author: Muedock :

text:
    Central Railroad Company of New Jersey, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76493.
    Promulgated February 17, 1937.

      Richard J. Lolly, Esq., for the petitioner.

      E. O. Algire, Esq., and Lloyd B. Harrison, Esq., for the respondent.
   OPINION.

Muedock :

The Commissioner did not allow, except in the case of the Newark Bay drawbridge and the signals and interlockers used in connection therewith, any deduction for depreciation of roadway, and the following roadway structures and machinery owned and' used by the petitioner in its common carrier business:

Under tlie accounting regulations of tlie Interstate Commerce Commission, to which, the petitioner is subject, the setting up of depreciation accounts on the books is permissive and not mandatory. Sec. 8, Classification of Operating Revenues and Operating Expenses of Steam Roads. If the carrier has set up depreciation accounts on its books, then the cost of any properties retired and replaced, diminished by the amount of depreciation set up on the books with respect to the property retired, is charged to operating expenses (repair accounts) of the year in which the retirement is made; and if the properties are not replaced, that diminished cost is charged to profit and loss. Secs. T and 8, Classification of Investment in Road and Equipment of Steam Roads. That is what is called in these proceedings the “depreciation method of accounting.” On the other hand, if the carrier has not set up depreciation accounts on its books, then the cost of any properties retired and replaced, undiminished by depreciation sustained in prior accounting periods, is charged to operating expenses (repair accounts) of the year in which the retirement is made; and if the properties are not replaced, that undiminished cost is charged to profit and loss. This latter is here called tlie “retirement method of accounting.” Under both methods, the costs of all renewals of the carrier’s properties, when those renewals constitute less than the major portions of the values of the renewed properties, are charged to operating expenses.

The petitioner employed the retirement method of accounting in keeping its books of account, at least from 1918 until after 1930. Taxable net income was computed by that method in all of the petitioner’s returns for that period and also for the year 1931. Those returns, so far as the method of computing net income is concerned, were accepted and approved by the respondent. The petitioner has never sought nor obtained permission to compute its net income in any other way. Cf. Mount Vernon Trust Co. v. Commissioner, 75 Fed. (2d) 938; Brown v. Helvering, 291 U. S. 193.

The petitioner now claims the right to compute net income for 1930 by applying the depreciation method of accounting to all additions since 1913 to the particular accounts listed above. Its claim is based upon the grounds that all of its roadway structures and machinery have limited useful service lives, regardless of any and all expenditures made to maintain them in an efficient operating condition ; the applicable taxing statute provides for the deduction from income of a reasonable allowance for depreciation of property used in its business; and, therefore, it is entitled, irrespective of what has been its consistent accounting practice in the matter of depreciation, to an annual deduction for depreciation in respect of the structures and machinery. The respondent’s position is that the petitioner has regularly employed the retirement method of accounting in keeping its books of account; the retirement method clearly reflects the petitioner’s net income and has been followed and accepted in computing taxable net income in returns for all of the years 1913 to 1930, inclusive, and thereafter; double deductions will result in this year if the petitioner’s contention is allowed; the petitioner may not now change its method of accounting for 1930, without first obtaining permission to do so, which permission has neither been sought nor granted; and, in any event, the charges to operating expenses for maintenance more than offset any depreciation of the structures and machinery carried in its road accounts.

The petitioner introduced a great amount of documentary and oral evidence in an effort to establish the depreciation bases of all structures and machinery acquired after February 28, 1913, and the useful service lives of those facilities. However, detailed findings as to these bases and service lives have not been made, since they would be immaterial to the disposition of the case. Assuming for the moment, without deciding, that the depreciation method is a more acceptable, method of computing net income than the retirement method, if uniformly applied to all roadway property accounts, there is no proof that the resulting net income would be different from that determined by the respondent. The petitioner did not carry its proof that far and all signs point to its inability to do so. However, the decision need not rest entirely upon that insufficiency of proof. The petitioner’s claim will be considered upon its merits.

On the legal question, as to how taxable net income is to be computed, section 41 of the Revenue Act of 1928 is controlling. It requires that net income be computed in accordance with the method of accounting regularly employed in keeping the taxpayer’s books of account. However, the respondent is given discretionary power to determine the effectiveness of the taxpayer’s method of accounting for use in computing taxable net income, and, if the method does not clearly reflect the income, the statute directs him to make the computation by such method as in his opinion does clearly reflect the income.

In the instant case, the respondent has determined that the petitioner’s accounting method meets the statutory , test of a clear reflection of income, and, except in respects not important here, he has accepted and approved the 1930 return, in which the net income was computed by that method. That determination is prima facie correct. Moreover, it has the virtue of being consistent with the respondent’s action over a period of more than seventeen years, dating back to the inception of the income tax; it conforms with what, apparently, has always been the petitioner’s accounting practice; it is a practical recognition of and gives effect to the rules and regulations of a coordinate branch of the Government, which is charged by law with the duty of prescribing accounting regulations for the railroad industry, or so much of it as is engaged in interstate commerce; and it conforms with what is the almost universal accounting practice of railroads within the jurisdiction of the Interstate Commerce Commission. Consequently, before any change in the petitioner’s long-established accounting practice, for the purpose of computing the taxable net income for 1930, would be required or even permitted, most compelling reasons should appear.

The petitioner contends, in substance, that its method of accounting does not clearly reflect net income, because (1) there is not an annual accounting for the depreciation of its roadway properties sustained within the year, and (2) such depreciation is not recognized and accounted for until the year of the retirement of the property from use, when its original cost is charged against operating expenses, the effect of which is to burden the earnings of that year with depreciation losses sustained in prior years. The statute permits, as annual deductions from income, reasonable allowances for the exhaustion, wear, and tear of property used in the trade or business, including reasonable allowances for obsolescence, sec. 23 (k), Revenue Act of 1928; and losses sustained upon the sale or other disposition of property must be diminished by depreciation deductions allowable for prior years, sec. 111(b)(2), Revenue Act of 1928. The taxpayer has deducted amounts from its income on a theory different from that of depreciation but calculated to produce the same result in the end, to wit, the restoration of capital from earnings before the remaining earnings are taxed. The case must turn upon whether or not the method used by the petitioner and approved by the Commissioner clearly reflects income.

That individual units of roadway property do depreciate in useful and serviceable value, despite the maintenance performed to keep them in an efficient operating condition, seems too obvious to need any extended discussion. After all, the properties are made of destructible materials; and nothing wrought by the hand of man is immortal. The inevitable consequences of exposure to the elements, the effect of wear and tear occasioned by usage, the growing inadequacy of facilities to cope with the needs of an ever expanding business, and the normal progress and advancements made in the improvement of transportation, all indicate a limited physical and economic life for the properties. That this depreciation does take place has been recognized by the respondent, and we do not understand that he denies it here. See Bulletin “F” (Revised January 1931), Income Tax Depreciation and Obsolescence, Revenue Act of 1928. It has also been recognized by the Interstate Commerce Commission, and the accounting for it is a matter that has engaged the attention of the Commission from time to time over a long period of years. See Interstate Commerce Commission Order No. 15100, Depreciation Charges of Steam Railroad Companies, 177 I. C. C. 351. There is adequate evidence that the petitioner’s roadway properties are not immune to this depreciation.

However, the petitioner, if its contention in regard to depreciation were granted, would receive the benefits not only of the depreciation method of accounting, but also of the retirement method of accounting. It has already reduced its income by charging to operating expenses amounts expended in restoring its properties and in making good depreciation which would not be deductible from income had it used the depreciation method of accounting (sec. 24 (a) (3), Revenue Act of 1928) and, further, it has reduced its income by retirement losses which represent depreciation sustained in prior accounting periods. These items can not now be isolated or eliminated. They are unidentifiable and indeterminate in amount so far as this record is concerned, yet they are undoubtedly substantial. Therefore, double deductions in respect of the same losses would result by the allowance now of deductions for depreciation. Cf. Ilfeld Co. v. Hernandez, 292 U. S. 62. • A method of accounting allowing such double deductions would not clearly and correctly reflect taxable net income. The method used by the taxpayer in keeping its books and in reporting its income more clearly reflects its net income than the one which it now seeks to use as a substitute.

There is little about the method which the petitioner now suggests as a basis for computing 1930 net income that merits any vei’y serious consideration as a better method than the one it has used over a long period, of years. It is not available for uniform application to all of the petitioner’s roadway property accounts, because of lack of historical and accounting data, and, in these proceedings, the petitioner, with knowledge of that fact, has not attempted to so apply it. It is a hybrid combination of both the depreciation method and the retirement method of accounting. Under it, the petitioner would continue its present accounting practice with respect to all properties acquired before March 1,1913, which represent by far the major part of its investment in roadway properties, and make the change to the depreciation method only with respect to the properties acquired after that date. Such a hybrid method is wholly incapable of a clear reflection of net income. Either the one or the other of the depreciation and retirement methods should be uniformly applied to all of the roadway property accounts. That is what has been done under the petitioner’s established accounting method. To this further extent, also, that method more clearly reflects the petitioner’s net income than the one which it now seeks to substitute for it.

Decision will he entered for the respondent.

       Sec. 8. Depreciation of Fixed Improvements. — Depreciation accounts, in which to include uniform monthly charges to coyer the depreciation of fixed improvements, have been provided for the purpose of creating reserves which will meet or reduce the amounts otherwise chargeable, as may be appropriate, to operating expense or to profit and loss accounts to cover property retired. Such depreciation charges shall be based in each instance upon the percentage of the original cost (estimated if not known), ledger value, or purchase price of the property determined to be equitable by the carrier’s experience and best sources of information as to the actual current loss from depreciation. A statement of the bases used by the carrier for computing these charges shall be included in its annual report to the Commission, until further directed the use of depreciation accounts for fixed improvements is optional with the carrier.

