15 T.C. 770">*771 The respondent determined deficiencies in estate and income taxes as follows:

The respondent amended his pleadings to request additional deficiencies for reasons set forth in our findings of fact.

In the first issue we are concerned with the decedent's estate tax liability and the question is whether the decedent owned all the assets standing in his name at death; the second relates to the income tax liability of the decedent for a period prior to his death and the similar liability of his estate. These 1950 U.S. Tax Ct. LEXIS 30">*33 issues, and to a certain extent the third, are subordinate to the basic question of whether we are bound by the decisions of the Texas courts which determined the decedent's property interests.

The third issue is whether the respondent erred in restoring to the gross income of the estate, charitable contributions made by a business owned in part by the decedent and continued in operation during administration of the estate.

The fourth issue is the amount, if any, of the good will of a business owned in part by the decedent.

The fifth issue is whether certain court costs which include attorney's fees, are properly deductible from the gross estate under the provisions of section 812 (b).

The proceedings were consolidated for trial and were submitted on a stipulation of facts, exhibits, deposition, and oral testimony. The stipulated facts are so found and in so far as they appear pertinent to the issues, are incorporated in the following findings of fact. The other facts are found from the evidence.

FINDINGS OF FACT.

The petitioner is the independent executor of the estate of his deceased father, A. Bluestein, sometimes called Alexander or Alec Bluestein, and hereinafter referred to1950 U.S. Tax Ct. LEXIS 30">*34 as the decedent.

From 1914 to the date of his death, September 18, 1944, the decedent was a resident of Port Arthur, within the first collection district of Texas, where he filed his individual income tax returns.

15 T.C. 770">*772 In January 1897, the decedent was married to Lena Levy Bluestein, in Lake Charles, Louisiana. They had three sons: Leon, born in 1897; Edwin, also known as Ed, born in 1900, and Frankel, also known as Frank, born in 1902.

The decedent operated a small mercantile business in Lake Charles, Louisiana, until 1914, when he became bankrupt. The family then moved to Beaumont, Texas, and later to Port Arthur, Texas.

In 1914, the decedent became associated with two other individuals in a partnership organized to operate "The Toggery Shop", a clothing store, in rented quarters at 347 Proctor Street, Port Arthur, Texas. Each of the partners made an original capital contribution of $ 1,000. The decedent obtained his contribution of $ 1,000 from a loan upon a 20-payment insurance policy on his life in the face amount of $ 5,000 and issued on March 27, 1902. The loan was repaid over the years between 1914 and 1938. At the time this money was borrowed, the decedent had 1950 U.S. Tax Ct. LEXIS 30">*35 no other assets of any significant amount.

Campbell, one of the partners, withdrew from the partnership within 6 months. The decedent and the other partner, A. E. Albright, continued in the operation of the shop until July 1918, when they terminated their business relationship and divided the cash, stock and fixtures. The decedent continued "The Toggery Shop" as sole proprietor and Albright opened a new store at 539 Proctor Street.

No regularly kept books or records can be located as to the decedent's activities from May 22, 1919, to December 31, 1922. However, books and records were regularly kept subsequent to December 31, 1922, showing income, expenses, assets and liabilities, received, paid and held in the name of A. Bluestein up to the time of his death in 1944.

Some time in the fall of 1922, the decedent acquired the fixtures of his former partner's business at 539 Proctor Street and at that address opened a women's clothing store under the name of "Bluestein's". From then on until 1934, it and The Toggery Shop were operated in the decedent's name, with one bank account and one set of books, merchandise being freely moved from one store to the other. Each store, however, 1950 U.S. Tax Ct. LEXIS 30">*36 maintained its own merchandise inventories, as well as records as to sales and related expenses. Until about 1925, the decedent made most of the purchases for the two stores. He was assisted in the management of the stores by his son Frank. The two businesses sold merchandise on a cash basis until 1924, when a gradual change to credit sales took place.

The original clothing store known as "The Toggery Shop" continued at 347 Proctor Street. During the latter part of 1933, there was acquired in decedent's name in exchange for 347 Proctor Street and cash, a business property located at 601 Proctor Street. The furniture and fixtures were moved from 347 and 539 to 601 Proctor 15 T.C. 770">*773 Street and repaired and rebuilt. From early in 1934, the two stores formerly operated at 347 and 539 Proctor Street were consolidated at the new location and operated under the name of "Bluestein's." In moving the two stores to the new location at 601 Proctor Street, only one day's operation was lost.

Lena Levy Bluestein died testate on May 22, 1919. In her will dated May 8, 1917, she appointed her husband, the decedent, the sole independent executor thereof without bond, and gave and bequeathed to1950 U.S. Tax Ct. LEXIS 30">*37 each of her sons an undivided one-third of all her interest in the community property of herself and husband, and also to each son she gave an undivided one-third interest in all her separate property.

About two weeks before his mother's death, Leon was discharged from the Army. Ed and Frank were in San Francisco and came home for the funeral. In about July 1919 they were discharged. From the time of his discharge to September 18, 1944, Frank was employed on a salary basis by his father, the decedent. Leon was also similarly employed from shortly after his discharge, except for the period of time he was in the employ of Haber's, Inc. Ed went to the University of Texas. After receiving a degree in civil engineering, he was employed by the State Highway Department of Texas, is still so employed and is now district engineer at Atlanta, Texas. Except for short periods during vacations, Ed was never employed by his father.

