
    PHILIP LIEBER AND MRS. CLARA L. LIEBER v. THE UNITED STATES
    [No. 218-52.
    Decided April 6, 1954.
    Plaintiff’s motion for rehearing: overruled June 8, 1954]
    
      
      Mr. Elias Goldstein for plaintiffs.
    
      Mrs. Elizabeth B. Davis, with whom was Mr. Assistant ..Attorney Generad H. Brian Holland, for defendant. Mr. .Andrew D. Sharpe was on the brief.
   Whitaker, Judge,

delivered the opinion of the court:

Plaintiff Philip Lieber entered into certain partnership -agreements with his children. The profits therefrom were reported by the alleged partners and taxes on the profits were ¡paid accordingly. Later, the Commissioner of Internal Eev-enue decided that the alleged partnerships were fictitious, rather than real, and taxed plaintiffs as though they were the recipients of the entire income of one of the partnerships, and as though plaintiff, Philip Lieber, was the recipient of that portion of the income of the other one which he alleges he received as trustee for certain of his children. Taxes were paid accordingly, less credit for the amounts paid by the children, and this suit was brought to recover them.

The issue presented is whether the partnerships were real or fictitious.

This is the test laid down in Commissioner v. Culbertson, 337 U. S. 733. The gist of the court’s opinion in that case is thus stated on page 742:

The question is not whether the services or capital contributed by a partner are of sufficient importance to meet some objective standard supposedly established by the Tower case [327 U. S. 280], but whether, considering all the facts — the agreement, the conduct of the parties in execution of its provisions, their statements, the testimony of disinterested persons, the relationship of the parties, their respective abilities and capital contributions, the actual control of income and the purposes for which it is used, and any other facts throwing light on their true intent — -the parties in good faith and acting with a business purpose intended to join together in the present conduct of the enterprise.

In that case, former cases were discussed that had been supposed to lay down hard and fast rules which determined: the taxability of partnership income; but it was said that in those former cases it was not intended to lay down hard and fast rules; but that, in the last analysis, the determining factor was the bona fide intent of the parties, did they or not intend to enter into a real, and not a fictitious agreement to conduct a business as partners.

This opinion, and others, recognizes that there are varying forms of partnership agreements, but all agree that all of them must conform, for tax purposes, at least, to the elements essential fco a valid partnership agreement, which is an association between persons to jointly carry on a common enterprise. Each must contribute something. One cannot be a partner in an enterprise if he contributes nothing to it and is merely the recipient of the earnings derived from the labors or the capital of others.

Two partnerships are involved here, the Philip Lieber Company and the Building Service Company.

1. The Philip Lieber Company is alleged to be a partnership composed of Philip Lieber, two of his minor children, and his adult children and their spouses. To this alleged partnership no one contributed any services other than Philip Lieber. His children had nothing whatever to do with its management or control, nor did they make any other contribution to the alleged partnership, unless it can be said that they furnished a part of the working capital. Did they do this ?

Let us look, first, to the minor children. Did they furnish any capital to carry on the enterprise ? Whatever they may have furnished was given to them by their father Philip Lieber. Had he given them anything which they later contributed to the common enterprise ? Apparently not. What he had done in years past was to accumulate a fund which he regarded as belonging in part to them; but he had not actually given it to them; he had not put it under their dominion and control; it was still his, to do with as he pleased. This fund was put into the partnership. It was his fund, not his children’s fund.

There was more substance to the contributions of the adult children. On November 16,1942, plaintiff conveyed to them by deed a tract of land on Texas Avenue in Shreveport, Louisiana, which Mr. Lieber regarded as the consummation of prior gifts to them, which was later turned over to the partnership. The deed from Philip Lieber to his children recited a consideration of $50,000 in cash and the assumption of a mortgage of $25,000; but no consideration actually passed. The reason a consideration was recited was that a deed without a valuable consideration was invalid under Louisiana law. While the fact that there actually was no consideration, although one was recited, may have made the conveyance invalid, still, the recitation of a consideration, and the execution and recording of the deed, is some indication of an intention on Mr. Lieber’s part to divest himself of title to this property and to put title in his adult children.

This property, as stated, was conveyed to the partnership. It was worth $100,000, although the recited consideration in the deed from Philip Lieber to his children was $75,000. Whether the interests of the grantees in the property were the same does not clearly appear, because the conveyance to the partnership of the interests of two of the children, Mrs. Fox and Mrs. Shavin, and their husbands, recited a consideration of $45,000, whereas the conveyance of the interest of Philip Ben Lieber recited a consideration of only $5,000.

This is the only transaction which may be considered as a contribution to the partnership by the adult children. After Mr. Lieber had transferred to the partnership the funds which he had accumulated for his minor children, but had never given to them, it was then considered that each child, ■or child and spouse, had contributed $40,000 to the partnership. Mr. Lieber also contributed to the partnership $80,000 •of his own funds.

As stated, the minor children contributed nothing. If we regard the contribution of the real estate by the adult children as real, and that they had an equal interest in it, then ■each contributed $33,333.33, and Mr. Lieber gave them the balance to make up the $40,000.

