The first major revision of the provisions relating to personal holding companies came in the Revenue Act of 1937, ch. 815, 50 Stat. 813. By that time, significant loopholes in the existing law had become evident. ²⁰ One such loophole enabled corporations to shelter interest, dividends, and other such1981 U.S. Tax Ct. LEXIS 33">*67 "hard-core" personal holding company income by the simple expedient of investing sufficient capital in rental property to derive 21 percent of their gross income from rents, thereby avoiding personal holding company status. This problem, as 77 T.C. 934">*949 well as the congressional solution, was discussed in the following report of the Ways and Means Committee:

Subsection (g) [of section 353, Revenue Act of 1937] includes as personal holding company income, rents which do not constitute 50 per cent or more of the gross income. For this purpose, rents are defined as compensation, however designated, for the use of, or right to use, property. * * * Under existing law, rents are excluded from the 80 per cent classification. This was done principally so as not to interfere with bona fide and legitimate operating companies whose business consisted of the ownership and operation of office buildings, apartment houses, etc. However, your committee believes that the entire exemption of rents from this classification has permitted certain personal holding companies which are not bona fide operating companies to escape their just share of the tax burden. To prevent certain holding companies 1981 U.S. Tax Ct. LEXIS 33">*68 which are not bona fide operating companies from taking advantage of this exception and to protect legitimate operating companies, the proposed bill provides that rents be included in the definition of personal holding company income unless they constitute 50 per cent or more of the gross income of the corporation. This will prevent a corporation from getting out of Title IA by investing just enough in rents to constitute the gross income therefrom, 21 per cent of the total, and still deriving the remainder of its income from dividends, interest, etc. On the other hand, it will protect the bona fide real estate corporation and other corporations renting property and deriving 50 per cent or more of their gross income from rents. "Rents" as here used is defined in its broadest sense and includes such items as charter fees, etc., and is not limited to rent of real property. [H. Rept. 1546, 75th Cong., 1st Sess. (1937), 1939-1 C.B. (Part 2) 704, 708. Emphasis added.]

Thus, the law (ch. 815, 50 Stat. 814-815) was amended to provide as follows:

SEC. 352. DEFINITION OF PERSONAL HOLDING COMPANY.

(a) General Rule. -- For the purposes of this title and1981 U.S. Tax Ct. LEXIS 33">*69 of Title I the term "personal holding company" means any corporation if --

(1) Gross income requirement. -- At least 80 per centum of its gross income for the taxable year is personal holding company income as defined in section 353 * * *

For the purposes of this title the term "personal holding company income" means the portion of the gross income which consists of:

* * * *

(g) Rents. -- Rents, unless constituting 50 per centum or more of the gross income. For the purposes of this subsection the term "rents" means compensation, however designated, for the use of, or right to use, property * * *

Several conclusions can be drawn from the evolution of the 77 T.C. 934">*950 personal holding company provisions, and especially from the legislative history, through 1937. First, it is apparent1981 U.S. Tax Ct. LEXIS 33">*70 that Congress recognized a qualitative difference between rents and such hard-core types of personal holding company income like interest and dividends. However, Congress included rents within personal holding company income in an effort to frustrate easy avoidance of the personal holding company tax. Second, in including "rents" within personal holding company income, Congress defined that term "in its broadest sense." H. Rept. 1546, 75th Cong., 1st Sess. (1937), 1939-1 C.B. (Part 2) 704, 708. ²¹ Third, desiring only to penalize holding companies and not bona fide operating companies, Congress created a "50 percent" test whereunder corporations deriving 50 percent or more of their gross income from rents were statutorily deemed to be operating companies. Although utilizing an admittedly arbitrary percentage, the 50-percent test was obviously considered sufficient for its intended task of distinguishing between operating companies and holding companies. Congress apparently preferred to employ an objective test, offering administrative ease and a high degree of certainty, rather than a subjective one focusing on "significant services" or some other murky1981 U.S. Tax Ct. LEXIS 33">*71 standard.