       Sec. 7. Property Retired and. Replaced,. — When a unit of property other than land or equipment — such as a section of road, side or yard track, shop or power plant machine, building, or other structure — is retired from service and replaced with property of like purpose, the ledger value of the retired property shall be credited to the appropriate accounts of this classification at the time that the property is retired from service. The amount of this credit shall be charged concurrently as follows:
      An amount equal to the credit balance in the accrued depreciation balance-sheet account with respect to the property thus retired shall be charged to that account and the remainder (less salvage and insurance recovered, if any), together with the cost of demolishing the property, if demolished for or by the carrier, shall be charged to the accounts in the Operating Expenses appropriate for the cost of repairs of the property before retirement. The accounting for the salvage shall be in accordance with the disposition made of the material recovered.
      If, however, the property retired and replaced with property of like purpose is of minor importance, such as a small roadway building or other small structure, and is replaced in kind without betterment, the cost of the replacement shall be charged to operating expense accounts, and no adjustment made in the road and equipment accounts. * * *
      When the renewals to be made to an important building or other structure will constitute the major portion of its value when renewed, the property, when taken out of service, shall be considered as retired and accounted for as provided above, and for the purposes of this classification the renewed property shall be considered as an addition, and the appraised cost thereof shall be included in the accounts of this classification, consideration being given to the secondhand portions remaining therein. In no case shall the charge for the renewed property exceed the cost (at current market prices of labor and material) of new property of equal capacity and equal expectation of life in service, less a suitable allowance on account of the secondhand parts remaining therein.
      Sec. 8. Property Retired and Not Replaced. — When a unit of property other than land or equipment — such as a section of road, side or yard track, shop or power plant machine, building, or other structure — is retired from service and not replaced, the ledger value shall be credited to the appropriate property accounts at the time that the property is retired from service. The amount of this credit shall be concurrently charged as follows:
      An amount equal to the credit balance in the accrued depreciation balance-sheet account with respect to the property thus retired shall be charged to that account, and the remainder (less salvage and insurance recovered, if any), together with the cost of demolishing the property if demolished by or for the account of the carrier, shall be charged to the appropriate profit and loss account. The accounting for the salvage shall be in accordance with the disposition made oí the material recovered.

         The lone exception to .that was in the ease of the Newark Bay drawbridge and the signals and interlockers used in connection therewith. That facility was completed in 1927, and, beginning in 1928 and for a period of five years, depreciation thereof was accounted for on the books and in the annual reports to the Interstate Commerce Commission.

       Sec. 41. General Rule. — The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. If the taxpayer’s annual accounting period is other than a fiscal year as defined in section 48 or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year.

       SEC. 23. deductions FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      * * * * * * ' *
      (k) Depreciation. — A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. la case of property held by one person for life with remainder to another person, the deduction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust the allowable deduction shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each.

         SEC. III. DETERMINATION OF amount OF GAIN OR LOSS.
      S> * * * * * *
      (b) Adjustment of iasis. — In computing the amount of gain or loss under subsection (a)—
      ****** *
      (2) The basis shall be diminished by the amount of the deductions for exhaustion, wear and tear, obsolescence, amortization, and depletion which have since the acquisition of the property been allowable in respect of such property under this Act or prior income tax laws; but in no case shall the amount of the diminution in respect of depletion exceed a depletion deduction computed without reference to discovery value under section 114 (b) (2) or to percentage depletion under section 114 (b) (3). In addition, if the property was acquired before March 1, 1913, the basis (if other than the fair market value as of March 1, 1913) shall be diminished in the amount of exhaustion, wear and tear, obsolescence, and depletion actually sustained before such date, and * * *.


source: Caselaw Access Project

author: Disney :

license: Public Domain

text:
    Theodore Plestcheeff, Petitioner, v. Commissioner of Internal Revenue, Respondent. Guendolen C. Plestcheeff, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 80025, 80026.
    Promulgated February 17, 1937.

      Gyril D. Hill, Esq., and A. G. Elder, Esq., for the petitioners.

      8. B. Anderson, Esq., for the respondent.
   OPINION.

Disney :

The respondent determined a deficiency in income tax for the year 1932 against the petitioners in the sum of $309.22. The issue is the same in both cases and is as to the deductibility of taxes assessed in 1931 and paid in 1932 on real estate in the State of Washington. The facts are agreed and stipulated and the cases consolidated for bearing. The facts, so far as material to the issues herein, are as follows:

(3) The said petitioners, Theodore Plestcheeff and Mrs. Guendolen Plest-cheeff, are and throughout the year 1932, were husband and wife.
(4) Mr. J. Carkeek, the father of the petitioner, Mrs. Guendolen C. Plest-cheeff, died on April 5, 1931, and by will devised to her, and the said petitioner acquired under the said will, certain real estate situated in the state of Washington. The decree of distribution confirming the said devise was entered in the Superior Court of the State of Washington, for King County, on December 31, 1931.
(5) During the taxable year 1932 the books of the petitioners were kept and their income tax return for the said year was made on the basis of cash receipts and disbursements.
(6) During the year 1932 the petitioner Mrs. Guendolen C. Plestcheeff paid the amount of $4,268.69 for and on account of general property taxes on the said real estate which were assessed in the year 1931.
(7) The said real estate taxes paid by the petitioner Mrs. Guendolen C. Plestcheeff in the amount of $4,266.69 during the year 1932 were claimed as a deduction in computing taxable net income of the petitioners for the said year.
(8) The said deduction was disallowed by the respondent on the theory that the ownership of property in the state of Washington on March 1st is the event which determines the liability for both real estate and personal property taxes, and fixes the amount thereof, although such amount is not ascertainable on such date.

The only error assigned is that in computing petitioners’ income tax liability for 19S2 the Commissioner disallowed as a deduction the sum of $4,266.69, the amount paid by the petitioner Guendolen C. Plestcheeff in 1932 for real property taxes due the State of Washington and its political subdivisions.

The Revenue Act of 1932 provides in section 23:

SEC. 23. deductions FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * * * * * *
(e) Taxes Genebax.lt. — Taxes paid or accrued within the taxable year * * *

The title to the real estate upon which the taxes in question were paid in 1932 passed to Guendolen C. Plestcheeff on April 5, 1931, the date of the death of her father, section 1366 of Remington’s Revised Statutes of the State of Washington providing in part:

When a person dies seized of lands, tenements or hereditaments, or any right thereto or entitled to any interest therein in fee or for the life of another, his title shall vest immediately in his heirs or devisees, subject to his debts, family allowance, expenses of administration and any other charges for which such real estate is liable under existing laws. No administration of the estate of such decedent and no decree of distribution or other finding or order of any court shall be necessary in any case to vest such title in the heirs or devisees, but the same shall vest in the heirs or devisees instantly upon the death of such decedent: provided that no person shall be deemed a devisee until the will has been probated. * * *

Other sections of said statutes provide in part:

The assessment year contemplated in this act shall commence on the first day of March and end on the last day of February in each year * * *. [Sec. 11242.]
On the first Monday in January next succeeding the date of levy of taxes the county auditor shall deliver to the county treasurer the tax-rolls of his county for such assessment year with his warrant thereto attached, authorizing the collection of said taxes, taking his receipt therefor, and said books shall be preserved as a public record in the office of the county treasurer. The amount of said taxes levied and extended upon said rolls shall he charged to the treasurer in an account to be designated as treasurer’s “Tax Roll Account” for- and said rolls with the warrants for collection shall be full and sufficient authority for the county treasurer to receive and collect all taxes therein levied: Provided, that the county treasurer shall in no case collect such taxes or issue receipts for the same or enter payment or satisfaction of such taxes upon said assessment-rolls before the first Monday in said February following. [Sec. 11243.]

Section 11265 of said Remington’s Revised Statutes provides:

Life of lien — Between grantor and grantee — Lien of personalty ta<v — Following property — Personalty lien upon realty.
The taxes assessed upon real property shall be a lien thereon from and including the first day of March in the year in which they are levied until the same are paid, but as between a grantor and grantee such lien shall not attach until the first Monday in February of the succeeding year. The taxes assessed upon each item of personal property assessed shall be a lien upon such personal property from and after the date upon which the same is listed with and valued by the county assessor, and no sale or transfer of such personal property shall in any way affect the lien for such taxes upon such property. * * *

Section 11235 of Remington’s Compiled Statutes of Washington, 1922, provides:

For the purpose of raising a revenue for the state, county indebtedness, county current expense, school, road and other purposes, the board shall, at said October session, levy a tax on all taxable property in the county, as shown by the assessment-roll, sufficient for such purposes: * * *

No brief in bebalf of respondent is filed, but in ah explanatory statement accompanying deficiency notice, in justification of bis determination disallowing the claimed deduction of $4,266.69, be cites and relies on General Counsel’s Memorandum 6667, Cumulative Bulletin VIII-2, p. 94, to tbe effect that the ownership of property in the State of Washington on March 1 is the “event” which determines the liability for both real estate and personal property taxes and fixes the amount, although not ascertainable on that date. The effect of the respondent’s contention is that the law permits one to deduct only his own taxes, but that he can not deduct taxes owed by some one else, such as his predecessor or successor in title. That this is a settled principle of law is, of course, undoubted, and the question here is as to whether the taxes in question were owed by Guendolen C. Plestcheeff, or her father and predecessor in title, J. Carkeek. Klickitat Warehouse Co. v. Klickitat County, 42 Wash. 299; 84 Pac. 860, and City of Puyallup v. Lakin, 45 Wash. 368; 88 Pac. 578, were relied on in the above General Counsel’s memorandum; also Sloan Shipyards Corporation v. Thurston, 111 Wash. 361; 190 Pac. 1015, a personal property case. But as to those cases, in Wilberg v. Yakima County, 132 Wash. 219; 231 Pac. 931, the court stated:

* * * As was noted in Raymond v. King County supra, the case of State of Washington v. Snohomish County, 71 Wash. 320, 128 P. 667, apparently laid down a rule in regard to real property different than that announced in Klickitat Warehouse Co. v. Klickitat County, supra; City of Puyallup v. Lakin, supra; and Mills v. Thurston County, supra, which were cases involving the lien of personal property taxes.

