1928 BTA LEXIS 3738">*3738 1. Petitioner filed returns for calendar years 1921 and 1922, and subsequently filed amended returns pursuant to permission granted to change from calendar to fiscal year basis, for the period January 1 to June 30, 1921, and for the fiscal year ended June 30, 1922. Respondent found taxes due for these fiscal periods greater than the amounts reported, but credited against the taxes he computed both the amounts shown on the calendar year returns and the fiscal period returns and thereby found apparent overassessments. Held, that the amounts shown on the calendar year returns were no part of the amounts shown on those for the fiscal period, and that the respondent's finding of taxes due for the fiscal periods greater than the amounts reported and assessed for those periods is a determination of deficiencies and that the Board has jurisdiction.
2. Returns held properly filed on fiscal year basis, there being no evidence to show that such method was improper.
3. Petitioner held not entitled to exclude from income sums paid his mother under an alleged partnership agreement.
4. Royalties paid to petitioner's mother and wife held to constitute income of petitioner.
1928 BTA LEXIS 3738">*3739 5. Amounts paid under annuity contracts which were forfeited held deductible as a loss in the year the contracts were forfeited.
6. Amount paid in to a so-called strike fund held deductible by the partnership of which petitioner was a member.
7. Amount advanced by petitioner to his partner held to be a loan and neither deductible as an expense nor subject to depreciation.
8. Claimed deductions for excise taxes and for advertising, entertainment, and traveling expenses disallowed.
9. Held, respondent did not err in applying section 226(c) of the Revenue Act of 1921 to income for the period January 1 to June 30, 1921.
11 B.T.A. 743">*743 Proceedings for the redetermination of income taxes determined by the respondent as follows:
| Docket. | Period. | Amount. |
| 15074 | Calendar year 1918 | $14,273.28, deficiency. |
| 8615 | Calendar year 1919 | $52,695.62, deficiency. |
| Calendar year 1920 | $162,734.30, deficiency. | |
| 9602 | Jan. 1, 1921, to June 30, 1921 | $12,411.16, overassessment. |
| July 1, 1921, to June 30, 1922 | $11,423.52, overassessment. | |
| July 1, 1922, to June 30, 1923 | $32,233.76, deficiency. |
1928 BTA LEXIS 3738">*3740 11 B.T.A. 743">*744 The issues, stated in the order considered in the opinion, are:
(1) As to the period January 1, 1921, to June 30, 1922, whether the Board has jurisdiction, and whether returns should be on calendar year or fiscal year basis.
(2) As to the entire period involved, whether petitioner properly excluded from income sums paid his mother under an alleged partnership agreement.
(3) As to 1918, whether certain royalties constituted income to petitioner.
(4) As to 1919 and 1920, whether certain royalties were income to petitioner.
(5) As to 1919, whether petitioner is entitled to a deduction as a loss on account of the payments on annuity contracts forfeited.
(6) As to 1920, whether petitioner's distributive share of partnership income should be reduced on account of a payment by the partnership of $10,000 to the Producing Managers' Association.
(7) As to 1920, whether advances aggregating $150,000 allegedly made to secure the management and control of booking rights of a theater are deductible as expenses.
(8) As an alternative to the preceding issue, if decided adversely to petitioner, whether petitioner is entitled to depreciate the sum of $150,000 over1928 BTA LEXIS 3738">*3741 the period August 1, 1922, to June 1, 1925.
(9) As to the period January 1, 1921, to June 30, 1921, and fiscal year ended June 30, 1922, whether petitioner is entitled to deductions for so-called luxury taxes.
(10) As to the period January 1, 1921, to June 30, 1921, and fiscal years ended June 30, 1922, and 1923, whether petitioner is entitled to deductions for claimed expenses of advertising, traveling and entertainment.
(11) As to the period January 1, 1921, to June 30, 1921, whether respondent erred in applying section 226 of theRevenue Act of 1921.
Another error alleged in the petition in Docket No. 8615 was the disallowance of claimed partnership business expenses for the fiscal year ended June 30, 1919, but no proof was offered as to this item. Errors alleged as to the disallowance of claimed bad debts for the fiscal years ended June 30, 1922, and June 30, 1923, were abandoned at the hearing.
By amendment to his answer, the respondent alleged that he erred in allowing as a credit against tax liability for the fiscal year ended June 30, 1923, an amount of $15,407.39.
FINDINGS OF FACT.
Petitioner's father and mother were theatrical people and he began to make1928 BTA LEXIS 3738">*3742 regular stage appearances in 1887 when nine years of age. 11 B.T.A. 743">*745 Since that time he has always been engaged in some phase of the theatrical business.
Petitioner's first regular stage appearance was in a little show with his father, mother, and sister, which was billed as the"Cohan Mirth Makers." The family was subsequently known as "The Cohan Family" and still later as the "Four Cohans." For several years they appeared in different parts of the country in various sketches and shows which were staged as a part of "variety programs," the forerunner of the present day vaudeville. During the early years of the family appearances the productions were managed by petitioner's father, Jeremiah Cohan, who also wrote some of the sketches. In those days the contracts for appearances were made for the entire family even though at times only one or two members of the family actually made an appearance. All the receipts from the family bookings, whether one or all appeared, were paid into a family treasury which was managed entirely by the mother, Helen F. Cohan. About 1894 the petitioner began writing songs and the receipts from this source were likewise paid into the family treasury.
