Appealing from an adverse judgment1 in the court below, taxpayer, Tobin Armstrong,2 presents a novel question for our determination: Under the Internal Revenue Code of 1954 is it legally possible for a partner to be an employee of his partnership for purposes of section 119 of the Code? In granting the government's motion for summary judgment, the District Court answered this question in the negative. We disagree and reverse.

Taxpayer is the manager of the 50,000 acre Armstrong ranch located in Armstrong, Texas. Beef cattle are raised and some of the land contains certain mineral deposits. The ranch is owned by a partnership in which taxpayer has a five percent interest. In addition to his share of the partnership profits and a fixed salary for his services as manager of the ranch, the partnership provides taxpayer certain other emoluments which are the subject of this controversy. The partnership provides a home at the ranch for taxpayer and his family, most of the groceries, utilities and insurance for the house, maid service and provides for the entertainment of business guests at the ranch. Taxpayer did not include the value of these emoluments in his gross income for the years 1960, 1961 or 1962. The Internal Revenue Service determined that these items should have been included and therefore increased his taxable income by approximately $6,0003 for each year involved. Taxpayer paid the assessed deficiencies, filed a refund claim, and no action having been taken thereon within the requisite period taxpayer brought this suit seeking to recover the paid deficiencies on the ground that he is an employee of the ranch and that, as such, he comes within the provisions of section 119 of the Internal Revenue Code of 19544 and is therefore entitled to exclude the value of the items in question from his gross income. Taxpayer filed an affidavit in support of his allegations and his deposition was taken. Each side moved for a summary judgment. The court granted the government's motion without an opinion and this appeal ensued.

The case law interpreting the 1939 Internal Revenue Code held that a partner could not be an employee of his partnership under any circumstances, and that therefore no partner could take advantage of the "living expense" exclusion promulgated in the regulations and rulings under the 1939 Code.5 Commissioner of Internal Revenue v. Robinson, 3 Cir. 1959, 273 F.2d 503, 84 A.L.R. 2d 1211; United States v. Briggs, 10 Cir. 1956, 238 F.2d 53; Commissioner of Internal Revenue v. Moran, 8 Cir. 1956, 236 F.2d 595; Commissioner of Internal Revenue v. Doak, 4 Cir. 1956, 234 F.2d 704.* The earlier cases, Doak and Moran, followed with little discussion by the later cases, were grounded on the theory, present throughout the 1939 Code, that a partnership and its partners are one inseparable legal unit. However, in 1954 Congress rejected this "aggregate theory" in favor of the "entity theory" in cases where "a partner sells property to, or performs services for the partnership." H.R.Rep. No. 1337, 83d Cong., 2d Sess. 67 (1954), U.S.Code Cong. & Admin.News 1954, pp. 4025, 4093. Under the entity approach "the transaction is to be treated in the same manner as though the partner were an outsider dealing with the partnership." Id. This solution to the problem of the characterization of a partner's dealings with his partnership was codified as section 707(a) of the 1954 Code, 26 U.S.C.A. § 707(a).6

Considering the legislative history and the language of the statute itself, it was manifestly the intention of Congress to provide that in any situation not covered by section 707(b)-(c),7 where a partner sells to or purchases from the partnership or renders services to the partnership and is not acting in his capacity as a partner, he is considered to be "an outsider" or "one who is not a partner." The terms "outsider" and "one who is not a partner" are not defined by Congress; neither is the relationship between section 707 and other sections of the Code explained. However, we have found nothing to indicate that Congress intended that this section is not to relate to section 119.8 Consequently, it is now possible for a partner to stand in any one of a number of relationships with his partnership, including those of creditor-debtor, vendor-vendee, and employee-employer. Therefore, in this case the government is not entitled to a judgment as a matter of law.9

Our reversal of the District Court is not dispositive of the issues upon which rest taxpayers ultimate right of recovery. On the record before us we cannot resolve these issues, nor do we express any opinion on the final outcome of the case. Among the questions which must be answered are whether taxpayer is, in fact, an employee of the partnership; whether meals and lodging are provided for the convenience of the employer; whether living at the ranch is a condition of taxpayer's employment; whether taxpayer's wife and children are also employees and, if not, how much of the $6,000 must be allocated to their meals and lodging. These questions are not meant to be exhaustive, but are merely intended to give an indication of the nature of the inquiry into the merits which must be held on remand.10

Reversed and remanded.