Source: https://www.legalcrystal.com/case/96659/heiner-vs-mellon
Timestamp: 2016-10-22 09:58:48
Document Index: 335714314

Matched Legal Cases: ['§ 218', 'Art. 1570', '§ 219', '§ 219', '§ 218', '§ 219', '§ 220', 'Art. 547']

Heiner Vs Mellon - Citation 96659 - Court Judgment | LegalCrystal
Save as PDF Add a Tag Add a Note Semantics Visualize Heiner Vs. Mellon - Court Judgment	LegalCrystal Citationlegalcrystal.com/96659CourtUS Supreme CourtDecided OnMay-16-1938Case Number304 U.S. 271AppellantHeinerRespondentMellonExcerpt:.....year may be deducted from profits, if any, earned by him in that later year; but the tax on a year's income may not be withheld because losses may thereafter occur. if a. overholt & company and west overton distilling company had remained corporations, they would have been obliged to make each year return of the profits made therein and pay taxes annually throughout the period of liquidation although it might ultimately prove that the losses of the later years exceeded the profits of the earlier ones. [
] likewise, if the concerns had each been owned by a single individual, the fact that his sole business was liquidating the concern would not have relieved him from paying annually taxes on the
net profits. no good reason is suggested why.....Judgment:
Heiner v. Mellon - 304 U.S. 271 (1938)
1. That net profits made in 1920 in disposing of partnership assets were taxable, under Revenue Act, 1918, § 218(a), to the surviving partners to the extent of their distributive shares. P.
304 U. S. 274
2. The fact that the partnership had been dissolved by the death did not affect this tax liability of the surviving partners. P.
304 U. S. 277
3. Art. 1570, T.R. 45, does not provide that dissolution capitalizes all interest of the partner in future partnership profits; it deals only with the determination of a partner's gain or loss on his investment when he completely severs his connection with the partnership and its assets. P.
4. The dissolution did not make the surviving partners trustees taxable only as fiduciaries under Revenue Act, 1918, § 219. P.
304 U. S. 278
the state law, but mean the proportionate share of the partner in the net income of the partnership. P.
304 U. S. 280
The Revenue Act of 1918 [
] governs taxation of 1920 income. Section 218(a) of the Act provides that individuals carrying on business in partnership shall be liable in their individual capacities for the income tax on profits earned therein, and that, in computing the net income of each partner, there shall be included his distributive share, whether distributed or not, of the net income of the partnership for the taxable year. Section 224 provides that the partnership shall file an informational return setting forth the items of its gross income, the deductions allowed, and the distributive share of net income to which each partner is entitled.
The primary question for decision is whether the net profits made by the two partnerships in 1920 from the
sales of whisky were in their nature taxable income. Throughout 1920, A. Overholt & Company and the West Overton Distilling Company were engaged in business. The mere fact that the purpose of the partnerships was to liquidate the assets taken over from the corporations is not of legal significance. Profits made in the business of liquidation are taxable in the same way and to the same extent as if made in an expanding business. Nor is it of legal significance that the liquidation was not completed until 1925, and that, until completion of the liquidation, it could not be known whether the business venture, taken as a whole, had been profitable. The federal income tax system is based on an annual accounting. [
] Under that law, the question whether taxable profits have been made is determined annually by the result of the operations of the year.
Purchasing real estate, subdividing, and selling it in parcels is, in essence, a liquidating business. The claim has been repeatedly made that no income was realized until the investment was recouped, but the Board of Tax Appeals has uniformly held, in accord with Article 43 of Regulations 45 (and later regulations), that the cost of the real estate must be apportioned among all the lots, and income returned upon the sales in each year, regardless of the number of lots remaining undisposed of at the close of the tax year. [
] A like rule has been applied where the
taxpayer had purchased personal property in a block and was engaged in selling it in parcels. The claim that there was no taxable income until the capital had been returned was rejected. [
The fact that it might prove that, when the business was fully liquidated, the profits of 1920 were offset by heavy loss of later years is immaterial. Losses suffered by a taxpayer in a later year may be deducted from profits, if any, earned by him in that later year; but the tax on a year's income may not be withheld because losses may thereafter occur. If A. Overholt & Company and West Overton Distilling Company had remained corporations, they would have been obliged to make each year return of the profits made therein and pay taxes annually throughout the period of liquidation although it might ultimately prove that the losses of the later years exceeded the profits of the earlier ones. [
The fact that the partnerships had been dissolved by Frick's death before 1920 does not affect the liability of the Mellons as surviving partners for income taxes on their distributive shares of the net profits made in that year.
Compare Rossmoore v. Anderson,
1 F.Supp. 35,
67 F.2d 1009;
Rossmoore v. Commissioner,
76 F.2d 520. The business of A. Overholt & Company did not terminate on Frick's death. Although dissolved, the partnerships and the business continued, since, as stated in the Pennsylvania Uniform Partnership Act: "On dissolution, the partnership is not terminated, but continues until the winding up of partnership affairs is completed." [
] Throughout the year 1920, the business of selling stock on hand and deriving income therefrom was carried on precisely as it had been theretofore, and for the same purpose. Article 424 of Regulations 45 recognizes that, even in the hands of a receiver, a partnership must file a return.