The transfer of the real estate to the partnership has at least the appearance of a genuine contribution to the partnership by the adult children. It was made about a year after the transfer of the real estate to them. However, Mr. Lieber’s conduct of the partnership business and the provisions of the partnership agreement itself raise doubts as to whether he had actually relinquished control over the real •estate conveyed to the adult children, and which they, in turn, transferred to the partnership.

Under the partnership agreement, plaintiff, Philip Lieber, was named the “Managing Partner.” As such he had “sole •and exclusive power and authority to bind and obligate the partnership in any manner whatsoever. * * *” He was given authority to borrow money, to pledge the firm’s assets, .and “to sell all or any part of” them. He was “especially authorized and empowered to fix and determine from time to time the salaries and drawing accounts of each partner, including himself. * * *” The agreement provided that the' profits of the partnership “shall be distributed to such extent as may be determined by the Managing Partner. Such distribution need not be made in proportion to the interests of the several partners, but shall be made in such manner as the Managing Partner deems fair and equitable.” No partner, except the Managing Partner, could transfer his interest “without the consent of the Managing Partner”; but a partner might withdraw from the partnership.

The Managing Partner could not be deposed except by a vote of partners holding a two-thirds interest in the partnership. The only other restriction upon his absolute control of the assets and of the income therefrom was that his distribution of the profits might be overridden by vote of the partners holding a majority in interest of those present at the meeting. This, however, was no restriction, in fact, until the minors reached their majority, because plaintiff owned a two-sevenths interest, and plaintiff as the guardian of his minor children owned another two-sevenths, thus giving him a majority.

Under the partnership agreement, therefore, plaintiff, Philip Lieber, had the absolute power to give the income from the partnership to whomsoever he wished and in such amount as he wished. It was his to do with as he pleased. In fact, though not in form, he had the same control over the assets and the profits derived therefrom after the partnership was formed as he had before. This, however, is subject to the limitation that, presumably, upon liquidation the assets were to be distributed in proportion to the partners’ interest in the enterprise. But, so long as the partnership lasted, and the minors had not reached their majority, plaintiff, Philip Lieber, could do with the assets and profits whatever he wished.

Even after the minors came of age his actual power of control was but little diminished, because partners receiving more than their share could be expected to uphold the distribution of profits he had decided upon, and he only needed the votes of two children out of five to be upheld.

He actually handled the partnership business as if it were his own. No one of his children took any part in its management, nor did any work for it. The amount of the profits he determined each child was entitled to was not in proportion to the interests of the partners. He determined that more should go to some than to others. The only reason he assigns for this is that some of his children were entitled to income from another family partnership, whereas others were not, and he wanted to somewhat equalize the aggregate income to which each was entitled.

■ As a matter of fact, no part of the profits of the Philip Lieber Company were ever distributed during any of the years in question, nor was any account set up for the different partners. However, income tax returns were filed by the partnership, which, under the heading “Partners’ shares of Income Credits” showed the following for each of the years in question:

Philip Lieber.. Elizabeth L. Fox. Harry Fox_ Kosabel L. Shavin. Joseph S. Shavin. Philip Ben Lieber1_ Harriet Caroline Lieber *. Samuel L. Lieber. 1945 1946 1947 1948 $149.36 100.00 100.00 100.00 100.00 100.00 2,700.00 2,700.00 6,049.36 $35.12 1,000.00 $5,008.88 1,000.00 1,000.00 5,432.59 4,216.29 1,000.00 5,000.00 4,000.00 12,684,00 15,008.88 i. 974.35 i, oon. oo 10, ooo. oo 6,000.00 37,974.35

Mr. Lieber’s distributive share for one year was $149.36, for another $35.12, for the next about $5,000, and the next nearly $21,000.

His minor children fared next best, the distributive share of one being reported at an aggregate of about $23,000, and the other, at about $17,000. Two of the adult children were reported as entitled to $1,100, and a third child to $100. In one of the years, two of the adults were reported as entitled to nothing, but one, as entitled to $1,000; and in two of the years none of the adults were reported as entitled to anything.

As further indicating Mr. Lieber’s control over the partnership assets and income, he decided in 1947 that two of his adult children and their spouses should withdraw from the partnership, and this was done, but no distribution of income or assets was made to them either in that year or the following year, although Mr. Lieber claims he did set aside for them some government bonds, but the amount of the bonds was not shown.

No distribution of the partnership assets was ever made until after this tax dispute arose. In 1952, five years after the last taxable year in question, the partnership was liquidated and each child received assets in proportion to his interest in the partnership.

While this distribution on liquidation lends support to the claim that the children had a real and not a fictitious interest in the partnership, we are not convinced that they were actually partners during the years in issue. The record, as a whole, shows that Mr. Lieber intended to retain complete •control of the partnership assets and income, and to postpone .actual distribution of the income until liquidation, and then in such amounts to each child as to him seemed best.

This retention of control over the assets of the partnership and over the enjoyment of its income justified the Commissioner of Internal Eevenue in treating the partnership income as plaintiffs’ income. (Philip Lieber and his wife owned the partnership property as community property.) As a practical matter, Mr. Lieber retained the same control over the handling and the disposition of the assets and the income therefrom after the formation of the partnership as he had had before.

