Alteration order No. 24, dated November 18, 1941, provided, in part, as follows:

Please add to this order the following: "You are to be reimbursed for additional expenses incurred by wage rate increases, 1946 U.S. Tax Ct. LEXIS 23">*37 and increases in over-time payment as outlined in our letter of February 27, 1941, and of March 2, 1941. This increase covered operators of power equipment, truck drivers, jackhammer men, laborers and welders. In billing for the wage differential you are to add the actual increased labor cost, the percent for social security taxes, etc., four percent; 2.77, four percent; 1-314-2.909 percent from 2-1-41 for Workmen's compensation and Public Liability Insurance, and five percent to cover additional expenses due to interest, taxes, et cetera. Each of the above percentages are to be applied against the actual increased labor cost. The invoice, covering this increased labor cost, is to be submitted in separate vouchers, and not combined with your regular billing. No other change. Approximate total debt for this alteration, $ 40,000. Terms meet this alteration."

7 T.C. 1195">*1202 Alteration order No. 7, dated October 26, 1940, to original purchase order SLC-331 stated, in part, as follows:

Terms of Payment. Invoices for rented equipment are to be paid in full within five days after receipt of invoice by duPont. The remainder of the order based on payment of 85 percent of the value of 1946 U.S. Tax Ct. LEXIS 23">*38 the work completed each month and payable by the 15th of the following month; fifteen percent of the value of the completed work will be retained until an amount of approximately $ 25,000 has been reached, after which payment for one percent of the work will be made. The $ 25,000 retained will be held until fifteen days after the completion of the contract.

A substantial part of the equipment used on the Charlestown Ordnance job was rented and some was bought especially for the job. Most of the purchased equipment was sold on a satisfactory basis upon the completion of the job.

In addition to purchase order SLC-331, covering excavating and grading work, petitioner also received purchase order SLC-2540, dated October 18, 1940, covering outside electrical work on the Charlestown Ordnance job. The electrical work was performed by Consolidated Contractors, a partnership consisting of J. G. Estes, Frank B. Liddell, and Charles L. Stehle, who also received compensation from petitioner as its employees.

The purchase orders, together with the alteration orders, were treated as one project and were recorded on one account in the books of petitioner. To November 30, 1941, the total billings1946 U.S. Tax Ct. LEXIS 23">*39 were $ 4,992,351.83, of which $ 4,691,745 was allocated to SLC-331 and $ 300,606.59 to SLC-2540. Of those total billings, $ 4,936,127.01 had been collected in cash and $ 56,224.82 represented the estimate receivable on November 30, 1941.

Work was substantially completed on SLC-331 and all alteration orders issued prior to that date on November 10, 1941, and work on SLC-2540 was entirely completed prior to November 30, 1941, and Consolidated Contractors were paid $ 58,050 on November 30, 1941.

Although the bid covering excavating, grading, and outside electrical work on the Charlestown Ordnance job was made by petitioner, other contracting concerns participated in the performance of the work. On October 7, 1940, a letter was addressed to Clark, Kearney & Stark, of St. Louis, Missouri, as follows:

Charlestown, Ind., October 7, 1940.

Clark, Kearney & Stark

3607 Pershing Avenue

Gentlemen:

This will serve to confirm our verbal agreement on the work to be done under contract for the du Pont Company on the Charlestown Ordnance Works at Charlestown, Indiana, which is substantially as follows:

7 T.C. 1195">*1203 The Forcum-James Company shall continue to act1946 U.S. Tax Ct. LEXIS 23">*40 as Agent for Pioneer Contracting Company, the Forcum-James Construction Company, and Clark, Kearney & Stark, and as a matter of convenience, all negotiations and records for this work shall be handled in the name of the Forcum-James Company.

The general agreement is confirmed that you are to furnish one-third the required capital; the balance to be furnished by other parties. Any profit or loss resulting from the venture is to be divided in proportion. It is also generally agreed that equipment for the operation will be rented, purchased, or supplied by the principals. If equipment is purchased, it will be disposed of at completion of the job. The cost of such equipment will be treated as a direct cost to the job, and any receipt from sale will be entered as income. All rentals will be included in cost of operation. Rentals for equipment supplied by the principals will be agreed upon.

You are to have a competent representative on the job at all times to aid in the prosecution of the work.

Yours truly,

Forcum-James Company.

WEM: nws

cc: Pioneer Contracting Co.

Forcum-James Constr. Co.

Pioneer and Forcum-James Construction Co. received copies of this letter. Forcum-James1946 U.S. Tax Ct. LEXIS 23">*41 Construction Co. had no capital interest in Clark, Kearney & Stark. The latter was supposed to share equally in the profits on the Charlestown Ordnance job with Pioneer Contracting Co. and Forcum-James Construction Co.

On September 7, 1940, petitioner was indebted to Forcum-James Construction Co. in the amount of $ 57,562.19. From a schedule attached to the partnership's balance sheet as of December 31, 1940, it appears that the balance of the indebtedness from the petitioner to the partnership, as of January 1, 1940, amounted to $ 19,406.83, and that additional advances were made during that year of $ 93,324.54. During that year the partnership was repaid $ 110,472.50, and as of December 31, 1940, the balance due the partnership for advances to petitioner was $ 11,186.02. For the year 1941 a similar schedule shows that during that year the partnership advanced $ 368,059.44 to petitioner and that during the same year petitioner repaid $ 335,284.44 of that amount.

