*2502 1. The books of the partnership of Thompson & Black of which the petitioner was a member held to have been kept on the accrual basis, and the income of the partnership and the petitioner's distributive share thereof should be determined on that basis.
2. The petitioner was in 1920, 1921, and 1922 a member of a partnership which was on the basis of a fiscal year ending June 30. The petitioner drew from the partnership certain amounts as salary, but they were in fact distributions of earnings. Held, the amount so drawn in any fiscal year of the partnership was income to the petitioner for the calendar year in which the fiscal year ended.
3. Collection of $31,205.51 of the tax assessed on the original return of the petitioner for 1919 held to be barred by the statute of limitations.
*1192 This proceeding is for the redetermination of deficiencies in income tax asserted by the respondent in the amounts of $33,578.93 for the year 1919, $9,554.49 for the year 1920, and $1,333.07*2503 for the year 1922. The petitioner also alleges that collection of $31,205.51 of the tax assessed on his original return for 1919 is barred by the statute of limitations.
FINDINGS OF FACT.
The petitioner is an individual residing at Tulsa, Okla. During the years 1919 to 1922, inclusive, he was a resident of New York City. He is now an independent producer of oil, but his training *1193 and experience have been chiefly as a lawyer, a certified public accountant, and an appraisal engineer.
In the latter part of the year 1918 the petitioner and one Jacob Schapiro, who had been an accountant in New York specializing in income-tax matters, formed a partnership under the firm name and style of Thompson & Black. This partnership continued until the end of 1921. During most of that time Dean Langmuir, Herman Stein, and M. L. Glass were also members of the firm.
The firm of Thompson & Black did no auditing in the ordinary sense, but dealt primarily with cases involving mixed law and accounting, including railroad litigation and tax matters. The charges for the services of this firm were not made on a per diem basis, but on the basis of round fees. Upon the organization*2504 of the partnership the petitioner determined that the partnership books should be kept on the accrual basis. The original records kept by the partnership included copies of bills rendered to clients, the memoranda records of checks on the bank. At first the petitioner would post these records to a general analysis sheet, which had the effect of records of checks on the bank. At first the petitioner would post being a ledger and a balance sheet statement. During 1918 the only records that were contemporaneously kept were the copies of bills, the memoranda on the check stubs showing deposits, and the entries on the check books showing checks drawn on the bank. But beginning in 1919 a set of books comprising a cash book, a journal, and a ledger were kept currently and were written up to embody the accounts for 1918. The cash book of the partnership for 1918 was written up in 1919, in accordance with the petitioner's instructions, from the original check books and bill records for 1918. Journals and ledgers were started in 1919 in the same way as the cash book, and were written up to cover 1918 from the original records. Journal and ledger entries were made under the petitioner's*2505 instructions from the check books and copies of bills, and were intended to reflect the manner in which the petitioner wanted the books to be kept. The books of the partnership were inadequately kept during the years 1919 and 1920 by an employee who was hired in February, 1919. Some time in 1920 a certified public accountant was employed to go over and audit all of the items and prepare balance sheets for the years 1918, 1919, and 1920.
The returns of the partnership of Thompson & Black for the years 1918 to 1921, inclusive were made on the accrual basis and the petitioner included in his personal income-tax returns for those years his distributive share of the partnership income computed on that basis.
About July 1, 1920, the petitioner organized the partnership of Thompson & Worley. The partnership kept its accounts and filed *1194 its income-tax returns on the basis of a fiscal year ending June 30. In his return for the calendar year 1920 the petitioner included the sum of $16,660.67, representing a distribution to him in the last six months of 1920 of the profits of Thompson & Worley earned in its fiscal year ended June 30, 1921. In his return for the calendar*2506 year 1922 the petitioner included the sum of $12,666.62, representing a distribution to him in the last six months of 1922 of profits of Thompson & Worley earned in its fiscal year ended June 30, 1923, but did not include therein the sum of $16,666.62 representing a distribution to him in the last six months of 1921 of profits of Thompson & Worley earned in its fiscal year ended June 30, 1922. Said amounts were reported by the petitioner as being salary from Thompson & Worley.
On March 15, 1920, the petitioner filed an income-tax return for the year 1919 showing a tax of $62,622.06, which was assessed. Upon the filing of the return the petitioner paid to the collector $15,655.52, and on or about June 15, 1920, paid the further amount of $15,761.03, leaving the amount of $31,205.51 which is still unpaid.