On October 7, 1919, an application of decedent for the probate of his wife's will was filed in the County Court of Jefferson County, Texas. On January 27, 1920, on order of the Court, the will of decedent's wife was admitted to probate and letters testamentary1950 U.S. Tax Ct. LEXIS 30">*38 were granted to the decedent. On January 27, 1920, an inventory and appraisement was filed in the proceedings. The only property of decedent's wife listed in the inventory was separate property of the wife consisting of the sum of $ 653.89 on deposit in the First National Bank of Port Arthur, Texas.

In June 1920, the decedent filed with the Judicial District Court Sitting in and for the Parish of Calcasieu, Louisiana, a petition for recognition as the duly appointed testamentary executor under the will of his deceased wife. In the petition it is stated, among other things, that the petitioner's wife left a last will and testament in which she had "named her three minor sons, Leon, Edwin and Frankel Bluestein her sole heirs, share and share alike in all of her separate property and her interest in the community property accumulated since her marriage to Petitioner," and that the deceased wife was the owner of three pieces of real property, thereinafter described, in the State of Louisiana, purchased with her own separate and paraphernal funds under her own control and management. The petition requests that a rule issue on the sheriff and ex-officio tax collector, Calcasieu Parish, 1950 U.S. Tax Ct. LEXIS 30">*39 15 T.C. 770">*774 Louisiana, to show cause on a date fixed by the court "why Leon, Edwin and Frankel Bluestein minor children of the deceased, should not be recognized as such and sent and put into possession of the property described herein in the proportion of an undivided one-third interest to each of them free and clear from the payment of any inheritance tax * * *." On June 5, 1920, an order was entered adjudging and decreeing, inter alia, that "Leon, Edwin and Frankel Bluestein, minor children of the deceased be and they are hereby recognized as the sole and only heirs of Mrs. Lena Bluestein, born Levy, deceased, and as such are sent and put into possession of the hereinafter described separate property belonging to said deceased * * *." It was further adjudged that Alec Bluestein be recognized as the testamentary executor in accordance with the wishes of the deceased as expressed in her will.

On April 27, 1922, the decedent filed an amended petition with the same Louisiana court in which he stated, inter alia, that at the time of reciting the property owned by his wife in Louisiana, he neglected to declare 120 shares of stock in the Lafayette Building Association of Lafayette, 1950 U.S. Tax Ct. LEXIS 30">*40 Louisiana, in the form of three certificates for $ 1,000 each and requested that the proceedings be reopened so that the minor children (Leon and Ed were then of age) of his deceased wife be recognized as the sole heirs and as such put in possession of the three certificates aggregating $ 3,000, in the proportion of an undivided one-third to each of them. In an order of the court filed on April 27, 1922, it was adjudged and decreed that "Leon, Edwin and Frankel Bluestein * * * be sent and put in possession of the three Certificates" mentioned above "in the proportion of an undivided one third interest to each of them, * * *."

The separate real property located in Lake Charles, Louisiana, of decedent's wife was sold in about 1926 for a total of about $ 4,500. The necessary conveyances were signed by the decedent and his three sons. The proceeds of this sale of property were deposited in an account with the First National Bank of Port Arthur. The balance in that account in the amount of $ 3,819.60, was transferred on May 31, 1931, by decedent or his son Frank to the decedent's bank account.

The decedent's sons knew even during their childhood that their mother owned certain separate1950 U.S. Tax Ct. LEXIS 30">*41 real property in Lake Charles, Louisiana, which she had received from her family, and that she wanted this property to go to her children. They did not know until after the death of their father that their mother had executed a will or that the same had been admitted to probate.

From the time of his wife's death to the time of his own death, the decedent derived all but a small part of his income from the merchandising business heretofore referred to. He never acquired any separate property through gift or inheritance. His only other source 15 T.C. 770">*775 of income was from the investment property which he bought with the profits from the business.

Subsequent to his wife's death the decedent continued to operate the store in his own name as sole proprietor. He insisted at all times upon being recognized as the sole owner thereof. The decedent became ill in 1925, and thereafter he took little part in the active management of the business. His son Frank handled some of the negotiations prior to the purchase of various investment properties, but the decedent insisted upon closing all the transactions himself. The store business and the other business and investment transactions were1950 U.S. Tax Ct. LEXIS 30">*42 always carried on in the decedent's name. His sons, who were paid on a salary basis, always consulted him on any major matter of business, such as plans relating to any changes in the store and the like. Until the sons learned of the will of their mother following the death of their father, they assumed he was the sole owner of the store business and of all the properties held in his name acquired with the profits of such business.

In his will executed on April 21, 1937, the decedent named his son Frank as independent executor thereof. The will further provides as follows:

FIRST:

I do hereby GIVE, DEVISE AND BEQUEATH to my sons, LEON BLUESTEIN and FRANK BLUESTEIN, both of Port Arthur, Texas, and ED BLUESTEIN of Bryan, Texas, share and share alike, the building situated at Procter and Waco Streets, Port Arthur, Texas.

