*2222 1. Rule laid down in Clinton G. Edgar,10 B.T.A. 110">10 B.T.A. 110, relative to inclusion in capital account of certain expenditures for capital items which were charged to expense and for the computation of allowances for depreciation on account thereof, applied.
2. Petitioner's distributive share of the net income of W. H. Edgar & Son for the calendar year 1925 determined.
*14 This proceeding is for the redetermination of an alleged deficiency in income tax for the calendar year 1925 amounting to $2,574.14. The petitioner alleges that the respondent erred (1) in refusing to *15 allow a proper and adequate deduction from gross income on account of depreciation; and (2) in erroneously computing petitioner's distributive share of the net income of the partnership of W. H. Edgar & Son.
FINDINGS OF FACT.
The petitioner is an individual residing in Detroit, Mich., and is engaged in conducting a wholesale sugar business in Detroit under the name of W. H. Edgar & Son. From 1860 to 1898 the business had been*2223 operated more or less as a family affair by the petitioner's great grandfather, grandfather, grandmother, and father, successively. In 1898 the petitioner joined his father in the business and so continued until 1906, when his father died. At that time the total capital of the business amounted to $250,000, of which $25,000 represented the petitioner's interest.
By the terms of his father's will everything that his father owned, including his interest in the business, was left to the petitioner's mother, and after some question as to whether the business should be continued it was decided that the petitioner and his mother would go on with the business. Since 1906 the petitioner has had entire and exclusive control of the business. The mother's interest is financial only and she takes no active part in the conduct of the business, which was continued under the same name, that is, W. H. Edgar & Son.
On or about May 1, 1908, a written agreement was entered into between the petitioner and his mother for the period of one year, which agreement reads as follows:
ARTICLES OF PARTNERSHIP made and entered into the first day of May, One thousand nine hundred and eight, BETWEEN MARY*2224 G. EDGAR OF DETROIT, WAYNE COUNTY, MICHIGAN, AND C. G. EDGAR of the same place
WITNESSETH, - It is mutually covenanted and agreed
FIRST - The name and style of the firm shall be W. H. EDGAR & SON. stSECOND - The business of the firm shall be that of buying and selling SUGARS, SYRUPS, MOLASSES & GLUCOSE in all the branches of the trade, and shall be the same business in character as heretofore carried on by the parties, at Nos. 520-532 Lafayette Boulevard, Detroit.
THIRD - MARY G. EDGAR contributes $225,000 Dollars
C. G. EDGAR contributes 25,000 Dollarsto the capital stock.
FOURTH - C. G. EDGAR shall have the entire and exclusive control and management of the business in all its departments and branches and devote his entire time, skill and attention to the business.
FIFTH - THE PROFITS of the business shall be divided between the parties in the following manner -
FIRST - MARY G. EDGAR shall be paid from the net profits of the business an amount equal to 6% on that portion of the capital contributed by her.
*16 SECOND - C. G. EDGAR shall be paid an amount equal to 6% on that portion of the capital contributed by him, and should there be any surplus over*2225 and above the aforesaid, the same shall accrue to him.
SIXTH - NEITHER THE FIRM or either party hereto shall become as surety in any manner or form for the accommodation of another.
SEVENTH - THIS PARTNERSHIP hereby formed shall commence on MAY 1, 1908 and shall continue until and including MAY 1, 1909.
WITNESS WHEREOF the parties hereto have hereunto set their hands and affixed their seals on this twenty-second day of APRIL, One thousand nine hundred and eight.
(Signed) MARY G. EDGAR
C. G. EDGARThe business has been continued in accordance with the terms of the foregoing instrument, there having been no subsequent written agreement between the petitioner and his mother. The business has at all times been a family affair. The capital contributed by petitioner's mother has never been reduced and it is not clear from the record under just what circumstances the petitioner would have permitted a diminution of his mother's capital. After the expiration of the one-year period provided for in the instrument executed by the petitioner and his mother, there were, from time to time, oral discussions between the petitioner and his mother relative to the business, the result*2226 of such discussions being an agreement between the parties that the business should be conducted as theretofore and that the petitioner's mother was to receive the amount of $13,500 each year, such amount being equivalent to 6 per cent on her capital investment. There was no arrangement whereby the petitioner's mother was to receive less than $13,500 each year and she never did receive less than that amount for any particular year. She was paid the amount of $13,500 in each of the years 1922, 1923, 1924, and 1925, payment of one-twelfth of that amount having been made each month.
