11 T.C. 663">*663 The Commissioner has determined a deficiency in petitioner's income tax for the year 1943 of $ 47,370.30. The year 1942 was involved in the 11 T.C. 663">*664 determination of the deficiency because of the Current Tax Payment Act. However, only two small adjustments were made by the Commissioner for 1942 and these are not contested by petitioner. For 1943 the Commissioner made several adjustments to 1948 U.S. Tax Ct. LEXIS 49">*50 the net income of $ 149,461.98 as disclosed by the return filed by petitioner. The only one of these which petitioner contests is adjustment (a), by which the Commissioner added to petitioner's net income $ 52,457.12 of partnership income. This adjustment is explained in the deficiency notice as follows:

(a) It is held that the agreement effective January 2, 1943 did not create a valid partnership for Federal income tax purposes and that the entire net income of Blumberg's Department Store for the year 1943 is taxable to you.

To this action of the Commissioner petitioner assigned errors as follows:

(a) The Commissioner erred in disallowing the partnership between the petitioner and his son, George Blumberg.

(b) The Commissioner erred in allocating to the petitioner partnership income for the calendar year 1943 in the sum of $ 52,811.92, which represents George Blumberg's share of the partnership income for that year.

FINDINGS OF FACT.

Petitioner is an individual, residing in Portsmouth, Virginia. He filed his income tax returns for the calendar years 1942 and 1943 with the collector at Richmond, Virginia.

Petitioner is engaged in the department store business at Portsmouth, Virginia, 1948 U.S. Tax Ct. LEXIS 49">*51 and has been so engaged for about 30 years.

Petitioner's son, George Blumberg, is the petitioner's only son by a prior marriage and was 20 years of age in December 1942.

Petitioner married his present wife, Sophie Blumberg, about 18 years ago, and since that time she has been active, without interruption, in helping the petitioner in the operation of his business. Between the years 1939 and 1943 the petitioner employed between 80 and 100 employees in connection with the operation of the department store business.

In the year 1939 petitioner's son George was attending the Augusta Military Academy in Virginia and petitioner asked his son to quit school and come into the business with him because petitioner had been working hard and had developed a high blood pressure condition and needed his services. Also, petitioner was anxious to train his son in the business from the bottom up and, if he made good, to take him in as a partner in the business at some later date. These facts were made known to George at the time in 1939 when petitioner requested him to quit school and enter the business.

George commenced working in the department store some time in December 1939, and he devoted1948 U.S. Tax Ct. LEXIS 49">*52 all of his time to that business up to 11 T.C. 663">*665 the date of the hearing, with the exception of the period that he was actively engaged in the armed services (between December 1942 and November 1945). When George entered the store in 1939 he commenced his training at the "bottom," starting in the shipping and freight room, learning the fundamentals of how merchandise is checked in. Then he was trained as a salesman, then as assistant to the buyer, then in position of floorwalker, and then as buyer of merchandise.

By the spring of 1941 George had acquired a sufficient familiarity with the operation of the various departments to enable him to take full charge of the department store during the absence of the petitioner and his wife for about 6 weeks, which was necessitated by petitioner's illness at that time. During this 6 weeks in the spring of 1941 when George was left in charge and control of the store he supervised the 25 or 30 departments, checked the bills, signed all the checks, opened the store, closed the store, took care of the cash, and was the only one in the department store at the time who had the combination of the safe.

Upon petitioner's return (spring of 1941) after1948 U.S. Tax Ct. LEXIS 49">*53 an absence of about six weeks he received very favorable reports from senior employees concerning George's management of the business. Petitioner then congratulated George on his ability to manage the business and he asked him whether he was sure that he would like to stay in the business and make a career of it. George stated that since he had been left alone to run the business he was now sure that he would like to stay in the business as a permanent career. Petitioner then told George that he would be taken in as a partner sometime in the near future and that he would give him a 25 per cent interest in the business. Thereafter and during the year 1941 George assumed other active duties and started buying merchandise for the store and made two trips to New York during the year 1941 and another trip during the year 1942 for the purchase of merchandise.

Petitioner and his wife again left for Florida during the spring of 1942 and George again remained in charge of the store during their absence.

