such holding of the Tax Court estopped the respondent from then trying the family partnership issue. The District Court concluded that the prior Tax Court decision did not collaterally1956 U.S. Tax Ct. LEXIS 70">*99 estop the respondent from challenging the validity of the partnership, and on appeal the 27 T.C. 1">*12 Court of Appeals for the Fourth Circuit affirming such ruling. After reviewing the principles of collateral estoppel and indicating the precise nature of the question presented previously to the Tax Court, which question was not one of the validity of the family partnership but of the validity of the family trusts, the Court of Appeals stated (183 F. 2d, at p. 894):

Under the Clifford doctrine, control and the duration of a trust are the important factors in determining to whom income is taxable. Since the decision of the Tax Court in the Stanback cases, however, the Supreme Court has laid down the rule that the validity of a family partnership, for tax purposes, depends upon the bona fide intent of the partners to join together in the conduct of the partnership business. Control is now only one of the many factors which must be considered in making this determination. Commissioner v. Culbertson, 337 U.S. 733">337 U.S. 733, 69 S. Ct. 1210">69 S. Ct. 1210, 93 L. Ed. 1659">93 L. Ed. 1659; Lusthaus v. Commissioner, 327 U.S. 293">327 U.S. 293, 66 S. Ct. 539">66 S. Ct. 539, 90 L. Ed. 679">90 L. Ed. 679;1956 U.S. Tax Ct. LEXIS 70">*100 Commissioner v. Tower, 327 U.S. 280">327 U.S. 280, 66 S. Ct. 532">66 S. Ct. 532, 90 L. Ed. 670">90 L. Ed. 670, 164 A. L. R. 1135. Mr. Justice Douglas in the Clifford case, supra, did employ the phrase "bundle of rights" but it is evident that he used these words solely in connection with the question of control. 309 U.S. at page 337, 60 S. Ct. at page 557, 84 L. Ed. 788.

In the cases before the Tax Court upon which appellants rely, the facts were substantially the same as in the present case and partnership income was involved in both instances; but it is apparent from the Tax Court's opinion that no question was raised as to the validity of the partnership for income tax purposes. The Tax Court in the Stanback cases was concerned only (as was the Supreme Court in the Clifford case) with the question of the allocation of income for tax purposes and never commented on the question of the validity of the partnership for tax purposes, the fundamental issue in the case now before us. As we have already pointed out, collateral estoppel can be invoked only where the same issue has actually been previously1956 U.S. Tax Ct. LEXIS 70">*101 litigated. Here the precise issue before us has not been previously adjudicated and, even if it had been, the law applicable to the situation has been altered by supervening decisions of the Supreme Court. [Emphasis supplied.]

It is evident, however, that while the Court of Appeals did not consider the issue previously before the Tax Court to be the same as that then being presented to the District Court (with which view we agree, independently of the view of the Court of Appeals), the precise question now before us regarding the effect by way of collateral estoppel of the earlier decision of this Court is the same as that presented to the District Court and the Court of Appeals in the earlier litigation over the validity of the family partnership for 1941. Since the issue raised there by petitioners is the same as that presented here, and since the circumstances in such respects as are relevant to consideration of such contention and the law applicable thereto is the same in every detail, the doctrine of collateral estoppel is here clearly applicable, and precludes petitioner from again raising such question or contention.

We think it is clear from the authorities that the doctrine1956 U.S. Tax Ct. LEXIS 70">*102 of collateral estoppel may be applied to the issue of validity of a family 27 T.C. 1">*13 partnership in an appropriate case. In Harley Alexander, 22 T.C. 318 (1954), we held that the taxpayers were barred from relitigating the validity of a family partnership, which, in a prior proceeding involving certain earlier years, had been determined to be invalid. We indicated that the basic facts concerning the formation of the partnership were presented in the earlier proceeding and the issue there disposed of. On appeal, the Court of Appeals for the Fifth Circuit ( Alexander v. Commissioner, (C. A. 5, 1955) 224 F.2d 788) in reversing (but not on the ground that the doctrine of collateral estoppel could not be applied to a case of a family partnership) expressed the view that certain actions of the parties not before the court in the first proceeding might have a significant bearing on the determination, and therefore held that collateral estoppel did not apply in the particular case. See Argo v. Commissioner, (C. A. 5, 1945) 150 F.2d 67.

