Gross v. Commissioner , 7 T.C. 837 ( 1946 )

William H. Gross, Petitioner, v. Commissioner of Internal Revenue, Respondent

Gross v. Commissioner

Docket No. 5949

United States Tax Court

7 T.C. 837; 1946 U.S. Tax Ct. LEXIS 73;

September 23, 1946, Promulgated

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Decision will be entered under Rule 50.

Intrafamily partnership transaction held to result in taxable gift under I. R. C., section 1002.

Harry J. J. Bellwoar, Jr., Esq., Theodore G. Rich, Esq., for the petitioner.

William H. Best, Jr., Esq., for the respondent.

Opper, Judge.

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OPPER

By this proceeding petitioner seeks a redetermination of a deficiency of $ 51,818.06 in gift tax for the year 1942. A penalty for delinquent filing of $ 12,954.52 is also involved. Respondent now concedes the valuation used in arriving at the deficiency to be excessive, and that in the event a taxable gift is found, the amount should be reduced accordingly.

The primary question is whether transfers of partnership interests between members of a family resulted in taxable gifts, under Internal Revenue Code, section 1002.

The facts were presented by stipulation and evidence adduced at the hearing. Those facts hereinafter appearing, which are not from the stipulation, are facts otherwise found from the record.

FINDINGS OF FACT.

The stipulated facts are hereby found accordingly.

Petitioner is an individual residing at Philadelphia, Pennsylvania.

A delinquent gift tax return was filed with the collector of internal revenue, Philadelphia, first district of Pennsylvania.

Petitioner, some time prior to 1926, discovered a formula for a skin ointment. He gave this ointment the trade name "Mazon" and marketed it commercially with success. On December 31, 1941, Belmont Laboratories, Inc., a Pennsylvania corporation which marketed the skin ointment "Mazon" and a companion product "Mazon Soap," was liquidated and its assets distributed to its two stockholders, petitioner and Annie W. Gross, his wife. The net assets, rights, and property (tangible and intangible) of Belmont Laboratories, Inc., were received by petitioner and Annie W. Gross, in proportion to their stock ownership as a result of the liquidation, which was authorized and approved by its officers and stockholders. Petitioner received 80 per cent of the assets, and Annie W. Gross received 20 per cent thereof.

On January 1, 1942, petitioner, Annie W. Gross, B. Madalin Eckert (their daughter), and Walter L. Eckert, Jr. (their son-in-law), entered into an agreement of partnership, which provided substantially as follows:

The parties agreed to the formation of a partnership to manufacture, buy, sell, and deal in chemical compounds, and pharmaceutical preparations under the firm name and style of "Belmont Laboratories Company"; that petitioner and his wife as of the date of the agreement transferred and contributed capital assets "consisting of stock, fixtures, machinery, supplies, accounts, deposits, leases and automobiles * * * designated in an inventory and valuation entered on the books of the firm as of this date," to be used in the conduct of the business; that:

4. No real estate or securities or other property excepting only such as may be required for the purposes of the business shall be purchased or sold by the partnership except with the consent of all of the members thereof. Title to any real estate or securities purchased or acquired on behalf of the partnership shall be taken in the name of the partnership.

It was further agreed that the partnership should continue for a term of one year and thereafter from year to year until written notice by a member desiring to terminate the agreement, given at least three months before the expiration of any year; that:

8. All profits, gains and increases which shall arise by reason of the operation of the partnership business shall be divided between them in the following shares and proportions: William H. Gross 60%, Annie W. Gross 20%, B. Madalin Eckert 10% and Walter L. Eckert 10%. All obligations and losses that shall be incurred in the management and operation of the business of the partnership shall be discharged, paid and borne by the partners in like shares and proportions.

9. The said William H. Gross may draw out of the profits by equal monthly payments the annual sum of $ 21,000.00; the said Annie W. Gross the annual sum of $ 18,000.00; the said B. Madalin Eckert the annual sum of $ 5,200.00; and the said Walter L. Eckert the annual sum of $ 15,000.00 also by equal monthly payments; but if at the end of any general accounting period, it shall appear that the share of any partner of the net profits in such [period] shall not amount to the sum already drawn by him, then he shall immediately refund to the partnership such sum as he may have drawn out in excess of his net share of the profits.

