Coca-Cola Bottling Co. v. Commissioner

Coca-Cola Bottling Company of Sacramento, Ltd., Petitioner, et al., 1 v. Commissioner of Internal Revenue, Respondent Coca-Cola Bottling Co. v. Commissioner Docket Nos. 19828, 25082, 25083 United States Tax Court 17 T.C. 101; 1951 U.S. Tax Ct. LEXIS 115; July 31, 1951, Promulgated *115 Decisions will be entered under Rule 50. 1. Income -- Separate Entities -- Corporation and Partnership -- Section 22 (a). -- Sacramento Corporation (Coca-Cola Bottling Company of Sacramento, Ltd.), which had a sole and exclusive license to bottle and vend Coca-Cola in the Sacramento, California, area, granted to a partnership formed by its two principal stockholders, N. M. Sellers and Gladys Sellers, a sublicense to bottle and vend Coca-Cola in all of its territory for a period of 5 years. The corporation also sold to the partnership at book value all of its operating equipment and all of its inventories of materials and supplies used in the Coca-Cola bottling business in exchange for two promissory notes executed by the partnership. Held, that a new partnership was a separate entity from the corporation and that the net income and capital gain of the new partnership for the years 1944, 1945, and 1946 are not includible in the income of the taxpayer corporation. 2. Personal Holding Company -- Income from Royalties -- Excess Profits Tax. -- By the terms of the sublicense agreement with its parent bottler, Sacramento Corporation agreed to purchase from the parent bottler*116 all the Coca-Cola syrup which it used at a basic rate of $ 1.30 per gallon. By the terms of a sub-bottling agreement with a partnership, the partnership agreed to purchase from the corporation the Coca-Cola syrup it used at a basic rate of $ 1.50 per gallon. The syrup was shipped directly to the partnership which transmitted $ 1.50 per gallon to Sacramento Corporation. The corporation retained 20 cents per gallon and transmitted the remainder to the parent bottler. Held, that the 20 cents per gallon retained by Sacramento Corporation constituted royalties which it received for the exclusive license which it had granted to the partnership, and held, further, that the petitioner, Sacramento Corporation, was a personal holding company and, therefore, was not entitled to any unused excess profits carry-back. 3. Family Partnership -- Children of Petitioners not Recognized as Members of Partnership. -- Upon consideration of all of the facts and circumstances present in these proceedings, held, the petitioners, N. M. Sellers and Gladys Sellers, did not in good faith and acting with a business purpose intend to join together with their two children in the present conduct *117 of the partnership during 1944 and 1945. W. T. Fitzgerald, Esq., and C. E. Musto, Esq., for the petitioners. W. J. McFarland, Esq., for the respondent. Harron, Judge. Black, J., dissenting. HARRON *102 The Commissioner has determined deficiencies in taxes as follows: Income Petitioner Year ended tax Coca-Cola Bottling Co. of Sacramento, Ltd., Docket 2/29/44 $ 327.87 No. 19828 2/28/45 18,755.20 2/28/46 19,662.50 12/31/44 17,497.67 N. M. Sellers, Docket No. 25082 12/31/45 12,047.89 12/31/44 17,497.67 Gladys Sellers, Docket No. 25083 12/31/45 12,047.89 *118 Declared Petitioner value Excess excess-profits profits Coca-Cola Bottling Co. of Sacramento, Ltd., Docket [0] $ 13,194.41 No. 19828 $ 7,467.88 36,187.77 5,521.68 12,204.94 N. M. Sellers, Docket No. 25082 Gladys Sellers, Docket No, 25083 In Docket No. 19828, Coca-Cola Bottling Company of Sacramento, Ltd., petitioner, referred to hereinafter as the Sacramento Corporation, the respondent determined that an alleged partnership, created in 1944 to bottle and vend Coca-Cola, was "lacking in substance or business purpose" and that the entire income of the partnership for 1944, 1945, and 1946 and all of its capital gains for 1945 and 1946 were taxable to the Sacramento Corporation. The primary question in Docket No. 19828 is whether the petitioner corporation is taxable in 1944, 1945, and 1946 on the net income and capital gains of a partnership and that question turns on whether any partnership carried on a business separate and apart from the Sacramento Corporation. In Docket No. 19828, an alternative question arises if the respondent's determination that a partnership cannot be recognized for tax *103 purposes is rejected. The second question is raised*119 by an allegation in the petition that for the taxable year ended February 29, 1944, the respondent erred in determining that the Sacramento Corporation was not entitled to an unused excess profits credit carry-back from the taxable year ended February 28, 1946, in the amount of $ 53,023.09, and in refusing the Sacramento Corporation's claim for refund of $ 17,359.52 excess profits taxes for the year ended February 29, 1944, based upon the unused excess profits credit. The respondent makes an alternative contention that the Sacramento Corporation was a personal holding company, not subject to the excess profits tax, and, therefore, not entitled to any excess profits credit. In Docket Nos. 25082 and 25083, N. M. Sellers and Gladys Sellers, petitioners, the primary question is whether their son and daughter were members of the partnership which is involved in the main issue in Docket No. 19828 during the years 1944 and 1945. If it is decided that the partnership conducted a business of its own separate and apart from any business of the Sacramento Corporation, the respondent, in the alternative, takes the position that only N. M. and Gladys Sellers were members of the partnership, *120 and that their son and daughter were not members of the partnership in 1944 and 1945. There is another question presented which is reached only if it is held in Docket No. 19828 that a partnership cannot be recognized for tax purposes to any extent whatsoever, regardless of any question relating to the composition of or membership in an alleged partnership, namely, whether the two chief stockholders of the Sacramento Corporation, N. M. and Gladys Sellers, received dividends of the corporation constructively during 1944 and 1945. The petitioners filed their returns for the taxable years in question with the collector for the first district of California. The record in these proceedings comprises oral testimony, a stipulation of facts, and various exhibits. FINDINGS OF FACT. The facts which have been stipulated are found as stipulated. Issue 1. N. M. Sellers and Gladys Sellers were married in 1919. They have two children, Jack born in 1920, and Virginia born in 1924. Shortly after their marriage, together they had about $ 5,000, part of which belonged to Gladys Sellers. They used $ 3,500 of their $ 5,000 for a down payment on the purchase of a one-sixth interest in a Coca-Cola*121 bottling company in South Bend, Indiana. The total price to be paid for the one-sixth interest was $ 5,000; and a note, which was subsequently paid, was given for the remaining $ 1,500. N. M. Sellers was hired as the general manager of the bottling plant. In 1927 the Sellers sold their interest in the bottling plant for approximately $ 18,000. *104 After they sold their interest in the South Bend plant, the Sellers went to California, where they purchased all the assets of a Coca-Cola bottling and vending business in Sacramento for $ 19,500. In order to have working capital to operate the bottling works, the Sellers borrowed $ 11,000 from Gladys' brother-in-law. They operated this business as equal partners until 1930, when the Coca-Cola Bottling Company of Sacramento, Ltd., hereinafter referred to as the Sacramento Corporation, was incorporated under the laws of California to take over the business. The original capital structure of the corporation consisted of 278 1/2 shares of common stock, each having a par value of $ 100. Ten of these shares were issued to the Pacific Coast Coca-Cola Bottling Company, hereinafter referred to as Pacific Coast, in payment of a $ 1,000*122 debt; 110 shares were issued to Mrs. Sellers' brother-in-law in payment of the $ 11,000 which had been borrowed from him in 1927, and the remaining 158 1/2 shares were issued in the name of N. M. Sellers. On December 1, 1936, N. M. and Gladys Sellers jointly executed