In State of Washington v. Snohomish County, 71 Wash. 320, it was stated in part:

* * * The fact that the lien of the tax so created is hy relation attached to specific property as of the date of the initiation of the process on March 1st cannot do away with the necessity of pursuing the whole statutory proceeding before any tax is created so as to attach as a lien as of that or any date. While the state has power, for the purposes of the lien, to treat the entire proceeding as having been taken at any given time, that fact does not do away with the necessity of any step in the proceeding. It seems self-evident that there can be no valid or effective lien for a tax until there is a valid tax in some specific amount. “For, in the nature of things, no tax or assessment can exist so as to become a lien or encumbrance upon real estate until the amount thereof is ascertained and determined.” Black on Tax Title (2d Ed.) § 189. * * *
# Sit # * * sjt Hi
We are not blind to the fact that a contrary view finds apparent support in the decisions of this court in Klickitat Warehouse Co. v. Klickitat County, 42 Wash. 299, 84 Pac. 860, and City of Puyallup v. Lakin, 45 Wash. 368, 88 Pac. 578. Those cases, however, construe only that part of the lien statute relating to taxes on personal property. * * * The lien is thus by statute made complete, perfect, and enforceable prior to the levy for the current year. Every purchaser of personal property subsequent to the assessment, therefore, takes subject to a perfected and indestructible lien. No such provision for acceleration and computation is found as to real property taxes. The lien as to them is inchoate and unenforceable until the tax has been fully imposed by the levy for the current year. The passage of the title to the state in the interim, therefore, cheeks the ripening of the inchoate into a matured and perfect lien, makes it incapable of enforcement, in effect aborts and destroys it. The distinction seems plain. Moreover, as observed by Judge Donworth in United States v. Pierce County supra: “Further support for the position that the tax lien did not attach is found in the provision of the statute that ‘as between a grantor and grantee such lien [of the taxes on real property] shall not attach until the first Monday of February of the succeeding year,’ and the United States became the grantee long before that date.” Here also the state became the grantee long prior to February of the succeeding year. * * *

The Snohomish Coimty case is cited with approval in Ballard v. Wooster, 182 Wash. 408; 45 Pac. (2d) 511, and in In re Graley’s Estate, 183 Wash. 268; 48 Pac. (2d) 634, it is distinguished because in the latter case there had been a levy, the court saying as to the Snohomish Comity case: “The court concluded that under the law the tax for 1907 could not become fixed until the levy in October of that year * *

In State v. City of Hoquiam, 155 Wash. 678; 287 Pac. 670, the court considered the question of the time of incidence of taxes in a matter wherein property was taken under condemnation proceedings. It cited at length Bethany Presbyterian Church v. City of Seattle (Wash.), 282 Pac. 922, disclosing that therein that court had held that the church, the property of which was condemned and taken, had a right to the condemnation award undiminished by the taxes for the reason that the title passed on January 16, 1929, whereas the statute provided that as between grantor and grantee the lien should not attach until the first Monday in February. The court, therefore, held in the Hoquiam case that since the title to the property had not yet passed (after first Monday in February 1930), the 1929 taxes, as well as the 1928 taxes, should be deducted from the condemnation award — thus doubly emphasizing in the cited case and the decided case that in that state the incidence of the taxes as between grantor and grantee was upon the first Monday in February.

In Puget Sound Power & Light Co. v. City of Seattle, 201 Pac. 449, 451, referring to the Snohomish County case, supra, the Supreme Court of Washington again emphasized the principles of that case by referring to it as follows:

* * * It was pointed out that in giving a lien for a real estate tax the statute contemplates a levy as well as an assessment, while as to personal property only an assessment is required.; and it was decided that as the levy had not been made at the time of the purchase the state took the real property free of any lien for taxes. * * *

In John H. Hord, 33 B. T. A. 342, 347, we pointed out that:

* * • The decisions have been uniformly to the effect that the ownership of the property on the date fixed by state law as the date of tax incidence determines the right of a taxpayer to a deduction under the Federal income tax law. The owner on such basic date is entitled to the deduction for taxes paid by him.

The question for our determination therefore is the basic date for tax incidence in the State of Washington.

In our opinion, the taxes assessed on real estate for the year 1931 did not, under the statutes of Washington as construed by its courts, attach and become a perfected lien on said realty prior to October 1931, in which month the tax levy is made in that state.

It is true that in Grand Hotel Co., 21 B. T. A. 890, there was involved a case from the State of Washington and that therein we said that March 1 is the event which determines the liability for real estate tases and fixes the amount, although not ascertainable on that date. But in that case, as we stated, “the taxes were assessed, levied, and accrued during the year 1921, while J. E. Ransome was the owner of the hotel real estate” — whereas the petitioner there acquired the property from J. E. Ransome on February 10, 1922, after which it paid the taxes for 1921 and claimed same as a deduction. It was not necessary in that case, therefore, to decide as to when in 1921 was the date of the tax incidence. As above seen, the statutes of that state provide that the assessment year ends on the last day of February, provide for the tax levy in October, and further provide that the tax lien upon real property shall not attach as between grantor and grantee until the first Monday in February, so that it is seen that in any event in the Grand Hotel Co. case the date of tax incidence had passed prior to passage of title. Neither the Snohomish County case nor the other cases hereinabove cited were called to our attention in Grand Hotel Co. Grand Hotel Co. mentions Groton Willamette Paper Co., 14 B. T. A. 133, and Arcade Department Store, 18 B. T. A. 1172, but in the former case we specifically stated that it was not necessary to determine the exact date within the taxable year when the taxes became a lien under the laws of Oregon and Washington. Moreover, personal property taxes were involved. Arcade Department Store was also a personal property tax case.

In the light of State of Washington v. Snohomish County, supra, and the other cases cited above, consistent therewith, we are impelled to hold that the date of tax incidence on real property in that state, and in this case, was not until after Mrs. Plestcheeff received the real estate by devise from her father on April 5,1931. She paid said taxes in 1932 and she and her husband took and, in our opinion, under the Washington statutes and decisions, and by virtue of section 23 (c) of the Revenue Act of 1932, were entitled to take as a deduction, in computing their net taxable income for 1932, the $4,266.69 taxes so paid. The taxes were owed by Mrs. Plestcheeff and she and her husband had a right to deduct same.

We, therefore, are of the opinion and hold that the respondent committed error in disallowing the deduction claimed by the petitioners.

Reviewed by the Board.

Judgment of no deficiency will be entered.


author: TURNER: Smith,

text:
    Chester N. Weaver Company, a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent. Chester N. Weaver, Petitioner, v. Commissioner of Internal Revenue, Respondent. Elsie S. Weaver, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 82865, 82870, 82871.
    Promulgated February 17, 1937.

      A. E. Graupner, Esq., for the petitioners.

      O. W. Swecher, Esq., for the respondent.
   OPINION.

TURNER:

The only question for determination is whether or not section 23 (r) (l) of the Revenue Act of 1932 bars the deduction of the losses sustained by the petitioners on liquidation of the Townsend Co. There is no claim by the petitioners that the gross income reported, and against which the deduction is sought, includes gains from the sale of stocks or bonds which were not capital- assets.

It is the contention of the petitioners that the provisions of sections 22 (d), 115 (c), 111, and 112 (a) of the act provide for the deduction in full of losses sustained as the result of a distribution in complete liquidation of a corporation, and that the provisions of section 23, relating to deductions from gross income, are not applicable.

The petitioners’ argument that the losses in question are deductible without regard to section 23 starts with section 22 (d), which provides that “distributions by corporations shall be taxable to shareholders as provided in section 115.” Referring next to subsection (c) of section 115, they point out that although “amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock” the “gain or loss to a distributee resulting from such exchange” is determined under section 111, and “recognized” to the extent provided in section 112. Our attention is then called to the fact that by the terms of section 112 (a), the entire amount of gain or loss “upon the sale or exchange” of property “shall be recognized” except as thereafter provided in that section. It is then concluded that since the remaining provisions of section 112 contain no limitation or prohibition of the recognition of a loss resulting from complete liquidation of a corporation, the entire .•amount of the loss is recognized, and being recognized in full, its deduction is in no way dependent upon or limited by the provisions ■of section 23.