10. On the last day of each quarter in every year of the partnership, a general accounting shall be taken of all moneys, debts and effects belonging or due to the partnership and of all liabilities thereof, and of all other property included in the partnership account; and the partners shall be entitled to receive their respective shares of the net profits of the business as soon after each quarterly accounting period as the general accounts have been settled. It is understood and agreed, however, that in the settlement of said accounts and calculation of profits, there may be set up for the purposes of the business such reserves for operation, accruals or contingencies as shall or may reasonably be required and that the amounts thereof shall not be withdrawn by the partners during the continuation of the partnership. The share of the net profits of each partner after deducting the amounts drawn by him shall be carried to his credit on the books of the partnership immediately after such quarterly account shall have been stated and may be drawn out by said partner at his pleasure.

11. If any partner shall with the consent of the other partners bring in or advance any additional capital or leave any part of his profits in the business, the same shall be considered a debt due to such partner from the partnership without interest, but the same shall not be drawn out except upon giving thirty days' written notice; and such partner shall be bound to draw out the same been stated and may be drawn out by said partner at his pleasure.

The agreement also provided that petitioner was to be the general manager of the business and in charge of its general policies and operations; that his wife was to be "assistant to the general manager," in charge during his absence; that petitioner's daughter was to be in charge of the books, records, office, correspondence, and filing, and that petitioner's son-in-law was to act as medical director in charge of research and all other medical matters. And it was provided that:

14. In all matters respecting the general policies of the partnership and the management and operation of the business, the expressed wish and opinion of the majority of the parties to this agreement shall govern and be binding upon the whole of said parties.

And that:

16. Each partner shall during the partnership devote his whole time diligently and faithfully to the partnership business, and shall not, either alone or in conjunction with any other person, firm or corporation, either directly or indirectly engage in any other trade or business without the consent in writing of the other partners; he shall not undertake any professional business or accept any office or trust except for the benefit of the partnership. The rendering of military, naval or public service, the making of private investments in other business ventures, or the inability to actively contribute to the operation of the business due to illness or other incapacity, by any of the partners shall not constitute a breach of this provision.

It was further agreed that during the partnership and for ten years thereafter any member without the consent of the others would not divulge any trade secret; and that:

19. Upon the termination of the partnership a full and general account in writing shall be taken in the manner provided for the taking of the general account, and the residue of the partnership property and moneys shall be divided between the partners or their representatives. Out of such distribution there shall be paid to William H. Gross and Annie W. Gross respectively the amount of their initial capital contributions as shown by the books of the firm in the following proportions: To William H. Gross 80% thereof, and to Annie W. Gross 20% thereof; and the remaining capital assets and profits shall be paid and distributed to the partners in the following proportions: To William H. Gross 60%, Annie W. Gross 20%, B. Madalin Eckert 10% and Walter L. Eckert 10%.

Provisions relating to settlement on the death or withdrawal of a partner state that if the remaining partners continued the business they were to pay the representative of the deceased partner or the former partner "a sum equal to the book value of the share of the deceased or withdrawing partner as specified in the preceding paragraph, [par. 19] and in fixing the book value no value shall be placed upon the good will of the partnership, it being the intention that such good will as may exist shall be and remain with the business of the surviving or remaining partners."

And it was agreed that:

22. So long as this partnership and the business thereof shall exist and shall remain the property of the parties hereto or of any who shall survive or remain after the death or withdrawal of any of them, the said William H. Gross and Annie W. Gross shall and do give and grant to said firm the sole and exclusive right and privilege to manufacture, sell and distribute the preparation "Mazon" and "Mazon Soap" together with the use of the registered name "Mazon" in connection with said products and of all lists, literature and advertising matter pertaining thereto.

23. And it is agreed between the said parties that none of them shall, without the consent of the others obtained in writing, sell or assign his share or interest in the said joint trade to any person or persons whatsoever.

Walter L. Eckert, Jr., is a physician, having graduated from Hahnemann Medical College with the degree of Doctor of Medicine in June 1932. He married B. Madalin Gross on February 20, 1938.