In Jones v. Trapp, (C. A. 10, 1950) 186 F.2d 951,1956 U.S. Tax Ct. LEXIS 70">*103 the court held that the judgment on the issue of the validity for tax purposes of the partnership between Trapp and his wife for the year 1940 was conclusive and binding in a later proceeding in respect of the year 1941. In applying the doctrine of collateral estoppel, the court stated (pp. 953-54):

The additional facts relied upon in the instant case as justifying a different result in tax liability for the two years, consist of letters written by the taxpayer to a bank in 1911 in connection with his application for credit, and Mrs. Trapp's testimony concerning their business relationship through the years. One of the letters to the bank recited that the Trapps were trying to get into the municipal bond business; that Mrs. Trapp was interested in the business, and was furnishing her own separate collateral as security for the proposed loan with which to engage in business. But these facts are historical and were available in the former trial. "No new facts were tendered in this case which did not exist and were not available for production in the former case. The applicable and controlling facts remain the same -- they are static, immutable, and therefore precisely identical1956 U.S. Tax Ct. LEXIS 70">*104 for the purposes of estoppel." * * * [Emphasis supplied.]

See also Lynch v. Commissioner, (C. A. 7, 1954) 216 F.2d 574.

It is apparent from the foregoing cases that the doctrine of collateral estoppel may be applied in tax cases involving the issue of validity of a family partnership, but that application of such doctrine is subject to limitations which best serve the ends of justice and do not tend to perpetuate a decision which has not taken account of significant changes of fact or law. Thus, the facts and the evidence thereof material to the consideration of the validity of the partnership must in all respects be substantially the same in the later proceeding as in the prior one. If there is any significant change which may reasonably be calculated to alter the situation (but not merely additional or somewhat different evidence of historically past events 27 T.C. 1">*14 and actions which took place prior to the first hearing and are static in character) then the first decision will not constitute a bar to litigating the issue in the later year(s).

With these principles and limitations in mind, we proceed to examine petitioners' specific arguments1956 U.S. Tax Ct. LEXIS 70">*105 against here applying the bar of collateral estoppel. The sense of petitioners' main argument against the conclusive applicability to the present proceeding of the decision in Stanback v. Robertson is not that the issue there presented was not the same as that here before us, except for the different tax years involved, or that there have been any changes during the intervening years in material facts pertinent to such issue (which is petitioners' second point and is discussed infra), but is that the decision in Commissioner v. Culbertson, 337 U.S. 733">337 U.S. 733 (1949) was not properly interpreted and applied in Stanbackv. Robertson. Petitioners point to various portions of the trial judge's charge to the jury and to certain of the questions directed by the trial judge to various witnesses during the course of the hearing, and urge that they clearly indicate the application of what petitioners would consider the "dead" hand of Tower and Lusthaus and not the properly applicable law of family partnership as clarified in Culbertson. Petitioners suggest that Culbertson was not fully understood1956 U.S. Tax Ct. LEXIS 70">*106 so shortly after its promulgation and that the legal climate has since changed as a consequence of such greater understanding, evidenced by various cases, Mimeograph 6767, and the family partnership provisions of the Revenue Act of 1951. Petitioners also point to portions of the Court of Appeals decision and argue on brief as follows:

It is clear from the charge of the District Judge, and from the opinion of the Court of Appeals, that the rule of Culbertson was not being followed but that the tests which had been erroneously attributed to Tower and Lusthaus were being followed. It is clear that while paying lip service to Culbertson, both courts were applying the very tests which Culbertson had condemned. Similar to another historically famous decision, the hand was the hand of Culbertson but the voice was the disguised voice of Tower and Lusthaus.

* * * *

The Judge's charge discloses the tests upon which the jury were instructed and practically directed to make the decision which it made.

