*1436 1. Income from the sale of cartoons created by petitioner, and from licenses granted to use the characters portrayed in the cartoons, is taxable to petitioner and may not be divided with his father and mother, who contributed nothing to the partnership through the books of which the income was passed.
2. The evidence does not establish that racing and breeding stables were established with the expectation of profit, and a loss sustained in the operation may not be deducted.
*1041 The respondent determined a deficiency in petitioner's income tax for the year 1925 in the amount of $27,931.01. Petitioner alleges that respondent erred in determining that there was no valid partnership between himself and his father and mother, as a result of which respondent has added to petitioner's reported income the amounts credited to the father and mother on the partnership books. Petitioner further alleges that he is entitled to a deduction for a loss sustained in the operation of a racing and breeding stable for profit.
*1437 FINDINGS OF FACT.
I.Petitioner is the originator of the "Mutt and Jeff" cartoons. In 1907 he entered into a contract with the Bell Syndicate, Inc., under which he was to supply that corporation with Mutt and Jeff cartoons. *1042 The business of the Bell Syndicate, Inc., is to furnish cartoons and other features to newspapers. Petitioner in later years engaged in the production of motion pictures based on the Mutt and Jeff cartoons.
Petitioner entered military service in 1917 and his attorney considered it advisable to have his cartoon and motion picture business carried on by corporations during petitioner's service in the military forces. Accordingly, two corporations were organized, known as "Bud Fisher's Mutt and Jeff Cartoon Corporation" and "Bud Fisher Films Corporation." Some stock in these corporations was issued in the names of petitioner's father, A. A. Fisher, and his mother, Nellie G. Fisher. These corporations were granted personal service classification by the respondent for the year 1919.
On January 1, 1919, petitioner, his father, and his mother entered into a written partnership agreement which, according to its terms, was to continue for five*1438 years. The business of the partnership was to be the "production, purchase and sale of cartoons, moving pictures, dramatic rights and novelties and the licensing of other persons and corporations to use or deal in the same." The three parties to the agreement assigned to the partnership their interests in the corporations that had been organized in 1917, and it was agreed that the "partnership shall succeed to and include all of the business" of the two corporations, which were to be dissolved after transferring their assets to the partnership. It was provided in the partnership agreement that:
THIRD: The said partnership business shall be conducted under the name "Fisher and Fisher".
FOURTH: The interest of the several partners in the said partnership business and in the earnings thereof shall be share and share alike, one-third each.
The partnership was not formally dissolved upon expiration of the agreement at December 31, 1923, but continued, without formal extension, until December 31, 1925.
On January 3, 1921, petitioner entered into a new contract with the Bell Syndicate, Inc., under which he was to supply "cartoons drawn by the party of the second part [petitioner] *1439 and known as 'Mutt and Jeff' cartoons, consisting of drawings for seven column week day comic strips and drawings for Sunday colored comic pages." This contract was to run for the three years from August 8, 1921, to August 7, 1924. For the cartoons supplied by petitioner, the Bell Syndicate, Inc., agreed to pay him $3,000 per week, plus 75 percent of the amount of its gross sales of the cartoons up to $4,700 per week (against which the $3,000 per week was to be applied), and 50 percent of gross sales in excess of $4,700 per *1043 week. On the back of this contract an endorsement, signed by the Bell Syndicate, Inc., and "Fisher and Fisher by Bud Fisher" was entered December 12, 1923, as follows:
The within contract having been assigned by the party of the second part to the partnership of Fisher and Fisher, it is hereby agreed by and between the respective parties to the within contract that the same shall be and it is hereby extended for the further term of three years ending August 7, 1927, upon all of the same terms and conditions to which each of the undersigned parties hereby agrees.
During the year 1925 the Bell Syndicate, Inc., issued checks weekly in the amount*1440 of $3,000 each, and at various times checks for the agreed percentage of sales, all payable to the order of "Fisher and Fisher." These checks were received by petitioner's attorney who deposited them in bank to the credit of "Fisher & Fisher." During the years 1920 to 1923, inclusive, several contracts were executed by Fisher & Fisher granting to others the right to use the Mutt and Jeff characters in various ways, such as printing them on handkerchiefs, the manufacture of toy figures, and the publication of comic strips in book form. Such contracts provided for royalties or a percentage of proceeds of sales to be paid to Fisher & Fisher. The principal source of income to Fisher & Fisher was the Bell Syndicate, Inc., contract.
Neither the petitioner nor his father or mother performed any service for the partnership. The drawings necessary for the newspaper cartoons and the motion picture films were made by paid employees. In 1925 petitioner was abroad for four or five months. The operations of the partnership were conducted under the supervision of petitioner's attorney; it had no separate office in 1925. The attorney negotiated all contracts, and after he concluded negotiations*1441 and reached favorable terms he consulted the partners concerning them. The partnership books were kept by a firm of certified public accountants.