The Mellons contend, and the court below held, that the partners' interests in the partnerships were capitalized upon dissolution, so that, until the liquidation returned to them the cost of their interests, no taxable income was received; that Article 1570 of Regulations 45
The Mellons contend that, because the partnerships were dissolved by the death of Frick in 1919, A. W. Mellon and R. B. Mellon, being surviving partners, became, by operation of law, liquidating trustees; that any income earned in 1920 from operations of the dissolved partnerships was income to the Mellons only in their
We do not find it necessary to determine whether assessment of the tax on this theory is now outlawed, or whether, as the Collector urges, recovery is precluded, in any event under the doctrine of
Stone v. White,
, for we are of the opinion that the Mellons are not trustees within the meaning of § 219. The fact that they may be so denominated by the law of Pennsylvania is not conclusive. It is well settled that, in the interpretation of the words used in a federal revenue act, local law is not controlling unless the federal statute, "by express language or necessary implication, makes its own operation dependent upon state law." "The state law creates legal interests, but the federal statute determines when and how they shall be taxed."
] We think it is clear that, under the circumstances set forth, the income earned in 1920 was income of a partnership "carrying on business" within the meaning of § 218, rather than of a trust under § 219.
The Mellons contend that, under the law of Pennsylvania, no distribution of profits could lawfully have been made by the surviving partners as liquidating trustees until all debts and liabilities, contingent or otherwise, had been paid or satisfied, and the partners' capital returned, and that, although the business of the partnerships had been carried on after dissolution precisely as before, and the partnership accounts for the year 1920 showed large profits earned, their respective shares of them were not distributable, and could not be deemed taxable income of the partners.
If "distributive" meant "currently distributable under state law," the contentions made by the Mellons might have some force. But it does not. Article 322 of Regulations 45 (and corresponding articles of subsequent Regulations) defines "distributive" as meaning "proportionate."
Compare Earle v. Commissioner,
38 F.2d 965, 967, 968. And § 220 of the Revenue Act of 1918, 40 Stat. 1072, taxing to the shareholders the income of a corporation improperly accumulating its gains and profits for the purpose of avoiding surtax, assumes that the two words are synonymous. The tax is thus imposed upon the partner's proportionate share of the net income of the partnership, and the fact that it may not be currently distributable, whether by agreement of the parties or by operation of law, is not material. [
] No claim is made that the proportionate interests of the surviving partners was improperly determined by the Commissioner.
Finally, the Mellons contend that, in 1928 and 1929, the Commissioner determined that no profit was realized until final liquidation of the partnerships in 1925, and that income taxes for that year have been collected on this theory and not yet refunded. The Commissioner's alleged change of position is not here important. It is not shown that refund of these taxes is now barred. Nor is it necessary for us to consider the cost to the Mellons of their interests in these partnerships, or whether the Mellons' 1925 income taxes were erroneously assessed and collected, or whether the Commissioner correctly settled the tax liability of the Frick estate. None of these questions has any bearing upon the determination of the case before us.
291 U. S. 198
Helvering v. Morgan's Inc.,
293 U. S. 126
Appeal of J. S. Cullinan, 5 B.T.A. 996; J. S. Cullinan v. Comm'r, 19 B.T.A. 930; Thomas J. Avery v. Comm'r, 11 B.T.A. 958; Brodie C. Nalle v. Comm'r, 19 B.T.A. 427; Frederika Skinner v. Comm'r, 20 B.T.A. 491.
B. S. Roberts, 7 B.T.A. 1162; Hannibal Missouri Land Co. 9 B.T.A. 1072; D.C. Clarke, 22 B.T.A. 314, 325; Biscayne Bay Islands Co. 23 B.T.A. 731; Searles Real Estate Trust, 25 B.T.A. 1115.
Compare Perkins v. Thomas,
86 F.2d 954, 956,
see also Elmhurst Cemetery Co. v. Commissioner,
Santa Maria Gas Co., 10 B.T.A. 1412; American Industrial Corp., 20 B.T.A. 188; Bancitaly Corp., 34 B.T.A. 494.
Weser Bros., Inc., 12 B.T.A. 1394; C. H Swift & Sons, Inc., 13 B.T.A. 138; Deer Isle Logging Co., 14 B.T.A. 1027; O. H. Himelick, 32 B.T.A. 792.
Regulations 45, Art. 547;
Tazewell Elec. Light & Power Co. v. Strother,
84 F.2d 327;
Northwest Utilities Securities Corp. v. Helvering,
67 F.2d 619;
First Nat. Bank of Greeley v. United States,
86 F.2d 938.
Compare Burnet v. Lexington Ice & Cold Storage Co.,
62 F.2d 906;
Taylor Oil & Gas Co. v. Commissioner,
47 F.2d 108;
Hellebush v. Commissioner,
65 F.2d 902;
Whitney Realty Co. v. Commissioner,
80 F.2d 429.
See also Burk-Waggoner Oil Association v. Hopkins,
269 U. S. 110
269 U. S. 113
-556;
Biddle v. Commissioner,
302 U. S. 573
Compare Chicago Board of Trade v. Johnson,
264 U. S. 8
269 U. S. 327
See also Hart v. Commissioner,
54 F.2d 848, 851;
Fidelity-Philadelphia Trust Co. v. Commissioner,
47 F.2d 36, 38;
Rosenberger v. McCaughn,
25 F.2d 699;
Eagan v. Commissioner,
43 F.2d 881, 883;
Fritz v. Commissioner,
76 F.2d 460, 461, 462.
38 F.2d 965;
Hill v. Commissioner,
38 F.2d 165, 168;
Pope v. Commissioner,
39 F.2d 420;
Ruprecht v. Commissioner,
39 F.2d 458;
Benedict v. Price,
38 F.2d 309; W. Frank Carter, 36 B.T.A. 60.
O.D. 187, 1 C.B. 174.