an agreement by which they converted the 158 1/2 shares of Sacramento Corporation's stock then standing in the name of N. M. Sellers into community property. On December 30, 1942, N. M. and Gladys Sellers entered into an agreement whereby each was given an undivided one-half interest in all their property as the sole and separate property of each. In accordance with this agreement, the 158 1/2 shares which had been issued in the name of N. M. Sellers were reissued in equal parts to N. M. and Gladys Sellers. The business of bottling and vending Coca-Cola is controlled throughout the United States by two companies, the Coca-Cola Company of Atlanta, Georgia, and Coca-Cola Bottling Company (Thomas), Inc., of Chattanooga, Tennessee, hereinafter referred to as Thomas. The right to bottle and vend Coca-Cola in the United States has been granted to six companies, including Thomas, which are known as "parent bottlers." Pacific*123 Coast is the parent bottler for most of the west coast area. The parent bottlers do not, however, actually engage in the bottling business, but sublicense to others in their respective territories the right to engage in such business. With the permission of the Coca-Cola Company and of Thomas, the parent bottlers may grant the right to bottle and vend Coca-Cola in all or in a portion of their respective territories under a license unlimited as to its duration. A bottler who has been granted all or a portion of a parent bottler's territory is known as a "first-line bottler." A first-line bottler may with the permission of the Coca-Cola Company, Thomas, and its parent bottler in turn grant the right to bottle and vend Coca-Cola in all or a portion of its territory to another bottling company which is known as a "sub-bottler." *105 On September 3, 1930, Sacramento Corporation entered into a first-line bottler's contract with Pacific Coast, its parent bottler. Under this contract Pacific Coast granted to Sacramento Corporation a "sole and exclusive" sublicense to bottle and vend Coca-Cola in the Sacramento area. Under this contract Sacramento Corporation agreed to pay $ 1.30*124 per gallon to Pacific Coast for Coca-Cola syrup. This contract was amended in 1932 and again in 1936 to increase the territory in which Sacramento Corporation was licensed to bottle and vend Coca-Cola. As part of the enlargement of its territory in 1936, Sacramento Corporation entered into an agreement with another first-line bottler, Coca-Cola Bottling Company of California, whereby the latter bottler agreed to release the additional territory to Sacramento Corporation in exchange for an agreement by Sacramento Corporation to pay to it 20 cents per gallon for all Coca-Cola syrup consumed in the Woodland area which was released. The contract concerning the Woodland area was for a term of 2 years with provision for automatic renewals of 2-year terms, unless there was an election to cancel the contract. With the expansion of its territory, Sacramento Corporation opened branches in Auburn and Woodland and Marysville, California. In the spring of 1942, the construction of Camp Beale, a large Army camp at Marysville, California, commenced. At about this time, the building of a large warehouse was completed by N. M. and Gladys Sellers, as individuals in Marysville at a total cost of*125 $ 21,685.99 on land which they had acquired in May 1941 at a cost of $ 2,180.77. Part of the cost was paid for by a loan of $ 13,400 made by the California Western States Life Insurance Company. This loan was secured by a mortgage on the property. In October 1942, the Sellers, as individuals, leased the building to Sacramento Corporation under a 10-year lease for a rental of $ 200 per month, plus taxes, for use as a warehouse and distribution point for Coca-Cola sales in the Marysville area. N. M. and Gladys Sellers made a gift of the Marysville property to their children, Jack and Virginia, on November 14, 1942, and assigned the lease to them. Thereafter, the rent was paid directly to Jack and Virginia until December 31, 1943. At this time there was an outstanding indebtedness of $ 12,435.87 on the property. The loan of California Western States called for monthly payments of $ 215.74, including interest, which began on June 1, 1942. The final payment was made on May 4, 1948. Jack and Virginia applied the leasehold rental payments to the monthly loan payments. In the spring of 1943, Sacramento Corporation succeeded in obtaining priorities for the manufacture of Coca-Cola *126 bottling machinery and equipment to be installed in the Marysville property for the purpose of supplying bottled Coca-Cola to the armed forces at Camp *106 Beale. The installation of the machinery was finished and bottling operations began in December 1943. On December 31, 1943, N. M. Sellers and Gladys Sellers each bought 55 shares of Sacramento Corporation stock from Gladys' brother-in-law, Dr. Thurlow. After that date, they each owned approximately 48.2 per cent of the corporation's outstanding stock, total 96.4 per cent. The other stockholders were Arthur P. Pratt and George T. Hunter, who owned five shares each. They had owned stock in Pacific Coast Coca-Cola Bottling Company. Sacramento Corporation entered into a contract dated December 31, 1943, with a newly-formed partnership having the name of Cola-Cola Bottling Company of Sacramento, which was composed of N. M. and Gladys Sellers and, also, of their two children. The partnership was created as of January 1, 1944. The facts relating to the partnership agreement are set forth hereinafter under Issue 3. Under the articles of partnership, the partnership is to exist for an indefinite length of time, and its duration*127 is not limited to any fixed period of years. Under this contract Sacramento Corporation granted to the partnership a sublicense to bottle and vend Coca-Cola for a period of 5 years in the areas of Sacramento, Woodland, and all other territory in which Sacramento Corporation had been sublicensed by Pacific Coast to bottle and vend Coca-Cola. This sub-bottling contract was drawn up by the legal counsel of the Coca-Cola Bottling Company and was a typical sub-bottler's contract, of which more than 300 are in effect throughout the United States. The term of 5 years was the maximum term permitted by the parent bottlers for sub-bottling contracts, but the term could be extended. The contract provided that the partnership should pay to Sacramento Corporation $ 1.50 per gallon for Coca-Cola syrup. This amount was transmitted by Sacramento Corporation to the parent bottler, Pacific Coast, after the deduction of 20 cents per gallon. $ 1.50 per gallon was the highest price that the parent bottlers would permit a first-line bottler to charge to a sub-bottler at that time, and it was the standard price paid by sub-bottlers in the United States. The agreement also provided that if it were*128 still in full force and effect at the end of the initial 5-year period, and if thereafter the partnership should continue to order syrup and Sacramento Corporation should continue to deliver syrup to the partnership, the entire agreement would remain in effect until terminated by either party. The sub-bottling contract with the partnership was approved by Pacific Coast Coca-Cola Bottling Company, the Coca-Cola Company, and the Coca-Cola Bottling Company of California. On January 1, 1944, Sacramento Corporation entered into an agreement with the partnership by which Sacramento Corporation agreed to sell to the partnership all of the corporation's operating *107 equipment and all of its inventories of supplies and materials used in the Coca-Cola bottling business. Sacramento Corporation also agreed to assign and transfer to the partnership existing policies of insurance covering the properties and operations transferred. In exchange, the partnership executed two promissory notes to Sacramento Corporation, each bearing interest at the rate of 2 per cent. The first of these notes in the face amount of $ 36,577.32 was payable in 1 year and was given for the purchase of the inventory*129 of supplies and materials and for the existing policies of insurance which had been transferred. The second note in the face amount of $ 138,565.55 was payable in ten equal