This, it seems to us, is inconsistent with the idea of a partnership in which people join together for the promotion of a common enterprise, each contributing his share, either of capital or services, or both, and each enjoying his share of the profits and bearing his share of the losses.

In Commissioner v. Culbertson, supra, the Court said at pages 745-746:

* * * In the Tower and Lusthaus cases this Court, applying the principles of Lucas v. Earl, supra; Helvering v. Clifford, supra; and Helvering v. Horst, 311 U. S. 112, found that the purported gift, whether or not technically complete, had made no substantial change in the economic relation of members of the family to the income. In each case the husband continued to manage and control the business as before, and income from the property given to the wife and invested by her in the partnership continued to be used in the business or expended for family purposes. We characterized the results of the transactions entered into between husband and wife as “a mere paper reallocation of income among the family members,” noting that “The actualities of their relation to the income did not change.” 327 U. S. at 292.. This, we thought, provided ample grounds for the finding that no true partnership was intended; that the husband was still the true earner of the income.

The court also said at page 746:

* * * It is frequently stated that transactions between members of a family will be carefully scrutinized. But,, more particularly, the family relationship often makes it possible for one to shift tax incidence by surface changes of ownership without disturbing in the least his dominion- and control over the subject of the gift or the purposes for which the income from the property is used. He is able, in other words, to retain “the substance of full enjoyment of all the rights which previously he had in the property.” Helvering v. Clifford, supra, at 336.

We do not think Mr. Lieber’s “dominion and control over the subject of the gift or the purposes for which the income from the property [was] used,” was disturbed. He retained “ ‘the substance of full enjoyment of all the rights which previously he had in the property’ ”, at least until liquidation of the partnership, which was after the tax years in question.

There can be no doubt of this in the case of the minor children, and but little doubt in the case of the adult children. It is true the adults transferred to the partnership the property on Texas Avenue, but when we offset against this the fact of plaintiff’s control over this property, as well as other-partnership assets, and the income from it, and, further, that he required two of the donees of this property to retire-from the partnership without any distribution to them of the-partnership assets until five years later — when we offset these things, we must conclude that the adults, as well as the minors,. were not partners in fact.

2. The Building Service Company. The situation with-reference to this partnership is entirely different. Indeed,, it points up the unreality of the partnership known as the-Philip Lieber Company, discussed above.

Plaintiff, Philip Lieber, prior to 1935 had been one of'the •owners of the Building Service Company, Inc.' A Mr. Segall was the other owner. In 1935 Mr. Lieber purchased Mr. Segall’s interest, and then suggested to his son-in-law, Harry Fox, that he take over the management of this business. The proposal was accepted, and Harry Fox continued to manage the business from that time until after the close of the last taxable year in question. In 1936 Philip Ben Lieber, plaintiff’s son, became a partner and thereafter devoted his entire time to the conduct of the business. Mrs. Rosabel Shavin, plaintiff’s daughter, served as the bookkeeper, of the business from 1935 to 1946. Plaintiff’s other adult children purchased interests in this enterprise, presumably through gifts or loans from Mr. Lieber.

Plaintiff, Philip Lieber, divested himself of all interest in this partnership, because he thought that he might be criticized for engaging in the sale of building materials and supplies, since he was secretary of a savings and loan association. He took no part in the management of this business nor in the keeping of its books and records. The partnership return for 1945 listed the following as partners: Harry and Elizabeth Fox, Harriet C. Lieber, a minor, Philip Ben Lieber, and Joseph S. and Rosabel Shavin.

A short time prior to January 1, 1946, the Shavins and Harry Fox fell out over the operation of the business, and Fox demanded that the Shavins dispose of their interest and withdraw from the partnership. They did so, ostensibly; A new partnership was then formed between Harry Fox, Philip Ben Lieber, and Philip Lieber, trustee. Philip Lieber was trustee for his two minor children and, surreptitiously, for Mr. and Mrs. Shavin, — Harry Fox was not aware that Mr. Lieber was trustee for the Shavins, as well as for his minor children.

The partnership agreement provided that Harry Fox and Philip Ben Lieber would devote their full time and attention to the business, and would have full authority to transact all the regular business of the partnership. The profits were to be divided equally among the partners, Harry Fox, Philip Ben Lieber, and Philip Lieber, trustee, and the agreement provided that each should contribute an equal amount of the capital. This was in fact done. The share of the profits received by Philip Lieber, trustee, was by him distributed, one-third to the Shavins, and one-third each was credited by him to the account of each of his minor children.

Although the capital contributed by the children to the partnership consisted of gifts or loans made by Mr. Lieber, the Building Service Company was a partnership in fact. Plaintiff exercised no control nor dominion over the partnership, either in his individual capacity or as trustee; the entire management and control of the business was in some of his adult children or their spouses; and the profits from the business were divided among his children in proportion to their respective shares.

Under such circumstances we think this was a partnership in fact and that the Commissioner of Internal Revenue was not justified in taxing any part of the income to plaintiff, Philip Lieber.

It is true the minor children contributed no services and their capital investment was a gift to them by their father, but, in the case of this partnership, the gift seems to have been a bona fide one, fully consummated, with no strings attached.