SECOND:

I GIVE, DEVISE AND BEQUEATH to my sons, LEON BLUESTEIN and FRANK BLUESTEIN, both of Port Arthur, Texas, the business now located at the corner of Procter and Waco Streets, Port Arthur, Texas, and all assets belonging and appertaining thereto including merchandise, fixtures, accounts receivable and good will, except the building hereinabove1950 U.S. Tax Ct. LEXIS 30">*43 devised. I have not devised any interest in said business to my son Ed, because it has been operated and developed by my said sons, Leon and Frank, and it is my WISH and WILL that same shall go to them and I have hereforeso provided herein.

THIRD:

I GIVE, DEVISE and BEQUEATH to my son, LEON BLUESTEIN, of Port Arthur, Texas, the property numbered 2940 Procter Street, Port Arthur, Texas, together with the residence situated thereon and the furniture and other personal property located in said residence.

FOURTH:

I GIVE, DEVISE and BEQUEATH to my son, ED BLUESTEIN, as Trustee, the brick building situated at 711 Procter Street, Port Arthur, Texas, in trust for my grandchildren, ED BLUESTEIN, JR., and FRANCES ANNE BLUESTEIN, both of Bryan, Texas, share and share alike.

15 T.C. 770">*776 FIFTH:

I GIVE, DEVISE AND BEQUEATH to my son, FRANK BLUESTEIN, as Trustee, the apartment house situated at 1910-1916 Procter Street, Port Arthur, Texas, in trust for my granddaughter, PEGGY LENORA BLUESTEIN, of Port Arthur, Texas.

SIXTH:

I GIVE, DEVISE AND BEQUEATH all of my property, not herein expressly devised, whether the same be real, personal or mixed, to my said sons, LEON1950 U.S. Tax Ct. LEXIS 30">*44 BLUESTEIN, ED BLUESTEIN and FRANK BLUESTEIN, share and share alike.

SEVENTH:

I hereby CONFER upon ED BLUESTEIN and FRANK BLUESTEIN, as said Trustees, severally, full, complete and absolute authority to hold, manage and control the property devised to them as Trustees, and the income therefrom, with full and complete authority to, from time to time, mortgage, pledge, trade, exchange and sell the same, on such terms as to him may seem proper and advisable; and to release and deliver all receipts, releases, conveyances, mortgages, pledges, deeds of trust, deeds and such other instruments as in his opinion may be proper; and to receive the proceeds derived from any such sale, pledge, mortgage, trade or exchange; and, from time to time, to invest all such proceeds in such manner and in such properties, real or personal, as he may deem proper, and to take title to all such properties in his name as Trustee.

EIGHTH:

I direct that Ed Bluestein, as Trustee, shall from time to time, out of the principal or the income of the property held in trust, pay such accounts and advance such amounts as in his opinion is necessary to properly educate and care for my grandchildren, Frances Anne1950 U.S. Tax Ct. LEXIS 30">*45 Bluestein and Ed Bluestein, Jr.,; PROVIDED, HOWEVER, that when said Ed Bluestein, Jr., shall become twenty-one (21) years of age, the said Trustee shall pay, deliver or convey to him and to Frances Anne Bluestein, share and share alike, the property herein devised in trust for them, or the property then held by the said Trustee in lieu thereof.

NINTH:

I DIRECT that Frank Bluestein, as Trustee, shall from time to time, out of the principal or the income of the property held in trust pay such accounts and advance such amounts as in his opinion is necessary to properly educate and care for my grandchild, Peggy Lenora Bluestein; provided however, that when said Peggy Lenora Bluestein shall become twenty-one (21) years of age, the said Trustee shall pay, deliver or convey to her the property herein devised in trust for her, or the property then held by the said Trustee in lieu thereof.

By order of the County Court of Jefferson County, Texas, upon application of Frank Bluestein, the decedent's will was admitted to probate on October 2, 1944.

Shortly after the decedent's will had been admitted to probate, his son Ed Bluestein, in his individual capacity and as trustee for his minor children1950 U.S. Tax Ct. LEXIS 30">*46 -- Ed Bluestein, Jr., born October 16, 1930, and Frances Anne Bluestein, born June 8, 1928 -- filed suit in the District Court of Jefferson County, Texas, against Leon Bluestein and Frank Bluestein, the latter in his individual capacity and as independent executor 15 T.C. 770">*777 of the estate of the decedent and as trustee for his minor daughter, Peggy Bluestein (born in 1925), and others, as to which other defendants the suit was dismissed.