On or about October 10, 1925, the petitioner executed the following written instrument:
In order to enable the Bureau of Internal Revenue to give thorough consideration to any claims for abatement or credit filed by or on behalf of M. W. Thompson, of 14 Wall Street, New York, N.Y. covering any income, excess-profits or war-profits tax assessed against the said taxpayer under*2507 the existing or prior Revenue Acts for the year(s) 1919, and to prevent the immediate institution of a proceeding for the collection of such tax prior to the expiration of the six year period of limitation after assessment within which a distraint or a proceeding in court may be begun for the collection of the tax, as provided in Section 278(d) of the existing Revenue Act, the said taxpayer hereby waives any period of limitation as to the time within which distraint or a proceeding in court may be begun for the collection of the tax, or any portion thereof, assessed for the said year(s), and hereby consents to the collection thereof by distraint or a proceeding in court begun at any time prior to the expiration of this waiver.
This waiver is in effect from the date it is signed and will remain in effect until December 31, 1926.
Dated this 10th day of October, 1925.
M. W. THOMPSONTaxpayer.
On November 26, 1926, and October 25, 1927, consents in writing were executed as follows:
TAX COLLECTION WAIVER
NOVEMBER 26, 1926.
It is hereby agreed by and between M. W. Thompson of formerly 14 Wall St., N.Y.C., now of 36 West 44th St., N.Y.C., party of the first part and the*2508 Commissioner of Internal Revenue, party of the second part, that the amount of $31,205.51, representing an assessment of income tax for the year(s) 1919 *1195 made against the said party of the first part, appearing on the C.L.P. 333304 March 1920 L assessment list, page 280, line O, for the 2d district of N.Y., may be collected, (together with such interest, penalties, or other additions as are provided by law) from said party of the first part by distraint or by a proceeding in court begun at any time prior to December 31, 1927.
M. W. THOMPSON,(Taxpayer.)
By: FRANK K. BOWERS,
Collector of Internal Revenue.
TAX COLLECTION WAIVER
OCT. 25, 1927.
It is hereby agreed by and between M. W. Thompson of 14 Wall Street, New York, N.Y., party of the first part, and the Commissioner of Internal Revenue, party of the second part, that the amount of $31,205.51 representing an assessment of income tax for the year 1919 made against the said party of the first part, appearing on the #333304 March 1920 assessment list, page 280, line O, for the 2d District of New York, may be collected (together with such interest penalties, or other additions as are provided by law) *2509 from said party of the first part by distraint or by a proceeding in court begun at any time prior to December 31, 1928.
M. W. THOMPSON,Taxpayer.
By D. H. BLAIR,
Commissioner of Internal Revenue.
By FRANK K. BOWERS,
Collector of Internal Revenue.
The respondent, upon audit of the returns of the petitioner and of the partnership of Thompson & Black, determined that the books of the partnership were kept on the basis of cash receipts and disbursements. He accordingly computed the partnership income on the basis of cash receipts and disbursements and computed the petitioner's distributive share thereof accordingly, and determined that there are deficiencies in tax as above set forth.
OPINION.
MARQUETTE: The pleadings in this case raise five issues. One issue, which involves depletion of oil property, was withdrawn by the petitioner at the hearing and as to another issue the petitioner conceded it was in error, the adjustment it seeks in income having been made by the respondent in the deficiency letter. This leaves three issues for decision.
The respondent has determined that the books of the partnership of Thompson & Black were kept on the basis*2510 of cash receipts and disbursements, and he has computed the partnership income and the petitioner's share thereof accordingly. The returns of the *1196 partnership were made on the accrual basis and the petitioner contends that the books of the partnership were kept on that basis and that he has properly computed his distributive share of the partnership income. It appears that there is no dispute as to the amounts or items of income, the issue being solely as to the basis on which the income of the partnership should be determined.
The evidence shows that the petitioner is a certified public accountant, familiar with the keeping of books of account and with both the accrual and cash receipts and disbursements methods of accounting. When the partnership was formed he determined that its books should be kept on the accrual basis and he made the returns for each year on that basis. While during that part of 1918 that the partnership was in existence there was no formal set of books, there were records and memoranda showing the partnership operations and income, and in 1919 a formal set of books was opened. Apparently these books were unskillfully kept during the years*2511 1919 and 1920, and in 1920 a certified public accountant was employed to audit them and to prepare balance sheets. There was no intention on the part of the petitioner that the partnership books should be kept or the returns made on other than the accrual basis, and we can not see that the inexperience of incompetency of the bookkeeper can change the partnership to a cash basis. In our opinion the evidence shows that the partnership was on the accrual basis, that its books and other records reflect its income on that basis, and that the respondent is in error in computing the partnership income and the petitioner's distributive share thereof on the basis of cash receipts and disbursements.
