author: Disney : Leech,

text:
    Dorothy Whitney Elmhirst, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 85040, 85880, 95298.
    Promulgated February 14, 1940.

      John H. Alexander, Esq., for the petitioner.

      Thomas H. Lewis, Jr., Esq., for the respondent.
   OPINION.

Disney :

These proceedings, duly consolidated, involve income taxes for the years 1932,1933, and 1934, in the amounts of $69,979.46, $407,-156.83, and $442,281.20, respectively. A large portion of the facts was stipulated. The facts so stipulated are adopted by reference as our findings of fact, and, in addition thereto, we will set forth hereinafter certain other findings of fact.

The petitioner, a resident of Devonshire, England, kept her accounts and prepared her income tax returns, during all the years material to this proceeding, upon a calendar year basis and upon the basis of cash receipts and disbursements. About November 23, 1924, Straight Securities Corporation, hereinafter referred to as the corporation, was organized under the laws of Delaware, and has at all times material kept its books and made its income tax returns on a calendar year basis and on the basis of an accrual method of accounting. The original authorized capital stock was 1,000 shares of no par value, •which were acquired by the petitioner about November 30, 1924, in exchange for securities of a fair market value of $19,830,365.52. Petitioner remained sole owner of all of the capital stock of the corporation until March 20, 1931. On that date the authorized stock was increased by 50,000 shares of 6 percent cumulative preferred stock of the par value of $100. The outstanding 1,000 shares of capital stock became common stock of no par value, and until December 31, 1934, petitioner remained owner thereof. On April 1, 1931, the corporation issued to petitioner 15,000 shares of the authorized preferred stock, as a dividend upon the common stock, and on that date petitioner transferred, as gifts, such preferred stock in equal amounts of 5,000 shares each to trustees in trust for her three minor children, one of whom arrived at majority November 6,1933, the others remaining minors during the taxable years. In addition to the preferred stock given to the trustees on April 1, 1931, the trustees purchased additional preferred stock in the corporation, purchasing up to April 19,1933,143 shares which were repurchased by the corporation about December 26, 1933. The trustees also purchased an additional 1,382 shares up to October 1, 1934, which were all held by the trustees until after the close of the year 1934. On September 13, 1933, the corporation issued to petitioner a dividend on common stock of 7,500 shares of preferred stock, of a fair market value of $750,000, which on September 14, 1933, petitioner transferred to the trustees of the trusts above referred to. On June 29,1934, the authorized stock of the corporation was increased by 40,000 shares of 5 percent cumulative preferred stock, of a fair market value of $4,000,000, and same was distributed to petitioner as a dividend on common stock; and on August 2, 1934, petitioner transferred the 40,000 shares of 5 percent preferred stock to Dartington Hall Trust, which was a trust created by petitioner and her husband on July 26, 1932, and complied with the requirements of a charitable trust under section 23 (o) of the Revenue Act of 1934. At the date of the creation of the trust and at the date of the transfer to it of the 40,000 shares of preferred stock, the trust was revocable by petitioner and her husband with the consent of the trustees, but on August 31, 1934, the power to revoke was surrendered by deed by the grantors, who reserved the right to amend the trust, provided no amendment should cause the trust premises or income thereof to be used- otherwise than for religious, charitable, scientific, literary, or educational purposes.

The following table sets forth by years (a) the book net income as adjusted by the Commissioner, on the basis of cost to corporation of securities, (b) net income on basis of transferor to corporation, (c) net income as defined by section 104 (c) of the Revenue Acts of 1928 and 1932 (section 220 (d), Act of 1926), and (d) amount included in gross income by petitioner under section 104 (d) of the Revenue Act of 1928 (section 220 (e), Act of 1926):

In the year 1927 petitioner did not include in her income the sum of $1,021,961.66, earnings and profits of thes corporation; as to 1928, she included in income slightly less than net income as defined by section 104 (c) of the Revenue Act of 1928; as to 1929 and 1930, she included more than the net income of the corporation as sol defined; and, as to 1931, the parties do not disagree that the corporation distributed more than its earnings and profits. She did not include any corporate income as to 1932 and 1933, and the parties stipulate that during 1932 and 1933 the corporation was not within the provisions of section 104 of the Revenue Act of 1932 and that the corporation was in 1934 a personal holding company within the meaning and intent of section 351, Revenue Act of 1934. It was dissolved in 1936.

