Peterson v. Commissioner

*1010 These proceedings, duly consolidated, are for the redetermination of deficiencies in the petitioners' income tax for 1923 as follows:

The sole issue, common to both proceedings, is raised by the following allegation of error:

(a) In determining the petitioner's net income for 1923, the Commissioner has erroneously added to the net income reported one-half of the earnings reported by the Glenn Colusa Sheep Company.

FINDINGS OF FACT.

The petitioners are residents of the State of California.

During and prior to the taxable year 1923, each petitioner owned 45 per cent of the capital stock of the Moore-Peterson Company, (hereinafter*1267 referred to as the Corporation), a California corporation engaged in the business of sheep raising and farming. Following the slump of 1920 and 1921, the Corporation was in bad shape financially and unable to discount its notes or to finance its operations. The San Francisco Cattle Loan Company had been financing the operations of the Corporation and agreed to continue to finance these operations under a new arrangement. A new financing company, known as the California Cattle Loan Company, was organized and the petitioners "set up the Glenn-Colusa Sheep Company" (hereinafter referred to as the Partnership). The Corporation and the Partnership were doing business in 1923 and each filed an income tax return. The Partnership return of income was filed on Form 1065. This return showed gross sales in the amount of $711,321.26 and a net income of $24,562.69. This return, which was subscribed and sworn to by "R. B. Moore (Member of Partnership)," contains the following statement:

This partnership is owned 50% by R. B. Moore of Willows, California and 50% by P. R. Peterson of Sites, California. The same parties own practically all of the capital stock of Moore Peterson Co. a corporation*1268 of California. This partnership was formed for the express purpose of financing operations, the profits from which were used to retire debts and pay losses of the Moore-Peterson Co. The Total amount of income shown by this return was paid to R. B. Moore and P. R. Peterson for the account of Moore Peterson Co. and will be reported as income on the return of the Moore Peterson Co. We believe that this places the return of both the corporation and the partnership in proper form but return showing consolidation of accounts could be filed if necessary, the result being the same.

*1011 The Corporation reported gross sales in 1923 in the amount of $147,346.03, and returned as income from the Partnership the amount of $24,562.69, which had been returned as the net income of the Partnership. The Corporation return was signed by "R. B. Moore, President, P. R. Peterson, Secty."

The books of the Partnership were kept at the office of the California Cattle Loan Company and the net earnings of the Partnership were applied against the indebtedness of the Corporation evidenced by notes endorsed by these petitioners.

The net earnings of the Partnership were not distributed to these*1269 petitioners. The Commissioner has added one-half of the amount of such net earnings to the income reported by each petitioner.

OPINION.

SMITH: The petitioners claim that the earnings of the Partnership belong to the Corporation, and that they never received any portion of such earnings. In effect, they seek to repudiate the sworn statement on the Partnership return for 1923 and contend that they were not the owners or operators of the Glenn Colusa Sheep Company, but that it was in reality the enterprise of the finance company and that they (the petitioners) were mere employees. It appears that the Partnership was "set up" for the purpose of creating a more favorable balance sheet so that the same operations, theretogore conducted through the Corporation (owned and controlled by these petitioners), could be continued under a new finance arrangement. At the hearing, petitioner Moore Testified that he and Peterson set up the Glenn Colusa Sheep Company.

Section 2395 of the Civil Code of California defines a partnership as "the association of two or more persons, for the purpose of carrying on business together, and dividing its profit between them." No sufficient evidence*1270 has been offered to show the nonexistence of the Partnership, which the petitioners now seek to repudiate. Section 218(a) of the Revenue Act of 1921 provides in part that:

* * * There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year, * * *

The reported net income of the Partnership has been properly included in the net income of these petitioners. The income of the Partnership was used to reduce the indebtedness of the Corporation, for which the petitioners had a liability as endorsers. The reduction of that liability pro tanto benefited these petitioners, and their acquiescence in such application of the income that otherwise would have been distributed to them does not relieve them of their tax liability thereon. Cf. .

Judgment will be entered for the respondent.