Sometime around July or August of 1942 petitioner informed his accountant, W. P. Edmondson, of petitioner's arrangement with his son George whereby he had agreed to give George a 25 per1948 U.S. Tax Ct. LEXIS 49">*54 cent interest in the business, at which time he emphasized, however, to his accountant that the interest was in the "store only" and not in the petitioner's other property, of which he had considerable. The accountant then told petitioner he thought it was too late to enter into a written partnership agreement effective for 1942, since much of the year had already passed. The accountant, however, suggested that the written agreement of the partnership be then drawn up and signed by the parties and that the agreement provide that the partnership should be 11 T.C. 663">*666 effective from January 1, 1943. Petitioner thereupon asked his accountant to prepare the necessary papers and sometime subsequently petitioner received two copies of the partnership agreement, which petitioner and George signed at their place of business sometime in the latter part of August 1942. This partnership agreement, omitting formal parts, reads as follows:

1. The said partners hereby agree that they will become and be partners in business for the purpose and upon the terms hereinafter stated:

2. The firm or trading name of the partnership shall be Blumberg's Department Store.

3. The business to be carried on1948 U.S. Tax Ct. LEXIS 49">*55 by the said partnership is the operation of a retail department store.

4. The principal office and principal place at which said business is to be carried on is 733 High Street, Portsmouth, Virginia.

5. The term for which said partnership is organized is from the first day of January, 1943 to the last day of December, 1943, but this agreement shall remain in effect from year to year in the absence of dissolution of the partnership by mutual agreement or by any other cause.

6. The capital of the partnership to begin business shall be deemed One Hundred Thirty-two Thousand ($ 132,000.00) Dollars, of which Isaac Blumberg's share shall be Ninety-nine Thousand ($ 99,000.00) Dollars, and George Albert Blumberg's share shall be Thirty-three Thousand ($ 33,000.00) Dollars. Bother [sic] of the partners are to share in the profits and/or losses of the said business in the same proportion in which they have contributed to the capital of the business.

7. Isaac Blumberg shall be permitted to draw from the funds of the Company, for his service as directing manager of the business a reasonable salary not to exceed Twelve Thousand ($ 12,000.00) Dollars annually, and George Albert Blumberg shall1948 U.S. Tax Ct. LEXIS 49">*56 be permitted to draw from the funds of the Company a reasonable salary not to exceed Six Thousand ($ 6,000.00) Dollars. All salaries or compensation paid to the partners shall be charged as expense of the business before a determination of the profits for an accounting period is made.

8. Both partners shall give whatever of their time and attention as is necessary to promote the purposes of this partnership, but nothing contained herein shall lessen the rights and privileges of George Albert Blumberg arising from this agreement, because of his inability to devote his time and energies to the partnership by reason of his service in the armed forces of the Country.

9. Any amounts other than salary or other compensation paid to or for the account of the partners, either monthly, quarterly, semi-annually, or annually, shall be charged to them at the annual audit or accounting, and the sums so paid shall be charged against their respective shares in the profits. If the respective shares in the profits shall not be equal to the sums so withdrawn, each shall repay to the Company any deficiency.

10. In the event of dissolution by death of either partner the surviving partner shall have 1948 U.S. Tax Ct. LEXIS 49">*57 the exclusive option and right to purchase at book value the interest of such deceased partner, as shown by the last annual audit of the Company with proper adjustment for undrawn salary and withdrawals, if any, to the date of death. Nothing contained herein shall be construed to modify any testamentary provisions made by such deceased partner.

11. In the event of death of either partner during the term of this partnership, such partnership shall not be deemed to be dissolved thereby, but the special representative of the partner so dying shall immediately succeed to his interest in the partnership, and shall stand in his place in respect to the deceased partner's 11 T.C. 663">*667 share and profits in the business of the partnership during the remainder of the term originally or subsequently fixed for the duration of the partnership hereby formed; and such personal representative shall have the same rights and powers and shall be subject to the same duties and liabilities, as the deceased partner would have possessed and would have been subject to had he not died.

12. It is further agreed that books of account covering all transactions of said partnership shall be at all times open to inspection1948 U.S. Tax Ct. LEXIS 49">*58 by both partners. Each partner shall cause to be entered upon the said books a just and true account of all his or her dealings, receipts and expenditures for or on account of said Company.

