*2977 1. Where persons agree to purchase property for their joint benefit and one advances sufficient money to meet taxes and interest charges, such amounts when repaid to him by his coadventurers, it having been agreed that interest on such advances was to be paid, are not deductible by them as taxes and interest as they constitute repayments of a loan rather than taxes and interest as such.
2. The existence of a partnership between father and son at the time of the sale of certain lands and the inclusion in partnership assets at any time of such lands, held not established by the evidence.
*421 The Commissioner determined deficiencies as follows:
| 1920 | 1921 | |
| William D. Hutchins | $10,080.35 | 4,900.09 |
| Clifton S. Humphreys | 7,427.03 |
The issues before the Board raised by the amended petitions are: (1) Whether a tenant in common in respect to real estate for whom one of his cotenants pays taxes and interest on property held over a series of years is entitled to add such charges when repaid to the*2978 cost *422 of the property in determining the profit derived from a sale, or (2) whether such charges may be deducted in the year of their reimbursement to such cotenant. These issues are in respect to the petitioner Hutchins applicable to the years 1920 and 1921 and in respect to the petitioner Humphreys only to the year 1920.
The petitioner Humphreys alleges additional error on the part of the respondent in taxing the entire profit on his share of the real estate to him alone without recognizing a partnership alleged to have existed between him and his son.
FINDINGS OF FACT.
The petitioner Hutchins was a dealer in real estate in Augusta, Me. In the year 1916 he purchased with two others, Kendall and the petitioner Humphreys, the former being of Augusta and the latter of Madison, Me., the south half of a tract of land known as Hobbstown. Kendall and Humphreys each took a quarter interest and Hutchins a one-half interest in the property. The understanding between these three persons was not reduced to writing. Hutchins agreed with Humphreys and Kendall in connection with the purchase of the south half of Hobbstown that Kendall was to finance the purchase insofar*2979 as it was impossible for the others to finance their share of it for themselves. The petitioners were able to furnish part of the money as well as part of the carrying charges. These advances by Kendall, it was agreed, were to be repaid to him upon the sale of the property.
The same arrangement prevailed in regard to the north half of Hobbstown except that Humphreys had nothing to do with this deal.
The north half of Hobbstown was purchased in 1917 and was carried by Kendall, who, in 1920, presented to Hutchins a statement of the amount of the carrying charges. Hutchins in the year 1920 repaid such charges to Kendall. The payments made by Kendall for which he was reimbursed represented taxes and mortgage interest. Hutchins paid his share of the advances made by Kendall from the years 1916 to 1920 representing charges on both the north and south sections.
The original purchase price of the south half of Hobbstown was $121,000 and the original purchase price of the north half was $102,220. The south half was sold in 1920 for $327,124 and the north half was sold in 1921 for $273,679.98. Hutchins received one-half of the proceeds of the sale of each tract.
In addition*2980 to the payments of interest made in 1920 by Hutchins, he made a payment of interest in 1919 amounting to $760.20, which was deducted from 1920 gross income.
*423 Kendall paid taxes in the year 1917 but in the subsequent years Hutchins paid his share of the taxes and deducted them on his income-tax return for that year. The only deduction taken by Hutchins on his 1920 return for taxes paid in prior years was an item paid in 1919 above referred to.
Humphreys negotiated the sale of south Hobbstown and in August, 1920, received a commission based on the services rendered by him in connection with such negotiations. The commission on the south half amounted to $8,520, for half of which Hutchins made payment to Humphreys, and for one-quarter of which Kendall made payment to Humphreys. Humphreys received one-fourth of the profit on South Hobbstown less his share of the advances made by Kendall.
The petitioners rendered their returns on a cash basis.
In determining the amounts of the deficiencies in the case of both petitioners the Commissioner decreased the cost of the property as shown on the returns by the amount of all business expenses, interest and taxes applicable*2981 to years prior to the taxable years involved.
The petitioner Humphreys had always intended to take his only son, who had had an engineering training, into partnership with him. Several conversations had been had with the son to this effect. In the year 1920 the son, who had been working for a Chevrolet agency in New York State, contemplated dissolving his connection with that business and had a talk with his father in regard to the possibility of forming the partnership at that time. The son had done some work in connection with the acquisition of the Hobbstown tract and the tract had, in fact, been purchased through reliance to some extent on the son's judgment after a survey made by him. There was no written agreement of partnership, but in August, 1920, a conversation was had between father and son in regard to the commencement of such partnership. Notice of the new firm was announced bearing date of December 15, 1920. This notice stated that Mr. Philip Collis humphreys had become a junior member of a firm to be known as Clifton S. Humphreys and Son.