1928 BTA LEXIS 3738">*3743 Petitioner was married in 1899 and at that time it was arranged to divide the family income on the basis of 25 per cent to petitioner, 25 per cent to his sister, and 50 per cent to his father and mother. The petitioner at that time began collecting the family salary and making the division of it. In the same year the family became associated with one Beeman who placed them in a variety show with which they toured the country for two seasons. In 1901 the family, under Beeman's management, appeared in a three act play which had been written by the petitioner. For their appearance in that play the family received a salary plus a percentage of the profits all of which was divided according to the arrangement made in 1899. After Beeman's death in 1902 or 1903, petitioner managed the show with the same division of proceeds. About 1904, a business manager, one Niblo, was hired on a straight salary. Niblo married petitioner's sister Josephine, and at some time during the season of 1904 and 1905 the two left the Cohan family and started in business for themselves. Petitioner at that time was writing a new play. It became necessary to have a business manager and petitioner made an1928 BTA LEXIS 3738">*3744 oral arrangement with Sam H. Harris to represent the family and manage its productions. Under this agreement petitioner received no salary but drew royalties, his father and mother received salaries, and of the balance of the receipts 50 per cent went to Harris, 25 per cent to petitioner's father and mother and 25 per cent to the petitioner. The salaries drawn by the father and mother amounted to either $400 or $500 per week. Prior to that the family had received as high as $3,000 per week in vaudeville, of which the share of the father and mother was 11 B.T.A. 743">*746 one-half or $1,500. The arrangement for the distribution of part of the profits to petitioner's father and mother was known to Harris but was never reduced to writing.
The first production staged under the management of Harris was produced mostly on credit. Such cash as the petitioner put in the enterprise he obtained from his mother, and Harris borrowed the cash he contributed.
During the early part of petitioner's business association with Harris, their bookings were made through Klaw and Erlanger who received 50 per cent of the profits. This arrangement continued for 5 years. The name of Klaw and Erlanger did1928 BTA LEXIS 3738">*3745 not appear on any of the billings of the Cohan and Harris productions.
The first productions put out under the management of Harris were billed "Sam H. Harris presents," but within a year or two they were billed "Cohan and Harris present."
During subsequent years, down to and into the early part of 1914, petitioner and his father and mother appeared in various plays under the arrangement for salaries and division of profits entered into at the time petitioner became associated with Harris, as heretofore related. During this period petitioner and his father worked together in writing and rewriting plays. The father, however, took no part in the selection of actors or the supervision of rehearsals.
Prior to January, 1914, petitioner and his father, while on a tour with one of their shows, had decided that they would make no more personal appearances, but would devote their time to their office work in New York as they believed their services would be more valuable there. January 31, 1914, was the sixty-sixth birthday of petitioner's father. The Cohans at that time were playing in Detroit and on the morning of that day petitioner wrote a letter to his father and put it under1928 BTA LEXIS 3738">*3746 the door of his father's room in the hotel. The letter read as follows:
JANUARY 31ST, 1914.
MY DEAR LITTLE DADDY:
This is your 66th birthday, God Bless You. The best little daddy that any body ever had in the whole wide world. Of course, Daddy dear, that's what every regular fellow thinks of his dad. I hope to God my boy will grow up to think the same and love me one hundredth part as much as I love you. Daddy, dear, we have all worked hard for a great many years, and thank goodness we've succeeded in making ourselves happy at last. But we must not think of retiring for both of us are young yet, altho' you are really younger than I. That's no joke. Every one says so and I'm beginning to realize it, too. Daddy, I have never loved my own without a reason. Gee! but you've been good to me! From this day, Daddy, we are partners in every theatre and theatrical property I possess. You are my partner, half and equal, in the Cohan Theatre, the Astor Theatre, the Gaiety Theatre, the Grand Opera House in Chicago. So far this season all these theatres are winners and as I am going to devote my time to the Astor in New York and the Grand in Chicago, believe me 11 B.T.A. 743">*747 1928 BTA LEXIS 3738">*3747 they'll always be winners while I live. It isn't like giving you something - its just what belongs to you. We've been partners for years, and we're always going to be unless you discharge me from the partnership. I've got everything on top of God's earth I want and now I want to see that you are fixed the same way. I'm going to make you rich, Daddy, dear. That's why I don't want to waste my time acting any more. You gave me the brain to work with and I'm going to try and make good. You will get your first dividend about the first ofJune, and it ought to be a corker. Gee! Just look back, Daddy, and see what we've all been through. Isn't it wonderful! Isn't it like Arabian Nights Stories? I'm so happy. I hope your little grand son will grow up to by worthy of his Grand Dad - the best loved man in the whole profession.
God bless the best Daddy on earth,
Your son and partner,
GEO. M.After that date the elder Cohans did not again appear on the stage. Thereafter petitioner was assisted by his father in the writing and revising of plays.
On July 31, 1917, petitioner's father died. Shortly after that time Petitioner in a conversation with his mother, and1928 BTA LEXIS 3738">*3748 at which his personal counsel was present, advised his mother that his father's estate was to be hers, that he wanted her to remain interested in their business affairs, and that those affairs would be conducted as they had been in the past. Since that time petitioner has divided equally with his mother his salary and profits from the partnership of Cohan and Harris, and his profits from the enterprises conducted individually after the dissolution of Cohan and Harris.
In 1910 petitioner worked the story of "Get Rich Quick Walling-ford" into a three-act play, and to that dramatization his father added a fourth act, in which form it was staged. When petitioner and his father were working on the play petitioner told his father that if the play were produced he (the father) should have the royalties on it. The play was produced under Cohan and Harris management for a time and then was played by stock companies. Petitioner's father received the royalties, which were based on gross receipts, until his death, and thereafter and during 1918, petitioner's mother received them. The royalties in 1918 amounted to $675. This amount petitioner did not include in his taxable income for 19181928 BTA LEXIS 3738">*3749 but it was added thereto by respondent.