It was the practice of petitioner to make bids on various projects, the work on which was performed partly or entirely by other concerns on a profit-sharing basis. As a rule there were no written agreements evidencing1946 U.S. Tax Ct. LEXIS 23">*42 such arrangements. Occasionally such arrangements were evidenced by an informal memorandum or letter.

As the Charlestown job progressed payments were made by petitioner as follows: 7 T.C. 1195">*1204

In November 1941 Clark, Kearney & Stark, having obtained another defense contract at Clarksville, Tennessee, desired to withdraw its equipment and personnel from the Charlestown Ordnance job and to be relieved from further responsibility in connection with such undertaking. Under date of November 10, 1941, a "Settlement Agreement" was executed, as follows:

Settlement Agreement

This settlement agreement entered into this day by and between the Forcum-James Company of Dyersburg, Tennessee, agent, and hereinafter known as Party of the First Part, and Clark, Kearney & Stark, a partnership doing business as a contracting company and having it's main office in St. Louis, Missouri and hereinafter known as Party of the Second Part.

Witnesseth, that whereas Party of the First Part acting as agent for the said Clark, Kearney1946 U.S. Tax Ct. LEXIS 23">*43 & Stark and the Pioneer Contracting Company of Dyersburg, Tennessee and the Forcum-James Construction Company of Dyersburg, Tennessee did negotiate a contract with E. I. duPont de Nemours & Company of Charlestown, Indiana on September 7th, 1940, for certain work to be done in connection with the construction of the plant for the Indiana Powder Company, whereby each of the said above companies were to receive their proportionate part of the profits, or were to assume their proportionate part of the losses.

Witnesseth further that the work now is substantially completed but final accounting cannot be made at present time.

Witnesseth further that a profit is indicated from this joint venture and Party of the Second Part desires to make final settlement in order that they may have immediate use of the monies to which they are entitled. Party of the Second Part also desires to be relieved of any further responsibility in connection with the said project.

Therefore in consideration of being relieved of any further responsibility in connection with this joint venture, and in consideration of having immediate use of their portion of the monies derived from this said contract, the said1946 U.S. Tax Ct. LEXIS 23">*44 Clark, Kearney & Stark Party of the Second Part hereby agrees to accept the amount of One Hundred and Fifty Thousand ($ 150,000.00) Dollars as full and complete and final settlement of all claims whatsoever, and it is further agreed that said Party of the Second Part is hereby relieved from any further responsibility for maintenance and completion.

It is further agreed that Party of the Second Part has a remaining balance of Seventy-five Hundred ($ 7,500.00) Dollars which was deposited with Party of the First Part as operating capitol in this joint venture, and that said Seventy-five Hundred ($ 7,500.00) Dollars is to be returned to said Party of the Second Part upon the execution of this settlement agreement, and the receipt of which is hereby acknowledged.

7 T.C. 1195">*1205 The above One Hundred and Fifty Thousand ($ 150,000.00) Dollars is also to be paid to Party of the Second Part immediately upon signing of this instrument and the receipt is hereby acknowledged.

Signed this 10th day of November 1941.

Forcum-James Co.

Agent By [Signed] W. E. Moore, Vice Pres.

Clark Kearney Stark

By [Signed] L. B. Clark

Approved:

Pioneer Contracting Co.

by [Signed] A. G. Hall

Forcum-James 1946 U.S. Tax Ct. LEXIS 23">*45 Constr. Co.

by [Signed] C. B. Ford

The books of account of petitioner show payment of $ 150,000 to Clark, Kearney & Stark on November 1, 1941.

Later in November 1941 Pioneer Contracting Co. and Forcum-James Construction Co. also desired to withdraw from the Charlestown Ordnance job and to be relieved from further responsibility in the performance thereof. It was agreed orally that petitioner take over the completion of the job, that Pioneer Contracting Co. and Forcum-James Construction Co. be relieved of further responsibility in respect thereto, and that each receive in full settlement payment of $ 300,000, which was in addition to the payments of $ 200,000 made to each on May 2 and June 24, 1941. The records of petitioner show payment of $ 300,000 to Pioneer Contracting Co. on November 26, 1941, and a payment of $ 300,000 to Forcum-James Construction Co. on November 29, 1941. In determining the payments in settlement to Clark, Kearney & Stark, Pioneer Contracting Co., and Forcum-James Construction Co., an allowance of $ 140,000 was made to petitioner for services rendered by it on the Charlestown Ordnance job.

The total billings, cost, and profit on the Charlestown Ordnance contract1946 U.S. Tax Ct. LEXIS 23">*46 reported by petitioner on its Federal income tax return for the year ended November 30, 1942, were $ 5,144,685.05, $ 4,729,479.87, and $ 415,205.18, respectively, which billings included those for SLC-331, SLC-2540, another purchase order, SLC-48, and alteration orders. Cost of $ 4,729,479.87 included $ 140,000 charged for 1940-1941 service of petitioner and included as income in its income tax return for the period ended November 30, 1941, and payments in 1941 to Clark, Kearney & Stark of $ 350,000, to Pioneer Contracting Co. of $ 500,000, and to Forcum-James Construction Co. of $ 500,000.