The personal holding company provisions were again extensively amended, this time in 1964, by section 225, Revenue Act of 1964, Pub. L. 88-272, 78 Stat. 79, to read as sections 543(a)(2) and 543(b)(3) are quoted above. The amendments made the use of personal holding companies considerably less attractive. See H. Rept. 749, 88th Cong., 1st Sess. (1963), 1964-1 C.B. (Part 2), 125, 128-129, 199-209; S. Rept. 830, 88th Cong., 2d Sess. (1964), 1964-1 C.B. (Part 2) 505, 508-509, 608-619. For example, the income test was1981 U.S. Tax Ct. LEXIS 33">*72 reduced from 80 to 60 percent and applied against adjusted ordinary gross income rather than gross income. Similarly, adjusted income from rents was substituted for gross rents for purposes of the 50-percent test. Moreover, 77 T.C. 934">*951 the 10-percent test was introduced to further assure that rents could not be used to shelter any appreciable amount of other personal holding company income.

The legislative history of section 225 of the Revenue Act of 1964 confirms the three conclusions discussed above, as demonstrated by the following excerpts from the Finance Committee report:

(a) Present law. -- * * * In general terms, a personal holding company is a closely held corporation, most of whose income is derived from certain specified forms of passive income. * * * at least 80 percent of the corporation's gross income must be from what is defined as "personal holding company income."

In general terms, personal holding company income consists of income from what are considered to be passive forms of investment. Thus, it includes dividends, interest, and annuities. * * * Rents are also classified as personal holding company income unless they represent 50 percent or more of1981 U.S. Tax Ct. LEXIS 33">*73 the company's gross income. * * *

(b) General reasons for provisions. -- Congress first imposed this tax on personal holding companies in 1934 in order to prevent the avoidance of the individual upper bracket surtax rates, by leaving what is essentially investment-type income in a corporate organization, subject to the lower corporate income tax. As indicated by the Administration, ways around the present personal holding company provisions have been found in several arrangements which permit the use of holding companies to avoid the individual income tax with respect to what is essentially investment-type income without the company involved being classified as a "personal holding company."

The principal avoidance devices involve the use of rental income, income from mineral operations, and certain capital gains which are not classified as personal holding company income as means of sheltering other investment income in such a manner that 80 percent or more of the company's gross income does not come within the technical definition of personal holding company income. In view of this, a number of modifications are made in the personal holding company provisions designed1981 U.S. Tax Ct. LEXIS 33">*74 primarily to minimize the extent to which these special categories of income can be used to shelter clearly passive income. * * *

(c) General explanation of provisions. -- The bill makes a series of modifications in the application of the personal holding company tax in the case of domestic corporations. * * * Most of the modifications * * * are designed to eliminate various means by which holding companies have been avoiding classification as personal holding companies * * *

* * * *

(c)(ii) Decrease in 80-percent test. -- As previously indicated, one of the tests under present law provides that a company, to be a personal holding company, must derive 80 percent or more of its gross income from certain specified types of passive income, called personal holding company income. 77 T.C. 934">*952 The bill decreases this 80-percent test to 60 percent. The decrease in this percentage is made because too many holding companies which are essentially holding companies of passive income have avoided the classification as such by holding their "personal holding company income" just slightly below the 80-percent limit. The more realistic 60-percent limit together with other1981 U.S. Tax Ct. LEXIS 33">*75 modifications described below will make the avoidance of this classification much more difficult for holding companies generally.

(c)(iii) Adjusted ordinary gross income requirement. -- Under present law the 80-percent requirement referred to above is applied to the gross income of the corporation; i.e., if the gross income derived from certain passive sources equals 80 percent of the total gross income of the corporation, the corporation is classed as a personal holding company. This has made it possible for corporations to avoid personal holding company classification by seeking out types of income not characterized as passive, or of a personal holding company type, which give rise to a proportionately large amount of gross income even though leaving little, if any, income after the deductions attributable to this income. In this manner, various types of income have been used to shelter investment income and remove the company from the classification of a personal holding company. Rents, where they constitute more than 50 percent of the gross income of the corporation, are an example of a type of income used to shelter passive income, such as dividends. * * *

To1981 U.S. Tax Ct. LEXIS 33">*76 overcome this problem, the bill adjusts downward the income from certain sources to the extent of certain specified deductions attributable to these types of income. Thus, the corporation will be a personal holding company if 60 percent of "adjusted" gross income consists of certain passive income. The adjustments are as follows:

1. In the case of gross income from rents, the deductions for depreciation and amortization, property taxes, interest, and rents paid to the extent attributable to the rental income received, are to be deducted from gross income.

