in 1953, reported the $56,250 as a long-term capital gain. The Government claimed the $56,250 was taxable as ordinary income. In agreeing with Berry, the Sixth Circuit, among other things, said:

It is settled law in this Circuit that * * * the sale of a partnership interest in a going concern is not the sale of the assets of the partnership but is to be treated as the sale of a capital asset. **

The rulings in some of those cases, however, turn upon the fact that at the time of the sale of the partnership interest a portion of the selling price was charged to the selling partner as income because at the time of sale it was earned income by the partnership, definitely ascertained in amount and not contingent upon the happening of future events. Income already earned by the partnership, to which the selling partner was legally entitled to his partnership share, was not changed into a capital asset by the sale.

The situation in the present case is quite different. The partnership agreement provided for a distribution of profits to the partners on the "completed contract" basis after it was determined whether the complete performance resulted in a profit or a loss. At the time of the sale of the partnership interest, the construction contract was only approximately 76.5% completed. Many uncertainties still existed which could have a decisive effect upon the ultimate result of whether upon the final completion of the contract the partnership would derive therefrom net income or suffer a loss. * * * We find no basis for the determination by the Commissioner that at that time the taxpayer and his associates had earned $75,000 profit or income from the incompleted construction project and it is accordingly rejected.

[Emphasis supplied.]

We agree with petitioners that the Berry case is in point and involves substantially the same principles as are involved in the instant

case.

In his brief the respondent also takes the position,1 apparently in the alternative, that the partnership created by Lenney and Gibbs continued in a state of liquidation after May 12, 1953; that it was not dissolved as a result of the contract of May 12, 1953; that the so-called sale of partnership interests was nothing but a sham; and that, in substance, what occurred was that the Ryals merely presided over the liquidation of the Lenney-Gibbs partnership for an estimated fee of $30,000. If the respondent is correct in such a position, which we do not think he is, then it is apparent that even on that basis there could be no deficiency in this proceeding for the reason that any profit made during the period March 1, 1953, to February 28,

1 The position is stated in his brief thus:

"In effect, after May 12, 1953, the Lenney and Gibbs partnership was in a state of liquidation. The so-called 'sale' and 'assignment' of 'partnership interests' to Mr. and Mrs. Ryals was not a bona fide sale of an interest in a going business but a transaction designed to avoid the payment of income taxes. The transaction from beginning to end was nothing but a sham. ・・・ It is clear that the Ryals did not acquire a going business but merely presided over the liquidation of such a business for an estimated fee; such fee being determined on the basis of the amount of estimated profits to be derived on the sale of all of the homes and being paid via a sale to Ryals for a $30,000 discount of such amount."

1954, would be reported in the partnership's return for that fiscal year and would not be taken up by Lenney under section 706, I.R.C. 1954,2 until the calendar year 1954, which year is not before us. Under this approach all that would be reportable in petitioners' joint return for the calendar year 1953 would be Lenney's share of the partnership loss of $3,156.77 for the fiscal year ended February 28, 1953.

We hold that the gain realized by Lenney on the sale and transfer on May 12, 1953, was a long-term capital gain from the sale of a partnership interest and not ordinary income from the sale and transfer of partnership assets.

Decision will be entered for the petitioners.

LANDY TOWEL & LINEN SERVICE, INC. OF READING, PA., ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 86288-86292. Filed May 18, 1962.

Petitioners became affiliated February 1, 1954, with petitioner in Docket No. 86288 as the parent corporation. The parent filed a consolidated return for the group for its calendar year 1954, including therein the income of the subsidiaries from July 1 to December 31, 1954, and also filed consolidated returns for the years 1955 and 1956, including all the income of the subsidiaries therein. Each subsidiary filed a separate return for its fiscal year ending June 30, 1954, but did not file separate returns thereafter. The subsidiaries did not file the authorization and consent forms, Form 1122, as required by section 1.1502-12 (b), Income Tax Regs. Respondent did not issue the notice for failure to do so as provided in section 1.1502-18 (a), Income Tax Regs., but computed petitioners' tax liability on a consolidated basis for each of the years 1954, 1955, and 1956, including in the consolidated income for the year 1954 the income of the subsidiaries from February 1 to December 31, 1954. Petitioners contend that because of the failure of the subsidiaries to file the consent forms, the election to file a consolidated return was void and their income must be computed on a separate basis under section 1.1502-18 (a), Income Tax Regs. Held for respondent.

