*2086 Held that no partnership existed composed of petitioner, his wife and his son, and that respondent correctly taxed petitioner upon the income from the business conducted in his name.
*712 This is a proceeding for the redetermination of an asserted deficiency in income taxes for the calendar year 1922 in the amount of $5,654.78.
It is alleged in the petition that:
(1) The respondent erred in determining that during the calendar year 1922, no partnership existed between the petitioner and Seymour Tally;
(2) The respondent erred in determining that during the calendar year 1922, no partnership existed between the petitioner, Mary A. Tally and Seymour Tally with respect to the operation of Tally's Broadway Theatre and Glenn Ranch;
(3) The respondent erred in determining that the entire net income for the calendar year 1922 from the operation of Tally's Broadway Theatre and Glenn Ranch was taxable to the petitioner;
*713 (4) The respondent erred in determining that the taxes paid by Mary A. Tally and Seymour*2087 Tally for the calendar year 1922, or such portion of those taxes as are alleged by the respondent to be refunded, should be refunded to those taxpayers; and that
(5) If the determination of the respondent that for the calendar year 1922, no partnership between the petitioner and Mary A. Tally and Seymour Tally existed is proper, then the respondent erred in his failure to make such determination within such time as would permit the refund of any overassessment resulting therefrom.
FINDINGS OF FACT.
The petitioner is an individual having principal office at 833 South Broadway, Los Angeles, Calif. He moved to Los Angeles in 1895. Prior to that time petitioner had been engaged in the phonograph business in San Antonio, Tex. His wife, Mary A. Tally, helped him in running that business as did his son, Seymour Tally, from the time he was ten or twelve years old. From the time Seymour Tally was old enough to know the value of money, petitioner allowed him access to the cash without restraint.
Since petitioner has resided in Los Angeles, he has been engaged in the moving-picture business at various locations. After Seymour Tally finished school, he did not take outside employment, *2088 but worked with his father. Seymour Tally is now about 40 years of age.
The business in which the petitioner has been engaged has always been conducted under the name of "T. L. Tally." During 1922 the enterprise in which petitioner was engaged included Tally's Broadway Theatre and Glenn Ranch.
On January 1, 1919, the following agreement was executed:
KNOW ALL MEN BY THESE PRESENTS, that T. L. TALLY, MARY A. TALLY and SEYMOUR TALLY, all of Los Angeles, California, have this first day of January, 1919, entered into a copartnership;
The said T. L. TALLY, MARY A. TALLY and SEYMOUR TALLY are father, mother and son respectively;
The said parties above named have agreed, and by these presents do agree, to become copartners in business together, under the firm name and style of "T. L. TALLY" in the business of motion picture exhibitors and other business connected with the motion picture industry as well as the handling of real estate and the doing of all other matters necessary or convenient in the handling of the property of the partnership;
IT IS AGRDDE that said copartnership commences on the 1st day of January, 1919, and shall continue as long as mutually agreeable to all*2089 of the parties hereto.
The said T. L. TALLY hereby declares and agrees that the use of all of the property, real, personal and mixed, now belonging to or standing in his name is hereby contributed to this copartnership during the life thereof.
AND IT IS AGREED by and between the said parties that at all times during the continuance of their said partnership, they and each of them will give their *714 attention, and do their and each of their best endeavors, and to the utmost of their skill and power, exert themselves, for their joint interest, profit, benefit and advantage; that they shall and will during all times bear, pay and discharge, equally between them, all expenses that may be required for the support and management of their said business and property; that all gains, profits and increase that shall come, grow or arise from or by means of said business or property, shall belong to the said partners share and share alike, except as hereinafter provided, and that any loss that may be sustained will be borne share and share alike.
