8 T.C. 945">*946 The Commissioner determined deficiencies in the income taxes of the petitioners for 1941 as follows:

The petitioners assign as error the action of the Commissioner in taxing to them more than their1947 U.S. Tax Ct. LEXIS 215">*216 distributive shares of the 1941 income of a partnership known as Flock Manufacturing Co.

FINDINGS OF FACT.

The petitioners filed separate individual income tax returns for 1941 with the collector of internal revenue for the first district of Pennsylvania.

Emanuel Flock is a younger unmarried brother of Sol M. Flock. They do not live in the same house. Della B. Flock is the wife of Sol, and Manfred and Howard are their sons. Manfred was born in 1919 and Howard in 1922.

The Flock Manufacturing Co., at all times material hereto has been a partnership engaged in the business of purchasing yarns, having them dyed, putting them up in balls or skeins, and selling them at wholesale to retail stores throughout the United States. The number of employees ranged from about 50 to about 100.

The business was founded in 1900 by the father of Sol and Emanuel. He took his sons into the business as partners, Sol in 1912 and Emanuel in 1917. The father died in 1931. Sol and Emanuel have devoted their entire time to the business ever since they entered it. Sol has had charge of the office, finances, and purchasing, and makes some sales. Emanuel has had charge of the manufacturing, packing, and1947 U.S. Tax Ct. LEXIS 215">*217 shipping. He also makes some sales. He did not receive much formal education. The two brothers had been equal partners prior to 1935.

Sol, Emanuel, and Manfred entered into an agreement on November 15, 1934. Manfred was then just 15 years of age and was attending 8 T.C. 945">*947 boarding school away from home. The agreement provided that the three were to be partners in carrying on the business of Flock Manufacturing Co., beginning on January 1, 1935, and continuing for five years, and thereafter from year to year unless terminated by written notice. It was stated in the agreement, inter alia, that Sol and Emanuel contributed their good will and the assets and liabilities of the business; profits and losses would be divided equally; and Manfred's weekly drawing account would not exceed $ 100 until such time as his capital in the business should amount to at least $ 25,000, and for that purpose he was to allow his profits to remain in the business until the $ 25,000 accumulated. Manfred made no capital contribution to the business at that time.

Another agreement was entered into on November 15, 1935, by Sol, Emanuel, Manfred, and Della. It provided that those four persons would1947 U.S. Tax Ct. LEXIS 215">*218 be copartners in the business of Flock Manufacturing Co. beginning January 1, 1936, and continuing for five years, and from year to year thereafter until terminated by written notice. It provided that the profits and losses should be shared one-third each by Emanuel and Manfred, and one-sixth each by Sol and Della. It made no reference to withdrawals. It does not appear that Della made any contribution of her own property to the partnership at that time or at any later time.

The same four parties entered into another agreement on April 20, 1938. It was substantially the same as their previous agreement, except for a new provision that in case of dissolution the net assets were to be distributed, first, in repayment of capital contributions of the partners as shown on the books, and the balance, if any, in the same proportion in which the partners shared profits.

Sol, Emanuel, Manfred, Della, and Howard all entered into an agreement dated March 25, 1941, providing that the five of them were to carry on the Flock Manufacturing Co. business as partners, beginning January 1, 1941, for one year, and from year to year thereafter unless terminated by written notice. It provided that1947 U.S. Tax Ct. LEXIS 215">*219 profits and losses were to be shared one-third by Emanuel and one-sixth by each of the other four, and that the net assets upon dissolution should be used, first, to repay capital contributions of the partners, as shown on the books, and any balance should be distributed in the proportions in which profits were to be shared. Manfred at that time was a little over 21 years of age and Howard was approaching 19. The books of the partnership show a capital contribution of $ 50,000 from Howard under the date March 25, 1941. That $ 50,000 was a part of an undisclosed amount representing gifts from Manfred's grandfather and from Sol, all of which Sol had placed, from time to time for safe keeping, in an envelope marked with Howard's name in Sol's safe deposit box.

8 T.C. 945">*948 Certificates under the Fictitious Name Act were duly filed for the various partnerships.

Capital was required in the operation of the business. No interest was ever paid or credited on the capital accounts.

No amount was ever paid or credited to a partner as compensation for his services.

Manfred worked regularly full time in the business during 1941. He attended to some of the manufacturing and shipping, and he 1947 U.S. Tax Ct. LEXIS 215">*220 did some work in the office.

Della, during 1941, made some model garments which were furnished customers for display to show the uses to which the yarns could be put. She frequently discussed the business with her husband at home and while accompanying him on business trips. She was not regularly employed at the firm's place of business and she did not devote much of her time to the business during 1941.

Howard was attending college away from home during 1941. He worked in the factory during vacations.

About four or five salesmen, who had other lines too, sold goods for Flock Manufacturing Co. on a commission of 4 per cent, but Sol and Emanuel were responsible for about eight-thirteenths of the 1941 sales.