In his petition Ed Bluestein alleged, among other things, that all of the property in Texas owned by the community of A. Bluestein and his wife at her death consisted of a going mercantile business conducted by decedent; that under the will of the decedent's wife, he and his two brothers, Leon and Frank, were each entitled to an undivided one-third interest in all of her interest in such community property; that pursuant to the will of the decedent's wife, and on order of the court probating the same, the decedent entered upon his duties as independent executor of her estate; that the decedent had never accounted to his sons for their share of the community property; that after the death of his wife, the decedent continued to exercise control, management1950 U.S. Tax Ct. LEXIS 30">*47 and supervision over all of the assets which had constituted the community property of himself and his wife, and to invest, reinvest and handle and commingle all of the assets of such community estate and income and profits therefrom, and that during all of the period from the death of the decedent's wife to the death of the decedent, the latter held in trust for the plaintiff and his two brothers, one-half thereof, not only the corpus thereof but all the rents, profits and increases. The petition also alleged that section two of the will of the decedent in which he bequeathed the store business to Leon and Frank Bluestein was indefinite as to whether the business should be charged with the bills and accounts payable by such business or how much, if any, of the cash or bonds on hand at the time of his death should pass by such bequest as being a part of such business.

The prayer of the petition included the request that the independent executor of the estate of the decedent be enjoined and restrained from filing in the County Clerk's office of Jefferson County, Texas, or elsewhere, any inventory or appraisement or list of property belonging to decedent in such a manner as to include1950 U.S. Tax Ct. LEXIS 30">*48 an undivided one-sixth interest belonging to the plaintiff as being property belonging to such estate.

After trial had on February 21, 1945, the District Court for Jefferson County, Texas, entered its judgment on March 1, 1945, wherein it was adjudged and decreed, inter alia, that one-half of all the property, real and personal, undertaken to be devised and bequeathed by the decedent in his will, did not pass by such will but in law was vested in his three sons, each owning an undivided one-third thereof, subject to a like proportion of the liabilities; that the decedent held his sons' interest in trust for them; that Frank Bluestein, in filing the inventory of the property belonging to the estate of the decedent, should list and inventory only the undivided one-half interest in all the property 15 T.C. 770">*778 involved; that under paragraph two of the decedent's will an undivided one-fourth interest in the mercantile business and in all the assets belonging or appertaining thereto, including the merchandise, fixtures, accounts receivable, deferred charges and good will, subject to a corresponding liability of one-fourth of the accounts payable relating thereto, should pass to Frank1950 U.S. Tax Ct. LEXIS 30">*49 Bluestein and one-fourth of the same interest under the same conditions should pass to Leon Bluestein, and that the one-half interest of the decedent in all the other property involved should pass in accordance with the terms of his will.

Peggy Bluestein, one of the decedent's grandchildren, the daughter of his son Frank, was married in 1947 to Maurice Born. On December 30, 1948, she was joined by her husband in a motion to set aside the judgment entered on March 1, 1945, and for a new trial on the merits. As grounds therefor she alleged that the estate of the decedent was not adequately and properly represented by reason of the fact that Frank Bluestein, who represented the estate as its executor, had an interest adverse to and conflicting with the interest of the estate; that Peggy Bluestein Born, Ed Bluestein, Jr., and Frances Anne Bluestein Jackson were all minors at the time the original suit was filed and at the time of entry of judgment therein; that no legal guardian or guardian ad litem had been appointed for any of them; that Frank Bluestein purported to represent Peggy Bluestein as trustee and Ed Bluestein purported to represent as trustee, Ed Bluestein, Jr., and 1950 U.S. Tax Ct. LEXIS 30">*50 Frances Anne Bluestein but that neither was a proper person to act as representatives of such minors for the reason that they each had a personal interest in the matters involved in the suit adverse to and conflicting with the interest of such minors. It was further alleged that any cause of action which Ed Bluestein had against the decedent as trustee for the recovery of an interest in community property accrued almost 25 years before the action being contested was begun and was, therefore, barred by the applicable statutes of limitation; that even if it could be shown that Ed Bluestein was the owner of a one-sixth interest in the mercantile business operated in the name of the decedent at the time of the latter's death, which was denied, he was not entitled to a one-sixth interest in the real estate devised by the decedent to his grandchildren for the reason that neither the community estate nor any funds or income therefrom could be traced into such real estate by a showing that such real estate was purchased with the community estate of decedent and his wife or the proceeds therefrom. By order of the court dated January 12, 1949, an administrator ad litem was appointed to1950 U.S. Tax Ct. LEXIS 30">*51 represent the estate of the decedent and a guardian ad litem was appointed to represent the minor grandchild, Ed Bluestein, Jr. This controversy resulted in a final declaratory judgment on February 5, 1949, wherein the judgment entered on March 15 T.C. 770">*779 1, 1945, was approved, ratified and confirmed. The court stated that the prior judgment had been opened and reviewed because the minor grandchildren had not been properly represented. Peggy Born and the administrator ad litem for the estate and the guardian ad litem for the minor grandchild appealed to the Court of Civil Appeals for the Ninth Supreme Judicial District of Texas. That court, on May 12, 1949, affirmed the judgment of the trial court ( Born et al. v. Bluestein et al., 220 S. W. (2d) 345).

After entry of the judgment on March 1, 1945, accountants advised Frank Bluestein (the executor of the decedent's estate and the petitioner herein) and his brothers to operate the business as a partnership consisting of the estate (having a one-half interest) and the three sons of the decedent (each as having a one-sixth interest). Accordingly, although no written agreement was entered1950 U.S. Tax Ct. LEXIS 30">*52 into, the three brothers agreed to continue the business and operate it as a partnership. It was agreed that Leon and Frank would draw salaries and that the profits and losses would be shared in proportion to their respective interests.