The fallacies in this argument are elementary and obvious, and are at once apparent upon examination of the structure and plan of the income tax statute. The tax is imposed on net income and. according to section 21, net income is “gross income computed under section 22, less tlie deductions allowed by section 23.” Section 22 provides generally that gross income “includes gains, profits, and income * * * of whatever kind and in whatever form paid, or from * * * any source whatever.” It also enumerates certain specific items that are to be included in gross income and others that are to be excluded. Section 23 enumerates and describes the allowable deductions referred to in section 21. It is argued in this connection that sections 112 to 120, inclusive, are relief or distinctive provisions, and to rule that their application is to be made with reference to section 23 would amount to their repeal or nullification. We find nothing in any of these sections to indicate that the so-called relief or distinctive provisions are to be applied without reference to section 22 if they involve items of gain or profit, or without references to section 23 if they involve losses or other charges allowable against gross income. On the other hand, Congress has particularly and specifically brought the application of these so-called relief sections within the provisions of sections 22 and 23. Illustrations are numerous. Subsection (b) (7) of section 22 provides for the exclusion from gross income of the items of gain set foi’th in section 116, while subsections (g), (h), (i), (1), (m), and (n) of section 23 specifically give effect to the provisions of sections 113, 118, 117, 114 (b) (3), and (4), 114, and 120$ respectively. It is thus apparent from the general plan of the statute that, in the absence of specific language to the contrary, deductions from gross income are allowable by and through the provisions of section 23 only. No other method of determining net income is provided-.

The petitioners seek to vary the general plan of the statute by arguing that losses resulting to stockholders from corporate liquidations are to be given effect through section 22 (d). That argument is, in short, a claim that a loss deduction may be taken in the form of a minus or negative item of gross income, under the gross income provisions of the statute and without regard to the provisions of section 23. Obviously the provision in section 22 (d), to the effect that “distributions by corporations shall be taxable to shareholders as provided in section 115”, is not susceptible of such strained construction. ■

The argument made here would also permit the deduction of a loss from the sale of stocks or securities on the market, without regard to section 23, since section 112 (a) provides that such a loss is to be recognized in full, there being no subsequent provision in that section providing otherwise. Such reasoning would completely nullify the provisions of section 23 (e), (f), and (r) (1). The recognition or nonrecognition of gain or loss under section 112 is in no sense a determination that the gain is to be included in gross income or that the loss is to be deducted therefrom. It is merely a determination as to whether or not the gain or loss is to be given such tax significance :as the statute provides in the year in which the transaction giving rise to the gain or loss occurred, or is to be postponed until the happening of a further transaction in a subsequent year. Even though recognized, the tax effect of the gain or loss in computing net income is to be determined through the application of the gross income and ■deduction provisions of the statute. The result here being a recognized loss, the extent to which that loss is deductible is determined hy the provisions of section 23.

In their reply brief the petitioners make the further contention that the limitation prescribed by section 23 (r) (1), on loss deductions, is not applicable here on the ground that a loss sustained in the disposition of stock in a corporate liquidation is not a loss from the sale or exchange of stock within the meaning of the statute. The reasoning advanced is that Congress, through sections 22 (d) and 115 (c), ■on the one hand, and sections 22 (e) and 111 (a) and (b) on the other, has carefully drawn a distinction between the disposition of stock in liquidation and an ordinary sale or exchange of stock on the market, :and that the disallowance or limitation under section 23 (r) (1), of ;a loss sustained in the disposition of stock in liquidation requires the. distortion or disregard of other pertinent provisions of the statute. Tt is also claimed that section 23 (r) (1.) is applicable only to losses sustained in a sale or exchange of stocks and bonds on the market, because the Congressional Committees, in stating reasons for the insertion of section 23 (r) (1) in the statute, made specific reference to sales or exchanges on the market and no reference to the disposition of stock in a corporate liquidation.

It is well established that the reports of Congressional Committees may be resorted to as an aid to construction when the terms of the statute are contradictory or ambiguous, or the meaning of the words used is doubtful. Caminetti v. United States, 242 U. S. 470; Penn Mutual Life Insurance Co. v. Lederer, 252 U. S. 523. But it is equally well established that the intent of the lawmaker must be sought in the language of the statute, and where that language is’ clear and unambiguous, it must be enforced according to its terms and may not be varied or limited by reference to committee reports. The plain language of the statute may not be cast aside for other language thought by some one to have been in the mind of the legislative body. Congress must be presumed to have meant what it has said. Crooks v. Harrelson, 282 U. S. 55; United States v. Goldenberg, 168 U. S. 95; Helvering v. City Bank Farmers Trust Co., 296 U. S. 85; Edith M. O'Donnell, 35 B. T. A. 251. From a consideration of the cases before us and the provisions of the statute involved, it does not appear here that the aid of the Committee reports is invoked because the language of section 23 (r) (1) is ambiguous, but because the petitioners desire to limit and restrict the application of that language to the situations covered by specific illustrations in those reports. Clearly the cases cited do not permit reference to legislative history for such purposes, and where there is no ambiguity the language of the statute is controlling.

In support of their claim for a narrow and restricted application of section 23 (r) (1), the petitioners have cited numerous court decisions which deal with the interpretation and construction of statutes. It is our opinion that the cases cited generally support the respondent rather than the petitioners. In Helvering v. Stockholm Enskilda Bank, 293 U. S. 84, the Supreme Court stated that the intention of Congress, with reference to a particular provision of a taxing statute, is to be determined not by viewing the provision apart and separate from its setting in the act, but by considering it in connection with the context, general purpose of the statute in which it is found, and the occasion and circumstances of its use. ‘ In section 115 (c), on which petitioners base their claim for distinction, it is provided that amounts distributed in complete liquidation of a corporation are to be treated “as in full payment in exchange for the stock.” It is then provided that the amount of gain or loss is to be “determined under section 111” and recognized “to the extent provided in section 112.” These sections deal generally with the “sale or exchange” or “the sale or other disposition” of property. It thus appears by direct reference to other sections of the statute, that the disposition of corporate stock in liquidation is to be treated, for income tax purposes, as a “sale or exchange” and the distinction claimed by the petitioners is refuted by the plain words of the statute. Furthermore, it is interesting to note that if any doubt did exist and there were any basis for a claim of ambiguity, the report of the Committee on Ways and Means of the House of Representatives submitted with the bill which became the Revenue Act of 1924, in which report the language used in section 115 (c) was inserted, definitely indicates that the disposition of stock in a corporate liquidation is, for income tax purposes, a sale. The Committee there said: “The proposed bill, as did the 1918 Act, treats a liquidating dividend as a sale of the stock to the corporation and recognizes the true effect of such a distribution.”

The deduction of recognized losses in the case of an individual is governed by the provisions of subsection (e) of section 23, and of a corporation by the provisions of subsection (f). In both of these subsections it is provided that the deductions so allowed are subject to the limitation provided in subsection (r), paragraph (1) of which has been quoted above. The language of that limitation is plain and the deduction of any loss resulting from the sale or exchang'e of stocks or bonds, not capital assets, is limited in amount to gains derived from the sale or exchange of similar assets. In the cases before us the preferred stock of the Townsend Co. was disposed of in liquidation of that company. The stock did not constitute capital assets in the hands of the petitioners and they make no claim that they realized any gains from the sale of similar assets. This disposition of the stock, under the provisions of the statute considered above, was a sale or exchange and the deduction of the losses sustained is barred by the provisions of section 23 (r) (1) of the statute.

Reviewed by the Board.

Decision will he entered wider Rule 50.

Smith,

dissenting: It is a cardinal principle of statutory construction that taxing statutes should be interpreted according to the intent of the legislative body enacting them. Thus, in Smythe v. Fiske, 23 Wall. 374, the Supreme Court said:

A thing may be within the letter of a statute and not within its meaning, and within its meaning, though not within its letter. People v. The Utica Insurance Co., 15 Johnson, 380; Atkins v. The Fibre Disintegrating Co., 18 Wallace, 301; Bacon’s Abridgment, title Statutes, 1, 2, 3, 5. The intention of the lawmaker is the, law.

In Helvering v. New York Trust Co., 292 U. S. 455, the Supreme Court said:

The rule that, where the statute contains no ambiguity, it must be taken literally and given effect according to its language, is a sound one not to be put aside to avoid hardships that may sometimes result from giving effect to the legislative purpose. Commr. of Immigration v. Gottlieb, 265 U. S. 310, 313, 44 S. Ct. 528, 68 L. Ed. 1031; Bate Refrigerating Co. v. Sulzberger, 157 U. S. 1, 37, 15 S. Ct. 508, 39 L. Ed. 601. But the expounding of a statutory provision strictly according to the letter without regard to other parts of the act and legislative history would often defeat the object intended to be accomplished. Speaking through Chief Justice Taney in Brown v. Duchesne, 19 How. 183, page 194, 15 L. Ed. 595, this court said: “It is well settled that, in interpreting a statute, the court will not look merely to a particular clause in which general words may be used, but will take in connection with it the whole statute (or statutes on the same subject) and the objects and policy of the law, as indicated by its various provisions, and give to it such a construction as will carry into execution the will of the Legislature, as thus ascertained, according to its true intent and meaning.” Quite recently in Ozawa v. United States, 260 U. S. 178, page 194, we said: “It is the duty of this Court to give effect to the intent of Congress. Primarily this intent is ascertained by giving the words their natural significance, but if this leads to an unreasonable result plainly at variance with the policy of the legislation as a whole, we must examine the matter further. We may then look to the reason of the enactment and inquire into its antecedent history and give it effect in accordance with its design and purpose, sacrificing, i£ necessary, the literal meaning in order that the purpose may not fail.” And in Barrett v. Van Pelt, 268 U. S. 85, 90, 45 S. Ct. 437, 439, 69 L. Ed. 857, we applied the rule laid down in People v. Utica Ins. Co., 15 Johns. (N. Y.) 358, 381, 8 Am. Dec. 243, that “a thing which is within the intention of the makers of a statute is as much within the statute as if it were within the letter, and a thing which is within the letter of a statute, is not within the statute, unless it is within the intention of the makers.”

