5 T.C. 702">*703 These consolidated proceedings involve income tax deficiencies and a delinquency penalty for the calendar year 1940 in the following1945 U.S. Tax Ct. LEXIS 86">*88 amounts:

Both deficiencies arise out of a transaction whereby petitioner Louis A. Blum in the taxable year withdrew from a partnership with his brother, petitioner Nathan Blum, leaving the latter to carry on the business as an individual. In Docket No. 4627 the issue is whether, in the year 1940, Nathan Blum realized additional income from the disposition of some of the assets he received upon dissolution of the partnership. In Docket No. 4628 the issues are whether Louis A. Blum is entitled to deduct a loss he incurred as a result of said transaction and whether his failure to file a timely return for 1940 was due to reasonable cause and not to willful neglect.

FINDINGS OF FACT.

Petitioners Nathan Blum and Louis A. Blum are brothers. For many years prior to 1940, and until October 31 of that year, they were equal partners, engaged in a wholesale men's furnishings business in Chicago, Illinois, under the name "Blum Company." Their individual income and defense tax returns for the calendar year 1940 and their partnership return of income covering the period from January 1 to October 31, 1945 U.S. Tax Ct. LEXIS 86">*89 1940, were filed with the collector for the first district of Illinois.

Differences arose between the brothers in 1940, and they decided to terminate their relationship. On October 31, 1940, they entered into an agreement which, after reciting that the parties had agreed to dissolve their partnership and that Nathan Blum was desirous of purchasing and Louis A. Blum was desirous of selling 49 shares of stock held by the latter in the Wimbledon Shirt Co., of which the latter was president, provided in material part as follows:

Now, Therefore, in consideration of the sum of Sixteen Thousand Five Hundred ($ 16,500.00) Dollars paid by the First Party [Nathan Blum] to the Second 5 T.C. 702">*704 Party [Louis A. Blum], receipt of which is hereby acknowledged, It is Mutually Agreed As Follows:

(1) That the partnership business known as Blum Company is hereby dissolved as of this date.

(2) That the Second Party hereby assigns to the First Party all of his right, title and interest in the business of the partnership hereby dissolved and in the monies in the bank, trade marks, trade names, accounts due or to become due, and any and all other assets of any kind whatsoever belonging to the said partnership.

1945 U.S. Tax Ct. LEXIS 86">*90 * * * *

(7) That the First Party covenants to assume, pay and satisfy, or cause to be paid and satisfied, all debts, taxes and other liabilities of the partnership hereby dissolved, and to release the Second Party except that the Second Party shall be liable for such debts or liabilities, if any, as may at any time or times have been contracted by the Second Party in behalf of the partnership and that have not been entered in, or upon the partnership books.

(8) The Second Party covenants with the First Party that he will not, at any time hereafter, directly or indirectly, use the name Blum Company or any variation thereof without using his first name in conjunction with the name "Blum" and shall not use the names "Wimbledon Shirt Company, Inc.", "Red Seal", "Truly", "Wimbledon", "Red Man", "Vux-Hall" or any name so similar or so nearly resembling the same as to be confusing or misleading to the public.

(9) That the Second Party agrees to endorse in blank the Certificate or Certificates representing the forty-nine (49) shares in the Wimbledon Shirt Company, Inc., a corporation, and to deliver the same to the First Party simultaneously with the execution of this agreement, and shall1945 U.S. Tax Ct. LEXIS 86">*91 execute and deliver to the First Party, simultaneously with the execution of this Agreement, his written resignation as President and Director of the corporation.

(10) That the Second Party shall not, directly or indirectly, at any time interfere with the business of the Blum Company or the Wimbledon Shirt Company, Inc., a corporation, and shall not, directly or indirectly, employ or accept for employment any person presently employed or to be employed by the Blum Company or the Wimbledon Shirt Company, Inc., a corporation.

The sum of $ 16,500 was paid to Louis A. Blum by a check drawn against the partnership bank account. The brothers dealt at arm's length, and the entire transaction was in good faith. They took into consideration the value of the assets in connection with continuation of the business and the value of Louis' interest in the partnership as a going concern.