IT IS FURTHER UNDERSTOOD that said property has been accumulated and acquired, largely through the perserverance, energy, ability and*2090 sound business judgment of the said T. L. TALLY and in consideration thereof and in consideration of the contribution by the said T. L. TALLY of the use of said business and property to said partnership, under this agreement, the said T. L. TALLY, shall be the general manager of said business and property and shall be the absolute dictator as to the methods and policies to be pursued in the management thereof, particularly including the manner, method and amount of all expenditures, and division of all profits.
IN WITNESS WHEREOF, the parties hereto have subscribed their names the day and year first above written.
(Signed) THOMAS L. TALLY.
MARY A. TALLY.
SEYMOUR TALLY.
The above agreement was never recorded in any public office. The parties have continued to act under it ever since its execution.
In 1922 Mary A. Talley and Seymour Tally assisted the petitioner in operating Tally's Broadway Theatre. Mary A. Tally did not take any large part in the conduct of the business but she assisted Seymour Tally in managing the theatre while the petitioner was away on trips. She managed the large number of employees connected with the theatre at times when the petitioner was*2091 away, and also when he was there. In 1922 she was about 62 years old.
All of the property used in the business stood in the petitioner's name. Likewise the bank account of the business was in petitioner's name, although Seymour Tally and Mary A. Tally had the power to draw checks against it.
Petitioner and his son divided their time between Glenn Ranch and the theatre. Those two parts of the business required more time than any of the other properties. Petitioner and his son would alternate in staying at the two places.
Neither Seymour Tally nor Mary A. Tally contributed anything to the business except general cooperation. None of the parties drew a regular salary but withdrew money from the business as it was needed. They generally drew about the same amount monthly, but if any one of them needed more, it was paid out of the general fund. In some years Seymour Tally withdrew more than the petitioner. The profits which were not withdrawn were invested in other property such as Glenn Ranch. The books of the business were not posted to show, at the end of any year, the amount to which the *715 parties were entitled. After the revenue agent had visited the petitioner, *2092 the petitioner made entries upon the books showing that Mrs. Tally drew $3,000 in 1922. The petitioner also made entries in the books for 1922 showing a debit of $991.07 and a credit of $5,599.51 to the account of Seymour Tally.
The respondent held that the wife of the petitioner was not a partner either in Glenn Ranch or in Tally's Broadway Theatre; that the son of the petitioner was not a partner in the theatre business; that the son was an equal partner in the ranch; that the son was entitled to an allowance of salary from the theatre business; that the deficiency in the case of the petitioner is $5,654.78; and that the taxes paid by Mary A. Tally and Seymour Tally can be refunded only in part, by reason of the expiration of the statutory period of limitation.
OPINION.
MCMAHON: The petitioner assigns as error the inclusion in petitioner's taxable income for 1922 of income which petitioner claims belonged to his wife and son as his partners. The respondent has held that no partnership existed composed of petitioner, his wife and his son. The petitioner, in support of his contention that such a partnership did exist, introduced into evidence the agreement which we have*2093 set forth in our findings of fact.
It is well established that one of the requirements of a partnership relation is a right on the part of each partner to share in the profits from the business conducted. In 47 C.J., p. 668, it is stated:
As the prosecution of a business for the common benefit of the participants is the basis of every partnership, it follows that an agreement to share profits, although not necessarily express, is an essential element of the relationship and that, at least as between the parties, themselves, there must be a community of interest, or right to participate, in the profits of the business or venture before it can be said that an agreement of partnership has been entered into and exists. * * *
In the case of Drake v. Hall,220 Fed. 905, the Circuit Court of Appeals, Seventh Circuit, considered the question of partnership. In that case, upon the dissolution of a partnership, all the property was conveyed to the succeeding partner except a patent, issued to the two partners jointly and under which they had been manufacturing. The succeeding partner was given the exclusive use and control of the patent for one year, for which*2094 he was to pay the other party a royalty on all articles made thereunder. The Court held that such agreement did not constitute a partnership, but that the ownership of the patent remained as before, vested in the patentees as tenants in common. The Court stated:
*716 The distinctions between co-ownership of property and copartnership relation therein, and that mere joint ownership and control of property does not constitute relationship as copartners therein, are well settled. Lindley on Partnership (2d Am. Ed.) § 6, c. 1. It is of the essence of copartnership relation that an agreement appear, express or implied, for sharing the profits of a business.
