of the Internal Revenue Code, as amended by section 454 of the Revenue Act of 1942, provides:

In the case of gifts (other than gifts in trust or of future interests in property) made to any person by the donor during the calendar year 1939 and subsequent calendar years prior to 1943, the first $4,000 of such gifts to such persons shall not, for the purposes of subsection (a), be included in the total amount of gifts made during such year.

The parties are in agreement that the gift was effected December 27, 1941, when the amended trust instrument was executed. It can not be disputed that the gift was in trust. Thus, under the specific provision of the statute, no exclusion may be allowed. Respondent's action in denying the exclusions is approved.

The remaining issue is whether respondent was correct when he included in the gift interest accrued as of the date of the gift upon certain bonds, a part of the corpus of the trust, which interest had not then been paid.

Petitioner argues that such interest, having already accrued, constituted income belonging to her which should not be included in the value of the securities passing to the trustee.

It is difficult to understand the basis for this contention. Assuming such interest did belong and was taxable as income to petitioner, donor,' that would not dispose of our question. The controversy here is as to the value of a gift for gift tax purposes. The trust agreement, as amended December 27, 1941, contains no reservation to petitioner of the interest upon the bonds transferred to the trustee. Thus the gift included not only the bonds, but accrued, though unmatured, interest thereon. Cf. Rebekah C. Schoonmaker, 39 B. T. A. 496; Annie A. Colby, 45 B. T. A. 536. Certainly, therefore, the value of the gift would include the value of that interest, as well as the bonds.

Decision will be entered for the respondent.

FORCUM-JAMES COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 1048. Promulgated November 29, 1946.

1. In September 1940 petitioner made a bid to E. I. du Pont de Nemours Co. for excavating certain kinds of dirt on a United States Government defense plant, at a unit price per yard. Upon this bid a purchase order was issued to petitioner by du Pont, in an amount of of $130,000 or $150,000. Thereafter, certain so-called alteration orders were issued by du Pont to petitioner for additional services and the construction of certain items for which a unit price had not been submitted in the original bid. On receiving the purchase order petitioner associated with itself three other concerns in the enterprise, or

1 Cf. Estate of 8. W. Anthony, 5 T. C. 752; affd., 155 Fed. (2d) 980.

joint venture, for performing the work provided for in the purchase
order, among which concerns was a partnership which was controlled
by the same interests as those controlling the petitioner. Work was
performed on the purchase and alteration orders by the petitioner
and two others of the associates, but none was performed by the
partnership. Early in November 1941 all three of petitioner's as-
sociates, including the partnership, withdrew from the venture and
each received from petitioner certain amounts in settlement. Peti-
tioner thereafter continued alone to perform work under the arrange-
ments with du Pont. Held, that the withdrawal of petitioner's asso-
ciates from the venture constituted a closed transaction; held,
further, that $313,195.98 carried on its books as deferred income and
realized from the venture by the petitioner constituted income of
petitioner in the taxable period; held, further, that, the petitioner
having performed the services in carrying out the venture by which
$500,000 paid the partnership was earned and the partnership having
performed none, the $500,000 constituted income to petitioner rather
than to the partnership, under section 45 of the Internal Revenue
Code; held, further, that the $500,000 paid over to the partnership by
petitioner constituted a dividend distribution to its controlling stock-
holders doing business under the partnership name.

2. Petitioner is entitled to a deduction as compensation for services
rendered by its employees of a certain amount paid by it into a
pension trust for the benefit of those employees.

3. Respondent must be sustained in his determination as to the amount allowable to petitioner as a deduction growing out of services performed for it by a firm of accountants.

Benjamin Grund, C. P. A., and Maxwell Wexler, C. P. A., for the petitioner.

S. Earl Heilman, Esq., and Frank M. Thompson, Jr., Esq., for the respondent.

The Commissioner determined deficiencies as follows:

With respect to the deficiency in income tax for 1940, petitioner assigned error in the disallowance of $625 as an ordinary and necessary business expense. This assignment of error was waived by petitioner. Hence, there is no controversy as to the deficiency in income tax for 1940. The issues to be decided pertaining to the deficiencies determined for the taxable period ended November 30, 1941, are: (1) Whether the withdrawal of three participants in the performance of a so-called Charlestown Ordnance contract and payment to them by petitioner in November 1941 of their agreed share in profits constituted a closed transaction requiring the inclusion in petitioner's income for that period of $313,195.98 shown on its books as deferred

