
    OTIS HAROLD WILLIAMSON, ET AL. v. THE UNITED STATES
    [No. 161-54.
    Decided July 12, 1957]
    
      
      Mr. Nathan Pats, for tbe plaintiffs.
    
      Mr. Jerome Fink, with, whom was Mr. Assistant Attorney General Charles K. Rice, for the defendant. Mr. James P. Garland and Mr. Theodore D. Peyser, Jr., were on the brief.
   MaddeN, Judge,

delivered the opinion of the court:

The plaintiffs, husband and wife, bring this suit to recover income taxes which they were required to pay and which, they say, should not have been collected from them because the income to which the taxes were attributable was not their income, but that of their three children. It is a family partnership income tax case, and concerns the tax years 1943 through 1949.

The plaintiff, Otis Harold Williamson, has been successfully engaged in the veneer manufacturing business for most of his adult life. From 1921 to 1929, he and his brother, Marion, conducted such a business in corporate form. From 1930 through 1936 he operated through another corporation. Between 1936 and June 30,1941, he operated as an individual, and leased, for use in his business, a warehouse from his wife, the plaintiff Virginia, who was a woman of independent means.

On July 1,1941, a partnership agreement was executed between Harold and Virginia, to conduct a veneer manufacturing business under the name of “Veneers”, the name which Harold had used when he operated as an individual. The wife contributed the warehouse, having a stated value of $57,000 and the husband contributed the assets of his going business, having a stated value of $167,414.64. The agreement provided for a salary of $12,000 a year for Harold,. $4,000 a year for Virginia, a 5 percent return to each on their capital accounts and equal division of the profits above those fixed charges. This partnership operated the business in accordance with the agreement.

On December 31,1942, the plaintiffs executed a declaration of gift which stated that they were transferring to their three children certain named amounts of their capital accounts in the partnership. Harold gave $5,000 to each of the children. Virginia gave $7,100 to Margaret, and $3,000 each to Nancy and John. The recited reason for the larger gift to Margaret was that Virginia had already, during the year, made gifts of $4,100 each, of other property to Nancy and John.

Also, on December 31, 1942, the plaintiffs and their three children executed an “Agreement .of Partnership”. This document adopted by reference the partnership agreement of the parents of July 1, 1941, and made amendments to it to make it applicable to the children. The provision that each partner was to devote substantially all his time to the partnership business was made inapplicable to the children. The agreement designated the parents as the “managing partners” and provided that only the parents would be authorized to draw checks on the partnership bank account. At the time of the execution of the December 31, 1942 agreement, Margaret was 20 years old, Nancy 18, and John 15. All were in school.

In connection with the declaration of gift, executed on the same date as the partnership agreement, it is relevant that, back in the 1927-1929 period, when Harold was operating the business in corporate form with his brother, there had been entered on the books of the corporation items transferring credits owing by the corporation to Harold to the three children all of whom were, in 1927, less than six years old. Interest was credited on the corporation’s books up to September 1, 1929, and on that date the books showed that the corporation owed each of them $16,402.96. In September 1929, the corporation sold its assets to an outside party for some $160,000. The corporation ceased to be active, but Harold used the money which he received for his one-half interest in it to continue in the veneer manufacturing business. The credits to the children on the books of the corporation disappeared for some years, and, no doubt, Harold got the money represented by those credits. In 1942, the children then being quite mature, there was family discussion of these old obligations. It was agreed that interest on the amounts of some $16,000 credited to each of the children in 1929 would be some $28,000 in all, and that the children should be given interests in their parents’ partnership in that amount. In the December 31,1942, declaration of gift, Margaret was given $12,100 and Nancy and John $8,000 each. In the September discussion it was agreed that Harold, the father, would, during the year 1943, pay the children the principal amounts owing to them in 1929, a total of $49,208.58. He paid them these amounts mostly in 1943 and the rest in 1944. Those payments were invested by or for the children in enterprises other than the veneer business.