annual installments and was given for the purchase of the operating equipment of Sacramento Corporation. On January 1, 1944, Sacramento Corporation leased to the partnership three parcels of improved real property, located in Sacramento and Woodland, on which buildings were located, which were to be used by the lessee for the purpose of conducting its business of bottling and distributing Coca-Cola. The lease of these properties was for a term of 10 years until December 31, 1953, and provided for a rental of $ 800 a month to be paid by the partnership. In addition, Sacramento Corporation assigned to the partnership all of the corporation's rights as lessee of the building in Marysville, which had been used by Sacramento Corporation in the conduct of its business in that area. Thereafter, the partnership paid the leasehold rent of $ 200 per month to Jack and Virginia Sellers. The warehouse which N. M. and Gladys Sellers, as individuals, caused to be constructed at Marysville was completed on April 9, 1942, and*130 was used thereafter by Sacramento Corporation as a warehouse until the end of 1943. In December of 1943, bottling machinery was installed in the Marysville building, and at the end of 1943 the premises were converted into a bottling plant and ready for operation. This plant went into operation under the partnership on January 1, 1944; it was never operated as a bottling plant by Sacramento Corporation. The production of the Marysville plant was approximately three-fourths of the production of the Sacramento bottling plant. It was not until the end of 1943, for the first time, that the Coca-Cola business in the Sacramento area expanded to the point that a second bottling plant -- the one at Marysville -- was needed. During 1944, the Marysville plant bottled approximately 325,000 cases of Coca-Cola, each case containing 24 bottles. During 1944, there were employed at the Marysville plant by the partnership about 40 people who were bottlers, route salesmen, supervisors, and office workers. The partnership adopted a fiscal year running from December 1 to November 30. On or before February 15, 1945, and on or before February 15 of each subsequent year the partnership has filed Federal*131 income tax returns. *108 After January 1, 1944, and during the three fiscal years following, the last of which ended on November 30, 1946, the partnership bottled, sold, and delivered to customers the following quantities of bottled Coca-Cola in cases containing 24 bottles each: Fiscal year Number of cases 1/1/44 to 11/30/44 887,461 12/1/44 to 11/30/45 777,404 12/1/45 to 11/30/46 643,149 In connection with the bottling and vending of Coca-Cola, the partnership purchased Coca-Cola at a base price of $ 1.50 per gallon in the following amounts during its fiscal years as follows: Fiscal year Gallons of syrup 1/1/44 to 11/30/44 160,213 12/1/44 to 11/30/45 152,118 12/1/45 to 11/30/46 122,850 The syrup thus purchased by the partnership was billed to the partnership by Sacramento Corporation and was paid for by checks of the partnership drawn to the order of Sacramento Corporation. During the above periods and until August of 1947, the amount of sugar which could be used in the manufacture of Coca-Cola syrup for civilian consumption was rationed, but sugar was not rationed in the preparation of Coca-Cola syrup for sale to the armed forces. As a result*132 of the sugar rationing regulations, the bulk of the partnership's sales of Coca-Cola in 1944 and 1945 were to the armed forces. On January 10, 1944, the corporation's board of directors duly approved the sale to the partnership, as well as the lease of the real properties to the partnership. Of the 207 sub-bottlers within the territories of the 5 parent bottlers, approximately 110 have a common financial relationship with their respective first-line bottlers. In very few of these, all of the stockholders of the first-line bottler may be interested in the sub-bottler. In a great majority of these sub-bottlers, only a few of the stockholders are common to both the first-line and the sub-bottler, including ownership by a child or relative. There are 97 sub-bottlers in these same territories which do not have any common financial relationship whatsoever with their respective first-line bottlers. In addition to the sub-bottler's contract from Sacramento Corporation to the partnership, there are at least six other sub-bottlers contracts in which the territory of the sub-bottler is coextensive with the territory of the first-line bottler. In only one or possibly two of these six contracts, *133 the ownership of the first-line bottler and the sub-bottler is identical. Soon after January 1, 1944, the partnership opened a complete new set of books and records which were not only kept independently, but were kept physically separate and apart from the books of Sacramento Corporation. *109 On January 3, 1944, the partnership opened a bank account with the Bank of America, Oak Park Branch, in Sacramento. The partnership also opened bank accounts in the Woodland Branch of the Bank of America, the Auburn Branch of the Bank of America, and the Marysville-Rideout Branch of the Bank of America. Checks bearing the partnership name printed thereon were put into use on January 4, 1944. Expenses of operating the partnership business, such as telephone, gas and electricity, etc., were paid by the partnership by checks drawn on its accounts in the Bank of America. Sacramento Corporation has, at all times material hereto, maintained a bank account separate and apart from that of the partnership, in the Oak Park Branch of the Bank of America at Sacramento. On December 31, 1943, Sacramento Corporation's bank accounts in the Woodland Branch of the Bank of America, in the Auburn Branch*134 of the Bank of America, and in the Marysville-Rideout Branch of the Bank of America, were closed out. The balances in those bank accounts were not transferred to the accounts of the partnership opened in the same banks. On January 1, 1944, the partnership established its own payroll and since that date has paid all salaries of all its employees who number about 110. In addition, the partnership has paid amounts to each of the partners as salaries during the years in question. On and after January 1, 1944, the partnership has, as is required by law, acted as a withholding agent with respect to salaries paid to its employees for Federal income taxes, Federal social security taxes, and California unemployment taxes, and has paid its own Federal social security taxes, and California unemployment taxes. The partnership has withheld said Federal social security taxes under its own identification number. The partnership has withheld said California unemployment taxes under its own identification number, which is 51-9276. Sacramento Corporation has its own identification numbers for Federal social security taxes and California unemployment taxes. One of the methods employed by the partnership*135 in selling Coca-Cola to the public was through the use of vending machines (coolers). During the periods in question the partnership owned approximately 750 vending machines which it had purchased from Sacramento Corporation, and approximately 60 per cent of these were located in Army camps. In addition to the vending machines owned by the partnership, it also supplied, serviced, and repaired approximately 2,500 vending machines owned by customers of the partnership. To accomplish this servicing and repairing, the partnership maintained a service department with its own mechanics. Sacramento Corporation and the partnership were separate and independent economic units during the taxable years in question. Issue 2. After January 1, 1944, Sacramento Corporation did not bottle and sell Coca-Cola. Its principal source of income after that *110 date was from the payments made by the partnership under the sub-bottling contract. During the fiscal years ended February 29, 1944, February 28, 1945, and February 28, 1946, the partnership purchased 9,729 gallons of Coca-Cola syrup, 175,108 gallons, and 145,368 gallons for use in its business. The fiscal year of Sacramento Corporation*136 ran from March 1 to February 28 or 29. Delivery of the syrup was direct to the partnership. Sacramento