In 1919 the petitioner and his partner Harris were members of the Producing Managers' Association. That association was negotiating with the Actors' Equity Association to prevent the enforcement of a closed shop on its members and to forestall a threatened strike. The strike, however, was suddenly called. At a meeting of the Producing Managers' Association a fund was raised to combat the demands of the strikers to which the firm of Cohan and Harris contributed the amount of $10,000 in the fiscal year ended June 30, 11 B.T.A. 743">*748 1920. The fund so raised was used to pay counsel fees, for publicity, and to finance the small producers who could not afford to be inactive during the period the strike continued. The strike affected several of the plays of Cohan and Harris. The Producing Managers' Association was strictly a business organization and had no social features. No part of the contribution of Cohan and Harris has ever been returned.
No deduction for the item of $10,000 was claimed in the partnership return, but claim therefor was subsequently made in a protest filed and at a hearing in the Income Tax Unit. The respondent refused1928 BTA LEXIS 3738">*3750 to allow the deduction.
Prior to 1919, petitioner wrote certain songs which became a part of the show "The Royal Vagabond," and on January 15, 1919, he entered into a contract with M. Witmark & Sons, musical publishers, for the printing, publishing, and sale of the songs on a royalty basis. Thereafter petitioner orally agreed with his wife, Agnes M. Cohan, to give her the royalties from the sale of the songs. Petitioner did not notify the publishers of the agreement and in the years 1919 and 1920, they issued the royalty checks to the petitioner. The checks were received by petitioner's attorney who endorsed them and deposited them either to the account of Agnes M. Cohan or to a so-called attorney account upon which in turn he drew checks and deposited them to Agnes M. Cohan's account. The publisher reported the royalties as having been paid to the petitioner. The royalties for 1919 amounted to $14,816.85 and for 1920 they were $5,488.82. These amounts were added by respondent to petitioner's income for the respective years.
In September, 1918, petitioner invested in three annuity contracts with the Union Central Life Insurance Co. of Cincinnati, Ohio. The three contracts1928 BTA LEXIS 3738">*3751 were identical as to their provisions, the only difference being in the amounts of premiums and the amounts payable to the annuitant or beneficiary. They provided that in consideration of premium payments of $18,874 each year for 15 years the company would thereafter pay the petitioner the sum of $2,000 monthly for 10 years, beginning September 18, 1933, and if he lived more than 10 years, the company would pay the same amount for each year on which he should enter. Petitioner had the option of surrendering the policies on September 18, 1933, at their commuted values. If he died after payment of the 15 premiums and before the annuity had been paid for 10 years, his wife, who was named beneficiary, was to receive the annuity for the balance of the period. In case petitioner ceased the payment of premiums after paying for three years, he had the option of surrendering the policies for paid-up annuities, or surrendering them for their cash surrender values which consisted of 11 B.T.A. 743">*749 the sum of the premiums paid, without interest, less surrender charges. In case of failure to pay any of the first three years' premiums it was provided that such failure would avoid and nullify the1928 BTA LEXIS 3738">*3752 contracts. In case of petitioner's death during the premium paying period it was provided that the premiums paid in, without interest, woult be paid to his beneficiary.
Petitioner did not undergo a physical examination as a condition of the issuance of the contracts, and it was provided in two of them that subject to evidence of insurability satisfactory to the company they might be converted into life insurance policies.
At the time petitioner purchased the contracts his counsel was out of the city. Upon return of his counsel petitioner submitted the contracts to him for examination. His counsel advised him that the contracts were unprofitable, that the longer he carried them the more unprofitable they would be, and to get any return on the premiums paid that he could and to refuse to pay any further premiums. Unsuccessful efforts were then made by petitioner's counsel to secure a refund on the premiums paid. No part of the premiums have ever been returned to the petitioner. Petitioner did not pay the premiums which fell due in 1919 but allowed the contracts to lapse and forfeited the amount of $18,874 paid in 1918. This forfeiture was absolute and petitioner had no remedy1928 BTA LEXIS 3738">*3753 to recover the amount paid.
In his income-tax return for 1919, petitioner claimed a deduction as a loss in the amount of $18,874 paid as premiums in 1918. The respondent disallowed the deduction claimed.
Prior to 1920 an outlet for the attractions presented by the partnership of Cohan and Harris had been the Grand Opera House Building in Chicago. This theater was originally leased by Cohan and Harris individually and as copartners in 1911, and that lease they assigned to the George M. Cohan Grand Opera House Co., a corporation capitalized at $10,000, in which petitioner and Harris each owned half the stock. The lease of 1911 was terminated by agreement of all the parties on May 27, 1920, on which date a new lease was executed whereby petitioner and Harris, individually and as copartners, became the lessees of the treater for the period June 1, 1920, to July 31, 1942. This lease the lessees likewise assigned to the George M. Cohan Grand Opera House Co. The Grand Opera House was the only theater that Cohan and Harris had in Chicago at that time, and by reason of having control of it they gave their plays preferential bookings in it. In the theatrical business it is considered1928 BTA LEXIS 3738">*3754 necessary for a new show to have a run either in New York or Chicago before being presented in other towns.
