*3578 1. Where a partnership computed its net income in the year 1917 upon the basis of net worth on January 1, 1917, and net worth on December 31, 1917, and the net worth at the close of the year was determined upon a different basis from that at the beginning of the year, the increase in the net worth will not necessarily reflect the profits of the partnership for the year. For lack of evidence enabling the Board to determine the true gain of the partnership for the year the addition to net income made made by the Commissioner of an amount claimed to represent the cost of merchandise on hand at the close of the year is approved.
2. The returns made by the petitioners for 1917 were not fraudulent and the penalty for the filing of fraudulent returns was not incurred.
3. The partnership was dissolved on or about September 1, 1924. Thereafter, on December 3, 1924, the partnership by one of its partners, exected a consent in writing for the purpose of extending the period within which deficiencies for 1917 might be determined against the partnership, such consent being one of a chain of consents extending the time for assessment of deficiencies. Held, that the assessment and*3579 collection of the deficiency against the partnership is not barred by the statute of limitations.
*191 These proceedings, consolidated for the purpose of hearing and decision, are for the redetermination of deficiencies in profits tax for 1917 against Pottash Brothers, a partnership, of which Max Pottash and Harry Pottash were the partners. On December 18, 1925, the Commissioner notified Pottash Brothers of a deficiency in profits tax for 1917 of $26,596.21 and a 100 per cent penalty for the filing of a fraudulent return, making a total tax and penalty alleged to be due of $53,192.42. On the same date the Commissioner notified Max Pottash of a total tax liability in respect of his income tax for 1917 of $2,469.31, to which was added a 100 per cent penalty, making a total alleged tax and penalty of $4,938.62 against which there was credited an original assessment of $533.81, leaving a net tax and penalty alleged to be due of $4,404.81. On the same date the Commissioner notified*3580 Harry Pottash of an alleged deficiency in tax and penalty of $4,404.81, which amount was arrived at in exactly the same manner as indicated above for Max Pottash.
The issues raised in the petition of Pottash Brothers, Docket No. 11990, are as follows:
(1) That the Commissioner has overstated the net income for 1917 in the amount of $12,600 and has understated the invested capital for 1917 in a like amount, due to the fact that he has treated a sale which was consummated in December, 1916, as if made in January, 1917.
(2) That the Commissioner has overstated net income for 1917 in the amount of $8,797.53 and has understated invested capital for 1917 in a like amount, all of which is due to understating the cash on hand on January 1, 1917.
(3) That the Commissioner has overstated income for 1917 in the amount of $2,113.12 and understated invested capital for 1917 by the same amount, due to the fact that he has failed to recognize loans outstanding on January 1, 1917, of said amount.
(4) That the Commissioner has increased its income and understated its net worth and invested capital on January 1, 1917, in the amount of $3,326, which amount represents investment payments*3581 made by petitioner to a building and loan company up to that time.
(5) That the Commissioner has increased net income for 1917 in the amount of $34,323.22, due to the fact that he has excluded cost of purchase for the year in that amount.
(6) That the Commissioner has increased net income for 1917 in the amont of $2,060.43 by failure to allow bad debts charged off in that year.
(7) That the Commissioner has asserted a penalty of 100 per cent upon the tax computed for 1917 under the provisions of section 3176 of the Revised Statutes of the United States, as amended by section 16 of the Revenue Act of 1916.
*192 (8) That in computing the net income to be shared by the partners the Commissioner has reduced the total net income by only the amount of the profits tax but not the penalty.
(9) That assessment of any tax for 1917 is barred by the statute of limitations because the period in which to assess had expired and the Commissiner was without a valid waiver at the time of issuing his deficiency notice on December 18, 1925.
(10) That any assessment made against it can not now be collected because the partnership of Pottash Brothers was dissolved in September, *3582 1924, and all its assets passed to a successor corporation on that date; and that said partnership had ceased to exist prior to the issuance of said deficiency notice on December 18, 1925.