A question of importance, though not, we think, decisive, is whether the sums, totaling some $28,000, which were credited to the children as shares in the five-member partnership, were gifts made to them at that time, or were payments to them of interest on preexisting debts. The “declaration of .gift” stated that, under the gift tax law as it was on the date of the declaration, but would not be on the following day, the gifts of the amounts involved in the declaration, plus the other amounts given during the year, would be tax-free. That being so, the donors may well have been advised that, in view of the rather vague past history of the debt to the children, it would make the transaction more clean-cut, and cost nothing, to put it in the form of a gift. They could not possibly have thought that their situation in an income tax case such as the instant one would be improved by calling the transaction a gift, rather than the payment of a debt, since it has been frequently urged by the Government that gifts by parents to children of shares in a partnership do not relieve the parents from paying the taxes on all of the partnership income.

We do not, however, think the transaction was a gift. The entries in the corporation’s books in 1927-1929 said, in substance, “Pay these sums which are due to me, Harold, to my three children.” The debtor, the corporation, assented to the novation. The transaction being a pure benefit to the children, their assent was presumed and the transaction was complete. When one-half of the sale price of the corporation’s assets came, in 1929, into the hands of Harold, and he, as a half-owner of the corporation, did not see to it that the debt to the children was paid, he became responsible to them for it, and for interest upon it until it was paid. He used the money to develop his veneer manufacturing business and it was not only just but also legally obligatory that the children be paid as they were paid in 1942 and 1943. We think the five-member partnership, formed on December •31, 1942, started with contributions of capital which was owned by the several partners before that date.

The partnership agreement provided for salaries of $12,000 and $4,000, respectively, to Harold and Yirginia; for a 5 percent return on the capital standing to the account of each partner; for an apportionment of the profits according to the capital shares of the partners, except that the proportion attributable to the shares of Harold and Virginia should be divided equally between them. As we have said, Harold and Virginia were designated as the managing partners and checks on the partnership account were to be signed only by them. The agreement contained conventional detailed provisions about dissolution, etc.

Upon the formation of the five-member partnership, notices of the formation of the firm and the identity of the partners were given to the bank, several insurance companies, and Dun and Bradstreet. A federal gift tax return was filed. A certified public accountant set up an accounting system showing the capital interests, additions to capital, withdrawals and other usual information. No withdrawals by or on behalf of the children were used to pay expenses which should have been paid by the parents during the minority of the children, or to pay the debts or expenses of the parents. A deed to an additional piece of land was taken in the name of the five partners “trading as Veneers”, and was recorded on March 19,1949.

After the formation of the partnership on December 81,. 1942, the children continued to go to school. Margaret and Nancy, during tax years here in question, spent very little time in Baltimore, the area of the firm’s business. When they were there, they discussed the firm’s business and did some clerical work for which they were not paid. John was away at school or in the Army until 1948, when he enrolled in Johns Hopkins University in Baltimore. He began in 1948 to assume responsibilities in the firm and has become one of the principal managers of the firm.

The veneer business was good during the tax years in question, the partnership made money, and the three children partners received large amounts of income. The Government taxed that income to the parents, the plaintiffs, and because of the higher brackets applicable to the parents, the tax was much larger.

As we have said, we think the children bought their shares in the partnership with their own money which was due them on a preexisting debt. But if their shares were gifts from their parents, made on the day of the formation of the partnership, we think the income from their shares was still their income for all purposes, including income tax purposes.

One may avoid paying taxes on the future income from his property by the drastic remedy of giving away his property. Such a gift may be to anyone at all, certainly including his children. It may be of land, stocks, bonds, or any other kind of property. It may be of a separate interest or an undivided interest. The only question pertinent in an income tax case is whether he really gave the property away, or only pretended to give it away in order to escape or reduce the taxes on the income.

We think the statements which we have just made are applicable to shares in partnerships as well as to other kinds of property, and even if the partnerships are family partnerships. This, we think, is the teaching of Commissioner v. Culbertson, 837 U. S. 733. The Court there said:

The Tax Court’s isolation of “original capital” as an essential of membership in a family partnership also indicates an erroneous reading of the Tower opinion. We did not say that the donee of an intra-family gift could never become a partner through investment of the capital in the family partnership, any more than we said that all family trusts are invalid for tax purposes in Helvering v. Clifford, supra. The facts may indicate, on the contrary, that the amount thus contributed and the income therefrom should be considered the property of the donee for tax, as well as general law, purposes. * * * [p. 745].

