Herbert v. CIR
| Decision Date | 31 May 1967 |
| Docket Number | No. 19935.,19935. |
| Parties | Bow HERBERT and Nancy Herbert, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
George M. Bryant, Clyde R. Maxwell, Robert E. Guilford, Daniel R. Sheahan, Robert A. Hinshaw, J. W. Allyn, of Bryant, Maxwell, Guilford & Sheahan, Los Angeles, Cal., for appellants.
Richard M. Roberts, Acting Asst. Atty. Gen., Louis F. Oberdorfer, Asst. Atty. Gen., Meyer Rothwacks, Robert N. Anderson, Carolyn R. Just, Attys., Tax Div., U. S. Dept. of Justice, Mitchell Rogovin, Chief Counsel, Henry Kutz, Atty., Internal Revenue Service, Washington, D. C., for appellee.
Before JERTBERG and MERRILL, Circuit Judges, and TAVARES, District Judge.
Before us is a petition for review of a decision of the Tax Court involving asserted deficiencies in income tax against petitioners for the fiscal years ending September 30, 1958, September 30, 1959, and September 30, 1960, in the aggregate amount of $54,476.61.
The petitioners, husband and wife, filed joint income tax returns for the fiscal years in question. The Commissioner asserted that petitioners understated their income in their income tax returns for each of said years. On petition for redetermination by the Tax Court, that Court upheld the deficiency determination made by the Commissioner.
Hereafter for convenience, petitioner, Bow Herbert, will be referred to as the taxpayer, and only incidental reference will hereafter be made to petitioner, Nancy Herbert.
It appears from the record that during the tax years under review, and for several years prior thereto, there were two limited partnerships composed of the petitioners, as general partners, and in the case of the Gardena Club, Adam S. Campbell, Michael M. Wind, Murray Klein and taxpayer as limited partners, and in the case of the Horseshoe Club, Ben Cohen, Michael M. Wind, and A. S. Campbell and taxpayer as limited partners. Each partnership owned and operated a draw poker parlor located in the City of Gardena, the operation of which was legal under the laws of the State of California and the ordinances of the City of Gardena, and each was duly licensed to so operate by the City of Gardena.
The taxpayer was the managing partner of both partnerships, which derived their income from the rental of seats to the general public at poker tables where legalized gambling was permitted. The partnership did not participate in the losses or winnings of the players. Additional income to each partnership was derived from the operation of restaurants and news stands on the premises, and from the sale of miscellaneous items.
The limited partnership known as the Horseshoe Club was acquired by taxpayer and associates in 1951 and a successor limited partnership was formed in 1956. The limited partnership known as the Gardena Club was acquired by taxpayer and associates in 1952, and a successor limited partnership was formed in 1955.
Amended certificates of the formation of the two limited partnerships were signed, filed and recorded as required by the Uniform Limited Partnership Act of the State of California, Section 15501 et seq., of the Corporations Code of the State of California.
Pertinent parts of the certificates of limited partnership reveal:
Taxpayer received salary from each club in the following amounts:
Year Ended Horseshoe Gardena
9-30-58 $23,850.00 $20,605.00
9-30-59 $23,400.00 $20,280.00
9-30-60 $26,000.00 $10,920.00
During the tax years under review, and prior years, it was the practice of each partnership to deposit, periodically, partnership funds into an account designated "Bow Herbert, Personal Account", maintained in the United California Bank, Crenshaw Branch.
Checks deposited to said account were drawn on the partnership bank account, and in the case of the Gardena Club were signed either by the taxpayer or an employee of the partnership and one of the designated limited partners; and in the case of the Horseshoe Club were signed by the taxpayer or an employee of the partnership. Such deposits were charged in the books of each partnership to the following accounts:
The Horseshoe Club
Other Expense Account Public Relations Account #418
The Gardena Club
Other Expense Account Public Relations Account #674
The "Bow Herbert, Personal Account" was segregated from the taxpayer's other accounts and other personal financial affairs of the taxpayer.
During the tax years in question there was deposited in the "Bow Herbert, Personal Account" the following amounts:
Year Ended Horseshoe Club Gardena Club
9-30-58 $19,500.00 $13,000.00
9-30-59 $19,500.00 $13,000.00
9-30-60 $19,500.00 $ 5,000.00
Withdrawals from said account were made by checks prepared by club employees, signed by taxpayer, and drawn to cash in all except five instances.
Audit reports and periodic financial statements of both partnerships, reflecting deposits made by the partnerships to the "Bow Herbert, Personal Account", were distributed to the limited partners.
The partnerships did not claim deductions in their tax returns for the deposits made by the partnerships into the "Bow Herbert, Personal Account." The amounts of said deposits were reported as income on the individual tax returns of the members of the partnerships.
During the years in question, and prior years, taxpayer made no accounting to the partnerships or to the limited partners with respect to the disbursement of funds from the "Bow Herbert, Personal Account."
The limited partnerships continued in existence until December 31, 1961, at which time an Amended Certificate of each limited partnership was signed, filed and recorded as required by law.
Under the Amended Certificate of each limited partnership:
1. The limited partners became also general partners along with petitioners, who also remained limited partners;
2. The new general partners acquired co-signing authority on all checks drawn against the partnership bank accounts; and
3. The taxpayer remained as the managing partner at a salary of $65.00 per day, seven days a week, in the Gardena Club, and $75.00 per day, seven days a week, from the Horseshoe Club.
Contemporaneously with the signing, filing and recording of the Amended Certificates, each of the limited partnerships entered into a written agreement with taxpayer whereby taxpayer was employed as managing general partner, to manage and conduct the business of the limited partnership, at the salaries specified in the certificates. The agreement respecting the Gardena Club provides in paragraph 7 as follows:
Paragraph 7 of the Management Agreement relating to the Horseshoe Club is identical except that the amount specified therein is the sum of $1500.00 per accounting period. The provisions of paragraph 7, except with respect to the amount of public relations expenses for each accounting period, are in conformity with the practices which prevailed during the years in question and prior years.
The Amended Certificates of the limited partnerships of December 1961, and the Managing General Partner Agreements of that year were the products of a settlement of litigation instituted in 1959 in the state court by the limited partners against the taxpayer. The litigation arose because of taxpayer's refusal during the years in question, and prior years, to disclose to the limited partners the identity of the recipients of money disbursed by taxpayer from the "Bow Herbert, Personal Account." As stated in the findings of the Tax Court:
Notwithstanding such disputes the record establishes that during the years in question and prior years the "public relations" accounts were maintained and disbursements therefrom were made solely by taxpayer without accounting to...
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