Indeed, defendant’s argument that the income from this partnership should have been included in plaintiff’s gross income seems to us half-hearted.

Judgment both on the original and amended petitions and on the counterclaim will be withheld until the incoming of a stipulation by the parties, or, in the absence thereof, until the incoming of a report from a commissioner showing the amount due, computed in accordance with this opinion.

It is so ordered.

MaddeN, Judge/ LittletoN, Judge; and JoNes, Chief Judge, concur.

FINDINGS OF FACT

The court having considered the evidence, the report of Commissioner Wilson Cowen, and the briefs and argument of counsel, makes findings of fact as follows:

1. Plaintiffs, Philip Lieber and Clara L. Lieber, are husband and wife and have been for more than 80 years residents of Shreveport, Louisiana. Plaintiff, Philip Lieber, hereinafter referred to as Mr. Lieber, has been engaged in the savings and loan business and also in the real estate development business in Shreveport, Louisiana, for a number of years, including the taxable years 1945, 1946, 1947, and 1948 involved in this action. He and Mrs. Lieber have five children — Philip Ben, Rosabel L. married to Joseph S. Shavin, Elizabeth L. married to Harry Fox, Harriet C., and Samuel L. At some time during the taxable years, Philip Ben married Sherrie Sternberg, and Harriet C. married Lynn Pomeroy.

2. During the years from 1929 to about 1942, Mr. Lieber had accumulated and set aside certain funds which he regarded as gifts to his several children. Prior to November 16,1942, none of the gifts had been consummated by the payment or delivery of any funds or property to any of his children. On that date, i. e., November 16, 1942, he had a tract of land situated on Texas Avenue in Shreveport, together with the buildings thereon, conveyed by deed through the First Federal Savings and Loan Association of Shreveport to Mrs. Elizabeth Lieber Fox and her husband Harry Fox, Mrs. Rosabel Lieber Shavin and her husband Joseph S. Shavin, and Philip Ben Lieber, a single man, represented by Philip Lieber, his agent and attorney in fact. The value of the real estate conveyed by the deed was approximately $100,000. The consideration for this transfer, as recited in the conveyance, was $50,000, of which $25,000 was in cash and the balance was payable in a note secured by a mortgage on the property. Actually, however, no consideration was paid by the grantees as a result of this transaction. The deed was intended by Mr. Lieber as a consummation of the gifts which he had earlier set aside for the children named as grantees in the deed.

3. Sometime prior to August 1, 1943, Mr. Lieber had acquired a large quantity of unimproved real estate in Shreveport which he desired to develop. He concluded, however, that his own financial resources were insufficient for that purpose and decided to organize a company in which the other members of his family, who had some funds or assets, could share in the results of his experience and activities.

Among the assets which Mr. Lieber desired to use in the ■development of the real estate were the funds which he had .accumulated and regarded as gifts to his minor children, Harriet C. and Samuel L. Lieber. These funds, which were not paid to the minors, had been retained in Mr. Lieber’s possession.

After discussing the matter with members of his family, they entered into a written agreement designated “Partnership Agreement” on August 2,1943. The agreement, which is in evidence as Plaintiffs’ Exhibit 1, was filed for record in Caddo Parish, Louisiana, on October 30, 1943.

In the opening paragraph thereof, the agreement recited that Philip Lieber, Samuel L. Lieber, Harriet Caroline Lieber, Elizabeth L. Fox, Harry Fox, Kosabel L. Shavin, Joseph S. Shavin, and Philip Ben Lieber declared that they had formed an ordinary partnership under the name of Philip Lieber Company.

After setting forth that the objects and purposes of the partnership were to acquire real property and to engage generally in the business of acquiring, owning, developing, and selling real estate, the agreement, in Articles III, IV, .and VII, provided as follows:

ARTICLE IH
The partnership shall start business with assets of the value of at least TEN THOUSAND AND no/ioo ($10,000.00) dollars. Its assets shall be owned by and liability for its debts imposed upon the partners in the following proportions:
Philip Lieber_ 2/7
Samuel L. Lieber- 1/7
Harriet Caroline Lieber- 1/7
Elizabeth L. Pox_ 1/14
Harry Pox_ 1/14
Rosabel L. Shavin_ 1/14
Joseph S. Shavin- 1/14
Philip Ben Lieber_ 1/7
ARTICLE IV
The business and affairs of the partnership shall be managed and controlled by one of the partners, who shall he known as the “Managing Partner” and who shall have the sole and exclusive power and authority to bind and ■obligate the partnership in any manner whatsoever except that other partners and employees may be empowered by the Managing Partner to bind and obligate the partnership in respect to matters the handling of which is entrusted to them by the Managing Partner. Similarly, the Managing Partner may designate from time to time special or general agents to act for the partnership in such manner and with such power as he may think proper.
Without derogation from or limitation of the full and feneral powers hereinabove conferred on the Managing ’artner, he shall have the right, power, and authority in behalf of the partnership and each of the members thereof with regard to its business to borrow money, execute notes and other obligations, and generally to sell, assign, endorse, negotiate, mortgage, pledge, and hypothecate all or any part of the assets and properties of the partnership. He shall likewise have power to institute and prosecute suits in behalf of the partnership, to vote in its name all stocks or shares in corporations owned by it, and generally to exercise in relation to the partnership property and business all of the powers that ordinarily might be exercised by all of the partners jointly. He is especially authorized and empowered to fix and determine from time to time the salaries or drawing accounts of each partner, including himself, and each employee, and he may in his discretion at any time terminate the employment of or discontinue the active participation by any partner in the conduct of the business and affairs of the partnership.
Philip Lieber shall be the Managing Partner, and he shall continue as Managing Partner until his successor shall have been elected by a vote of partners owning at least two-thirds of the total interest in the partnership or until he should die or should become incapacitated to serve by reason of physical or mental disability.
article vn
Within sixty (60) days after the close of each fiscal year the profits of the partnership for such year shall be ascertained and shall be distributed to such extent as may be determined by the Managing Partner. Such distribution need not be made in proportion to the interests of the several partners, but shall be made in such manner as the Managing Partner deems fair and equitable. The Managing Partner shall take into consideration in making such distribution the value of services rendered to the partnership by particular partners and not otherwise fully compensated. A statement of the condition of the affairs of the partnership and of the distribution of the profits by the Managing Partner shall be mailed or delivered to each partner as soon as practicable after the Managing Partner shall have determined the distribution of earnings for the preceding fiscal year; and any partner who may be dissatisfied with such distribution shall within thirty (30) days after the date of delivery to him or of mailing to his last known address of such statement be entitled to file with the Managing Partner a written protest setting forth his objections to the distribution and his reasons therefor. Upon receipt of such protest the Managing Partner shall call a meeting of all of the partners, of the holding of which meeting each, and every partner shall be given at least ten (10) days’ notice, and the matter shall be submitted to the partners, at such meeting, together with such other matters as the Managing Partner or any other partner may desire, provided that if a meeting of the partners shall have already been called at the time when such protest shall be received, then the matter shall be submitted to such meeting and it shall not be necessary to call a special meeting-to consider the protest or protests.
At all partnership meetings the vote of each partner-shall be counted in proportion to his interest in the-partnership and the majority in interest of those present at any meeting called as hereinabove provided shall prevail. A quorum at any partnership meeting shall consist of partners owning an aggregate of more than sixty per cent (60%) of the partnership.

Article Y provided for the termination by death or withdrawal of a partner unless the remaining partners decided, to take over the interest of such deceased partner and stated that any partner might withdraw upon giving certain notice to the other partners.

Article VI specified that the interest of a partner other-than the managing partner should not be transferred in-whole or in part without the consent of the managing partner, and Article VIII provided that in the event the partnership was terminated, the managing partner would be the-liquidator and would not be required to give bond.

4. Plaintiffs Philip Lieber and Clara L. Lieber contributed $80,000 out of their assets for the formation of the Philip-Lieber Company.

By deed dated November 4, 1943, Mrs. Elizabeth Fox and her husband, Harry Fox, Mrs. Rosabel Shavin and her husband, Joseph Shavin, conveyed the property which they had acquired in the deed of November 16, 1942 (Finding 2) to the Philip Lieber Company, an ordinary partnership, for a stated consideration of $20,000 and the assumption of a mortgage for $25,000. By deed dated September 30, 1943, Philip Ben Lieber conveyed his interest in the same property to the Philip Lieber Company for a stated consideration of $5,000 in cash. Actually, no consideration was paid by the Philip Lieber Company for the real estate transferred to it under these deeds. It was agreed between Mr. Lieber and the grantors that the real estate so conveyed constituted the-contribution of said grantors to the capital of the partnership.

For the contributions of the minor children, Samuel L.. Lieber and Harriet C. Lieber, Mr. Lieber made available to-the Philip Lieber Company funds which he had accumulated for and regarded as gifts to the minors but which had been, retained in his possession.

The evidence does not show exactly what amounts were paid to or made available for the use of the Philip Lieber Company in behalf of said minor children, but when the above-described transactions were completed, Mr. Lieber and his children considered that each unmarried child and each married child with spouse had contributed approximately $40,000 to the capital of the Philip Lieber Company.

Except as stated above, no member of the partnership except Mr. Lieber made contributions of money, assets, or services to the Philip Lieber Company.

5. In accordance with the terms of the agreement described in Finding 3, the business of the Philip Lieber Company was managed and controlled solely by Mr. Lieber. It was his custom to call family gatherings each week, and these occasions were utilized by him to keep his children and their spouses informed as to the activities and progress of the Company. During the entire period the business of the Philip Lieber Company was conducted, the relations among Mr. Lieber and the other parties to the agreement were harmonious. No objections were made regarding Mr. Lieber’s conduct of the business.

The venture proved to be very profitable. At the end of each year, Mr. Lieber determined the amount of profits to be distributed under the agreement to each of the persons who was a party thereto. Such determinations as to the amounts to be distributed were generally not made in proportion to their capital interests in the Philip Lieber Company, as set forth in Article III of the agreement of August 2, 1943. Article VII of the agreement provided that Mr. Lieber was not required to make such distributions in proportion to the capital interests of the several partners. He took into consideration the amounts that some of his children were receiving from the Building Service Company, a partnership referred to hereinafter, so that the children who were receiving distributions from the Building Service Company were not allotted as much from the Philip Lieber Company as the other children.