Some of those erroneous tests were predicated upon a palpable misconception or misunderstanding of Culbertson; some were predicated upon assumption of facts 1956 U.S. Tax Ct. LEXIS 70">*107 which did not exist (such as that the wives and children of the Stanbacks were alleged to be partners); some were predicated upon assumptions which were wholly contrary to the determined facts (such as lack of ownership in the limited partners of a portion of partnership income which the Tax Court had specifically held did belong to the trusts); some were predicated upon issues which were totally agsent and which had application only in cases involving gifts of anticipatory income (as in the Horst case), having no relation to the case being tried; while some had application only in so-called "Clifford cases," or in "Stuart cases" involving sec. 167. In essence the Court's charge was a 27 T.C. 1">*15 potpourri of elements thoroughly mixed, jumbled and confused. They included every so called "test" for determining taxability condemned by the Culbertson case.

Without further detailing the specific criticisms by the petitioners of the trial judge's instructions or the application of the Culbertson decision to the facts by either the trial judge or the judges of the Court of Appeals in affirming the lower court decision, we think that we are here bound by what was there 1956 U.S. Tax Ct. LEXIS 70">*108 done. We think it appropriate to comment, however, that we do not find that the interpretation and application of the law as embodied in the Culbertson decision was erroneously applied in Stanbackv. Robertson as urged by the petitioners. ² The Court of Appeals faced squarely the question of whether the Culbertson decision was properly applied by the trial court to the facts then at hand, and held that it had been. Petition for certiorari was thereafter denied, 340 U.S. 904">340 U.S. 904 (1951).

1956 U.S. Tax Ct. LEXIS 70">*109 As we understand the Culbertson case, the substantive question is whether or not the partnership among the petitioners and the several trusts established by petitioners for the benefit of their respective wives and children constituted a valid partnership during the years in question for Federal income tax purposes. The reality of the "family partnership" for tax purposes depends on "whether the partners really and truly intended to join together for the purpose of carrying on the business and sharing in the profits and losses or both." Commissioner v. Tower, 327 U.S. 280">327 U.S. 280 (1946). The issue is one of fact and the intention of the parties is to be gleaned in each case from a consideration of all of the particular circumstances involved, without placing special emphasis on any given factor(s). As the Supreme Court stated in 337 U.S. 733">Commissioner v. Culbertson, supra:

The question is * * * whether, considering all the facts -- the agreement, the conduct of the parties in execution of its provisions, their statements, the testimony of disinterested1956 U.S. Tax Ct. LEXIS 70">*110 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 intent -- the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise. [Emphasis supplied.]

We do not think that these principles were misconceived or misconstrued by either the trial judge or the Court of Appeals in Stanback v. Robertson. Nor can we say that time has here altered the legal climate. Culbertson itself was but a further explication of the basic underlying principles enunciated in Tower and Lusthaus and the principles 27 T.C. 1">*16 are the same now as they were then. The Supreme Court in Culbertson attempted to lead back to those principles such courts as had misconstrued Tower and Lusthaus as having laid down a series of objective tests. The Court of Appeals in Stanback v. Robertson, in its opinion affirming the District Court, did, as it stated, apply the Culbertson test and in our opinion properly applied its principles. In so doing, its 1956 U.S. Tax Ct. LEXIS 70">*111 determination that the District Court properly applied the Culbertson rule acts to bar the petitioner from here raising a contention that such rule was not there properly applied. Furthermore, upon close examination of the charge to the jury in Stanbackv. Robertson, we are of the opinion that the trial judge performed well and fairly a very difficult task in couching his instructions to convey to the jury the necessary elements of the law in an intricate and subtle area of tax matters. Such instructions fairly reflect the essence of what we understand to be the rule which the Supreme Court has laid down for determining the validity of family partnerships. We point out in the margin below some of the trial judge's statements to indicate clearly that the essence of these principles was carefully stated, particularly so when they are read in the context of the judge's whole instructions ³ and not merely piecemeal as pointed to by the petitioners.