Further, the Court, in Culbertson, held in effect that it is not for the Commissioner of Internal Revenue or the courts to review the action of the parties to the partnership agreement, and, if they determine that the contributions of the questioned partners were not worth what they cost the admitted partners in sharing the profits with them, disregard, for tax purposes, the partnership agreement. The Court said:

* * * But such a determination is not conclusive, and that is the vice in the “tests” adopted by the Tax Court. It assumes that there is no room for an honest difference of opinion as to whether the services or capital furnished by the alleged partner are of sufficient importance to justify his inclusion in the partnership. If, upon a consideration of all the facts, it is found that the partners joined together in good faith to conduct the business, having agreed that the services or capital to be contributed presently by each is of such value to the partnership that the contributor should participate in the distribution of profits, that is sufficient. The Tower case did not purport to authorize the Tax Court to substitute its judgment for that of the parties; it simply furnished some guides to the determination of their true intent. * * * [pp. 744-745]

This court’s statement in Lieber v. United States, 128 C. Cls. 128, 130, “The issue presented is whether the partnerships were real or fictitious” sets the problem with a minimum of words. We conclude that the partnership in the instant case was not fictitious or pretended, and that it should have been treated by the taxing authorities as real.

The plaintiffs are entitled to recover. The amounts of their-judgments will be determined in further proceedings under Buie 38 (c).

It is so ordered.

LabamoRE, Judge; Whitaker, Judge; Littleton, Judge;- and Jones, Chief Judge, concur.

BINDINGS OF FACT

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

1. Plaintiffs, husband and wife, operated a veneer manufacturing business at Cockeysville, Maryland, as partners under the firm name and style of “Veneers”. On December-31, 1942, plaintiffs entered into a new and supplemental partnership agreement which extended the partnership to include-their three children, Margaret, Nancy, and John.

Appropriate partnership information returns were duly filed with the Internal Bevenue Service for each of the years; 1943 to and including 1949, and individual income tax returns, and taxes, for each of these years was made and paid to the Collector of Internal Bevenue in Baltimore, Maryland.

The Collector of Internal Bevenue refused to recognize the children as bona fide partners of the firm and, on this basis, recomputed plaintiffs’ income taxes and assessed deficiencies against them, with appropriate adjustment and refund on the tax returns of Margaret, Nancy, and John. These deficiency assessments were paid by the plaintiffs under protest, and timely claims for refund were filed by them.

2. The veneer manufacturing business involves the milling of hardwood logs into thin sheets of veneer which are sold to furniture manufacturers and cabinetmakers. In addition to the managerial and financial management skills important in any manufacturing business, the veneer manufacturing business specifically requires for success an ability to predict trends in the popularity of woods, the ability to judge by external appearance the quality of the logs, most of which are imported from Africa, and the ability to determine the most economical and advantageous method of cutting each log.

3. Plaintiff, Otis Harold Williamson, hereinafter called Harold, has been successfully engaged in the veneer manufacturing business for most of his adult life. From 1921 to 1929, he conducted a veneer manufacturing business in conjunction with his brother, Marion, through a corporation known as the Williamson Brothers Yeneer Company.

4. During the operation of the above corporation the two brothers, who were the sole stockholders and operators of the firm, withdrew only sufficient moneys each month for their living and other expenses; the balance of their earnings was allowed to accrue and was set up as a liability of the corporation to them as individuals.

In 1921 and 1928 plaintiff set aside part of his accrued earnings in the names of his three children, who, at that time (1928), were 5 years, 4 years, and 1 year old, respectively.

By August 31, 1929, the total amount of accrued earned compensation was $115,399.53, of which $47,516.07 was due to Marion D. Williamson. The balance, $68,883.46, was accrued in four separate liability accounts, one in the name of plaintiff, Harold, in the amount of $18,674.88, and one each in the names of his three children, in individual amounts of $16,402.86.