For the taxable period January 1 to November 30, 1941, petitioner reported a net income of $ 53,037.06. In determining petitioner's taxable income the Commissioner added to reported net income the amount of $ 813,195.98, giving the following explanation therefor:

7 T.C. 1195">*1206 During the year, you engaged in a contract to do certain work in connection with the construction of an ordnance plant in Charlestown, Indiana. Joint participants with you in executing the contract were:

(1) Your active officers and controlling stockholders doing business as partners under the name of Forcum-James Construction1946 U.S. Tax Ct. LEXIS 23">*47 Company;

(2) Pioneer Contracting Company, a partnership, fifty percent of the beneficial interest of which was owned by (1); and

(3) Clark, Kearney & Stark. Although the contract was not completed at the end of the taxable year, participants (1), (2) and (3) withdrew from participation on or about the close of the year. They were relieved of any further responsibility in connection with the contract and payments were made to them in complete and final settlement of all claims whatsoever which they had in connection therewith. Following withdrawal of the joint participants, completion of the contract was undertaken by you alone. Included in the payments made to the joint participants was $ 500,000.00 to (1). After all payments had been made to joint participants, there remained $ 313,195.98 of profit on the contract which was not included in income reported on your return. Neither was the amount of $ 500,000.00 distributed to (1) included in income reported on your return.

Under the authority of Section 45 of the Internal Revenue Code, gross income in the amount of $ 500,000.00 is allocated to and included in your taxable income. This allocation is necessary in order to clearly1946 U.S. Tax Ct. LEXIS 23">*48 reflect your income and that of the partnership, Forcum-James Construction Company, owned and controlled by your active officers who also own, manage and control your business through ownership of your stock.

There is also included in your taxable income the amount of $ 313,195.98, profit on the contract, recorded on your books as deferred and not reported in your return. The withdrawal of your joint participants in the contract constituted a completed transaction giving rise to a taxable gain to the extent that it was realized to the date of withdrawal.

In determining the excess profits credit based on invested capital the Commissioner reduced invested capital as reported by petitioner on its excess profits tax return by $ 6,681.37, with the following explanation:

During this short taxable year there was distributed to your stockholders doing business as partners under the name of Forcum-James Construction Company the amount of $ 500,000.00, the last such distributions of $ 300,000.00 being made on November 29, 1941. It has been held herein that the amount distributed represented a dividend in that the partners of the distributee are your controlling stockholders. It has been 1946 U.S. Tax Ct. LEXIS 23">*49 further determined that of the total amount distributed, earnings and profits available for distribution totaled $ 276,842.14 and that the balance, $ 223,157.86 was a distribution not out of earnings of the taxable year. Invested capital is accordingly reduced by the daily average of the amount distributed not out of earnings and profits of the taxable year as follows:

On November 15, 1941, a written agreement, or plan, effective as of November 1, 1941, was entered into by petitioner, Forcum-James Construction Co., Pioneer Contracting Co., L. O. Brayton & Co., and W. R. Aldrich & Co. for the establishment of a pension trust, styled "Forcum-James Associates Pension Trust," for the "exclusive benefit of 7 T.C. 1195">*1207 some or all of the employees of each member of the group * * *." The plan provided that beginning with November 1941, and on or before December 30 of each year thereafter, each member of the group was to notify the trustees of the "reasonable and fair Pension deposit voted to the employees," payment thereof to be made to the trustees within two months; that in determining the amount of the deposit each group member had the exclusive right1946 U.S. Tax Ct. LEXIS 23">*50 to determine the amount, if any, for each of its employees, taking into consideration "such factors as responsibility of position, salary, age, period of service * * *"; that any payment into the fund was in no event to be less, in any one year, than $ 50 for any employee who participated; that the participating employees were not required to match any funds deposited with the trustees by any of the group members; that all present employees who had been in the employ of any of the group members for at least 1 month out of each of the preceding 5 years prior to June 30, 1941, and who were still employed as of November 1, 1941, were eligible for participation in the plan; that participants were eligible for retirement pension payments on the first day of the month following either the age of 60 if employed for a period of not less than 15 years, or the age of 65 if employed for a period of less than 15 years; that upon retirement a participant would be entitled to 1 per cent per month of his individual account until exhausted and in the event of his death his designated beneficiary should receive the balance of payments when due; that in the event of death before retirement age the 1946 U.S. Tax Ct. LEXIS 23">*51 account balance was distributable to any beneficiary previously indicated by the employee; that the trustees were to invest the funds in the manner set out in the declaration of trust and the earnings therefrom were to belong to the individual employee participants and credited to their separate accounts annually within a reasonable time after the close of the fiscal year of the fund; that in the event of loss of his job through his own acts which resulted in the donors suffering any damage, the participant was to forfeit all fund earnings credited to his account, but those earnings were to be added to the earnings for the year in which the loss of job took place and redistributed to the remaining participants on the same basis as all other earnings for that year, and the balance remaining in such account was to be distributed to him immediately or retained by the trustees until the former employee reached retirement age and then distributed to him.

The plan further provided that it was entirely voluntary on the part of the donors and was not to be construed as creating a contractual relationship or a guaranty between the donors and an eligible employee; that the donors could amend1946 U.S. Tax Ct. LEXIS 23">*52 or terminate the plan, 7 T.C. 1195">*1208 provided, however, that no amendment was to be retroactive, nor was any amendment or termination to affect benefits created for individual participants; that in case of a termination of the plan and a liquidation of the fund, "anything else to the contrary notwithstanding, title to all monies or properties held for the benefit of each participant on the date of termination shall pass to such participant"; that it was to be impossible, at any time prior to the satisfaction of all liability with respect to employees, for any part of the corpus or income to be used for or diverted to purposes other than the exclusive benefit of participating employees. Also, under the plan the trustees were to maintain a separate account for each participating employee showing, among other things, the pension deposits made by the donors for participants' accounts, the aliquot share of the fund earnings, pension payments, balances remaining, and contingent beneficiaries, and were to make settlements with the participants in accordance with the plan. The plan was actuarily sound.