* * * *

In applying the 60-percent test, not only is the total gross income adjusted downward by the amount of the deductions (or interest) referred to in the cases specified above, but also in determining the rental income * * * for purposes of this test, this income also is reduced by the specified reductions.

* * * *

(c)(v) Rental income. -- Under present law rental income is classified as personal holding company income only if it represents less than 50 percent of total gross income. This is based on the concept that where rental income represents the major activity, the activity involved is more likely to be1981 U.S. Tax Ct. LEXIS 33">*77 of an active rather than passive character. The House bill retains this 50-percent test (applying it, however, to adjusted income from rents and to adjusted ordinary gross income) but adds a second test providing that rental income may be characterized as passive, or personal holding company income even where it represents 50 percent or more of the adjusted ordinary gross income * * *

* * * *

[The 10-percent test] gives assurance that the personal holding company 77 T.C. 934">*953 income (apart from rent) sheltered in the company may not exceed 10 percent of its ordinary gross income.

[S. Rept. 830, 88th Cong., 2d Sess. (1964), 1964-1 C.B. (Part 2) 608-611.]

The Ways and Means Committee report ²² contains essentially the same language.

1981 U.S. Tax Ct. LEXIS 33">*78 The legislative history of section 225 of the Revenue Act of 1964 thus reveals Congress' continuing concern about the use of rents to shelter hard-core personal holding company income such as interest and dividends. Congress sought to alleviate this abuse not by attempting to distinguish between "active" and "passive" rents by creating a subjective "substantial services" (or similar) standard, but rather by utilizing objective criteria (the 50-percent and 10-percent tests) and employing "adjusted" income concepts. Nowhere in the legislative history is there even a suggestion that "rents" should be construed less expansively than before. That the term should continue to be construed "in its broadest sense" is supported not only by the absence of any contrary indication in either the statute or its legislative history, but also by the fact that the amendments were enacted approximately 6 years after the adoption of section 1.543-1(b)(10), Income Tax Regs., ²³ which defines "rents" using language found in section 353(g) of the Revenue Act of 1937 and in H. Rept. 1546, 75th Cong., 1st Sess. (1937), 1939-1 C.B. (Part 2) 704, 708. Also significant is the fact1981 U.S. Tax Ct. LEXIS 33">*79 that the amendments were enacted at a time when other sections of the regulations ²⁴ expressly distinguished between "active" and "passive" rentals on the basis of services rendered. As previously noted, however, Congress did not deign to adopt this distinction in the personal holding company area. ²⁵

The parties have not cited any personal holding company cases involving the issue1981 U.S. Tax Ct. LEXIS 33">*80 of active versus passive rents. We are aware of only one: Webster Corp. v. Commissioner, 25 T.C. 55">25 T.C. 55 (1955), affd. per curiam 240 F.2d 164">240 F.2d 164 (2d Cir. 1957). ²⁶ In Webster, the corporate taxpayer actively participated in the management of its farm. However, the actual farming operations were performed by a farmer pursuant to successive 1-year contracts. Under the terms of each contract, the farmer, as operator, was required to farm in conformity with the taxpayer's master plan which programmed such matters as planting and harvesting, fertilization, and crop rotation. The farmer was also required to furnish the machinery, tools, vehicles, draught animals, and supplies necessary to properly operate the farm, as well as sufficient seed corn to plant the agreed acreage. The taxpayer, on the other hand, was required to furnish material and labor necessary for the maintenance of the farm improvements as well as one-half of the fertilizer and grass seed. The contract prohibited the farmer from operating any other farm without consent, from permitting it to be occupied by any other party for any reason, and from assigning his1981 U.S. Tax Ct. LEXIS 33">*81 interest. It also expressly provided that --

this agreement is an operating agreement for the operation of the Farm by the Farmer as an independent contractor, in return for the compensations herein specified and that this agreement does not render the parties hereto partners nor give the Farmer any estate, right of possession or right to occupy or enter upon the Farm, other than the license to enter upon and occupy the Farm for the purposes and during the time contemplated by this agreement.

