Guaranty Trust Co of New York v. Commissioner of Internal Revenue

• Citation: 82 L.Ed. 975,58 S.Ct. 673,303 U.S. 493
• Decision Date: 28 March 1938
• Docket Number: No. 301,301
• Parties: GUARANTY TRUST CO. OF NEW YORK v. COMMISSIONER OF INTERNAL REVENUE
• Court: United States Supreme Court

303 U.S. 493

58 S.Ct. 673

82 L.Ed. 975

GUARANTY TRUST CO. OF NEW YORK

v COMMISSIONER OF INTERNAL REVENUE.

No. 301.

Argued Jan. 12, 13, 1938.

Decided March 28, 1938.

Messrs. Montgomery B. Angell and John W. Davis, both of New York City, for petitioner.

Mr. Edward J. Ennis, of New York City, for respondent.

Mr. Justice STONE delivered the opinion of the Court.

Whether a deceased partner's taxable income for the calendar year 1933 includes his share of partnership profits from the beginning of the partnership fiscal year on August 1, 1933, to the date of his death in the same year, in addition to his share of the partnership profits for its fiscal year ending July 31, is the question for decision.

Petitioner's testator, who died December 16, 1933, was a member of a New York partnership whose fiscal year expired on July 31, 1933. The partnership, with the addition of a new partner, was renewed, by agreement, for one year from August 1. After his death the surviving partners, by a further agreement, continued the partnership business from that date until July 31 of the next year, as of which date profits were to be determined, and thereafter from year to year. Decedent kept his books on the cash receipts and disbursements basis and filed his returns for income tax for each calendar year on that basis. The partnership kept its books on a like basis, but made its returns for a fiscal year ending July 31.

Upon a partnership accounting as of the date of decedent's death, his share of the profits from August 1 to that date was ascertained and in the following January and February was paid to petitioner, as executor. In making return for taxation of decedent's income for 1933, petitioner included decedent's share of the firm profits accruing for the year ending July 31, but omitted to re- turn his share of the firm profits earned between that time and his death.

The Commissioner's determination of a deficiency based on the omitted income, was set aside by the Board of Tax Appeals. 34 B.T.A. 384. The Board's order was reversed by the Circuit Court of Appeals for the Second Circuit, which held that decedent's share of the partnership profits for the year ending July 31 and for the ensuing period ending December 16, 1933, was income of decedent in 1933 and taxable as such for that year. 89 F.2d 692. We granted certiorari, 302 U.S. 670, 58 S.Ct. 42, 82 L.Ed. —-, the question being of importance in the administration of the revenue laws, and the decision being challenged by petitioner as not in harmony with Burnet v. Sanford & Brooks Co., 282 U.S. 359, 51 S.Ct. 150, 75 L.Ed. 383.

Both by the practical construction given to the partnership agreement by petitioner and the surviving partners, and by the applicable provisions of the New York Partnership Act,¹ decedent's death dissolved the partnership, terminated his right to share in the profits, and fixed the date as of which the surviving partners were bound to account for the profits. Darcy v. Commissioner, 2 Cir., 66 F.2d 581. Decedent's estate in fact received the profits accrued on the date of his death, and partnership profits thus accrued and distributable by reason of the death of a partner are his income, taxable as such. Bull v. United States, 295 U.S. 247, 55 S.Ct. 695, 79 L.Ed. 1421. But petitioner insists that here they cannot be included in decedent's 1933 income for purposes of taxation, since in that case his partnership profits both for the full year ending July 31, 1933 and for the ensuing four and one-half months' period ending with his death in December, would be taxed as his profits for a single year. This it is said offends against the policy of the revenue acts to assess income taxes annually on the basis of twelve month periods and, so offending, conflicts with the appropriate construction of the applicable provisions of sections 181, 182, of the Revenue Act of 1932, 47 Stat. 169, 222, 26 U.S.C.A. § 181 and note and section 188 note, relating to the taxation of partnership profits.

Under the Act of 1932, as with earlier revenue acts, partnerships are not taxed upon their income. By section 189, 26 U.S.C.A. § 187 and note, they are required to file information returns showing the partnership profits and the respective shares of the partners in the profits. But section 181, 26 U.S.C.A. § 181 and note, provides that the partners shall be 'liable for income tax only in their individual capacity,' and section 182(a), 26 U.S.C.A. § 188 note, reads:

'General Rule.—There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year. If the taxable year of a partner is different from that of the partnership, the amount so included shall be based upon the income of the partnership for any taxable year of the partnership ending within his taxable year.'

Since the partnership is not a taxpayer, it has no taxable year in a literal sense. But as used in this section 'taxable year of the partnership' means its fiscal year, for 'taxable year' is defined by section 48, 26 U.S.C.A. § 48 and note, as including in its meaning 'a fiscal year * * * upon the basis of which the net income is computed' and 'fiscal year' is defined as 'an accounting period of twelve months ending on the last day of any month other than December.' A 'taxable year,' it is declared, includes the period for which a return is made when, under the provisions of the act or regulations, a return for a fractional part of a year is required. As a partner's profits are ascertainable only on an accounting for such periods as may be fixed by law or by the partnership itself, and as the fiscal year or accounting period of the partnership may differ from that of the taxable year of the partner, section 182(a), as a matter of convenience to taxpayers, authorizes and provides for this difference by requiring in that case that the partner's distributive share of the profits ascertained at the end of the partnership fiscal year shall be included in his taxable income for the year in which the fiscal year of the partnership ends.

Petitioner does not complain of the taxation of decedent's share of the partnership profits for the year ending July 31 as 1933 income. But it contends that the reference in section 182(a) to the 'taxable year of the partnership,' and the requirement that the amount of the partner's taxable income 'shall be based upon the income of the partnership for any taxable year of the partnership ending within his taxable year,' read in their context and in the light of the practice long established by the revenue acts, of taxing income for twelve month periods, contemplate that a partner returning income for a calendar year shall be taxable in that year only upon his income from his firm for a single partnership year. This is said to be the case even though the income derived by a partner from the firm business between the end of the partnership fiscal year and the date of his death in the same year cannot be taxed in any other.

This argument is, we think, based upon a misconception of the policy of the Act and a mistaken construction of section 182(a). It is true that the acts of Congress taxing income have consistently laid the tax upon the net income received by or accrued to the taxpayer in a 'taxable year,' which is either the calendar year or a different fiscal year, as the taxpayer may elect. But they have never undertaken to limit the income taxable in any one year to that derived from the taxpayer's activities occurring in that or any other single year. The items of gross income and of allowed deductions to be included in the income return, are those of the taxpayer for his taxable year, even though they may have resulted from or be affected by his business transactions of other years. Burnet v. Sanford & Brooks Co., supra, 282 U.S. 359, 364, 365, 51 S.Ct. 150, 151, 152, 75 L.Ed. 383. Circumstances wholly fortuitous may determine the year in which income, whenever earned, is taxable, and may thus affect the amount of tax. Receipt of income or accrual of the right to receive it within the tax year is the test of taxability, not the time it has taken the taxpayer to earn it nor the duration of his investments which have finally resulted in profit. Lucas v. Alexander, 279 U.S. 573, 49 S.Ct. 426, 73 L.Ed. 851, 61 A.L.R. 906.

The revenue acts have consistently adhered to that policy in taxing the income of a partner. Since the partner is entitled to profits only upon a partnership accounting at the end of an accounting period, his profits become...