Heiner v. Mellon
Headline: Court reverses lower rulings and holds partnership liquidation profits taxable to partners, letting the Government collect income tax on whiskey sales made during liquidation even if distributions were delayed.
Holding: The Court held that profits from partnership sales during liquidation are taxable to individual partners in the year earned, and must be included as their distributive shares even if distributions are delayed.
- Partners must pay tax on their share of profits earned during liquidation.
- Surviving partners are individually taxed even if distributions are delayed.
- State law labels or fiduciary roles do not avoid federal tax liability.
Summary
Background
A.W. Mellon and R.B. Mellon sued the former federal tax collector to recover amounts paid in 1927 after the Commissioner taxed one-third of certain 1920 partnership profits from whiskey sales as each partner’s income. The partners and H.C. Frick had formed two partnerships in 1918 to liquidate distilling corporations, transferred the corporate assets to those partnerships, and sold whiskey in 1919–1920. Frick died in 1919, the partnerships continued winding up, and the partnerships’ books showed large gains from 1920 whiskey sales that the partners did not include in their individual returns.
Reasoning
The main question was whether the profits from whiskey sales during liquidation were taxable income of the partners for 1920. The Court applied the annual accounting rule in the Revenue Act of 1918 and held that gains realized in a year are taxable in that year. Section 218 required each partner to include his distributive share of partnership net income for the year, "whether distributed or not." Dissolution by death and continued winding up did not change that result. The Court also said a rule about measuring gain when a partner completely severs his interest (Article 1570) does not convert yearly partnership profits into non-taxable capital, and state labels or fiduciary duties do not control federal tax treatment. Because the partnership books showed the income, the partners were taxable on their shares.
Real world impact
The decision means partners who sell partnership assets while winding up must pay federal income tax on their yearly share of profits, even if the partnership is dissolved, distributions are withheld, or state law treats them as trustees. The Court reversed the lower courts’ judgments for the taxpayers.
Dissents or concurrances
Two Justices did not participate in the decision; there are no written dissents or concurrences in the opinion to explain differing views.
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