4. The net profits of the partnership shall be divided and the net losses of the partnership shall be borne in the same portions as set forth in Paragraph #3 above.

5. It is specifically agreed between the parties that JACOB ALTSHULER, REBECCA ALTSHULER, MORTON KULICK and MARTIN KRUGMAN, shall devote their time and attention to the partnership1962 U.S. Tax Ct. LEXIS 127">*134 business and that in consideration therefor the partners guarantee to each of the said partners a salary as set forth below, which shall be paid and shall be charged against their proportionate interests in the profits of the partnership; that is to say, that the following amounts shall represent a charge upon the assets of the partnership prior to the allocation of profits to the remaining partnership interests:

JACOB ALTSHULER -- $ 12,500.00 for the first year and $ 15,000.00 for each year thereafter.

REBECCA ALTSHULER -- $ 12,500.00 for the first year and $ 15,000.00 for each year thereafter.

MORTON KULICK -- $ 5,000.00 per year.

MARTIN KRUGMAN -- $ 5,000.00 per year.

6. The partners shall have such drawing accounts as may be agreed upon between them, but the drawings of each shall be charged against his or her share in the net profits.

7. The partnership business shall be managed by the working partners. All checks, drafts, notes, leases or other documents signed on behalf of the partnership, shall be signed by JACOB ALTSHULER or MARTIN KRUGMAN and REBECCA ALTSHULER or MORTON KULICK, it being the intention that each such document or evidences of obligation shall be signed1962 U.S. Tax Ct. LEXIS 127">*135 by at least two (2) of the aforegoing.

8. All funds of the partnership shall be deposited in such checking account or accounts as shall be designated by the working partners.

9. The partnership books shall be maintained at the prinicpal office of the partnership, located at #262 Main Street, Paterson, New Jersey, and each partner shall at all times have access thereto.

10. No partner shall, except with the consent of the other partners, assign, mortgage, or sell his share in the partnership or in its capital assets or property, or enter into any agreement as a result of which any person shall become interested with him in the partnership, or do any act detrimental to the best 38 T.C. 330">*334 interests of the partnership or which would make it impossible to carry on the ordinary business of the partnership. The estate of a deceased partner shall have no voice in the management of the partnership business. Its rights shall be limited to the receipt of such payments as shall be provided for herein to be paid to the decedent.

11. The withdrawal or death of any partner shall not terminate the partnership, but the rights of the withdrawing partner or the heirs of the deceased partner shall 1962 U.S. Tax Ct. LEXIS 127">*136 be limited solely to the receipt of payment of such moneys as would have been received by the deceased partner had he or she survived.

12. Upon any liquidation of the partnership business, the partners including the estate of any deceased partner, shall continue to share in the net profits and losses in the proportionate share as set forth herein. The proceeds of the liquidation shall first be paid in discharge of all partnership liabilities, thereafter in the equalization and payment of undrawn partnership profits and finally in proportionate distributions against the respective balances in the capital accounts of the partnership.

13. This agreement shall be binding upon and inured to the benefit of the partners, their legal representatives, successors and assigns.

[Here follow the signatures of all the partners, signed on the 12th day of January 1955.]

The partners of Albee Company are related by blood or by marriage and consist of Jacob Altshuler, Rebecca Altshuler (William's widow), the 10 children of Jacob and William, and the husbands of 2 of the children. No capital was contributed to the partnership by any of the partners.

Effective January 1, 1955, Albee Company executed1962 U.S. Tax Ct. LEXIS 127">*137 leases whereby it undertook to lease the real properties owned by all the corporate petitioners from them. The leases between Albee Company and the four corporations were identical as to terms, differing only in respect to the description of the leased premises and the rentals to be paid. The lease between Interior and Albee Company is typical and provided as follows:

This Lease, effective January 1, 1955 by and between INTERIOR SECURITIES CORP., A Corporation of the State of New Jersey, as "Landlord" and ALBEE CO., A Partnership with offices at #262 Main Street, Paterson, New Jersey, as "Tenant"

Witnesseth, that the said Landlord has let unto the said Tenant, and the said Tenant has hired from the said Landlord, the following premises: 111-113 Main Street, Hackensack, New Jersey; 93-95 Main Street, Paterson, New Jersey; 337-339 Main Street, Paterson, New Jersey; 261-263 Main Street, Paterson, New Jersey and #102 Broadway, Paterson, New Jersey for a period of three (3) years, and from year to year thereafter, unless terminated by either party giving to the other thirty (30) days' notice of their intention so to do, upon the conditions and covenants following:

1st: That the Tenant1962 U.S. Tax Ct. LEXIS 127">*138 shall pay the annual rent of Sixteen Thousand Eight Hundred ($ 16,800.00) Dollars; said rent to be paid in equal monthly payments of One Thousand Four Hundred ($ 1,400.00) Dollars, on the 1st day of each and every month, in advance.