6. During the taxable years involved here, i. e., 1945,1946, 1947, and 1948, Samuel L. Lieber, Harriet C. Lieber, Elizabeth L. Fox, Harry Fox, Bosabel L. Shavin, Joseph S. Shavin, and Philip Ben Lieber reported their individual incomes from the Philip Lieber Company, as shown in the income tax returns of the Company for the same years. The taxes on the incomes so reported were paid. However, no part of the profits of the Philip Lieber Company were actually paid to or received by any members of the family during the taxable years named, nor until 1952 when the Company was liquidated. Some of the income taxes of the children on the shares of profits of the Philip Lieber Company, which had been reported in the tax returns of the Company as distributions of profit to them, were paid by checks drawn by Mr. Lieber on the bank account of the Philip Lieber Company.

7. The books of the Philip Lieber Company consisted of a cash book and a general ledger kept by Mr. Lieber. He kept his individual accounts in the same books but on •separate sheets. He did not set up a separate drawing account for each member of the Company, but in 1946 and thereafter he kept what he described as an over-all capital account. In tbe same boobs but on separate sheets, Mr. Lieber also kept his accounts as trustee for certain partners of the Building Service Company.

The Philip Lieber Company had a bank account in the Commercial National Bank in Shreveport and later in the Continental National Bank in that city. No one in the Company had authority to draw on these bank accounts except Mr. Lieber.

8. During the year 1947, Mr. Lieber decided that Elizabeth L. Fox, Harry Fox, Rosabel L. Shavin, and Joseph S. Shavin should withdraw from the Philip Lieber Company because of other business activities in which they were then engaged, and, at his request, the Foxes and Shavins withdrew from the Company. No payments were made to them at that time by the Philip Lieber Company, but Mr. Lieber set aside for them some Government bonds, representing the value of their interests in the Company. The evidence does not show the dates nor the amounts of these bonds, and no payments were made to the Foxes or Shavins for their shares in the Philip Lieber Company until 1952.

9. Sometime during the year 1952, after the tax dispute which resulted in this litigation, Mr. Lieber liquidated the interests of his children in the Philip Lieber Company. Each one received a payment which represented the full value of his interest in the Company, except for certain adjustments which are dependent upon the outcome of this suit. Mr. Lieber has a record of the profits credited to each individual who owned a share in the Company and of the taxes paid by each. Any additional amounts which may be due any of them on the basis of the decision rendered in this action are to be paid by Mr. Lieber. Mr. Lieber is now the sole owner of the assets of the Philip Lieber Company.

10. Sometime prior to 1935, Mr. Lieber had invested $10,000 with a Mr. Segall in a corporation known as Building Service Company, Inc., which dealt in builders’ supplies and materials. Since Mr. Segall desired to enter another business, Mr. Lieber bought out Mr. Segall’s interest and liquidated the corporation in 1935. At that time, Mr. Lieber suggested to his son-in-law, Harry Fox, that he take over the business. Mr. Lieber agreed to loan Mr. Fox the necessary money for conducting the business. Mr. Fox accepted the suggestion and has been the manager of the Building Service Company since its existence. Mrs. Eosabel Shavin and Joseph S. Shavin also became partners in the Building Service Company, and Eosabel Shavin served as its bookkeeper from 1935 to 1946. In 1936, Philip Ben Lieber became interested in the Building Service Company and has devoted his full time to the conduct of its business. From time to time as funds were needed, Mr. Lieber loaned money to the Building Service Company, which has never borrowed money from any other source.

At the time Mr. Fox assumed the management of the Building Service Company, Mr. Lieber stated that he was unwilling to become a partner in the Company, since he was secretary of a savings and loan association and might be criticized if he engaged in the sale of building materials and supplies.

From time to time after 1936, Mr. Lieber made gifts or loans to other members of his family, who purchased interests in the Building Service Company, which was conducted as a partnership.

Mr. Lieber has never taken any part in the management of the Building Service Company nor in the keeping of its books or records.

11. The partnership return of the Building Service Company for the year 1945 listed the following as members of the partnership: Harry and Elizabeth Fox, Harriet C. Lieber, Philip Ben Lieber, and Joseph S. and Eosabel Shavin.

A short time prior to January 1, 1946, a dispute arose between the Shavins and Harry Fox, who insisted that the Shavins dispose of their interest and withdraw from the partnership. As a result of this dispute, a written agreement was entered into on March 25, 1946, between Harry Fox, Philip Ben Lieber, and Philip Lieber, trustee, reciting that they had formed a new partnership as of January 2, 1946, for the conduct of the business of the Building Service Company. The agreement provided that Harry Fox and Philip Ben Lieber would devote their full time and attention to the business and would have full authority to transact all of the regular business of the partnership. The agreement further provided that each of the partners would contribute an equal amount of the capital and that the profits would be divided equally among them annually.

