*2839 1. Held, that a partnership between petitioner and his three daughters existed during the taxable years.
2. Held, that petitioner was not subject to the delinquency penalty in filing his return for the year 1921.
*561 In this proceeding petitioner seeks a redetermination of his income and profits taxes for the years 1919 to 1921, inclusive, for which the Commissioner has determined deficiencies of $16,365,62, $27,630.23, and $25,989.96, respectively, and has also applied a delinquency penalty of 25 per cent for the year 1921, amounting to $6,497.49.
Petitioner alleges error on the part of the Commissioner (1) in including in taxable net income of the petitioner for each of the years 1919 to 1921, inclusive, the entire net income of M. D. Olds & Co., which the petitioner claimed was a partnership composed of four equal copartners, the petitioner being one of the partners; (2) in proposing to impose upon the petitioner a penalty of 25 per cent in the sum of $6,497.49 as a delinquency penalty.
*2840 A third issue relating to a reasonable allowance for exhaustion, wear and tear and obsolescence of certain dock property located in Sheboygan, Mich., was settled by agreement of the parties.
All other issues raised in the petition were waived by the petitioner at the hearing.
FINDINGS OF FACT.
Petitioner is an individual residing at Sheboygan, Mich. Prior to the year 1919 the petitioner had conducted a dock business and a timber business as his individual property at Sheboygan, Mich. He also owned certain timber properties and various stocks and other securities.
About December 31, 1918, the petitioner informed his daughters that he desired to take them into his business as partners. The petitioner desired to train his daughters in the handling of large sums of money, and also wished to divide his property during his lifetime so as to avoid any family disputes regarding its division after his death. On December 31, 1918, he and his three daughters entered into an agreement whereby he transferred to each of them a one-fourth interest in all of his properties and took from each of them a non-interest-bearing note payable on demand for $400,000. At the same time they*2841 entered into an oral agreement that the petitioner and his three daughters would constitute a partnership and the three daughters would participate in the profits and share in the losses. The agreement of sale was as follows:
WITNESSETH, that Millard D. Olds, party of the first part, agrees to sell one quarter interest in everything he owns to each of his daughters; parties of the second part agree to buy, giving their promissory note for $400,000 each. It is agreed that the business shall be conducted by party of the first part, by him and in his name, or in any other name that he sees fit to use. Parties of the second part are not to draw out any of the profits, only in such amounts *562 as said party of the first part, sees fit to pay them, and as they, parties of the second part, may have need for their living and comforts during his lifetime. Parties of the second part, may have the privilege of looking over the books and everything pertaining to the business, at any or all times. These notes are to be made for $400,000 each payable on demand and without interest.
If at any time, either party of the parties of the second part, are in any way dissatisfied with*2842 the way said party of the first part, conducts the business, and think that their interest is being impaired by such management, party of the first part agrees to return their notes and take over their interest.
In WITNESS THEREOF, the parties hereto have hereunto set their hands the day and year above mentioned.
After the petitioner received the information that the Commissioner of Internal Revenue took the position that no partnership existed and ascribed all of the income of M. D. Olds & Co. to the petitioner, the three daughters in October, 1925, filed a bill of complaint in the Equity Court of Sheboygan County, Michigan, praying the court to construe the contract and to declare the title to the property. The Commissioner of Internal Revenue was notified of the pending of the suit and was invited to intervene, but did not participate in the proceedings. The defendant, Millard D. Olds, in his answer to the suit admitted that the three daughters were his partners, and that the properties held in his name were properties of the partnership, and that his three daughters held each a one-fourth interest therein. A decree of the court, from which no appeal was taken, contained*2843 the following:
That a co-partnership does now exist and has existed since December 31, 1918 between plaintiffs and defendant, each owning a one-fourth interest therein and in the assets thereof. That the assets shown by the answer and supplemental answer of the defendant herein and now standing in defendant's own name, belong to the co-partnership of the plaintiffs and defendant now known as M. D. Olds & Company, and defendant holds said property as trustee in and for said co-partnership; that defendant shall transfer the same to said co-partners on request being made by plaintiffs or any one of them. That until such time such transfer shall be requested and made defendant shall hold said property in trust for said co-partnership and shall account therefor to the co-partnership.