The second issue involves the proper allocation of the amount of $16,666.62 drawn by the petitioner from the firm of Thompson & Black in the last six months of 1920, and the amount of $12,662.62 drawn by him from that firm in the last six months of 1922.
The petitioner kept his books of account and made his return of income on the calendar year basis. The partnership of Thompson & Worley was on the basis of a fiscal year ending June 30 of each year. The amount of $16,662.62 drawn by the*2512 petitioner in the last six months of 1920 was reported by him in his income-tax return for 1920 as salary from Thompson & Worley, but it was in fact a distribution to him of profits of Thompson & Worley earned in its fiscal year ended June 30, 1921. The amount of $12,662.62 drawn by the petitioner in the last six months of 1922 was reported by him in his return for 1922 as salary from Thompson & Worley, but it was in fact a distribution of the profits of Thompson & Worley for the fiscal year ended June 30, 1923. It appears that in his income-tax return for 1921 the petitioner included the distribution of $16,662.62 drawn by him in the last six months of that year from Thompson & *1197 Worley, which represented a distribution of the profits of Thompson & Worley earned in its fiscal year ended June 30, 1922. The petitioner contends that the amounts drawn by him from the partnership in any fiscal year were income to him for the calendar year in which the fiscal year of the partnership ended. The respondent contends that the petitioner having drawn the amounts in question, and having reported them as salary from the partnership, they should be considered as salary and taxed*2513 to him as income in the calendar year in which they were actually received.
The situation presented is very similar to that found in . In that case Tilton and one Keeler were members of the partnership of Tilton & Keeler. By agreement between the partners Keeler received 55 per cent and Tilton 45 per cent of the yearly net profits, after each was paid a fixed sum designated as salary for services rendered. The partnership kept its books and made its returns on the accrual method on the basis of a fiscal year ended June 30. Each partner kept his individual accounts and made his personal income-tax returns on the cash receipts and disbursements method on a calendar year basis. The Commissioner determined that the amounts drawn by Tilton and Keeler as salaries for services rendered to the partnership were either actually or constructively received by them during each month of the taxable year and constituted income to them when received. In holding that they were distributions of anticipated net distributive income and were income to the recipients at the close of the partnership's accounting period, this Board said:
An agreement*2514 between partners to pay salaries from profits is nothing more than the determination of a basis for dividing such profits. A partner devoting his time and energies to the business of the firm is in fact working for himself and can not be considered as an employee of the firm in the sense that he is in the service of another. It follows, therefore, that he can not be paid a salary by the firm out of earnings in the sense of compensation for services rendered to an employer. In effect any allowances drawn by a partner from partnership assets are payments which he makes to himself and no man can be his own employer or employee. A partner receiving a salary is merely transferring money from one to another of his own pockets. .
It follows that whether or not a salary allowance to a partner, being merely a distribution of partnership assets, is taxable income to the recipient, can not be determined until the close of the partnership year for not until that time can it be known whether such payments were made from capital or profits. The salary is chargeable to the partner as income for his taxable year in which the partnership*2515 accounting period ends. To hold that a salary paid by a partnership to one of its members is income when received, regardless of whether such payment is made from capital or profits, may result in the taxation of capital. This Board has recognized this principle in , in which case we said:
*1198 * * * In recognizing a partnership for accounting purposes, Congress realized that until the close of the partnership's accounting period it can not be determined whether or not the partnership has any net income. The earnings of the earlier month may be entirely eliminated by losses sustained in the closing months of the partnership's accounting period, even to the extent of showing a net loss for the entire accounting period. Under such circumstances, it could not be said that distributions during the first months of the partnership's accounting period constitute income to the partners when the operations of the entire accounting period show that the partnership sustained a loss.
