*751 In 1934 a partnership, after paying and deducting Federal revenue stamp taxes, had a net income of over $700,000. The petitioners, members of the partnership, paid no income tax in that year by virtue of credits and exemptions. In 1938 the partnership received a refund of the stamp taxes deducted in 1934. Held, that the partners are taxable on their distributive shares of the partnership income for 1938, which was determined by including in its computation the refunded tax, even though the partners would not have paid a tax in 1934 if the deductions for stamp taxes had not been taken by the partnership.
*1 The Commissioner determined deficiencies in income tax of petitioners for the year 1938 as follows:
| Docket No. | Amount |
| 106284 | $85.91 |
| 106285 | 426.05 |
The issue before the Board is whether or not the reimbursement to a partnership in the taxable year of stamp taxes, deducted by the partnership in computing net income for a prior year, is taxable to partners who paid no income tax in the prior year and would not*752 have paid such tax even if the partnership had not taken the deduction with respect to stamp taxes.
The proceedings were consolidated for hearing and opinion. The facts were stipulated and are adopted as our findings of fact. Only those facts necessary for discussion of the issue presented will be hereinafter set out.
FINDINGS OF FACT.
Petitioner in Docket No. 106284 is an individual who resides in Garden City, New York, and is hereinafter referred to as Haughey. *2 Petitioners in Docket No. 106285 were husband and wife, residing in Far Hills, New Jersey; the husband will hereinafter be referred to as Mellick. The Federal income tax returns of petitioners for the taxable year were filed on the cash receipts and disbursements basis with the collector of internal revenue for the second district of New York.
At all times herein material Haughey and Mellick were general partners of Carlisle, Mellick & Co., a partnership engaged in the business of buying and selling securities listed on the New York Stock Exchange. The partnership, in connection with its business, was required to purchase and use a substantial amount of Federal revenue stamps for the transfer of*753 securities.
The partnership deducted from gross income for the year 1934 the sum of $8,869.19 for Federal stamp taxes paid in that year. The net income of the partnership for 1934 was approximately $730,000. Haughey's share in the 1934 net income of the partnership was $7,781.32, and his share in the $8,869.19 by virtue of his partnership interest was $277.16. Mellick's distributive share of the 1934 partnership net income was $32,966.63 and his share in the $8,869.19 by virtue of his partnership interest was $923.87.
During the year 1938 the partnership received a refund of Federal revenue stamp taxes, together with interest, in the total amount of $37,886.98. This refund included the sum of $8,869.19, exclusive of interest, which the partnership had paid for Federal revenue stamps in 1934.
Haughey did not include in gross income for 1938 the sum of $277.16, representing his share of the refund to the partnership of stamp taxes paid in 1934. The Commissioner determined that the sum of $277.16 was income to Haughey in 1938 and, after allowing the partnership other deductions not here material, added the sum of $274.80 to Haughey's net income for 1938 as income from the*754 partnership.
The computation of tax made by Haughey on his Federal income tax return for the calendar year 1934 was as follows:
| Net income | $1,540.69 | |
| Less: Personal exemption | 2,500.00 | |
| Balance (surtax net income) | None | |
| Less: | ||
| Dividends | $2,776.21 | |
| Earned income dredit | 154.07 | |
| 2,930.28 | ||
| Normal tax | None | |
| Surtax | None |
*3 Mellick did not include in gross income reported for 1938 the sum of $923.87, representing his share of the refund to the partnership of stamp taxes paid in 1934. The Commissioner determined that the sum of $923.87 was income to Mellick in 1938 and, after allowing the partnership other deductions not here material, added the sum of $549.63 to the net income of Mellick and his wife for 1938 as income from the partnership.