At or about the same time the new partnership was created, Mr. Lieber agreed with Mrs. Rosabel Shavin that he would keep the interests of the Shavins in the Building Service Company in his trusteeship without the knowledge of Harry Fox. On April 2,1946, Mr. Lieber addressed the following statement to Joseph S. and Mrs. Rosabel L. Shavin:

This will acknowledge that you have paid me a sum ■of money representing a one-third interest in the capital account which is in my name as trustee on the books of Building Service Company, Shreveport, Louisiana.
This certifies that you are the owner of one-third of one-third of the capital account of Building Service Company, and as such, you will always be entitled to receive one-third of the profits which Philip Lieber, trustee, receives from that company.

At the request of Mr. Fox, Mr. Lieber agreed to and did purchase and own in his individual capacity a one-eighteenth interest in the Building Service Company for the year 1946 only.

12. In its partnership income tax returns for the years 1947 and 1948, the Building Service Company listed the following as partners: Harry Fox; Philip Ben Lieber and Philip Lieber, trustee. Under the heading “Percentage of Time Devoted to Business” with respect to Philip Lieber, trustee, the word “Part” appears on each of these returns. The amounts of the partnership profits distributable to Philip Lieber, trustee, were $49,387.77 for 1947, and $36,881.51 for 1948.

13. Returns were prepared and filed by Philip Lieber, trustee, on Form 1065 “Partnership Return of Income” for the years 1946, 1947, and 1948. In using such forms, Mr. Lieber was unaware of the fact that there were tax forms available for reporting the income of a fiduciary.

In the 1946 return of Philip Lieber, trustee, the following appeared under the heading “Partners’ Shares of Income and Credit”:

Under the same heading, the 1947 return listed Samuel L. Lieber, Lynn R. and Harriet L. Pomeroy, and Joseph S. and Rosabel Shavin and showed that the total amount distributable to them was $49,387.77. The 1948 return showed Samuel L. Lieber, Lynn R. Pomeroy and Mrs. Harriet L. Pomeroy, with a total of $36,881.51 distributable to them.

During the period in which he was a member of the partnership as a trustee, Mr. Lieber paid to Rosabel and J. S. Shavin their portion of the profits as he received them. He credited to his two minor children Samuel L. Lieber and Harriet L. Pomeroy the amounts shown as their share of the partnership earnings on the returns filed by Philip Lieber, trustee. The amounts so credited to the minor children were used in 1948 to purchase the interests of Joseph S. and Mrs. Rosabel L. Shavin in the Building Service Company for Samuel L. Lieber, Lynn R. Pomeroy and Mrs. Harriet L. Pomeroy.

14. Income tax returns on Form 1065 were prepared and filed by Mr. Lieber for the Philip Lieber Company for the calendar years 1945, 1946,1947, and 1948. Under the heading “Partners’ Shares of Income and Credits”, the returns showed the following:

The above-mentioned return of Philip Lieber Company for the year 1946 showed on the balance sheet as total assets at the beginning of the year $448,167.14, and as of the end of the year $426,205.84. An explanation of these figures was submitted by Mr. Lieber to the Internal Revenue Agent in Charge at New Orleans, Louisiana, on October 21,1949. This explanation was as follows:

Explanation of increase in trial balance figures of Philip Lieber Company from $280,000.00 when organized in 1943 to $462,000.00 as of December 31,1946:
(1) The figure of $462,000.00 is the total of the trial balance before closing entries. The net worth amounted to $401,450.61; there was a depreciation reserve of $9,422.40. Earnings before expenses amounted to about $51,000.00. Net worth after closing books amounted to $426,205.84. The trial balance included all pages of Philip Lieber Company accounts and all pages of Philip and Clara L. Lieber personal accounts.
(2) Assets taken into Philip Lieber Company when organized_$280,000.00
(S) Items belonging to Philip Lieber and wife not taken by Company, but later kept in same ledger on different pages:
Savings and Loan Share Accounts- $9,346.51
Masonic Lodge Bonds_ 2,000.00
Notes Receivable_ 2, 000.00
Partnership of Broadmoor Company- 4,124. 79
Home belonging to Mrs. Lieber_ 30, 000.00
Owed to us by Building Service Company (in addition to partnership investment by two minor children)_ 42,000. 00
- $89,471.30
(4) Net earnings of Philip Lieber Company 1943-1946,
retained in the Company__ 38,663.04
(6) Debit and credit amount showing value of investment in 1946 of Joe S. and Rosabel L. Shavin in Building Service Company (in name of Philip Lieber, trustee)- 21,567.41
421, 038.71
(6) Income of Philip and Clara L. Lieber,
1943-1946_ $93, 540.36
Income taxes paid_ 24,391.92
Net personal earnings. 69,148.44
Savings of Philip and Clara L. Lieber from above will easily account, during the four-year period, for_ $5, 000. 00
(7) Cash value of life insurance policies nearly $50,000.00 in 1946.