Brady O. Bryson, Esq., Alfred J. McDowell, Esq., and Daniel S. Knight, Esq., for the petitioners.

Edward L. Newberger, Esq., for the respondent.

SEC. 706. TAXABLE YEARS OF PARTNER AND PARTNERSHIP.

(a) YEAR IN WHICH PARTNERSHIP INCOME IS INCLUDIBLE.-In computing the taxable income of a partner for a taxable year, the inclusions required by section 702 and section 707 (c) with respect to a partnership shall be based on the income, gain, loss, deduction, or credit of the partnership for any taxable year of the partnership ending within or with the taxable year of the partner. [Emphasis supplied.]

1 Proceedings of the following petitioners are consolidated herewith: Landy Towel & Linen Service, Inc. of Lancaster, Pa., Docket No. 86289; Landy Towel & Linen Service, Inc. of Pottsville, Pa., Docket No. 86290; Landy Towel & Linen Service, Inc. of Williamsport, Pa., Docket No. 86291; and Landy Towel & Linen Service, Inc. of Wilmington, Del.. Docket No. 86292.

OPINION.

DRENNEN, Judge: Respondent, on January 26, 1960, in separate notices of deficiency, determined deficiencies in income tax against petitioners as follows:

Petitioners in Docket Nos. 86289, 86290, 86291, and 86292 are all wholly owned subsidiaries of petitioner in Docket No. 86288.

The only issue remaining for decision in this consolidated proceeding is whether respondent's determination of the tax liability of all the petitioners on the basis of a consolidated return for the period February 1 to December 31, 1954, and for the years 1955 and 1956 was correct.2

The case was submitted on a stipulation of facts and exhibits attached. We find the facts to be as stipulated and incorporate herein by this reference the stipulation and the exhibits attached thereto. A summary of those facts follows.

Petitioners Landy Towel & Linen Service, Inc. of Reading, Pa. (hereinafter sometimes called the parent corporation), Landy Towel & Linen Service, Inc. of Lancaster, Pa., Landy Towel & Linen Service, Inc. of Pottsville, Pa., Landy Towel & Linen Service, Inc. of Williamsport, Pa., and Landy Towel & Linen Service, Inc. of Wilmington, Del. (hereinafter sometimes called the subsidiary corporations), are corporations organized and existing, with one exception,

For reasons that will become apparent, notices of deficiency were sent to the subsidlaries for their fiscal years ending June 30, 1954, only. The only adjustment proposed was the assertion of the accumulated earnings tax, sec. 102, I.R.C. 1939, and sec. 531, I.R.C. 1954, against each subsidiary. The notice of deficiency mailed to the parent corporation proposed certain miscellaneous adjustments to taxable income for each of the years and also added to income for the year 1954 the net income of each of the subsidiaries for the period February 1, 1954, the date of affiliation, to June 30, 1954. The return filed by the parent for 1954 included the net income of the subsidiaries only for the period July 1 to December 31, 1954. Petitioners have conceded the miscellaneous adjustments in the parent's income and respondent has conceded the accumulated earnings tax determined against the subsidiaries. The parties also stipulated to the effect that if the Court should hold that the income tax liability of the petitioner should be determined on the basis of a consolidated return, then the net income of the subsidiaries for the period February 1, 1954, to June 30, 1954, should be added to the consolidated income reported by the parent for the year 1954 and should be eliminated from the income reported by the subsidiaries on their returns for the fiscal years ending June 30, 1954.