Prior to the year 1921, there had been purchased for use by the business and charged to expense certain capital assets as follows:
| In use | |||
| during | |||
| Item | Cost | Date acquired | year |
| AUTOMOTIVE EQUIPMENT | |||
| 1 truck | $ 2,252.61 | 1918 | 1922 |
| 2 trucks and car | 3,717.94 | 1919 | 1923 |
| 5 trucks, 3 cars, spare motor, and truck body | 25,313.58 | 1920 | 1924 |
| MACHINERY | |||
| 3 sugar mills | 2,160.00 | 1913 | 1923 |
| Electric hoist | 800.00 | 1915 | 1925 |
| 906.50 | 1916 | 1925 | |
| 3,920.00 | 1917 | 1925 | |
| Package sealing, sewing, and other machinery | 676.20 | 1919 | 1925 |
| 4,155.45 | 1920 | 1925 | |
| Furniture and fixtures | 5,996.20 | 1917-1920 | 1925 |
*2227 *17 In determining the net income of the business for the calendar years 1923, 1924, and 1925 to be $13,474.79, $6,539.48, and $38,354.89, respectively, the respondent did not allow any deduction on account of depreciation sustained on assets acquired prior to 1921 and charged to expense.
OPINION.
SMITH. The issues in this case are (1) whether the respondent made proper deductions for depreciation in computing the net income of W. H. Edgar & Son for the calendar year 1925; and (2) whether the respondent properly computed petitioner's distributive share of the net income of W. H. Edgar & Son for the calendar year 1925.
With respect to the first issue, we have heretofore ruled in , that certain capital items of equipment, machinery, furniture and fixtures purchased prior to the year 1921 and charged to expense should be restored to the capital account of W. H. Edgar & Son and depreciation allowed thereon, and the respondent concedes that the petitioner is entitled to receive the benefit of a deduction on account of depreciation on those capital items which were acquired by the business prior to 1921 and which were still*2228 in use and not fully depreciated during the calendar year 1925, in accordance with that decision. Consequently, the assets heretofore excluded from the capital account but which were in use by W. H. Edgar & Son during the calendar year 1925 and had not been depreciated fully prior to that year, should be depreciated in accordance with the rates set out in our former decision, and the amount of depreciation thus ascertained should be allowed as a deduction in computing the net income of W. H. Edgar & Son for the year 1925.
With respect to the second issue, the petitioner alleges that W. H. Edgar & Son was a partnership consisting of petitioner and his mother, Mary G. Edgar; that her capital invested in the partnership was $225,000; that his investment in the partnership was $25,000; that Mary G. Edgar was entitled to all of the partnership profits that might be earned in any year or years up to an amount equal to 6 per cent on the amount of capital contributed by her to the partnership; that such amount at all times has amounted to $13,500; that after Mary G. Edgar had received her distributive share of partnership profits, any profits remaining over and above such share were and*2229 are distributable to him, and that the net income of the business for each of the years 1922, 1923, and 1924 was less than $13,500. The petitioner argues that the conclusion to be drawn from his allegations is that since the net income of the business for each *18 of the years 1922, 1923, and 1924 was less than $13,500, the distributive share of Mary G. Edgar of the earnings of the business for the year 1925, which earnings amounted to $38,354.89 computed without the benefit of any allowance for depreciation on account of capital assets purchased prior to 1921, consisted of $13,500 plus the difference between that amount each year and the net earnings of the partnership for each of the years 1922, 1923, and 1924, aggregating a total distributive share amounting to $51,499.54. However, before discussing the problem involved, we must point out that we can not determine the accuracy of the figure $51,499.54, since it has not been shown what the net income of W. H. Edgar & Son was for the year 1922.
If W. H. Edgar & Son was a partnership, and if it had dissolved at the close of the year 1925, it is conceivable that under certain circumstances an accounting at the demand of*2230 Mary G. Edgar might be had upon the basis presently contended for by the petitioner. However, we are not convinced from the evidence in this proceeding that the contention of the petitioner is sound. Without deciding whether the business conducted under the name of W. H. Edgar & Son constituted a partnership, although some doubt that such was the case might be entertained when the provisions of the agreement providing that the petitioner should have the entire and exclusive control and management of the business in all of its departments and branches are viewed in the light of what was said relative to the incidents of a partnership in , and , we are convinced that a proper interpretation of the agreement, and/or any amplification or restrictions thereof under which the business was conducted during the years 1922, 1923, 1924, and 1925, is that Mary G. Edgar should have all of the profits of the business up to and including $13,500 per year, and not that her distributive share of partnership earnings should be $13,500 each year irrespective of the amount of such earnings. *2231
The mere fact that there was paid to her the amount of $13,500 each year we do not believe is material to a disposition of this proceeding, since we are convinced that the difference between that amount each year and the earnings of the business for each of the years 1922, 1923, and 1924 constituted either a gift to his mother by the petitioner or a reduction of her capital investment. Furthermore, it is significant that the books of the business, aside from the private ledger maintained by the petitioner, do not reflect the payments made Mary G. Edgar in the years prior to the one under review, nor are we aware that any credits for the year 1925, other *19 than the amount of $13,500, have been set up in any records maintained by the business or privately by the petitioner.
In view of what has been said, we are of the opinion that the respondent properly computed the petitioner's distributive share of the net income of W. H. Edgar & Son for the year 1925, except as such distributive share may be modified by reason of our disposition of the first issue herein.
Judgment will be entered under Rule 50.