In the instant proceeding the record discloses that Keeler received $40,000 and Tilton $20,000 on June 30 of the taxable year, and that*2516 the former also received 55 per cent and the latter 45 per cent of the distributive partnership income remaining after the payment of the amounts specified in the annual supplementary agreement providing for distribution to members of the firm on account of services rendered. That the agreed amounts paid or credited to Keeler and Tilton were designated as salaries is not material to the question to be decided. Regardless of what they were called, such amounts were received by the petitioners on June 30, 1919, and must be accounted for by them as income for the year ended December 31, 1919.
It is our opinion that the amounts drawn by the petitioner as salary from the partnership of Thompson & Worley in any fiscal year of the partnership should be taxed to the petitioner as income for the calendar year in which the fiscal year of the partnership ended.
The last question is whether collection of the amount of $31,205.51, which was assessed against the petitioner on his original return for 1919 and is unpaid, is barred by the statute of limitations. That we have jurisdiction of this issue is settled by *2517 .
The petitioner's return for 1919 was filed on March 15, 1920, and the tax of $62,622.06 due thereon appears to have been assessed in the year 1920. The five-year period for collection of the tax provided by the Revenue Acts of 1918, 1921, and 1924 expired on March 15, 1925. On October 10, 1925, the petitioner signed and filed a waiver of collection, but this waiver was never signed by the respondent. On November 26, 1926, and October 25, 1927, the petitioner and the respondent, the latter acting through a collector of internal revenue at New York, executed consents in writing to a later collection of the tax. The consents of November 26, 1926, and October 25, 1927, were not executed until subsequent to the effective date of the Revenue Act of 1926, and, unless the consent executed by the petitioner on October 10, 1925, operated to revive and extend the time within which collection of the tax could be made, the liability was extinguished by section 1106 of the Revenue Act of 1926, and the latter consents were of no effect. Therefore, we must first consider the waiver of October 10, 1925. In the case of *2518 , we were confronted with a situation identical *1199 with the one we are now considering. In that case we held that a written instrument executed on February 25, 1926, by a taxpayer and not by the Commissioner, consenting to a later collection of tax which had been assessed prior to the effective date of the Revenue Act of 1924, was not a valid consent in writing as required by law and did not operate to extend the period for collection. We said:
The case of Benjamin Russell v. United States, supra, differs from the case at bar only in that prior to the enactment of the Revenue Act of 1926, the petitioner executed an instrument which purported to extend the time for collection to December 31, 1926, and our question is as to the effect of this instrument. In disposing of the question thus presented, it is pertinent to observe that the 1924 Act made no provision for an agreement in writing between the taxpayer and the Commissioner for a later collection of tax (), and that the provisions governing the collection of taxes assessed prior to the 1924 Act and while the*2519 1921 Act was in effect would be those provided for by the latter Act (Benjamin Russell v.United States, supra). The 1921 Act, section 250(d) provides, in so far as here pertinent, that taxes for 1917 "shall be determined and assessed within five years after the return was filed, unless both the Commissioner and the taxpayer consent in writing to a later determination, assessment, and collection of the tax, and no suit or proceeding for the collection of any such taxes due under this Act or under prior income, excess-profits, or war-profits tax Acts, or of any taxes due under section 38 of such Act of August 5, 1909, shall be begun, after the expiration of five years after the date when such return was filed, * * *." (Italics supplied.) Leaving out of consideration the sections dealing with false and fraudulent returns and other special situations, none of which are here applicable, it would follow that the collection of the deficiency involved in this proceeding is barred unless the instrument executed on February 25, 1926, satisfied the requirement for a later collection. We are of opinion that it does not meet the specific test laid down by the statute for the reason*2520 that it is only a consent in writing by the petitioner and not by the petitioner and the Commissioner. On its face it does not purport to be more than an instrument in which the petitioner would consent to a later collection without any signing or "writing" on the part of the Commissioner. And there is no evidence that there was a written request on the part of the Commissioner that the petitioner sign the instrument, but, on the contrary, the best recollection of the individual who signed for the petitioner was that a representative of the Commissioner called at his office, requested that the instrument be signed and later came to get it after the petitioner's signature was attached thereto. In our opinion, and instruments thus signed only by the taxpayer does not meet the requirements of the statute for a consent in writing between the taxpayer and the Commissioner, and the collection of the deficiency is accordingly barred. Cf. .
We hold that the consent executed by the petitioner on October 10, 1925, did not operate to extend the period within which collection of tax in question could be made, and that the period for collection*2521 having expired prior to the effective date of the Revenue Act of 1926, the liability was extinguished by section 1106 of that Act.
Judgment will be entered under Rule 50.