The declaration of trust executed on the same date as the plan named, as trustees, Vern 1946 U.S. Tax Ct. LEXIS 23">*53 Forcum, W. E. Moore, C. B. Ford, R. M. Ford, Alvin Hall, L. O. Brayton, W. R. Aldrich, and F. B. Liddell, all of whom were officers of petitioner or members of the partnerships, except Liddell, who was comanager with two others of petitioner's Memphis office. It provided that the trustees should have complete management and control of the trust fund, including powers of investment, but they were to have no authority to take action impairing the established benefits of qualified participants. It also provided that the trust "shall continue until all funds trusteed hereunder are paid out and disbursed in accordance with the terms of the Plan * * *" (italics supplied) unless sooner amended or terminated by majority action of the trustees and the donor companies, but such action should not have retroactive effect nor affect current benefits created for individual participants in accordance with the plan. The declaration of trust also contained provisions similar to those in the plan prohibiting the impairment of created rights of participants or the use of corpus or income for purposes other than for the exclusive benefit of participant employees.

The pension plan and trust agreement1946 U.S. Tax Ct. LEXIS 23">*54 were printed in booklet form and distributed to all the employees of Forcum-James Associates.

The funds of the trust were kept separate from any funds of the donors to the trust fund.

During the taxable period ended November 30, 1941, petitioner contributed $ 72,900 to the fund for the benefit of its employees who were also receiving annual compensation, and has since continued to make contributions. The contributions and compensation during the period ended November 30, 1941, were as follows: 7 T.C. 1195">*1209

1946 U.S. Tax Ct. LEXIS 23">*55 All the above named were employees of petitioner and were eligible under the plan. Forcum, the two Fords, and Wade E. Moore were directors of petitioner, and all, except R. M. Ford, were officers of petitioner. Forcum, the two Fords, and Moore devoted all their time to petitioner's business. Estes, Liddell, and Sander were comanagers of petitioner's Memphis office. Sander was also general superintendent on the Charlestown Ordnance job. Carter, Cooper, Courter, and Stehle were superintendents. Cooper participated in the profits on work over which he had supervision. The other parties for whom contributions were made were working in various capacities. Donald Forcum, the son of Vern Forcum, was about 21 years of age. He was eligible under the plan, having worked for petitioner during the five years prior to June 30, 1941.

In determining the amount to be contributed to each employee, the employees eligible under the plan were first grouped into classes, such as day laborers, foremen, machine operators, timekeepers, superintendents, executives, and so on. The officials, in determining the amount to be contributed to each employee, took into consideration the value of his services1946 U.S. Tax Ct. LEXIS 23">*56 rendered, the responsibility of his position, and the rate or scale of his regular compensation. Due to bad weather in some locations, some of the employees were unable to earn as much as others doing similar work in areas where work was not interrupted by bad weather. Under some contracts and in certain areas the wage scale was higher than in others. To equalize compensation between employees doing similar work of approximately the same value to petitioner, 7 T.C. 1195">*1210 an employee working in areas paying lower wages or laid off because of weather conditions was allotted a greater contribution in proportion to his regular compensation than the employee working in an area paying a higher scale of wages or who worked without interruption by bad weather and without any loss in pay by reason thereof.

The respondent, in explanation of his determination disallowing the $ 72,500 as a deduction, stated:

(b) Included in deductions on your return was "Pensions $ 72,000.00". [Correct amount $ 72,500.] It has been held that the deduction is not allowable in that the officers and partners of the affiliated participants in the pension plan are the principal beneficiaries; the amounts set aside1946 U.S. Tax Ct. LEXIS 23">*57 for any individual are arbitrarily fixed, and no actuarial computation is made.

The compensation paid by petitioner to its employees enumerated on the list above set out, together with its contributions made to the pension trust for those employees, constituted reasonable compensation for services actually rendered by each such employee, excepting the contribution of $ 1,500 to Donald Forcum.

Under date of February 6, 1942, an invoice in the amount of $ 12,500 was rendered to petitioner by a firm of accountants for services rendered in connection with accounting and tax matters for 1941. The services required of the accountants for 1941 had increased substantially over those required for the preceding year, due to the expansion of petitioner's business. No new system of accounting for carrying out Government contracts was installed. The services rendered included the making of provision for handling records to cover work performed in "other states." Petitioner's 1941 Federal income tax return was prepared by the accountants. The charge of $ 12,500 also covered services rendered in connection with the pension plan heretofore referred to, estimated at no more than $ 1,000. For 1946 U.S. Tax Ct. LEXIS 23">*58 1940 the charge made by the same firm for services rendered to petitioner was $ 3,000 and for the year 1942, $ 7,500. The Commissioner disallowed $ 7,500 of the claimed deduction of $ 12,500 for 1941, his explanation for the disallowance being as follows:

(c) Charged to administrative expense on your books and included in deductions on your return was the amount of $ 12,500.00. Information available indicates that the charge was for auditing $ 5,000.00; Advice in re State and Federal tax matters, setting up systems for carrying out Government contracts, etc., $ 5,000.00 and Pension Plan $ 2,500.00. It has been held that $ 7,500.00 of the charge, covering items and services other than auditing, is not allowable as a deduction and has accordingly been disallowed.

OPINION.

(1) In determining petitioner's taxable income for the period January 1 to November 30, 1941, the respondent increased its reported taxable income for that period by adding thereto 7 T.C. 1195">*1211 $ 313,195.98, "profit on the contract, recorded on your [petitioner's] books as deferred and not reported in your return." The inclusion of the $ 313,195.98 is based upon the Commissioner's determination that:

* * * withdrawal1946 U.S. Tax Ct. LEXIS 23">*59 of your [petitioner's] joint participants in the contract constituted a completed transaction giving rise to a taxable gain to the extent that it was realized to the date of withdrawal.