The issues raised in the petitions of Max Pottash, Docket No. 11991, and Harry Pottash, Docket No. 11992, are as follows:
(11) That the Commissioner has overstated the 1917 income of the partnership of Pottash Brothers as set out in the foregoing issues and has thereby overstated each petitioner's share of said income.
(12) That the Commissioner has erred in his method of computing the distributive shares of the partnership income for 1917 in that while the Commissioner has reduced the partnership income by the amount of the profits tax paid by the partnership, as required by the 1917 profits-tax law, he has not reduced each individual member's distributive share of said net partnership income by the said individual's proportionate share of the profits tax paid by the partnership.
(13) That the Commissioner is in error in asserting the 100 per cent fraud penalty in connection with any tax liability of the individual partners for 1917.
FINDINGS OF FACT.
Pottash Brothers was a partnership*3583 organized in 1904, the members of which were Max Pottash and Harry Pottash, each owning a 50 per cent interest therein. The partnership was engaged in the manufacture of burlap bags in Philadelphia, Pa., and continued in such business until September, 1924, when it was dissolved and succeeded by a corporation known as Pottash Brothers Co. This corporation took over all of the assets of the predecessor partnership.
The partnership kept regular books of account on the accrual basis throughout the years 1917 and 1918. Prior to 1917, the books of accont were in rather a deplorable condition, more or less single entry books. At the close of 1916, a certified public accountant was called in to make an audit of the books. He prepared a balance sheet of the business as of January 1, 1917, in order to put the books on a double entry basis and opened a set of books on that basis. The bookkeeper who had kept the books for 1916 was employed to keep the books on a double entry basis for 1917. She was given instruction by the accountant and to a certain extent he supervised the keeping *193 of the books in 1917. An entirely new ledger was opened as of January 1, 1917, and balances*3584 from the old ledger were transferred thereto. The same accountant made an audit of the books for the year 1917. He discovered that the bookkeeper had made numerous errors therein and the 1917 ledger was not closed but a net worth statement and balance sheet was prepared at the end of 1917 and a new ledger opened on January 1, 1918, based thereon. This accountant prepared income-tax returns for the partnership and for the individual partners for 1917. He made his computation of income of the partnership by deducting from the net worth of the partnership as found by him at the close of 1917, the net worth of the partnership as determined by him at January 1, 1917. The balance sheets at January 1, 1917, and December 31, 1917, attached as exhibits to the income and profits-tax return filed for the partnership for 1917, are as follows:
| January 1, 1917 | ||
| Assets: | ||
| Cash | $13,013.49 | |
| Accounts Receivable | 69,956.49 | |
| Merchandise Inventory | 135,200.00 | |
| Building & Loan Investment | 3,326.00 | |
| Real Estate | 109,800.00 | |
| Machinery Fixtures Wagons etc | 13,350.00 | |
| Total Assets | $344,645.98 | |
| Liabilities: | ||
| Accounts Payable | $15,904.00 | |
| Notes Payable | 48,759.11 | |
| Real Estate First Mortgages | 50,850.00 | |
| Building & Loan Mortgages | 27,900.50 | |
| Accrued Expense | 5,105.87 | |
| Capital | 196,126.50 | |
| Total | 344,645.98 | |
| December 31, 1917 | ||
| Assets: | ||
| Cash | $5,966.57 | |
| Accounts Receivable | 72,332.26 | |
| Merchandise Inventory | 142,820.00 | |
| Building & Loan Investment | 4,070.00 | |
| Real Estate | 111,300.00 | |
| Machinery Fixtures Trucks etc | 12,108.62 | |
| Total Assets | 348,597.45 | |
| Liabilities: | ||
| Accounts Payable | $6,905.35 | |
| Bills Payable | 57,876.29 | |
| Real Estate First Mortgage | 48,850.00 | |
| Building & Loan Mortgages | 24,252.50 | |
| Capital | 210,713.31 | |
| Total | 348,597.45 |
*3585 *194 The gain for 1917 arrived at in this manner was $14,586.81, which is the amount of net income of the partnership reported in the income and profits-tax return, Form 1102.