Corporation performed no services in connection with the procurement of the syrup, except to receive the payments of $ 1.50 per gallon from the partnership, and to transmit the payments to Pacific Coast Coca-Cola Bottling Company after deducting 20 cents per gallon. It was the right to use the Coca-Cola name and formula which rendered the business valuable. The 20 cents per gallon retained by Sacramento Corporation was in exchange for the corporation's exclusive license to bottle and vend Coca-Cola in the Sacramento area, which it had sublicensed to the partnership for a period of 5 years. Sacramento Corporation had gross income of $ 40,662.79 during the fiscal year ended February 28, 1946. Of this amount, $ 29,073.60 was received under its sublicense agreement with the partnership; $ 9,600 was received from rents from the partnership; $ 1,828.47 was received from interest on notes of the partnership; and $ 60 was received from dividends -- total, $ 40,562.07. During the entire fiscal year ended February 28, 1946, N. M. Sellers and Gladys Sellers each owned 48.2 per cent of *137 the outstanding capital stock of Sacramento Corporation. After January 1, 1944, Sacramento Corporation had three employees, N. M. Sellers, Felix Schuler, and Gladys Sellers. Sacramento Corporation filed a Federal income and declared value excess-profits tax return and an excess profits tax return for the fiscal year ended February 29, 1944, on or before May 15, 1944. For its fiscal years ended February 28, 1945, and February 28, 1946, Sacramento Corporation filed, on or before May 15, 1945, and 1946, a Federal income and declared value excess-profits tax return, an excess profits tax return, and a personal holding company return. Issue 3. As of January 1, 1944, N. M. Sellers and Gladys Sellers entered into a partnership agreement with their two children, Jack, who was 23, and Virginia, who was 19. The partnership was to be effective January 1, 1944, and was to do business under the firm name of Coca-Cola Bottling Company of Sacramento. The partnership agreement provided that the partnership was to engage in the business of bottling and distributing Coca-Cola. The partnership was formed to take over the business of Sacramento Corporation under a sub-bottling contract. The*138 articles of partnership provided that each party should have a 25 per cent interest each in the partnership and for an initial capital contribution of $ 6,000 from each of the four *111 parties, total $ 24,000, who agreed that the profits should be equally divided "between the partners," and losses should be borne and defrayed by them "equally." N. M. Sellers deposited $ 24,000 in a bank account of the partnership on January 3, 1944. Jack and Virginia each signed a demand note for $ 6,000 payable to their father and mother and bearing interest at 2 per cent. These notes were paid in 1947 out of the profits of the business, which were credited and disbursed to Jack and Virginia for the purpose of making payment of the notes. The partnership agreement provided that N. M. Sellers was to "devote full time to the affairs of the partnership," and that the other three partners were to devote only such time to the business as their "other interests" would "reasonably permit." It was provided that the business was to be under the management of N. M. and Gladys Sellers as general managers, and that "All questions of policy, including the particular services to be rendered by each of *139 the partners in the firm, and all matters otherwise involved in the conduct of the firm business shall be decided by them [N. M. and Gladys Sellers]." No partner could pledge the credit of the partnership without the previous consent in writing of N. M. Sellers. At no time were Jack and Virginia ever given authority to sign checks for the partnership. The partnership agreement provided, also, that each of the partners shall be entitled to withdraw from the firm without obligation to repay such amounts monthly as may be agreed upon by the parties, which withdrawals shall be considered and treated as items of firm expense in the computation of the firm profits; that a general account shall be made and an audit taken annually of the assets and liabilities of the firm, and the profits of the business, if any, apportioned "between" the partners, and at such time "the partners shall adjust, each with the other, their just share of the profits so made." Upon termination of the partnership, the net assets of the partnership shall be "divided among the partners in the proportion in which they are entitled to share in the profits." In the event of the death of a member of the partnership, *140 then the surviving partners, or such of them as elect to do so, shall be privileged, in equal shares, to acquire the interest in the firm of the person dying, which option shall be exercised by notice in writing served upon the decedent's personal representatives on or before 30 days after the appointment and qualification of a personal representative. The full compensation for the interest of a deceased partner shall be an amount equivalent to the book value of the deceased partner's interest and may be paid by a 1-year promissory note bearing 4 per cent interest. In the event of the death of a partner and the acquisition of his interest in conformity with the above terms, the surviving partners may elect to cause new articles *112 of partnership to be executed and to form a new partnership to continue the partnership dissolved by the death of a partner. The arrangements for providing the partnership with $ 24,000 were handled by N. M. Sellers. On December 31, 1943, he obtained checks for $ 20,000 from his own sources of his own funds. He borrowed $ 4,000 from a bank, giving his own note for the loan. The loan was for 90 days and was repaid on January 13, 1944, out of the*141 proceeds of bonds owned by Mr. and Mrs. Sellers which they sold shortly after January 3, 1944. Sellers opened a bank account in the name of Coca-Cola Bottling Company of Sacramento for the partnership in which he deposited the total of the $ 24,000 of funds which he obtained, as set forth above. On January 4, 1944, Jack executed a general power of attorney in favor of his father. He executed the power of attorney in Cook County, Illinois. N. M. Sellers, acting under the power of attorney, signed the name of Jack Sellers to the sub-bottling agreement and other documents of agreement with Sacramento Corporation and a fictitious name certificate for the partnership. At the time the partnership agreement was entered into, 2 Jack was stationed at the Naval Air Station in Glenview, Illinois. Jack began working for Sacramento Corporation in 1934, when he was 14 years old. From 1934 to 1941 he worked during the summer for the corporation at various jobs for which he was adequately compensated. Late in 1941 he enlisted in the Navy and was called to active duty on January 15, 1942. He was not separated from active duty with the Navy until October 1945, at which time he returned to Sacramento. *142 Jack Sellers did not perform services for the partnership during 1944 and 1945 until after he was separated from the Navy. About two weeks after his return, he began working for the partnership as a route salesman. His job consisted primarily of placing Coca-Cola vending machines in factories, offices, and machine shops. He held this job for about six months, after which he worked for the partnership in various other capacities until December 1, 1948, when he became sales manager of the entire business. He was paid a salary of $ 300 per month for the services he performed after he returned in 1945, and during 1946. The salary was increased to $ 350 per month in June 1946. *143 Four months after the partnership was formed, in May of 1944, Virginia became engaged to Willard Roper who was a flight instructor in the Army Air Corps. It was the desire of Mr. and Mrs. Sellers *113 that after Roper married Virginia and received his discharge from the Air Corps, he would go to work for the partnership and "look after his wife's interest." On September 9, 1944, Virginia and Willard Roper were married. Prior to her marriage she worked part time for the partnership during about four