*1945 1. The respondent's action in holding that the earnings of a partnership firm belonged in equal shares to two members, and not five, sustained.
2. Held, in Docket No. 29501, that the evidence sustains the allegations of fraud in respect to the filing of the returns for all of the years involved.
*1393 In the proceeding at Docket No. 20501 the respondent asserted deficiencies in income taxes for the years 1917 to 1923, inclusive, in the aggregate amount of $57,463.52. At the hearing he amended his answer, alleging fraud for each of such years and asking for the imposition of penalties aggregating $34.600.33. In Docket No. 29502 he determined and assessed deficiencies for the same years in the aggregate amount of $87,644.88, which has been reduced to $54,986.85 by the abatement of $32,658.03. The petitioners allege that he erroneously determined that the income in question was that of a two-member partnership and contend that there were five members thereof in each of the taxable years, and*1946 petitioner B. P. Wickham denies that any returns filed by him were false or fraudulent. The two proceedings have been consolidated for hearing and decision.
FINDINGS OF FACT.
Continuously since about 1888 to 1923, inclusive B. P. Wickham and his brother E. A. Wickham, now deceased, were sole members of a copartnership firm known as E. A. Wickham and Company, and were engaged in the building construction and paving business at Council Bluffs, Iowa. E. A. Wickham, the business head of the firm, was a man of unusual executive and business ability and a dominant *1394 figure in the business affairs of Council Bluffs. He was president of two banks in Council Bluffs, as well as principal owner and executive head of the National Construction Company and the Wickham Bridge and Pipe Company, all corporations. Under this management the affairs of E. A. Wickham and Company prospered and at times it carried as much as $100,000 in cash deposits in the banks, and had assets valued at not less than $400,000.
About 1893 or 1900, Eleanor Wickham, a sister, became bookkeeper for E. A. Wickham and Company and continued as such up to and including the years involved. No contract of*1947 employment was entered into with Eleanor Wickham for these duties, nor other understanding had, except that E. A. Wickham told her, at the time, that they needed her in the office and asked her to come in and "be in the business." Later, two brothers, John and Leo Wickham, began working for the firm under similar circumstances. When the first of these brothers came to the firm about 1906 or 1907, E. A. Wickham said to him: "You might just as well go into the business, John, and all work together. We will all have an interest in it." Leo, who came in 1916, was told by E. A. Wickham that they wanted him to "learn the business" and go in with them and that they "would give him an interest in the concern." No salaries were paid by the partnership firm to any of these employees; nor does the record show the time they devoted to its affairs. All, however, owned stock in the National Construction Company and the Wickham Bridge and Pipe Company, family corporations, simultaneously operated by them, from which they derived substantial dividends. From the last named corporation, during at least two of these years, Eleanor Wickham drew a yearly salary of $7,500 as secretary. All of these*1948 Wickham brothers drew certain weekly allowances as expenses when out on the business of the firm.
On September 17, 1919, James Wickham, father of these brothers and sister, died at the family homestead in Council Bluffs, Iowa. For many years the father had been associated with his brother O. P. Wickham, in a partnership firm, as building contractors and manufacturers of brick. At the time of his death, James Wickham owned certain undisclosed business interests and properties, the title to which stood in the names of E. A. Wickham and B. P. Wickham, and which had been under the management and control of these brothers. On the day following the funeral of their father, these children of James Wickham assembled at the family homestead and entered into the following written agreement:
Partnership agreement entered into this 21st day of September 1919, by and between E. A. Wickham, B. P. Wickham, Eleanor A. Wickham, Leo J. Wickham and John J. Wickham all children of James Wickham, decedent, who died on September 17th, 1919, whereby all agree and consent to carry *1395 on without division or interruption, the business known as the Wickham Business interests of Council Bluffs, *1949 Iowa, and other localities, in which James Wickham, decedent, had a working interest at the time of his death, the business having been managed by E. A. Wickham and B. P. Wickham, the two oldest sons of the decedent, in whose name or names the title to the properties was taken in such manner as seems best suited to the convenience of the business, and according to the best judgment of E. A. Wickham and B. P. Wickham. And we the above named children of James Wickham, decedent, agree to continue and carry on the business in the same manner, as partners, and without division or interruption, under the management of E. A. Wickham and B. P. Wickham agreeing that all profits and earnings of every description and character shall belong 30% to E. A. Wickham, 30% to B. P. Wickham, 20% to Eleanor A. Wickham, 10% to Leo J. Wickham and 10% to John J. Wickham. Investments are to be made when deemed advisable by E. A. Wickham or B. P. Wickham, and it is further agreed that this partnership agreement shall operate from January 1st, 1919, and terminate December 31st, 1928, unless terminated by mutual agreement or by death of some of the partners prior to December 31st, 1928.