On June 30, 1920, petitioner and Harris dissolved their partnership and thereafter as individuals carried on the same line of theatrical business. On November 22, 1920, they entered into an agreement 11 B.T.A. 743">*750 reciting, among other things, that for several months they had been producing and presenting plays as individuals and not as partners, that they had found it difficult to manage the Grand Opera House so as to provide equal booking rights for their shows, that the petitioner was desirous of securing the management of and right of priority in booking in that theater, and that Harris desired to secure an interest in two new theaters about to be constructed in Chicago, for which purpose he required $150,000 and desired petitioner to furnish him with that sum. The agreement then provided for the assignment of all of Harris' rights in the management and operation of the theater to the petitioner, except that until August 1, 1922, the use was to be shared between them along lines laid down. It then provided for the payment of $150,000 by petitioner to Harris, which amount1928 BTA LEXIS 3738">*3755 was to be considered a loan, was to bear no interest, and was to be repaid out of earnings accruing to Harris from the operation of the Grand Opera House property. The amount of $150,000 was paid to Harris by petitioner by two checks dated November 19 and December 27, 1920, each check being in the amount of $75,000. It was understood between petitioner and Harris that there was no personal obligation on the part of Harris to repay the amount so advanced, but it was to be paid entirely out of profits of the theater.
Under date of October 20, 1922, petitioner and Harris executed an agreement whereby Harris assigned to petitioner his right, title, and interest in the lease on the Grand Opera House and in his capital stock of the George M. Cohan Opera Co. Harris also assigned to petitioner his interest in Liberty bonds and cash that had theretofore been deposited in escrow pursuant to the lease of May 27, 1920. The agreement further provided that the $150,000 advanced by petitioner to Harris was to become the absolute property of Harris. The lease of May 27, 1920, was canceled by agreement of the parties on June 1, 1925, and a new lease was entered into on the same date between1928 BTA LEXIS 3738">*3756 the Grand Opera House Co. of Chicago as lessor and the petitioner as lessee for a period ending July 31, 1958.
In his return for 1920, petitioner deducted the amount of $150,000 with the explanation: "Payment for right of priority to perform George M. Cohan's theatrical entertainments in Grand Opera House Chicago." The respondent disallowed the claimed deduction.
For the years 1918 and 1919 petitioner filed his returns on the calendar year basis. On December of 1920, his attorneys wrote to the collector requesting permission for the petitioner to file his "return on the basis of a fiscal year for the period ending June 30th of each year, instead of on the basis of a calendar year as at present." The reasons stated for requesting leave to change were that petitioner's income was principally from theatrical productions which ended 11 B.T.A. 743">*751 their season on June 30, and that he was interested in corporations which reported on a fiscal year basis. The collector referred the request to the Commissioner. After some further correspondence, the Commissioner, by letter dated February 17, 1921, advised the collector as follows:
In reply you are advised that permission is herewith1928 BTA LEXIS 3738">*3757 granted George M. Cohan to change the basis of computing his income and of filing his returns from the calendar year to the fiscal year ending June 30.
Mr. Cohan will be required to file a return for the calendar year 1920 on or before March 15, 1921.
To effect the change as granted, he will be required to file a return for the fractional period from January 1, 1921, to June 30, 1921, on or before September 15, 1921. This return should be accompanied with a copy of this letter as evidence of the taxpayer's authority to make the change in his taxable year. Attached to the return should also be a statement that the books of his business include not only income received from the business itself but also all other income from whatever sources it may be derived.
Mr. Cohan's books of account must be closed each year on June 30 and returns on this fiscal year basis should be rendered on or before the following September 15.
This letter was forwarded to petitioner's attorneys by the collector.
Under date of February 24, 1921, petitioner's attorneys wrote the Commissioner's office explaining that their desire was to commence petitioner's fiscal year reports with June 30, 1920, instead1928 BTA LEXIS 3738">*3758 of June 30, 1921, and asking permission to make the change accordingly. The request was denied, the Commissioner's letter reading in part:
In reply, you are advised that inasmuch as your original request for this permission was dated December 7, 1920, it was not made within sufficient time for this office to grant the change as of June 30, 1920, for the reason that Article 26, Regulations 45, requires that the request of the taxpayer for such a change be made, at least, thirty days before the original due date of the taxpayer's return on the basis of his existing taxable year, and at least, thirty days before the due date of the separate return for the period between the close of the existing taxable year and the date designated as the close of the proposed taxable year.
The petitioner filed returns, on or before the date required by law, for each of the calendar years 1920, 1921 and 1922.
Under date of September 29, 1923, the Commissioner wrote the collector saying that his office had no record of having revoked the permission granted the petitioner to change from calendar year to fiscal year basis, and that the petitioner would be required to file "amended individual returns1928 BTA LEXIS 3738">*3759 for the period January 1 to June 30, 1921, and the fiscal years ended June 30, 1922 and 1923." The collector sent a copy of this letter to petitioner. The attorneys for the petitioner on November 16, 1923, wrote the Commissioner asking that he "acquiesce in the filing of returns for the calendar year 1921 and 1922 and permit the taxpayer to adopt the fiscal year basis for 11 B.T.A. 743">*752 returns to be made in the future." The Commissioner's office, under date of November 24, 1923, wrote the collector affirming the previous instructions, the letter reading in part as follows:
In view of the fact that the permission granted Mr. Cohan to change to the fiscal year ending June 30th effective June 30, 1921, made it mandatory upon him to file a return for the period January 1, 1921, to June 30, 1921, and to file returns for subsequent years on the basis of the fiscal year ending June 30, it will be necessary for Mr. Cohan to comply with those requirements as advised in office letter of September 29, 1923.
The collector forwarded copy of the Commissioner's letter to petitioner's attorneys.