The operating statements of the corporation for the years 1937 to 1941, inclusive, are as follows:

		1937	1938	1939
Sales		$ 329,583.69	$ 389,315.38	$ 431,803.54
Cost of sales		27,752.92	21,346.59	25,730.32
Gross profit on prime costs		301,830.77	367,968.79	406,073.22
Operating expense:
	Salaries -- officers:
	W. H. Gross	21,000.00	36,000.00	36,000.00
	W. L. Eckert		16,250.00	20,000.00
	B. M. Gross (Eckert)	17,950.00	17,800.00	15,850.00
	A. W. Gross	7,950.00	22,750.00	28,000.00
	Salaries and wages	7,455.00	14,188.06	15,000.70
	Advertising	51,905.08	21,334.14	14,389.97
	Other items and miscellaneous	68,234.65	57,422.11	57,240.26
		174,494.73	185,745.31	186,470.23
Net operating profit		127,336.04	182,223.48	219,602.99
Other income		1,690.38	517.61	527.80
		129,026.42	182,741.09	220,130.79
Other expense		694.93
Net profit before provision for
Federal taxes		128,331.49	182,741.09	220,130.79
Provision for Federal taxes		23,715.66	31,205.55	37,833.61
Additional Federal and State tax
assessments made subsequent to 1941				1,561.22
		23,715.66	31,205.55	39,394.83
Less refunds -- Federal taxes
		23,715.66	31,205.55	39,394.83
Net profit		104,615.83	151,535.54	180,735.96

		1940	1941
Sales		$ 459,285.69	$ 520,798.11
Cost of sales		27,116.16	41,836.21
Gross profit on prime costs		432,169.53	478,961.90
Operating expense:
	Salaries -- officers:
	W. H. Gross	46,000.00	22,000.00
	W. L. Eckert	20,000.00	15,630.00
	B. M. Gross (Eckert)	15,200.00	5,205.00
	A. W. Gross	30,500.00	13,000.00
	Salaries and wages	15,390.47	12,717.00
	Advertising	14,772.02	10,778.50
	Other items and miscellaneous	74,982.29	87,974.15
		216,844.78	167,304.65
Net operating profit		215,324.75	311,657.25
Other income		4,559.70	1,424.46
		219,884.45	313,081.71
Other expense		9,500.00
Net profit before provision for
Federal taxes		210,384.45	313,081.71
Provision for Federal taxes		48,942.15	106,422.45
Additional Federal and State tax
assessments made subsequent to 1941		12,694.98	2,785.05
		61,637.13	109,207.50
Less refunds -- Federal taxes		4,423.77	1,597.72
		57,213.36	107,609.78
Net profit		153,171.09	205,471.93

The closing balance sheet of the corporation as of December 31, 1941, was as follows:

Assets
Current:
	Cash	$ 59,900.58
	Accounts receivable	32,463.14
	Merchandise inventory	13,945.70
	Marketable securities	7,446.25
	Loans and advances	235,068.13
		348,823.80
Miscellaneous:
	Cash value -- life insurance policy	12,118.14
	Refunds -- Federal taxes	2,990.57
	Formula	10,000.00
		25,108.71
Fixed:
	Machinery and equipment	2,814.82
	Furniture, fixtures, autos, and truck	2,075.59
		4,890.41
	Less reserve for depreciation	2,417.30
		2,473.11
Prepaid expense:
	Prepaid salary and deferred expense	596.00
		377,001.62
Liabilities, Capital, and Surplus
Current:
	Accounts payable	$ 59,456.63
	Accruals:
	Taxes	155,485.55
	Salaries	5,238.67
	Salary and bonus -- B. M. Gross
		197,274.22
		256,730.85
Capital and surplus:
	Capital stock:
	1,250 shares, common, issued and outstanding	23,000.00
	Surplus:
	Paid-in or capital surplus	25,000.00
	Earned surplus	72,270.77
		97,270.77
		120,270.77
		377,001.62

The opening balance sheet of the partnership as of January 1, 1942, was as follows:

Assets
Current:
	Cash	$ 59,900.58
	Accounts receivable	32,102.02
	Notes receivable	361.12
	Merchandise inventory	13,945.70
	Marketable securities	7,446.25
	Loans and advances	234,185.13
		347,940.80
Miscellaneous:
	Mortgage receivable	883.00
	Formula	10,000.00
		10,883.00
Fixed:
	Machinery and equipment	2,814.82
	Furniture and fixtures	492.10
	Automobiles and truck	1,583.49
		4,890.41
	Less reserve for depreciation	2,417.30
		2,473.11
Deferred:
	Building account	150.00
		361,446.91
Liabilities and Net Worth
Current:
	Accounts payable	$ 6,974.53
	Due U. S. Government	28,430.55
	Accruals:
	Taxes	126,532.40
	Salaries and wages	5,238.67
		131,771.07
	Pennsylvania Department of Revenue	24,051.55
		191,227.70
Net worth:
	Wm. H. Gross, capital	136,175.37
	Annie W. Gross, capital	34,043.84
		170,219.21
		361,446.91

A tabulation of the corporation's gross sales, net income reported, and dividends paid for the years 1926 to 1941, inclusive, is as follows:

		Net income	Dividends
Year	Gross sales	(loss) reported	paid
1926	$ 5,503.91	($ 2,478.98)
1927	22,935.78	4,686.74
1928	24,877.48	8,383.28
1929	36,178.04	13,348.49
1930	54,964.55	21,650.69
1931	84,352.99	39,162.60
1932	125,864.99	44,088.84	$ 25,000
1933	170,231.07	67,444.90	65,000
1934	225,202.48	95,421.27	100,000
1935	250,277.19	100,680.72	100,000
1936	279,591.73	103,752.53	100,000
1937	329,583.69	128,331.49	100,000
1938	389,315.38	182,741.09	100,000
1939	431,803.54	220,130.79	100,000
1940	459,285.69	210,384.45	100,000
1941	520,798.11	313,081.71	50,000

The operating statements of the partnership for the years 1942 to 1945, inclusive, are as follows:

		1942	1943
Sales		$ 655,893.87	$ 901,843.36
Cost of goods sold		42,516.03	59,561.36
Gross profit on prime costs		613,377.84	842,282.00
Operating expense:
	Salaries and wages	19,129.10	18,350.83
	Rent		175.00
	Taxes	2,711.74	9,514.54
	Depreciation	1,104.19	1,007.36
	Sales returns and allowances
	Advertising	11,025.86	10,198.51
	Legal and accounting	4,286.05	13,042.60
	Commissions		6,111.76
	Interest and discounts	14,580.36	20,996.19
	Research
	Other items and miscellaneous	13,295.45	14,550.72
		66,464.03	93,947.51
Net profit from operations		546,913.81	748,334.49
Other income		$ 1,287.41	$ 2,579.53
		548,201.22	750,914.02
Other expense			67.00
Net profit -- tax purposes		548,201.22	750,847.02
Less insurance premiums on lives of officers		7,155.00	7,155.00
Net profit		541,046.22	743,692.02
Distribution of profits:
	W. H. Gross	328,920.73	450,508.21
	A. W. Gross	109,640.25	150,169.41
	W. L. Eckert	54,820.12	75,084.70
	B. M. Eckert	54,820.12	75,084.70
		548,201.22	750,847.02

		1944	1945
Sales		$ 1,061,960.32	$ 1,263,218.48
Cost of goods sold		68,856.82	76,902.50
Gross profit on prime costs		993,103.50	1,186,315.98
Operating expense:
	Salaries and wages	21,183.22	20,755.38
	Rent	407.42	250.00
	Taxes	13,288.62	16,049.50
	Depreciation	786.68	1,332.49
	Sales returns and allowances	6,372.25	16,615.79
	Advertising	10,610.65	8,869.88
	Legal and accounting	17,478.86	10,648.48
	Commissions	8,611.47	9,765.46
	Interest and discounts	20,821.76	24,740.11
	Research	484.00
	Other items and miscellaneous	20,499.37	25,612.24
		120,544.30	132,639.33
Net profit from operations		872,559.20	1,053,676.65
Other income		$ 2,622.12	$ 5,651.28
		875,181.32	1,059,327.93
Other expense			.25
Net profit -- tax purposes		875,181.32	1,059,327.68
Less insurance premiums on lives of officers		7,307.75	7,155.00
Net profit		867,873.57	1,052,172.68
Distribution of profits:
	W. H. Gross	525,108.80	635,596.61
	A. W. Gross	175,036.26	211,865.53
	W. L. Eckert	87,518.13	105,932.77
	B. M. Eckert	87,518.13	105,932.77
		875,181.32	1,059,327.68