2nd: That the Tenant shall take good care of the premises and shall at the Tenant's own cost and expense make all repairs to the interior and exterior of the demised premises, and at the end or other expiration of the term, shall 38 T.C. 330">*335 deliver up the demised premises in good order or condition, damages by the elements excepted.

3rd: That the Tenant shall promptly execute and comply with all Statutes, ordinances, rules, orders, regulations and requirements of the Federal, State and City Government and of any and all their Departments and Bureaus applicable to said premises, for the correction, prevention and abatement of nuisances, violations or other grievances, in, upon or connected with said premises during said term; and shall also comply with and execute all rules, orders and regulations of the Board of Fire Underwriters for the prevention of fires, at the Tenant's own cost and expense.

4th: The Tenant shall not assign this agreement, without the1962 U.S. Tax Ct. LEXIS 127">*139 prior written consent of the Landlord, or occupy or permit or suffer the same to be occupied by anyone for any business or purpose deemed disreputable or extra-hazardous on account of fire, under penalty of damages and forfeiture.

5th: That in case of any damage or injury occurring to the glass in the said demised premises, or damage and injury to said premises of any kind whatsoever, then the said Tenant shall cause the said damage or injury to be repaired as speedily as possible at Tenant's own costs and expenses.

6th: It is expressly agreed and understood by and between the parties to this agreement, that the Landlord shall not be liable for any damage or injury to person or property caused by or resulting from steam, electricity, gas, water, rain, ice or snow, or any leak or flow from or into any part of said building, or from any damage or injury resulting or arising from any other cause or happening whatsoever.

7th: It is expressly agreed and understood that if for any reason it shall be impossible to obtain fire insurance on the buildings and improvements on the demised premises in an amount, and in the form, and in fire insurance companies acceptable to the Landlord, the Landlord1962 U.S. Tax Ct. LEXIS 127">*140 may, if the Landlord so elects, at any time thereafter terminate this lease and the term thereof, on giving to the Tenant three day's notice in writing of Landlord's intention so to do and upon the giving of such notice, this lease and the term thereof shall terminate and come to an end.

8th: It is understood and agreed that the Tenant herein will keep the buildings demised herein insured for liability and fire insurance, in such amounts and with such companies as the Landlord shall require.

9th: That should the land whereon the said buildings stand or any part thereof be condemned for public use, then in that event, upon the taking of the same for such public use, this lease, at the option of the Landlord, shall become null and void, and the term cease and come to an end upon the date when the same shall be taken and the rent shall be apportioned as of said date. No part of any award, however, shall belong to the Tenant.

And the said Landlord doth covenant that the said Tenant on paying the said yearly rent, and performing the covenants aforesaid, shall and may peacefully and quietly have, hold and enjoy the said demised premises for the term aforesaid, provided, however, that this1962 U.S. Tax Ct. LEXIS 127">*141 covenant shall be conditioned upon the retention of title to the premises by the Landlord.

And it is further understood and agreed, that the covenants and agreements herein contained are binding on the parties hereto and upon their respective successors, heirs, executors and administrators.

[Here follow the signatures of Interior Securities Corp., as lessor, and the Albee Company partnership, as lessee.]

The leases between Albee Company and the corporations covered the following properties and provided for rents to be paid by Albee Company as follows:

38 T.C. 330">*336 Wellworth:

71-73 Main Street, Paterson

28 Main Street, and 60 River Street, Paterson

135-141 Broadway, Paterson

540 East 23d Street, Paterson

409-411 Tenth Avenue, Paterson

61-63 Clark Street, Paterson

78-80 Fair Street, Paterson

35 McKinley Avenue, Hawthorne

Interior:

111-113 Main Street, Hackensack

93-95 Main Street, Paterson

337-339 Main Street, Paterson

261-263 Main Street, Paterson

102 Broadway, Paterson

Elsia:

21-27 Auburn Street, Paterson

349-351 Fair Street, 1962 U.S. Tax Ct. LEXIS 127">*142 Paterson

Jacwill:

288 Graham Avenue, Paterson

44-48 Twelfth Avenue, Paterson

The gross annual rents collected by Albee Company from the tenants to whom it sublet the rental properties were as follows:

The total gross rents collected by Albee Company from the tenants were $ 210,142.92, $ 205,654.08, and $ 224,212 for 1955, 1956, and 1957, respectively.

The expenses incurred (exclusive of rental payments to the petitioners) by Albee Company for the operation and management of the rental properties were $ 48,056.01, $ 59,221.64, and $ 66,015 for 1955, 1956, and 1957, respectively.

Pursuant to the terms of the lease agreements the total rentals payable to the corporate petitioners were $ 80,400 annually for each of the years 1955, 1956, and 1957.

The reported gross receipts and taxable income of the corporate petitioners were as follows:

1962 U.S. Tax Ct. LEXIS 127">*144 The reported gross receipts (rentals) and taxable income of Albee Company were as follows:

During the years here involved Albee Company collected the rents on the real properties owned by the petitioners from its tenants and 38 T.C. 330">*338 paid the operating expenses. Albee Company then paid a monthly rental to the petitioners pursuant to the leasehold agreements and reported the remaining income as partnership profits. The corporations claimed deductions of taxes and depreciation as the owners of the respective properties.