For the taxable years*1950 here in controversy, the net income of E. A. Wickham and Company was as follows:
| 1917 | $33,759.66 |
| 1918 | 166,744.18 |
| 1919 | 49,973.96 |
| 1920 | 147,716.01 |
| 1921 | $173,493.21 |
| 1922 | 39,947.28 |
| 1923 | 74,034.42 |
Not accounted for in the earnings shown above is the cost of fifteen brick houses built during these years from material and labor supplied and paid for by the partnership, to which E. A. Wickham and B. P. Wickham took joint title, each claiming a one-half interest.
Prior to 1923, no income tax return was filed on behalf of E. A. Wickham and Company; nor did either of the two partners, each of whom filed personal income tax returns for all of the years involved, report any income derived by them from the business of that partnership. Some time during 1923 officials of the Treasury Department began an investigation of the affairs of the partnership of E. A. Wickham and Company, and of the returns filed by its members. Some negotiations were had by these officials and E. A. Wickham which resulted in a postponement of the investigations until the spring of 1924. One condition for such postponement was the execution of assessment waivers by E. A. and B. P. Wickham, *1951 who represented to the Government officials that they were the sole members of the partnership firm of E. A. Wickham and Company and constituted all of the parties of interest.
On March 12, 1924, a return for the calendar year 1923 was filed in behalf of E. A. Wickham and Company. This return represented that firm to be a two-member partnership consisting of E. A. Wickham and B. P. Wickham, between whom its income, amounting *1396 to $28,238.06, was apportioned in equal parts. In his individual income tax return for 1923, each of these partners reported $14,119.03, or one-half of the amount shown in the partnership return, as income received by him from the partnership in 1923. In May, 1924, Robert R. Wade, a certified public accountant, was employed to audit the accounts of the partnership and to put them in shape for the Government agents. Wade worked upon accounts about three months and prepared a "set-up" from the bank deposit tickets and canceled checks, which were the only memoranda found in the office. These memoranda failed to show the true income of this firm by more than $208,000; but, from them, an amended partnership return was prepared and filed for the*1952 calendar year 1923. On the same date delinquent returns for all prior years to and including 1918 were filed. These returns showed E. A. Wickham and Company to be a five-member partnership, with interests divided, upon a percentage basis, among the following alleged partners:
| Members | Interest, per cent |
| E. A. Wickham | 30 |
| B. P. Wickham | 30 |
| Eleanor A. Wickham | 20 |
| Leo J. Wickham | 10 |
| John J. Wickham | 10 |
Omitted from such returns were amounts received by the partnership for work performed for the city of Council Bluffs in these years, as follows:
| 1917 | $22,046.93 |
| 1918 | 24,700.90 |
| 1919 | 3,751.32 |
| 1920 | 34,713.17 |
| 1921 | $86,988.46 |
| 1922 | 9,092.33 |
| 1923 | 27,470.22 |
B. P. Wickham and E. A. Wickham each filed income tax returns for the years 1918 to 1922, inclusive, but neither reported any income received in these years from E. A. Wickham and Company. For 1923, each of these partners reported receipt of $14,119.03 as his distributive share of the earnings of that firm; this being one-half of its reported earnings for the period as shown in the partnership return filed May 13, 1924. On May 26, 1924, these partners filed amended income tax returns*1953 for 1923 in which they reported less amounts than formerly returned, to wit: $2,874.67, as their respective portion of the partnership earnings for 1923. On May 26, 1924, B. P. Wickham filed amended income tax returns for 1919, 1920, and 1921, in which he reported income received from the firm of E. A. Wickham and Company for these years in respective amounts of $15,588.48, $52,193.18, and $22,932.86.