5. The Williamson Brothers' Yeneer Company continued in operation until September 1929 when the Pickrel Walnut Company, a Missouri corporation, entered into a contract to purchase the physical assets of the Williamson Brothers’ firm. Before settlement under this contract was had, it was converted, in December 1929, into an agreement by which Pickrel was to purchase the outstanding stock of Williamson Brothers rather than its physical assets. In preparation for the consummation of this sale, all of the accounts noted in the preceding finding were closed out and transferred to “Paid-in Surplus”, and the acounts were verified by an independent firm of certified public accountants, as of December 31, 1929.

6. In June 1930, the Williamson Company and Pickrel executed a new contract which rescinded and superseded both of the earlier agreements and by which Pickrel agreed to purchase certain of the Williamson Company’s assets, including some inventories, real estate and trade names, and machinery and equipment. Under this last arrangement a deposit of $25,000 made by Pickrel under the terms of one of the earlier agreements was to be retained by the seller, leaving a balance payable by Pickrel of $134,240.07. By the terms of this final agreement with Pickrel, Williamson Brothers Veneer Company, the plaintiff, Harold, and his brother, Marion, convenanted that all obligations of Williamson Brothers prior to September 1929, had been, or would be paid and satisfied. This 1930 agreement was consummated and settled by the payment by Pickrel to the Williamson Brothers Veneer Company of $134,240.07.

7. Thereafter plaintiff, Harold, and his brother, Marion, organized a new veneer manufacturing business, known as Veneers, Inc., a corporation, and purchased raw materials and supplies, including logs, processing machinery and equipment, etc., required in the operation of the business, using for that purpose the entire proceeds of the sale of the assets of the Williamson Brothers Veneer Company, which, in total amount, was $159,240.07.

8. Approximately 18 months after the organization of Veneers, Inc., Marion decided to withdraw or retire, and he sold his interest in the business to Harold. Harold continued the business as a corporation until 1936, and thereafter conducted the business as a sole proprietorship under the name “Veneers”, until 1941. During this latter period he leased a warehouse for use in his business from his wife, Virginia, who was a woman of independent means.

9. On July 1,1941, Harold and his wife, Virginia, executed a formal agreement to conduct the business “Veneers” as a partnership. Virginia contributed the warehouse, having a stated value of $57,000 to the partnership, and Harold contributed the assets of “Veneers”, having a stated net book value of $167,414.64. Under the partnership agreement, O. H. Williamson was to receive a salary of $12,000 per annum and his wife a salary of $4,000 per annum. In addition, each was to receive 5 percent interest per annum on his capita] account. Profits in excess of the salaries and interest were to be divided equally. Both partners were to devote substantially all of their time to the business. It was provided that the partnership bank account would be subject to checks signed by either party. The necessary partnership information returns were filed for this company with the Collector of Internal Revenue. The Internal Revenue Service recognized this partnership, and it has not been questioned as a tax-reporting entity.

10. Prior to forming the partnership with his wife, Harold had, in 1940, created a trust for the benefit of his three children, with himself and the Equitable Trust Company of Baltimore, Maryland, as cotrustees. In creating this trust, he deeded to it a parcel of real estate known as the Beaver Dam warehouse which he had earlier acquired and improved at a cost to him of $20,000. The rental from this property yielded substantial income to the beneficiaries. In the years from 1943 to 1949, substantially all of the income from this trust was deposited in the National Bank of Cockeysville, to an account named “Margaret L. Williamson — Special”. Reference to this account is made hereinafter.

11. During the year 1942 the veneer business in general, and of Veneers, in particular, was the subject of frequent discussion among plaintiffs and their family. In these discussions it was recalled that the liability accounts which had been set up in the old Williamson Brothers Veneer Company’s books in 1929 in favor of Margaret, Nancy, and John, had never been discharged or liquidated by payment to them of the amounts, which are set forth herein in finding 4, supra.