The corporation had on its books on December 31 of each of the years 1931, 1932, 1933, and 1934, surplus in the following respective amounts: $5,526,918.62; $4,903,141.19; $3,344,653.38; and$7,740,572.55.

In addition to the facts stipulated, we find, and set forth here as a matter of logical order, the following facts:

The income tax return filed by the corporation for the year 1932 shows a loss in February 1932 from sale of stocks and bonds, in the amount of $436,429.78,, and no loss or gain upon sales of stocks or bonds in January 1932. The corporation’s income tax report for 1933 shows a loss from sale of stocks and bonds in the amount of $381,066.75 in November 1933. The business of the corporation as stated in the returns was investing in stocks and bonds, and no loss is set up from any other source. The corporate hooks were closed once a year on December 31, and estimates of accruals made. As a more or less general practice, accruals were determined only at the end of the year. Monthly trial balances were prepared.

A closing statement of the corporation showing its financial condition as of any date, except December 31, and the results of its operations for any period could not be determined from the books alone. The preparation of a closing statement showing financial condition, other than as of December 31, would require outside information, such as financial publications, market value of securities, solvency of debtors, etc. Such closing of the books would be a considerable task. To do so for the 24 months from January 1, 1932, to December 31, 1933, would require many weeks. The books of the corporation were cash book, journal, general ledger, and a subsidiary ledger, containing the details of the corporation’s security investments. They show losses on capital assets at the dates when sold throughout the year. Monthly trial balances, appearing among the corporation’s records, for 1932 and 1933 reflect some accruals, but'not all, except for December when the remainder appear on income tax returns.

During 1932 the investments of the corporation as, reflected, in its income tax return were approximately $25,000,000, all of which were stocks, bonds, and governmental securities, except approximately $1,500,000, and the corporation had an income from dividends of $1,221,017 out of a total gross income of $1,340,059.81, with $88,269 as dividends receivable on December 31. During 1933 the corporation’s investments according to the income tax report ran from approximately $24,500,000 at the beginning of the year to approximately $26,500,000 at the end of the year, all of such investments being in stocks, bonds, and governmental securities, except approximately $1,500,000, and income reported from dividends was $1,009,478.70 out of a total gross income of $1,609,455.77 with $81,786.40 dividends receivable December 31. By far the greater portion of the investments were in common stocks. The liabilities of the corporation, other than capital stock reported in the income tax returns, were as follows: 1932, beginning of year, $749,108.85; end of year, $202,-973.62; and at the end of 1933, $2,320,194.77, inchiding $2,250,000 notes payable. In 1932 and 1933 the larger losses in general occurred in the latter part of each year. The income tax returns show salaries paid of $25,000 per year and show that current liabilities were comparatively small and more than equaled by cash and receivables, except $2,250,000 notes payable appearing at the end of 1933.

The! deficiencies were determined in the main because of distributions on common stock from the corporation to petitioner and on preferred stock to trusts set up by her, which distributed in part to beneficiaries, all in the following amounts:

As to the items $155,000, $850,000, $850,000, and $43,793.80, the issue is whether, as respondent contends, they were taxable because distributed, in the main, from corporate earnings and profits of the years 1932, 1933, and 1934 and in a lesser degree from earnings and profits of the year 1927, as to which year admittedly petitioner failed to report as income the sum of $1,021,961.66 income of the corporation ; or whether, as petitioner contends, the distributions were exempt under section 104 (d) of the Revenue Act of 1932 from tax because they Avere from the corporate earnings and profits of 1929 and 1930 which she had included in her income, and because at the end of each of the years 1932, 1933, and 1934 the corporation, which was on an accrual basis and closed its books only at tbe end of each year, had a net loss for the year.