13. It is further agreed that at the close of each accounting period a full and complete inventory of stock shall be taken, a complete statement of the financial condition of said partnership shall be made and one accounting between the said partners shall be had, at which time profits or losses for the preceding year shall be divided or apportioned in accordance with the plan outlined herein.

14. Either partner may withdraw from the partnership at any time by mutual consent, in which case the remaining partner shall have the exclusive right to purchase at book value the interest of the withdrawing partner.

15. This partnership, subject to the provisions of Articles numbered one (1) to fourteen (14), inclusive, hereinabove set forth, may be dissolved at any time by mutual consent, at which time the business shall be wound up, the debts paid, and the remaining assets divided between the partners in accordance with their respective interests therein.

Subsequently petitioner filed a gift tax return1948 U.S. Tax Ct. LEXIS 49">*59 in March of 1943 based upon the gift of a 25 per cent interest in the business which he had made to his son. The Commissioner, in auditing the gift tax return, increased the value of the petitioner's gift to his son from $ 33,000, as reported on the return, to $ 62,500 and determined a gift tax deficiency in the sum of $ 2,197.50, which was paid by petitioner.

The partnership return for the calendar year 1943 reflected George Blumberg's interest in the partnership to the extent of 25 per cent of the business and of the income thereof and the remaining 75 per cent allocable to the petitioner. Petitioner included his 75 per cent share of the profits, $ 150,935.75, in the individual return which he filed for 1943 and George included his 25 per cent share of the profits, $ 52,811.92, in the return which he filed for 1943.

During the period George was in military service (December 1942 to November 1945) the petitioner continued the operation of the department store business and neither he nor his wife had any vacations until after their son returned from military service in November of 1945 and resumed his position in the store. At the time of the hearing before the Tax Court George1948 U.S. Tax Ct. LEXIS 49">*60 was married and was devoting his full time as a partner in the operation of the department store business, having the title of general manager. After his induction into the Army, George remained in this country about four or five months during the year 1943 and maintained communication with his father and stepmother concerning the operation of the business; he suggested various improvements which should be made to the business, such as a new cosmetic department, 11 T.C. 663">*668 and advised with them concerning contemplated structural changes in the department store. George continued during the year 1943 to render advice and assistance in the formulation of major policies concerning the operation of the business, particularly with respect to enlarging the ready-to-wear department and the installation of new lighting, new ceilings, and different little things that came up all the time. These matters were the subject of correspondence between the petitioner and his wife and his son while George was in the military service during the year 1943 and while he was still stationed in this country. George went overseas in 1943 for military service and remained there until the war was over in 1948 U.S. Tax Ct. LEXIS 49">*61 1945. He was then returned to the United States and discharged and, as has already been stated, resumed active participation in the partnership business.

OPINION.

The sole issue involved in this proceeding is whether during the taxable year 1943 there existed a valid partnership between petitioner and his son George in the operation of Blumberg's Department Store, Portsmouth, Virginia, and whether this partnership should be recognized for Federal income tax purposes. The parties to the partnership agreement themselves have recognized it. A partnership return on Form 1065 was filed by Blumberg's Department Store, in which it was stated that the partners were Isaac Blumberg and George Albert Blumberg. On this partnership return the distributive share of the profits of Isaac Blumberg was shown to be $ 150,935.75. These profits he returned for taxation and paid taxes thereon. On the partnership return the distributive share of the profits of George Blumberg was shown to be $ 52,811.92. These profits he returned for taxation and paid tax thereon.

The Commissioner on his part refused to give recognition to the partnership and added George's share of the profits to the net income of1948 U.S. Tax Ct. LEXIS 49">*62 petitioner. He did this upon the ground that George contributed no capital of his own to the business and contributed no services of any importance to the partnership in 1943 and, therefore, should not be recognized as a partner, under the doctrine of the Supreme Court in , and .

Petitioner in his brief argues that the substance of the Supreme Court's decisions in the Tower and Lusthaus cases was that:

The test in determining the bona fide character of a family partnership is to ascertain whether the partners really and truly intended to join together for the purpose of carrying on a business and sharing in its profits, or whether the partnership was a mere sham utilized solely for the purpose of reducing a taxpayer's true tax liability by a pretended distribution of income.

11 T.C. 663">*669 We think the foregoing statement is a very good summary of the rationale of the Supreme Court's decisions in the Tower and Lusthaus cases.

