3 T.C. 1120">*1121 Respondent determined deficiencies in income tax against petitioner as follows: For 1938, $ 680.24; for 1939, $ 460.05; and for 1940, $ 550.23.

These deficiencies are chiefly the result of respondent's determination that petitioner is taxable, as the sole owner thereof, on all the net income of an unincorporated business operated during the taxable years under the style of Birmingham Electric & Manufacturing Co. No other adjustment is in controversy. Petitioner contests this determination on the ground that the business was owned and operated as a partnership during the taxable years. He also pleads res judicata, based on a1944 U.S. Tax Ct. LEXIS 83">*85 judgment of the United States District Court for the Southern Division of the Northern District of Alabama in an action by this petitioner against the collector of internal revenue for the district of Alabama to recover income taxes paid for the year 1937, wherein the issue was whether the Birmingham Electric & Manufacturing Co. was, during that year, a partnership among petitioner, his wife, and his three children. The proceedings have been consolidated.

Petitioner concedes on brief that an item of $ 4,600 earned by him as commissions in 1939 independently of the business activities of the Birmingham Electric & Manufacturing Co., which item was entered on the books of that company as received by it, embraced in its partnership returns for that year, and included by respondent in his computation of deficiencies against petitioner for that year, is taxable to him, irrespective of the finding of this Court as to whether or not a bona fide partnership existed during 1939.

It was stipulated at the hearing that if we should find there was a valid partnership during 1938 and 1939, for income tax purposes, the petitioner is not entitled to credit in those years for the dependency of Sarah1944 U.S. Tax Ct. LEXIS 83">*86 Ellen Argo, as was allowed by respondent. Effect to the concession and stipulation will be given under Rule 50.

FINDINGS OF FACT.

Petitioner is a resident of Birmingham, Alabama. He filed his income tax returns with the office of the collector for the State of Alabama.

During 1936 petitioner owned all the capital stock of the Birmingham Electric & Manufacturing Co., a corporation organized under the laws of Alabama, and engaged in the business of repairing and rebuilding electrical machinery and equipment. The business, both while operated as a corporation and as an unincorporated concern, was of a type requiring technical knowledge. Petitioner is a graduate electrical engineer and he has been engaged in that profession since 1912. He was president of the corporation and received a salary for the year 1936 of $ 12,000.

3 T.C. 1120">*1122 During 1936 petitioner discussed with an attorney, an auditor, and a certified public accountant the question of dissolving the corporation and forming a partnership consisting of himself, his wife, and his three minor children. The possibility of a saving in income taxes was also discussed. Petitioner's attorney advised him to form the partnership1944 U.S. Tax Ct. LEXIS 83">*87 and stated it could be accomplished legally without the execution of a written agreement. The proposed partnership was also discussed by petitioner during the latter part of 1936 with his wife, Esther B. Argo, and his children, Malcolm M. Argo, Jr., then of the age of 18, Ann A., then of the age of 16, and Sarah Ellen, then of the age of 7. Malcolm M. Argo, Jr., became of age on July 9, 1939, and Ann A. Argo in January 1941. As a final result of these discussions petitioner told his wife and children that he was going to dissolve the corporation and was going to make an outright gift to each of them of a one-fifth interest in the partnership and that they would be partners with him and be responsible for any debts of the partnership. It was understood that petitioner was to receive $ 6,000 a year from the profits and would manage the business, with the right to operate it as he saw fit. The profits after deducting the petitioner's $ 6,000 per annum were to be distributed equally between the other four members of the family.

At that time petitioner's wife owned no property except the family home, which was encumbered by a mortgage on which petitioner was liable. Her occupation1944 U.S. Tax Ct. LEXIS 83">*88 was that of a housewife, and she was without any income other than a small amount derived from writing. The occupation of the children was that of attending school and they had no property or income.

During the time that the business was operated as a corporation petitioner's wife frequently helped with the office work, his son worked for the business during his school vacations, and his oldest daughter also worked for the business during her school vacations.

On December 31, 1936, the Birmingham Electric & Manufacturing Co., the corporation, was dissolved, and petitioner, as its sole stockholder, received all its assets and assumed its liabilities. These assets were immediately credited to an unincorporated business which thereafter conducted the same character of business as had the corporation and under the same name as that of the corporation. This unincorporated business will be sometimes referred to hereinafter as the company.

