E. T. Renfro Drug Co. v. Commissioner of Internal Revenue

Fifth Circuit

E. T. Renfro Drug Co. v. Commissioner of Internal Revenue

183 F.2d 846

CourtCourt of Appeals for the Fifth Circuit

DecidedSeptember 13, 1950

Docket12966

StatusPublished

Cited by5 cases

This text of 183 F.2d 846 (E. T. Renfro Drug Co. v. Commissioner of Internal Revenue) is published on Counsel Stack Legal Research, covering Court of Appeals for the Fifth Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook

E. T. Renfro Drug Co. v. Commissioner of Internal Revenue, 183 F.2d 846 (5th Cir. 1950).

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RUSSELL, Circuit Judge.

The question presented by the petition for review in this case, is whether the Tax Court erred in sustaining a determination of the Commissioner of the excess profit credit,¹ based upon income, to which the petitioner for review was entitled for the calendar years 1940, 1941, 1942 and 1943, by refusing to add to, or include in petitioner’s base period (1936 to 1939, inclusive) net income the average base period net income of four certain partnerships, of which petitioner claims to have been an “acquiring corporation,” and the said partnerships •claimed to have been “component corporations.”² Determination of this question in turn depends upon the legal effect of the unqualified purchase by two members of the partnerships of an “undivided % interest in and to four retail drug partnership” businesses, and the transfer of these properties to petitioner, which the purchasers controlled. Confronted with regulation 112, § 35.740-4, providing that “a partnership (or a business owned by a sole proprietorship) cannot be an acquiring corporation and, therefore, section 740(g) cannot operate to make any of its predecessors component corporations of its acquiring corporation,” the Tax Court determined that by the purchase by two members of a partnership of the interest of the third, "one of two events occurred. Either there was then created a new partnership [847]*847of Renfro and Allen [the purchasing partners] which acquired the assets of the * * * old partnerships; or the assets of the old partnerships were acquired by * * * [the purchasers] in joint proprietorship. In either event the property of the * * * partnerships passed through the hands of a partnership or of individuals who could not, under the statute and regulations, transfer to the corporation the business experience of the * * * partnerships during the base period because the intervening proprietors were not ‘acquiring corporations’ as defined in the Internal Revenue Code.”

The petitioner here contends that this ruling fails to give effect to the distinction between the dissolution and termination of a partnership following the withdrawal of a partner therefrom. Its entire argument is based upon the proposition that while from the purchase and withdrawal of the partner there followed a dissolution of the partnership as a firm, the remaining partners were nevertheless charged with winding up the affairs of the partnership, and while this was taking place, the partnership continued until its affairs were wound up and the net assets distributed to those entitled thereto, that is, to the two purchasing partners.

Petitioner’s argument fails to convince us that the Tax Court was in error in evaluating the legal effect of the transaction. It confuses the rule of dissolution and subsequent “winding up” for the benefit of, and distribution of assets to, the members of the dissolved partnership, with the rights of the purchasers of a partnership interest to deal with such purchased interest as they may choose. Thus, dependent upon the facts of any case, the purchasers might continue a partnership, but unless we attribute to a partnership an independent juristic entity, which the law does not permit, it would not be the original partnership, but a new one. In the absence of such agreement for continuance as partners, the purchasers would hold as joint proprietors. The petitioner has failed to show us how its claim can legally avoid the two horns of the dilemma with which it is confronted: the new partnership or joint proprietorship on the one side, or on the other, impalement upon the horn of inability to meet the test of the Internal Revenue Code § 112(b) (5), which excepts the transfer “only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.”

The decision of the Tax Court, upon the facts of this case as fully found by it and stated in its published opinion (11 T.C. 994), is correct, and is affirmed.

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RUSSELL, Circuit Judge.

The question presented by the petition for review in this case, is whether the Tax Court erred in sustaining a determination of the Commissioner of the excess profit credit,¹ based upon income, to which the petitioner for review was entitled for the calendar years 1940, 1941, 1942 and 1943, by refusing to add to, or include in petitioner’s base period (1936 to 1939, inclusive) net income the average base period net income of four certain partnerships, of which petitioner claims to have been an “acquiring corporation,” and the said partnerships •claimed to have been “component corporations.”² Determination of this question in turn depends upon the legal effect of the unqualified purchase by two members of the partnerships of an “undivided % interest in and to four retail drug partnership” businesses, and the transfer of these properties to petitioner, which the purchasers controlled. Confronted with regulation 112, § 35.740-4, providing that “a partnership (or a business owned by a sole proprietorship) cannot be an acquiring corporation and, therefore, section 740(g) cannot operate to make any of its predecessors component corporations of its acquiring corporation,” the Tax Court determined that by the purchase by two members of a partnership of the interest of the third, "one of two events occurred. Either there was then created a new partnership [847]*847of Renfro and Allen [the purchasing partners] which acquired the assets of the * * * old partnerships; or the assets of the old partnerships were acquired by * * * [the purchasers] in joint proprietorship. In either event the property of the * * * partnerships passed through the hands of a partnership or of individuals who could not, under the statute and regulations, transfer to the corporation the business experience of the * * * partnerships during the base period because the intervening proprietors were not ‘acquiring corporations’ as defined in the Internal Revenue Code.”

The petitioner here contends that this ruling fails to give effect to the distinction between the dissolution and termination of a partnership following the withdrawal of a partner therefrom. Its entire argument is based upon the proposition that while from the purchase and withdrawal of the partner there followed a dissolution of the partnership as a firm, the remaining partners were nevertheless charged with winding up the affairs of the partnership, and while this was taking place, the partnership continued until its affairs were wound up and the net assets distributed to those entitled thereto, that is, to the two purchasing partners.

Petitioner’s argument fails to convince us that the Tax Court was in error in evaluating the legal effect of the transaction. It confuses the rule of dissolution and subsequent “winding up” for the benefit of, and distribution of assets to, the members of the dissolved partnership, with the rights of the purchasers of a partnership interest to deal with such purchased interest as they may choose. Thus, dependent upon the facts of any case, the purchasers might continue a partnership, but unless we attribute to a partnership an independent juristic entity, which the law does not permit, it would not be the original partnership, but a new one. In the absence of such agreement for continuance as partners, the purchasers would hold as joint proprietors. The petitioner has failed to show us how its claim can legally avoid the two horns of the dilemma with which it is confronted: the new partnership or joint proprietorship on the one side, or on the other, impalement upon the horn of inability to meet the test of the Internal Revenue Code § 112(b) (5), which excepts the transfer “only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.”

The decision of the Tax Court, upon the facts of this case as fully found by it and stated in its published opinion (11 T.C. 994), is correct, and is affirmed.

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183 F.2d 846, Counsel Stack Legal Research, https://law.counselstack.com/opinion/e-t-renfro-drug-co-v-commissioner-of-internal-revenue-ca5-1950.

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