The closing balance sheets for the corporation for 1937 through 1940 are as follows:

		1937	1938
Assets
Current:
	Cash	$ 35,632.04	$ 62,475.95
	Accounts receivable (net)	18,999.58	33,422.31
	Merchandise inventory	7,264.35	12,407.69
	Marketable securities
	Loans and advances	13,505.00	44,705.03
		[75,400.97]	[153,010.98]
Miscellaneous:
	Cash value life insurance policy
	Refunds -- Federal taxes
	Formula	360,000.00
	Good will	159,129.88
		[519,129.88]
Fixed:
	Machinery and equipment, furniture and
	fixtures, auto and truck -- less reserve for
	depreciation	1,790.98	2,415.84
Prepaid expenses		1,119.51
	Total assets	597,441.34	155,426.82
Liabilities, Capital and Surplus
Current:
	Accounts payable		$ 4,945.99
	Accrued taxes	$ 34,728.33	40,100.92
	Loans payable		17,000.00
		[34,728.33]	[62,046.91]
Reserves:
	Taxes		50,000.00
	Legal and infringement
Capital and surplus:
	Common stock -- 1,250 shares issued and
	outstanding	519,129.88	10,000.00
	Surplus -- paid in
	Surplus -- earned	43,583.13	33,379.91
		[562,713.01]	[93,379.91]
Total liabilities, capital and surplus		597,441.34	155,426.82

		1939	1940
Assets
Current:
	Cash	$ 96,394.32	$ 104,475.69
	Accounts receivable (net)	30,181.49	35,193.85
	Merchandise inventory	11,003.13	14,201.81
	Marketable securities
	Loans and advances	54,525.22	97,630.64
		[192,104.16]	[251,501.99]
Miscellaneous:
	Cash value life insurance policy
	Refunds -- Federal taxes
	Formula
	Good will
Fixed:
	Machinery and equipment, furniture and
	fixtures, auto and truck -- less reserve for
	depreciation	3,080.83	2,234.59
Prepaid expenses		270.00	210.00
	Total assets	195,454.99	253,946.58
Liabilities, Capital and Surplus
Current:
	Accounts payable	$ 3,958.61	$ 3,470.55
	Accrued taxes	25,456.60	96,476.71
	Loans payable
		[29,415.21]	[99,947.26]
Reserves:
	Taxes	91,000.00	50,000.00
	Legal and infringement	25,000.00	25,000.00
Capital and surplus:
	Common stock -- 1,250 shares issued and
	outstanding	23,000.00	23,000.00
	Surplus -- paid in
	Surplus -- earned	27,039.78	55,999.32
		[166,039.78]	[153,999.32]
Total liabilities, capital and surplus		195,454.99	253,946.58

If, as a matter of law, the Tax Court holds that the partnership agreement resulted in gifts to Walter L. Eckert, Jr., and to B. Madalin Eckert, respectively, it is agreed that the value of each gift was $ 56,500.

Under date of May 18, 1943, a letter was sent to petitioner from R. T. Miles, revenue agent in charge of the Philadelphia division, advising petitioner that information on file in his office:

* * * indicates that you made a gift on or about January 1, 1942 to Dr. and Mrs. W. L. Eckert for which no gift tax return was filed.

Enclosed please find Form 709 which should be filed in duplicate with Revenue Agent S. Schultz, at the above address within a period of ten days from the date of this letter.

By letter dated May 22, 1943, petitioner recounted the formation of the partnership as the possible basis for the agent's letter, but denied that gift tax liability resulted.

