Docket No. 5346. | B.T.A. | Jan 19, 1926
Lead Opinion
OPINION.
The question presented by this appeal is whether an individual partner who keeps his own books on the cash basis is required to include in his income his distributive share of partnership income determined on an accrual basis, or whether the distributive share in the partnership’s income should be determined on the basis of cash receipts and disbursements.
It is provided in paragraph (a) of section 218 of the Revenue Act of 1918 as follows:
That individuáis carrying on business in partnership shall be liable for income tax only in their individual capacity. There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year, or, if his net income for such taxable year is computed upon the basis of a period different from that upon the basis of which the net income of the partnership is computed, then his distributive share of the net income of the partnership for any accounting period of the partnership ending within the fiscal or calendar year upon the basis of which the partner’s net income is computed.
The net income of the partnership shall be computed in the same manner and on the same basis as provided in section 212 except that the deduction provided in paragraph (11) of subdivision (a) of section 214 shall not be allowed.
Section 212 (b) provides as follows:
The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall bb made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income.
The expression “net income,” as used in section 218 (a), has the same meaning when used in section 212 (b). The net income of the partnership, the distributive share of which is taxable to the partners, is the net income computed upon the basis of the method of accounting regularly employed in keeping the books of the partnership, provided such method clearly reflects the income of the partnership. That it did so reflect the income of the partnership is not questioned in this appeal. The partner’s distributive share, referred to in section 218, is that share of the income of the partnership computed on the accrual basis.
The taxpayer contends that he did not know or consent to the use of the accrual method adopted by the partnership. This fact seems to us to be immaterial. The books were kept by the order of the senior partner. It was one of the liabilities, which the taxpayer assumed when he became a partner, that he was subject to.be bound by the action of his associate within the scope of the partnership. The adoption of a method of bookkeeping is clearly within the scope of the partnership. The principle of mutual agency is one of the characteristics of a partnership.