The computation of tax made by Mellick and his wife on their Federal income tax return for the calendar year 1934 was as follows:
| Net income | $5,919.29 | |
| Less: | ||
| Personal exemption | $2,500.00 | |
| Credit for dependents | 1,200.00 | |
| 3,700.00 | ||
| Balance (surtax net income) | $2,219.29 | |
| Less: | ||
| Dividends | $8,076.36 | |
| Earned income credit | 591.93 | 8,668.29 |
| Normal tax | None | |
| Surtax | None | |
| Less: Income tax paid at source | $13.50 | |
| Balance of tax | None |
*755 The Commissioner made no additions to the taxable income of petitioners for the year 1934 as reported on their return for that year and did not disallow any deductions claimed on those returns. The Commissioner is barred by limitation from collecting additional income taxes for 1934 from petitioners.
OPINION.
ARUNDELL: The partnership of Carlisle, Mellick & Co., in computing its income for the year 1934, deducted the amount of $8,869.19 for Federal revenue stamp taxes paid and had a net income of approximately $730,000. In the taxable year the partnership received a refund of stamp taxes which included the $8,869.19 deducted from its gross income in 1934. Respondent determined that the amount of the refund was income to the partnership in the taxable year. The deficiencies arise from respondent's inclusion in the incomes of petitioners of amounts representing their allocable shares of the additional partnership net income derived from the refund of the stamp taxes. Petitioners contend that they received no tax benefit from the deduction of the stamp taxes by the partnership so that no part of the amount representing the reimbursement may be included in their incomes. Respondent*756 maintains that reimbursement of a previously deducted item is includible in gross income irrespective of tax benefit. He also argues that petitioners in fact received a tax benefit in that each *4 of the petitioners had a net income for the year 1934 and failed to pay a tax merely because they had exemptions and credits in excess of net income.
The "tax benefit" theory, upon which petitioners rely, may be simply stated. Where a taxpayer takes a deduction in one year but because of other deductions has no taxable income for that year without reference to the deduction in question, a later refund of all or a part of the amount deducted will not be treated as income. We have consistently followed this doctrine since the date of promulgation of our opinion in . ; ; ; . See *757 . Where, however, a taxpayer by virtue of a deduction paid less tax than would have been paid if the deduction were not taken, a subsequent refund to the taxpayer of the deducted item is includible in gross income to the extent that taxable income of the prior year was offset by the deduction. ; . With these principles in mind we turn to the question of their application to the instant case.
The partnership is not a taxable entity. Yet it is separate and distinct from its partners for purposes of computing partnership income, which is taxed to the partners. The revenue acts provide that the net income of a partnership shall be computed, with exceptions immaterial here, in the same manner and on the same basis as that of an individual. See section 183 of the Revenue Act of 1938. Each partner's distributive share of the partnership net income, so computed, must be included in income of that partner. Sec. 182, Revenue Act of 1938. The distributive shares of the partners in 1934 were amounts which reflected the deduction*758 of the stamp taxes by the partnership. The distributive shares of the partners in 1938 necessarily included the allocable portions of the partnership's net income for 1938. The fact that the partnership net income was greater by reason of including as an item the refund of taxes is of no importance.
The tax benefit theory, if applicable, should be employed to determine whether the partnership received an offset of income by virtue of the payment of stamp taxes. Since the partnership had a net income of approximately $730,000 in 1934, there can be no question that it did. The petitioners, then, can not invoke the tax benefit rule with respect to the partnership. Nor do we think it may be tested by the final tax benefit accruing to the individual partners, as here urged. That such a rule would be fraught with administrative difficulties is evident. For example, a partnership having a large number of partners might realize a tax benefit from a deduction, receive a refund of the *5 deduction in the taxable year, and yet have the individual shares of its partners for income tax purposes vary widely, depending upon whether those partners had other deductions or credits in*759 the year the partnership took the deduction. The tax benefit rule has never been based on a strict dollar saving in tax, ;, but rather on the use of the deduction in reducing the net income of the taxpayer. . The fact that petitioners paid no tax and would not have paid a tax even if the deduction had not been available to the partnership is not controlling. Petitioners' income from the partnership was reduced by reason of the partnership availing itself of the deduction. That is sufficient to sustain respondent's determination. Petitioners must include in gross income for the taxable year their entire shares of income of Carlisle, Mellick & Co.
Reviewed by the Board.
Decisions will be entered for the respondent.
LEECH concurs only in the result.