Did the Congress by section 23 (r) intend to prevent corporate stockholders sustaining losses upon the liquidation of corporations from deducting those losses from gross income except to the extent of gains realized from sales or exchanges of stocks and bonds? I think not.

The legislative history of section 23 (r) of the Revenue Act of 1932 shows that that provision was designed to prevent corporate stockholders from deducting from gross income losses created through sales or exchanges “in the stock and bond markets.” The Ways and Means Committee Report 708 on H. R. 10236, which later became the Revenue Act of 1932, comments upon five proposed additions to section 23 of the Revenue Act of 1928, i. e., subsections (r), (s), (t), (u), and (v). These proposed subsections emerged in amended form as subsections (r), (s), and (t) of the Revenue Act of 1932. In presenting the five proposed additions to the House the Ways and Means Committee Report stated, p. 12:

Many taxpayers liare been completely eliminating from tax their income from salaries, dividends, rents, etc., by deducting therefrom losses sustained in the stock and bond markets, with serious effect upon the revenue. Your committee is of the opinion that some limitation ought to be placed on the allowance of such losses.

After referring to the exclusion of “dealers in securities”, as provided in subsection 23 (r) (3), the Committee report stated:

Traders or other taxpayers who buy and sell securities for investment or speculation, whether or not in their own account, and irrespective of whether such buying or selling constitutes the carrying on of a trade or business, are not regarded as dealers in securities within the meaning of this rule.

The Finance Committee Report of the Senate on this same bill (Report 665, p. 12) contains the following:

The House Bill adopted very severe limitations upon the allowance of losses from the sale of securities, as a deduction in computing net income. The provision is based upon a twofold policy: (1) Protecting the revenues from the growing practice of reducing tax liabilities by the sale of securities on which losses had accrued, and (2) preventing speculative losses from wiping out ordinary income, which represents real tax-paying ability.

There is nothing in the Committee reports which tends in the slightest to show that section 23 (r) had in contemplation losses sustained through the liquidation of corporations.

Section 22 (cl) of the Revenue Act of 1928 provides that “Distributions by corporations shall be taxable to the shareholders as provided in section 115”, and section 115 (c) provides in part:

Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for -the Stock. * * *

The Revenue Act of 1928 contained no provision corresponding to section 23 (r) of the Revenue Act of 1932. Section 22 (cl) and section 115 (c) of the Revenue Act of 1928 were incorporated and made a part, without change, of the Revenue Act of 1932. '

Where corporations are liquidated, stockholders receiving liquidation distributions may or may not turn in their shares of stock. It is a common thing for them to do so. See Phelps v. Commissioner, 54 Fed. (2d) 289. Whether they do so or not, however, they are treated as exchanges under both the Revenue Act of 1928 and that of 1932 for the purpose of giving corporate stockholders the benefits of sections 111 and 112.

The word “exchange” in its ordinary meaning carries with it the idea of mutual agreement — a transfer of property for property in a transaction freely arrived at between two parties. See Law v. McLaughlin, 2 Fed. Supp. 601. These elements are lacking where in distributions in liquidation a stockholder has no alternative but to surrender his shares of stock and receive his proportion of the assets of the corporation distributable to him. Section 115 (c) does not provide that distributions in liquidation shall constitute “exchanges.” It simply provides that they shall be treated as in full or part payment “in exchange” for the stock.

In section 23 (r) of the Revenue Act of 1932 the word “exchange” is coupled with the word “sales.” Under the doctrine of ejusdem generis the word “exchanges” must be interpreted in the light of the word with which it is associated. Losses sustained upon sales of stocks and bonds are subject to the limitation of section 23 (r) (1). If the word “exchanges” had not been used in this provision the very evil at which section 23 (r) was aimed might have been perpetuated by corporate stockholders exchanging their stocks and bonds for other securities or other property. Such circumvention of the statute was forestalled by the language used by the draftsmen of the act.

" In the light of the legislative history of section 23 (r) I can not believe that Congress had any intention of limiting the deduction from gross income of losses sustained by taxpayers in the liquidation of corporations.

Blace, TysoN, Hill, and HakRON agree with this dissent.

       Sec. 23. (r) Limitation on Stock Losses. — (1) Losses from sales or exchanges-of stocks and bonds (as defined in subsection (t) of this section) which are not capital assets (as defined in section 101) shall he allowed only to the extent of the gains from such sales or exchanges (including gains which may be derived by a taxpayer from the retirement of his own obligations).

         Sec. 22. (d) Distributions by Corporations. — Distributions by corporations shall be taxable to tlie shareholders as provided in section 115.
      Seo. 115. (c) Distributions in Liquidation. — Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. In the case of amounts distributed in partial liquidation (other than a distribution within the provisions of section 112 (h) of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital accounts shall not be considered a distribution of earnings or profits within the meaning of subsection (b) of this section for the purpose of determining the taxability of subsequent distributions by the corporation.
      Sec. 111. (a) Computation of Gain or Loss. — Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 113 (b), and the loss shall be the excess of such basis over the amount realized.
      *******
      (c) Recognition of Gain or Loss. — In the case of a sale or exchange, the extent to which the gain or loss determined under this section shall be recognized for the purposes of this title, shall be determined under the provisions of section 112,
      Sec. 112. (a) General Rule. — upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.


author:
SteRNhagen: ARNOLD,
      Disney,

text:
    General Motors Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52824.
    Promulgated February 19, 1937.

      James A. Taylor, Esq., and Frank B. Schlosser, Esq., for tire petitioner.

      Elden McFarland, Esq., John F. Greaney, Esq., and Claude B. Marshall, Esq., for the respondent.
   OPINION.

SteRNhagen:

The Commissioner determined deficiencies in petitioner’s income taxes for 1924, 1925, 1926, and 1927. Those for 1924, 1925, and 1927 have been entirely settled by a stipulation, and paid. For 1926 the deficiency was determined to be $15,342,369.45, and the controversy turns upon whether transactions whereby the petitioner acquired the assets of the Fisher Body Corporation resulted in gain; which, under the Revenue Act of 1926, section 203, properly escapes recognition, as contended by petitioner, or resulted in taxable profit by way of a liquidation distribution, as contended by respondent. The facts have been stipulated in detail and need not be specially found. They can be briefly stated. The plan is the same as that considered in Charles T. Fisher, 34 B. T. A. 1215.

The petitioner, a Delaware corporation with principal office at Detroit, Michigan, is engaged in the manufacture and sale of automobile parts. In June 1926 it owned 1,402,920 shares, or about 58 percent, of the outstanding common stock of the Fisher Body Corporation, a New York corporation, which manufactured automobile bodies and parts and furnished petitioner with all bodies required by it, under a 10-year contract beginning November 1, 1919. For a 6-month period ending June 30, 1926, the Fisher Body Corporation’s sales amounted to about $126,000,000, and about 87.27 percent of its business was done with petitioner.

For reasons germane to its business, petitioner, in the early part of 1926, decided to acquire the assets of the Fisher Body Corporation. After preliminary negotiations, the two corporations adopted a plan whereby, in June 1926, the Fisher Body Corporation transferred all its assets to petitioner in exchange for 1,600,000 of petitioner’s common shares and the assumption by petitioner of all the liabilities of the Fisher Body Corporation. The Fisher Body Corporation immediately distributed the 1,600,000 shares among its shareholders and dissolved. As a shareholder of the Fisher Body Corporation, petitioner received in the liquidation 935,280 of its own common shares, represented by certificate WC 21242.

The 1,600,000 common shares of petitioner which the Fisher Body Corporation received consisted of 638,401 shares of original issue, 26,319 shares of treasury stock, and 935,280 shares represented by certificate' WC 21242, which, on June 23, 1926, had been borrowed for 30 days from the General Motors Securities Co., an unaffiliated corporation, for use in carrying out the plan. Petitioner was to return 935,280 shares to the Securities Co. upon receipt by petitioner of its distributive part of the 1,600,000 shares. The stipulation states that it was intended that full title pass from the Securities Co. to petitioner in order that petitioner might pass full title to the Fisher Body Corporation, and it was expected that petitioner would receive back this certificate as its distributive share in the liquidation of the Fisher Body Corporation, and would then return it to the Securities Co. in full satisfaction of its obligation. The same certificate was returned to the Securities Co. on July 1,1926.

. The fair market value of 1,600,000 common shares of petitioner on June 30, 1926, was $237,500,000, or 148^ a share. The fair market value of a share on July 1, 1926, was 147yg. The value of its own shares which petitioner received on the liquidation of the Fisher Body Corporation was $138,830,625; the cost of its 1,402,920 shares of Fisher Body Corporation stock was $31,254,825. The Commissioner determined that the difference of $107,575,800 was taxable gain.