The items of $41,303, $54,790, and $63,322.96 were not distributed to petitioner but were included in larger amounts distributed to trusts set up by her, owning preferred stock, which trusts in turn distributed the items in the above amounts to beneficiaries. As to these amounts respondent contends that the statute does not apply, in terms, because distribution was not made to petitioner herself; but that even if within the literal terms of the statute the distributions were not exempt, first, because they were in part from earnings and profits of the year of distribution and in part from income of 1927, a previous year not reported by taxpayer, and, second, because under Douglas v. Willcuts, 296 U. S. 1, the distributions were for the discharge of petitioner’s legal duty to support her children and were therefore taxable to her. Petitioner, though earlier relying only upon the idea that the distributions to her were from earnings earlier reported by her and admitting the effect of Douglas v. Willcuts, supra, now relies upon Jay C. Hormel, 39 B. T. A. 244, and contends for exemption from tax also upon the theory that there was no mandate in the trust to devote the funds to discharge of legal duty to support (though not denying actual use for that purpose). Certain minor issues have been disposed of by stipulation and need not be discussed.

Petitioner meets respondent’s contention that the distributions were from current earnings and profits of the years when distributed by pointing out that respondent computed such earnings and profits (so far as from securities transferred to the corporation by petitioner for stock) on an erroneous basis, i. e., on basis in hands of transferor, instead of cost to corporation. She contends that there was, therefore, at the end of each year of distribution, instead of the profit computed by respondent, a net loss; that such net loss must be prorated over the year because'the corporate books were closed only at the end of the year and it is impossible to ascertain from the books the condition as to profit or loss at any date earlier than the end of the year — with the result that there was loss, and no earnings or profits available for distribution, at all of the dates when distributions were made. To this respondent replies that his determination that the distributions were (in part) from current earnings and profits is correct, first, because his computation of profit and loss on a basis of cost to transferor is correct, and, second, because accepting as correct the earnings and profits as shown by the corporate books, there were in fact at the various dates when distributions were made current earnings and profits actually available for the distributions then made; that the burden of showing otherwise is upon the petitioner; and that a net loss when the books were closed at the end of the year does not so demonstrate. So contending as to only part of the distributions, be argues that the remainder, a minor portion, was from earnings and profits of 1927, as the most recently accumulated earnings and profits under section 115 (b), Bevenue Act of 1932. He relies upon the presumption of correctness of his determination as to 1934, but as to 1932 and 1933 relies also upon certain evidence adduced by him, which he contends demonstrates that losses were not ratably incurred as petitioner argues; and on other evidence establishing affirmatively, he argues, that there were current earnings and profits available to cover, in large part, the various distributions when made.

I. We first examine the question of proper basis for computation of profit or loss: Bespondent concedes that the Board has decided this question adversely to him in W. S. Farish & Co., 38 B. T. A. 150, and Ida I. McKinney, 32 B. T. A. 450; affd., 87 Fed. (2d) 811, to the effect that for the purpose of ascertaining the amount of earnings and profits available for distribution as dividends, cost to the corporation should be used rather than the statutory basis for determining gain or loss for purpose of computing tax. Since W. S. Farish & Co. has been affirmed, 104 Fed. (2d) 833, by the Circuit Court of Appeals for the Fifth Circuit, and since the same conclusion, in effect, in F. J. Young Corporation, 35 B. T. A. 860, has been affirmed by the Circuit Court of Appeals for the Third Circuit, 103 Fed. (2d) 137, further discussion of this point is unnecessary, and we hold, in accordance with said cases, that the proper basis is the basis of cost to the corporation. The same decisions require a holding against the respondent upon two minor items entering into the computation of profit or loss of the corporation, to wit, whether $287,586.36 is an allowable deduction for losses for 1932 from sale of securities held less than two years, losses on wash sales, and taxes: and whether $144,979.18 is an allowable deduction for the year 1933 because of adjustment to cost of securities sold, and losses on wash sales. The same logic dispositive of the above cases indicates that such deductions, though not to be taken into consideration in arriving at taxable net income, should be deducted in computing earnings or profits of the corporation in the determination of avails for distribution. Since the parties have stipulated that as computed by petitioner and in the manner approved by us above, the book net income of the corporation, as adjusted, represents the earnings and profits of the corporation, we hold that the corporate books of Straight Securities Corporation properly show a loss as of December 31 of each of the years in question, 1932,1933, and 1934, in the amounts contended for by the petitioner, sustained as a net result of the operations of the whole of each of said years.