The statement of assets and liabilities of the Blum Co. as of October 31, 1940, was as follows:

1945 U.S. Tax Ct. LEXIS 86">*92 5 T.C. 702">*705 No actual inventory was taken on October 31, 1940. The item of $ 56,521.70 in the above statement was an approximated figure arrived at by the auditor at the end of the year when he prepared the partnership return and Nathan Blum's individual return. The item included some obsolete goods, broken sizes, and odds and ends.

From January 1 to October 31, 1940, the partnership earned $ 31,937.95, as reported in the partnership return of income. Of that sum, Louis A. Blum withdrew $ 5,683.65 and Nathan Blum withdrew $ 5,479. When there is added to Nathan Blum's withdrawals the sum of $ 16,500 paid to Louis A. Blum in pursuance of the contract of October 31, the following table shows the capital accounts of the partners as of January 1 and October 31, 1940:

In his individual return for 1940 Nathan Blum reported his1945 U.S. Tax Ct. LEXIS 86">*93 share of the partnership earnings for the first 10-month period of the year ($ 15,968.98) and the net profit from the individual operation of the business during the last 2-month period ($ 6,098.02). Those figures were arrived at by the auditor, who at the end of the year, in order to allocate the earnings from the year's business between the period of partnership operation and the period of individual operation, determined the percentage of gross profit to sales for the entire year and 5 T.C. 702">*706 then applied that percentage to sales for each period, approximating the inventory for October 31, 1940, to conform to the allocation of income between the two periods. The opening and closing inventories for the entire year were actually taken.

The following is a statement of the operations for the two periods as disclosed in the partnership return and in Nathan Blum's individual return:

1945 U.S. Tax Ct. LEXIS 86">*94 Total collections from sales and receivables for the two-month period amounted to $ 64,866.89, and accounts receivable on December 31, 1940, amounted to $ 40,490.41.

In his notice of deficiency to Nathan Blum, the Commissioner, under the heading "Explanation of Adjustments," made the following statement:

(a) Prior to October 31, 1940, the Blum Company, a partnership, was owned and operated by you and your brother, Louis A. Blum, as equal partners. On said date the partnership was dissolved and all of its property distributed to you in consideration of the payment by you of $ 16,500.00 to Louis A. Blum for his partnership interest, plus the assumption of the partnership liabilities. It is held that the basis of the assets purchased from your brother on or about October 31, 1940, for the purpose of determining the amount of income realized by you in 1940 on the sale of such property, is the cost to you under the provisions of Section 113 of the Internal Revenue Code.

The Commissioner determined that Nathan Blum's basis in the said assets was $ 90,279.12, that figure being the sum of Nathan's capital account on October 31, 1940 ($ 30,163.37), the liabilities assumed ($ 43,615.75), 1945 U.S. Tax Ct. LEXIS 86">*95 and the additional cash invested by the payment to Louis A. Blum ($ 16,500). Comparing the basis so determined with the book value of the assets on October 31, 1940 ($ 120,237.82), and subtracting from each figure the sum of $ 292.80 for petty cash and unexpired insurance (assets worth 100 percent), the Commissioner determined that Nathan's cost basis was 24.977 percent less than the book value of the assets. He accordingly reduced the basis of the specific assets listed in the above statement of assets and liabilities as of October 5 T.C. 702">*707 31, 1940, by that amount. As a consequence of applying the reduced cost basis, certain bad debt and loss deductions were decreased and profits were determined on the collection of accounts receivable and other accounts and on inventory turnover during the last 2-month period of the year.

The following schedule shows the book value of the assets as of October 31, 1940, and the basis allocated by the Commissioner:

1945 U.S. Tax Ct. LEXIS 86">*96 The Commissioner determined that of the accounts receivable ($ 49,794.49) Nathan collected $ 40,801.57 in the period from November 1 to December 31, 1940, and increased his income by 24.977 percent of that amount, or $ 10,191 01. In his individual return for 1940 Nathan claimed a bad debt deduction of $ 1,371.44 with respect to said accounts receivable as of October 31, 1940. The Commissioner increased his income by 24.977 percent of that amount, or $ 342.54.

The Commissioner determined that Nathan collected the accommodation account of $ 37.50 in full during the last two-month period of the year and increased his income by the difference between that amount and the basis, or $ 9.36.