Partnership returns were filed for the period from January 1, 1944, to September 1944, and for the fiscal years ended August 31, 1945, and August 31, 1946, showing division of the income from the store business and other assets after deducting all expenses. The division of income in those returns was as follows:

The charitable contributions made by the business and allocated to the reported income were $ 2,953.45, $ 4,795.25, and $ 7,111.20 for each of the above periods, respectively.

Frank Bluestein, as executor, filed an individual income tax return for decedent covering the period January 1, 1944, 1950 U.S. Tax Ct. LEXIS 30">*53 to September 18, 1944.

Fiduciary income tax returns were filed on behalf of the estate of the decedent for the fiscal years ended August 31, 1945, and August 31, 1946, and the share of the income of the estate from the business for such years was reported therein, and the distributions made to heirs, legatees and beneficiaries of the estate, were shown as deductions.

Frank Bluestein, as independent executor of the Estate of A. Bluestein, filed an estate tax return on behalf of the estate of the decedent 15 T.C. 770">*780 in due time and proper form reporting that the decedent was the owner of only 23.84 per cent of the property standing in his name at death.

The assets held in the name of the decedent at the date of his death, together with the book values and the market valuation as of the date of death, as fixed by the respondent and subsequently agreed to by petitioner, are as follows:

1950 U.S. Tax Ct. LEXIS 30">*54 Port Arthur, Texas, the city where the Bluestein clothing store is located, is on the Gulf Coast with a population prior to 1940 of about 48,000, which increased during the war by an additional 20,000 to 25,000. A large portion of the residents are normally employed as industrial workers in the two oil refineries located there. The refineries greatly expanded their operations during the war. There were also a number of new temporary war industries established in the city. Such increased industrial activity, together with the general increase in prices and higher wages, all contributed to increase the purchasing power in the city and to make Port Arthur a "boom town" during the war.

Set out below are the sales, gross profits (including other income) and net profits, before taxes (all to nearest one thousand dollars), of the Bluestein store during the war period and during the prior 10-year period:

15 T.C. 770">*781 Although the store handles a full line of men's, women's and children's clothing, the most important items are women's clothing. It is known as a departmentalized "specialty" store. Frank Bluestein, who operated the business, did most of the buying and performed, himself, most of the functions of management. Expenses of management were less than average for a store doing this volume of business.

In a statutory notice dated March 11, 1948, respondent advised the executor of the estate of decedent of his determination of the net taxable estate, resulting in his computation of a deficiency in Federal estate tax of $ 317,250.52. The respondent determined that the decedent was taxable on all assets, including the business assets, listed in his name. In addition, respondent determined that the department store known as "Bluestein's," allegedly owned in its entirety by decedent, had a value representing intangible assets to the extent of $ 455,163.40 as at September 18, 1944, and the tangible assets on the same date had a value of $ 469,659.34, or a total value for estate tax purposes of $ 924,822.74, all of which was properly returnable in1950 U.S. Tax Ct. LEXIS 30">*56 the gross estate. Respondent determined good will as follows:

In arriving at the taxable estate, respondent, through error, omitted secured notes receivable totaling $ 25,974.92 and overstated accounts payable by $ 1,610.86, thus understating the taxable estate by $ 27, 585.78. The respondent accordingly requested an increased deficiency in an amended answer. The petitioner does not contest the arithmetical correctness of this adjustment and the taxable estate as so adjusted will be determined by the question of decedent's proportionate ownership.

In a statutory notice of deficiency dated March 23, 1950 U.S. Tax Ct. LEXIS 30">*57 1948, respondent advised petitioner, as executor of decedent's estate, as to his determination of a deficiency in the decedent's income tax liability of $ 81,224.91 for the period prior to his death -- January 1 to September 18, 1944. Respondent determined that all of the income from business and from all other sources was taxable to decedent.

15 T.C. 770">*782 In a statutory notice dated March 2, 1949, respondent also advised petitioner, as executor of decedent's estate, as to his determination of deficiencies in income tax of $ 119,698.57 for the period September 19, 1944, to August 31, 1945, and of $ 98,829.21 for the fiscal year ended August 31, 1946, while the estate was in administration. Respondent determined that all of the income from the business and from all other sources was taxable to decedent's estate.

In the notice of deficiency the respondent determined that none of the charitable contributions in the amount of $ 7,111.20 made by the the business for the fiscal year ending August 31, 1946, were deductible in the computation of the income tax liability of the estate for that year. In an amendment to his answer, the respondent requested an increased deficiency for the year1950 U.S. Tax Ct. LEXIS 30">*58 ending August 31, 1945, based on his disallowance of the estate's share of similar charitable contributions during that year, of $ 7,192.87.

The business known as "Bluestein's" had an intangible asset of good will in the amount of $ 69,640 as of the date of the death of decedent.