The petitioner contends that no gain from the above transactions may be recognized in 1926 because they constituted a statutory reorganization, Bevenue Act of 1926, sec. 203 (b) (2) or (3). Beorgani-zation is defined as, among other things, a merger, including the acquisition by one corporation of substantially all the properties of another, sec. 203 (h) (1) (A) . The petitioner acquired all the properties of the Fisher Body Corporation in exchange for its own shares, and, therefore, so much of what was done falls clearly within the statutory definition of reorganization. Charles T. Fisher, supra. The acquisition of the Fisher properties was the paramount object to be achieved, for purely business reasons, and therefore Gregory v. Helvering, 293 U. S. 465, is inapplicable. What the parties wanted was that petitioner should own and operate the Fisher plant and business as part of its own business, and everything that was done was in adjustment to that end. The borrowing of shares and their transfer, the liquidation and dissolution of the Fisher Corporation, and the return of the borrowed shares, were incidents of this paramount purpose, Charles T. Fisher, supra. Therefore, when it appears that the acquisition of the properties is itself a statutory reorganization in which gain or loss escapes recognition, it is not easy to say that the same gain or loss is nevertheless to be recognized in an incidental transaction used in carrying the purpose to completion. And, of course, it is not necessary, or indeed proper, to conclude how this reorganization may affect the taxes of the participants in future years.

This reorganization was planned and accomplished in 1926, when the law of the subject was still uncertain in respects no longer doubtful. Since Helvering v. Minnesota Tea Co., 296 U. S. 378, it is clear that the absence of liquidation and dissolution does not prevent the recognition of a statutory reorganization. A liquidation which follows but is not essential to a reorganization which is not a merger or consolidation under (A) of the definition, may result in taxable gain under section 201 (c). Liquidating Co., 33 B. T. A. 1173. But where the liquidation and dissolution are essential to the reorganization because the reorganization is by way of merger in its broad sense, Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U. S. 462, they do not serve to justify recognition of gain under section 201, which escapes by virtue of section 203. “Both can have effect, and if one does somewhat overlap the other the taxpayer should not be denied, for that reason, what one paragraph clearly grants him.”' Helvering v. Minnesota Tea Co., supra.

If, however, the liquidation of the Fisher Body Corporation be separately regarded, wherein the petitioner, being the holder of 1,402,920 Fisher shares which had cost it $31,254,825, received 935,820 •of its own shares, worth $138,830,625, it involves no gain -which may be recognized. In this, the situation is in all substantial respects like that in Helvering v. Winston Brothers Co., 76 Fed. (2d) 381. a case which had full consideration in the Board, 29 B. T. A. 905; 28 B. T. A. 1248, and was affirmed by the United States Circuit Court of Appeals for the Eighth Circuit.

There is argument by the Commissioner that gain resulted from the transactions with the Securities Co., either because the use and return of the borrowed 935,280 shares is upon analysis similar to a short sale, or because the borrowing created a debt to the Securities Co. in the amount of the value of the shares when borrowed, which was discharged by the shares received from the Fisher Body Corporation in exchange for the Fisher shares, which had a lower cost. Cf. Kirby Lumber Co. v. United States, 284 U. S. 1. Both of these arguments are based upon concepts of the arrangements with the Securities Co. at variance with the true fact. This was simply a borrowing by petitioner of 935,280 shares to be used for a few days and returned in kind. There wras no financial debt, but only a potential .liability in damages for failure to return the shares. The return of -.the shares involved neither gain nor loss. The analogy of a short sale falls because the borrowed shares were not used to effectuate a sale or a ■ covering purchase, but in perfecting a reorganization wherein gain or Joss is not to be recognized.

The respondent’s determination as to 1926 is reversed.

Reviewed by the Board.

Judgment will be entered itnder Rule 50.

Turner dissents.

ARNOLD,

dissenting: I agree that the transaction whereby petitioner acquired the assets of the Fisher Body Corporation in exchange for 1,600,000 shares of its stock and received 935,280 shares of its own stock in exchange for 1,402,920 shares of stock which it owned in the Fisher Body Corporation as a liquidating dividend is nontaxable under the reorganization provisions of the statute. I do not agree that when petitioner used the General Motors stock it received in exchange for its Fisher Body stock to satisfy its obligation to the General Motors Securities Co., no taxable gain resulted.

The ultimate question here is whether petitioner realized gain ■upon the disposition of the Fisher Body stock. Since the exchange of petitioner’s Fisher Body stock for assets of the Fisher Body Corporation (which then consisted solely of General Motors stock) was a nontaxable transaction, it is evident that the shares of stock petitioner .received for its Fisher Body stock were assets in its hands, and, unless there is a taxable transaction upon the disposition of the assets (General Motors stock) for which its Fisher Body stock was exchanged, (any gain derived from petitioner’s investment in Fisher Body stock will never be subject to tax.

In Charles T. Fisher, 34 B. T. A. 1215, we had a similar question before us, arising from the same reorganization and dependent on the same basis, with the exception that Charles T. Fisher sold the General Motors stock which he had received in exchange for his Fisher Body stock on the market, while here petitioner used the General Motors stock which it had received in exchange for its Fisher Body stock to satisfy an outstanding obligation to the General Motors Securities Co. Clearly there is no difference in principle in these two transactions. In the Fisher case we held the difference between the cost of the Fisher Body stock and the price received for the General Motors stock for which it was exchanged was taxable gain. Had petitioner sold the stock it received for its Fisher Body stock on the market as the taxpayer did in the Fisher case, undoubtedly the difference between the cost of its Fisher Body stock and the amount received would be taxable gain, as we held in that case. The majority opinion here holds that no taxable gain was realized on the disposition of the General Motors stock to satisfy a binding and enforceable obligation of petitioner.

I do not think it can be successfully argued that the transaction wherein petitioner used the General Motors stock received in exchange for its Fisher Body stock to satisfy its obligation to General Motors Securities Co. did not constitute a final disposition of its Fisher Body stock. When petitioner obtained the 935,280 shares of stock from the General Motors Securities Co. a valid contractual obligation was created to return an equivalent amount of stock within thirty days, Provost v. United States, 269 U. S. 443, and the law imposed upon petitioner a legal liability to comply with the agreement or respond in damages for its failure so to do. Profits realized by a taxpayer in paying or satisfying an outstanding obligation give rise to taxable gain. Twin Ports Bridge Co., 27 B. T. A. 346 ; Hagan Corporation, 21 B. T. A. 41; Carlisle Packing Co., 29 B. T. A. 514; United States v. Kirby Lumber Co., 284 U. S. 1; Helvering v. American Chicle Co., 291 U. S. 426; Commissioner v. Coastwise Transportation Corporation, 71 Fed. (2d) 104, reversing 28 B. T. A. 725; certiorari denied, 293 U. S. 595; Garland Coal & Mining Co., 28 B. T. A. 348; affd., 75 Fed. (2d) 663; Consolidated Gas Co. of the City of Pittsburgh, 24 B. T. A. 901; Woodward Iron Co., 24 B. T. A. 1050; Ohio Central Telephone Co., 28 B. T. A. 96; B. F. Avery & Sons, Inc., 26 B. T. A. 1393; E. F. Simms, 28 B. T. A. 988; Peerless Investment Co. v. Commissioner, 80 Fed. (2d) 427, affirming 30 B. T. A. 491.

Petitioner satisfied its obligation by delivering to the General Motors Securities Co. 935,280 shares of stock it received for its Fisher Body stock. The cost basis of this stock for the purpose of determining gain or loss on sale or other disposition was the cost of the Fisher Body stock. Sec. 204 (a) (6), Revenue Act of 1926. The basis of the decisions of the Board and the courts in the cases referred to above is that the discharge of a solvent taxpayer’s obligation for less than the amount due releases assets offset by the obligation, resulting in a corresponding accession to income. The same is equally true when a taxpayer’s obligation is discharged by the use of an asset having a cost basis less than the amount of the obligation satisfied. In both instances the net worth of the taxpayer is correspondingly increased to the extent of the difference between the amount of the obligation and what it cost to satisfy it.

Had petitioner discharged this obligation by stock other than by the use of the stock it received for its Fisher Body stock it would have cost it the market price of the stock the day the obligation was satisfied, or $137,603,070 for the 935,280 shares required. This I think is the amount realized by petitioner on disposition of the General Motors stock — a realization of the increase in value of its Fisher Body stock.

The General Motors Securities Co. was not a party to the reorganization or merger and the acquisition by petitioner of the 935,280 shares from it and the discharge of the obligation so incurred were wholly foreign to any part of the reorganization. It was petitioner’s method of financing its deal with the Fisher Body Corporation in which it acquired all of the Fisher Body assets.

The fact that the stock certificate which was obtained from General Motors Securities Co. was endorsed in blank when it was delivered to petitioner and used in the several transactions does not render the transaction between the General Motors Securities Co. and petitioner any the less a valid and enforceable obligation, nor doe's the fact that it was called a loan serve to absolve petitioner from tax on any profit or gain on the delivery to the General Motors Securities Co. of the number of shares required to discharge its obligation. Neither is it material that the obligation to restore the General Motors Securities Co. to the same economic position it was in with reference to the ownership of the stock at the time it was obtained, Avas not a direct money obligation. It was a definitely ascertainable amount, cf. A. F. Osterloh, 13 B. T. A. 713. This satisfies the revenue laAV for the purpose of determining the realization of gain or loss. The obligation was a liability against petitioner’s assets which could be discharged only by assets of equivalent Avalué and that value Avas the market value of 935,280 shares of General Motors stock on the day the obligation Avas discharged. The stock used in discharging tlie obligation was that acquired in exchange for Fisher Body stock, and can no longer be considered the identical stock obtained from the General Motors Securities Co.

The parties stipulated that the full legal title to the 935,280 shares of General Motors stock passed from the General Motors Securities Co. to petitioner and that the certificate was endorsed in blank to enable petitioner unconditionally to transfer full legal title to the Fisher Body Corporation. The General Motors Securities Co. was completely divested of title to the stock when the stock certificate was delivered to petitioner and petitioner was completely divested of title to the stock when it exchanged the stock for Fisher Body assets.