On March 18, 1924, petitioner's attorneys sent to the collector amended returns disclosing taxes1928 BTA LEXIS 3738">*3760 as follows:
| Period. | Tax disclosed. |
| Jan. 1, 1921, to June 30, 1921 | $51,524.37 |
| July 1, 1921, to June 30, 1922 | 2,959.38 |
| July 1, 1922, to June 30, 1923 | 61,814.30 |
| Total | 116,298.05 |
The returns theretofore filed for the calendar years 1921 and 1922 disclosed taxes as follows:
| Calendar year. | Tax disclosed. |
| 1921 | $61,298.93 |
| 1922 | 15,407.39 |
| Total | 76,706.32 |
In the letter transmitting the amended returns to the collector it was requested that the taxes for 1921 and 1922, as shown by the calendar year returns, and which had been paid in full, be credited against the amount disclosed by the three returns filed on the fiscal year basis.
The respondent, in determining the taxes for the period January 1 to June 30, 1921, and the fiscal ended June 30, 1922, did not credit the taxes theretofore assessed on the basis of the calendar year return, but assessed both the amounts disclosed by the fiscal year returns and the calendar year returns. Upon audit of the fiscal year returns, and as a result of a revenue agent's report, the respondent increased petitioner's income and found taxes due as follows:
| Period. | Tax computed by respondent. |
| Jan. 1, 1921, to June 30, 1921 | $100,412.14 |
| July 1, 1921, to June 30, 1922 | 6,943.25 |
| July 1, 1922, to June 30, 1923 | 97,876.81 |
1928 BTA LEXIS 3738">*3761 In determining petitioner's tax liability for the period January 1 to June 30, 1921, respondent credited against the tax as computed by him ($100,412.14) the sum of the assessments theretofore made for both the six months' period and the calendar year 1921 11 B.T.A. 743">*753 ($51,524.37 and $61,298.93, a total of $112,823.30) and found an apparent overassessment of $12,411.16, of which he advised petitioner. For the fiscal year ended June 30, 1922, respondent followed a similar procedure. That is he credited against the tax that he computed for that year ($6,943.25) the sum of previous assessments made for the fiscal year 1922 and the calendar year 1922 ($2,959.38 and $15,407.39, a total of $18,366.77) and found an apparent overassessment of $11,423.53, of which he advised petitioner.
In determining the deficiency for the fiscal year ended June 30, 1923, the respondent credited against the tax computed ($97,876.81) the amount of tax the petitioner reported for the calendar year 1922 ($15,407.39) and also one-half of the tax reported by petitioner on his return for the fiscal year 1923 (one-half of $61,814.30 or $30,907.15).
On December 31, 1920, petitioner purchased from Tiffany1928 BTA LEXIS 3738">*3762 & Co. a necklace which he paid for by three checks, dated December 31, 1920, January 14, 1921, and January 26, 1921, each in the amount of $25,000. In March, 1922, he purchased some loose pearls for $10,475 and paid for them in September of that year. Claimed deductions for luxury taxes in the amount of $2,250 for the years 1921 and 1922 were disallowed by the respondent.
Beginning in May, 1921, petitioner staged the show entitled "The O'Brien Girl" in Boston, Mass., for a period of eighteen weeks. Petitioner was producing the show on an "open-shop basis" and the Actors' Equity Association was attempting to force the "closed shop" on him. Due to these circumstances petitioner produced his show with a new cast and a new chorus each week of the eighteen-week period. This situation compelled petitioner to make about two trips per week to New York to secure new actors. On each of the trips he took people with him on his return to Boston and on some trips he took people from Boston to New York. In Boston petitioner found it necessary during this period to entertain the members of the cast and to provide lunches for them during rehearsals in order to keep them in town and was obliged1928 BTA LEXIS 3738">*3763 to spend larger sums than usual in tips.
After four weeks of rehearsal petitioner opened the show "Little Nellie Kelly" in Boston the first week in August, 1922. The show ran for 15 or 16 weeks. Only a part of the cast were Equity Association people. During the rehearsals for and the production of this show petitioner expended money for lunches and entertainment of the cast.
In 1923 petitioner produced the show "Two Fellows and a Girl," which opened in Rochester in March. Petitioner went to Rochester for the opening and went with the show from there to Chicago where it was rehearsed for two nights before the theater was opened. 11 B.T.A. 743">*754 On that trip and during the rehearsals the petitioner spent money for railroad fare, tips, stage hands, and coffee and sandwiches for the cast during rehearsals.
Petitioner went to Chicago two or three times in May, once in October, and two or three times in November, 1920, and once in October and once in November, 1922, in connection with the grand Opera House lease. On most of these trips petitioner was accompanied by his attorney. The railroad fares and cost of hotel accommodations on those trips were paid by petitioner.
In1928 BTA LEXIS 3738">*3764 October, 1922, petitioner went to Chicago in connection with the opening of "Robin Hood" at the Grand Opera House. That show was not produced by petitioner and his trip to Chicago was partly for the purpose of amending the contract with the producer and partly to promote good will for the theater. For the purpose of promotion of good will petitioner entertained four or five critics and some of the city hall employees.
The expenditures for the rehearsal and opening of the shows above mentioned in 1921, 1922 and 1923, and the trips to Chicago in 1920 and 1922, were made from petitioner's pocket and were not entered on any books of account.