Shortly after the suit was filed in the equity court, Millard D. Olds filed his petition with this Board.
No new books were opened specifically for the partnership but the books of account kept by M. D. Olds, individual, were continued and entries made therein to represent the partnership business and interests. On December 31, 1918, the net assets of the petitioner were entered at $1,990,176.41. *2844 Against this amount was debited by the bookkeeper $1,200,000 representing the three notes of $400,000 given by the petitioner's three daughters, which left a balance at January 1, 1919, standing in the name of M. D. Olds of $790,176.41. At the same time the books of account showed debits to the account of Gertrude Olds accumulated in 1918 and prior years amounting to *563 $14,807.88. Her account was credited with the $400,000, which left a net balance January 1, 1919, of $385,192.12. The books also contained an account of Mrs. G. L. Buhrman, nee Florence Olds, which contained debits for 1918 and prior years amounting to $13,999.05. Her account was credited with the $400,000, leaving a net balance January 1, 1919, of $386,000.95. The account of Blanche Olds showed debits for 1918 and prior years amounting to $13,966.26. Her account count was credited with $400,000, which gave a net balance at January 1, 1919, of $386,033.74.
At the close of the year 1919 M. D. Olds' account showed an increase of $90,124.70 against which miscellaneous debits were charged, amounting to $55,072.54, or a net increase of $35,052.06, of which $6,411.99 represented one-fourth of the net*2845 profits shown by the profit and loss account for the year 1919.
Realizing that the entry of $400,000 each to the credit of the three daughters did not represent a one-fourth interest in the assets as provided in the agreement, the parties had entered on the books at the close of 1919 a debit against the account of M. D. Olds amounting to $327,321.62, and the three girls were credited as follows:
| Gertrude Olds | $109,684.72 |
| Florence Olds Buhrman | 109,031.10 |
| Blanche Olds | 108,605.80 |
The accounts of the girls were also each credited with one-fourth of the profits as shown by the profit and loss account amounting to $6,412 each.
There were withdrawals during the year as follows: M. D. Olds, $15,020.76, of which amount about $6,950 was included in the miscellaneous debits of $55,072.54; Gertrude Olds, $3,381.98; Mrs. G. L. Buhrman, $3,537.18; Blanche Olds, $3,144.68.
These adjustments and withdrawals resulted in the net balance in the account of each of the parties being equal and amounting to $497,906.85 at January 1, 1020.
At the close of 1920 the accounts showed a net balance as follows:
| M. D. Olds | $522,030.03 |
| Gertrude Olds | 508,393.82 |
| Florence Olds Buhrman | 508,393.82 |
| Blanche Olds Bernheisel | 508,393.82 |
*2846 The increase in the balances of the three girls was represented by one-fourth of the amount shown as profit in the profit and loss account, amounting to $10,486.95. Certain withdrawals made by two of the girls were debited to the account of M. D. Olds.
At the close of the year 1921 the books showed a net balance as follows:
| M. D. Olds | $521,107.75 |
| Gertrude Olds | 518,325.67 |
| Florence Olds Buhrman | 517,576.82 |
| Blanche Olds Bernheisel | 517,375,66 |
*564 The increase in the account of each of the girls was occasioned by an entry of one-fourth of the net gain for the year 1921 as shown by the profit and loss account, amounting to $9,931.85. A withdrawal by Gertrude Olds amounting to $3,619.86 was charged to the account of M. D. Olds. Withdrawals by Mrs. G. L. Buhrman, amounting to $748.86, were debited to her account, and withdrawals by Blanche Olds, amounting to $950 were debited to her account.