On February 16, 1944, petitioner, through his attorneys, Bellwoar & Rich, had a conference with Alexander Solo, a revenue agent, regarding the 1942 gift tax return of petitioner. The conference came about by reason of a letter of protest which the attorneys filed on behalf of petitioner. At the end of the conference Solo directed petitioner to file a gift tax return on or before February 21, 1944. Pursuant thereto petitioner filed a gift tax return on Form 709 with the collector of internal revenue for the first district of Pennsylvania for 1942.

The return as filed indicated no gift or gift tax due. Accompanying it was the following statement:

Attached hereto is a copy of the Articles of Partnership of the Belmont Laboratories Company, a partnership consisting of William H. Gross, Annie W. Gross, B. Madalin Eckert and Walter L. Eckert and formed on January 1, 1942.

No gift tax return was filed at the time of the creation of the partnership by the taxpayer, or at any time since, inasmuch as William H. Gross was advised by counsel that no gift was involved.

The Commissioner of Internal Revenue, acting through his authorized agent, by letter dated June 26, 1943, alleged that William H. Gross had made a gift to B. Madalin Eckert and Walter L. Eckert under the aforementioned partnership agreement and that the said William H. Gross was determined to have a Gift Tax Liability for the year 1942.

A protest to said determination on behalf of William H. Gross was duly filed with Bureau of Internal Revenue at Philadelphia on July 21, 1943.

On February 16, 1944 a conference was held with Alexander Solo, Revenue Agent, at the office of the Internal Revenue Bureau, Philadelphia, Pennsylvania, at which time counsel for William H. Gross informed the Revenue Agent no gift tax return had been filed by said William H. Gross for the year 1942 because in the opinion of counsel no gift had been made.

Alexander Solo, Revenue Agent, acting for the Commissioner of Internal Revenue, informed counsel at said conference that William H. Gross would have until Monday, February 21, 1944, to file a Gift Tax return for the year 1942. In accordance therewith this return is filed. Nothing herein contained is to be construed as an admission by William H. Gross of the existence of any gift arising by virtue of the aforesaid partnership agreement.

The transfer on January 1, 1942, by petitioner to B. Madalin Eckert and Walter L. Eckert was without full and adequate consideration in money or money's worth.

OPINION.

From the beginning, consideration of the vexed question of family partnerships has assumed that there might be two sources of partnership income -- capital and the personal services of the partners. In the income tax field, contributions of the latter in a "vital" or managerial capacity are acceptable as evidence of the reality of the business operation in the determination of taxability. See Commissioner v. Tower, 327 U.S. 280">327 U.S. 280; Lusthaus v. Commissioner, 327 U.S. 293">327 U.S. 293. Conversely, a business which relies for its income on the activity of one or some of the partners can not be employed as a device to shift the tax liability to others whose contribution is negligible or absent. M. M. Argo, 3 T. C. 1120; affd. (C. C. A., 5th Cir.), 150 Fed. (2d) 67; W. M. Mauldin, 5 T.C. 743">5 T. C. 743.

Much of the difficulty in recent years has stemmed from the other type of earning -- that attributable entirely or in the main to capital. Such tendency as there may have been to look only to the technicalities of title, and to view the requirements of the tax law as satisfied by the titular ownership of some part of the partnership's earning assets, has, it appears, now been terminated. We may regard it as settled that if a capital contribution is to be the sole reliance, it must at least originate with the putative partner and not come merely as a gift from the former proprietor. Commissioner v. Tower, supra;Lusthaus v. Commissioner, supra.

So far, of course, the present discussion has dealt with the income tax aspect of the partnership problem. Respondent does not here question the bona fides of the present partnership for income tax purposes, but contends, in effect, that a part of the partnership interest was acquired by gift, and that accordingly the gift tax applies. That result would appear logical only if the share of partnership earnings assigned to the newly created partners is in excess of the value of their services to the partnership, and if the surplus comes, not from the services of the remaining partners but from some asset of the business, not excluding good will, which can thus be treated as in part the subject matter of the transfer.