The respondent disallowed deductions claimed by petitioner as follows:
| Period. | Item | Amount |
| claimed | ||
| Jan. 1 to June 30, 1921 | Traveling expenses | $6,000 |
| Entertaining expenses | 5,000 | |
| July 1, 1921, to June 30, 1922 | Advertising expenses | 10,000 |
| Traveling and entertaining expenses | 12,000 | |
| July 1, 1922, to June 30, 1923 | Traveling and entertaining expenses | 12,000 |
| Advertising expenses | 10,000 |
In making his amended return for the period January 1 to June 30, 1921, petitioner placed on an annual basis all items1928 BTA LEXIS 3738">*3765 of income which were recurrent throughout the entire year, but did not place on an annual basis items which were already on an annual basis in that they represented income which occurred but once during any year, merely because the time of accrual happened to fall within the six months' period. In the income reported by petitioner for the six months' period, the following items were included:
| Salary from George M. Cohan's Grand Opera House Co | $8,203.09 |
| Share of profits of Cohan and Harris partnership | 16,939.76 |
| Dividend from George M. Cohan's Grand Opera House Co | 2,121.03 |
| Dividend from 149th Street Opera House Co | 758.35 |
| Total | 28,022.23 |
All of these items were annual items which fell in or occurred only once during any particular year, and the petitioner first placed 11 B.T.A. 743">*755 his other income on an annual basis and then added the sum of the above items.
In computing the tax for the period January 1 to June 30, 1921, respondent placed all net income of the petitioner for that period on an annual basis and computed the tax accordingly.
OPINION.
ARUNDELL: At the outset our jurisdiction to determine the tax computed for the period January 1, 1921, to1928 BTA LEXIS 3738">*3766 June 30, 1921, and for the fiscal year ended June 30, 1922, is challenged by respondent. His contention is based on the ground that no deficiencies were determined for those periods and that the overassessments determined by him did not result from the rejection in part of claims in abatement. The controversy on this point grows out of the change in the manner of reporting petitioner's income, the details of which are set forth at length in the findings of fact. Petitioner, in the first instance, reported his income for the years 1921 and 1922 on a calendar year basis and the tax shown on the returns was duly assessed. Thereafter, on respondent's demand, other returns were filed in which the income for the period from January 1 to June 30, 1921, and for the fiscal year ended June 30, 1922, was reported. These latter returns disclosed taxes in the respective amounts of $51,524.37 and $2,959.38, which amounts were assessed. As a result of his audit of the returns for those periods respondent determined taxes in the respective amounts of $100,412.14 and $6,943.25. The respondent added together the amounts assessed as originally returned on a calendar year basis and the amounts1928 BTA LEXIS 3738">*3767 assessed on the returns filed on a fiscal year basis, and as the aggregate was more than what he has determined as the tax liability for the fiscal periods in dispute, it is claimed that there is no deficiency within the meaning of section 273 of the Revenue Acts of 1924 and 1926. But the admissions contained in the two sets of returns were not cumulative, but overlapping. As petitioner aptly states, two admissions that he owes the same amount does not make him owe twice that much. We have no hesitancy in finding that the Commissioner has determined a deficiency within the meaning of the statute and that the Board has jurisdiction of the proceedings. Respondent's motion to dismiss for want of jurisdiction is denied.
As to the question whether returns beginning in 1921 should be on a calendar or fiscal year basis, all that we have before us is that petitioner asked permission to change from calendar to fiscal year and that such permission was granted. We do not know as a fact how petitioner's accounts were kept either before or after 1921. We must assume, however, that the petitioner satisfied the respondent 11 B.T.A. 743">*756 that his accounts were kept on a fiscal year basis and1928 BTA LEXIS 3738">*3768 that being so kept they correctly reflected income.
The issue that pervades all the years is whether the amounts that petitioner received and then paid to his mother should be included in his income. The amounts so paid were half of petitioner's salary and share of the profits from the partnership of Cohan and Harris and the same proportion of profits derived from petitioner's individual operations after the dissolution of Cohan and Harris.
The petitioner contends that he properly excluded from his taxable income all sums paid to his mother and advances several theories in support of his claim. He says that he and his mother were partners or joint adventurers; that his mother was either a sub-partner of the firm of Cohan and Harris, or that Sam H. Harris was a sub-partner of the partnership relationship existing between himself and his mother; and that his mother had a proprietary interest in the business of the firm of Cohan and Harris, and in all theatrical attractions produced and theaters operated by petitioner independently of the firm of Cohan and Harris, and that she therefore had a proprietary interest in the net profits of the firm and of petitioner's independent operations.
1928 BTA LEXIS 3738">*3769 What are the underlying facts? The Cohan family, father, mother, son and daughter had operated together in the early days. Following her marriage in 1904, the daughter withdrew from the arrangement. George continued his association, but the family arrangements were different and changing. It was during this period that petitioner was winning his way to the front ranks of his profession. His parents were growing older. It was on his father's sixty-sixth birthday that petitioner wrote the letter we have quoted in full in the findings of fact, which letter is now offered as constituting the basis for a legal relationship. It is that period after his father's death, however, with which we are here concerned. Petitioner had assured his mother that everything would go on as it had theretofore and that he wanted her to take an interest in his business affairs. True to his word, he thereafter paid over to her one-half of his income from the partnership with Harris and after the dissolution of that partnership he paid to her one-half of his income from enterprises conducted by him individually.
It is this arrangement between petitioner and his mother that we are asked to characterize1928 BTA LEXIS 3738">*3770 as a legal partnership or as giving the mother a proprietary interest recognizable in law in petitioner's business. Where in this state of facts can a partnership or joint venture be found? As far as we can find from the record the mother contributed nothing in the way of services or property. She had nothing invested that would entitle her to any part of the proceeds 11 B.T.A. 743">*757 of any of the enterprises in which petitioner was engaged. The fact that Harris may have known of the arrangement between petitioner and his mother did not make the latter a partner, and such portion of the proceeds as she received came to her not from the partnership but from the petitioner. ; ; .
While the courts have been for the most part reluctant to lay down a comprehensive definition of a partnership, there can be no doubt that one of the essentials is the contribution by each of the pretended partners of either property or services to the enterprise. See 1928 BTA LEXIS 3738">*3771 ; ; .