The Commissioner determined that all the accounts receivable due from salesmen as various commissions were collected or closed out at face value before the end of the year and accordingly increased Nathan's income by the difference between the book value of said accounts and the basis, or $ 791.88.

In his individual return Nathan Blum reported the cost of goods sold during the period November 1 to December 31, 1940, as $ 39,930.28. The Commissioner subtracted from that figure $ 342.44 for freight charges1945 U.S. Tax Ct. LEXIS 86">*97 and determined that, because of the reduced basis of the November 1, 1940, inventory, 24.977 percent of the remainder ($ 39,587.84), or $ 9,887.85, represented additional income to Nathan.

Of the accounts receivable due from the Wimbledon Shirt Co., the Commissioner determined that Nathan collected $ 312.54 prior to December 12, 1940, and that 24.977 percent of that amount, or $ 78.08, represented additional income to Nathan. On December 12, 1940, the 5 T.C. 702">*708 Wimbledon Shirt Co. was dissolved and liquidated. In his 1940 return Nathan reported that he had received $ 5,882 upon liquidation of said corporation and claimed a loss in the amount of $ 1,865.59. The Commissioner determined that, since Nathan's basis of the account was $ 5,946.89 and Nathan had collected $ 234.46 of the principal, his remaining cost to be recovered was $ 5,712.43, and that, having received $ 5,882 upon liquidation, Nathan recovered his entire cost and, in addition, realized $ 169.57 as a liquidating dividend on the stock. Subtracting that amount from the cost of the stock ($ 750.23), the Commissioner determined that Nathan's net loss on the dissolution of the shirt company was $ 580.76, with 66 2/3 percent, 1945 U.S. Tax Ct. LEXIS 86">*98 or $ 387.17, to be taken into account. The difference between the loss claimed ($ 1,865.59) and the loss allowed ($ 387.17), or $ 1,478.42, was held by the Commissioner to be additional income to Nathan.

The total increase in income determined by the Commissioner amounted to $ 22,779.14.

Louis A. Blum filed a tentative return on March 23, 1941, with the collector for the first district of Illinois, showing no tax liability. He obtained an extension of time for filing his final return until May 15, 1941. The final return was not filed, however, until October 7, 1941. In it he reported $ 15,968.97 as his distributive share of partnership income. He also reported a loss of $ 19,673.38 on the sale of his partnership interest in the Blum Co. (the difference between his reported cost, $ 36,173.38, and the $ 16,500 he received in payment) with 50 percent, or $ 9,836.69, to be taken into account. His correct cost basis of his partnership interest was $ 46,458.71.

The Commissioner determined that no deduction was allowable for the loss sustained by Louis A. Blum on account of the sale of his partnership interest to his brother because of the provisions of section 24 (b) (1) (A) of the1945 U.S. Tax Ct. LEXIS 86">*99 Internal Revenue Code. He, accordingly, increased Louis A. Blum's net income by $ 9,836.69 and asserted a deficiency in the amount of $ 1,181.19 in income tax and a penalty of $ 295.30 for delay in filing the return.

The only reason given by Louis A. Blum for the delay in filing the return was that he needed figures from Nathan Blum or his accountant and that somehow or other he was unable to get them. The delay was not due to a reasonable cause.

OPINION.

The parties are in agreement that the transaction between Nathan Blum and his brother, Louis A. Blum, was a sale, but they differ as to the details, the petitioner contending that he bought his brother's partnership interest, and the respondent contending that petitioner bought his brother's interest in the partnership 5 T.C. 702">*709 assets. Petitioner's argument is to the effect that gain or loss is realized only upon the sale or disposition of the business as such, not from the disposition of the assets in the course of business.