income, or whether that amount was received by petitioner from the performance of a long term contract not yet completed at November 30, 1941, and, therefore, was not its income in the taxable year, its accounts and returns being on a completed contract basis; (2) whether the amount of $500,000 paid by petitioner to one of those participants in 1941 was properly allocated as income to petitioner under section 45, Internal Revenue Code, or, in the alternative, whether such amount was income received by petitioner from the performance of a long term contract not yet completed at November 30, 1941, and, therefore, was not its income in the taxable year, petitioner's accounts and returns being on a completed contract basis; (3) whether a settlement in a "renegotiation proceeding" is res judicata with respect to the time of completion of the Charlestown Ordnance contract in 1942 and with respect to the $500,000 above referred to as representing an item of cost to petitioner rather than its income; (4) whether petitioner made a capital distribution requiring the reduction of invested capital by $6,681.37; (5) whether the amount of $72,500 paid to a pension fund is allowable as a deduction from gross income of petitioner; and (6) whether accountants' fees of $12,500 are deductible from the gross income of petitioner as an ordinary and necessary business expense. Several assignments of error as to the period ended November 30, 1941, do not now present questions for determination in this opinion, since they have been disposed of by prior order of this Court as to one issue and, at the hearing, by petitioner's waiver of two issues, by respondent conceding error on one issue, and, by stipulation of the parties to give effect, in the recomputation under Rule 50, to their agreement on several issues involving the method of computation.

FINDINGS OF FACT.

The petitioner is a Tennessee corporation, with its principal office in Dyersburg, Tennessee. It was organized in 1928 and was engaged in the general contracting business. It filed its income and excess profits tax returns with the collector of internal revenue at Nashville, Tennessee. It kept its books of accounts and made its Federal income and excess profits tax returns on the accrual basis and, in respect to long term contracts, on the completed contract basis. Petitioner's use of such accrual and completed contract bases had been approved by the Commissioner. Petitioner's outstanding 2,500 shares of stock of the par value of $100 each were held by the following:

Mrs. Lannom and Mrs. Forcum acquired their shares from the estate of Hilt Forcum, deceased, Mrs. Forcum being decedent's widow, and Mrs. Lannom his daughter. C. B. Ford and R. M. Ford are brothers. The Fords are not related to either the Forcums or W. E. Moore. In 1940 and 1941 Vern Forcum was president of petitioner, W. E. Moore, vice president, and C. B. Ford, secretary and treasurer. They and R. M. Ford were directors.

The petitioner during 1940 and 1941 had between five and six hundred employees. It had some equipment which was located principally at its Memphis office.

In 1933 Forcum-James Construction Co., a partnership was organized, the partners being Vern Forcum, W. E. Moore, C. B. Ford, and R. M. Ford, each having a 25 per cent interest until at least the end of 1940. Attached to the balance sheet of the partnership as of December 31, 1940, copies of which it sent to the trade, bonding companies, banks, and others, is a statement as follows:

Effective midnight December 31, 1940, two partners, through irrevocable gifts, transferred part of their partnership interests. With the start of business January 1, 1941, the partners and their respective interests are as follows:

Partner:

Vern Forcum_.

Ralph M. Ford.

Wade E. Moore__.

Charles F. Moore, Trustee for William Kent and Jere B. Ford, minors_.

Mrs. Madge Moultrie Moore___.

Mrs. Gladys Blankenship Ford....

C. B. Ford____

TOTAL

Per cent

25.00

25.00

16.67

12.50

8.33

6.25

6.25

100.00

In the partnership return for 1941 the partners and their shares of the 1941 partnership income were stated to be as follows:

In case of disagreement a majority of the partners would control. the management and conduct of the business.

After its organization Forcum-James Construction Co. acquired 50 per cent interests in two other partnerships engaged in the contracting business, known as W. R. Aldrich & Co. and L. O. Brayton & Co. In 1937 it also acquired a 50 per cent interest in Pioneer Contracting Co., a partnership. A. G. Hall and his brother, Guy N.

Hall, in 1940 and 1941 owned equally the remaining 50 per cent interest in Pioneer Contracting Co.

Charles F. Moore, an employee of petitioner, kept the books and records of petitioner, Forcum-James Construction Co., the Pioneer Contracting Co., W. R. Aldrich & Co., and L. O. Brayton & Co., from 1935 to 1940. Thereafter such records were kept by employees of petitioner under Moore's supervision.

The balance sheets of Forcum-James Construction Co. as of December 31, 1940 and 1941, are as follows:

ASSETS

Cash in banks....

Marketable securities.

Retainage receivable on contracts..

Investments in and advances to other partnerships and affiliated companies.

During 1940 and 1941 Forcum-James Construction Co. had neither employees nor equipment. It had no offices of its own, its headquarters being in the office of petitioner, with no specific space reserved for its use. Its books and records were kept by petitioner's employees, who were paid by petitioner. Its four partners were paid no salary by the partnership. They devoted all of their time to petitioner's affairs and each was paid by petitioner an annual salary of $18,000 during 1940 and 1941.

In its 1940 and 1941 partnerhip returns Forcum-James Construction Co. reported income and claimed deductions as follows: