To the foregoing adjustment made by the Commissioner, the petitioner assigned errors as follows:

(a) The Commissioner erred in holding that the holding period for the purpose of applying the percentage rates specified in section 117 of the Revenue Act of 1936 to the capital gain determined by him to have been realized by petitioner from the sale in 1937 of a fractional interest in the partnership of Lehman Brothers was to be measured from the date or dates of acquisition by the partnership of the specific partnership assets which the partnership owned at the date of such sale.

(b) Even if the Commissioner did not err in the respect set forth in subparagraph (a) above, in applying the percentage rates specified in section 117 of the Revenue Act of 1936 to the capital gain determined by him to have been realized by petitioner from the sale in 1937 of a fractional interest in the partnership of Lehman Brothers, the Commissioner erred in attributing the gain to the different holding periods of the partnership assets in proportion to the market value of the partnership assets having the same holding periods.

(c) If the Commissioner did not err in the respect set forth in subparagraph (a) above, in applying the percentage rates specified in section 117 of the Revenue Act of 1936 to the capital gain determined by him to have been realized by petitioner from the sale in 1937 of a fractional interest in the partnership of Lehman Brothers, the Commissioner erred in applying the capital gains and losses provisions of section 117 of the Revenue Act of 1936 to securities held by the partnership as a dealer in such securities.

FINDINGS OF FACT.

The case was submitted upon a stipulation of facts incorporating as a part thereof certain exhibits and upon oral testimony. The stip

ulation is incorporated herein by reference and adopted as part of our findings of fact.

Petitioner is an individual residing at Tarrytown, New York. His return for the calendar year 1937 was prepared on the cash basis and filed with the collector of internal revenue for the second district of New York at New York City.

Lehman Brothers is a copartnership engaged in a general financial, investment, and brokerage business. Since 1929 the partnership has been located at 1 William Street, New York, New York, and its business has been conducted under the laws of the State of New York. The partners have from time to time changed, some partners having died or withdrawn and some new persons having been admitted as partners.

Petitioner became a partner in 1908 upon the acquisition of a capital interest of $500,000, and his capital account and interest fluctuated between that date and December 31, 1925, by reason of various cash withdrawals from and contributions to partnership capital. As of December 31, 1925, petitioner's capital account in the partnership as then constituted was $1,035,710.59, which represented a 14.99 per cent interest in the partnership. Thereafter, from December 31, 1925, until December 31, 1935, the capital account of the petitioner and his percentage interest with relation to the total capital of the partnership as constituted at the several times fluctuated as follows, by reason of withdrawals from and additions to capital by the petitioner and the other partners:

At all times material herein, subsequent to December 31, 1925, the capital of the petitioner was not less than $1,035,710.59 and his percentage interest in the partnership as constituted at any time was not less than 13.425 per cent.

As of January 1, 1936, the partners signed a new partnership agreement with themselves and one Edward J. Bermingham, under which the said Edward J. Bermingham was admitted to membership in the partnership as a capital partner. The capital partners and their capital accounts under the new agreement were as follows:

No change in the above capital accounts of the partners occurred prior to the death of Arthur Lehman on May 16, 1936.

In this same partnership agreement of January 1, 1936, it was agreed that before determining the net profits for 1936 certain deductions should be made which are not needed here. It was agreed that after those deductions the remaining net profits should be divided in the following proportions:

On May 16, 1936, Arthur Lehman died and in accordance with the provisions of the partnership agreement dated January 1, 1936, the interest of the decedent was continued in the firm until June 30, 1936. As of July 1, 1936, the capital account of the decedent was transferred on the books of the partnership to an account payable to his estate. By reason of the transfer the total capital of the partnership was reduced from $12,500,000 to $10,118,750, where it remained through December 31, 1936. The liability of the firm to the estate of the deceased partner was thereafter liquidated in accordance with the terms of the partnership agreement. The partnership agreement drawn January 1, 1936, provided that the partnership should be continued if partners having together more than 50 per cent of the capital of the partnership should so determine. The remaining partners, having more than 50 per cent of the capital of the partnership, determined to continue in partnership with the surviving partners and they continued in business through December 31, 1936.

ness.

Upon changes in the partnership personnel and their capital accounts during the period 1925 to 1937, new partnership agreements were executed. Such changes had no effect on the partnership busiThe business was not formally terminated, but continued in the same manner and under the same firm name throughout this period. The books and records of the partnership were not formally closed after such changes in personnel and interests, but adjustments were made in the appropriate accounts. Outstanding underwriting contracts and other agreements of the firm in connection with its investment banking business continued unchanged.

On January 1, 1937, upon the admission of certain new capital partners, the continuing partners and the new capital partners signed a

new partnership agreement. The respective capital accounts of said. partners, including the petitioner, were as follows:

It was also agreed in this partnership agreement that after certain deductions not needed here the remaining net profits or losses of the partnership should be divided in the following proportions:

The reduction in the partnership capital from $10,118,750 as of December 31, 1936, as set out above, to $10,000,000 as of January 1, 1937, was effected on January 1, 1937, by actual withdrawals in cash and charges to the respective capital accounts of certain other continuing partners as follows:

As of January 1, 1937, on the admission of new capital partners to Lehman Brothers, the petitioner, Robert Lehman, Philip Lehman, and John D. Hertz each sold a fractional part of his property rights in the partnership to one of the continuing partners, Edward J. Bermingham, and to the five new capital partners, John M. Hancock, Paul M. Mazur, William J. Hammerslough, Thomas H. Hitchcock, Jr., and Joseph A. Thomas. The property rights sold by the petitioner to the buying partners constituted a fractional share of his interest in the partnership. The selling partners made actual cash withdrawals from the partnership of the amounts of the reduction in their capital accounts from that set forth in the partnership agreement on January 1, 1936 (but after the reduction in capital of $118,750 described above) and the amounts of their capital accounts provided for in the new partnership agreement dated January 1, 1937.

At the same time the buying partners contributed to the partnership the amount of their capital account as provided for in the partnership agreement and as set out above.

As of January 2, 1937, and as a part of the same transaction, each of the buying partners caused a letter to be sent to the partnership confirming their understanding of the transaction and agreeing to pay to the selling partners in proportion to their interest in the capital of the firm on December 31, 1936, an amount equal to a certain percentage of the excess over cost on its books of the value of the assets of the firm on December 31, 1936, after such assets had been valued by the partners holding more than 50 per cent of the capital of the partnership. In accordance with this understanding, the buying partners made payments (in excess of their capital contributions) to the selling partners as follows:

By reason of these transactions, the selling partners received the following amounts as withdrawals in capital and payments by the buying partners, and the excess of the amounts received over the reduction in their capital account is as follows:

The cost or other basis of that which the petitioner sold as described above for the determination of gain was $345,000. The gain of the petitioner on the sale (by reason of certain adjustments made between the selling partners including the petitioner) was $99,899.58.

In connection with the transaction set out above, the petitioner executed no bill of sale with respect to any specific assets of the partnership or any other document, other than the January 1, 1937, partnership agreement. The partnership assets were at all times during the transaction carried in the partnership name and on its books on the basis of cost, and the books did not reflect any fluctuations in the value of these assets.