The sole issue is whether or not the petitioner, as transferee of a dissolved corporation, is entitled to deduct the Federal income tax on the corporation paid by her in 1947 from the gain realized in 1945 on the liquidation of the corporation.

The case was submitted on a stipulation of facts, exhibits, and oral testimony.

FINDINGS OF FACT.

The facts stipulated are so found. The other facts are found from the evidence.

The petitioner is an individual and a resident of Corpus Christi, Texas. She filed her individual income tax returns on the cash receipts and disbursements basis of accounting with the collector of internal revenue for the first district of Texas.

The Eureka Laundry Co., sometimes referred to hereinafter as the corporation, was organized in 1920 as a corporation under the laws of Texas, to operate a laundry and dry-cleaning establishment. The petitioner owned all the capital stock of the corporation except the minimum qualifying shares. The corporation kept its books and filed its returns on the accrual basis of accounting.

For a number of years the petitioner had been interested in disposing of the laundry business. Sometime in 1944 the petitioner, as president of the corporation, began negotiations with a view towards its sale.

On March 27, 1945, it was resolved to liquidate and dissolve the corporation. On March 28, 1945, the Secretary of State of Texas issued a certificate of dissolution.

On April 2, 1945, but as of the close of business on March 31, 1945, the petitioner, as transferee, sold the business properties and good will of the dissolved corporation.

In connection with the dissolution of Eureka Laundry Co., the petitioner was advised by her attorney that she might be held liable as transferee of the dissolved corporation for any Federal income tax deficiency asserted against the corporation.

In the fall of 1945 the petitioner's attorney was advised by an agent of the respondent that a tax would be asserted against the corporation and against the petitioner as transferee, due to an alleged deficiency in the tax on the corporation.

On February 21, 1946, the respondent notified the petitioner and the corporation, in separate thirty-day letters, that an adjustment in the corporation's tax liability for 1945 appeared to be warranted and that there was proposed for assessment against petitioner the tax liability of the corporation.

On June 20, 1946, the respondent, in a statutory notice, notified the corporation of his determination that the gain from the sale of its

property was taxable to the corporation and that incident to that sale the gain was understated, resulting in a net deficiency in the income tax liability of the corporation of $2,620.69 for the taxable year January 1 to March 28, 1945.

In a statutory notice also dated June 20, 1946, the respondent notified the petitioner of his determination that the petitioner was liable for the deficiency as transferee of assets of the corporation.

Both the petitioner and the corporation petitioned this Court for a redetermination of their tax liabilities. On April 14, 1947, based on a stipulation filed by the parties, this Court entered its decision that the corporation owed a tax of $2,620.69 (Docket No. 12049), and that the petitioner was liable therefor (Docket No. 12048).

No appeals were taken from these decisions and on or about August 20, 1947, the petitioner, as transferee, paid the deficiency in tax, with interest, a total of $2,921.46. On May 17, 1946, the petitioner filed her individual income tax return for 1945, reporting a gain of $19,686.91 on the liquidation of the corporation. After an examination of her 1945 return, the respondent determined that this gain should have been $21,669.61. In so doing, the respondent refused to allow the petitioner to reduce the gain on the liquidation of the corporation by the amount of the taxes on the 1945 income of the corporation paid by the petitioner as transferee in 1947.

OPINION.

VAN FOSSAN, Judge: The sole issue is whether or not the petitioner, as transferee of the dissolved corporation, is entitled to deduct the Federal income tax on the corporation paid by her in 1947 from the gain realized in 1945 on the liquidation of such corporation.

The petitioner contends that she should be allowed to decrease the value of the assets which she received upon dissolution of the corporation by the amount of taxes which, as transferee, she paid in a later year. Thus, as the petitioner sees the issue, it involves the adjustment or redetermination of the amount of the capital gain. This view, we believe to be incorrect. Since she, as an individual, is on a cash basis of accounting, there can be no question of the proper accrual of the tax paid in the prior year.

The collection of Federal taxes in the United States contemplates an annual accounting by taxpayers. In Burnet v. Sanford & Brooks Co., 282 U. S. 359, the Supreme Court said:

It is the essence of any system of taxation that it should produce revenue ascertainable, and payable to the government, at regular intervals. Only by such a system is it practicable to produce a regular flow of income and apply methods of accounting, assessment, and collection capable of practical operation.

This principle is now a familiar one and has often been stated and applied. See Security Flour Mills Co. v. Commissioner, 321 U. S. 281, and cases there cited.

There is no basis for making an exception to this sound principle in the instant case of a transferee of the assets of a corporation. If it were done here, other exceptions would suggest themselves. If the petitioner's contention, that the capital gain should be adjusted, were to be followed, the result would be to hold in abeyance the final determination of the capital gain on a corporate dissolution until the final corporate income tax had been paid. This would place an unwarranted burden on the tax collection process.