In auditing this return after an investigation of the books and records the Commissioner increased the net income of the partnership for 1917 to $78,457.56 and fixed the net worth on January 1, 1917 (and therefore the invested capital), at $166,192.41.
In arriving at its net worth at January 1, 1917, the partnership included a cash balance on hand of $13,013.49. The Commissioner reduced the cash balance by $8,798.13, thereby reducing the net worth at January 1, 1917, in a like amount and increasing the net income by the same amount. The cash balance on January 1, 1917, as shown by the cash book, was $13,013.49. The partnership had three bank accounts on January 1, 1917, and the reconciliation between the check book stubs and the bank pass books and the cash book discloses a total cash balance of the same amount, namely, $13,013.49. The Commissioner arrived arrived at the cash balance on January 1, 1917, by taking the difference between the cash receipts and disbursements of the partnership*3586 for the month of December, 1916, amounting to $4,214.32 and to this amount adding $1.04 alleged petty cash account, thus arriving at $4,215.36, the cash balance which he used in the computation of the deficiencies.
In arriving at its net worth at January 1, 1917, the partnership included therein $12,600 representing an account receivable from the Philadelphia Ceiling & Stevedore Co. This account was charged on the partnership books as of December 22, 1916, and appears as an account receivable on January 1, 1917. The account represents a sale of 100,000 burlap bags made to the Philadelphia Ceiling & Stevedore Co. early in December, 1916, for delivery within 10 days from the date of the order. The bags, which were to be used in loading a ship, were made by Pottash Brothers and delivery tendered to the Philadelphia Ceiling & Stevedore Co. on schedule time. Due to delays in loading the ship the company could use only 55,500 of said bags before January 1, 1917, and had no place to store the others. Accordingly, Pottash Brothers delivered 55,500 of the bags before January 1, 1917, and retained in its warehouse the remaining 44,500 subject to the purchaser's orders. These were not*3587 included in the partnership inventory taken December 31, 1916. On its books of account Pottash Brothers treated the transaction as a sale of bags in 1916. The Commissioner treated this sale as a sale made in January, 1917, based upon his information that payment of $12,600 was approved by the receiving clerk of the Philadelphia Ceiling & Stevedore Co. on January 8, 1917. By so doing the Commissioner reduced Pottash Brothers' net worth on January 1, 1917, in the *195 amount of $12,600 and likewise increased its income by the same amount.
In arriving at its net worth at January 1, 1917, the partnership included therein as accounts receivable loans in the amount of $2,159.69. The Commissioner allowed $46.57 of this loan account to stand and excluded from the partnership net worth the balance of $2,113.12 and thereby increased net income in the same amount. The items making up this loan account claimed by Pottash Brothers appear in the partnership's 1917 ledger as follows:
| Page 284, Harry Pottash | $1,504.28 |
| Page 400, A. Pottash | 534.41 |
| Page 330, Frank Clapp | 17.00 |
| Page 352, Golden | 4.00 |
| Page 348, Hammerman | 20.00 |
| Page 344, M. J. Hansen | 10.00 |
| Page 336, J. W. Weinstein | 50.00 |
| Total | 2,159.69 |
*3588 These accounts represent balances on the partnership ledger at December 31, 1916, which were carried forward into the new ledger by the accountant employed to open a new set of books as of January 1, 1917. The amount of $1,504.28 charged against Harry Pottash represents a withdrawal by him from the partnership in excess of the amount of the withdrawals made by his brother, Max Pottash. In 1917 the account was closed out and charged to salary account of Harry Pottash. The account receivable from A. Pottash represents an amount advanced to a relative of the partners. The advice obtained by the Commissioner from the bookkeeper was that it represented a donation to a relative. The other accounts listed represent advances made either to employees or to peddlers who transacted business with the partnership.
In arriving at its net worth on January 1, 1917, the partnership included therein a building and loan investment account of $3,326. The Commissioner excluded this amount from the net worth of the partnership on January 1, 1917, upon the ground that the amount represented payments made to building and loan associations by the partnership upon books standing in the names of other*3589 persons than the partners.