Petitioner instructed his bookkeeper to make entries on the company's books dividing interests in the company equally among the five members of the family, and he told her that he was making a gift to his wife and children of those interests. She was1944 U.S. Tax Ct. LEXIS 83">*89 also told that petitioner was to be distributed $ 6,000 annually from the profits and the remaining profits were to be distributed four ways among the other members of the family. In January 1937 capital accounts were opened 3 T.C. 1120">*1123 on the books crediting each member of the family with a total of $ 4,317.58.

Petitioner did not execute any deed, bill of sales, or other written form of conveyance transferring any interest in the business to his wife or children. After January 1937 the everyday operations of the company continued in the same manner and under the same name as during incorporation, except for capital accounts, and for accounts of withdrawals by each of the members of the family in the case of the company. Petitioner continued to handle and control the affairs of the company as he had in the case of the corporation.

The balance sheet of the company, as shown on its return made as a partnership, contained as of January 1, 1937, the same assets and liabilities as the balance sheets of the corporation of December 31, 1936, as shown on its return, and that balance sheet is as follows:

1944 U.S. Tax Ct. LEXIS 83">*90 During the taxable years petitioner's wife assisted in the business of the company when it was convenient for her to do so at night, as 3 T.C. 1120">*1124 she was attending to her household affairs during the day, or on Saturday afternoons. She did clerical work, filing, and typing letters. She received no salary.

Petitioner's son Malcolm, Jr., attended college throughout 1937, except for the summer vacation period, during most of which period he assisted in the business of the company during afternoons in the shop and on night emergency calls when pumps or motors in coal mines were damaged by electrical storms. He also assisted his father during that year in managing the business. During the first half of 1938 he was away at college and during the remainder of the year, except while on a vacation in Cuba, he attended a local college during the morning and worked in the company warehouse in the afternoon, repairing and reconditioning motors. He attended college throughout 1939 and until graduating as an electrical engineer in June 1940, when he began working for the company on a full time basis, continuing to do so until he enlisted in the Army in October 1940. He received no salary.

1944 U.S. Tax Ct. LEXIS 83">*91 Petitioner's daughter Ann was away at college during 1937, except for a summer vacation, during half of which she attended a local college in the mornings. In the afternoons when not in school she helped in the business with filing and stenographic work. She did no work in 1938, being away at school during both the regular and summer terms. She did no work in 1939. In 1940 she did no work until October, after graduation. The balance of that year she worked regularly in the office or in the plant, operating machines and helping make carbon brushes. She received no salary. Petitioner's daughter, Sarah Ellen, did no work for the company at any time.

The amount and character of the company's assets for various periods, as shown by the balance sheets attached to partnership returns filed by it, are as follows:

For the years 1937, 1938, 1939, and 1940 the company books in the various capital accounts of petitioner, his wife, and his three children, the partnership returns of income filed by petitioner, and the individual income tax returns filed by the members of the family show net distributable profits as follows:

1944 U.S. Tax Ct. LEXIS 83">*93 The above listed profits of $ 10,656.83 in 1939 include $ 4,600 in personal commissions now conceded by petitioner to be his individual income, taxable to him as such.

There were no drawing accounts on the books for petitioner's wife and children during 1937. All withdrawals by or for them during that year, totaling $ 7,650, were charged to petitioner on the books. Neither petitioner's wife nor his children had authority at any time to draw checks on the company's bank account.

Drawing accounts on the books of the company reflect withdrawals for the years 1938, 1939, and 1940 as follows:

The withdrawals totaling $ 10,438.41 for 1939 include erroneous charges for withdrawals not in fact made, in the amount of $ 4,600, charged to the extent of $ 600 against petitioner's account and $ 1,000 against each of the remaining accounts. The foregoing drawing accounts 3 T.C. 1120">*1126 of petitioner's wife1944 U.S. Tax Ct. LEXIS 83">*94 and children, and the amount of withdrawals listed as above therein, also include a number of items based on checks drawn to the order of petitioner and deposited in his individual bank account, as follows:

Petitioner's wife had an allowance for running the house and would obtain what money she needed from the bookkeeper for household and personal expenses. Her withdrawals represented these amounts, except those represented by the checks deposited as above shown to petitioner's individual bank account.