The petitioner would distinguish the case of Estate of Henry E. Mills, 4 T. C. 820, cited by respondent, on the ground that there the taxpayer received the liquidating dividend without restriction or limitation on its use, whereas petitioner here knew that she would be taxed personally as transferee if a deficiency were asserted against the income of the dissolved corporation. In our opinion, the cases are not distinguishable on that narrow ground or on the fortuitous circumstance that we happen to have before us the year 1945. In Stanley Switlik, 13 T. C. 121 (on appeal, CA-3, Dec. 29, 1949), the facts were somewhat similar to the instant case. The holding there was that the tax payments made by transferees in a year subsequent to dissolution were deductible in the later year as ordinary losses and not as capital losses. In so holding, we said:

Prior to the decision of the Supreme Court of the United States in North American Oil Consolidated v. Burnet, 286 U. S. 417, this Court, then the United States Board of Tax Appeals, held in cases involving facts similar to those in the instant proceeding that the corporate taxes paid by transferees in a year subsequent to the receipt of distributions in liquidation should be treated as reducing the amount of those distributions rather than as a loss in the year the corporate taxes were paid. O. B. Barker, 3 B. T. A. 1180; Benjamin Paschal O'Neal, 18 B. T. A. 1036. * * In John T. Furlong, 45 B. T. A. 362, the Board

pointed out that North American Oil Consolidated v. Burnet, supra, overruled the Barker and O'Neal cases, and it held that a participant in a syndicate who reported his profits in 1928 and 1929 and was required to contribute in 1937 to pay taxes due from the syndicate was entitled to deduct the amount paid in 1937 as a loss

*

In our opinion, the tax on the corporation paid by the petitioner in 1947 can not be used as a deduction in the computation of the petitioner's income tax for 1945.

Decision will be entered for the respondent.

1

WESTERN CONSTRUCTION COMPANY, PETITIONER, ET AL.,1 v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 15495, 15496, 15497, 15498, 15499, 15500, 15586, 15588.

Promulgated March 22, 1950.

Petitioner Western Construction Co. was created as a limited partnership under the laws of the State of Washington in 1942 and again in 1943. The certificate of formation of the partnership included petitioners J. A., George, and Albin Johnson as the general partners and their several adult sons and daughters as the limited partners. Held, on the evidence, petitioner Western Construction Co. does not resemble an association in corporate form and is, therefore, not taxable as such (Glensder Textile Co., 46 B. T. A. 176, followed); held, further, the Western Construction Co. is a bona fide partnership composed of the three Johnson brothers and their several children as set out in the certificate of formation of the partnership and is recognized as such for tax purposes (John A. Morris, 13 T. C. 1020, followed).

Ralph B. Potts, Esq., for the petitioners.
Wilford H. Payne, Esq., for the respondent.

In these consolidated proceedings, the Commissioner determined deficiencies in Federal taxes of petitioners for the years and in the amounts as follows:

Proceedings of the following petitioners are consolidated herewith: Albin Johnson; Ellen M. Johnson; Huldah M. Johnson; George J. Johnson; J. A. Johnson; Roberta M. Johnson; and Lloyd W. Johnson.

The deficiencies result from several adjustments to petitioners' net incomes as disclosed by their returns for the years in question. By appropriate assignments of error petitioners contest these adjustments. The parties agreed by stipulation to an adjustment of most of the issues involved, and effect will be given these stipulations in a recomputation under Rule 50. The stipulations leave for our consideration only two issues:

The first issue is whether petitioner Western Construction Co. is taxable as a corporation. This was explained in a statement attached to the deficiency notice of petitioner Western Construction Co. as follows:

It is held that for income tax, declared value excess profits tax and excess profits tax purposes the Western Construction Company under the so-called limited partnership agreements of February 24, 1942 and June 30, 1943 constitutes an association taxable as a corporation as prescribed by Section 3797 (a) (3) of the Internal Revenue Code and Section 29.3797-5 of Regulations 111. Section 3797 (a) (3) of the Internal Revenue Code 2 and section 29.3797-5 of Regulations 1113 are printed in the margin.

The second issue is in the alternative, if Western Construction Co. is held not to be taxable as a corporation, then whether Western Construction Co. constituted a bona fide partnership consisting of the general partners and the several limited partners for the taxable years 1942 to 1945, inclusive, or whether it was a partnership consisting only of the three general partners. This was explained in a statement attached to the deficiency notice of petitioner George J. Johnson as follows:

SEC. 3797. DEFINITIONS.

1942.]

[As amended by secs. 120 (f) and 511, Revenue Act of

(a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof

(1) PERSON.-The term "person" shall be construed to mean and include an individual, a trust, estate, partnership, company, or corporation.

(2) PARTNERSHIP AND PARTNER.-The term "partnership" includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a trust or estate or a corporation; and the term "partner" includes a member in such a syndicate, group, pool, joint venture, or organization.

(3) CORPORATION.-The term "corporation" includes associations, joint-stock companies, and insurance companies.

3 SEC. 29.3797-5. LIMITED PARTNERSHIPS.-A limited partnership is classified for the purpose of the Internal Revenue Code as an ordinary partnership, or, on the other hand. as an association taxable as a corporation, depending upon its character in certain material respects. If the organization is not interrupted by the death of a general partner or by a change in the ownership of his participating interest, and if the management of its affairs is centralized in one or more persons acting in a representative capacity, it is taxable as a corporation. For want of these essential characteristics, a limited partnership is to be considered as an ordinary partnership notwithstanding other characteristics conferred upon it by local law.

The Uniform Limited Partnership Act has been adopted in several States. A limited partnership organized under the provisions of that Act may be either an association or a partnership depending upon whether or not in the particular case the essential characteristics of an association exist.