Pottash Brothers purchased large quantities of secondhand burlap from peddlers and from some large corporations. It did this throughout the years 1916, 1917, and 1918. Sometimes it was dealing with as many as 100 peddlers at the same time. It was its practice to advance to the peddlers or persons shipping burlap approximately 80 per cent of the estimated purchase price of the burlap prior to the time invoices for the burlap were received and put through its books of account. When advances were thus made debits were made *196 in the accounts payable ledger. When the burlap was assorted and the value thereof determined an invoice was made out, put through the books, and the excess amount payable to the shipper or peddler was paid, thus balancing the account. The accountant discovered this situation at the close of 1917 and ascertained that the debit balances in the accounts payable ledger in the amount of $39,501.70 did not represent advances made to peddlers and others prior to the receipt of the burlap but represented partial payments for burlap received. All of the burlap received had either been manufactured and sold prior to the close*3590 of the year or was included in the inventory at the close of the year. He determined that the debit balances in the accounts payable ledger at December 31, 1917, represented merely a part of the cost of burlap which had been received in 1917. He therefore made a journal entry debiting merchandise with $39,501.70 and credited sundry accounts payable with the same amount. The effect of this transaction was to increase the cost of merchandise purchased during the year 1917 to the extent of $39,501.70. There is a counter entry of $6.50, leaving the net amount of the increase in the cost of merchandise $39,495.20. The Commissioner has allowed $5,171.98 as an additional cost of purchases in 1917 but has disallowed $34,323.22 as the cost of merchandise purchased in 1917 and has increased the partnership's net income for 1917 by a like amount.
The Commissioner increased the partnership income for 1917 in the amount of $2,060.43, representing bad debts deducted by the partnership in 1917. The following accounts appearing in the 1917 ledger less a credit of $450 in 1917 by Pottash Brothers account for this items:
| Page 344, M. J. Hanson | $10.00 |
| Page 348, Hammerman | 17.00 |
| Page 374, B. Sekenofsky | 1.50 |
| Page 396, New Amsterdam | 786.40 |
| Page 400, A. Pottash | 694.15 |
| Page 404, J. Gordon Lodge | 18.88 |
| Page 446, Joseph Forbstein | 795.00 |
| Page 448, John Toliver | 7.50 |
| Page 454, I. Katz | 20.00 |
| Page 462, Reuben Fishman | 10.00 |
| Total | 2,510.43 |
| Page 336, Credit J. Weinstein | 450.00 |
| Net amount | 2,060.43 |
*3591 These accounts were not ruled off on the 1917 ledger but in preparing a balance sheet on December 31, 1917, they were all eliminated and were not carried forward and entered on the new ledger opened January 1, 1918. For this reason they did not appear among the assets of the partnership on December 31, 1917.
*197 The return of Pottash Brothers for 1917 was filed in the office of the collector at Philadelphia, on March 27, 1918. The partnership was dissolved in September, 1924. The deficiency notice was mailed on December 18, 1925. Pottash Brothers had filed a chain of waivers or consents extending the time within which deficiencies might be assessed and collected. It filed one such consent dated December 3, 1924, which extended the period within which to assess and collect any tax on the partnership. This consent provided as follows:
In pursuance of the provisions of existing Internal Revenue Laws, Pottash Bros., partnership, a taxpayer, of Water & Wolf Streets, Philadelphia, Pa., and the Commissioner of Internal Revenue, hereby consent to extend the period prescribed by law for a determination, assessment, and collection of the amount of income, excess-profits, *3592 or war-profits taxes due under any return made by or on behalf of said taxpayer for the year 1917 under the Revenue Act of 1924, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes," approved August 5, 1909. This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the statutory period of limitation within which assessments of taxes may be made for the year or years mentioned, or the statutory period of limitation as extended by Section 277(b) of the Revenue Act of 1924, or by any waivers already on file with the Bureau.
(Signed) POTTASH BROTHERS.