Following objections made by an Internal Kevenue agent that: (1) sales of real estate had been reported in 1947 and 1948 as capital assets instead of as current income, and (2) that the shares of profit distributed to the partners were not in proportion to their capital interests as set forth in Article III of the partnership agreement, the Philip Lieber Company filed amended partnership returns for 1947 and 1948,, showing a distribution of income as follows:

15. For the years 1945, 1946, and 1947, Philip Lieber and his wife Clara L. Lieber filed separate income tax returns on a community property basis. For 1948 they filed a joint income tax return. In his income tax return for 1945, Mr. Lieber reported $149.36 as income from the Philip Lieber Company. In his return for 1946, he reported income from the Philip Lieber Company of $7,299.71. This is the sum of $35.12, shown on the return of the Philip Lieber Company as his share of the earnings, plus $7,264.59 shown on the return of the Philip Lieber Company as capital gain but not included in the taxable income on the return of the Philip Lieber Company. On his return for 1947, Mr. Lieber reported $18,876.10 from the Philip Lieber Company. This is the sum of $5,008.88, reported on the return of the Philip Lieber Company as his share of the earnings for that year, and $13,867.22 shown on the return of the Philip Lieber Company as capital gain but not included in the taxable income on that return. Mr. Lieber also filed an amended return for 1947 showing income from the Philip Lieber Company of $17,097.33. The joint income tax return of Mr. and Mrs. Lieber for 1948 showed an amount received from the Philip Lieber Company of $20,974.85 and an amended return filed by them for that same year showed the amount received as $22,653.55.

16. The amounts shown due on the income tax returns of Mr. Lieber and his wife Clara L. Lieber were duly paid.

17. After audit of the returns, deficiencies in income taxes were determined against plaintiffs as follows:

Philip Lieber, 1945_ $6, 779.94
Philip Lieber, 1946_ 14, 531.31
Philip Lieber, 1947_ 23, 532.00
Philip Lieber and Clara L. Lieber, 1948- 42,294. 28
Clara L. Lieber, 1945_ 6,779. 94
Clara L. Lieber, 1946_ 14, 531.31
Clara L. Lieber, 1947_ 23, 532. 00
Total of deficiencies asserted_ 131, 980. 78

After various protests made by Mr. Lieber and his wife, the deficiencies set forth above were assessed except for the year 1946. The deficiency assessed against each of them for 1946 was $14,031.31 instead of the amount asserted. In arriving at the above deficiencies, the Commissioner of Internal Eevenue, in addition to other adjustments, included in the income of Mr. Lieber for each of the years 1945, 1946, 1947 and 1948, the entire net income of the Philip Lieber Company for each of the respective years and also income of the Building Service Company, which was shown on the returns of the Building Service Company as earnings of Philip Lieber, trustee.

18.Portions of the above deficiencies were satisfied by application or credit of overpayments determined in the names of Samuel L. Lieber, J. S. Shavin, Eosabel L. Shavin, Lynn E. Pomeroy, Harriet C. Pomeroy, Philip Ben Lieber, and Mrs. Sherrie Sternberg Lieber. The totals of these over-payments and the years to which attributable are as follows:

1945_$6,619.14
1946_ 10,963. 92
1947_ 21,894.49
1948_ 19, 687.14
Total. 59,164. 69

Additional payments were made to the Collector of Internal Revenue at New Orleans, Louisiana, in the following amounts and on the following dates: January 26, 1950, $70,000.00; July 29,1950, $13,489.63.

19. On August 15, 1951, claims for refund were filed by Mr. Lieber for the years 1945, 1946 and 1947, by Clara L. Lieber for the years 1945, 1946, and 1947, and by Mr. and Mrs. Leiber jointly for the year 1948, seeking refunds of income taxes paid for those years. The claim for refund for 1945, filed by Mr. Lieber, stated that refund was claimed on the following grounds:

In August, 1943, taxpayer with other members of his family formed a partnership by the name of Philip Lieber Company to deal in real estate. The partnership proved a profitable venture and each partner reported his income and paid a tax on it. The examining agent erroneously treated the entire income of the partnership as owned by Philip Lieber and his wife, Mrs. Clara L. Lieber.
In about 1930 a partnership was formed by taxpayer and other members of his family, the name of which is Building Service Company. For many years prior to 1945 its affairs were controlled and its business managed by other members of the family and taxpayer likewise many years ago disposed of his interest in this partnership to other members of the family. Subsequently at the request of several of the partners among whom a disagreement had arisen, taxpayer permitted an interest in the partnership to be placed in his name as trustee for four of the partners. The Revenue Agent held taxpayer to be a “partner in commendam” and taxed him with the Building Service Company income which had been previously reported by the persons for whom he was trustee. This holding is erroneous.

Each of the other claims referred to above contains substantially the same language.

On December 28, 1951, these claims for refund were rejected by the Commissioner of Internal Revenue by registered mail.

CONCLUSION OP LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes that as a matter of law plaintiffs are entitled to recover.

The entry of judgment on the original and amended petitions and counterclaim is suspended to await the filing of a stipulation by the parties showing the amount due plaintiffs computed in accordance with this opinion, or, in the absence thereof, until the incoming of a report of a commissioner showing the amount due. 
      
       In 1946,1947, and 1948 under names of Philip Ben and Sherrie L.
     
      
       In 1946,1947, and 1948 under names of Harriet and Lynn Pomeroy.
     
      
       In 1946, 1947, and 1948 under names of Philip Ben and Sherrie L.
     
      
       In 1946, 1947, and 1948 under names of Harriet and Lynn Pomeroy.
     