The farmer's compensation for operating the farm was a specified percentage of the crops to be grown and the use of the farm buildings, including the storage facilities, during the term of the contract.

1981 U.S. Tax Ct. LEXIS 33">*82 The issue in Webster was whether the taxpayer's farm 77 T.C. 934">*955 income constituted "rent" within the meaning of section 502(g), I.R.C. 1939, ²⁷ for purposes of the personal holding company surtax. In a Court-reviewed opinion we held that it did not. Although our opinion did not undertake to precisely define the legal relationship between the taxpayer and the farmer, it appears that it was other than lessor-lessee. Thus, we stated as follows:

An owner can receive rent in crops as well as in money, but where the owner who receives a percentage of the crop takes an active part in the operation by reserving and exercising the right of detailed supervision and direction of the operation of the farm, and the farmer is subject to all of the restrictions here present, the farmer appears to be in some category other than that of a tenant, and the money which the petitioners received appears to be more in the nature of income from their own use of their own land than rent received by them for permitting the farmer to use their land. Certainly some part of the amount which these petitioners received was received because of their activities in operating and supervising the farms. 1981 U.S. Tax Ct. LEXIS 33">*83 The share of the crop taken by the farmers in this case, whether they be considered employees, independent contractors, joint venturers, or something else, was in the nature of payment for their services in carrying out the instructions of the petitioners * * * and the share retained by the petitioners was their return for their management and operation of the farms owned by them as well as for the use of their own land in the operations. * * * [Webster Corp. v. Commissioner, 25 T.C. 55">25 T.C. 61. Emphasis added.]

See also 240 F.2d 164">240 F.2d at 165 where the Second Circuit, in affirming our opinion, stated that "The problem presented arises out of an arrangement comprising many factors some of which pointed toward a landlord-and-tenant relationship and others of which pointed in other directions."

1981 U.S. Tax Ct. LEXIS 33">*84 The facts in Webster were thus somewhat unique. Accordingly, that case is clearly distinguishable from the present one in which there was no joint enterprise between either the partnership and the tenants of Alimur Trailer Park, or Merced and the tenants of El Rancho. In both instances, the legal relationship was clearly that of lessor-lessee, and we do not understand Merced to contend otherwise.

77 T.C. 934">*956 In view of the foregoing, we hold that the income received by Merced from the operation of Alimur Trailer Park and El Rancho constitutes "rents" within the meaning of section 543(a)(2).

Gain from the sale of property is measured by the difference between the amount realized and the adjusted basis. Sec. 1001(a). ²⁸ The amount realized is "the sum of any money received plus the fair market value of the property (other than money) received." Sec. 1001(b). Thus, the issue here is whether the partnership underreported its gain from the sale of Alimur Trailer Park by failing to include as part of the amount received the fair market (rental) value of the Ellers' right of occupancy. ²⁹ If so, adjustment to the incomes of the Ellers, Modesto, 1981 U.S. Tax Ct. LEXIS 33">*85 and Merced would follow. ³⁰

1981 U.S. Tax Ct. LEXIS 33">*86 The disposition of the issue turns on whether the Ellers ³¹ conveyed their entire fee interest in the dwelling without reservation and leased it back for a 2-year period, or whether they merely conveyed a remainder interest in it. In other words, did their possessory interest in the dwelling arise by virtue of their status as lessees, as contended by respondent, or as legal owners of a reserved term for years, as contended by petitioners? The issue is factual and the burden of proof is, of 77 T.C. 934">*957 course, on petitioners. Welch v. Helvering, 290 U.S. 111">290 U.S. 111, 290 U.S. 111">115 (1933); Rule 142(a). ³²

We have carefully examined the record and studied the authorities cited by the parties. The issue is close. However, we have concluded that petitioners have not convincingly demonstrated that the Ellers only conveyed1981 U.S. Tax Ct. LEXIS 33">*87 a remainder interest.