(jí) We next consider the petitioner’s contention that the corporate books, closed only at the end of each of the years of distribution, then showed a net loss for the year, and that, since it was impossible from such books alone to prepare a closing statement fairly reflecting the financial position of the company at any earlier date, it must be presumed that there were, on petitioner’s theory of prorating such year’s loss to any date of distribution, no current earnings or profits available for distribution at the dates when distributions were actually made. Kespondent contends that his determination that there were such earnings and profits available should be sustained as to all years on the burden of proof, the petitioner having failed to show the actual condition or earnings and profits on the dates of distribution, and that he, the respondent, has, as to 1932 and 1933, affirmatively shown that the net loss was in fact not ratably incurred throughout the year and that there were, on petitioner’s own basis of computation, actual earnings and profits available on the dates of distribution.

We are required first, therefore, to examine the situation as to burden of proof. The petitioner does not' question respondent’s position on that ground as to 1932 and 1933. The deficiency notices for those years do not indicate upon what basis of computation of profit or loss the Commissioner determined the deficiencies. The notice for 1933 states that the petitioner’s contention “is denied in view of the fact that Straight Securities Corporation had sufficient current earnings from which to pay the dividend in question,” while that for 1932 is based in general terms upon dividends received, tax liability paid by the corporation, and reliance upon Douglas v. Willcuts, supra.

As to 1934, the deficiency notice covers both the $850,000 item and the $63,322.96 item under the general heading of dividends added to income as upon common and preferred stock “since the profits of the corporation reported and tax paid by the stockholders in prior years * * * were based upon the values applicable to certain assets on the date turned over to the corporation solely in exchange for its capital stock instead of the basis in the hands of the trans-feror.” Petitioner points out in her reply brief that the deficiency letter as to 1934 raised only the question as to use of a base of cost to corporation, as against basis to transferor, in computation of gain or loss on sales of assets acquired on corporate organization, but in fact makes no issue of the burden of proof. To the respondent’s statement, “She does not meet this burden by showing merely that the net result of the operations for the year considered as a unit was a loss,” she responds: “The accuracy of the last quoted sentence is open to considerable doubt but its accuracy is only of academic interest in these proceedings. The petitioner did much more than show that the net result of the operations * * * was a loss.”

However, whether or not the burden is contested, review of the deficiency notice, the pleadings, and the position taken by petitioner at trial demonstrates, we think, that the burden is properly left with petitioner, as to 1984 as well as to 1932 and 1933. The petition specifically alleged error in the determination that the amounts involved were taxable dividends and constituted taxable income, alleged that the corporation had no earnings, gains, or profits available for distribution during 1932, 1933, and 1934, and that the distributions were made by the corporation from its earnings, gains, and profits, which petitioner had included in her gross income in her returns for prior years. This allegation the respondent specifically denied. At the preliminary hearing, principal hearing, and in her opening brief, petitioner defines the issue as involving the question of distribution from earnings or profits of the years of distribution. “The phrasing of the notice of deficiency * * * is not the cause of action and does not frame the issues.” Edgar M. Carnrick, 21 B. T. A. 12. See also Charles J. O'Laughlin, 30 B. T. A. 1327; affd., 81 Fed. (2d) 269; Gowran v. Commissioner, 87 Fed. (2d) 125. We leave the burden of proof with the petitioner.

Does the proof before us show that such burden has been met? Petitioner on brief states: “The petitioner does not dispute that ordinarily the earnings and profits of a corporation available for distribution are to be ascertained to the dates of payment.” She attempts to show compliance with that idea by prorating net loss appearing on the books at the end of the year. In other words, a presumption is offered instead of an affirmative showing of fact, because of claimed impossibility of proof from the corporate books alone.