months in 1944. She was paid a salary for her limited services. After her marriage she traveled with her husband, during 1944 and 1945, to the various parts of the United States where he was stationed. In October 1945, she returned to Sacramento to await her husband's discharge from the armed service, which occurred on February 19, 1946. During this period she again worked part time for the partnership. She was paid a salary for her services. On April 1, 1946, Roper began working full time for the partnership as a route salesman. After about seven months, he was made manager of the Cooler Sales and Service Department. When Virginia signed the partnership agreement, she did *144 not intend to become active in the business. She expected to marry and to look after her home. Although Jack and Virginia Sellers held the title to the property where the Marysville plant was located, they did not in any written or oral agreement contribute that property to the partnership. Also, although they were entitled to receive the rent for this property, from the partnership, at the rate of $ 200 per month, they did not assign the rent receivable to the partnership as contributions to the capital thereof. They applied the rent so received to reduce an indebtedness of $ 12,435.87 on the property which was due to California Western States Life Insurance Company, payable at the rate of $ 215.74 per month. (See Issue 1 above.) Jack and Virginia Sellers did not attempt to borrow from a bank or any nonfamily source any funds which they could contribute to the business venture in question although they owned the property where the Marysville plant was located. When the partnership agreement was being discussed, N. M. Sellers told his children that he and Mrs. Sellers would "loan" them $ 6,000 each for their one-fourth interests. Although the partnership agreement recites that*145 salary withdrawals by the individual partners could be arrived at by agreement of the parties, there is no evidence that the children arrived at any agreement relating thereto with their parents in 1944 or 1945. Amounts allocated to them during 1944 and 1945 were so allocated by N. M. Sellers in his own discretion and under his control both as to the amounts and the manner of allocation. N. M. Sellers allocated funds of the business in 1944 and 1945 by purchasing war savings bonds in their names, by paying life insurance premiums, and by paying income taxes on their returns. *114 When Roper returned from the armed service, N. M. Sellers did not tell him that he was either an employee or a partner. He was not put on the payroll and did not receive compensation for his services. Checks were made payable to Virginia as her salary, for which she did not render services, and were deposited in a joint account in hers and Roper's names. The opening balance sheet of Coca-Cola Bottling Company of Sacramento, the partnership, as of January 1, 1944, after the purchase of assets by its notes from Sacramento Corporation was as follows: Assets Current: Cash in bank $ 24,000.00 Merchandise inventory 96,997.31 Deferred charges 4,246.86 $ 125,244.17 Fixed: Machinery and equipment $ 48,376.96 Trucks 18,567.32 Bicycles 429.90 Furniture and fixtures 6,524.52 $ 73,898.70 Total assets $ 199,142.87 Liabilities and Capital Notes payable to Sacramento Corporation $ 175,142.87 Capital 24,000.00 Total $ 199,142.87 *146 The partnership during the fiscal periods January 1, 1944, to November 30, 1944, and December 1, 1944, to November 30, 1945, realized gross and net income and had expenses and made expenditures as follows: Jan. 1, 1944 to Dec. 1, 1944 to Nov. 30, 1944 Nov. 30, 1945 Sales and rentals -- gross $ 742,698.88 $ 651,779.62 Cost of goods sold 418,103.77 347,765.65 Gross profit $ 324,595.11 $ 304,013.97 Less expenses for selling and administration 241,220.37 253,326.58 Net profit $ 83,374.74 $ 50,687.39 Add for partners' salaries, etc 15,084.00 21,458.01 Net profit per tax returns $ 98,458.74 $ 72,145.40 The profits of the partnership were derived in large part from selling operations and from the sub-bottling agreement. Selling expenses amounted to $ 160,058.66 in the 1944 fiscal year and to $ 160,370.37 in the 1945 fiscal year. The mechanical equipment and *115 inventory of the partnership were acquired from Sacramento Corporation on credit by the issuance of notes of the partnership totaling $ 175,142.87. The inventory and machinery so acquired gave rise to some of the earnings of the partnership in 1944 and 1945. Neither Jack *147 nor Virginia Sellers contributed in 1944 or 1945 any money, directly or through borrowing, to the purchase of equipment and inventory costing $ 175,142.87. The sub-bottling agreement was obtained for the partnership by the personal efforts of N. M. Sellers. The earnings of the partnership in 1944 and 1945 were not due in any part to any services or capital of Jack or Virginia Sellers. During 1944 and 1945, N. M. and Gladys Sellers had complete control over the earnings and property of the partnership in question. On January 3, 1944, N. M. and Gladys Sellers contributed $ 24,000 to the partnership; neither Jack nor Virginia Sellers contributed $ 6,000, each, to the capital of the partnership in 1944. On or about January 1, 1944, N. M. Sellers and Gladys Sellers, on the one hand, and Jack Sellers and Virginia Sellers, on the other hand, did not in good faith and acting with a business purpose intend then to join with each other, the parents with the children or the children with the parents, in the present conduct of the business known as Coca-Cola Bottling Company of Sacramento, a partnership, and Jack and Virginia Sellers were not during 1944 and 1945 bona fide members of that partnership. *148 OPINION. Issue 1. The primary issue in these proceedings is whether the respondent erred in refusing to recognize the separate existence of the partnership and in including its income in the gross income of Sacramento Corporation. Sacramento Corporation, in Docket No. 19828, contends that the partnership was a separate economic entity and that its income cannot be imputed to the corporation. The respondent, however, alleges that the creation of the partnership served no business purpose and was merely a device whereby income was reallocated among the family group with resulting tax advantage. He argues, therefore, that the partnership was a sham which should be disregarded and that the income which purportedly was that of the partnership was in reality that of Sacramento Corporation. This issue relates to the tax liability of the corporation for its fiscal years ended February 29, 1944, February 28, 1945, and February 28, 1946. It is an established rule that a taxpayer has the right to adopt the type of organization for the conduct of a business which he deems to be suitable and preferable, and he is not required to adopt the type of business organization which will yield*149 the maximum tax upon the income earned by the business. Moline Properties, Inc. v. Commissioner, 319 U.S. 436; Chelsea Products Corp., 16 T. C. 840; Cedar *116 ., 16 T. C. 870; Estate of Julius I. Byrne, 16 T. C. 1234; Buffalo Motor Co., 10 T. C. 83; Miles-Conley Co., 10 T. C. 754, affd. 173 F. 2d 958; Seminole Flavor Co., 4 T. C. 1215; Koppers Co., 2 T. C. 152; Essex Broadcasters, Inc., 2 T. C. 523; Twin Oaks Co. v. Commissioner, (C. A. 9, 1950), 183 F. 2d 385, reversing a Memorandum Opinion of this Court; and Denning v. Commissioner, 180 F. 2d 280. However, if the form of a business enterprise which a taxpayer adopts is a sham and a device to evade the burden of taxation, the law allows looking through the form to reality and disregarding the selected form of the business. Higgins v. Smith, 308 U.S. 473;*150 Gregory v. Helvering, 293 U.S. 465. The evidence shows that it was the intent of the parties that a partnership should take over and conduct the bottling and distributing business which the corporation previously had conducted, and that the operation of the bottling business actually was conducted by the partnership. A partnership consisting of N. M. and Gladys Sellers was created and operated as a distinct and separate economic entity. The partnership opened and maintained separate books of account; it opened