In the years 1919 to 1925, inclusive, the withdrawals of the partners from income in the Fisher & Fisher account were as follows:
| Year | Petitioner | A. A. | Nellie G. |
| Fisher | Fisher | ||
| 1919 | |||
| 1920 | $162,545.97 | $12,306.43 | $12,252.03 |
| 1921 | 170,763.29 | 13,237.50 | 13,738.27 |
| 1922 | 166,131.82 | 19,456.92 | 18,794.09 |
| 1923 | 76,406.80 | 18,597.68 | 17,893.23 |
| 1924 | 88,225.97 | 13,998.75 | 12,948.01 |
| 1925 | 138,245.94 | 11,721.16 | 11,041.41 |
At the close of the years 1924 and 1925 petitioner's overdrafts were, respectively, $294,842.47 and $374,091.43.
*1044 On January 2, 1926, petitioner and his father and mother executed a "memorandum of agreement of dissolution of partnership" to take effect at December 31, 1925, which provided:
That the assets of the said partnership of Fisher and Fisher shall be distributed among the parties hereto as their interests appear according to the books of account of the said partnership.
No physical distribution of assets was made at December 31, 1925. The assets - other than*1442 contracts - were credited to the partners as joint owners, and income from the securities on hand at the date of dissolution was credited to them as joint owners until the death of A. A. Fisher, and since then it has been credited two thirds to petitioner and one third to his mother. Such credits to petitioner's account and a credit by reason of his inheritance of his father's estate in 1926 had reduced the amount of his partnership overdraft to $123,759.67 at June 30, 1930.
By instrument dated January 2, 1926, Fisher & Fisher assigned three contracts, including that with the Bell Syndicate, Inc., to a newly organized corporation, Fisher & Fisher, Inc., for a recited consideration of 75 shares of stock. The authorized capital stock of this corporation consisted of 100 shares.
Petitioner's father died December 23, 1926. Petitioner, his father, and his mother had previously executed wills, under which all of petitioner's property was to go to his father and mother, and all of the property of the father and mother was to go to petitioner. Under the father's will petitioner acquired all of his property at his death in 1926. In the estate tax return filed by petitioner as executor*1443 of his father's estate, the father's share of the partnership capital was listed at $245,391.53, exclusive of an amount of $100,000 which the father had caused to be transferred to petitioner on the partnership books in 1925. In the return filed the decedent is shown as the owner of one share of stock in Fisher & Fisher, Inc., which share was claimed to have a book value of $798.78. Federal estate tax in the amount of $1,237.46 was paid by the petitioner as executor of the decedent's estate.
For the years 1919 to 1925, inclusive, partnership returns were filed by Fisher & Fisher showing income from contracts, royalties, and interest as distributable to petitioner, his father, and his mother, one third to each. The respondent allowed the income to be so divided for the years 1919 to 1924, inclusive. For the year 1925 the respondent refused to allow the income to be divided, and increased income reported by petitioner by the amount of $111,149.79, this being the amount shown on the partnership return as being distributable to petitioner's father and mother.
*1045 II.
In 1910 petitioner commenced the operation of a racing stable, and since that time has had horses*1444 and stables. In 1925 he had about 25 horses, some of which were at his breeding stables in Kentucky and the others, about 10 in number, were in training at the several tracks in the eastern part of the United States at which they were raced. Detailed records were kept of the costs of operating the stables. The costs, supported by vouchers, were tallied monthly under the headings of payroll, kitchen, personal expense - trainer, feed, shipping, jockeys, blacksmith, veterinary, medical supplies, stable supplies, and miscellaneous. The accounts were kept by a firm of certified public accountants. Petitioner kept himself informed as to the expenses of operation and discussed the several items with his trainer. Petitioner employed as a trainer a recognized expert. Petitioner attended sales and personally decided which horses to sell or buy and at what prices. He determined which horses should be entered in the various races, selected the jockeys, and gave them riding instructions.
In 1925 the expenses of operating petitioner's stables exceeded the gross income by $29,616.47.
OPINION.
ARUNDELL: The first question is whether the income carried through the partnership books*1445 in 1925 was in reality partnership income and distributable among petitioner, his father, and his mother, or whether it was income to petitioner alone and taxable to him.
The respondent allowed the income to be divided in prior years and petitioner places stress on this as overcoming the presumptive correctness of respondent's determination for 1925. We do not know what facts were presented as to the prior years, but, whatever they were, the findings for the prior years do not preclude the respondent from reaching a different conclusion for the current year either on questions of fact, , or law, if the prior interpretation is erroneous, ; affd., .