We do not think the facts before us justify the application of the presumption petitioner invokes. The evidence does not show that the “most recently accumulated earnings or profits” (sec. 115 (b), Bevenue Act of 1932) at such dates could not have been shown, in fact, or even that such could not have been shown by the corporate books alone, but only that the corporate books alone do not show ■financial condition as sufficient for a closing statement including valuation of securities, etc., and that to gather the necessary additional outside inf ormation to so close the books would be “considerable of a task”, and to do so for the 24 months throughout the years 1932 and 1933 would “take many weeks” and would “be quite a considerable task.” It thus appears that petitioner has not in fact shown failure of the books to show condition as to earnings or profits, but only that the books without outside information do not show complete financial condition. One of the principal reasons advanced by petitioner as to why the monthly trial balances prepared by the corporation and relied upon by respondent did not reflect accumulated earnings and profits was because of alleged accrual of dividends only at the close of each year in December. But dividends were in fact reflected throughout the year, and appear as accruals only in small amount at the end of the year. Petitioner’s witness testified that the corporation’s monthly trial balances did not reflect less income from dividends than would have been reflected on the accrual basis, because there would be allocation of dividends between months, “the effect of which we could not tell without going to the trouble of looking up all dividend records.” Yet the corporation’s subsidiary ledger contained the “details of its security investments.” Obviously, that ledger contained the “dividend records”, and checking them would not have entailed great trouble. At. least, petitioner has not shown otherwise. Since dividends comprised more than 90 percent of the corporation’s total income in 1932, and more than 65 percent in 1933 and during the same years all of approximately $25,000,000 investments was securities except about $1,500,000, it is apparent that dividends upon investments were by far the most important item in the corporation’s finances, and “going to the trouble of looking up all dividend records” and the examination of the “details of investment securities” in the property ledger would to a considerable extent at least have clarified the question. It was not necessary to show the exact financial situation at distribution dates, but only whether profit was more, or less, than the amount distributed.

In Edwards v. Douglas, 269 U. S. 204, Mr. Justice Brandéis said:

* * * Nearly every business witb a well-developed accounting system can, at any time, without the formal periodic inventory or closing of its books usual at tbe end of a fiscal year, determine approximately the amount of its current earnings, the amount accrued since the beginning of its fiscal year, and the part thereof undistributed. Many corporations do make such approximate ascertainment of profits monthly, or oftener; and, relying upon their system of cost accounting, they make distributions of current earnings without a closing of the books as the Phelps Dodge Corporation did in 1917.
This is shown by the record to be true of the Phelps Dodge Corporation. It paid during 1917 regular and extra dividends on June 28, on September 28, and on December 28, aggregating $8,100,000, which were declared, in its report to stockholders, to have been paid by it “out of earnings for the year 1917.”

We think the Court’s language is peculiarly applicable here, for in Arthur Curtiss James, 13 B. T. A. 764, it appears that the Phelps Dodge Corporation kept its books apparently in the same maimer as did Straight Securities Corporation — upon an accrual basis. “Neither the Phelps Dodge Corporation [nor certain others] kept their books in such maimer as to show earnings or profits for the accounting periods within which distributions were made by them, but all of them * * * kept their books in such manner that their earnings were determinable or determined only upon an annual basis and at the end of each year.” That such a situation was in the mind of the Court in Edwards v. Douglas, supra, and that though not upon the precise question here involved, substantially the same argument as herein advanced by petitioner was there advanced is indicated when the Court says:

* * * The argument is that the income tax is levied generally with reference to the period of a full year; that the net financial results of the full calendar and fiscal year of a corporation cannot he known until the expiration of the fiscal year; * * * that it was after December 31, 1917, before the net financial results of the operations of that year were formally and definitely determined by this corporation, by the usual taking of the annual inventory, the balancing of the books, and the carrying of the “undivided profits or surplus” to the appropriate account; * * *

The Court disapproved such contention. The question was one of definition of “most recently accumulated undivided profits”, under the statute then in force; herein, it is as to most recently accumulated earnings or profits under section 115 (b), Revenue Act of 1932. Certainly there is no essential difference. Yet the Court pointedly held that the question was not one of what the corporate books showed, but one of fact, saying: “The word ‘surplus’ is a term commonly employed in corporate finance and accounting to designate an account on corporate books. But this is not true of the words ‘undivided profits.’ * * * It is not known as designating generally in business an account on the corporation’s books, as distinguished from profits actually earned, but not yet distributed.” (Italics supplied.)