and maintained separate bank accounts; it held title to all motor vehicles; it paid its own operating expenses; it had its own social security accounts and was the withholding agent for taxes on the payroll of its employees who numbered about 110 persons. The partnership operated under a sub-bottler's contract which was prepared and approved by the general counsel for the parent Coca-Cola bottling companies, which was in the almost identical form as the standard sub-bottler's contract, and was in conformity with the standard contract. It was approved by Sacramento Corporation's parent bottler, Pacific Coast Coca-Cola Bottling Company, and*151 by the Coca-Cola Company. The entire arrangement of sublicensing the partnership would have been impossible without the approval of the above Coca-Cola companies. Under the original Articles of Partnership the term during which the partnership is to exist is of indefinite duration and is not limited to any period of years. The sub-bottling contract between Sacramento Corporation and the partnership can continue beyond the initial 5-year period, if the partnership continues to order Coca-Cola syrup for bottled Coca-Cola. The members of the partnership are subject to the unlimited personal liability which may develop out of the operation of the business by the partnership in place of the limited liability to which they had been subject previously as stockholders of Sacramento Corporation when it conducted the bottling and distributing business. The change in personal liability is evidence of the reality in the change of the form of the entity which thereafter operated the business. There was conversion of the operation of the bottling and distributing business from operation by a corporation to operation by a partnership. *117 The chief stockholders of Sacramento Corporation*152 are N. M. and Gladys Sellers, but there are also other stockholders, Pratt and Hunter, who, also, owned stock of Pacific Coast Coca-Cola Bottling Company. N. M. Sellers had attempted to purchase the stock of Sacramento Corporation which Hunter and Pratt owned, but they were unwilling to sell their stock. This explains to some extent the fact that Sacramento Corporation was not dissolved. The fact that Sacramento Corporation continued in existence, holding title to some parcels of real estate and providing the partnership with syrup under the sub-bottling agreement does not detract from the reality of the transfer of the bottling business from the corporation to the partnership. If the corporation had been dissolved, the franchise to bottle and sell Coca-Cola in the territory might have been lost. The price which the partnership paid to Sacramento Corporation for its physical assets represented the book value of the assets, and there is no evidence that the total price, $ 170,896.01 was not fair and reasonable. In this connection, it is noted that all of the vending machines were appraised and revalued so as to establish a fair price for them. The respondent argues that the purchase*153 price was not adequate because no payment was made for good will. However, the ability of Sacramento Corporation to make a profit arose solely from its ownership of the Coca-Cola franchise in the Sacramento area, which it retained. The good will of the business lay in the Coca-Cola name and in the franchise, see Floyd D. Akers, 6 T. C. 693, and Sacramento Corporation was adequately compensated for the sublicense which it gave to the partnership to use the Coca-Cola name and formula, since under the terms of its sub-bottling contract with the partnership, Sacramento Corporation received the maximum return which the Coca-Cola Company allowed a first-line bottler to receive from a sub-bottler under a sub-license agreement. The contract between Sacramento Corporation and the partnership followed the pattern set up by the Coca-Cola Company for such agreements and was, in fact, drawn by the legal counsel of that company. Upon consideration of all of the evidence, it is held that the respondent erred in refusing to recognize the partnership as a new and separate business entity and in including the income of the partnership for the taxable years in that *154 of Sacramento Corporation and that the income of the partnership is not properly includible in the gross income of Sacramento Corporation. It should be noted that the respondent does not rely upon the provisions of section 45 of the Code in making his determination that all of the income of the partnership should be added to the income of the corporation. We do not, therefore, consider the applicability of section 45. See, however, Cedar Valley Distillery, Inc., supra; and Miles-Conley Co., 10 T. C. 754, supra. *118 It follows from the holding made under this issue that in Docket Nos. 25082 and 25083, N. M. Sellers and Gladys Sellers, petitioners, the respondent erred in his determination that each of them received constructive dividends from Sacramento Corporation consisting of the net earnings of the partnership. Issue 2. The next question is whether Sacramento Corporation is entitled to an unused excess profits credit carry-back from the fiscal year 1946 to the fiscal year 1944. The respondent contends that Sacramento Corporation is not entitled to the carry-back because it was a personal holding company*155 within the meaning of sections 501 (a) and 502 of the Internal Revenue Code3 during 1946, and therefore was not subject to the excess profits tax. Sacramento Corporation argues, however, that it was not a personal holding company during 1946. It bases this argument on the contention that the major portion of its income was not in the nature of royalties from the sublicense of the use of the Coca-Cola name and formula, but represented profits from the purchase of Coca-Cola syrup at $ 1.30 per gallon and its resale at $ 1.50 per gallon. *156 Sacramento Corporation performed no actual services in connection with the procurement of the syrup, except to receive the payments from the partnership and pass them along to Pacific Coast after deducting 20 cents per gallon. Delivery of the syrup was direct to the partnership. The 20 cents per gallon retained by Sacramento Corporation was in exchange for the corporation's exclusive right to receive Coca-Cola syrup from Pacific Coast and exclusively to bottle and vend the Coca-Cola product in the Sacramento area. The 20 cents per gallon *119 was an interest reserved by Sacramento Corporation in return for the sublicense which it granted to the partnership to use the exclusive license owned by Sacramento Corporation. The amounts involved were paid by the partnership in proportion to the use made of the principal right granted by the sub-bottling contract, that is, on the basis of the quantity of Coca-Cola syrup used by the partnership in bottling and vending Coca-Cola. In addition, as Sacramento Corporation argued under the first issue, it was the right to use the Coca-Cola name which rendered the business profitable and without which the syrup would have had little value*157 over the basic cost of its ingredients. When Sacramento Corporation's territory was enlarged in 1936, the corporation entered into an agreement with another first-line bottler whereby the latter bottler agreed to release the additional territory, which originally had been licensed to it, in exchange for an agreement by Sacramento Corporation to pay it a royalty of 20 cents per gallon for all Coca-Cola syrup used in supplying the territory so released. There is no real difference between the payments of 20 cents per gallon made by Sacramento Corporation under that agreement and the 20 cents per gallon retained by it as the result of the sub-bottling agreement with the partnership. The exclusive right to use the Coca-Cola name and bottle and vend the bottled product in the Sacramento territory was licensed to the partnership by Sacramento Corporation for a period of 5 years. It is concluded that the 20 cents per gallon received by Sacramento Corporation above the amount which it had to remit to Pacific Coast constituted payment for the exclusive license granted to the partnership. As such, those amounts constituted royalties within the purview of section 502. Puritan Mills, 43 B. T. A. 