On brief, respondent states that "When the joint venture was closed a completed transaction occurred, giving rise to gain or loss to the parties in the venture at the time of the disposition of their interests therein."

The petitioner contends (1) that the amount was earned by it on a long term contract, i. e., a direct contract of petitioner with du Pont; (2) that such contract was not completed in the taxable period ended November 30, 1941; and that, consequently, petitioner, being on a completed contract basis, the amount did not constitute taxable income to it for that period. Petitioner also contends that the amount should not be included in its income for that period for the reasons that in making the arrangement with du Pont it was acting as agent for Forcum-James Construction Co., Pioneer Contracting Co., and Clark, Kearney & Stark, as principals, and that in making the arrangement with Forcum-James Construction Co., Pioneer Contracting Co., and Clark, Kearney & Stark, evidenced by its letter1946 U.S. Tax Ct. LEXIS 23">*60 to the latter concern of October 7, 1940, it was also acting as agent for those parties as principals.

If it could be said that the $ 313,195.98 was realized by petitioner from the direct contract between it and du Pont we should be unable to reach the conclusion, even if it were consequential, that such contract was a long term contract continuing for its performance beyond November 30, 1941. If such contract had its inception in purchase order No. SLC-2540, the record shows that order to have been entirely completed prior to November 30, 1941. If such contract had its inception in purchase order No. 48, the record shows nothing with reference thereto, except that it was issued to petitioner and the amount thereof was included in the total billings to du Pont. If such contract had its inception in purchase order SLC-331, we are unable to reach the conclusion that there was one long term contract continuing by reason of various so-called alteration orders for its performance beyond November 30, 1941, because: None of the orders was introduced in evidence and we are not informed of the provisions of purchase order SLC-331, except as to a portion thereof as set out in the excerpt1946 U.S. Tax Ct. LEXIS 23">*61 therefrom shown in our findings and that the order was for the amount of $ 130,000 or $ 150,000, computed on certain work to be done on the unit price named in the bid; and we are not informed of the provisions of the various so-called alteration orders, except as to portions of two of them, as also shown by excerpts therefrom set out 7 T.C. 1195">*1212 in our findings, and the statement of the secretary and treasurer of petitioner that "most of the alterations were for additional services requiring use or constructing certain items of which a unit price had not been submitted in the original bid." Lacking more information than that stated, we are unable to determine, even if we could otherwise do so, what work performed after November 30, 1941, was attributable to purchase order SLC-331 and the so-called alteration orders, It is true that C. B. Ford, secretary-treasurer of petitioner, after testifying that alteration orders Nos. 27 through 31 on SLC-331 were issued after November 30, 1941, stated categorically that "this job -- contract or project or whatever you want to call it," was completed in May 1942, but such testimony obviously refers to the final completion of all undertakings of1946 U.S. Tax Ct. LEXIS 23">*62 petitioner with du Pont, whether under one contract or several contracts, and in our opinion does not establish the existence of one long term, continuing contract which extended for its performance from a time prior to November 30, 1941, to a subsequent date.

Inasmuch as we can not conclude that the $ 313,195.98 was realized by petitioner from a long term contract the performance of which extended beyond November 30, 1941, and inasmuch as that amount was carried on petitioner's books on November 30, 1941, as deferred income resulting from performance of work involved in the Charlestown job, it would seem apparent that it was realized in the taxable period ended November 30, 1941, if it was realized as the result of a transaction closed in that period. Was it so realized? We think it is clear that it was realized as the result of such a transaction, for at the time of the settlements made with Clark, Kearney & Stark, Pioneer, and Forcum-James Construction Co., an enterprise or joint venture in which those parties were engaged with petitioner was terminated and as a result petitioner became entitled to the $ 313,195.98 income carried on its books as deferred income. See Frank Kell, 32 B. T. A. 21;1946 U.S. Tax Ct. LEXIS 23">*63 affirmed on this point, 88 Fed. (2d) 453. Cf. Jud Plumbing & Heating, Inc., 5 T.C. 127; affd., 153 Fed. (2d) 681. No contention is made by petitioner that the amount did not represent profits; nor does the record so show. We, therefore, hold that the respondent did not err in including the $ 313,195.98 in petitioner's income for the period ended November 30, 1941. And we think this is true even though petitioner was acting as agent of the other parties in carrying out the enterprise or joint venture. Petitioner seems to have recognized that income received by it from the enterprise or joint venture was income accrued to it for the period ended November 30, 1941, from a closed transaction, notwithstanding it was on the completed contract basis of reporting income, since it included in its income tax return for that period the $ 140,000 it admittedly received from that transaction. If it was proper to so include the $ 140,000, it would seem to be proper to 7 T.C. 1195">*1213 also include the $ 313,195.98, since the latter amount was accrued on the same closed transaction as was the $ 140,000.

We think 1946 U.S. Tax Ct. LEXIS 23">*64 that the contention of petitioner, that it acted merely as agent for the other three parties in making the contract with du Pont, is untenable, since the facts clearly show that the initial step of inviting bids was made to it; that petitioner took the next step by making the bid in its own name; that the purchase and alteration orders were issued directly to it in its own name and not as agent for any other party, or parties; that du Pont had no knowledge that petitioner was acting as agent for other parties; that du Pont looked to petitioner alone for performance of the work; and that petitioner knew that it alone was obligated to du Pont to perform the work. It may be that du Pont knew that other concerns would join in the performance of the work, but, so far as the record shows, it dealt with petitioner, and petitioner alone. It may be further stated that even if petitioner were so acting as agent for the other three concerns, income accrued to it in the amount of $ 313,195.98 at the termination of the joint venture and prior to January 30, 1941, as is shown by its books reflecting that amount as deferred income.