The parties stipulated that the attorney's and accountant's fees, set out in the estate tax return, and additional fees in the amount of $ 17,500 similarly incurred by the estate, were all properly deductible in the computation of the gross estate. In addition to those fees, there are involved the costs in the proceedings in the Texas courts referred to above. The Texas District Court ordered court costs in the amount of $ 5,029.20 to be paid by the decedent's estate. Included in these costs were legal fees allowed to attorneys representing the administrator ad litem of the estate, the guardian ad litem of a minor grandchild, and the attorney representing Ed Bluestein, the original plaintiff in those proceedings.

OPINION.

The first issue is whether the respondent erred by including in the gross estate all of the assets standing in the decedent's name at his death.

It is appropriate that we summarize1950 U.S. Tax Ct. LEXIS 30">*59 the essential facts in order to emphasize the nature of the problem.

The decedent, A. Bluestein, after several unsuccessful business ventures, moved to Corpus Christi, Texas, in 1914 and entered into a partnership to operate a small clothing store. Within a few years the decedent became the sole proprietor. He began this venture with an original capital of $ 1,000 borrowed on a life insurance policy taken out subsequent to his marriage. The business was successful and it increased substantially over the years. The decedent's wife owned some separate property which, on her death in 1919, she bequeathed to her three sons. She also bequeathed to her sons all her community property (a one-half interest in the mercantile business) 15 T.C. 770">*783 The decedent treated both his wife's separate property (and the proceeds from its sale later) and all of the mercantile business as his own, and although two of the sons managed their father's business after 1925, they did not know that their mother had left them any property or that they had any prior interest in the property accumulated by the decedent. After the decedent's death in 1944, his wife's will was discovered. The son Ed, who had 1950 U.S. Tax Ct. LEXIS 30">*60 been left nothing in his own right under the will of the decedent, brought suit against his two brothers (both in their own right and one as trustee) who had received under the decedent's will, the business and substantial amounts of other property. The District Court for Jefferson County, Texas, in an unreported decision, found "That all of the property which the said A. Bluestein had in his name or under his control at the time of his death or undertook to dispose of by will was property he had acquired from the proceeds, profits and increases of the community estate owned by himself and his deceased wife, Lena Levy Bluestein, at the time of her death, and that all property which the said A. Bluestein had in his name or under his control at the time of his death is traceable to the community property of himself and his wife, Lena Levy Bluestein, at the time of her death and, therefore [since she bequeathed her share of community property to her sons] was owned in law at the time of said A. Bluestein's death one half by himself and one sixth by each of his said three sons." The court, in its decree, reconciled its above finding with the terms of the will, resulting in the interest1950 U.S. Tax Ct. LEXIS 30">*61 of certain of decedent's grandchildren in real estate passing under the will being reduced to a one-half interest. One of these grandchildren subsequently became of age and filed a motion to set aside the judgment previously entered. This proceeding resulted in an unreported declaratory judgment on February 5, 1949, in the District Court of Jefferson County, Texas, by which the judgment of March 1, 1945, was approved, ratified and confirmed. On appeal, this judgment was affirmed by the Court of Civil Appeals for the Ninth Supreme Judicial District of Texas, reported in 220 S. W. (2d) 345sub nom. Peggy Born et al. v. Ed Bluestein et al.

The rule has been settled in Freuler v. Helvering, 291 U.S. 35">291 U.S. 35, that on a question of property rights we are bound by the decision of the State court, if, in that proceeding, there was a real controversy to be settled and in which the facts and issues were fully and properly presented. But, on the other hand, we should not recognize and give effect to the decision of the State court in a proceeding which was "collusive in the sense that all the parties joined in a submission 1950 U.S. Tax Ct. LEXIS 30">*62 of the issues and sought a decision which would adversely affect the Government's right to additional income tax."

It is apparent that there was a real controversy in the Texas courts wherein the decedent's property rights were determined; that the 15 T.C. 770">*784 facts and issues were fully presented; and that the proceedings were not collusive in any sense. The instigator of the initial proceeding, Ed Bluestein, gained a one-sixth interest in the mercantile business and most of the other assets standing in the decedent's name at his death, whereas, under the decedent's will he took nothing in his own right. The interests of the other heirs and beneficiaries under the will were proportionately reduced. It follows that as to the property rights involved we are bound by the decision of the Texas courts, and we so hold. Louise Savage Knapp Trust A, 46 B. T. A. 846; Eva U. Townsend, 5 T.C. 1380.

In the estate tax return filed for the estate of the decedent, it was reported that the decedent was the owner of only 23.84 per cent of the property standing in his name at death and described therein. In the petitioner's brief this1950 U.S. Tax Ct. LEXIS 30">*63 computation was described as being "arrived at by charging the decedent's one-half share with withdrawals which he had made through the years." This computation, the petitioner concedes in his brief, is in error for "While the decedent might equitably have been entitled to only 23.84% of the business and other assets referred to in the return, under the applicable laws of property, he was in fact the owner of and his estate is taxable on an undivided one-half interest in the business and other assets." We agree, since this is the substance of the decision of the Texas court which we held above is controlling.

The next issue is subordinate to our holding above. It relates to the income tax liability of the decedent for the period January 1, 1944, to the time of his death on September 18, 1944, and to the income tax liability of the estate during its administration.