1956 U.S. Tax Ct. LEXIS 70">*112 27 T.C. 1">*17 Petitioners further contend that the Court of Appeals disregarded completely the prior decision of this Court to the effect that the family trusts were valid, and argue that collateral estoppel may not therefore be applied here. It is true that that court did not deal with the prior determination of this Court since the record in such prior proceeding was not there before it. But our prior determination only went to the validity of the trusts for purposes of the so-called Clifford doctrine. The trusts are plainly valid under State law, and they are valid for Federal income tax purposes insofar as the Clifford doctrine is concerned. But the validity of the trusts for such purposes does not resolve the issue of validity of the family partnership. Control over and duration of a trust are the important factors in determining to whom the income is to be taxed under the Clifford doctrine, but it is the relationship of the partners, one to the other, in terms of the carrying on of a valid partnership business that is critical in determining the validity of a family partnership, even though the partners are also related as grantors of the trusts which it 1956 U.S. Tax Ct. LEXIS 70">*113 is claimed are limited partners. Control by the partners, qua partners, over the partnership income which under the agreement should flow to the trusts as limited partners bears on the validity of the partnership, but absence of control qua grantors over the trusts and thus the income due the trusts has nothing to do with the validity of the partnership. Likewise, as we indicated in Robert P. Scherer, 3 T.C. 776 (1944), control over the flow of partnership income to the trusts does not affect the validity of ownership of such income by the trusts once in the hands of the trusts. See also Theodore D. Stern, 15 T.C. 521 (1950); Edward D. Sultan, 18 T.C. 715 (1952).

27 T.C. 1">*18 We disagree with petitioners' view that Mimeograph 6767, supra, sets up standards more liberal than those expounded in the Culbertson decision, and different from those applied by the trial judge and the Court of Appeals in Stanback v. Robertson. The Mimeograph specifically indicates that it is only a statement of what the respondent conceives to be the applicable principles derived from the 1956 U.S. Tax Ct. LEXIS 70">*114 Culbertson decision, and when such expression of view is read as a whole in context, we think it has adequately and fairly stated such principles. ⁴ The Mimeograph clearly indicates that the validity of the family partnership depends on the intent of the parties forming the partnership and that such intent is to be gleaned in each case from the particular circumstances there involved. Such intent was determined by the jury in the District Court and the judgment there was affirmed by the Court of Appeals. We not only cannot here say that it was wrong, but on the contrary are of the opinion that there was no misinterpretation or misconstruction by those courts of the applicable Culbertson principles. In all events, as indicated above, we consider ourselves bound by the decision of the Court of Appeals to the effect that the Culbertson doctrine was correctly applied in Stanbackv. Robertson, and petitioners are now collaterally estopped from raising such question.

1956 U.S. Tax Ct. LEXIS 70">*115 Petitioners' next point is to the effect that the evidentiary facts here differ significantly from those before the trial court in Stanbackv. Robertson. They argue that since the record in the first Tax Court proceeding was not a part of the evidence admitted in the District Court trial, whereas it is here in evidence, "[if] it had been so included the probabilities are that the decision in that case would have been different." We do not agree. A careful comparison of the record of the prior Tax Court proceeding with that of the District Court proceeding reveals that all of the pertinent facts regarding the formation of the partnership appear and were introduced in the latter record in virtually the same manner and by testimony of mostly the same individuals as previously in the record before the Tax Court. We have not found anything favorable to petitioners which is a part of the record in the prior Tax Court proceeding, directed to the Clifford trust issue, which is not also independently a part of the separate record of the District Court proceeding. But even if this were not true, we could not accept petitioners' argument, since the issue before the Tax Court 1956 U.S. Tax Ct. LEXIS 70">*116 was different from that before the District 27 T.C. 1">*19 Court and there was consequently no basis in the latter proceeding for admitting as evidence the transcript of the prior proceeding over the objection of the then collector of internal revenue, defendant.

Petitioners next urge that the fact the partnership was terminated on December 31, 1949, in accordance with the partnership agreement and that in the reorganized partnership effected on January 2, 1950, each alleged partner, general and limited, received a fair share under the new agreement, was not before the District Court (the event had not then occurred) and that such circumstance of which evidence has been produced in this proceeding acts to lift the bar of collateral estoppel. We cannot agree. Such fact is not in a real sense new, nor does it change the complexion or significance of the previously pertinent facts. The event occurred in accordance with the terms of the agreement, which was before the court in the prior proceeding. That it ultimately so came to pass changes nothing. The events pertinent to determining the intent of the parties to form and carry on a partnership are generally historical and were clearly 1956 U.S. Tax Ct. LEXIS 70">*117 so in the instant case. Such events were past by the time the technical (under State law) partnership was actually terminated. The termination of the partnership, however, was not an event or change in the activities of the parties in years subsequent to the year of the prior determination which required reexamination of the basic question. The action, as above indicated, was taken in conformity with the terms of the agreement which was before the court in the earlier case. The ultimate right to share in the distribution upon termination in accordance with the agreement was always a part of the picture and not only so upon actual termination. Therefore, we do not think such fact is new, nor does it cause the removal of the bar of collateral estoppel to relitigation of the basic issue.

Petitioners next contend that the evidence submitted at the time of this hearing regarding the value of the capital contributions and the value of the services of the general partners is such a change in facts as will prevent application of the doctrine of collateral estoppel. Again we must disagree with petitioners' view. We do not believe that such evidence goes to the issue of validity of the1956 U.S. Tax Ct. LEXIS 70">*118 family partnership at all, but as presented here goes only to the petitioners' alternative contention discussed infra regarding reallocation of the income. Moreover, it is our view that such facts are in reality historical and static and not new. The changing relations of the personal services rendered by the general partners does not bear on the intent to form a partnership or in any way tend to effect a subsequent formation of a valid partnership. We do not think, therefore, that such evidence can be considered as significant in relation to the primary issue and as evidentiary facts new to this proceeding.

27 T.C. 1">*20 We conclude that since the question before us goes to the validity of the family partnership, which issue depends on the circumstances leading up to and surrounding the formation of the partnership, all previously before the District Court in the prior proceeding wherein the issue was the same as that here before us, and since there has been no showing of a change in the relationship of the parties subsequent to such prior determination, the petitioners are here barred from relitigating the family partnership question. Commissioner v. Sunnen, 333 U.S. 591">333 U.S. 591 (1948);1956 U.S. Tax Ct. LEXIS 70">*119 Tait v. Western Maryland Co., 289 U.S. 620">289 U.S. 620 (1933); Harley Alexander, supra;Jones v. Trapp, supra.⁵

1956 U.S. Tax Ct. LEXIS 70">*120 Petitioners contend that even if the validity of the family partnership is not sustained, we must nevertheless make an allocation of the business income among the Stanback brothers and the several trusts in accordance with their proportionate investments after an allowance for the reasonable value of the services rendered to the partnership by themselves. We do not accept this view.

Petitioners rely, inter alia, for authority for this technique of calculation on Mimeograph 6767 (the pertinent portion of which is set forth in the margin below) ⁶ and also upon section 191 of the Internal Revenue Code of 1939, added by the Revenue Act of 1951, which petitioners urge to be declaratory of preexisting law.

1956 U.S. Tax Ct. LEXIS 70">*121 Petitioners, however, misconceive the purpose of this method of allocation. The Mimeograph provision and section 191 of the Code deal only with cases in which the family partnership is recognized as valid, but where the allocation of income in the partnership agreement 27 T.C. 1">*21 does not adequately allow for the value of services rendered to the partnership by any of the partners. A reasonable allowance for the value of the services of the active partners is required if the basic principle that income be taxed to the earner thereof is to be satisfied. Where the partnership is not recognized as to the trusts, however, as here, the problem is not to assure the allowance of a reasonable amount for services rendered, but only to determine (see discussion infra) whether, and in what amounts, the partnership may be entitled to a deduction for payments made to the trusts for the use of capital of the trusts in the partnership business. The technique for so doing urged by petitioners is inappropriate because it has the effect of allowing the unrecognized partners to share in the business profits, over and above the allowance for salaries, in proportion to the capital contributed just1956 U.S. Tax Ct. LEXIS 70">*122 as though they were in fact partners. If this approach were to be followed, it would be fruitless to consider whether a partnership is valid and to be recognized for Federal tax purposes. We think the proper rule for this case is that some fair return be allowed for payments made by the partnership for the use of the capital of the several trusts in the Stanback business by way of an annual deduction by the partnership for each of the years here in issue.

The underlying principles here applicable are summarized in Wofford v. Commissioner, (C. A. 5, 1953) 207 F.2d 749, in which the court said (p. 753):

These facts plus the undisputed fact that the trust contributed to the venture the use of its one-third interest, while, in view of the Tax Court holding, not sufficient to establish a partnership, were ample as a basis for a finding as to the value in terms of income of the contribution the trust made. There was, therefore, evidence upon which the Tax Court could have allotted to the trust the interest in the income which the parties had agreed to give it. Whether this should be called rent, or the value of the use, it was certainly the measure1956 U.S. Tax Ct. LEXIS 70">*123 of what the parties had agreed would entitle it to one-third of the net income.