In passing, it may be noted that petitioner's contention that it1946 U.S. Tax Ct. LEXIS 23">*65 was acting as agent for the other parties in its transactions with du Pont is in direct conflict with its contention that the $ 313,195.98 was received on a long term contract of petitioner with du Pont, since if petitioner so acted as agent such contract as it made with du Pont could not be a long term contract of its own.

Petitioner makes the same contentions with regard to the $ 500,000 as it makes with regard to the $ 313,195.98; i. e., that the amount was realized on a long term contract and that petitioner was acting as agent for the other three concerns in making the contract with du Pont and in entering into the enterprise, or joint venture, with the other three concerns. With regard to the $ 500,000, there is also no contention made by petitioner that that amount did not represent profits; nor does the record so show. The answer we have made to petitioner's like contentions made with regard to the $ 313,195.98 applies with equal force to the $ 500,000.

However, with regard to the $ 500,000 which was paid by it to the Forcum-James Construction Co. and was included in petitioner's income by respondent under the authority of section 45 of the Internal Revenue Code, ¹ the 1946 U.S. Tax Ct. LEXIS 23">*66 petitioner makes the further contention that that 7 T.C. 1195">*1214 section does not apply so as to justify such inclusion. The amount was so included by respondent with the explanation in part as follows: "Included in the payments made to the joint participants was $ 500,000 to [Forcum-James Construction Co.] * * *. Under the authority of Section 45 of the Internal Revenue Code, gross income in the amount of $ 500,000 is allocated to and included in your taxable income. This allocation is necessary in order to clearly reflect your income and that of the partnership, Forcum-James Construction Company, owned and controlled by your active officers who also own, manage and control your business through ownership of your stock."

1946 U.S. Tax Ct. LEXIS 23">*67 Did the $ 500,000 accrue to petitioner under the provisions of section 45, supra, as determined by the respondent? We think it did.

The facts show that during the taxable period petitioner had equipment and that the partnership had none; that the partnership had no employees and that petitioner had 500 or 600 employees, which it is fair to assume were used by it in the performance of the work, since there is nothing in the record showing they were used on any other work; that the partnership had no offices as its own; that its books and records were kept by petitioner's employees who were paid by petitioner; that petitioner paid $ 18,000 per annum to each of four of its stockholders (who were also members of the partnership and three of whom were petitioner's officers) for their services on the job and the partnership paid them nothing; that on its income tax return for 1941 the partnership included the $ 500,000 as income, but showed no deduction as expenses incurred in producing such income; and that on the income tax return of petitioner for the period ended November 30, 1941, it reported as its expenses for that period the amount of $ 1,539,831.62. From all these facts and1946 U.S. Tax Ct. LEXIS 23">*68 circumstances it is obvious that the $ 500,000 was not earned through any work performed by the partnership, but, on the contrary, it is clearly indicated that the work was performed and the income earned by petitioner.

Petitioner, however, contends that it was not entitled to the $ 500,000, but that Forcum-James Construction Co. was a coadventurer so entitled. In support of this contention petitioner argues that the partnership's place in the venture was substantial, because it was included therein by reason solely of its financial resources and was consequently the generating as well as the sustaining force in the performance of the contract. There is nothing in the record to show that any of the partnership's resources were used in the venture, except that $ 57,562.19 was owed by petitioner to the partnership on September 7, 1940, the date of purchase order SLC-331 and, as testified to by C. B. Ford, such amount was "left" with petitioner in order to permit work on the project to begin. In the record there is a schedule attached to the partnership's balance sheet as of December 7 T.C. 1195">*1215 31, 1940, from which it appears that the balance of advances from the partnership to petitioner1946 U.S. Tax Ct. LEXIS 23">*69 as of that date amounted to $ 19,406.83; and that during that year additional advances of $ 93,324.54 were made. In the record there is a similar schedule showing that $ 368,059.44 was advanced by the partnership to petitioner in 1941. There is no showing that any of the advances shown in the schedules were expended by the partnership on the enterprise, or joint venture, but it is clear that even if they were expended on that venture they were expended by petitioner and merely constituted loans to petitioner from the partnership; and none of them could be esteemed as constituting a contribution by the partnership to the venture entitling it to the $ 500,000 or any share in the profits of the venture as a coadventurer. All this is especially so when it is considered that the credit and resources of petitioner enabled it to borrow $ 500,000 from the Union Planters National Bank & Trust Co. during the period from November 15 to December 30, 1940, and that on December 30, 1940, it had repaid all the $ 57,562.19 and other advances made during that year, except $ 11,186.02, as shown on the schedule attached to the partnership's balance sheet of December 31, 1940, and had on December 1946 U.S. Tax Ct. LEXIS 23">*70 31, 1941, repaid all other advances made by the partnership except $ 32,775. From all these facts and the financial condition of petitioner as shown on its balance sheets, it would appear that petitioner was well able to furnish its own operating capital for the undertaking it made with du Pont on September 7, 1940, as well as for the carrying out of the enterprise, or joint venture, terminated prior to November 30, 1941.