Plaintiffs reduced this phase of such discussions to writing, in a memorandum dated September 16, 1942, part of which reads as follows:

Following dissolution of the Williamson Bros. Veneer Company, the debts owing to the children, assumed then by the transferee, O. H. Williamson, were continuously used as a part of the capital of the individual operations of O. H. Williamson and thereafter during the period of years leading up to the creation of the partnership of Veneers now in existence between O. H. W. and Y. A. W., sucb funds were uninterruptedly used without allowance to the children but upon the understanding that accounting therefor would be satisfactorily made.
*****
We now, following such discussions, have consented to satisfy such capital rights of the children as follows:
1. Acknowledge the children’s capital participation in the present assets of Veneers by formally transferring to each of them a proportion of the present capital of Veneers to represent an agreed evaluation of such capital owned by the children, and we agree to execute such necessary documents as will establish the capital interests of the children in the Veneers partnership, representing the agreed value attributable to the utilization of the children’s capital during the more than thirteen years since August 31st, 1929; such capital interest now to be transferred for such item to be in the aggregate $28,000.00, or thereabouts;
2. To pay to the children or for their account, within the coming year, the value of such original funds of $49,208, which we pledge ourselves to do.

12. On December 31, 1942, Harold and Virginia transferred interests in their partnership to their three children. This transfer was formalized by the execution of a Declaration of Gift, the substance and pertinent parts of which read as follows:

Whereas, under the provisions of law now existing, there is an exemption from tax upon gifts up to a total of Forty Thousand Dollars ($40,000.00), and annual exclusions of Four Thousand Dollars ($4,000.00) which amounts are reduced by twenty-five per cent (25%) on and after January 1st 1943; and
Whereas, O. Harold Williamson desires to avail himself of the balance of his Forty Thousand Dollar ($40,-000.00) exemption, as well as of his annual exclusion, and Virginia Alcock Williamson also desires to make certain gifts within the provisions of the existing law; and
Whereas, the said O. Harold Williamson and Virginia Alcock Williamson are co-partners, trading as “Veneers”, in the business of buying and selling logs and manufacturing and selling veneers, with their principal place of business at Cockeysville, Maryland, the assets of said business at the present time having a value greatly in excess of the gifts herein provided for; and Whereas, the said O. Harold Williamson and Virginia Alcock Williamson are desirous of giving an interest in said business to their children, Margaret Leigh-ton Williamson, Nancy Cole Williamson, and John Al-cock Williamson; and
Whereas, the said Virginia Alcock Williamson has made gifts during the current calendar year to each of the said Nancy Cole Williamson and John Alcock Williamson of the value of Forty-one Hundred Dollars ($4,100.00), being one hundred shares (100) of the stock of the First National Bank of Baltimore given to each of them, which gifts she desires to equalize by the provisions herein made for Said children, this recital being included herein for the purpose of explaining the larger gift hereby made by her to the said Margaret Leighton Williamson;
NOW, THEREFORE, THIS DECLARATION OF GIFT WITNESSETH: That the said O. Harold Williamson and Virginia Alcock Williamson, in consideration of their natural love and affection for the donees, severally; grant, transfer, assign, bargain and sell and set over irrevocably to the said Margaret Leighton Williamson, Nancy Cole Williamson and John Alcock Williamson, individually and severally, the respective- interests in said partnership known as “Veneers”, set opposite their respective names, it being the intention hereof to transfer to the donees undivided interests in all of the assets of whatsoever nature, real or personal, tangible or intangible, of said partnership, in the amounts hereinafter set forth:

13. Simultaneously with the above Declaration the plaintiffs and their three children executed an “Agreement of Partnership” dated December 31,1942, in which it was stated that plaintiffs had given certain interests in Veneers to their children and therefore made this “amendatory and supplemental” agreement. The agreement between plaintiffs of July 1, 1941 was adopted by reference and made applicable to the children with certain modifications and exceptions. The children were exempted from the requirement that each partner devote substantially all his time and energy to the partnership, and plaintiffs were designated the “managing partners”. The provision of the earlier agreement outlining the duties of partners was not made applicable to the children. The agreement provided that only the plaintiffs would be authorized to draw checks on the partnership bank account.

With respect to capital contributions, the agreement provided :

(a) Paragraph 5 is amended so as to provide that the capital of the partnership shall consist of the total assets as of the date of this agreement, the contribution of the respective partners to be as follows:
O. Harold Williamson — his capital account as of this date, less $15,000.00;
Virginia Alcock Williamson — her capital account as of this date, less $13,100.00;
Margaret Leighton Williamson — $12,100.00;
Nancy Cole Williamson — $8,000.00;
John Alcock Williamson — $8,000.00.

As indicated in findings 11 and 12, supra,, these partnership interests of Margaret, Nancy, and John, were created by plaintiffs out of their natural love and affection for their children, and also because of the assumption by Mr. Williamson of a liability of the old Williamson Brothers Veneer Company, of which he was part owner when it ceased to function as a corporate entity in 1929. Plaintiff, Harold, discharged this assumed liability by cash payments in 1943 and 1944.

At the time of the execution of the partnership agreement on December 31,1942, Margaret was 20 years of age and was a student at Wellesley College in Massachusetts, Nancy was 18 years of age and was a student at Putney School in Vermont, and John was 15 years of age and a student in high school in Baltimore, Maryland.

Between 1943 and 1949 the children contributed so much of their services in the Veneer office and plant as their vacation periods and other circumstances permitted; Margaret and Nancy attended to clerical and other work in the office and sample room, and John, who was of strong physique, in the active operations of handling the physical inventory and the processing of it.

14. During the seven years in question, 1943 to 1949, inclusive, Margaret spent only a few months in the Baltimore area where the plant of Veneers was located. She attended college at Wellesley in Massachusetts from 1941 until her graduation in June 1945. In August 1945, she entered on duty with the American Eed Cross, going first to Washington, D. C. and then to Camp Pickett, Virginia, for training. In the fall of 1945 she went to the Philippines and later to Japan. She did not return to the Baltimore area until December 1946. After her marriage to J ames Fowler in April 1947, she and her husband spent several months in Colorado, returned to Baltimore, and left for Europe in September

1947. She remained in Europe from September 1947 to September 1949, at which time she returned to Baltimore. While she was resident in Europe, she corresponded actively and frequently with her parents on both social and business matters, including the policies and operations of Veneers.

During this same period, Nancy was for the most part a student at schools away from Baltimore. She studied in Vermont from September 1941 until December 1945. From 1947 to 1950 she attended college in New York City.

Throughout this period, John was either a full-time student or in the military service. He attended school in Vermont from 1943 to J une 1945. He attended Harvard College from June 1945 to February 1946. He left Harvard to serve in the Army until September 1947. He then returned to Harvard and remained there from September 1947 until June

1948. From the fall of 1948 to June 1950 he was a full-time student at Johns Hopkins in Baltimore.

The transfer from Harvard College to Johns Hopkins University at Baltimore enabled him to arrange his studies so that he could spend part of each day at the Veneers, Inc., plant in nearby Cockeysville.

15. Following execution of the partnership agreement on December 31, 1942, Veneers published the new arrangement by securing endorsements to existing insurance policies naming all five members of the family as partners, and by advice to the firm’s suppliers and customers. The change in partnership also was reported to Dun and Bradstreet, including the names and ages and relationship of the parties. A sawmill site was acquired with partnership funds by a deed running to the five as partners trading as Veneers, and was recorded among the Land Records as such, on March 19,1949.

16.On January 4,1944 the Collector of Internal Revenue for the District of Maryland received Gift Tax Returns from Margaret, Nancy and John Williamson. These returns, dated December 30,1943, reported the transfer by the plaintiffs to their three children of the partnership interests in Yeneers. Each of the returns described the transaction as for the calendar year 1942, and each carried the notation:

NOTE: This return is now filed since it has just been discovered that it had not been filed heretofore.

These returns were filed by Margaret, Nancy and John on the suggestion of their counsel who explained that the transaction was not really a “gift” nor yet strictly a “sale”, but that the returns should be filed with the Treasury Department, Internal Revenue Service, so that a record of the transfers would be made in the Treasury Department.

17. During most of the period from 1943 to 1949, Margaret, Nancy, and John did not have separate bank accounts of their own, other than nominal checking accounts which they used while away at school. However, a checking account in Margaret’s name was maintained in the National Bank of Cockeysville, Maryland, the bank where Yeneers has its business account. From time to time, withdrawals from Yeneers, charged against the capital accounts of the three children, were deposited in Margaret’s account. From time to time, there also was deposited in Margaret’s account other income of the three children and various gifts to them.

Until the latter part of 1949, the only persons authorized to draw checks on Margaret’s account were Margaret and her father Harold.