With respect to the partnership Albee Company, Rebecca Altshuler and Jacob Altshuler are considered to be the senior partners. No major capital expenditure is made without checking with them. Morton Kulick and Martin Krugman are also active and these two partners, together with Rebecca and Jacob, are guaranteed a salary from Albee Company. Generally a Friday morning meeting is held to discuss partnership business. The participants at these meetings usually include Kulick, Krugman, and any of the other partners who happen to be available. Rebecca 1962 U.S. Tax Ct. LEXIS 127">*145 reviews each decision that is made by Kulick and Krugman.

OPINION.

Respondent has determined that the entire rental income reported by the partnership is taxable to the four corporate petitioners under the provisions of section 61 of the 1954 Code on the grounds that the corporations retained ownership, dominion, and control over the rental properties, which properties were the source of the income. ²

Respondent primarily contends that either the partnership is not bona fide and is a sham created to divert corporate income or that the lease arrangements between the partnership and the corporate petitioners were nothing more than a tax device intended to split the corporate income. In the alternative, respondent contends that he can allocate or apportion the income to the petitioners1962 U.S. Tax Ct. LEXIS 127">*146 under the authority of section 482 of the 1954 Code even if the lease arrangements between the partnership and the corporations are recognized. ³ Petitioners contend that the partnership had a legitimate business purpose and that Albee Company was created to continue the activities of the J & W Altshuler partnership after the death of William Altshuler on December 27, 1954. J & W Altshuler partnership had 38 T.C. 330">*339 conducted a similar coordinated management program for most of the same rental properties owned by the same parties.

1962 U.S. Tax Ct. LEXIS 127">*147 Issue 1.

After a careful examination of the record presented here we believe that the weight of the evidence establishes that Albee Company was created for legitimate business reasons and that it cannot be regarded as a sham for tax purposes.

As we have said, Albee Company was formed in 1955 as a successor to the J & W Altshuler partnership which had been in existence since 1919. Both J & W Altshuler and Albee Company performed valid managerial services in the operation and maintenance of the rental properties leased to them. The centralized management of all these properties permitted a high degree of efficiency in the handling of the expenses and the purchase of supplies and equipment for all the properties. It is very well established that a taxpayer has the right to choose the form of organization that will achieve a desired business result, Polak's Frutal Works, Inc., 21 T.C. 953">21 T.C. 953 (1954), and we are convinced that Albee Company not only performed real and valuable services for the petitioners but was able through centralized management and control to effect savings that the corporate petitioners perhaps would not have been able to achieve 1962 U.S. Tax Ct. LEXIS 127">*148 operating independently. We hold that the partnership was not a sham. Nor do we think that the lease arrangements were tax devices intended to split corporate income.

Thus we decide Issue 1 in favor of the petitioners.

Issue 2.

Respondent argues in the alternative, and he has so determined in his deficiency notice, that even if we find that the partnership and/or the lease arrangements did not constitute a sham, the rental income is nevertheless taxable to the petitioners under the authority of section 482 of the 1954 Code. Section 482 of the 1954 Code is essentially the same as section 45 of the 1939 Code. Of course, it is clear that petitioners and the partnership of Albee Company were owned by the same interests. Thus that part of section 482 of the 1954 Code is met. But common control alone is not sufficient to justify the application of this section, Grenada Industries, Inc., 17 T.C. 231">17 T.C. 231, affd. 202 F.2d 873 (C.A. 5, 1953). It is only where there is a shifting of income from one controlled unit to another that any allocation is justified under section 482. Petitioners have proved to our satisfaction that there1962 U.S. Tax Ct. LEXIS 127">*149 was none in the instant case. We think they have borne their burden of proof in this respect. It seems to us that the actual basis for the respondent's action was his theory that the partnership or the lease 38 T.C. 330">*340 arrangements were sham devices, which contentions we have rejected. In view of the fact that the respondent's proposed reallocation would do away with all partnership income, we believe this action to be entirely unreasonable and arbitrary, Seminole Rock & Sand Co., 19 T.C. 259">19 T.C. 259 (1952). As was said in Seminole Flavor Co., 4 T.C. 1215">4 T.C. 1215, 4 T.C. 1215">1235 (1945):

Actually, the principal force behind all of the Commissioner's argument is that the petitioner could as well have done all the things that the partnership did and reaped all of the earnings of the related enterprises. Since petitioner could have had the earnings, the Commissioner would make it so by exercising the authority conferred by section 45. * * *

Such argument we there rejected. Accordingly, we do not agree with respondent's alternative contention. For the reasons stated herein we set aside his proposed reallocation under section 482, I.R.C. 1954.

1962 U.S. Tax Ct. LEXIS 127">*150 Decisions will be entered for the petitioners.