F. E. Gooding, Elizabeth Gooding, and Joyce Ann Gooding, their 1-year-old daughter, having, respectively, four-sevenths, two-sevenths, and one-seventh interests therein. The Bureau of Internal Revenue determined that Joyce Ann Gooding was not a bona fide partner for income tax purposes, which determination was accepted by petitioners, and her one-seventh interest in the partnership was taxed to her father for the years 1943 to 1946, inclusive. Petitioner sold the amusement devices and portable rides to the partnership, which operated them without having to pay rent therefor.

The partnership obtained public liability insurance in the principal amount of approximately $50,000, which, in the opinion of petitioner, went a long way toward covering any liability that might arise from accidents involving the partnership's property. The largest accident claim ever paid on behalf of the amusement enterprises controlled by petitioner was in the amount of $18,000.

The net taxable income of the partnership was as follows for the years 1943, 1944, 1945, and 1946:

From 1932 to the years here involved the corporations and partnership in some cases executed "privilege" contracts between 2 and 12 months in advance, which entitled them to the use of certain locations on which the amusement devices could be placed and operated.

On August 24, 1946, petitioner corporation was organized with F. E. Gooding, Elizabeth Gooding, and Kathleen Holleran, as its president and treasurer, vice president, and secretary, respectively.

At the close of business August 24, 1946, the partnership distributed to its three partners, assets consisting of advances to employees, accounts and notes receivable, land, buildings, cables, electrical equipment, office equipment, electrical towers, trucking equipment, canvas, mechanical rides, unexpired insurance, and advance payments on equipment. This distribution was made to the partners as tenants in common, with the result that F. E. Gooding, Elizabeth Gooding, and Joyce Ann Gooding owned, respectively, an undivided foursevenths, two-sevenths, and one-seventh interest in all the assets distributed. The book value of the assets so distributed was $177,037.29, and the book value of the undistributed cash, investments, land, and accrued interest was $285,745.84. In connection with this distribution each partner assumed a joint and several obligation to pay certain notes payable of the partnership in the total amount of $13,969.25, such payment to be made in accordance with his respective undivided interest in the distributed assets. The capital account of each partner

on the books of the partnership was proportionately reduced, so that the net total reduction in the capital account due to the distributions was $163,068.04, which was equivalent to the book value of the assets distributed, less notes payable assumed. The partnership continued in existence throughout the period here involved.

Included in the assets distributed to the partners were depreciable assets having a net book value on the books of the partnership of $152,764.55, of which $129,899.13 represented trucking equipment and mechanical rides. The privilege contracts referred to above were not carried at any value on the books of the partnership as of August 24, 1946.

On August 24, 1946, concurrently with the distribution of the partnership assets having a book value of $177,037.29, the partners made an offer to the newly formed corporation to exchange the aforesaid distributed assets at a value of $294,970.39. The difference between the depreciated book value of the distributed assets in the amount of $177,037.29 and the amount offered of $294,970.39, or $117,933.10, was the difference between the $129,899.13 book value of trucking equipment and mechanical rides on the books of the partnership, and the fair market value of these assets as appraised by petitioner with the help of Kathleen Holleran, the secretary of the corporation. In the process of making the new valuations, petitioner surveyed the equipment and rides in use on the various locations, checked the inventory records, and consulted his foremen from time to time with regard to the mechanical condition of the equipment and rides. The following table shows a comparison between the partnership book value of the trucking equipment and mechanical rides and the new values assigned to these assets by petitioner:

Pursuant to the above mentioned offer, the corporation accepted

the following assets at the indicated valuations:

The corporation also assumed the notes payable in the amount of $13,969.25 which had been assumed by the partners upon the distribution of partnership assets. In return for these assets in the net amount of $281,001.14, the partners received in proportion to their respective partnership interests the following:

"The payee of these notes was "F. E. Gooding as natural guardian of Joyce Ann Gooding."

Amount

$28,000.00

132,572.08 14,000.00

66, 286. 04 7,000.00

33, 143. 02

$281, 001. 14

There was no identification of the portion of the assets contributed for the shares and the portion contributed for the notes. The corporate notes were ordinary negotiable judgment notes, each containing an unconditional promise to pay on a fixed date the principal thereof, together with interest at 5 per cent per annum.

The opening entries on the corporation's books dated August 25, 1946, were as follows:

1 These figures reflect the increased values determined by the petitioner prior to the exchange.

The privilege contracts of the partnership were not carried at any value on the books of the corporation as of August 25, 1946. The

corporation performed the services required of the partnership under the contracts and in 1946 received income as a result thereof. The "Gooding" name was well established in the outdoor amusement business and was of substantial value in the securing of such contracts. No value was ascribed to goodwill on the books of either the partnership or the corporation.

Of the nonoperating assets in the amount of $285,745.84 left in the partnership, the sum of $184,444.23 was cash. The corporation received no cash from the partnership and made no borrowings in 1946.

For the taxable year 1946, each partner reported as a long-term capital gain his proportionate share of the difference between the depreciated cost of the transferred assets and the amount at which such assets were offered to and accepted by the corporation. On these gains the individual petitioners paid a total tax of $28,683.27. By a report dated March 29, 1948, respondent accepted petitioners' 1946 returns without eliminating therefrom the aforesaid capital gains.

In reporting in its income tax returns for the period August 24, 1946, to December 31, 1946, and the taxable years here involved depreciation expense and capital gains and losses attributable to the trucking equipment and mechanical rides acquired August 24, 1946, the corporation used as the unadjusted basis of such assets the increased valuation assigned to them by petitioner.

Between August 24, 1946, and December 31, 1952, the corporation sold 14.96 per cent of the trucking equipment and 56.85 per cent of the mechanical rides acquired on the former date. The following table indicates with respect to the above mentioned assets, the relationship of sale prices to appraised values:

1 As finally adjusted by the revenue agent, the total capital gain recognized was $114,733.10.

By an agreement dated December 20, 1946, certain of the corporation's key employees, in consideration for shares of the corporation's stock theretofore or thereafter issued to them, gave the corporation an option to repurchase any of such issued shares at any time at progressively increasing prices, beginning with $220 per share in 1947 and ending with $400 per share in 1956. It was further agreed that the option should expire at the close of 1956 unless extended for a further period by mutual agreement.

By the end of 1947 employees of the corporation had acquired 24.39 per cent of its outstanding stock. Additional shares were issued to employees in 1948 although the percentage of the employees' holdings dropped to 22.3 per cent, where it remained throughout 1949.

In 1947 the corporation acquired new equipment and rides at a total cost of $306,894.27.

In connection with its operations, including the acquisition of additional equipment in 1947 and later years, the corporation obtained funds and credits, which were evidenced by notes, from banks, merchants, petitioner, Joyce Ann Gooding, and the partnership. These notes were recorded in the corporation's Miscellaneous Notes Payable account and totaled $138,572.08 in 1947, $186,018.92 in 1948, and $246,149.40 in 1949. Included in these notes were those issued to petitioner, his daughter, and the partnership, as follows:

Date of Due date Amount Date paid at 12/31/47 at 12/31/48 at 12/31/49
Unpaid Unpaid Unpaid

note

During 1947 the partnership and Joyce Ann Gooding advanced to the corporation an additional sum of $23,000, of which $17,000 was outstanding at the close of both 1947 and 1948 and $14,000 was outstanding at the close of 1949.