*54 Decisions will be entered under Rule 50.
During the first part of the taxable year and during several prior years a partnership made many sales under fictitious names and failed to record them on its books. In the middle of the taxable year the partnership made a voluntary disclosure to the Commissioner and employed a reputable firm of accountants to ascertain all omitted sales. As a result of their efforts, some $ 295,000 of omitted sales were added to the sales recorded on the partnership books. These additional sales were reflected in the return prepared by the accountants for the taxable year and filed by the partnership. At the time it was filed the partnership thought it was a true return, but now concedes that it inadvertently omitted some $ 5,250 of sales. Respondent determined that a large amount of other sales was omitted. Held:
1. All petitioners were partners during taxable year.
2. Amount of sales omitted from return determined to be in excess of that conceded by petitioners upon failure of petitioners to prove the contrary.
3. Cost of "merchandise bought for sale" overstated on partnership return.
4. Respondent failed to prove fraud on part of petitioners*55 with regard to taxable year.
*221 The Commissioner determined deficiencies and 50 per cent fraud additions for the calendar year 1945 as follows:
| Deficiency | Addition under | |
| sec. 293 (b) | ||
| Sidney Cohen | $ 127,475.22 | $ 63,737.61 |
| Robert Leib | 20,600.00 | 10,300.00 |
| Betty R. Cohen | 34,015.74 | 17,007.87 |
| Bertram R. Zucker | 94,248.97 | 47,124.49 |
The deficiencies determined against Sidney Cohen and Bertram Zucker for 1942, 1943, and 1944 have been stipulated by the parties.
*222 The issues, broadly stated, are (1) whether petitioners Betty Cohen and Robert Leib were members of the partnership of L. Cohen & Sons during the calendar year 1945; (2) whether the partnership of L. Cohen & Sons had income in that year from sales in the sum of $ 111,810.21 in addition to that reported on the partnership income tax return; (3) whether an additional allowance on account of "merchandise bought for sale" should be made in computing net income of the partnership; and (4) whether any part of the deficiencies determined against the petitioners*56 for 1945 was due to fraud with intent to evade tax.
The respondent concedes error with respect to another issue involving the inclusion in the partnership income of an item of $ 30,000 appearing in the Loans & Exchanges Account on the books of L. Cohen & Sons' partnership.
FINDINGS OF FACT.
Some of the facts in these cases have been stipulated and are incorporated herein by this reference.
Two of the petitioners, Sidney Cohen and Betty R. Cohen, are husband and wife and were married in 1936. The other petitioners are Robert Leib, their son-in-law, and Bertram R. Zucker, a partner of Sidney Cohen's from 1942.
Prior to 1941 Sidney Cohen was engaged in the business of importing, wholesaling, and manufacturing jewelry items. During this period his wife Betty assisted her husband in his work. In March 1941 Sidney commenced doing business, together with his wife, under the firm name of L. Cohen & Sons. Betty Cohen devoted her full time to this business, taking care of all the inside work at the factory in accordance with her husband's instructions. Sidney handled the outside work or the selling end of the business. Betty was in charge of employees, but also made sales to those dealers*57 who would call at the place of business. By 1944 and continuing throughout 1945 she immediately supervised the work of about 50 employees in the jewelry factory. Her duties also included inspection of stock, packing, styling, and designing. Toward the end of 1942 Bertram Zucker became associated with the firm and he received a one-third interest in the net profits of the business in exchange for his full time and services in the buying end of the business for L. Cohen & Sons. Most of the silver used by the business was purchased by Zucker on the black market, and the search for the required materials required him to travel constantly outside of New York. In August 1944 the Cohens' son-in-law, Robert Leib, became associated with the company as Sidney's "executive assistant in charge of sales and of general administration." In 1945 he was in general charge of assembling the parts into *223 finished merchandise. During 1945 L. Cohen & Sons specialized in the manufacture and sale of identification bracelets, rosaries, and earrings and pearl necklaces. The firm also did some business of the same kind under the name "Elco Novelty Company." It shared office space and the services*58 of some employees with Locketag Jewelry Co., Inc., which manufactured silver jewelry and of which Sidney Cohen was a stockholder and officer.
On January 2, 1945, the four petitioners entered into an agreement affirming a previously existing partnership interest held by each of them in the firm of L. Cohen & Sons. Their respective partnership interests, as described in the agreement, were as follows:
| Name | Per cent |
| Sidney Cohen | 41 2/3 |
| Bertram Zucker | 33 1/3 |
| Betty Cohen | 15 |
| Robert Leib | 10 |
The books of account recorded the setting up of the partnership and the transfer of assets from the predecessor partnership. Betty Cohen and Leib, by the terms of the agreement, were to devote their full time and attention to the business of the partnership, and this they did throughout 1945. Betty, at all times material hereto, maintained a separate checking account in her own name in the Chase National Bank, and savings bank accounts in her own name in the North River Savings Bank and in the Excelsior Savings Bank. A total of $ 17,057.07 was charged to her partnership account in 1945, $ 5,200 of which was charged on the books as "Betty Cohen Drawings" and the rest being charged*59 as "Betty Cohen Excess Drawings." During 1945 some $ 12,173.13 was charged to Leib's account, $ 5,200 of which was charged as "Drawings" and $ 6,973.13 as "Excess Drawings."
For the calendar years 1942, 1943, 1944, and 1945 partnership returns of income, Form 1065, were filed by the firm of L. Cohen & Sons.
On the partnership return for 1944, in Schedule I -- Partners' Shares of Income and Credits, the following appeared:
| Name and address of each partner | Ordinary net income |
| Sidney Cohen, 160 Central Pk. So | $ 74,735.19 |
| Bertram Zucker, 255 Cabrini Blvd., N. Y. | 56,296.18 |
| Betty Cohen, 160 Central Pk. So., N. Y. (percentage) | 29,288.28 |
| Robert Leib, 111-32 76th St., Forest Hills, N. Y. | |
| (percentage) | 15,868.96 |
| $ 176,188.51 * * * |
On the partnership return of income for 1945, signed by Sidney Cohen, in Schedule I -- Partners' Shares of Income and Credits, the following appeared: *224
| Ordinary | |
| Name and address of each partner | net income |
| Sidney Cohen, 160 Central Pk. S. N. Y. | $ 65,048.17 |
| Bertram R. Zucker, 255 Cabrini Blvd. N. Y. C. N. Y. | 52,038.54 |
| Betty Cohen, 160 C. P. South, N. Y. C. | 23,417.34 |
| Robt. Leib, 24 Woodland, Pl. Great Neck, L. I. | 15,611.56 |
| $ 156,115.61 |
*60 In his individual income tax return for 1945 Robert Leib reported, in Schedule E, income from the partnership of L. Cohen & Sons in the sum of $ 15,611.56.
In her individual income tax return for 1945 Betty R. Cohen reported income from the partnership of L. Cohen & Sons, in Schedule E, in the sum of $ 23,417.34.
Betty Cohen and Robert Leib were partners with Sidney Cohen and Bertram Zucker in the firm of L. Cohen & Sons throughout the year 1945.
The books and records of the partnership did not reflect the correct amount of sales for that concern for any of the years 1942 to 1945, inclusive. Sometime in the middle of 1945 the partnership retained the accounting firm of David Kamerman Co. to determine any sales which had been omitted from the records and returns of the partnership for the calendar years 1942, 1943, and 1944, and to ascertain any sales which had not been included in the books or records of the partnership for the current year 1945. The firm had conducted business under various fictitious names during these years, and many of these sales were unrecorded on the books of the partnership. The partnership would have invoices and bills representing these sales sent to *61 the purchasers under a fictitious name, and the checks in payment of these sales were made to the order of the fictitious vendor. These checks were cashed by the firm at a check-cashing agency by an employee of the partnership authorized to do so and identified to the check-cashing agency. The cash obtained was handed over to one of the partners or placed in the partnership safe. No records of many of these transactions were made on the partnership books. As a result of an investigation by the accounting firm in July 1945 there was filed on behalf of the partnership of L. Cohen & Sons a voluntary disclosure to the effect that the partnership had failed to report the following amounts of sales: $ 7,816.55 for 1942, $ 289,629.18 for 1943, and $ 655,950.34 for 1944. As a result of 6 to 8 months' work by the accounting firm and its employees it was ascertained that unrecorded sales had been made in 1945 by L. Cohen & Sons in its own name, the name of Elco Novelty Co., and the fictitious names of Saul Rabkin, C. A. Saab, Al Dash, and Charles Rosen in the total amount of $ 295,235.05. A journal entry was made on the books of L. Cohen & Sons as of the end *225 of 1945 which increased*62 the proceeds from sales by this amount. Respondent's agents determined that additional unreported sales had been made by L. Cohen & Sons in 1945 under other fictitious names. The income tax return of L. Cohen & Sons for 1945 was prepared by the accounting firm and reported sales in an amount which included the additional sales of $ 295,235.05 recorded by the journal entry and reflecting all the additional sales which the accounting firm had found to have been made. In addition to the sales thus recorded and included in the income tax return for 1945, L. Cohen & Sons had made sales during that year in the sum of $ 101,109.81.
When the journal entry was made in the books of L. Cohen & Sons increasing the sales for 1945 by the sum of $ 295,235.05, an entry was also made increasing the account "merchandise bought for sale" by $ 239,140.39, which represented the accountant's estimate and calculation of the probable cost to L. Cohen & Sons of these additional sales. Neither the latter figure nor any amounts which it included had previously been recorded on the books of L. Cohen & Sons, and there were no checks or invoices to support it.
On the partnership return of income filed for *63 1945, the sum of $ 690,003.46 was claimed as "merchandise bought for sale." This sum was composed of (a) $ 317,621.98, which was reflected on the books of the partnership and evidenced by canceled checks and invoices of acknowledged suppliers, (b) $ 133,241.09, which was also reflected on the books of the partnership but represented checks drawn to cash or to fictitious names, which checks were cashed and proceeds turned over to Sidney Cohen, and (c) $ 239,140.39, which was reflected on the books by the journal entry referred to above. In his notice of deficiency respondent allowed the $ 317,621.98 referred to above, plus $ 206,589.11. Respondent, therefore, disallowed $ 165,792.37 of the total of $ 690,003.46 claimed as merchandise bought for sale, but allowed $ 73,348.02 in excess of the amounts reflected on the partnership books as merchandise bought for sale.
Silver was required by L. Cohen & Sons for the fabrication of its jewelry. Only 4,000 ounces of silver were legally available to it each month. It was using several times that much silver in 1945, and purchased a considerable amount of silver on black market for cash. Some silver purchased had to be refined and then made*64 into sterling silver and made up into "flat stock," wires, rings, or chains. The work on illegally acquired silver was also done surreptitiously and on a cash basis through agents who kept themselves and their principals anonymous.
It was stipulated that there are deficiencies in Federal income tax and 50 per cent additions due from Sidney Cohen for the years and in the amounts as follows: *226
| Year | Deficiency | Addition under |
| sec. 293 (b) | ||
| 1942 | $ 18,690.63 | $ 9,345.32 |
| 1943 | 322,430.99 | 161,353.96 |
| 1944 | 373,733.68 | 186,866.84 |
It was stipulated that there are deficiencies in Federal income tax and 50 per cent additions due from Bertram R. Zucker for the years and in the amounts as follows:
| Year | Deficiency | Addition under |
| sec. 293 (b) | ||
| 1942 | $ 8,040.19 | $ 4,020.10 |
| 1943 | 116,237.90 | 58,045.72 |
| 1944 | 152,671.10 | 76,335.55 |
No part of any of the deficiencies for 1945 was due to fraud with intent to evade tax.
OPINION.
The issues for decision herein are:
1. Whether Betty Cohen and Robert Leib were partners in the firm operating as L. Cohen & Sons during the calendar year 1945.
2. Whether income from any sales was omitted from the L. Cohen & Sons partnership*65 income tax return for 1945 and, if so, the amount thereof.
3. Whether respondent erred in determining that the cost of "merchandise bought for sale" was overstated on that partnership return.
4. Whether any part of the deficiencies determined against the taxpayers was due to fraud with intent to evade tax.
To determine whether Betty Cohen and Robert Leib were partners in L. Cohen & Sons during 1945 with Sidney Cohen and Bertram Zucker it is necessary to consider all of the factors established by the evidence which are relevant to such an inquiry. ; . No one of these factors predominates in importance, and all must be viewed together in determining whether there existed a valid partnership or not. .
The Commissioner points out that on January 2, 1945, Betty Cohen and Robert Leib signed a formal partnership agreement with Sidney Cohen and Zucker affirming their previously existing partnership relationship; that the partnership's income tax return for 1945 listed Betty*66 Cohen and Robert Leib as partners in the firm; that both Betty and Leib contributed important services to the firm during the year 1945; and that the individual income tax return of each for that year reflected the amounts received as a partner of L. Cohen *227 & Sons. Both Betty and Leib devoted their full time to their positions with the firm. These positions were important ones as Betty Cohen was the forewoman of the jewelry factory and Leib was Sidney Cohen's "executive assistant." Leib worked full time for the firm and, even though he lacked the knowledge of the business which the other partners possessed when he first joined the firm in 1944, he had a good business background, superior education, and the indubitable cachet to advancement arising from his status as the son-in-law of Sidney and Betty.
The petitioners argue that the partnership agreement was meaningless and should not be considered sufficient in itself to establish the existence of the partnership. Betty Cohen and Robert Leib testified that they did not know what they were signing at the time they signed the partnership agreement. Betty Cohen testified that she signed only because her husband told her *67 to sign, and Leib testified that he signed the agreement without reading it because he did not want to incur the displeasure of his father-in-law, Sidney Cohen. The petitioners contend that there was no bona fide intent that Betty Cohen and Robert Leib were to be actual partners in L. Cohen & Sons. We find this difficult to believe. We are of the opinion that the record establishes a bona fide intent on the part of all the parties that Betty and Robert should be partners in the firm, and that not only the agreement but their statements and services bear this fact out. After considering all the relevant facts, we are convinced that Betty Cohen and Robert Leib were partners of L. Cohen & Sons during the calendar year 1945.
The second issue for decision is whether the proceeds of some sales were omitted from the partnership income tax return for 1945. There is no longer any issue as to the years 1942, 1943, and 1944 as the deficiencies for those years have been stipulated by the taxpayers. The petitioners admit that the practice followed during the years 1942, 1943, and 1944 of omitting sales from the partnership records was continued for a portion of the calendar year 1945 until*68 an accounting firm was retained in July 1945 to determine any and all sales which had been omitted from their records for that year. The petitioners claim, however, that the journal entry posted by the accounting firm and representing the additional sales made in 1945 under fictitious names accounted for all of the sales made under fictitious names during that year, with the exception of sales in the approximate amount of $ 5,250 inadvertently omitted, and hence that there was no omission of sales on the partnership income tax return for 1945 with the exception noted. The respondent determined that the correction of the books and records by the accounting firm did not include all of the sales which were made by the partnership under various fictitious names in 1945. The partnership for several years *228 had been in the practice of concealing the amount of sales made by using fictitious names and by not recording on its books the sales made under those names. The payments for these sales were made by checks which were made out to the fictitious names and were cashed at a check-cashing agency. The proceeds from these checks were never recorded on the partnership records. *69 A considerable part of the cash thus derived was used to make the partnership's purchases of silver on the black market. Petitioners admit the confusion in their books and records but point to the fact that an honest attempt was made in 1945 to correct the records of the partnership as to the amount of sales made. Petitioners, though now conceding that a few sales were unaccounted for even after the correction of their records by the accounting firm, contend that the respondent's determination of additional unreported sales for 1945 in the amount of $ 111,810.21 was excessive, unreasonable, and arbitrary.
Upon a most unsatisfactory record, and relying considerably upon the rule as to the burden of proof with regard to deficiencies determined by the respondent and the inadequacy of petitioners' explanations, we have concluded that there were additional unreported sales by L. Cohen & Sons in 1945 of $ 101,109.81.