18. In this period, 1943 to Í949, contributions to, and withdrawals from, the capital accounts of Margaret, Nancy, and John, were in the following total amounts:

The source, and disposition, of the above amounts are as follows:

19. Substantial withdrawals were made from time to time by each of the partners and substantial contributions were made as additional capital for the firm by each of the three children of the plaintiffs. None of the withdrawals so made necessarily matched any withdrawals made by any other partner. None of the withdrawals from the firm on the part of the children of the plaintiffs was used for living expenses, educational expenses, or medical attention for any of such children until they had attained their respective legal majority. None of such withdrawals by the children was used for the account of, at the direction of, for the satisfaction of any obligations or expenses of their parents, or used or invested for, or in the name of, either of their parents.

20. For a short time the partnership of Veneers became a stockholder, in its partnership name, with several other firms engaged in the veneer manufacturing business, in a corporation organized for the purpose of consolidating operations and minimizing expenses, but the effort proved unsuccessful and, after some fifteen months of trial, the corporation was liquidated. The assets were returned to the stockholders who originally contributed them to the venture, and each of the stockholder firms, including Veneers, resumed its respective separate operations in the veneer manufacturing business. This merger took place in 1948, and was preceded by considerable discussion on the part of all five members of plaintiff’s family regarding its desirability. The merger was initially opposed by some of the family, but later agreed upon unanimously.

21. Each of the five Williamsons, individually, filed Federal income tax returns for each year since 1943, and therein reported and individually paid taxes on his or her respective income from all sources, including the share each received from the earnings of Veneers. During each of those years the children of plaintiffs accounted for their respective income from sources other than from the partnership, and such other income has been increasing in amounts during the years. The Commissioner of Internal Revenue has not challenged the propriety and correctness of the income tax returns of the children in their respective reporting therein of such other income, though in some instances the original source from which such other income has been derived, was donated by their parents, either directly to the children, or to a trust of which the children are the beneficiaries. Each of the children has received annual statements of the operations and results of Veneers, and each of them has individually filed with the Commissioner of Internal Revenue the self-employment returns and taxes due thereon.

22. The partnership information returns for the years 1943 through 1945 were examined by an agent of the Internal Revenue Service in 1947, and the partnership information returns for the years 1946 through 1949 were examined by another agent at one time.

The agent who examined the 1943-1945 returns recommended disallowance, for tax reporting purposes, of the allocations of earnings attributed to the capital interests in Veneers of the partners other than the plaintiffs, and for tax reporting purposes redistributed their shares of such earnings to the plaintiffs. As a result of this redistribution, tax deficiencies were assessed against each of the plaintiffs, and overpayments reported for each of the other members of the family.

The disallowance by this agent was on the ground that the three partners were minors, who appeared to have little to do with the actual participation in the partnership activities : and that from the books and records of the partnership available to him, their investment in the firm was considered as all-gift-capital.

The agent who examined the returns for the years 1946 through 1949 similarly disallowed, for tax reporting purposes, the allocations of earnings attributed to the capital interests of these three partners in Veneers. As a result income tax deficiencies were assessed against each of the plaintiffs, and overpayments reported for each of the other members of the partnership.

Each of the partners vigorously and consistently protested such nonrecognition and disallowance, and requested staff conference review. This review affirmed the agents’ nonrecognition and disallowance. The taxpayers, continuing to protest, took a further administrative appeal which did not reverse the agents’ recommendations.

23. As a result of the actions of the agents, set out in finding 22, the plaintiffs received written claims for the Internal Revenue Service for the following years, in the following amounts, which were paid under protest by the plaintiffs:

The plaintiffs in the above classifications, individually or jointly, as described above, paid such deficiency assessments on the following dates:

For the year 1943, principal paid on February 4, 1950; interest on July 19,1950;

For the year 1944, principal paid February 4,1950; interest on July 19,1950;

For the year 1945, principal paid February 4,1950; interest on July 19,1950;

For the year 1946, the entire assessment paid on April 11, 1952:

For the year 1947, the assessed amounts paid April 11, 1952;

For the year 1948, the assessed amounts paid April 11, 1952;

For the year 1949, the assessed amounts paid April 11, 1952.