The question is whether the decedent and his estate should be taxed on all of the income from the business and other sources, as contended by the respondent. After entry of the judgment on March 1, 1945, Frank Bluestein (the executor of the decedent's estate and, as such, the petitioner herein) and his brothers were advised1950 U.S. Tax Ct. LEXIS 30">*64 by accountants to operate the business as a partnership consisting of the estate (having a one-half interest) and the three sons of the decedent (each with a one-sixth interest). ¹ Accordingly, although no written agreement was entered into, the three brothers agreed to continue the business and operate it as a partnership. It was agreed that Leon and Frank, who were active in the management, would draw salaries and that the profits and losses would be shared in proportion to their respective interests. Partnership returns were filed for the period from January 1, 1944, to September 18, 1944 (decedent's death), and for the fiscal years ending August 31, 1945, and August 31, 1946, showing division 15 T.C. 770">*785 of the income from the store business and other assets after deducting all expenses.

1950 U.S. Tax Ct. LEXIS 30">*65 It would appear that the result on the first issue to the effect that the decedent owned but one-half of the assets standing in his name at death and the three sons, each being vested with a one-sixth interest in the business, should be dispositive of the question here. But the respondent argues that the partnership entered into between the three brothers and their father's estate and the distribution of income made thereunder are not valid for income tax purposes. This argument avoids the real question of who owned the properties involved and in what proportion, and following that, who received and was entitled to the income from the business. The Texas decree determined that the decedent owned only one-half of the business and the other assets standing in his name and that he held his sons' interests in trust for them. It follows that only the income from the decedent's one-half interest should be taxed to him for the period January 1, 1944, to the date of his death on September 18, 1944, and to his estate for the period before us when the estate was in administration, viz, the fiscal years ending August 31, 1945, and August 31, 1946. The income accruing to the sons from1950 U.S. Tax Ct. LEXIS 30">*66 their interests during the above periods was paid or credited to them and the decedent or his estate had no legal claim to it.

In his argument concerning the partnership aspect, respondent cites among others, the cases of Commissioner v. Culbertson, 337 U.S. 733">337 U.S. 733; Commissioner v. Tower, 327 U.S. 280">327 U.S. 280; Lusthaus v. Commissioner, 327 U.S. 293">327 U.S. 293. If any generalization can be made on the subject of partnerships in taxation, it might be that those cases, along with others familiar in the field, are concerned before anything else with the question: To whom was the money in dispute income? The validity of a partnership is only one, and in many cases only a secondary, aspect of the question. In any event, if the matter of validity of a partnership among co-owners is now in question, it is not new and pre-dates the contemporary cases relied on by the respondent. The general rule is familiar that co-ownership does not of itself create a partnership. It also appears to be the rule, however, that where heirs, devisees or legatees elect to continue a business, contribute for that purpose their1950 U.S. Tax Ct. LEXIS 30">*67 share, and receive profits accordingly, the partnership relation is established. See generally 150 A. L. R. 1033et seq. We conclude that it is not necessary to decide the question raised by the respondent of the validity of the partnership. Some comment, however, appeared to be indicated in view of the respondent's extended presentation.

The third issue concerns the charitable contributions made by the mercantile business, "Bluestein's." The respondent has restored to the gross income of the estate for each of the periods reported on herein, the charitable deductions made by the business, owned by the estate and the three brothers pursuant to the State decree.

15 T.C. 770">*786 The respondent's explanation for so doing is set forth in his brief as follows:

Sec. 23 (o), supra, specifically provides for the allowance of a deduction for contributions not to exceed fifteen per cent of adjusted gross income to individuals; while Sec. 162, supra, provides that the net income of an estate in administration shall be computed in the same manner as the income of an individual, except that in lieu of the deduction for contributions limited to fifteen per cent1950 U.S. Tax Ct. LEXIS 30">*68 of gross income as provided by Sec. 23 (o), supra, the estate shall be allowed as a deduction and without limitation all contributions paid pursuant to the provisions of the will. The decedent's will made no provisions for charitable contributions. The contributions here involved were paid by "Bluestein's" in normal course of business. Therefore, such contributions are not deductible. See Estate of Modie J. Spiegel (1949) 12 T.C. 524.

The respondent takes the same position here as he did without success in Estate of Aaron Lowenstein, 12 T.C. 694, affd. (CA-5), July 7, 1950, where we said:

As to the deductibility of the charitable gifts made by the partnership, the respondent takes the position that, since charitable gifts are deductible by an estate only where made pursuant "to the terms of the will or deed creating the trust," as provided in section 162, Internal Revenue Code, and since the decedent's will contained no provision for charitable gifts, the deduction cannot be allowed to the decedent's estate.