The result contended for by petitioner, however, does not follow from his premise. His contention ignores the fact, which can not be denied, that as a result of the transaction between him and his brother1945 U.S. Tax Ct. LEXIS 86">*100 he became sole owner of all the assets of the business and that some of those assets were disposed of during the period from November 1 to December 31, 1940. Petitioner's argument, in a slightly different guise, is in all material respects the same argument that has many times in the past been refuted; that is to say, that where property is acquired as a whole, gain or loss is not realized until it is all disposed of, even though it be disposed of in parcels. Such contentions are inconsistent with the theory of the tax laws, which are designed to levy taxes upon gains and profits of business for annual periods. Heiner v. Mellon, 304 U.S. 271">304 U.S. 271. It is now well settled that where property is acquired as a whole, for a lump sum, and subsequently disposed of a portion at a time, there must be an allocation of the cost or other basis over the several units (except where apportionment would be wholly impracticable) and gain or loss computed and reported upon the disposition of each part. See Santa Maria Gas Co., 10 B. T. A. 1412; O. H. Himelick, 32 B. T. A. 792; Bancitaly Corporation, 34 B. T. A. 494;1945 U.S. Tax Ct. LEXIS 86">*101 T. H. Symington & Sons, Inc., 35 B. T. A. 711; cf. 304 U.S. 271">Heiner v. Mellon, supra.

The cases relied upon by petitioner, among them Commissioner v. Shapiro, 125 Fed. (2d) 532; Thornley v. Commissioner, 147 Fed. (2d) 416, reversing 2 T.C. 220; McClellan v. Commissioner, 117 Fed. (2d) 988, affirming 42 B. T. A. 124; Dudley T. Humphrey, 32 B. T. A. 280; and Williams v. McGowan, 58 Fed. Supp. 692, we think, are not in point. The issue in most of these cases was the taxability of a retiring partner, and the problem was whether that partner's gain or loss was ordinary or capital. In the McGowan case, the issue was whether the loss sustained by a surviving partner who purchased the interest of his deceased partner and some two weeks later sold the entire business was an ordinary loss or a capital loss. Such is not the problem here, for we are not dealing with the sale of the business by petitioner as an1945 U.S. Tax Ct. LEXIS 86">*102 entirety. In none of those cases was the proposition contended for by petitioner, namely, that gain or loss is not realized until sale or disposition of the business as such, even hinted at.

What the Commissioner did in the instant case was merely to allocate Nathan Blum's cost proportionately to the separate assets of the business in the ratio of cost to book value. In doing so, we think the Commissioner acted properly. Petitioner has suggested no other method of allocation which he has demonstrated to be more proper. 5 T.C. 702">*710 No attempt was made to place any valuation upon good will, and good will was not carried on the books as an asset.

So far as the Commissioner's determination of the portion of the assets disposed of during the last two-month period of the year is concerned, the only items seriously challenged by petitioners are the collections of the accounts receivable, the inventory turnover, and the loss sustained upon dissolution of the Wimbledon Shirt Co.

The Commissioner determined that of the $ 49,794.49 accounts receivable on October 31, 1940, petitioner collected $ 40,801.57 prior to December 31, 1940. Petitioner testified that this figure was wrong and that 1945 U.S. Tax Ct. LEXIS 86">*103 he may have collected $ 20,000 or $ 25,000 of the accounts, but that he did not know how much was collected. The petitioner could have ascertained from his books exactly what amount of the old partnership accounts receivable he collected during the period of individual operation, and if the evidence had disclosed a sum different from that found by the revenue agent appropriate adjustment could have been made. We are not disposed, however, to accept the offhand statement of the petitioner as sufficient to overcome the correctness of respondent's determination, based, as it was, on an examination of the books and records.

With respect to inventory turnover, it appears to us that the effect of the Commissioner's determination is to treat all the sales during the last two-month period of the year as having been made from the inventory on hand as of October 31, 1940. The only evidence we have is petitioner's testimony in one instance that "maybe around 35 or 40 percent" and in another instance that "about a third of that inventory" was sold during the period of individual operation. Here again it seems to us that petitioner could have ascertained exactly what merchandise from the old1945 U.S. Tax Ct. LEXIS 86">*104 inventory was sold from November 1 to December 31, 1940, so that a proper allocation of cost basis could be made, and, as we stated with reference to the receivables, we are not disposed to accept statements entirely unsupported from the records as sufficient to overcome the respondent's determination, based, as it was, on the detailed examination of a revenue agent.

With respect to the liquidation of the Wimbledon Shirt Co., Nathan testified that he received nothing "because there were no assets there to amount to anything outside of $ 1,000 worth of machinery." However, he reported in his 1940 return that he received $ 5,882, and, when asked if that figure was correct, he stated, "I don't know. I suppose it is, because the auditor set this up."