24. The plaintiff O. H. Williamson filed with the Collector of Internal Revenue for the District of Maryland on August 2, 1950, written claims for refund of the amounts listed in finding 28, plus interest, in respect of each of the years 1943, 1944 and 1945.

The plaintiff Virginia Alcock Williamson filed with the same collector on August 2, 1950, written claims for refund of the amounts listed in finding 23, plus interest, in respect of each of the years 1943 and 1945.

O. H. Williamson filed with the same collector on March 17, 1953, written claims for refund of the amounts listed in finding 23, plus interest, in respect of each of the years 1946 and 1947.

Virginia Alcock Williamson filed with the same collector on March 17,1953, written claims for refund of the amounts listed in finding 23, plus interest, in respect of each of the years 1946 and 1947.

Otis Harold Williamson and Virginia Alcock Williamson jointly filed with the same collector on March 17,1953, written claims for refund of the amounts listed in finding 23, plus interest, in respect of each of the years 1948 and 1949.

Each of such written claims for refund was executed by the respective claimants, and set forth therein the year involved, the amount, the date, and the nature of the tax paid. Each claim for refund also set forth the fact that each had been paid under protest, following a deficiency assessment imposed by the collector upon each of the respective claimants, and outlined therein the reasons why each refund claim was filed and should be allowed. The reasons outlined were substantially as follows:

That the agents had erroneously and arbitrarily allocated, for tax reporting purposes, all of the earnings of the Maryland partnership known as Veneers to the plaintiffs, and had disregarded the right of the other three partners, Margaret, Nancy, and John, to shares of earnings of said firm; that the nonrecognition of the five-member partnership, and the arbitrary allocation of all the income of the firm to the taxpaying plaintiffs gave rise to the alleged deficiency in each case; that such action was “erroneous, improper and unwarranted in fact and in lawand that the refund claims were filed by each of the plaintiffs to recover such deficiency assessment.

25. Plaintiff O. H. Williamson was notified by registered mail under date of June 30,1952, that his claims for refund of the amounts listed in finding 23, for the years 1943,1944, and 1945, were disallowed.

Plaintiff Virginia Alcock Williamson was notified by registered mail under date of June 30,1952, that her claims for refund of the amounts listed in finding 23, for the years 1943 and 1945, were disallowed.

Plaintiff O. H. Williamson was advised in writing under date of August 2'6, 1953, that his claims for refund of the amounts listed in finding 23, for the years 1946 and 1947, were disallowed.

Plaintiff Virginia A. Williamson was advised in writing under date of August 26, 1953, that her claims for refund of the amounts listed in finding 23, for the years 1946 and 1947, were disallowed.

Plaintiffs O. H. Williamson and Virginia A. Williamson were advised in writing under date of August 26,1953, that their claims for refund of the amounts listed in finding 23, for the years 1948 and 1949, were disallowed.

Apart from the written notifications referred to herein, neither of the plaintiffs has at any time received notice of any other action taken by the Internal Revenue Service or its agents, in respect of any of the plaintiffs’ above-mentioned claims for refund.

.On April 18, 1954, the plaintiffs filed this action against the defendant for the recovery of the deficiency assessments, with interest, as set forth hereinbefore.

26. The parties to this action have stipulated that, if it is determined by the court that the plaintiffs are entitled to recover for one or all of the years involved in this proceeding, the parties will then undertake to agree upon the amount for ■which judgment should be entered, and will present such amounts to the court. The stipulation embraces the agreement of the parties that in computing the amount of such judgment the Government will be given offsetting credits for the refunds of income taxes paid to the three partners other than the plaintiffs. As a result of these stipulations the hearings before the Commissioner of this court were concluded without any additional testimony or evidence being offered by plaintiffs to show the further details in respect of the dates and amounts of deficiency assessment payments by the plaintiffs for the years described in this action.

27. Notwithstanding the action of the agents of Internal Revenue Service, recommending nonrecognition of the five-member partnership for tax reporting purposes, referred to in finding 22, the five-member partnership has continued to conduct the business of Veneers. Each of the five partners has continued as a partner in the business, in accordance with the partnership agreement referred to in finding 13.

CONCLUSION OP LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiffs are entitled to recover and judgment will be entered to that effect. The amount of recovery will be determined pursuant to Rule 38 (c).  