Title passed to the Fisher Body Corporation in the exchange of its assets for stock and the stock so acquired merged in the assets of the Fisher Body Corporation, which then consisted of 1,600,000 shares of General Motors Corporation stock. There was very definitely a conversion of the stock obtained from the Securities Co. when it was exchanged for Fisher Body assets.

In substance petitioner purchased the assets of the Fisher Body Corporation for 1,600,000 shares of General Motors stock. It is not disputed that the stock and assets acquired were equivalent in value. It owed the Securities Co. 935,280 shares for the shares obtained from it and used in part payment for Fisher Body assets. It paid the obligation by using the stock it received for its Fisher Body stock. It was not a return of the identical stock, nor was it an exchange of stock for stock. It was a satisfaction of the agreement to return an equal number of shares. Petitioner’s investment in the Fisher Body Corporation discharged the obligation under this contract.

Clearly the shares of General Motors stock which petitioner received in exchange for its Fisher Body stock were assets in its hands, in lieu of its investment in Fisher Body stock and took the same cost basis, and when they were used to satisfy the obligation to the General Motors Securities Co. it constituted a final disposition of petitioner’s Fisher Body stock.

A certificate of stock is but the evidence of individual ownership of corporate assets in the proportion the number of shares named bears to the entire number of shares issued. The use of the one certificate here as stipulated was for convenience only. It did not change the effect of the passing of title to the number of shares it represented in the several transfers, or prevent this stock from merging with the assets of the Fisher Body Corporation — its identity was lost.

Congress intended to tax gains and profits and so provided. It made provisions for the postponement of the tax in certain instances, designated as nontaxable transactions. Such, provisions were not intended to relieve profits and gains from tax, but to postpone the tax until such profits and gains were realized upon final disposition. Here there was a final disposition of the stock petitioner received in exchange for its Fisher Body stock through a nontaxable transaction and, I think, the gain thus realized should be included in income.

I do not think that Helvering v. Winston Brothers Co., 76 Fed. (2d) 381, relied upon in the majority opinion, is in point or is controlling here. There the stock received in exchange was' canceled. The Board specifically said “such cancellation is not a ‘sale or other disposition’ of such stock as is referred to in section 113. The ownership did not pass to others.”

Here there was clearly a sale or other disposition of the stock petitioner received for its Fisher Body stock and the gain realized is taxable under sections 202 and 203 of the Revenue Act of 1926. The gain petitioner derived is not immune from tax under article 543 of Treasury Regulations 69, on the theory that a corporation dealing in its own stock realizes no gain. Notwithstanding some of the early Board decisions and the regulations cited above, the later decisions of both the Board and the courts are to the effect that the real nature of the transaction in each particular case must be considered, and if the transaction is in connection with the assets of the corporation, of a commercial nature, or beyond the pale of capital transactions involving the capital structure, the gain or loss is recognized for tax purposes. Commissioner v. Woods Machine Co., 57 Fed. (2d) 635, reversing 21 B. T. A. 818; certiorari denied, 287 U. S. 613; Commissioner v. Boca Ceiga Development Co., 66 Fed. (2d) 1005, reversing 25 B. T. A. 941; Houghton & Dutton Co., 26 B. T. A. 52; Allyne-Zerk Co., 29 B. T. A. 1194; affd., 83 Fed. (2d) 525; Spear & Co. v. Heiner, 54 Fed. (2d) 134; affd., 61 Fed. (2d) 1030; Dorsey Co. v. Commissioner, 76 Fed. (2d) 339, affirming memorandum opinion of the Board not reported; certiorari denied, 296 U. S. 589.

The acquisition of General Motors stock in exchange for Fisher Body stock and the use of such General Motors stock to discharge petitioner’s obligation to the General Motors Securities Co. had no more effect on the capital structure of petitioner than a sale or disposition of any other asset.

I submit that when petitioner used stock received in a. nontaxable exchange for its Fisher Body stock, which had cost $31,254,825, to discharge an obligation that would otherwise cost $137,603,070 to procure the necessary amount of stock with which to satisfy it, petitioner realized a taxable gain to the extent of the difference.

Tysoüst, Hill, and Miller agree with this dissent.

Disney,

dissenting: The majority opinion seems to me to be based upon inconsistency, for the reason that what is termed a mere incident is utilized to defeat the deferment of taxation, which is inherent in and is the basic idea underlying the principle of nonrecognition of gain or loss in reorganization. The reorganization itself, in its very nature, would only defer taxation. In this instance taxation is definitely and permanently prevented, not merely deferred. Something outside the pale of reorganization must work this effect, since reorganization does not do so. Thus it appears that the so-called incident emerges as the controlling factor here. That it is outside of and no part of the reorganization is demonstrated not only by the fact that reorganization alone can not effect the tax-prevention result obtained by the majority opinion, but by the obvious fact that in order for the transaction between General Motors and the General Motors Securities Co. to be so completely a part of the reorganization as to be under the mantle of its nonrecognition of gain or loss, the General Motors Secu- ( rities Co. must be a party to the reorganization — which beyond argu- J ment it is not, and I do not understand that anyone contends it to be. ¡ Thus it is discerned that a principle applicable to the reorganization only is extended to include a transaction which is no part of the reorganization and otherwise would demand our examination as to the applicability of the revenue law. I believe that such examination of the nature of the transaction between General Motors and the General Motors Securities Co. demonstrates that it entails such economic betterment as constitutes income. Mr. Arnold has set this forth in terms to which I subscribe. It wfill not do to dismiss this transaction under the appellation of mere incident, or with the categorical statement that shares were borrowed to be used for a few days and returned in kind. These shares were not merely used, but were wholly disposed of and were replaced by an equivalent. Had the stock obtained from the General Motors Securities Co. not been completely owned by General Motors, to be merged in the reorganiza-' tion, it could not be said that it constituted stock or securities in a corporation a party to a reorganization, within the terminology and purview of the statute. Patently this was not merely use of the. stock.

I believe, too, that analogy to a short sale leads to the same conclusion as above expressed, and denies the conclusion reached by the majority. The essential nature of a short sale has been well examined in Provost v. United States, 269 U. S. 443. It is there demonstrated that it consists essentially of two transactions, one between the buyer and seller, which is closed by the delivery of borrowed stock to the buyer, and one, succeeding the first, consisting of the incurrence of contractual obligation between the lender and borrower of stock, and its satisfaction. It is in this transaction that the gain or loss occurs, for the buyer has been satisfied almost contemporaneously with the purchase, by the delivery of the borrowed stock, and with him the transaction is closed. Meyer on Stock Brokers and Stock Exchanges, p. 186. Plainly there is no appreciable profit or loss in that very brief transaction. It is in the “contractual relations”, as Meyer terms it, between borrower and lender that the profit is made or loss is sustained. Referring to the situation immediately after delivery of the borrowed stock to the purchaser, Provost v. United States, supra, says:

The original short sale is thus completed and there remains only the obligation of the borrowing broker, terminable on demand, either by the borrower or the lender, to return the stock borrowed * * *.

Montgomery on Federal Income Tax, p. 240, says:

In the case of a short sale, the stock considered to be sold is the stock used to cover and close out the sale. The period this stock is held is the governing factor. * * *

In Frances Bartow Farr, Executrix, 38 B. T. A. 557, 559, we said:

* * * The transaction which originated in the short sale may be closed by the return of stock purchased just for that purpose. This is called a “covering purchase.” * * * [Italics supplied.]

The above expressions indicate plainly that the transaction taxed in connection with the short sale is the second transaction involved* i. e., the profit, if any, made in the return of the borrowed stock. The stock acquired to satisfy the lender is the stock, according to Montgomery, supra, which is considered sold, aild it is significant that in the above quotation from Frances Bartow Farr, Executrix, reference is made not to the short sale, but to “The transaction which originated in the short sale.” The profit or loss, obviously, depends upon whether the borrowing can be repaid by the expenditure of an amount more or less than the amount of the obligation to the lender. Montgomery’s statement that “The period this stock is held is the governing factor” can mean nothing else.

It is true that in the Farr case, supra, relying upon but not quoting Robert W. Bingham, 27 B. T. A. 186, we said:

The gain or loss from a short sale is ascertained by matching the short sale price against the cost or other basis of the stock used to close the transaction. * * *

In those cases, however, we did not have before us the present question, that of examining the precise nature of the obligation to the lender of stock, and no query was raised, in considering what amount was to be matched “against the cost” of the stock used to close the transaction, as to whether such amount was the price received from the purchaser, or the amount of obligation to the lender. In the light of the Provost case, tlio proper amount is seen to be the latter, and the obligation to the lender appears as the basic factor. Ordinarily, short sale price (i. e., price paid by the buyer of the stock sold “short”) and amount of obligation to the lender of stock are the same, calling for no distinction, since the stock is borrowed practically at the same time the short sale is made (ordinarily within 24 hours), so that no distinction was made in the Farr or Bingham cases. But herein it becomes important to ascertain what it is, in fact, that causes loss or gires rise to profit in the short sale, for if the cost of satisfaction of obligation to lender is the determining factor there, analogy to short sale should assist us here, since plainly there is such obligation to discharge in this case.