191;*158 cf. Hugh Smith, Inc., 8 T. C. 660, affd. 173 F. 2d 224, certiorari denied 337 U.S. 918. Since Sacramento Corporation received more than 80 per cent of its gross income during 1946 from dividends, interest, rents, and royalties, and since more than 50 per cent in value of its outstanding stock was owned by not more than five individuals, the corporation was a personal holding company under section 501. As a personal holding company, Sacramento Corporation was specifically exempt from the excess profits tax under section 727. It follows and it is held that it is not entitled to any excess profits credit carry-back from the year 1946. Cf. Wier Long Leaf Lumber Co., 9 T. C. 990, revd. 173 F. 2d 549; Mesaba-Cliffs Mining Co., 10 T. C. 1010, revd. 174 F. 2d 857. Issue 3. The third issue pertains only to petitioners N. M. Sellers and Gladys Sellers, Docket Nos. 25082 and 25083, and relates to their income tax liability for 1944 and 1945. The question under this issue is whether the*159 two children of N. M. and Gladys Sellers should be recognized for tax purposes as bona fide partners in the partnership during the years 1944 and 1945. Although the respondent does not *120 dispute the existence of the partnership under this issue, it being his position that if under Issue 1 the partnership is recognized as a separate business entity apart from Sacramento Corporation, then in the alternative he recognizes Mr. and Mrs. Sellers as the only members of the partnership, he has refused to recognize Jack and Virginia as partners, and he has determined that their shares in the partnership income should be included in the gross income of their parents for their calendar years 1944 and 1945. The correctness of this determination depends upon whether or not N. M. and Gladys Sellers, in good faith and acting with a business purpose, really intended on January 1, 1944, to join together with Jack and Virginia in the then present conduct of a business. Commissioner v. Culbertson, 337 U.S. 733; and Commissioner v. Tower, 327 U.S. 280. Upon consideration of all the facts and circumstances present in these*160 proceedings, we have found as a fact that the parties did not intend on or about January 1, 1944, to join with their children, Jack and Virginia, in the then present conduct of a business in good faith and with a business purpose, and that the children did not have that intention on or about January 1, 1944; that during the period from January 1, 1944, until November 30, 1945, at least, Jack and Virginia Sellers were not bona fide members of the partnership, and that they were not bona fide members of the partnership during the calendar years 1944 and 1945. The conduct of the Coca-Cola bottling business remained unchanged upon the formation of the alleged partnership with Jack and Virginia. The parents continued personally to operate and control the partnership business as they had done with respect to the business of Sacramento Corporation in prior years. The partnership agreement is careful to reserve away from Jack and Virginia all right of participation in the control and management of the business. Such participation has been viewed by the Supreme Court as a factor of prime importance in determining the bona fides of a family partnership. Commissioner v. Culbertson, supra.*161 The actual conduct of the business is an important factor militating against the contention of the petitioners that Jack and Virginia were bona fide partners during 1944 and 1945. During 1944 and 1945 Jack was serving with the Navy, and for most of that time was stationed at the Naval Air Station in Glenview, Illinois. The only services he performed for the partnership during this period were as a route salesman during the last two months of 1945 after his separation from the Navy. Virginia, also, performed only desultory services for the partnership during several of the months involved. Both were adequately compensated for whatever services they did perform. However, neither Jack nor Virginia rendered vital services, and neither one participated in the management of the business during 1944 or 1945. Any intent which Jack or Virginia might have had to perform *121 services for the partnership in the future or to in fact become members of the partnership in the future, is not sufficient to give them a partnership status for tax purposes during 1944 and 1945. Commissioner v. Culbertson, supra.Moreover, the parties never intended that*162 Virginia should exercise an interest as a partner in the business. It was their intention that her husband, who was released from the Army in 1946, should work for the business and look after any interest that his wife might have upon his release from the Army. The petitioners rest their contention that their children became members of the partnership known as Coca-Cola Bottling Company of Sacramento primarily upon the allegation that each contributed $ 6,000 to the capital of the business in January 1944. Although no ready "test" can determine whether or not members of a family have joined with other members of the family in the present conduct of a business, Commissioner v. Culbertson, supra, the lack of a contribution of capital is an important factor which weighs heavily against the taxpayer who contends that another member of his family is a bona fide partner for tax purposes. Commissioner v. Tower, supra;Lusthaus v. Commissioner, 327 U.S. 293. Keeping in mind the admonition that no single "test" is determinative of the question, and that all of the facts and circumstances*163 must be considered, we have considered carefully all of the evidence under this issue, bearing in mind, also, that income produced by services is taxed to the person who performs the services, and income produced by property is taxed to the owner of the property. There was an established business, the conduct of which was changed in 1944 from operation by a corporation to operation by a partnership. The earnings were derived from sales of bottled Coca-Cola, and apparently the sales were made on a cash basis with a rapid turnover. Earnings were largely attributable to the sub-bottling contract from the corporation, to the selling efforts of hired salesmen, to the receptive market, particularly Camp Beale, and to management. N. M. Sellers applied his personal efforts toward the obtaining of the sub-bottling contract, and his entire time was devoted to managerial services, which included the hiring and supervising of salesmen. Admittedly neither Jack nor Virginia Sellers gave one iota of time or service in the obtaining of the sub-bottling contract or the selling activities. The property used in the business was acquired from the Sacramento Corporation, and notes of the partnership*164 were given therefor. None of the property used in the partnership business was acquired with any of the alleged capital contributions of Jack and Virginia. Jack and Virginia Sellers owned the improved realty where the Marysville plant was located, but they did not contribute that property to the partnership. The question is, therefore, whether the alleged cash contributions of Jack and Virginia were used in the business. *122 With respect to cash, there is no evidence about the cash position of the Sacramento Corporation at the time the partnership was created to take over the business, but a reasonable assumption is that it was good in view of the first year's earnings of the partnership. The gross and net receipts of the partnership in the 1944 fiscal year amounted to $ 742,698.88 and $ 83,374.44. Not only is there no evidence to show that any part of the earnings was due to the alleged contributions of $ 6,000 of Jack and Virginia, but there is evidence that in the first two fiscal years more than $ 12,000 was disbursed under the petitioners' directions to purchase for Jack and Virginia war bonds and property, and for their use. We cannot find from all of the evidence, *165 therefore, that their alleged contribution of $ 12,000 in 1944 was either needed in the business, used in the conduct of the business, or productive of any of the earnings of the business. The reality of the arrangement was that N. M. and Gladys Sellers deposited their own $ 24,000 in the firm's bank account over