We must hold, therefore, that the Commissioner did not err in his determination that Nathan Blum realized $ 22,779.14 additional income.

The only question with respect to the deficiency asserted against Louis A. Blum is whether the deduction of the loss he sustained upon 5 T.C. 702">*711 withdrawal from the partnership is precluded by section 24 (b) (1) (A) of the Internal Revenue Code. ¹ Both the petitioner and the respondent have agreed that1945 U.S. Tax Ct. LEXIS 86">*105 the transaction between Louis and Nathan amounted to a sale of property; and, since it was a sale between brothers, it would seem to fall squarely within the provisions of that section of the code.

Petitioner's contention is that the statute does not apply to a bona fide sale of a partnership interest, notwithstanding it is between brothers. He admits that the scope of the1945 U.S. Tax Ct. LEXIS 86">*106 provision is very broad and that he can find no ruling or decision to sustain his position. He states, however, that the history of the provision, which first appeared in the Revenue Act of 1934, shows that its enactment was brought about because of many family transactions which were sham and for the sole purpose of suffering losses for tax purposes, and he suggests that if the statute is applicable to a bona fide sale of a partnership interest, it works such a hardship as to challenge its soundness.

Undoubtedly Congress, in enacting the provision in question, was motivated by a desire to prevent intrafamily transactions in property for the sole purpose of sustaining "unreal" losses to be deducted for tax purposes. Almost every reference to the measure in the Committee reports and in debate on the floor of the House and the Senate commented on the fact that many "shocking" instances of such transactions had come to light, and that they constituted a major source of tax avoidance. Committee members in charge of the measure stated their belief that it would "effectively close this loophole."

Nevertheless, the language chosen by Congress to accomplish its purposes was that "no deduction1945 U.S. Tax Ct. LEXIS 86">*107 shall in any case be allowed in respect of losses from sales or exchanges of property, directly or indirectly, * * * between members of a family." (Italics ours.) That language is so broad as to admit of no exception. It is true that a hardship may result in particular cases, as in this one, where the transaction is in entire good faith; and there is some indication in the history of the measure that the legislators were not unaware of that fact. However, it was the belief of the drafters that, on the whole, the measure would be fair to the great majority of taxpayers. Congress could have provided that no deduction should be allowed in respect of losses 5 T.C. 702">*712 from intrafamily transactions unless they were bona fide. That it did not do. It may be that such a qualification would have defeated the purpose of the measure, or it may be that consideration of administrative convenience in collecting the revenues outweighed the occasional hardships which would result in particular cases. But whatever the reasons, the purpose being a legitimate one, the wisdom of the choice of the means is a matter for the decision of Congress, not of the courts. We could not, without indulging1945 U.S. Tax Ct. LEXIS 86">*108 in judicial legislation, graft an exception upon the broad measure adopted by Congress.

Furthermore, we have held that a loss sustained by the owner of a tire retreading and repairing business as a result of a sale to his brother was not deductible, Jordan C. Skinner, 47 B. T. A. 624; affd., 138 Fed. (2d) 418, and only recently that a loss sustained by a taxpayer who withdrew his interest in a joint account operated by himself, his mother, and his two sisters as a joint venture was not deductible, Henry V. B. Smith, 5 T.C. 323. Cf. Lewis L. Fawcett, 3 T.C. 308; affd., 149 Fed. (2d) 433.

For the reasons stated, we hold that Louis A. Blum is not entitled to any deduction for the loss he sustained as a result of the transaction with his brother.

As for the delinquency penalty, the only explanation offered by the petitioner for the delay was that he needed some figures from Nathan Blum or his accountant, which "somehow or other" he was unable to obtain. There is no showing in the record as to what efforts petitioner made to obtain the necessary1945 U.S. Tax Ct. LEXIS 86">*109 figures or as to why he was unable to obtain them. There is no showing that he exercised ordinary business care and prudence in attempting to file a timely return. We have, therefore, found as a fact that the delay was not due to a reasonable cause, and we accordingly hold that the delinquency penalty was properly asserted by the respondent.

Decisions will be entered for the respondent.