There is a further requisite to the application of section 45; i. e., that the petitioner corporation and the partnership were "owned or controlled directly or indirectly by the same interests." We think the facts clearly show that they were so controlled, since it is shown that at the end of 1940 the partnership was composed solely of Vern Forcum, W. E. Moore, C. B. Ford, and R. M. Ford, and it is not shown, within the test required by the income tax laws as applied by the courts, that during the taxable period ended November 30, 1941, there were others who had become members of the partnership. It is true that attached to the balance sheet of the partnership as of December 31, 1940, there was the statement, set out in our findings of fact, that two of the original1946 U.S. Tax Ct. LEXIS 23">*71 partners had made gifts of partnership interests to other parties, effective as of midnight of that date, and it is also true that in the partnership's return for the year 1941 those other parties, as well as others, were reported as having shares in the partnership. But this is a far cry from establishing that such other parties were partners, for income tax purposes, during the period in question, especially in view of the fact that the purported new 7 T.C. 1195">*1216 members were apparently members of the families of the original four partners, or trustees for members of such families, as indicated by some of their names. That this indication accurately represents the situation is borne out by the argument of petitioner in its brief on the question of control, in which it is stated that the members purportedly added to the original partnership sustained relationship to the four original partners as follows: Mrs. Gladys Blankenship Ford, wife of C. B. Ford; Mrs. Madge Moultrie Moore, wife of Wade E. Moore; Charles F. Moore, trustee for the sons of C. B. Ford; Donald Forcum, son of Vern Forcum; and Harry Moultrie, trustee for the daughter of Wade E. Moore. So far then as the record shows, 1946 U.S. Tax Ct. LEXIS 23">*72 the partnership throughout the pertinent period was, for income tax purposes, composed solely of Vern Forcum, W. E. Moore, C. B. Ford, and R. M. Ford, and these persons also during that period owned 1,577 of the 2,500 outstanding shares of stock of petitioner and were directors of petitioner. Vern Forcum, W. E. Moore, and C. B. Ford were also, during that period, president, vice president, and secretary-treasurer, respectively, of petitioner. It is thus obvious that the same interests "controlled directly or indirectly" the petitioner corporation and the partnership within the intendment of section 45, supra.

Having concluded that the $ 500,000 was earned by petitioner rather than by the partnership of Forcum-James Construction Co. and that the same interests "controlled directly or indirectly" that company and petitioner, we hold that the respondent did not err in including the $ 500,000 in petitioner's income for the period ended November 30, 1941. See Asiatic Petroleum Co. (Delaware) Ltd., 31 B. T. A. 1152; affd., 79 Fed. (2d) 234; certiorari denied, 296 U.S. 645">296 U.S. 645; Birmingham Ice & Cold Storage Co. v. Davis, 112 Fed. (2d) 453;1946 U.S. Tax Ct. LEXIS 23">*73 and National Securities Corporation v. Commissioner, 137 Fed. (2d) 600; certiorari denied, 320 U.S. 794">320 U.S. 794.

Petitioner cites Seminole Flavor Co., 4 T.C. 1215; Koppers Co., 2 T.C. 152; and Briggs-Killian Co., 40 B. T. A. 895, as cases in which section 45, supra, were held not to apply.

The Seminole and Briggs-Killian Co. cases are distinguished on their facts, among other material respects, in that there the other party whose income was sought to be allocated to the taxpayer earned the income. Such is not the case here, since Forcum-James Construction Co., the partnership, performed no services (or, at least, none of material consequence) in earning the $ 500,000. The facts in the Koppers Co. case are so obviously inapposite as to require no recitation of points of difference between that case and the instant case.

With regard to the third issue, presenting the question of res judicata, its suffices to say that there is no evidence in the record supporting, 7 T.C. 1195">*1217 or tending to support, same, and the issue1946 U.S. Tax Ct. LEXIS 23">*74 is consequently decided against the petitioner.

The fourth issue involves the question of whether respondent erred in reducing petitioner's invested capital by $ 6,681.37 for the purpose of determining its excess profits credit for the taxable period ended November 30, 1941. Such issue grows out of respondent's determination that the amount of $ 500,000 paid by petitioner during that taxable year to the partnership of Forcum-James Construction Co. constituted taxable income to petitioner from its Charlestown Ordnance contract; that such payment to the partnership constituted a dividend distribution to petitioner's controlling stockholders doing business under the partnership name; that of the $ 500,000 distribution, earnings, and profits available for distribution totaled only $ 276,842.14 and the balance was a distribution not out of earnings for the taxable year; and that, on account of the latter, petitioner's invested capital was reduced by $ 6,681.37. On this issue petitioner contends only that the $ 500,000 was not its taxable income and that it made no dividend distribution in the taxable year.

We have heretofore sustained respondent's inclusion of the amount of $ 500,0001946 U.S. Tax Ct. LEXIS 23">*75 in petitioner's taxable income for the year involved and, in our opinion, petitioner's payment in the taxable year of $ 500,000 of its own income to the partnership of Forcum-James Construction Co. constituted a preferential "dividend" ² distribution to its four principal stockholders who, as far as this record shows, comprised the partnership during that year. The fact that such a dividend distribution is disproportionate and ignores the holders of a minority number of petitioner's shares is not decisive. In Paramount-Richards Th. v. Commissioner, 153 Fed. (2d) 602, it was said:

Corporate earnings may constitute a dividend notwithstanding that the formalities of a dividend declaration are not observed; that the distribution is not recorded on the corporate books as such; that it is not in proportion to stockholdings, or even that some of the stockholders do not participate in its benefits. Nothing in the statute or decisions warrants the view that a dividend distribution loses its character as such and becomes a deductible business expense [or cost of a contract] merely because stockholders do not benefit equally from the distribution. Regensburg v. Commissioner, 2 Cir., 144 F.2d 41;1946 U.S. Tax Ct. LEXIS 23">*76 Chattanooga Savings Bank v. Brewer, 6 Cir., 17 F.2d 79; Christopher v. Burnet, 60 Ohio App. D.C. 365">60 Ohio App. D. C. 365, 55 F.2d 527; Hadley v. Commissioner, 59 Ohio App. D.C. 139">59 Ohio App. D. C. 139, 36 F.2d 543; Phelps v. Commissioner, 7 Cir., 54 F.2d 289. [Brackets supplied.]

