Case Name: E. T. RENFRO DRUG CO. v. COMMISSIONER OF INTERNAL REVENUE
Court: United States Court of Appeals for the Fifth Circuit
Jurisdiction: United States
Decision Date: 1950-07-27
Citations: 183 F.2d 846
Docket Number: No. 12966
Parties: E. T. RENFRO DRUG CO. v. COMMISSIONER OF INTERNAL REVENUE.
Judges: Before HUTCHESON, Chief Judge, and McCORD and RUSSELL, Circuit Judges.
Reporter: Federal Reporter 2d Series
Volume: 183
Pages: 846–849

Head Matter:
E. T. RENFRO DRUG CO. v. COMMISSIONER OF INTERNAL REVENUE.
No. 12966.
United States Court of Appeals Fifth Circuit.
July 27, 1950.
Rehearing Denied Sept. 13, 1950.
R. B. Cannon, Ft. Worth, Tex., for petitioner.
Harry Marselli, Sp. Asst, to Atty. Gen., Theron Lamar Caudle, Asst. Atty. Gen., Ellis N. Slack, Sp. Asst, to Atty. Gen., Charles Oliphant, Chief Counsel Bur. of Int. Rev., and Claude R. Marshall, Sp. Atty., Bur. of Int. Rev., Lee A. Jackson, Sp. Asst, to Atty. Gen., Washington, D. C., for respondent.
Before HUTCHESON, Chief Judge, and McCORD and RUSSELL, Circuit Judges.

Opinion:
RUSSELL, Circuit Judge.
The question presented by the petition for review in this case, is whether the Tax Court erred in sustaining a determination of the Commissioner of the excess profit credit, based upon income, to which the petitioner for review was entitled for the calendar years 1940, 1941, 1942 and 1943, by refusing to add to, or include in petitioner's base period (1936 to 1939, inclusive) net income the average base period net income of four certain partnerships, of which petitioner claims to have been an "acquiring corporation," and the said partnerships •claimed to have been "component corporations." Determination of this question in turn depends upon the legal effect of the unqualified purchase by two members of the partnerships of an "undivided % interest in and to four retail drug partnership" businesses, and the transfer of these properties to petitioner, which the purchasers controlled. Confronted with regulation 112, § 35.740-4, providing that "a partnership (or a business owned by a sole proprietorship) cannot be an acquiring corporation and, therefore, section 740(g) cannot operate to make any of its predecessors component corporations of its acquiring corporation," the Tax Court determined that by the purchase by two members of a partnership of the interest of the third, "one of two events occurred. Either there was then created a new partnership of Renfro and Allen [the purchasing partners] which acquired the assets of the old partnerships; or the assets of the old partnerships were acquired by [the purchasers] in joint proprietorship. In either event the property of the partnerships passed through the hands of a partnership or of individuals who could not, under the statute and regulations, transfer to the corporation the business experience of the partnerships during the base period because the intervening proprietors were not 'acquiring corporations' as defined in the Internal Revenue Code."
The petitioner here contends that this ruling fails to give effect to the distinction between the dissolution and termination of a partnership following the withdrawal of a partner therefrom. Its entire argument is based upon the proposition that while from the purchase and withdrawal of the partner there followed a dissolution of the partnership as a firm, the remaining partners were nevertheless charged with winding up the affairs of the partnership, and while this was taking place, the partnership continued until its affairs were wound up and the net assets distributed to those entitled thereto, that is, to the two purchasing partners.
Petitioner's argument fails to convince us that the Tax Court was in error in evaluating the legal effect of the transaction. It confuses the rule of dissolution and subsequent "winding up" for the benefit of, and distribution of assets to, the members of the dissolved partnership, with the rights of the purchasers of a partnership interest to deal with such purchased interest as they may choose. Thus, dependent upon the facts of any case, the purchasers might continue a partnership, but unless we attribute to a partnership an independent juristic entity, which the law does not permit, it would not be the original partnership, but a new one. In the absence of such agreement for continuance as partners, the purchasers would hold as joint proprietors. The petitioner has failed to show us how its claim can legally avoid the two horns of the dilemma with which it is confronted: the new partnership or joint proprietorship on the one side, or on the other, impalement upon the horn of inability to meet the test of the Internal Revenue Code § 112(b) (5), which excepts the transfer "only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange."
The decision of the Tax Court, upon the facts of this case as fully found by it and stated in its published opinion (11 T.C. 994), is correct, and is affirmed.
. § 710(b) (2) and 710(b) (3), Internal Revenue Code, 26 U.S.C.A. § 710(b) (2, 3).
. § 740 & 742, Internal Revenue Code, 26 U.S.C.A. § 740, 742; Regulation 112, § 35.740-1; 35.740-2.
. 9 T.C. 376.