"The requisites of a partnership are that the parties must have joined together to carry on a trade or adventure for their common benefit, each contributing property or services, and having a community of interest in the profits." Ward v. Thompson,22 How. 330">22 How. 330, 334, 16 L. Ed. 249">16 L.Ed. 249; Meehan v. Valentine,145 U.S. 611">145 U.S. 611, 618, 12 Sup.Ct. 972, 36 L. Ed. 835">36 L.Ed. 835.
Without proof of such import in the agreement or conduct of these parties the contention of copartnership relation between them*2095 thus became untenable.
In Meehan v. Valentine,145 U.S. 611">145 U.S. 611, it was held that one who lends money to a partnership under an agreement that he shall be paid one-tenth of the yearly profits of the business if those profits exceed the sum loaned, does not thereby become liable as a partner for the debts of the partnership. In its opinion, the Supreme Court said:
The requisites of a partnership are that the parties must have joined together to carry on a trade or adventure for their common benefit, each contributing property or services, and having a community of interest in the profits. Ward v. Thompson,22 How. 330">22 How. 330, 334.
* * *
* * * And participating in profits is presumptive, but not conclusive, evidence of partnership.
In Westcott v. Gilman et al.,170 Cal. 562">170 Cal. 562; 150 Pac. 777, the Supreme Court of California stated:
* * * But while thus the element of profit sharing does not alone and of itself establish a partnership, it is an essential element of every partnership, and it is an element present in this contract. * * *
At the hearing the petitioner testified that he had always considered Seymour*2096 Talley, his son, as a partner from the time he was born. He stated that Seymour Tally's first wife had died, and that he was about to remarry at the time the agreement was executed. Petitioner further stated that since he felt that the second wife might influence Seymour Tally in the conduct of the business, he caused the agreement to be executed in order that he might retain control of the business. However, the evidence discloses that petitioner retained title to the property employed in the business. The purported partnership agreement provides that "the said T. L. Tally * * * agrees that the use of all the property * * * is hereby contributed to this copartnership during the life thereof." It further provides "* * * that all gains, profits and increase that shall come, grow or arise from or by means of said business or property, shall belong to the said partners share and share alike, except as hereinafter provided, * * *." Thereafter in the purported partnership *717 agreement it is provided that the petitioner "shall be * * * the absolute dictator as to the methods and policies to be pursued in the management thereof, particularly including the manner, method*2097 and amount of all expenditures, and division of all profits." (Italics ours.)
While the agreement is called by the parties an agreement of co-partnership, it is our opinion that the above quoted extracts indicate that it was not such. From a reading of the agreement we can not avoid the conclusion that the petitioner reserved the right to absolutely deprive his wife and son of participation in the profits of the business if he so desired, and, as pointed out above, community of interest in the profits from the business is one of the prerequisites of a partnership relation. No issue has been raised as to whether the amounts withdrawn by the son and wife are deductible as salaries, and, in any event, we are without evidence to determine whether or not those amounts constitute reasonable salaries. The income from the business was, in the first instance, income to the petitioner and is taxable to him. See Charles P. Leininger,19 B.T.A. 621">19 B.T.A. 621, and Earl v. Lucas,281 U.S. 111">281 U.S. 111. The holding of the respondent is approved.
The petitioner asks that we hold that respondent is estopped to assert any deficiency against the petitioner because the respondent's*2098 determination that there was no partnership was not made within such time as would permit the refund to the wife and son of any overassessment which resulted therefrom. The petitioner advances no argument in favor of his contention and we can see no merit in it.
Reviewed by the Board.
Judgment will be entered for the respondent.