There was some discussion in August, 1920, as to whether the south half of the Hobbstown tract was to be included as an*2982 asset of the partnership. The tract was sold on August 27, 1920. Clifton S. Humphreys had taken no steps to convey any part of his share of the Hobbstown tract to his son had when the proceeds of the sale were received they were reinvested by the father in two other tracts of real estate. Clifton S. Humphreys received $30,660.34 as his share of the profit on the Hobbstown sale. This profit included *424 $8,520 commission, three-quarters of which was paid by his coowners to him for negotiating the sale. The tracts of land purchased with the proceeds from the Hobbstown deal were known as the Spencer Stream tract and the Shaw Hill tract. Clifton S. Humphreys paid between $25,000 and $26,000 for the Spencer Stream tract, which was purchased on October 9, 1920. The Shaw Hill tract was purchased for $5,000 on April 22, 1921. The deed to the Spencer Stream tract was taken in the name of Clifton S. Humphreys. The deed to the Shaw Hill tract, however, ran to C. S. and P. B. Humphreys, the P. B. Humphreys being intended to designate the son. The deed to the Shaw Hill tract was not made to Humphreys' son under any instructions from Humphreys, but because the seller knew that*2983 Humphreys and his son were at the time of the conveyance partners. Humphreys would have had the deed issued in his own name alone had the seller made any inquiries in regard to what grantees should be mentioned in the instrument.
OPINION.
MURDOCK: The petitioners argue that they should have benefit of the carrying charges, which were reimbursed to their cotenant Kendall, in one of two ways, either that the amount of such charges should be allowed as additions to their proportion of the cost of the property thereby decreasing the gain on the sale, or that they should be allowed as deductions from gross income in the year in which they were repaid to Kendall. The former method was adopted by the petitioners in rendering their returns and the reduction of the cost by the respondent gave rise to the deficiencies in question. Kendall had, upon the acquisition of the property, agreed to advance the carrying charges whenever his associates were unable to do so and the payments in question were the result of the carrying out of that understanding. Interest was charged by Kendall to his associates on these advances.
To sustain the first contention the petitioners have called our*2984 attention to a provision contained in Regulations 45, article 231, issued by the Commissioner of Internal Revenue, with respect to allowing a taxpayer to capitalize carrying charges in the case of timber lands during a period of unproductiveness. It is unnecessary for us to pass upon the validity of this regulation, as in our opinion the petitioners do not present a case where we are justified in holding that the regulation in question, if valid, would be applicable, such regulation having been issued to cover cases where lands are held for future development. In the present case the lands were merely purchased for resale without any intention on the part of the purchasers of conducting a timber business.
*425 It is also argued by the petitioners that when such payments were reimbursed to Kendall they, in fact, constituted payments of taxes and interest. It is clear from the arrangement between the parties that the advances made by Kendall constituted loans made by him to his associates. The interest payments establish this beyond doubt. That the advances were used to discharge obligations arising in connection with the ownership of the property and that these obligations*2985 consisted of taxes and interest due, can in no way help the petitioners, since when the repayment was made to Kendall upon the termination of the deal the amounts so repaid were not taxes and interest, as such, but were amounts paid to discharge the obligation owing to Kendall.
On the issue raised by the petitioner Humphreys as to the existence of a partnership at the time the Hobbstown tract was sold, the evidence is slight. The testimony of both Humphreys and his son indicates that a partnership had been contemplated before the son had finished his education. It also indicates that in August, 1920, the father and son had a conversation as to the actual commencement of a partnership and as to whether or not the Hobbstown tract should form a part of the assets of such partnership. Not only were no steps taken, however, to transfer to the son any portion of the father's undivided one-quarter interest in the Hobbstown tract prior to sale, but after closing the deal the elder Humphreys treated the proceeds of the sale in all respects as his own and upon reinvestment of those funds the major portion went to the purchase of a tract, the deed to which was taken solely in the name of*2986 the father, a smaller portion of the funds being used to acquire another parcel, the deed to which was by error on the part of the seller made out in the name of the father and another intended to designate the son. But this conveyance was made not only without the instruction of the father but without his knowledge and contrary to the manner in which he would have instructed the deed to have been prepared, since it would have designated the father alone as grantee had his wishes in the matter been consulted.
While there is some evidence to show that discussions looking to a partnership between father and son had been entered into with some frequency, and while it is established that not later than December 15, 1920, such a partnership had actually been formed, it is our opinion that the petitioner had not adduced sufficient evidence to establish the existence of a partnership between himself and his son at the time of the sale of the Hobbstown tract or to show that the Hobbstown tract was ever actually a partnership asset.
Judgment will be entered for the respondent.