Taxpayer
BY MAX POTTASH
a partner
D. H. BLAIRCommissioner
When the partnership of Pottash Brothers was dissolved, all of its assets were transferred to a corporation known as Pottash Brothers Co., which continued the business of the partnership.
Petitioners, Max and Harry Pottash, rendered individual income-tax returns for 1917, on each of which was shown*3593 a tax of $533.81, which was assessed. In an audit of these returns the Commissioner increased the income in each case to $30,877.66. In so doing he has included in gross income salary in the amount of $5,454.40 received from the partnership and $25,930.67 as each partner's distributive share of the partnership income as computed by him. The inclusion of $5,454.40 as salary represents the amount shown on the partnership books as salary paid to each partner.
In arriving at each partner's distributive share of income the Commissioner took one-half of the partnership income computed by him after deducting the partnership tax as computed by him. This distributive share was not again reduced by the partner's share of the partnership excess-profits tax.
*198 The Commissioner has valid written consents authorizing him to assess and collect any tax which may be found to be due from Tax and/or Harry Pottash.
In the deficiency notices sent to the petitioners, the Commissioner has proposed the assessment and collection of a 100 per cent fraud penalty which is based on the provisions of section 3176 of the Revised Statutes, as amended by section 16 of the Revenue Act of 1916, *3594 and in effect during the year 1917.
OPINION.
SMITH: The issues involved in these proceedings, stated at length in the preliminary statement, may be briefly stated as follows:
(1) What was the correct net worth of the partnership at January 1, 1917?
(2) What was the correct net income of the partnership for 1917?
(3) Whether the tax returns filed for the partnership and of the individual partners for 1917 were false and fraudulent.
(4) Whether the deficiency determined for the partnership is barred from assessment and collection by the statute of limitations.
(5) Whether the distributive share of each partner should be reduced by one-half of the profits tax payable by the partnership.
The books of account of the partnership prior to 1917 were kept mainly on a single entry basis and, as the certified public accountant testified, were "in a deplorable condition." When he was called in by the partnership at the close of 1916 for the purpose of auditing the books of account, the accountant made no closing of the books but opened a new set of books on a double entry basis to begin January 1, 1917. A new ledger was opened and balances from the old ledger were transferred*3595 to the new ledger. He determined the net worth of the partnership at January 1, 1917, to be $196,126.50. From that date the books of account, as above indicated, were kept on a double entry basis but apparently numerous errors were made by the bookkeeper during the year 1917. The same accountant, employed to audit the books for 1917, found so many errors that he did not make a complete audit and closing of the books but attempted to start afresh from January 1, 1918. Accordingly, a new ledger was opened as of January 1, 1918, and balances brought forward from the previous ledger. The accountant determined the gain of the partnership for 1917 by deducting from the net worth at December 31, 1917, the net worth at January 1, 1917. The profit thus determined was $14,586.81.
The Commissioner, in attempting to verify the correctness of the return made for the partnership for 1917, rejected the basis used by the certified public accountant and attempted to compute the net income from the books. The record of this action discloses that the *199 Commissioner made errors in determining the net income. He treated as income of 1917 a sale of merchandise made in 1916 for a price*3596 of $12,600 and clearly overstated the net income of the partnership for 1917 by that amount. Likewise, he determined the cash balance at January 1, 1917, as the difference between the debits on the cash book for the month of December and the credits on the cash book for the same month. He determined that the cash on hand at the close of 1916 was $4,215.36, whereas the proof is clear that the amount determined by the accountant, namely, $13,013.49, is the correct amount.
From a consideration of the entire record we are of the opinion that the net income of the partnership for 1917 can best be determined upon the basis of the net worth at the beginning and close of the year, making, however, certain adjustments as will be stated in some detail hereinafter.
