304 U.S. 271 (1938), Heiner v. Mellon

Citation:304 U.S. 271, 58 S.Ct. 926, 82 L.Ed. 1337
Party Name:Heiner v. Mellon
Case Date:May 16, 1938
Court:United States Supreme Court

Page 271

304 U.S. 271 (1938)

58 S.Ct. 926, 82 L.Ed. 1337




United States Supreme Court

May 16, 1938




The stock and business of two corporations were taken over by two partnerships, formed by the three stockholders, for the purpose of liquidation. One of the partners died in 1919, but the liquidation was carried on by the survivors as theretofore.


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. 274.

The income tax system is based on annual accounting. The fact that it could not be known until a later year, when the liquidation was complete, whether the enterprise had been profitable, is of no legal significance.

2. The fact that the partnership had been dissolved by the death did not affect this tax liability of the surviving partners. P. 277.

Under the Pennsylvania Uniform Partnership Act, which was applicable, on dissolution, the partnership is not terminated, but continues until the winding up of the partnership affairs is completed.

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. 277.

4. The dissolution did not make the surviving partners trustees taxable only as fiduciaries under Revenue Act, 1918, § 219. P. 278.

The fact that they may be so denominated by the law of Pennsylvania is not conclusive. In the interpretation of the words used in a federal revenue act, local law is not controlling.

5. In § 218(a) of the Revenue Act of 1918, the term "distributive share" does not mean the share currently distributable under

Page 272

the state law, but mean the proportionate share of the partner in the net income of the partnership. P. 280.

89 F.2d 141 reversed.

Certiorari, 302 U.S. 672, to review the affirmance of recoveries in two actions against a former Collector of Internal Revenue by taxpayers who had paid deficiency income tax assessments under protest.

BRANDEIS, J., lead opinion

MR. JUSTICE BRANDEIS delivered the opinion of the Court.

These cases, tried below in the federal court for Western Pennsylvania and argued together here, arise from the same facts and present the same questions of law. Each action was brought against D. B. Heiner, as former Collector of Internal Revenue and individually, to recover an amount paid under protest by the taxpayer in 1927 upon a deficiency assessment of his 1920 income tax. The amounts taxed as additional income were the distributive shares of certain profits alleged to have been earned by each in 1920 as a partner in two firms. Due demand for a refund was made. In No. 144, the taxpayer was A. W. Mellon; in No. 145, R. B. Mellon. Both having died, the suits are by their executors. In No. 144, the District Court entered judgment for $202,502.22 with interest (14 F.Supp. 424), in No. 145, for $187,787.17 with interest. These judgments were affirmed by the Circuit Court of Appeals, 89 F.2d 141. Certiorari was granted because

Page 273

of alleged conflict as to applicable rules of law important in the [58 S.Ct. 928] administration of the revenue laws.

There is no dispute as to the relevant facts. Prior to December 12, 1918, A. W. Mellon, R. B. Mellon, and H. C. Frick each owned one-third of the entire capital stock of two distilling corporations -- A. Overholt & Company and West Overton Distilling Company. On that day, those three individuals formed two partnerships in which each partner was to have a one-third interest. In January, 1919, they caused to be transferred to the partnership called A. Overholt & Company all the assets of the corporation of that name, and, to the partnership called West Overton Distilling Company, all the assets of that corporation. These assets included large whisky inventories in bonded warehouses. Neither corporation had distilled any whisky after 1916. Liquidation of the businesses of each had been started by the two corporations in 1918, and the partnerships had been organized for the purpose of liquidating them. The business of each partnership in 1920, had, like its business in 1919, consisted in the sale of whisky certificates and the storage, bottling, casing, and sale of the stock of whisky. It was not until 1925 that the assets of the partnerships then remaining were sold in bulk, and the proceeds distributed among those entitled thereto.

Frick died December 2, 1919; but throughout 1920, the businesses of A. Overholt & Company and of West Overton Distilling Company were conducted, and their books were kept, in the same manner as the businesses had been conducted and books had been kept by the partnerships in 1919, and by the corporations in 1918. For 1920, the partnership returns of the two concerns disclosed facts from which it appeared that substantial gains had been made from the sale of whisky. But the amounts were not reported as income of the partnerships, and neither A. W. Mellon nor R. B. Mellon included in their income

Page 274

tax returns for 1920 any amount on account of them. The Commissioner of Internal Revenue determined that these sums were distributive profits; that the returns of taxable income of A. W. Mellon and of R. B. Mellon for the year 1920 should have included one-third of the profits in that year of each firm from the sale of whisky, and made a deficiency assessment on A. W. Mellon of...

To continue reading