7 T.C. 1195">*1218 In view of the fact that the parties1946 U.S. Tax Ct. LEXIS 23">*77 have stipulated to give effect, in the recomputation under Rule 50, to their agreement on several issues involving the method of computation, and since some of those issues involve excess profits tax, it is directed that our decision on this fourth issue (i. e., that petitioner paid a dividend of $ 500,000 in the taxable period) be given effect in the Rule 50 recomputation.

On the fifth issue the respondent does not question the establishment of the pension plan and trust, nor that the contribution was made to such trust by the petitioner. Neither does he suggest that the officials of petitioner were not its employees. He argues that the pension plan was conceived and operated for the benefit of petitioner's officials who were also stockholders, since if the $ 7,500 contributed to the trust for each of those officials were added to his annual salary of $ 18,000 in the same year in which the contribution was made to the trust, i. e., the taxable year, instead of being postponed to a subsequent year when the $ 7,500 would be paid out of the trust, each official would have little left after payment of taxes for the taxable year thereon; and that under the circumstances the petitioner1946 U.S. Tax Ct. LEXIS 23">*78 is not entitled to the claimed deduction. Such argument is without merit. In this connection it may be pointed out that four other employees of petitioner, Estes, Liddell, Sander, and Stehle, each received substantially greater compensation, including therein their regular compensation and the contributions made for their benefit, than either of the four officials referred to. It may be further pointed out that, even with the addition of $ 7,500 to the regular compensation of each of two officials, the total thereof does not equal the regular compensation paid each of two other employees who were not officials or stockholders of petitioner. Also it may be noted that, although the contribution to each official was the same ($ 7,500), the number of shares in petitioner held by each was not the same, Forcum holding 559 shares, each of the Fords holding 400 shares, and Moore holding only 208 shares.

Here it was impossible under the plan and trust instrument for the trust funds and earnings to be diverted or used for any purpose other than for the exclusive benefit of the employee participants under the plan, and we have found after careful consideration of all the facts of record 1946 U.S. Tax Ct. LEXIS 23">*79 that the compensation paid by petitioner to the employees enumerated in our findings, together with petitioner's contributions to the pension trust, constituted reasonable compensation for services actually rendered by each of such employees, except as to Donald Forcum. As to the $ 1,500 contribution for Donald Forcum, who, in 1941, was about 21 years of age, the evidence fails to show that such amount should be included as a reasonable allowance for services actually rendered by him. C. B. Ford testified that "we possibly erred in including him for the amount we did." We 7 T.C. 1195">*1219 therefore hold that the amount of $ 72,500 contributed by petitioner to the pension trust, less $ 1,500 contribution for the benefit of Donald Forcum, is deductible by petitioner as a business expense under section 23 (a) (1) of the Internal Revenue Code; and this irrespective of the question as to whether that amount constituted a contribution under section 23 (p) to a pension trust described in section 165 of the code. Gisholt Machine Co., 4 T.C. 699Phillips H. Lord, 1 T.C. 286.

Lincoln Electric Co., 6 T.C. 37,1946 U.S. Tax Ct. LEXIS 23">*80 relied upon by respondent, is distinguishable on its facts, among others being that here there was the equivalent of "in case of the death of any one of the beneficiaries of the trust before distribution to him of his share of the trust fund, payment would be made of his share to any beneficiary he might designate," while there was no such provision, and lack of such provision was there stated on page 54 to constitute a "very significant difference" in distinguishing the Gisholt Machine Co. case. Among other distinguishing facts of the Lincoln Electric Co. case is that here the pension plan was communicated to the participants, while in that case it was not.

With respect to the sixth issue, which is on the accountants' fees of $ 12,500, the evidence is not very satisfactory. The only testimony on this issue was given by a member of the firm of accountants. He testified that he was generally familiar with the nature, scope, and extent of the services rendered; that the services had expanded rather substantially because of the expansion of petitioner's business; that the cost to the firm of accounting personnel was increasing; that it was necessary to make provision for handling1946 U.S. Tax Ct. LEXIS 23">*81 the records covering work in other states; that the firm did the customary work at regular, semiannual and annual periods required in connection with an enterprise of the size of petitioner; that the firm gave petitioner the benefit of the firm's experience in modern systems; that during the period involved no new system was installed; and that the work was "all in the run of the mill, and current adjustments" in the company's records. The exact nature, scope, and extent of the services were not detailed by the witness and the invoice covering those services was not presented in evidence. The witness further testified that Pioneer Contracting Co. and L. O. Brayton were clients of their office and that, although it was his impression that fees for services performed for them were not included in the amount of $ 12,500, he was not sure of it. Under all the facts and circumstances shown in the record, when considered in connection with the testimony of this witness showing an uncertainty as to whether the $ 12,500 covered services rendered to petitioner only, we conclude that the action of the respondent in disallowing $ 7,500 of the claimed deduction of $ 12,500 must be approved.

1946 U.S. Tax Ct. LEXIS 23">*82 Decision will be entered under Rule 50.