First, considering the net worth at January 1, 1917, the evidence shows that the partnership included as accounts receivable at January 1, 1917, an overdraft of Harry Pottash in the amount of $1,504.28 and a loan or donation to a relative, A. Pottash, in the amount of $534.41. The evidence does not show that these amounts were true accounts receivable. Harry Pottash had withdrawn from the business $1,504.28 more than his*3597 brother; but the evidence does not disclose that he was under any obligation to return this amount to the partnership. The overdraft was charged up to him as salary in 1917. The charge against A. Pottash appears to have been for an advance made to a relative. The bookkeeper gave the information that this was a donation made to such relative and that there was no intention that it ever would be paid back. Apparently there was a further advance to this same relative in 1917 and the account at December 31, 1917, showed an advance to him of $694.15. This was not recognized as a true account receivable at the close of 1917 and the partnership's accountant in opening the new ledger for 1918 omitted it therefrom. Upon this evidence we are of the opinion that the partnership overstated its net worth at the beginning of the year 1917 by the amounts claimed to be due the partnership from Harry Pottash and A. Pottash. We are also of the opinion that the investment of the partnership in shares of building and loan associations in the amount of $3,326 was not an asset of the partnership. The revenue agent testified that this amount represented payments made to building and loan associations*3598 to the wives or relatives of the partners. We therefore think that the investment of the partnership in the shares of building and loan associations was not an asset of the partnership and that the net worth found by the accountant at January 1, 1917, was overstated in the total amount of $5,364.69 and that the true net worth on that date was $190,761.81. *200 The accountant found that the income of the partnership for 1917 was $14,586.81. This is the amount reported on the partnership return for 1919. The respondent, upon the basis of the revenue agent's report, increased the net income to $78,457.56. The evidence discloses that the revenue agent made errors in reaching such net income. We are not convinced, however, that the net income reached by the accountant is entirely correct. The record shows that the partnership received large quantities of burlap from several large corporations and also from many junk dealers and peddlers. The burlap was delivered to the partnership's plant in large bundles. An estimate of the value was at once made and the shippers or the peddlers were given a cash advance in respect of the burlap. Max Pottash testified that the conditions*3599 in 1916 and 1917 were similar. The advances made were debited to the shippers or peddlers in the accounts payable ledger. The accountant's curiosity was not roused by this fact until he made his audit at the close of 1917. He then asked for an explanation of these debits and was told the true situation regarding them. Since the burlap had actually been received and had gone into the manufactured product and been sold, or was included in the inventory at the close of the year, the accountant decided to place the books on a correct basis at the close of 1917 and, accordingly, debited merchandise and credited accounts payable on the accounts payable ledger to the extent of the unbalanced debits which he found existing on the ledger at December 31, 1917. The entries which he made had the effect of increasing the cost of merchandise consumed in 1917 to the extent of $39,495.20. The respondent has allowed $5,171.98 as additional cost of merchandise for 1917, but has disallowed the balance, amounting to $34,323.22.
There can be no question but that the action of the accountant employed by the partnership was correct for the purpose of determining the true net worth of the partnership*3600 at December 31, 1917. He corrected, however, a practice which had been in existence apparently throughout 1916 and 1917. The same conditions existed in 1916 as in 1917. He did not correct the books at January 1, 1917. To the extent that there may have been unbalanced debits in the accounts payable ledger at January 1, 1917, an overstatement of the net worth of the partnership at the beginning of the year 1917 would have resulted; for the merchandise that had been received up to January 1, 1917, was either reflected in sales of merchandise in 1916 or in inventory at the close of the year. We can not determine the extent of any error that may have been made at the beginning of 1917. It is evident, however, that the net worth at the close of 1917 was determined on an entirely different basis from that at the beginning of the year and we can not accept the accountant's statement as reflecting the true net worth at the beginning of the year. *201 The respondent has determined that the net income of the partnership for 1917 was understated to the extent of $34,323.22 due to the correction made in the partnership books of account at the close of 1917. In the absence of proof*3601 of error the respondent's finding is sustained.