There were no "dollars and cents" restrictions on Malcolm Jr.'s withdrawals. When he needed money he would ask the bookkeeper for it and she would let him have it. Ann made her withdrawals by asking her father or the office for them. She did not have to consult her father, but she was not allowed to make promiscuous withdrawals in large amounts. The moneys received by 1944 U.S. Tax Ct. LEXIS 83">*95 each of the children through their withdrawals were used for school allowances, clothing, doctors and hospital bills, and for the other needs of each, except for those withdrawals represented by checks deposited in the petitioner's individual bank account as above shown.

The 1936 income and excess profits tax return of the corporation, Birmingham Electric & Manufacturing Co., was subscribed and sworn to by petitioner as president on March 12, 1937, and filed with the collector of internal revenue for the district of Alabama on March 15, 1937. On a schedule attached thereto appears the following statement:

Comment Relative to Dissolution

This corporation was dissolved on December 31, 1936, and the net assets were distributed to the stockholder in complete liquidation and cancellation of the capital stock as of that date. The business will be conducted henceforth without interruption by M. M. Argo, as a proprietorship.

Under date of February 23, 1937, petitioner addressed the following letter to the "Secretary of Treasury, Att: Commissioner of Internal Revenue":

As provided in Article 308 of Regulation 90 relating to excise tax on employers under Title 9 of Social Security Act, I1944 U.S. Tax Ct. LEXIS 83">*96 am hereby giving notice that the Corporation known as Birmingham Electric & Mfg. Company was dissolved December 31, 1936 and that henceforth the business will be conducted under the same name by M. M. Argo as proprietor.

3 T.C. 1120">*1127 Annual returns of excise tax under Title IX of the Social Security Act for the years 1937 and 1938 were filed with the same collector on behalf of the company by petitioner, who executed the affidavit thereto as "M. M. Argo, Owner."

Employer's summary information returns under Title VIII of the Social Security Act for the periods January 1 through June 30, 1937, and July 1 through December 31, 1937, were filed with the same collector on behalf of the company by petitioner, who executed the affidavit thereto as "M. M. Argo, Owner."

Seven employer's tax returns under the same title and act were filed with the same collector quarterly on behalf of the company for the period ended March 31, 1938, through the period ended September 30, 1939, by petitioner, who executed the affidavit to each as "M. M. Argo, Owner."

Petitioner filed personal property tax list returns with the tax assessor of Jefferson County, Alabama, covering the personal property of the company, 1944 U.S. Tax Ct. LEXIS 83">*97 and executed affidavits thereto on December 8, 1937, and October 6, 1938, respectively, wherein he stated that he was the "owner" of such property.

Petitioner, on or about June 10, 1937, filed a financial statement and balance sheet of the company with the First National Bank of Birmingham for credit purposes. The heading, "Corporation," on the printed form was stricken out and the word, "Individual," substituted. The statement showed "Condition at close of business April 30th 1937." The statement was signed in the name of the company, "By M. M. Argo, Title of Officer, Owner." On or about March 24, 1939, a balance sheet of the business as of February 28, 1939, was filed by petitioner with the same bank. It was signed, "M. M. Argo, Owner."

On December 16, 1940, petitioner filed a complaint against Henry J. Willingham, the collector of internal revenue for the district of Alabama, in the District Court of the United States for the Southern Division of the Northern District of Alabama, for the recovery of income taxes for the year 1937 alleged to have been paid April 19, 1940, in the amount of $ 876.14, plus interest, in response to a notice of deficiency determined on the ground 1944 U.S. Tax Ct. LEXIS 83">*98 that, "there was no bona fide partnership (referring to the Birmingham Electric & Manufacturing Company) and that the net income reported on form 1065 actually represented net income to Mr. M. M. Argo from his individually conducted business under the name of Birmingham Electric & Manufacturing Company." The complaint further alleged that the business was a partnership during 1937 and that the Commissioner erred in taxing petitioner with all the income of the business. A general denial to this complaint was filed.

3 T.C. 1120">*1128 On February 24, 1941, the judge of the District Court entered an "Order on Pre-Trial Hearing" wherein it was stated that:

It was agreed by all of the parties that the following are all of the issues in controversy in this cause:

Plaintiff claims refund of income taxes for the year 1937, under the revenue laws of the United States because The Birmingham Electric and Manufacturing Company was a partnership throughout the entire calendar year 1937 and the plaintiff was taxable only on partnership income accruing to him.

Defendant pleads:

(1) The general issue; and

(2) In the taxable year, plaintiff was the individual owner of the said business and was taxable 1944 U.S. Tax Ct. LEXIS 83">*99 on the entire income therefrom and there was no partnership.