Even then, an ordinary business transaction in which one party got somewhat the worst of the deal should not be thought of as a gift. While a literal reading of section 1002, Internal Revenue Code, might appear to embrace any transaction in which the respective considerations were not evenly balanced, ^{*847 position, and by his regulations Herbert Jones, 1 T. C. 1207.}

But the language of the provision suffices to dispose of petitioner's principal argument that a gift can have no consideration whatever. It may still be a gift for tax purposes unless the consideration, if there be such, is full and adequate. The breadth of the gift tax, demonstrated by the statutory language Smith v. Shaughnessy, 318 U.S. 176">318 U.S. 176. Aside from any question of value, an issue we shall consider in due course, there is no apparent reason why an interest in a going business can not be the subject of a gift like any other property. See Florence S. Hyman, 1 T. C. 911; affd. (C. A. A., 2d Cir.), 143 Fed. (2d) 425.

In the present case, the facts are perhaps less difficult to appraise than can generally be expected. One slight complication is introduced by the clause in the partnership agreement which reserves to petitioner the equivalent of all partnership capital contributed by him. From this it is left open to petitioner to argue that nothing material was given, but that what he had he retains. Granting the possibility of such a contention in other circumstances, it takes no undue penetration to perceive that the crucial asset of the business here was the trade name, good will, and formula of "Mazon" soap. That, from the capital standpoint, was what created the earnings. And that, under the agreement, must remain in the business even if petitioner withdraws. It follows that if we must isolate and identify what petitioner gave and the donees received, that can readily be done.

Other necessary elements are even more in evidence. The close family relationship supports inferences both of a lack of adequate consideration and of a donative intent. See Hoyt v. Commissioner (C. C. A., 2d Cir.), 145 Fed. (2d) 634; Paul, Federal Estate and Gift Taxation, vol. 2, p. 1076. Nothing appears in the record to justify concrete findings as to the contribution made by the Eckerts, its precise nature, its value, or its function in the partnership's organization. But if, even in the absence of evidence we speculate as to the purposes of the transaction, the assumption that the services of the Eckerts were of some value to the business advances us little. Although their previous compensation, presumably for the same services, had run to around $ 20,000 to $ 35,000 annually, they received between them a 20 per cent interest in earnings, which, for the current year, and excluding officers' salaries, were upward of $ 370,000 and, for the first year of the new arrangement, netted them over $ 100,000. It is not unreasonable to suppose that some part of the increase flowed from the newly acquired interest in the business itself and its principal asset, and that this, being inadequately supported by any consideration, was to some extent a gift.

We are compelled on the present record to dispose of the primary issue accordingly in favor of respondent. The value of the gift upon our conclusion that one was made is not in question, the amount having been agreed upon by stipulation of the parties. Cf. Robert P. Scherer, 3 T.C. 776">3 T. C. 776.

This is said by the parties to be a case of first impression. There has been no long history of legislative or administrative action to impress upon taxpayers the obligations imposed by transactions of this nature. Petitioner acted upon the advice of counsel in failing to file a timely gift tax return. Under such circumstances we think there was "reasonable cause" and that the penalty need not attach. Agricultural Securities Corporation, 39 B. T. A. 1103; affirmed per curiam (C. C. A., 9th Cir.), 116 Fed. (2d) 800.

Decision will be entered under Rule 50.

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Footnotes

• *. This item is unexplained.↩

• 1. Internal Revenue Code, sec. 1002, which in full, is as follows:

  "Where property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year."↩

• 2. Regulations 108 --

  "Sec. 86.8. Transfers for a Consideration in Money or Money's Worth. -- Transfers reached by the statute are not confined to those only which, being without a valuable consideration, accord with the common law concept of gifts, but embrace as well sales, exchanges, and other dispositions of property for a consideration in money or money's worth to the extent that the value of the property transferred by the donor exceeds the value of the consideration given therefor. However, a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is bona fide, at arm's length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money's worth. A consideration not reducible to a money value, as love and affection, promise of marriage, etc., is to be wholly disregarded, and the entire value of the property transferred constitutes the amount of the gift."↩

• 3. Internal Revenue Code, sec. 1000 (b):

  "The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible; * * *"↩

• 4. H. Rept. 708, 72d Cong., 1st sess., p. 27; S. Rept. 665, 72d Cong., 1st sess., p. 39; and see Commissioner v. Wemyss, 324 U.S. 303">324 U.S. 303↩.