which they exercised control. Jack and Virginia were not authorized to draw checks on the firm's bank account. The earnings of the business were under petitioners' control. Also, we cannot find that the giving of notes for the alleged loan of $ 12,000 satisfies the requirements of a contribution of capital. They were not repayable in any event but only out of earnings, and since $ 12,000 was advanced to Jack and Virginia, the notes involved could be viewed rather as evidence of personal loans. Upon the evidence it has been found as a fact that N. M. and Gladys Sellers contributed $ 24,000 on January 3, 1943, and that Jack and Virginia did not contribute $ 6,000 each, to the venture. Furthermore, a critical analysis of the entire arrangement of depositing $ 24,000 to the account of the partnership at the time the partnership agreement became effective shows that it lacked*166 a true business purpose. It is not shown that the partnership was in need of working capital. A going business was taken over from the corporation in which monthly sales gave a quick turnover of cash. The transfer of $ 24,000 by N. M. and Gladys Sellers to a bank account of the partnership from their other accounts was in itself a re-allocating of their own funds, and at least $ 12,000 thereof is not shown to have been either needed or to have been a loan in the usual business sense. Upon all of the evidence, we cannot find as a fact that there was a present intent on the part of N. M. and Gladys Sellers (or on the part of the children) to presently operate the business as a genuine partnership with their children during 1944 and 1945, and it is held that Jack and Virginia were not bona fide partners during 1944 and 1945. The respondent's determination on this issue is sustained. See: Simmons v. Commissioner, 164 F. 2d 220; Joseph J. Morrison, 11 T. C. 696, affd. 177 F. 2d 351; T. Edward Ritter, 11 T. C. 234, affd. 174 F. 2d 377;*167 W. F. Harmon, 13 T. C. 373; W. Stanley Barrett, 13 T. C. 539, *123 affd. 185 F. 2d 150; Herman Feldman, 14 T. C. 17, affd. 186 F. 2d 87. Decisions will be entered under Rule 50. BLACK Black, J., dissenting: I am in entire agreement with the majority opinion wherein it holds that the Coca-Cola Bottling Company of Sacramento, Ltd., and a partnership organized January 1, 1944, known as Coca-Cola Bottling Company of Sacramento were separate legal entities and the income of the partnership cannot be taxed to the corporation. It seems to me that the facts fully support the majority opinion in its holding on that issue. I think its reasoning is sound and the authorities which are cited well support the conclusion which is reached. While I find myself in entire agreement with the majority opinion on that issue, I am not in agreement with the holding of the majority that N. M. Sellers and Gladys Sellers were the only members of the partnership. It seems to me that such a holding is in conflict with the facts which are present in *168 this proceeding. The question of whether a partnership is to be recognized for income tax purposes depends upon whether the parties, in good faith and acting with a business purpose, intended to join together as partners in the present conduct of the enterprise. Commissioner v. Culbertson, 337 U.S. 733. The Commissioner has determined that N. M. Sellers and Gladys Sellers were members of the partnership which was organized January 1, 1944, but that their two children, Jack Sellers and Virginia Sellers, who also signed and obligated themselves under the very same partnership agreement, were not members of the partnership. The majority opinion sustains the Commissioner on this point and has an ultimate finding of fact as follows: On or about January 1, 1944, N. M. Sellers and Gladys Sellers, on the one hand, and Jack Sellers and Virginia Sellers, on the other hand, did not in good faith and acting with a business purpose intend then to join with each other, the parents with the children or the children with the parents, in the present conduct of the business known as Coca-Cola Bottling Company of Sacramento, a partnership, and Jack and Virginia Sellers*169 were not during 1944 and 1945 bona fide members of that partnership. I think the foregoing ultimate finding of fact is not justified by the record. At the time this partnership was formed Jack Sellers was 23 years old and Virginia was 19 years of age. They had grown up in the business, so to speak, and it seems only natural that the parents would want to take them into the business as partners and I think that they did so in the written partnership agreement which was executed by the respective partners. This is not a case of parents endeavoring to take young minor children into a partnership with a *124 view of reducing their own income taxes. Jack and Virginia had grown up to the adult stage at the time the partnership was formed. It seems to me that it is safe to say that the partnership thus formed would be recognized under the laws of California for all purposes and I see no reason why it should not be recognized for Federal income tax purposes. It seems to me that to refuse to recognize it for what it really was is wholly illogical. I shall not in this dissenting opinion undertake to review all the facts which I think sustain the validity of the partnership under *170 the rule of the Culbertson case, supra. It would unnecessarily prolong this dissenting opinion to do so. I will simply say that applying the test which the Supreme Court laid down in Commissioner v. Culbertson, I think the partnership which was formed January 1, 1944, was composed of N. M. Sellers, Gladys Sellers, Jack Sellers, and Virginia Sellers and that the majority opinion errs in holding that only N. M. Sellers and Gladys Sellers were members of the partnership and that all the income of the partnership is taxable to them. To this holding of the majority, I respectfully dissent. Footnotes 1. Proceedings of the following petitioners are consolidated herewith: N. M. Sellers and Gladys Sellers.↩ 2. The record is not clear as to the precise time that the partnership agreement was executed. The agreement recites that the parties subscribed their signatures as of January 1, 1944. Jack Sellers testified that he could not recall whether he signed the agreement in November 1943 when he was home on a visit, or whether it was mailed to him at Glenview, Illinois, where he was stationed.↩ 3. SEC. 501. DEFINITION OF PERSONAL HOLDING COMPANY. (a) General Rule. -- For the purposes of this subchapter and chapter 1, the term "personal holding company" means any corporation if -- (1) Gross income requirement. -- At least 80 per centum of its gross income for the taxable year is personal holding company income as defined in section 502; but if the corporation is a personal holding company with respect to any taxable year beginning after December 31, 1936, then, for each subsequent taxable year, the minimum percentage shall be 70 per centum in lieu of 80 per centum, until a taxable year during the whole of the last half of which the stock ownership required by paragraph (2) does not exist, or until the expiration of three consecutive taxable years in each of which less than 70 per centum of the gross income is personal holding company income; and (2) Stock ownership requirement. -- At any time during the last half of the taxable year more than 50 per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals. SEC. 502. PERSONAL HOLDING COMPANY INCOME. For the purposes of this subchapter the term "personal holding company income" means the portion of the gross income which consists of: (a) Dividends, interest (other than interest constituting rent as defined in subsection (g)), royalties (other than mineral, oil, or gas royalties), annuities. * * * * (g) Rents. -- Rents, unless constituting 50 per centum or more of the gross income. For the purposes of this subsection the term "rents" means compensation, however designated, for the use of, or right to use, property, and the interest on debts owed to the corporation, to the extent such debts represent the price for which real property held primarily for sale to customers in the ordinary course of its trade or business was sold or exchanged by the corporation; * * *↩