When the accountant opened a new ledger as of January 1, 1918, he failed to bring forward certain balances from the old ledger. These balances are claimed by the partnership to have constituted bad debts deductible from gross income. From an examination of the accounts thus claimed to represent bad debts it is found that one of them represents an investment in a building and loan association. No evidence as to the worthlessness of this account has been furnished the Board. The claim against A. Pottash has been referred to above. The bookkeeper gave information to the effect that it represented a donation made to a relative. The character of the J. Gordon Lodge account is not in evidence. Information was furnished the Commissioner by the bookkeeper that it represented lodge dues paid for members of the partnership. Upon the evidence of record the deduction for bad debts must be disallowed since there is no proof of an ascertainment of worthlessness of them during the year 1917.
From the foregoing we believe that the taxable net income of the partnership for 1917 was as follows:
| Net income shown by return | $14,586.81 |
| Adjustment made by accountant | 34,323.22 |
| Amount deducted as bad debts | 2,060.43 |
| Total | 50,970.46 |
*3602 The respondent has determined that the returns filed for the partnership and for the individual partners were false and fraudulent. We are convinced from a consideration of all of the evidence that they were not false or fraudulent with intent to evade the tax. The partners employed a reputable accountant to audit their books of account for 1917 and to prepare their income-tax returns. The records were in bad shape and he did the best that he could with the records available. Apparently the changes that he made in the books of account at the close of 1917 for the purpose of correcting the books were not done with any thought of evading the tax of the partnership or of the partners. We can not determine what effect the change made by the accountant in the closing entries for 1917 had upon the correct net income of 1917. Our conclusion is that any penalty for filing fraudulent returns was not incurred.
The partnership return for 1917 was filed on March 27, 1918. The statutory five-year period in which to assess any tax on this return expired March 27, 1923, except as it may have been extended by a consent or consents filed for a later determination of the tax. It was *202 *3603 admitted at the hearing that a chain of such consents had been filed. The partnership was dissolved in September, 1924. A consent was filed on December 3, 1924, as set forth in the findings of fact. This consent was filed on behalf of the partnership by Max Pottash, one of the partners. Counsel for the petitioners contend that Max Potash had no authority to sign a consent which would bind his brother. In support of this contention reliance is had upon decisions of the courts of Pennsylvania. In Schoneman v. Fegley,7 Pa.St. 433, the court said:
Now it is settled that, after dissolution, the late partners are not agents for each other, except to make good outstanding engagements, or for the purpose of liquidating the affairs of the partnership: They cannot enter into a new contract or engagement for their former associates, nor bind them by a new promise: Estate of Davis Desaugue,5 Whart. 530">5 Whart. 530; Levy v. Cadet, 17 Serg. & Rawle, 126. And if one acknowledges an account, it will not affect the other; *3604 3 Johns, 536.
Again, in Kaufman v. Fisher,3 Grant. 302, the court said:
That a promise, however expressed, made by one member of a dissolved partnership to pay a partnership debt already barred by the statute, does not revive the debt as to his copartner, is settled law in Pennsylvania. The ground is, that the power to create a new right against the partnership does not exist in any partner after the dissolution of it; and the acknowledgment of a debt already barred by the statute of limitations is not the mere continuation of the original promise, but a new contract springing out of, and supported by, the original consideration.
There is no evidence, however, that Harry Pottash was not consulted by his brother in connection with the filing of the consent or that he in any wise withheld consent. This consent was filed in connection with the winding up and liquidation of the affairs of the partnership and we are of the opinion that it bound Max Pottash and that he may be held liable for the assessment and collection of deficiencies of tax found to be due from the partnership.
*3605 The final assignment of error which it is necessary for us to consider is that in the computation of the deficiencies in income tax owed by the partners the respondent has failed to give effect to the decision of the United States Circuit Court of Appeals for the Second Circuit in the case of Reid v. Rafferty, 15 Fed.(2d) 264, which decision has been published with approval by the Treasury Department as Treasury Decision 3971. In accordance with that decision the distributive share of the net income of a partnership assignable to each partner is to be credited with the proportionate part of the excess-profits tax of the partnership apportioned to such partner. Max Pottash and Harry Pottash are entitled to have deficiencies in tax for 1917 computed in accordance with the decision of the court in Reid v. Rafferty, supra.
Judgment will be entered under Rule 50.