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

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U.S. Supreme Court

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

Heiner v. Mellon

Nos. 144 and 145

Argued March 8, 1938

Decided May 16, 1938

304 U.S. 271

Syllabus

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.

Held:

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.

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. 304 U. S. 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. 304 U. S. 277.

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 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 304 U. S. 272

the state law, but mean the proportionate share of the partner in the net income of the partnership. P. 304 U. S. 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.

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