The petitioner says that this branch of the case falls within the cases of ; ; ; and . In the Virden case the petitioner and his wife had joined together to carry on a trade or business, "one contributing property and the other property and services," and "they had a community of interest in the profits." In the Sunlin case each of the partners contributed property and services. The partners were thereafter married. We held that:
After marriage of the partners what had theretofore been a business partnership became a joint venture. The interest of the petitioner and his wife in the property and business and their respective rights to the income therefrom remained unchanged * * *. (Italics added.)
In the case of Parshall the wife of the petitioner acquired the latter's interest in a partnership in settlement of a debt owing1928 BTA LEXIS 3738">*3772 to her by the petitioner. In the Thomas case one of the partners sold to his daughter a one-half interest in his interest in the partnership. In each of these cases it is apparent that the party with whom the income was divided had acquired by purchase or contribution some interest in capital assets which is sufficient to distinguish them from the present case.
Our view is that the question is controlled by the decisions in ; , affd. , where Mitchel, a partner in a firm, contracted with his wife to transfer and assign to her one-half of his share of the profits of the partnership without attempting to convey to the wife any part of his interest in the partnership. The Board held that Mitchel's entire distributive share of the net income of the partnership should be included in the computation of his net income, and saying in part:
Clearly, under the statute, the income derived by the partnership must be returned for taxation as the income of the respective partners in accordance with their distributive shares and can not be diverted to1928 BTA LEXIS 3738">*3773 become the income 11 B.T.A. 743">*758 of someone else by agreement or otherwise. * * * As between the parties to this agreement it may be legal and enforceable and the taxpayer may be a trustee of one-half the income he receives from the partnership of which he is a member and compellable to account therefor, but this is of no materiality in considering the question before us. The income from taxpayer's interest in the partnership is first income to him, and no matter how he tries to dispose of it or does dispose of it, it is taxable to him as income from his interest therein. It does not alter the situation to say that as soon as income arises in the partnership at that instant it becomes the property of the grantee, as this is mere assertion. The fact is that before it becomes the property of the grantee it is income, within the meaning of the law, to the grantor, and the statute recognizes this fact when it requires the income of the partnership to be included as the income of the partners in their individual returns according to their respective shares therein.
In the decision in the same case in the 1928 BTA LEXIS 3738">*3774 , the court said in part:
As a subpartner the wife through the agreement got no present interest, equitable or legal, in the firm assets; the assent of the other partners would have been as necessary for this as to constitute her a partner, for ownership follows the status. Until by distribution the profits became the separate property of the plaintiff, her rights were upon the contract, not in re. * * * Therefore the plaintiff was in any event obliged to include all undistributed profits in his return; the statute so directed, and the profits pro tanto were still his. (Italics supplied.)
In the Mitchel case the agreement was founded upon valuable consideration and here we have no showing of such consideration. The amounts which petitioner paid to his mother, as far as the record shows, were purely gifts, and such gifts were made out of income after it had become petitioner's. It is our opinion that the petitioner was not entitled to exclude from income the amounts paid to his mother and we hold that the respondent did not err in adding such amounts to petitioner's income.
Issues 3 and 4 may be disposed of together, 1928 BTA LEXIS 3738">*3775 both involving the question whether petitioner had made such assignment or gift of royalty rights as would relieve him of tax on the royalties. In 1918 the play "Get Rich Quick Wallingford" produced royalties in the amount of $675, which amount was paid to petitioner's mother as a continuation of the prior practice of paying them to petitioner's father under a promise made in 1910 that if the play were produced the father should have the royalties.
The royalties from the songs in "The Royal Vagabond" were paid to petitioner's wife under an oral promise that petitioner would give them to her. They amounted to $14,816.85 in 1919 and $5,488.82 in 1920.
We do not know just how the "Wallingford" royalties reached the mother. The royalty checks from "The Royal Vagabond" songs 11 B.T.A. 743">*759 were issued to petitioner and by his attorney endorsed and passed on to petitioner's wife.
The evidence does not indicate to us that the petitioner had divested himself of the right to receive the royalties. Even if the assignees could have enforced petitioner's promise against him, that would not prevent the royalties from first being income to him. See 1928 BTA LEXIS 3738">*3776 ; ; . It may be that the petitioner at the time of making the promises intended to make gifts of the right to receive royalties, but if so, he failed to complete the gift for, as far as the record shows, he did not divest himself of control over the rights. See , and cases there cited, and ; . We can not find that the respondent erred in including in petitioner's income for 1918 the royalties from "Get Rich Quick Wallingford," and for 1919 and 1920 the royalties from songs in "The Royal Vagabond."
Under issue 5 the petitioner claims a deduction from 1919 income, as a loss, of the amount paid in 1918 on annuity contracts which he forfeited in 1919, by failure to pay the premiums which became due in the latter year. He contends that the contracts were not contracts of insurance of any kind, and is not deducting the premiums as such, but that the forfeiture resulted in the loss of his capital investment, and that this loss results1928 BTA LEXIS 3738">*3777 from a transaction entered into for profit.
The respondent disallowed the deduction claimed and says that there is nothing to distinguish the contracts from "ordinary annuity insurance contracts"; that the petitioner did not enter into the contracts for profit, and that the amount paid in 1918 was a personal expense of petitioner.
The respondent's descriptive phrase is an incongruity, insurance contracts and annuity contracts being entirely distinct and separate things. A contract for an annuity is not a contract for insurance and the price paid for annuities is not a premium paid for an insurance policy. ; affirmed, ; ; . However, we need not go into this feature as the petitioner is making no claim for the amount paid as an expense. A transaction does not fail to meet the test as one entered into for profit because the receipts therefrom may take the form of periodic returns to the investor. Convinced that the investment was not a wise one he refused to have more to do with it and in 1919, 1928 BTA LEXIS 3738">*3778 forfeited not only the amount theretofore paid in but all future rights under the contracts. The amount paid at the time of the forfeiture is an allowable deduction under section 214(a)(5) of the Revenue Act of 1918.