The business was profitable. The annual net profits were credited on the partnership books in accordance with the agreements, and undrawn portions thereon were credited annually to the capital accounts of the partners. The five individuals reported for 1941 the amount of ordinary income and net short term gain shown as distributable to them on the books of the partnership and on the partnership return. A net short term capital gain of $ 547.42 was shown as distributable one-third1947 U.S. Tax Ct. LEXIS 215">*221 each to Emanuel and Manfred and one-sixth each to Sol and Della.

The Commissioner, in determining the deficiency, made no change in regard to the net short term capital gain, but he reallocated the ordinary income of the partnership. The following table shows how he reallocated that income, and shows in the last column the amount of ordinary income reported by each of the partners:

The stipulation of facts is incorporated herein by this reference.

8 T.C. 945">*949 OPINION.

Emanuel was not a member of Sol Flock's family. He was the owner of a one-third interest in the business of the Flock Manufacturing Co. at all1947 U.S. Tax Ct. LEXIS 215">*222 times after January 1, 1935. He never shared that interest with any of the other parties to the various agreements or surrendered any part of his capital account. A part of his interest apparently went to Manfred under the 1934 agreement, but that would seem to be of no importance in this proceeding, since the Commissioner fully recognizes Manfred as a partner during 1941. Emanuel's one-third of the profits was either withdrawn by him or credited regularly to his capital account. His distributive share of the 1941 ordinary income of the partnership was $ 49,936.40. He was not entitled to receive any larger amount. The action of the Commissioner in taxing him with a larger share, to wit, $ 54,721.31, was arbitrary and not justified by the facts or the law. No sound reason for that action has been advanced and it is therefore reversed.

The Commissioner has recognized that Emanuel, Sol, and Manfred were partners for tax purposes during 1941. However, neither the circumstances under which Manfred was admitted to a partnership at the age of 15, nor the importance of the services contributed by him during 1941, would justify taxing him with more than his distributive shares of partnership1947 U.S. Tax Ct. LEXIS 215">*223 income for 1941 as fixed by the applicable agreements. He was a member of two different partnerships during 1941. The agreement of April 20, 1938, was in effect at least until March 25, 1941, and under that agreement he was entitled to one-third of the profits. He was thus entitled to one-third of the profits for the period from January 1 until March 25, 1941. A new agreement was entered into on the latter date, purporting to fix his interest as of January 1, 1941, and thereafter at one-sixth instead of one-third. However, no such agreement could change his tax liability for his share of the income already earned up to March 25, 1941. The record does not show what the income of the partnership was for that period. Thereafter he was entitled to one-sixth only under the agreement of partnership and he did not earn more than one-sixth of the partnership income. The record does not show what the income of the business was for the last nine months of 1941. It is thus impossible to determine the exact amount of Manfred's distributive shares of the ordinary income of these two partnerships for the periods in 1941 during which they were in existence. Manfred must suffer the consequences1947 U.S. Tax Ct. LEXIS 215">*224 of a failure of proof in this connection. However, it appears that the amount with which the Commissioner has taxed him may closely approximate the correct amount. If it were assumed that the profits were earned ratably during the year, then Manfred's share, consisting of one-third of the first quarter earnings, plus one-sixth of the earnings 8 T.C. 945">*950 of the last three quarters, would amount to about $ 31,250, as compared with $ 32,965.95 with which the Commissioner has taxed him. The Commissioner arrived at that amount upon another and an erroneous theory, but his determination should not be changed on the showing made in this record, in which there is an absence of proof of the correct amount. . Actually, his share of the earnings for the year may have been a larger amount.

Sol, who appears to have dominated and controlled the various arrangements in so far as the members of his immediate family were concerned, objects to being taxed with more than the one-sixth to which he was entitled under the partnership agreements. The Commissioner seeks to tax him with $ 38,220.29 of the ordinary income earned by the business1947 U.S. Tax Ct. LEXIS 215">*225 during 1941. That is less than one-third of the total ordinary income earned by the business during that year. Sol's share of the business on November 15, 1934, was apparently one-half. One of the subsequent divisions which he made of his original participation was to give Della a one-sixth interest in the business. The record does not show that she ever contributed any capital of her own to the business, and, while she contributed some services during 1941, they certainly were not vital to the success of the business. The circumstances show that the Commissioner did not err in taxing Sol with $ 38,220.29 of the ordinary income of the partnership for 1941, but might even justify taxing him with a larger share, upon the theory that as to Della, at least, there was merely a family arrangement to divide Sol's earnings two ways for tax purposes rather than an intention upon their part to carry on business as partners. ; ; . It is not necessary to go further in deciding the issues1947 U.S. Tax Ct. LEXIS 215">*226 presented in these cases.

Decision will be entered under Rule 50 in Docket No. 6828. Decisions will be entered for the respondent in Docket Nos. 6048 and 6829.