The General Motors Corporation entered into transactions essentially analogous to a short sale. On June 4, 1926, the contract between the General Motors Corporation and Fisher Body Corporation was perfected by acceptance, and thereupon the General Motors Corporation wTas just as much obliged to deliver 935,280 shares of its ( stock to the Fisher Body Corporation as is the short seller to deliver^ stock certificates to his purchaser. The General Motors Corporation did not own the necessary stock. It did not acquire such stock until June 23, when the necessary stock was acquired by “borrowing” from the General Motors Securities Co. This stock wTas effectually and wholly disposed of to the Fisher Body Corporation, in compliance with the contract between that company and the General Motors Corporation. The General Motors Corporation was obliged to return equivalent stock to the General Motors Securities Co. Meeker on Short Selling defines a short sale as a sale which creates a debt “in terms of goods.” This seems exactly to describe the position of the General Motors Corporation with reference to the General Motors Securities Co. Equivalent stock was, in fact, later secured by the General Motors Corporation and the obligation discharged by the delivery thereof. At the date of such delivery, the value of the stock delivered was $137,603,070. This stock had been secured through a transaction with the Fisher Body Corporation, of such a nature that it took the base of the stock of the Fisher Body Corporation, which had been exchanged for it, to wit, a base of $31,254,825, which was therefore the cost of fulfillment of the obligation to return equivalent stock to the General Motors Securities Co. If the above analogy to a short sale is valid and ascertainment of profit and loss is logically based upon the fulfillment of obligation to the lender of stock, then we have, in the discharge of the obligation to the General Motors Securities Co., accrual of income and a taxable transaction.

A. F. Osterloh, 13 B. T. A. 713, was affirmed by the Ninth Circuit, in 37 Fed. (2d) 277. Therein Osterloh borrowed from Seiberling shares of common stock of the Goodyear Tire & Rubber Co., the original shares to be returned, or, if borrower should be unable to do so, he would return cash or property in an amount equal to the fair market value of the stock at the date of receipt thereof. Osterloh used the stock as collateral, the value thereof declined, and as he was unable to pay his loans to certain banks, the stock was sold by the banks. He claimed a loss of the difference between what was realized out of the stock upon sale by the banks and the amount of the fair value of the stock when obtained by him.

The Board and the Circuit Court held, in effect, that he could not claim a loss until he had actually repaid the lender. The Board said that when the bank sold the stock, Osterloh “* * * became legally liable to Seiberling for the payment of a definitely ascertainable amount, because he could not return the stock unless he purchased it * * *.”

There seems no essential difference in this respect between the position of Osterloh and that of the General Motors Corporation, for Osterloh was to return the borrowed stock, but, if unable to do so, would return in lieu thereof cash or property eqxial to fair market value of the stock. As the Circuit Court pointed out, “The obligation to return the original stock was absolute and unconditional, if in the power of the petitioner so to do.” This was the same as the obligation of the General Motors Corporation. Osterloh could have done just as General Motors did — pay his obligation in property. Both the General Motors Corporation and Osterloh disposed of the stock borrowed, Osterloh by permitting it to be sold as collateral and the General Motors Corporation by assignment to the Fisher Body Corporation. Neither was able to return the stock. Either could return an equivalent (if obtainable) — at an expense of the price or outlay necessary to obtain it. Just as Osterloh “could not return the stock unless he purchased it” so the General Motors Corporation could not return the stock unless it purchased it — or, of course, otherwise acquired it. • It did acquire the necessary stock, not by purchase, which would have taken $137,603,070 from its treasury, but by an exchange, and that which was received in exchange, and used for the satisfaction of this “debt in terms of goods”, which was “of a definitely ascertainable amount” (the fair market value of the stock), was used to discharge the obligation. Its base was $31,254,825. I am unable to see why this transaction is not equally as taxable, upon the difference between the $31,254,825 base and $137,603,070 amount of obligation discharged, as was the loss of Osterloh deductible in the proper year. (The rationale of that decision necessarily is that the loss was in replacement of the stock or its value.) It is true that the amount of obligation in the Osterloh case was set as the value of the stock at the time of receipt thereof, whereas in the instant case, the dissenting opinion of Mr. Arnold sets tlie amount of tlie obligation as tlie value of tlie stock upon the date of delivery. This, however, is a mere matter of contract between the parties, subject to any terms they may agree upon. The General Motors Securities Co. allowed the General Motors Corporation thirty days in which to return the equivalent of the stock, and plainly estopped itself from claiming return, or basing claim for damages in case of nonreturn, upon values at a date earlier than thirty days from delivery of the stock. The General Motors Corporation having a right to discharge its obligation, as it did, on July 1, the obligation is “definitely ascertainable” as the value of the delivered stock on that date merely because of the contract between lender and borrower. But regardless as to whether the amount of obligation is to be fixed at the date of borrowing of stock, or the day of return of equivalent, there is clear obligation. The difference is one only in amount, a detail not important to the general question here.

The General Motors Corporation, by the use of stock which had a base of $31,254,825, avoided an expenditure of $137,603,070, or avoided decreasing its surplus in that amount, in order to satisfy its obligation to the General Motors Securities Co. This transaction is separated by a clear line of cleavage from the reorganization with the Fisher Body Corporation, and the nonrecognition therein inherent can not logically be stretched to include the transaction with the General Motors Securities Co. That transaction was the conclusive and ultimate disposition of the proceeds of Fisher Body stock. There was, in fact, a saving and a profit to the General Motors Corporation in that transaction. In my opinion, it should be taxed. If transactions merely incidental to, but not a part of, a reorganization, can be brought within the nonrecognition provision, -where are we to stop ? The principle of nonrecognition within and as an integral part of reorganization is intended only to defer taxation because taxation would unfairly burden what is in fact a continuity of business. Without that principle, tax would be payable on the exchange between the Fisher Body Corporation and the General Motors Corporation. But I find it wholly impossible to believe that it should be used to prevent the incidence of tax in a matter neither in terms nor in logic within the reorganization.

Can it be doubted that there was economic betterment when stock costing $31,254,285 was substituted for stock of a definitely and easily ascertainable value of $137,603,070? There was obligation. It is immaterial -whether it was in money or property. Its discharge was effected in a manner which saved the obligor some $107,000,000, in money or in stock of that value. Had it cost the obligor more than $137,603,070 to replace tbe stock there would have been a deductible loss. The “short” seller deducts a loss taken on a rising market. Economic betterment giving rise to income can not in logic depend upon whether the transaction involves money, provided there is a “gain * * * derived from * * * dealings in property * * to use the statutory expression, and provided there is realization and not mere unrealized appreciation. Such gain can inhere in discharge of loan or bailment. Herein there was clear realization. I do not believe that the petitioner should be allowed through its arrangement •with the General Motors Securities Co. to contract away the right of the sovereign to collect tax upon income, otherwise ultimately collectible. Such is the effect of that “borrowing” as viewed in the majority opinion.

The majority opinion observes that it is not necessary or proper to conclude how this reorganization may affect the taxes of the participants for future years. So far as the reorganization is concerned, its nature, intent, and effect are settled beyond cavil — it passes taxation to the future, and I can detect no impropriety in so noting or, rather, merely stating the law. Moreover, it is surely both necessary and proper to observe this inherent quality of reorganization, when the gain or loss in an “incidental” transaction indubitably outside the perimeter of the reorganization is identified as the same as that within it, and to reorganization is ascribed an effect which is the antithesis of its essential nature and object. The very ratio decidendi of the majority opinion requires the inquiry as to whether taxation is prevented, or whether it is only deferred. If it is prevented, reorganization has been exceeded. The transaction between the General Motors Corporation and the General Motors Securities Co. can not be infused into the reorganization without rendering relevant the inquiry as to whether a result is given which is contrary to the nature and effect of reorganization.

Finally, I1 suggest, on the principle of Gregory v. Helvering, 293 U. S. 465, that in order to get the benefit of nonrecognition of gain the General Motors Corporation must be shown in its transaction with the General Motors Securities Co. to be clearly within the intent of the reorganization statute. Gould v. Gould, 245 U. S. 151, holds:

In the interpretation of statutes levying taxes it is the established rule not to extend their provisions, by implication, beyond the clear import of the language used, or to enlarge their operations so as to embrace matters not specifically pointed out. * * *

It is true that the above citation goes on to state that in case of doubt, statutes are construed most strongly against the Government and in favor of the citizen, and it is also true that the ordinary application of the above principle involves construction in favor of the taxpayer. Nevertheless, the logic of the above language is equally applicable in a situation sucli as the one here at hand, where the taxpayer is, in effect, seeking to broaden the effect of a statute, that is, the reorganization statute. Woolford Realty Co. v. Rose, 286 U. S. 319, lays down the rule:

Taxpayer, claiming deduction for losses suffered in earlier year, must point to specific provision of statute permitting deduction, and bring liimself within its terms.

Exemption clauses are to be strictly construed. .We do not here have precisely the question of a deduction or exemption, but the basic idea in this case is the same as in those cited immediately above — the taxpayer seeking to except himself from the general terms of the taxing statute, or to bring himself within the purview of such a provision as nonrecognition of gain or loss entailed in reorganization, must show himself to be within that classification. It can not be said that the loan transaction between the General Motors Corporation and the General Motors Securities Co. is, under the statute and its obvious intent, any part or parcel of the reorganization with the Fisher Body Corporation. I dissent.

       (2) No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reoi’ganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.

       (3) No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.

       (h) As used in this section and sections 201 and 204—
      (1) The term “reorganization” moans (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation) * * *.

       (c) Amounts distributed in complete liquidation of a corporation shall be treated as-in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 202, but shall be recognized only to the extent provided in section 203. In the case of amounts distributed in partial liquidation (other than a distribution within the pi'Ovisinns of subdivision (g) of section 203 of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits within the meaning, of subdivision (b) of this section for the purpose of determining the taxability of subsequent distributions by the corporation.