Another question of fact before us is whether the petitioners are entitled to a larger allowance for "merchandise bought for sale" in 1945 than the Commissioner allowed in computing the net income of the partnership. In the partnership return for 1945 a deduction of $ 690,003.46*70 was claimed for cost of purchases. Of this amount the respondent allowed $ 317,064.98, which was reflected on the books and records of the partnership and evidenced by canceled checks and invoices, and disallowed the $ 133,201.40 claimed for cost of purchases which, though reflected on the books and records of the partnership, was supported only by checks drawn to cash or to fictitious names, and also disallowed an additional amount of $ 239,140.39 which was the amount determined by the accounting firm to be the cost of the additional sales of $ 295,235.05. However, the respondent did allow as cost of "merchandise bought for sale" the sum of $ 206,589.11 in addition to the $ 317,064.98 properly reflected on the partnership books and adequately supported. Thus, respondent allowed over 55 per cent of the amount of the cost of purchases in dispute, and the petitioners have failed to show that the partnership is entitled to any additional deductions on this account.
The final issue for decision is whether the petitioners are liable for the 50 per cent fraud additions determined by the respondent because a part of the deficiencies was due to fraud with intent to evade tax. The burden*71 of proof is on the respondent and the proof must be clear and convincing. Our conclusion that the petitioners have not successfully borne the burden of proof as to the greater part of the deficiencies *229 in tax determined by respondent does not relieve the respondent of the necessity of sustaining his burden as to the fraud issue. . The respondent stresses the pattern of fraud which was set by the partnership in the earlier years of 1942, 1943, and 1944, the years for which the then partners of L. Cohen & Sons have agreed to substantial deficiencies and fraud additions. The respondent claims that this pattern continued in 1945, and that a part of the deficiency for that year was also due to fraud with intent to evade tax. The record does show that the partnership made sales under fictitious names in an effort to conceal the true amount of sales during at least a part of 1945, but the record also shows that the petitioners retained an accounting firm sometime in the middle of the year 1945 to straighten out their records and to determine what sales income had been omitted from the books and records. As a *72 result of this investigation, additional sales in the amount of $ 295,235.05 were entered by petitioners' accountants on the books of the partnership, and these additional sales were included in the partnership's return filed for the taxable year.
As we view the record on the fraud issue after making due allowance for the burden of proof which is here upon the respondent, the books of petitioners' firm were fraudulently kept until the middle of 1945, but after that time there was an earnest and conscientious attempt by petitioners, acting through reputable accountants in connection with a voluntary disclosure, to assemble information which would make it possible to prepare an honest return of their income for the year 1945. As of the end of this tax accounting period and in connection with the return filed for this year (1945), we are unable to conclude that petitioners were then acting fraudulently; and it is with regard to the return filed for the taxable year that fraud must be shown. . Because of petitioners' manner of doing business and the inadequate, confused, and fraudulent books and records kept by*73 them until the middle of the taxable year, some $ 5,250 of sales was inadvertently omitted despite the well planned and well executed work of petitioners' accountants. There were also other questionable sales under fictitious names. Since the petitioners did not successfully bear the burden of proving that these sales were not made by them, we have included them in petitioners' gross income. However, on this issue of fraud the burden of proof is on respondent and therefore, in considering this issue, we cannot assume that these questionable sales were made.
Thus, we are left with a situation which may be described as follows: Petitioners' business was carried on and their books and records were maintained in a fraudulent manner until the middle of the taxable year; at that time a voluntary disclosure was made to respondent *230 and petitioners made a conscientious effort through capable accountants to straighten out their affairs; at the end of the taxable year the accountants prepared and petitioners filed a return which petitioners considered in good faith to be a true and correct return of their income for the taxable year; but this return, because of petitioners' past*74 fraudulent conduct and records, proved to be incorrect in that it inadvertently omitted a relatively small amount of sales.
Under these circumstances, we are unable to conclude that respondent has borne his burden of proof on the fraud issue.
Decisions will be entered under Rule 50.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: Robert Leib, Docket No. 51773, Betty R. Cohen, Docket No. 51774, and Bertram R. Zucker, Docket No. 51778.↩