Petitioner's contention throughout the trial of this case is that the first question for decision is limited to the narrow issue of whether a partnership existed in 1925. Two errors are alleged in respect of the partnership matter. First, the respondent erred in determining "that no valid partnership existed during the year 1925," and, second, that he "erred in increasing the net income reported*1446 by the petitioner in the amount of $111,149.79." Both of the alleged errors are denied by the respondent.
*1046 One of the first steps in petitioner's proof was establishing that under the laws of New York a partnership may continue without express agreement beyond the time fixed for its termination. The statutes of New York provide that in such cases "the rights and duties of the partner remain the same as they were at such termination." McKinney's Consol. Laws, Book 48, sec. 45. But we do not understand the question before us to be solely that of whether there was a partnership in 1925. Even though there was a valid partnership, it does not follow that all of the amounts recorded on its books constituted income to it. The issues framed by the two allegations of error, particularly the second, and the denial thereof, take the question out of the narrow range suggested by petitioner and require a determination of whether the income was in reality petitioner's or that of the alleged partnership.
We have in this case a great mass of documentary evidence, all of which, summarized, merely tends to show that there was a partnership agreement and that records were kept in*1447 partnership form. There is no evidence tending to show a contribution by petitioner's father and mother of either property or services to the enterprise conducted under the name of Fisher & Fisher. "The requisites of a partnership are that the parties must have joined together to carry on a trade or adventure for their common benefit, each contributing property or services, and having a community of interest in the profits." , quoted in . See also ; affd. on this point, . Here, none of the so-called partners contributed any services. Petitioner said that he brought his father in because he needed ideas, and that his mother did the bookkeeping, but the record contains no evidence of the contribution of ideas by the father, and it appears that the books were kept by a firm of certified public accountants. It is argued that the father and mother contributed capital by reason of their ownership of interests in the two corporations which preceded Fisher & Fisher. The evidence*1448 as to their interests in the corporations is decidedly unsatisfactory. The stock records of the corporations were not produced and petitioner's attorney who organized the corporations testified that he had never seen the stock records. He further testified that he knew that the stock was equally divided among the three. It seems to us that, confronted with a question as to the source of property from which income was derived, a clearer showing than this ought to have been made. The failure to produce the corporate records was not even explained.
The evidence as to the contributions of petitioner himself is likewise vague. It is clear that he performed no services for Fisher & Fisher in the taxable year. The firm's operations were conducted *1047 wholly by paid employees. There has been no record produced of petitioner's assignment of his interest in the Mutt and Jeff cartoons to the partnership. There is some testimony that the cartoons had not been successfully copyrighted, but it must be assumed that petitioner somehow had the exclusive right to the cartoons and the characters portrayed, else he could not have commanded the high prices paid by the syndicate and*1449 others for the right to publish or otherwise use them. Petitioner originated the cartoons, and, as far as the record shows, had a property right therein throughout the years. Under the contract of January 3, 1921, with the syndicate, the petitioner was personally obligated to supply the cartoons. No mention is made of a partnership in that contract, and clearly under it the income was petitioner's. It is not until December 12, 1923, that we find the partnership mentioned in connection with the contract, when by endorsement on the contract it is stated that it had "been assigned by the party of the second part to the partnership of Fisher and Fisher." But thereafter, and through the taxable year, petitioner took for his own use the bulk of the income alleged to belong to the partnership. His conduct in this respect, and the apparent acquiescence of the father and mother, strongly indicates that all three continued throughout to regard the cartoons and contracts as property of the petitioner and that the others had no substantial interest therein. He not only drew in full the one third claimed to be his share, but took out substantial sums which he alleges belonged to his father*1450 and mother. Each year he did so, and by the end of 1925 he had taken out $374,091.43 more than what he now says was his. This huge overdraft he has never repaid, though subsequent credits to his account have reduced it to $123,759.67. By far the greater part of the reduction appears to be due to petitioner's inheritance of his father's estate. The value of decedent's estate as returned for estate tax purposes was $253,466.86, from which deductions of $14,707.82 were claimed, leaving a net amount of $238,759.04. The total reduction of the overdraft amounts to $250,231.76.
It is inconceivable that a bona fide business partnership would be conducted in this way. On the one hand, we have a written document declaring three persons to be equal partners; on the other, there is the conduct of the parties, which in no respect is that of equal partners. He who created the property from which income is derived continues to enjoy that income. While the parties to the agreement, on the strength of it alone, might have compelled an accounting, this does not prevent the Government from inquiring into the practical questions of the source and recipient of income. When the true facts as*1451 to source and destination are disclosed "no distinction can be taken according to the motives leading to the *1048 arrangement by which the fruits are attributed to a different tree from that on which they grew." .