This is not to say that the Tax Court was compelled to accept their agreement, as to the value of the use or rental value if, under all the facts of record, the agreed amount was excessive, Cf. Greenspun v. Commissioner, supra. It is to say, though, that upon the rejection by the Tax Court of the claim of partnership, it was incumbent upon it to determine the value to the business of the use of the one-third interest owned by the trust and upon this basis reallocate the income attributed to petitioner by giving full effect to that determination.

Cf. David L. Jennings, 10 T.C. 505 (1948), and cases therein cited.

We next consider what is the actual capital of the trusts used in the Stanback business for the years in question and what is a reasonable amount to be paid for the use thereof. The evidence does not support a precise solution, and we must exercise our best judgment, keeping in mind the principles of Cohan v. Commissioner, (C. A. 2, 1930) 39 F.2d 540.

27 T.C. 1">*22 We have found as a fact that during the years here in question the1956 U.S. Tax Ct. LEXIS 70">*124 total capital of the several trusts in the Stanback business was in the amount of $ 187,194.48, and that a reasonable amount to be paid for the use of such capital would be 10 per cent annually. Total amounts in excess of 10 per cent of such total capital were paid or credited to the trusts by the partnership in each of the years in question, and we hold, in the light of the foregoing discussion, that the partnership is entitled to a resultant deduction for each of the years in question of $ 18,719.45. In arriving at $ 187,194.48 as the total amount of the capital of the trusts, we have accepted $ 90,000 as a proper valuation of the 24 per cent interest in the business given the trusts by the Stanback brothers in 1937, as determined by the Commissioner for gift tax purposes and on which basis the petitioners herein made settlement of gift tax deficiencies rather than the lesser amount of $ 30,000 appearing on the Stanback books. Likewise, the value of the additional 12 per cent interest transferred to the trusts in 1938 is considered to be $ 54,000 as the Commissioner determined for gift tax purposes and on which basis settlement of the petitioners' gift tax deficiencies was made, 1956 U.S. Tax Ct. LEXIS 70">*125 rather than the $ 15,000 assigned to such interest by petitioners on the books of the enterprise. In addition to such capital, transfers were effected, prior to the period here in question, from the drawing accounts of the several trusts to the surplus "capital" account in the total amount of $ 43,194.48 and represent an additional amount of capital of the trusts used in the business which must be included in the basis used for determining the amount of the allowable deduction.

In selecting the proper rate of return, we have gleaned such comprehension of the nature of the Stanback business as we could from the record before us. We recognize that the proprietary medicine business is a risk business which might be seriously affected by State or Federal regulation in an area where regulation is not uncommon; and also that demand for the Stanback product depends almost wholly on successful promotion, which in turn depends largely on extensive and costly advertising. Moreover, Stanback was not a diversified operation. It manufactured and distributed but a single product. It maintained no research facilities. All of these factors tend to require a return in excess of the normal return1956 U.S. Tax Ct. LEXIS 70">*126 on capital expected in the open market from a business enterprise entailing only an average amount of risk. With these factors in mind, but without emphasizing any particular one of them, and mainly on the basis of our judgment based on consideration of the entire record, we hold, in accordance with the principle of Cohan v. Commmissioner, supra, that a reasonable rate of return in the particular circumstances of this case is 10 per cent.

27 T.C. 1">*23 We have noted, of course, that petitioners introduced evidence in relation to the going concern value of the enterprise during the years 1942 through 1949, largely based upon capitalization of earnings. We think the year-by-year, over-all valuation of the business by petitioners' valuation expert was excessive. We need not, however, determine our own valuation, because it has already been made clear that such an approach is not a basis for valuation of the capital of the trusts used in the business or the determination of a reasonable allowance for the use thereof. Such value cannot be increased by the capitalization of the very earnings in which the trusts are not entitled to share because they are not partners.

Decisions 1956 U.S. Tax Ct. LEXIS 70">*127 will be entered under Rule 50.