At the outset, we note that the parties disagree over the appropriate standard by which to resolve the issue. Petitioners, citing Kruesel v. United States, an unreported case ( D. Minn. 1963, 12 AFTR 2d 5701, 63-2 USTC par. 9714), argue that our inquiry should focus on the intent of the parties to the conveyance. On the other hand, respondent, citing Alstores Realty Corp. v. Commissioner, 46 T.C. 363">46 T.C. 363 (1966), and Ashlock v. Commissioner, 18 T.C. 405">18 T.C. 405 (1952), argues that the appropriate inquiry should be which party to the conveyance bore the risks and burdens of ownership during the period of the Ellers' occupancy. In resolving the underlying issue, we have considered both of these factors, as well as the form of the transaction. In our opinion, each of these factors favors respondent. Accordingly, we do not find it necessary to choose which is preeminent.

The deed from the Ellers to the purchasers is absolute on its face and in no way purports to convey less than their entire fee interest without reservation. The underlying contract was not1981 U.S. Tax Ct. LEXIS 33">*88 introduced into evidence as an exhibit so we have no way of knowing what it may have recited. ³³ None of the other documents, however, purports to reserve a term for years to the Ellers.

The contract between the Ellers and the purchasers was consummated on February 14, 1973. Henceforth and throughout the period of the Ellers' occupancy, the purchasers paid 77 T.C. 934">*958 the real estate taxes and the insurance premiums ³⁴1981 U.S. Tax Ct. LEXIS 33">*89 on the dwelling. They also paid for the utilities consumed by the Ellers ³⁵ and undertook responsibility for the maintenance of the grounds surrounding the dwelling as well as any exceptional maintenance of the dwelling itself. In our opinion, these factors demonstrate that it was the purchasers who bore the risks and burdens of ownership during the period of the Ellers' occupancy.

We start with the purchasers. Their testimony would have been entitled to the greater weight because they are not interested parties in the present litigation. Petitioners did not call them as witnesses, however, and their absence is unexplained. ³⁶ As we have noted before:

The burden of proof * * * [is] upon petitioners and we cannot assume that the testimony of a critical absentee witness would have been favorable to them. Indeed, the normal inference is that it would have been unfavorable. Cf. * * * Interstate Circuit v. United States, 306 U.S. 208">306 U.S. 208, 306 U.S. 208">226. [Pollack v. Commissioner, 47 T.C. 92">47 T.C. 92, 47 T.C. 92">108 (1966), affd. 392 F.2d 409">392 F.2d 409 (5th Cir. 1968).]1981 U.S. Tax Ct. LEXIS 33">*90

Notwithstanding their absence, the purchasers' intent can be gleaned from their correspondence to the Ellers during the period immediately prior to the consummation of the contract. Thus, in their letter dated January 31, 1973, they begin by referencing the dwelling "being sold to us" and go on to agree "to permit" the Ellers "to occupy" it for their "personal use" for a 2-year period "without any cost." This language is simply incompatible with petitioners' contention that the Ellers reserved a term for years. If the Ellers had reserved such a term, it would not have been necessary, for example, to specify that their occupancy would be without cost to them.

77 T.C. 934">*959 Moreover, the January letter repeatedly uses the verb "occupy" and speaks of the Ellers' ownership in the past tense. For example, the second paragraph provides as follows:

We shall maintain the grounds around the main house together with any1981 U.S. Tax Ct. LEXIS 33">*91 exceptional maintenance during the two year period while you occupy the main house. The standard of maintenance to be substantially the same as during your ownership. You shall occupy the house free from interference from us or our agents or employees except as reasonably necessary to perform maintenance and repairs. You and your family shall be entitled to the same privacy as when you were the owner of the home. You and your family shall have and enjoy the same privileges and use of the facilities in the park on the same basis as any and all of the tenants of the park without cost to you. [Emphasis added.]

