Before BIGGS, Chief Judge, and McLAUGHLIN and STALEY, Circuit Judges.
This is a petition for review of a decision of the Tax Court which sustained the Commissioner's deficiency assessments in petitioner's income taxes for the years 1943, 1944, and 1945.*fn1
Petitioner, Bernard Stoumen, and his brother Abraham were equal partners in the firm Fairplay Knitting Mills, engaged in the manufacture and jobbing of knit goods. During the times which concern us here, petitioner's principal duties consisted of expediting shipments to the firm and working in the shipping end of the business. He did not handle the books and knew nothing of their details, Abraham being the managing partner and responsible for the firm's finances. Samuel Schwartz, petitioner's brother-in-law and an employee of the firm, did the buying for the business and supervised mill operations.
For the taxable years in question, Abraham had an accountant audit the firm's records and determine its income. Using the information obtained from that accountant, another accountant made up the firm's and petitioner's income tax returns. Petitioner's returns showed his full share of partnership income as reflected by the firm's books. It was learned in 1946, however, that Abraham and Schwartz had engaged in transactions which did not appear on the books.
In February and May of 1943, at Abraham's direction, Schwartz opened checking accounts in his own name in two New York banks. During the three years involved, Schwartz deposited about $410,000 in the two banks by the checks of six business concerns with whom Fairplay had dealt.The transactions, though somewhat varied in detail, were generally along the following and closely similar lines: Wool and yarn belonging to the partnership were shipped to various mills. The yarn was there processed or dyed and was then shipped to the ultimate purchaser, one of whom was Goodwear Knitting Mills, under invoices rendered in Schwartz's name.Payments were made by checks, payable to Schwartz, which were deposited in the New York accounts. Schwartz had the
exclusive right to draw on these accounts and, by mid-May of 1946, had withdrawn almost $400,000. The balance, with some minor corrections, remains, the accounts being dormant. About $200,000 of the withdrawals was in cash and some $68,000 was in unidentified checks. None of the checks were payable to petitioner, and he received none of the cash.
It had been the practice of petitioner and his brother to have the partnership pay some of their personal bills and to charge the appropriate amount against their share of partnership income. In 1945, some $2,800 of the New York funds was used in that fashion to pay petitioner's personal bills. Four thousand dollars from those funds was used to repay a loan that had been made to the partnership, and $5,000 was used to buy stock in the name of the partnership. At the time, however, petitioner was not aware of the source of these monies.
With Abraham's consent, Schwartz had withdrawn about $25,0ayable to the partnership and has been paying $100 weekly on those notes since about 1947, which amounts petitioner has accepted and entered in his books as "prepaid loans."
During the latter part of April, 1946, a special agent of the Internal Revenue Bureau informed Abraham of a proposed investigation of the firm's and the partners' income tax returns. On May 3 or 4, Abraham told petitioner that there were "implications" concerning the Goodwear Knitting Mills, that he had opened the New York accounts in order to keep the business going, and that he had loaned $25,000 to Schwartz. Until this disclosure, petitioner did not know of the existence of the New York accounts.
On the night of May 6, after receiving two extensions of time within which to submit the partnership books for examination by the Internal Revenue agents, Abraham destroyed all the partnership records except the general ledger for 1945. The next morning, after writing notes*fn2 to petitioner, Schwartz, and the investigating agents, he committed suicide.
The Commissioner, in reliance upon Section 182 of the Internal Revenue Code, 26 U.S.C. § 182, determined that all the money in the New York accounts represented partnership income and charged petitioner with one-half of that amount and assessed a 50 per cent fraud penalty. The deficiencies total about $180,000, plus substantial interest. The
Tax Court sustained the deficiency assessments but cancelled the fraud penalties, which holding the Commissioner does not question.
Petitioner's brief limits the area of dispute in the following manner. "Our attack on the decision of the Tax Court is based on its conclusion, and not on its findings of primary facts * * *." (Italics in original.) Distilled to its essence, the case comes to this. Abraham, acting for the partnership through Schwartz, sold partnership property and received checks in payment which were deposited in the New York accounts, all of this being unknown to petitioner. Consequently, it is clear that the proceeds of the sales were realized by the partnership, thus becoming partnership income by virtue of Sections 183(a) and 22(a) of the Code.*fn3 Section 182(c) allocates to the partner his distributive share of the ordinary net income of the partnership, whether or not distributed to him.*fn4 Therefore, the conclusion is inevitable. Once the partnership realized income, petitioner became taxable upon his distributive share, whether or not it was distributed, and the fact that he knowingly received none of that income and was unaware of its existence until shortly before his brother's death is of no moment, taxwise. 26 U.S.C. § 182(c); U.S.Treas.Reg. 111, § 29.182-1, 26 Code Fed.Regs. § 29.182-1 (1949); Heiner v. Mellon, 1938, 304 U.S. 271, 58 S. Ct. 926, 82 L. Ed. 1337; Neil v. United States, 9 Cir., 1953, 205 F.2d 121, 126.
But, says petitioner, the New York accounts never got to the point of becoming partnership income. It is said that, conceding that the New York funds were the proceeds of the sale of partnership property, nevertheless, as a matter of law, those funds were not partnership income since they were the embezzled proceeds from the surreptitious sales of stolen partnership assets, embezzled and stolen by a disloyal partner by secret methods as part of a scheme to defraud petitioner. So phrased, that contention paints an appealing picture. The trouble is that it has absolutely no support in the record. First, the Tax Court found, quite correctly, that Abraham sold partnership property. Second, it was found that, in so doing, Abraham was acting on behalf of the partnership. It is on this point that petitioner departs from his previously quoted disclaimer and ignores the evidence, some of it his own. Petitioner testified that Abraham told him, just before the proposed investigation of the firm's books, that "* * * he had opened a couple of bank accounts in New York, in order to keep the business going; that he had to open these accounts." Abraham's suicide note to Schwartz contained the following ...