11 B.T.A. 743">*760 As to issue 6 we think there can be no doubt that the $10,000 paid by the firm of Cohan and Harris into the so-called strike fund of the Producing Managers' Association was a necessary expense of the business. It is common knowledge that strikes seriously affect business enterprises and money expended to avert some of the consequences certainly has a direct relation to the business. The amount of $10,000 should be allowed to the partnership as a deduction and the petitioner's distributive share of the partnership income adjusted accordingly. Cf. .
The amount of $150,000 which was advanced by petitioner to his partner in 1920 is claimed to be an ordinary and necessary expense incurred in the acquisition of preferential booking privileges at the Grand Opera House in Chicago. The record does not support this claim. The contract of November 22, 1920, refers to the amount as a loan which was to be1928 BTA LEXIS 3738">*3779 repaid without interest. The petitioner testified that it was understood between him and Harris that there was no personal obligation to repay, but that it was to come out of the profits of the theater. This does not change the character of the transaction. If petitioner was satisfied to look to the profits of the theater for repayment of the amount advanced, that does not make the advancement any less a loan. The only effect of this is to change the character of the security upon which the petitioner relied for repayment.
As an alternative, petitioner says that he acquired an asset for the $150,000 and that that amount should be depreciated over the life of the asset. We do not understand what the asset is that petitioner claims to have acquired. It was not the lease, for that had been assigned to the George M. Cohan Grand Opera House Co., a corporation. All that he acquired, under the contract of October 20, 1922, was Harris' stock in the corporation, which of course is not depreciable. It is said that Harris gave up his rights to any profits. That is true, but it is only an incident to the sale of the stock and clearly it is nothing that is depreciable.
Under issue1928 BTA LEXIS 3738">*3780 9 deductions are claimed for so-called luxury taxes on jewelry purchased from Tiffany & Co. The taxes here involved are imposed by section 905 of the Revenue Acts of 1918 and 1921. That section is the same under both Acts, except for the effective date, the pertinent parts reading as follows:
That * * * there shall be levied, assessed, collected, and paid * * * upon all articles commonly or commercially known as jewelry, * * * pearls, * * * when sold by or for a dealer or his estate for consumption or use, a tax equivalent to 5 per centum of the price for which so sold.
Every person selling any of the articles enumerated in this section shall make returns under oath * * * and pay the taxes imposed in respect to such articles by this section * * *.
It 11 B.T.A. 743">*761 is apparent from this quotation that the taxes are imposed on sales by the dealer and are payable by him, and are not imposed on the purchaser. See Calgate & Co. v.United States (Ct. Cls.), decided February 20, 1928. Such being the case, the petitioner is not entitled to any deduction for any amount which he may have paid the jeweler as a reimbursement for excise taxes. If he paid the jeweler any amount1928 BTA LEXIS 3738">*3781 on account of excise taxes (and it is not shown that he did) such payment was a reimbursement to the dealer and not a payment of taxes; it was a demand of the jeweler, not of the sovereign.
The next issue is based on the claims of petitioner for deductions for advertising, entertainment and traveling expenses. We can not doubt, upon the record, that petitioner was required to and did spend large sums of money in traveling and entertaining during the period January 1, 1921, to June 30, 1923. There are, however, two obstacles to the allowance of the claims which the record has failed to overcome. One is that the amounts claimed are bare estimates unsupported by any vouchers or bookkeeping entries of any kind. The other is that we do not know what part of the amounts expended were for personal expenses. In these circumstances we can not say that the respondent erred in disallowing the deductions claimed.
While we do not have before us the actual computation of the respondent in determining the tax for the six months' period January 1 to June 30, 1921, it appears from the pleadings and the briefs that the computation was made in accordance with section 226(c) of the Revenue1928 BTA LEXIS 3738">*3782 Act of 1921.
The petitioner objects to having section 226(c) applied to such part of his income as consisted of items which fell in or occurred once during any particular year. Section 226 as a whole is certainly applicable to the instant case, providing as it does for cases of change from calendar to fiscal year basis. Subdivision (c) which lays down the rule to be followed in making the computation in such cases makes no distinction between income received on the first or last day of the period, or income consisting of a lump sum or received at intervals throughout the period. The language of section 226(c) is that "the net income shall be placed on an annual basis," and it makes no distinction between different kinds of net income or different dates of receipt. As we see it, the section applies to all net income of the period and we fail to see wherein the respondent erred in his application.
The affirmative issue raised by the respondent is that in computing the deficiency for the fiscal year ended June 30, 1923, he erred in allowing as a credit against the tax liability that he determined an amount of $15,407.39 under the erroneous assumption that a 11 B.T.A. 743">*762 return1928 BTA LEXIS 3738">*3783 had been filed for the calendar year 1923 showing that amount of tax.
The amount here involved, $15,407.39, was shown as the tax on the petitioner's return for the calendar year 1922, was assessed, and allowed as a credit by the respondent in determining the tax liability for the fiscal year ended June 30, 1922, as shown by the computation attached to the deficiency notice. No return was filed by the petitioner for the calendar year 1923. It is evident from this that the respondent did err in crediting against the tax for the fiscal year ended June 30, 1923, the tax reported for the calendar year 1922 and credited in making the computation for the fiscal year ended June 30, 1922.
Judgment will be entered on 15 days' notice, under Rule 50.