Again, we think that this language contemplates a sale and leaseback.

Finally, the various terms defining the Ellers' rights during the period of their occupancy are indicative of a lease. For example, they were not required to pay for utilities and were relieved of any responsibility for maintenance of the grounds and exceptional maintenance of the dwelling itself. Moreover, they were entitled to occupy the dwelling "free from interference" by the purchasers (except as reasonably necessary to perform maintenance and repairs) and to enjoy the same measure1981 U.S. Tax Ct. LEXIS 33">*92 of privacy as during their ownership. Petitioners' arguments to the contrary, the fact that California law may imply certain of these terms in any lease does not mean that the Ellers and the purchasers intended to create some other relationship. It is not at all unusual for parties to a transaction to expressly state their rights and obligations notwithstanding covenants implied by law.

Also of consequence is the letter dated February 12, 1973, from the purchasers' attorney to the Ellers. This letter refers to a prior letter ³⁷ regarding the Ellers' lease of the dwelling in which it was agreed that "there would be no subletting of the premises, and that upon your vacating of the premises during the twenty-four month period, your tenancy would lapse." (Emphasis added.) The letter goes on to provide that the dwelling is "sold to the buyer." In our opinion, this language is incompatible with petitioners' contentions.

77 T.C. 934">*960 1981 U.S. Tax Ct. LEXIS 33">*93 Insofar as the Ellers are concerned, their intent is less easily discerned. They did expressly evidence their understanding of the provisions of the attorney's February letter by executing it as requested. There is nothing in the record to suggest that they took issue with any of the provisions of the purchasers' January letter. There is also nothing in the record to suggest that they allocated their basis (actuarially or otherwise) in determining the amount of gain from the sale. ³⁸

Petitioners contend that negotiations for the sale of the house were premised on two facts. First, because the1981 U.S. Tax Ct. LEXIS 33">*94 Ellers were settled and did not have alternative housing, they were not willing to immediately surrender possession of the dwelling. Second, the dwelling did not have any immediate utility to the purchasers. ³⁹ While there is support in the record for both statements, we do not think that they are particularly relevant to our inquiry. The Ellers were concerned only about possession. There is nothing in the record to suggest that it was important to them that their right to possession be based on a reserved term for years rather than a lease. Similarly, there is nothing in the record to suggest that the purchasers preferred to acquire the dwelling by remainder rather than in fee subject to leaseback. ⁴⁰

1981 U.S. Tax Ct. LEXIS 33">*95 Petitioners rely heavily on Kruesel v. United States, an unreported case ( D. Minn. 1963, 12 AFTR 2d 5701, 63-2 USTC par. 9714). That case, however, is clearly distinguishable. In Kruesel, the taxpayers owned certain farm property in fee. They sold the property to a third party but remained on it pursuant to a rent-free right of occupancy for their respective lives plus 6 months. The question there, as here, was whether the taxpayers received property in the form of the right of occupancy or whether they only sold a remainder interest. The 77 T.C. 934">*961 court held for the taxpayers, determining that they had retained an interest in the property:

the whole contract indicates that the reservation of an interest in the selling party was an intention of both parties to the contract. This conclusion is firmly supported by the testimony of one of the taxpayers, the taxpayers' attorney, who negotiated for them, and the attorney who negotiated for [the third party]. [Kruesel v. United States, 12 AFTR 2d at 5704, 63-2 USTC par. 9714, at 89,847. Fn. ref. omitted; emphasis added.]

Here, however, 1981 U.S. Tax Ct. LEXIS 33">*96 the intent of the parties to the conveyance was to the contrary. Kruesel, therefore, affords petitioners no relief.