676308-63-20

under the laws of the Commonwealth of Pennsylvania, with the principal office of each at Blair and Schuylkill Avenues, Reading, Pennsylvania. Landy Towel & Linen Service, Inc. of Wilmington, Del. was organized and exists under the laws of the State of Delaware. The parent corporation filed a Form 1120, U.S. Corporation Income Tax Return, on a calendar year basis for each of the years 1954, 1955, and 1956 with the district director of internal revenue at Philadelphia, Pennsylvania. Each of the subsidiary corporations filed a separate corporate income tax return for the fiscal year July 1, 1953, to June 30, 1954, with the district director of internal revenue at Philadelphia, Pennsylvania.

M. Marshall Landy, Lewis Landy, and Abraham J. Oberson organized all the subsidiary corporations in 1952. In 1953 the same individuals acquired in equal shares all the outstanding stock of the Bijou Hosiery Mills, Inc. The name of this corporation was changed to Landy Towel & Linen Service, Inc. of Reading, Pa. (the parent corporation in this case). On February 1, 1954, these three individuals contributed to the capital of the parent corporation all the stock of the subsidiary corporations.

The Form 1120 filed by the parent corporation for the year 1954 reported all the income of the parent corporation for 1954 and all the income of the subsidiary corporations for the period July 1 to December 31, 1954, but did not include the income of the subsidiaries from February 1, 1954, the date of affiliation, to June 30, 1954. The Forms 1120 filed by the parent corporation for 1955 and 1956 reported the total income of the parent corporation and of each subsidiary corporation for those years. A completed Form 851, Affiliations Schedule, listing all the subsidiary corporations and the parent corporation was attached to each Form 1120. The question on the first page of the Form 1120 for 1954: "Is this a consolidated return?" was answered "Yes." It was unanswered on the returns for 1955 and 1956. All the riders attached to each of these returns had at the top of the page the caption "(Consolidated Return)" followed by the name of the parent corporation and each of the subsidiary corporations. The Forms 1120 filed by the parent corporation for the years 1954, 1955, and 1956 set forth as tax liability for those years the amounts of $17,601.27, $12,223.86, and $26,152.88, respectively. The tax liability on each return was computed at the consolidated return rate of 54 percent. Sec. 1503 (a), I.R.C. 1954. The tax liability as determined on these returns was paid in full by the parent corporation and allocated among the books of the affiliated group as follows:

All statutory references will be to the Internal Revenue Code of 1954 unless otherwise indicated.

When the subsidiary corporations were formed they all adopted a fiscal year for Federal income tax purposes, ending June 30. Each subsidiary filed a separate income tax return for the taxable year ending June 30, 1954. Each of the subsidiary corporations paid the tax computed to be due on its return and they had not up to the date of trial received a refund of tax for that taxable year. As of December 31, 1954, each subsidiary corporation changed its accounting period to the calendar year. These changes were made without the permission of respondent. As of the date of trial, respondent had not objected to these changes.

None of the subsidiary corporations filed separate income tax returns for the period July 1 to December 31, 1954, and the calendar years 1955 and 1956. Up to the time of trial, none of the subsidiary corporations had filed an authorization and consent form, Form 1122, and they had refused to do so when orally requested to do so by respondent's agent. At the time of trial, none of the subsidiary corporations had received a notice of any kind from respondent with respect to its failure to file Form 1122.

During the years 1954, 1955, and 1956, M. Marshall Landy, Lewis Landy, and Abraham J. Oberson were the sole shareholders of the parent corporation. During all times here material, the offices of president and of secretary-treasurer of the parent corporation and of each of the subsidiary corporations were held by either Oberson or Lewis Landy.

Respondent in a notice of deficiency sent by registered mail to the parent corporation determined deficiencies in income tax against the parent corporation and the subsidiary corporations for the years 1954, 1955, and 1956. In determining these deficiencies, respondent treated the Forms 1120 filed by the parent corporation for 1954, 1955, and 1956 as elections by the parent corporation and the subsidiary corporations of the privilege of filing a consolidated return for those years and determined their tax liability on that basis. The petition filed by the parent corporation in this Court alleged that the deficiency determination was in error, that respondent erroneously deter