For the calendar year 1919 the petitioner made an income-tax return showing a net taxable income of $49,135.75. For the calendar year 1920 the petitioner filed a return showing income from M. D. Olds & Co. amounting to $23,537.54, together with other income and*2847 losses which resulted in a net taxable income amounting to $13,904.08. For the calendar year 1921 the petitioner filed a return in which was shown income from the partnership of M. D. Olds & Co. amounting to $15,292.92 and a net taxable income of $15,292.92.
The return for the calendar year 1921 was attested May 4, 1922. The delay in filing the return was caused by the fact that the petitioner was unable to secure partnership return blanks for the year 1921. The petitioner understood that it was necessary for him to file a partnership return with his own return. He, therefore, waited until he could secure a partnership return before filing his own. The time for filing partnership returns was extended to May 15, 1922, by the Commissioner. (T.D. 3272, issued January 19, 1922.) Subsequently the respondent proposed a delinquency penalty against the petitioner, but on December 4, 1923, the petitioner received a letter from Fred L. Woodworth, collector, Detroit, Mich., which read as follows:
This office was recently in receipt of a communication from the Department at Washington, D.C., wherein they advised that the delinquency outstanding has been cancelled, and that no further*2848 action will be taken relative to the assertion to the specific penalty in your case.
The petitioner had a reasonable cause for delay and was not guilty of willful neglect in filing his return.
The value of the docks owned by M. D. Olds & Co. was stipulated to be $70,000 at January 1, 1919, and M. D. Olds & Co. is entitled to an allowance for exhaustion, wear and tear and obsolescence in the stipulated amount of 8 per cent of that value for each of the years 1919, 1920 and 1921.
OPINION.
VAN FOSSAN: We are satisfied from the evidence that a bona fide partnership was entered into between M. D. Olds and his three *565 daughters on December 31, 1918, and that it functioned as such during the taxable years. The intention and agreement to form a partnership, the contribution by the several parties of capital or services, the agreement to share profits or losses, cardinal tests of partnership relation, were all present in the instant situation.
Counsel for the respondent suggests that the effect of the transaction was the creation of a trust. The Michigan court to which the written agreement was submitted declared the same to create a partnership, with Olds occupying*2849 a position of trustee as to the partnership. In view of the conclusion we have reached from the evidence it is unnecessary to decide whether or not this ruling is conclusive of the issue before us. Suffice it that we are of the same opinion as was the court as to the creation and existence of the partnership.
Government counsel points emphatically to the fact that the three daughters were not able to withdraw their shares of the profits without restraint and that the father retained control over such withdrawals. From this he argues, untenably we believe, that the daughters did not possess a right to require a division of the profits. The right to demand a division of profits and the right to withdraw such profits are not synonymous. Nor is there anything inconsistent with the existence of partnership relationship in the provision that except for personal needs the profits should remain in the business subject to the discretion delegated to one member. The right to demand an accounting was not forgone by the delegation of such management and control.
Throughout the hearing and in his brief counsel for respondent has suggested either directly or by insinuation that improper*2850 motives lie back of the creation of the alleged partnership. He also would throw doubt on the bona fides of the suit in the Michigan court to construe the partnership agreement. We find no basis or justification whatsoever for such suggestions. If the respondent believes the whole transaction was fraudulently conceived to evade tax, the law dictates the proper procedure for him to follow. If respondent has not sufficient faith in his apprehensions to formulate them into charges they should not be brought into the case by indirection. Neither do we find justification in the record for the imposition of the penalty for delay in filing of the return. That respondent is not urging this penalty may reasonably be inferred from his brief, wherein he elects to omit any argument in support thereof.
The deficiency, if any, should be recomputed on the basis of the existing partnership relation, in accordance with this opinion and findings of fact.
Reviewed by the Board.
Judgment will be entered under Rule 50.