It seems to us that the facts in the instant case show that it was clearly the intention of petitioner1948 U.S. Tax Ct. LEXIS 49">*63 and his son George to form a bona fide partnership, effective January 1, 1943, when they each signed the written partnership agreement in August 1942 and that it was not a mere sham for tax evasion purposes. George was petitioner's only son and for several years he had in mind the plan and purpose to take George in as a partner, if and when he reached an appropriate age and demonstrated a willingness to engage in the business and make a career of it for himself. In furtherance of this plan George, at the suggestion of his mother and father, quit school in December 1939 and entered the store to learn the business from the ground up. He commenced his training at the "bottom," starting in the shipping and freight room and learning the fundamentals of how merchandise is checked in. Then he was trained as a salesman, then as assistant to the buyer, then in the position of floorwalker, and then as buyer. In 1941, when petitioner became ill and he and his wife had to go to Florida to give petitioner the opportunity for a rest, George was left in charge of the business, with power of attorney to sign all checks. Upon petitioner's return from this trip he received favorable reports from1948 U.S. Tax Ct. LEXIS 49">*64 his senior employees as to George's conduct as manager of the business. Again, in 1942 petitioner and his wife went to Florida for several weeks and left George in charge. Upon petitioner's return he again received favorable reports as to George's conduct of the store while petitioner and his wife were away. Later on petitioner talked over with George the fulfillment of his purpose to make him a partner in the business and to give him a one-fourth interest therein. Petitioner questioned George as to whether he had made up his mind that he was willing to make a career of the business. The substance of George's reply was that now that he had training and experience in the business he liked it and would be glad to make the business his career.

In August 1942 petitioner talked with his accountant and told him the substance of his conversation and agreement with George, asking him to draw up an agreement making George a partner in the business with a one-fourth interest therein. Petitioner emphasized to his accountant that George was not to have any interest in petitioner's outside property, which was considerable, but was only to be a partner in the business. The accountant stated1948 U.S. Tax Ct. LEXIS 49">*65 to petitioner that, inasmuch as about eight months of the year 1942 had already gone by, it was his opinion that no attempt should be made to make the partnership effective for 1942, but that the agreement should provide that the partnership 11 T.C. 663">*670 should be effective from January 1, 1943. Accordingly the partnership agreement was drawn up by the accountant and was signed by petitioner and George sometime in the latter part of August 1942. The full text of this partnership agreement is set forth in our findings of fact and need not be repeated here. Suffice it to say, we think, that under the terms of this agreement a valid, legal partnership was formed by petitioner and George, effective January 1, 1943. This is no partnership between husband and wife where the wife contributed no capital to the business and there was no intent that she should render any important services to the business, as was the case in the Tower and Lusthaus cases, supra. This is a case where a father takes his son into business after that son has had extended training in all departments of the business and after the son has demonstrated his fitness and competence and has expressed his willingness1948 U.S. Tax Ct. LEXIS 49">*66 to make the business his career. What could be more natural than for a father to take his son in as a partner under such circumstances? Cf. . In the Fischer case we said:

If a father can not make his adult sons partners with him in the business where they have grown up in the business and have attained competence and maturity of experience, then the law of partnership is different from what we understand it to be. Of course, it is true, as respondent argues, that petitioner could have continued to operate the business of Fischer Machine Co. as a sole proprietorship, and if he had done that, the entire net income of the business would have been taxable to him. On the other hand, he had the right, by agreement, to take in his two sons as partners and operate the business as a partnership. This latter thing he did, and we can see no reason which would justify us in disregarding it.

