Dunn v. Commissioner , 15 B.T.A. 1042 ( 1929 )

DEWITT C. DUNN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

J. LAWRENCE CARR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

BESSIE P. DUNN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

KATHLEEN M. CARR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Dunn v. Commissioner

Docket Nos. 18279-18282.

United States Board of Tax Appeals

15 B.T.A. 1042; 1929 BTA LEXIS 2747;

March 22, 1929, Promulgated

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Where a partnership did not have a fiscal year but a monthly accounting period and the partners reported the income from the partnership and filed returns on a calendar year basis, held, the respondent was in error in placing the partnership on a fiscal year basis, and in increasing the income of the partners.

John R. Moroney, Esq., and J. Lawrence Carr, for the petitioners.

L. A. Luce, Esq., for the respondent.

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MILLIKEN

This proceeding results from the determination of respondent of deficiencies in taxes in Docket No. 18281 for the years 1920, 1921, 1923, and 1924 in the amounts of $100.18, $274.98, $37.72, and $194.25, respectively; in Docket No. 18282, deficiencies in tax for the years 1920, 1921, 1923, and 1924 in the amounts of $109.02, $272.56, $37.72, and $170.53, respectively; in Docket No. 18280, for the years 1921 and 1923 in the amounts of $280.69 and $37.72, respectively; and in Docket No. 18279, taxes for the years 1921 and 1923 in the amounts of $304.38 and $37.72, respectively. The error assigned by each petitioner is that the respondent included in each of the years income of the preceding year. The four cases were consolidated for hearing and decision.

FINDINGS OF FACT.

Dewitt C. Dunn and J. Lawrence Carr were during all of the years in controversy equal partners in the partnership of Dunn and Carr, Houston, Tex. Bessie P. Dunn and Kathleen M. Carr were the wives of Dunn and Carr during all of the years in controversy.

In the early part of 1919 Dewitt C. Dunn, who was at that time president of the Union National Bank of Houston, Tex., and J. Lawrence Carr, who at that time was working for Neuhaus & Co. of Houston, Tex., formed a partnership to engage in the stock and bond business, handling New York listed stocks and curb stocks and doing a general investment business. They had no written articles of partnership. They began business between February 1, 1919, and February 15, 1919. They agreed that on the 15th of each month the books of account would be closed and such profits as had been made during the preceding month would be put into a profit and loss account and one-half of the profits was to be taken out of the profit and loss account and divided equally between the two partners. On the 15th of each month after the beginning of business and until the partnership was dissolved on September 15, 1925, such procedure was followed by the partnership.

The business of the partnership was such that the profits could be and were accurately determined on the 15th of each month as concerns the profits made for the preceding month.

Each of the partners for each of the years in question filed his individual income-tax returns on the calendar year basis and reported therein all the income earned during the year whether or not distributed. For the calendar year 1919 they reported the profits whether distributed or not for the period from the formation of the partnership to and including December 31, 1919. The partners returned each year as income both the profits actually distributed on the 15th of each month as well as any profits left in the bisiness.

The partners filed an information return for the partnership for the first period on a calendar year return blank representing the period February 15, 1919, to January 31, 1920, and thereafter for the period February 1 to January 31.

The partnership did not establish a fiscal year on its books of account and the partners filed the information returns for the partnership under the belief that a partnership must have a full year during its first year of business as well as thereafter. The partners so interpreted the instructions of the Bureau of Internal Revenue printed on the information returns.

OPINION.

MILLIKEN: The respondent has determined the deficiencies here in question by invoking section 218(a) of the Revenue Acts of 1918, 1921, and 1924. He determined that the partnership was on a fiscal year basis and the partners should report as their income, and be taxed accordingly, their proportion of the income of the partnership for its fiscal year ending within the calendar year of the partners. The result was to place in the year 1919 income subject to tax which the partners had reported and paid a tax on for the year 1918. The same situation obtained and resulted in the deficiencies for all the years in controversy.

If the partnership had a fiscal year ending within the calendar year of the partners, the action of the respondent would be correct. See , and .

The evidence of record however shows that the partnership was not on a fiscal year basis but kept its books of account and distributed its income on an accounting period ending on the 15th day of each month. The testimony is to the effect that the partnership never established an accounting period other than the 15th day of each month and we do not think the information returns filed under a mistaken view of the instructions of the Bureau of Internal Revenue should control. Also, pursuant to section 212 of the Revenue Acts of 1918, 1921, and 1924, if the partnership was not on a fiscal year basis the net income must be computed on the calendar year basis. We are of the opinion that the respondent erred in increasing the income of the petitioners by placing the partnership on a fiscal year basis and including in each of the petitioner's calendar year returns the income received, and upon which a tax was paid, in the prior years.

There is no dispute between the parties as to the correct income of each of the partners, provided section 218(a) does not require them to return the income of a partnership fiscal year ending in their calendar years.

Judgment will be entered under Rule 50.