The charitable gifts were made not by the decedent's estate, but by the partnership as a business unit. 1950 U.S. Tax Ct. LEXIS 30">*69 They were deducted in the partnership returns as ordinary business expenses and were allowed to the other two partners. It is not stipulated or otherwise shown whether the respondent allowed the deduction to the active partners as ordinary and necessary business expenses, as claimed in the partnership returns, or as charitable gifts by the individual partners, under section 23 (o), Internal Revenue Code. In any event, we think that the deduction should have been allowed to the decedent's estate, as well as to the active partners. The fact is that the estate never received the amount representing its portion of the charitable gifts. They were deducted from partnership income before its share of the earnings was ever determined. Under the partnership agreement the estate was entitled to receive only its one-third share of the distributable earnings; and, since the active partners were charged with the management of the business, it might be said that the charitable gifts they made were actually made pursuant to the partnership agreement. What the respondent has done, in effect, is to add to the petitioner's distributable partnership income one-third of the charitable gifts, which1950 U.S. Tax Ct. LEXIS 30">*70 is never received. We think that the entire amount of the gifts should have been allowed as a deduction in computing the distributable income.

In our opinion, the Lowenstein case is not distinguishable in principle and we adhere to that view here. Therefore, our holding on this question is that in the computation of the gross income of the estate a deduction should be allowed for its share of the charitable contributions made by the business.

The next issue is whether the respondent erred in computing the good will of the business known as "Bluestein's" at $ 455,163.40 as of the decedent's death.

The respondent arrived at this figure representing good will by 15 T.C. 770">*787 application of the formula provided in A. R. M. 34, 2 C. B. 31. This formula provides a method of valuation based upon the average net tangible assets and the net earnings of the business over a prior period of years which fairly reflect past earnings. White & Wells Co. v. Commissioner, 50 Fed. (2d) 120. It involves the selection of a rate representing a reasonable return on the average net tangible assets and the selection of a rate at which any excess1950 U.S. Tax Ct. LEXIS 30">*71 earnings attributable to intangibles may be capitalized.

As set forth in detail in our Findings of Fact, the respondent averaged the earnings of the business for the years 1938 through 1944 at a figure of $ 122,105.15 from which he subtracted 10 per cent of $ 310, 724.70 as a fair return on an average invested capital of that amount. This left a figure of "excess earnings" of $ 91,032.68 which he capitalized at 20 per cent, arriving at good will of $ 455,163.40.

The valuation of good will has been the topic of exhaustive judicial pronouncements and we see no need for repetition of the background material. See in this connection, D. K. MacDonald, 3 T.C. 720. It is important to point out, however, for the purposes of the discussion to follow, that in our opinion the emphasis in valuation of good will should be placed on the relation between the tangible assets and profits but only to the extent that those profits would survive a change in the management of the business. In attempting to place a value on the good will of a business, it is necessary, therefore, to place one's self in the position of a purchaser of the business and answer the question1950 U.S. Tax Ct. LEXIS 30">*72 -- How much am I willing to pay for this salable asset, the ability of this business to earn for me, profits over and above a fair return on the tangible assets? It is important to remember then, that when the purchaser of a business pays a price for good will, he is not paying for the profits in the past in excess of a fair return on tangibles, but for those profits of the future.

We have considered in detail each of the points raised by the petitioner including: the outmoded nature of the premises occupied by the business; the relatively low rent charged the business by the decedent, who owned the building; the effect on the business of its location in Port Arthur, Texas, a city which in turn was affected by increased employment during the war years; the stores competing with the subject business; the apparent competence and efficiency of the business management and the effect on profits of the prevailing "seller's market" during the war years. We find that all of these points are valid considerations in an attempt to reach a valuation of the good will of the business and have a factual basis in the record. But they are not in any combination sufficient to sustain the petitioner1950 U.S. Tax Ct. LEXIS 30">*73 in his contention that the good will of the business was nil. On the other hand, we think that the respondent's determination of $ 455,163.40 was clearly excessive.

15 T.C. 770">*788 After a careful consideration of all the facts of record, we have found that, as of the date of the decedent's death, September 18, 1944, the business known as "Bluestein's" had an asset of good will in the amount of $ 69,640.

The respondent, in arriving at the decedent's gross estate, included therein the total good will assigned to the business. Inasmuch as we have held above that only one-half of the assets standing in the decedent's name at death, including the business, should be included in his gross estate, it follows that only one-half of the value of good will attributable to the business should be so included.

The last issue is whether certain court costs are expenses of administration of the decedent's estate and properly deductible from the gross estate under the provisions of section 812(b) of the Code.

The parties stipulated that in addition to the attorney's and accountant's fees listed in the estate tax return, the amount of $ 17,500 is also a proper deduction for such services in the computation1950 U.S. Tax Ct. LEXIS 30">*74 of the estate tax due. The controversy concerns court costs in the amount of $ 5,029.20 incurred in the State court action referred to on the first issue. The Texas District Court ordered these expenses be taxed as court costs to be paid from the estate of the decedent as an expense of administration. Section 812 (b) provides for a deduction from the gross estate for "administration expenses * * * allowed by the laws of the jurisdiction * * * under which the estate is being administered * * *."

We are of the opinion that the expenses so incurred and taxed as court costs in connection with the litigation above referred to were incidental to the administration of the estate and constitute allowable deductions in computing the net estate. See Estate of Wilbur B. Ruthrauff, 9 T.C. 418.

Decisions will be entered under Rule 50.