Petitioners also rely on the District Court's opinion in Crosby v. United States, an unreported case ( S.D. Miss. 1973, 31 AFTR 2d 73-1191, 73-1 USTC par. 9399), affd. in part and vacated and remanded in part 496 F.2d 1384">496 F.2d 1384 (5th Cir. 1974). There, the taxpayers purportedly conveyed their residence to their corporation, reserving "a life estate in themselves and in their heirs." The "deed" also precluded the corporation from selling, mortgaging, or otherwise conveying any interest in the property without first offering the property to the taxpayers or their heirs at the current book value. The corporation subsequently purchased adjoining acreage and made substantial improvements to both properties. The Government determined that the taxpayers received constructive dividends by virtue of their rent-free occupancy, but the District Court disagreed, principally because it determined that both the taxpayers and their corporation had distinct interests in the residence. On appeal, however, the Fifth1981 U.S. Tax Ct. LEXIS 33">*97 Circuit held as a matter of law that the "deed" was so restrictive that the corporation received no meaningful interest and that "in practical effect ownership of the property remained in the [taxpayers]." Crosby v. United States, 496 F.2d at 1389. The Court of Appeals then vacated the judgment of the District Court and remanded the case for a determination of the amount of constructive dividends. Thus, we do not understand how petitioners can find solace in Crosby.

In view of the foregoing, we hold that the Ellers conveyed their entire fee interest in the dwelling without reservation and leased it back for a 2-year term. Accordingly, their rent-free 77 T.C. 934">*962 right of occupancy constitutes part of the amount realized from the sale of the trailer park. ⁴¹

Compensation is deductible under section 162(a)(1)⁴² only1981 U.S. Tax Ct. LEXIS 33">*98 if it is (1) reasonable in amount, (2) based on services actually rendered, and (3) paid or incurred. See also sec. 1.162-7(a), Income Tax Regs. In the notices of deficiency issued to the Ellers and to Modesto, respondent disallowed part of the compensation paid to the children on the ground ⁴³ that it was unreasonable and excessive. On brief, however, respondent argues that at least part of the amount paid to the children was not based on services actually rendered. ⁴⁴

1981 U.S. Tax Ct. LEXIS 33">*99 Whether amounts paid as compensation are reasonable and represent payments purely for services are questions of fact to be resolved on the basis of all of the surrounding facts and circumstances. Levenson & Klein, Inc. v. Commissioner, 67 T.C. 694">67 T.C. 694, 67 T.C. 694">711 (1977). The burden of proof is, of course, on the petitioners. Botany Worsted Mills v. United States, 278 U.S. 282">278 U.S. 282, 278 U.S. 282">289-290 (1929); Rule 142(a). The fact that payments are made to minor children by a related party does not preclude their deductibility. Denman v. Commissioner, 48 T.C. 439">48 T.C. 439, 48 T.C. 439">448-451 (1967); Rev. Rul. 72-23, 1972-1 C.B. 43.

As found above, we think that the Ellers' children performed substantial services the reasonable value of which was as follows: 77 T.C. 934">*963

Our findings differ somewhat from the amounts deducted by petitioners for two reasons. First, we think that the reasonable value of John's services must reflect the age differential between him and his brother and sister. ⁴⁷ In 1972, John was 7; Michael and Patti were 12 and 11, respectively. ⁴⁸ Experience teaches that 11- and 12-year old children can generally handle greater responsibility and perform greater services than 7-year old children. Moreover, Walt testified that it was his practice to promote youngsters as they demonstrated 1981 U.S. Tax Ct. LEXIS 33">*101 their aptitude, acquired experience, and developed greater responsibility. And as Michael testified, with greater responsibility came greater remuneration.

Second, we think that there should be some relationship between the reasonable value of the children's services over the 3-year period. After all, the record does not indicate that the children rendered significantly greater services (whether 77 T.C. 934">*964 measured quantitatively or qualitatively) during 1974 than they did during either 1972 or 1973.

Respondent advances a number of arguments in support of his position. Suffice it to say that we have considered those arguments but have concluded from our examination of the record that most of the compensation paid was both reasonable in amount and based on services actually1981 U.S. Tax Ct. LEXIS 33">*102 rendered.

To reflect both our conclusions herein and the concessions by the parties,

Decisions will be entered under Rule 155.