It is true that George contributed no capital to the business which originated with him. In that respect the instant case is different from the Fischer case. His entire one-fourth interest was given to him by his father. This gift1948 U.S. Tax Ct. LEXIS 49">*67 was bona fide and has been lived up to. Petitioner paid gift tax on the full value of the gift, and George unquestionably owns a one-fourth interest in the business. If George should die, certainly this one-fourth interest would be included as a part of his gross estate. But respondent argues that, not only did George contribute no capital of his own to the business, but in 1943 he rendered no important and vital services to the business and was therefore not a partner in the business, relying on the Lusthaus and Tower cases for his support. But in considering respondent's contention we think certain important facts should be kept in mind. When the partnership agreement was signed in August 1942 George was rendering important and vital services to the business. The nature of these services is detailed in our findings of fact. It was expected that these services would continue during 1943, when the partnership was to become effective. It was recognized, however, that George might be inducted into 11 T.C. 663">*671 the military service and thereby be unable to render active services to the partnership during the period of his military service. During the course of the hearing1948 U.S. Tax Ct. LEXIS 49">*68 George was asked the following question on cross-examination by respondent's counsel: "In August 1942 did you know that you were going to be inducted into the service in the near future?" To this question George answered as follows: "I felt I would be. I was capable and healthy and I saw no reason why I should not be."

Paragraph 8 of the partnership agreement provided for such contingency in the following language:

8. Both partners shall give whatever of their time and attention as is necessary to promote the purposes of this partnership, but nothing contained herein shall lessen the rights and privileges of George Albert Blumberg arising from this agreement, because of his inability to devote his time and energies to the partnership by reason of his service in the armed forces of the Country.

As our findings of fact show, George was inducted into the armed forces in December 1942. He remained in the United States several months in training camps during 1943 and was sent overseas in that year for military duty and served until 1945, when he was discharged. During the several months that George remained in the United States during 1943 he continued to keep in touch with the business1948 U.S. Tax Ct. LEXIS 49">*69 by correspondence and rendered service in an advisory capacity. The nature of these services is detailed in our findings. Respondent argues that these advisory services were not of that vital and important character which the Supreme Court speaks of in the Lusthaus and Tower cases, both supra. We find it unnecessary to decide this point. It seems clear that these advisory services were of some importance to the business, but whether they were of that important character to the business mentioned by the Supreme Court in the Tower and Lusthaus cases we do not decide. Clearly, if George had remained on with the business in 1943 and had continued to render the same kind of services that he was rendering the business in 1942, he would have been recognized as a partner under the rationale of the Lusthaus and Tower cases. We do not understand the respondent to contend otherwise. His contention that George should not be recognized as a partner in 1943 is based on the fact that all of that year he was in the military service and did not and could not render any important and vital services to the business. That George ceased to be a partner on that account1948 U.S. Tax Ct. LEXIS 49">*70 seems to us to be an untenable doctrine. Death, of course, terminates a partnership, but it would be a strange doctrine to say that one did not become a partner because he was inducted into the military service of his country and was thereby unable to personally serve the partnership. It seems to us that the Government should not be heard to say: "I will not recognize you as a partner even though you, in good faith, entered into it. I took 11 T.C. 663">*672 you into the Army to fight a war and you did not perform services for the partnership as you had agreed to do."

Under the facts of this case we think George was a bona fide partner in Blumberg's Department Store in 1943 and was entitled to one-fourth of the net profits, and the Commissioner's action in adding this one-fourth of the net profits to petitioner's net income is reversed.

Decision will be entered under Rule 50.

Turner, J., dissenting: On the facts found, it is my opinion that there was no partnership between the petitioner and his son during the taxable year 1943. The most that could be said of the agreement of August 1942 is that it contemplated the consummation of a partnership on January 1, 1943. Prior1948 U.S. Tax Ct. LEXIS 49">*71 to that time, however, petitioner's son entered the Army and consummation of the partnership plan had to await his return from service. In the majority opinion it is said that to hold that George ceased to be a partner because of his induction into military service would be an untenable doctrine. Such reasoning assumes the existence of a partnership from which George could have ceased to be a member upon his entry into the Army. The fact that he may have become a partner, pursuant to the terms of the agreement, if he had not been called into service, can not in my opinion be of any controlling importance; and the further fact that he was prevented by the draft from entering upon an activity which would have been very lucrative to him does not make his case different from the thousands of other young men who answered the call of their country -- whether by draft or voluntarily -- and should in no way tend to serve this petitioner, George's father, with a split of his income for income tax purposes. That petitioner may have been willing to contribute a part of his income to his son away in the service, though commendable, is no answer to the requirements of the Federal revenue statute1948 U.S. Tax Ct. LEXIS 49">*72 which requires the earner of the income to report such income and pay the income tax thereon. Lucas v. Earl, 281 U.S. 111">281 U.S. 111.

I accordingly note my dissent.