*1397 The returns filed by the petitioner B. P. Wickham for each of the years involved were false and fraudulent and were so made and filed with the intent of evading the tax.
OPINION.
LANSDON: The partnership of E. A. Wickham and Company was formed by E. A. Wickham and B. P. Wickham about the year 1888, and conducted by them as a two-member firm without change during and throughout its entire life. Prior to 1923 this partnership filed no income tax returns; but for that year, after an investigation had been started by the Government officials in reference to its business, a return was filed for it by E. A. Wickham. This return showed that all of the partnership earnings for that year were distributable in equal parts to E. A. Wickham and B. P. Wickham, who were represented*1954 as being the only partners. The returns filed by these partners for that year were in harmony with the partnership return and reported each as having received one-half of the net income reported for it. In the negotiations with the Government agents for a postponement of the investigations, in the spring of 1924, E. A. Wickham stated to them that he and B. P. Wickham were the only members of the partnership, and upon such representation was granted the continuance upon the execution of waivers signed only by these two brothers. Also, in the several letters and applications for relief sent to the Insurance Department of the State of Iowa in 1922 and 1923 by E. A. Wickham in behalf of the partnership, that member, upon oath, stated that he and B. P. Wickham were the only members and parties of interest in that firm. The petitioners claim that the statements severally made to the sister and two brothers, when each came to work for the firm, of a desire and intent that they should have an interest in, and "be in" the business, followed by their continuous employment upon a nonsalary basis, made them all partners in the business, with ratable interests in the income produced as shown*1955 in the agreement of September 19, 1919.
In so far as the agreement of September 19, 1919, is concerned we see no connection whatever between that document and the partnership firm which produced the income in dispute. It is conceded that the contracting business carried on by this firm, which was founded in 1888 by the elder Wickham brothers, was entirely separate and apart from the brick business conducted by their father, James Wickham; and that it was separately owned by them to the exclusion of the father. The contract of September 19, 1919, was made on the day following the funeral of the father, James Wickham; and, by specific recitals, shows that it was the business of the father which these children agreed to continue "without interruption *1398 or division," sharing profits as partners, for the period beginning January 1, 1919. Contracts similar to this one, following a death, are not uncommon between heirs, or distributees of an estate, as a convenience of administration; but it is difficult to see why an agreement to "carry on and continue without interruption" should be considered necessary to a business which had been successfully conducted for more than 30*1956 years. It is clear that this contract was in no way intended to affect the partnership business of E. A. Wickham and Company; and its application to the affairs of that firm, after investigation by the Federal agents had begun, we think, was an afterthought intended to fraudulently conceal the true distribution of partnership income. The record wholly fails to show any legal relations between E. A. Wickham and B. P. Wickham on the one hand, and the sister, Eleanor, and brothers John and Leo, on the other, which would make the last named, or either of them, partners in the business carried on by the firm of E. A. Wickham and Company. Most certainly, under this record, these alleged junior partners at no time could have been held for the debts of that partnership and we are of the opinion that at no time were they, or either of them, such partners. On the record we find that the partnership here involved was a two-member firm comprised of B. P. Wickham and E. A. Wickham, deceased. The deficiencies asserted by the respondent are approved.
The charge of fraud raised by the respondent in his amended answer is amply sustained by the record. The understatements of income in all of*1957 the returns filed, and the failure to report the true income received from this prosperous partnership business, in view of the petitioner's admitted knowledge covering a period of more than 30 years, is inexcusable and can not be justified upon the plea that he entrusted the making of such return to others. . In respect of B. P. Wickham, petitioner at Docket No. 29501, the allegations of fraud are sustained.
Decision will be entered under Rule 50.