; , cited by petitioner, has this to say on the question of whether a partnership existed:
Assuming some written contract between the parties, the question may arise whether it creates a partnership. If it be complete, if it expresses in good faith the full understanding and obligation of the parties, then it is for the court to say whether a partnership exists. It may, however, be a mere sham intended to hide the real relationship. Then other results follow. In passing upon it, effect is given to each provision. Mere words will not blind us to realties. Statements that no partnership is intended are not conclusive. If as a whole a contract contemplates an association of two or more persons to carry on as co-owners a business for profit, a partnership there is. Section 10. On the other hand, if it be less than this, no partnership*1452 exists. Passing on the contract as a whole, an arrangement for sharing profits is to be considered. It is to be given its due weight. But it is to be weighed in connection with all the rest. It is not decisive. It may be merely the method adopted to pay a debt or wages, as interest on a loan or for other reasons.
In the case before us the form of the written agreement was that of an association "to carry on as co-owners a business for profit." But the realities of the case are far different from the form of the contract as above pointed out. There was an ostensible "arrangement for sharing profits", but this, as we have seen, was utterly disregarded, and when it is "weighed in connection with all the rest" it is found wanting as a true expression of the intent of the parties to the agreement.
Arrangements within families for the diversion of income, while not necessarily subject to condemnation because of the close relationship of the parties, are always subject to careful scrutiny and clear and convincing evidence is required to establish their bona fides. See *1453 ; . It is helpful in such cases to have the background of the transaction that is under review and evidence of the actual operation through the testimony of the participants. In this case neither the petitioner nor his mother was called as a witness on the partnership question, although the presiding Members, during the trial, clearly expressed his view that such testimony was desirable as a possibly important element in the decision of the case. Near the close of the trial petitioner was called as a witness on another issue, and, when counsel for respondent attempted to cross-examine him on the partnership matter, counsel for petitioner objected and insisted that for any examination on that question the petitioner became a witness for respondent. The only testimony given by petitioner respecting the partnership was elicited by the presiding Member.
If, as alleged, the three were equal partners, the dissolution of the firm would seem to be an appropriate time for the casting up *1049 of accounts and a division of the property. But no such division was made. A part of the property*1454 was transferred to what is called a joint account. This, as we understand it, reflected petitioner's overdrafts. He neither then nor later repaid to the other two their shares. The rest of the property, consisting of three contracts, was assigned to the corporation organized to succeed to the business of Fisher & Fisher. If the three were equally interested in the partnership it would seem, in the absence of any other agreement, that their interests would be the same in the corporation. The evidence as to how the stock of the corporation was distributed is not at all satisfactory. The instrument of assignment of the three contracts to the corporation recites a consideration of 75 shares of stock of the new corporation. It does not appear that these shares were distributed to the three individuals, either directly or carried into the joint account established upon dissolution of the partnership. In the estate tax return filed by petitioner as executor of his father's estate, the father is shown as owning but one share of the stock. In the income tax return of Fisher & Fisher, Inc., for 1926, executed by petitioner as president and treasurer, it is stated that petitioner owned*1455 98 shares of stock and his father and mother one share each. At the trial of this case petitioner testified that his father and mother each owned one third of the 100 shares of capital stock of the corporation. Here again we feel that more reliable evidence might have been produced by the petitioner. The attorney who tried this case for petitioner was active in the organization and operation of the corporations preceding and the one succeeding Fisher & Fisher, and must be presumed to have access to the corporate records. Upon the record before us, confused as it is on this question, we are unable to make a definite finding as to who received the stock of Fisher & Fisher, Inc.
It is accordingly our conclusion that the partnership agreement did not reflect the true relation of petitioner, his father, and his mother; that, having regard to the substance of the matter rather than the mere form of the written instrument and bookkeeping entries, there was no bona fide partnership; that petitioner was the real owner of the income-producing property and the income in the first instance was his and taxable to him.
The second question is whether the loss sustained in the operation*1456 of petitioner's racing and breeding stables is deductible. Petitioner cities several cases in which losses incurred in operating stables have been allowed. See ; affd., ; ; ; ; affd., . In all of the cases cited it was found that the stable had been created with the expectation of making profits. For example, in the Field*1050 case, the court points out that the taxpayer testified that he established his stables "with a serious and business-like desire to make his operation profitable" and that "it was his intention to give up the enterprise if it was not successful in making money." We have no such evidence here. We know nothing of petitioner's object in embarking upon the hazardous enterprise of breeding and training horses for the race track. The substance of the evidence before us is that petitioner required detailed records to be kept of the cost of operating stables, and that he personally attended to a number of matters, *1457 such as the purchase and sale of horses and the selection of those to be entered in races. This evidence is insufficient to overcome the presumptive correctness of the respondent's determination. The keeping of accounts does not in and of itself demonstrate the object of an enterprise. And so as to the personal attention given to some phases of the stables, their operation as a hobby or pleasure would not preclude his giving them his attention. The evidence does not convince us that the stables were operated for profit and the deduction claimed cannot be allowed.
Reviewed by the Board.
Decision will be entered for the respondent.