The Court concludes that “undivided profits” means current undistributed earnings, or as above seen “profits actually earned”, and points to tire use in the same paragraph of “earnings and profits”— the expression in the statute herein controlling — and refused to view the matter from the close of a fiscal year. Yet that is precisely what petitioner herein urges. We think the Supreme Court made a clear choice between profits in fact and profits, or lack of profits, if and when shown on books alone as basis of distribution, and we can not approve the latter as sufficient proof as to avails for distribution.

But if we assume that the books alone do not contain the necessary information, yet if what is said in Edwards v. Douglas, supra, is the fair statement of corporate practice, which we consider it to be, we think petitioner here could and should have made the showing there required, even outside of the corporate books. This is no situation involving some small stockholder having no control of a corporation, nor of a corporation with complex industrial relations involving inventories, unfinished contracts, or intricate problems of profit and loss. The corporation was very closely held. Petitioner was the owner of all of the common stock and trusts set up by her, and owned most of the preferred stock. Moreover, the corporation was not engaged in business in the broad sense, but in effect was the holder of about $25,000,000 in securities, drawing dividends therefrom. Petitioner seems to entertain the idea that in order to determine earnings and profits subject to distribution, it is necessary to ascertain appreciated or depreciated values of capital assets. Under Edwards v. Douglas, supra, this is not necessary, and only “current undistributed earnings” need be ascertained. The closure of the corporate books on December 31 did not in fact show the values of capital assets, for no inventories were taken, as shown by the income tax reports. It thus appears that earlier statements could have been made up showing substantially the same as the year-end statements did, except only such accruals as then appeared and were not taken up earlier. Some were and some were not reflected earlier. The year-end statement, and basis of loss, is thus seen not to be based upon the information petitioner urges was necessary, outside the boohs, to determine mails for distribution. On that theory it may be that the annual statements would not reflect the net losses shown and relied upon, but might show profit, if assets were inventoried and valued. The current liabilities of the corporation were a small percentage of its assets. Since only about 5 percent of its investments were other than stocks, bonds, or securities, the corporation could with no great difficulty have ascertained almost all of its capital values at any time, largely by consulting the current market quotations. Accruals, of course, are properly examined in ascertaining earnings and profits, and much stress is laid upon accrual of dividends. There is evidence that the accruals “as a more or less general practice” were only in December, from which petitioner to a large extent deduces that monthly trial balances did not represent financial position. Yet the corporation income tax returns for 1932 show $1,221,017 in dividends received and only $88,269 as dividends receivable on December 31; while the report for 1933 likewise shows $1,009,478.70 dividend income and only $81,786.40 as dividends receivable on December 31. The remainder, therefore, would appear as cash receipts throughout the year in question. We may fairly presume that the situation is not greatly different in 1934, since the evidence as to method of accruing in December seems general. Of course, other elements than dividends would enter into ascertainment of financial condition. Yet office expenses were small, salaries of $25,000 per year may fairly be presumed to. be paid monthly, we think, current liabilities were small and more than equaled by cash and receivables, except an item of notes payable $2,250,000 appearing at the end of 1933. This may fairly be said throughout 1932 and 1933, and the manner of conducting business and keeping books was the same throughout 1934. It would appear reasonable therefore that a financial statement, along the lines described in Edwards v. Douglas, supra, could have been produced, sufficient for present purposes, more easily by a corporation of the nature of Straight Securities Corporation than by the ordinary industrial corporation. Petitioner’s position is essentially, not that she could not have shown the financial condition of the corporation at the date of distribution, but that it would have been too much trouble; therefore she relies upon the principle of proration of a year’s loss, later appearing on the books. The nature of the corporation, the petitioner’s position of control thereof, and its financial set-up, all indicate to us that we should not herein entertain a presumption as a substitute for ascertainable facts as to financial condition.

In Bessemer Investment Co. v. Commissioner, 31 Fed. (2d) 248, the Second Circuit Court of Appeals stated:

* * * the rights of the taxpayer should neither he established nor impaired by the bookkeeping methods employed by it. Douglas v. Edwards (C. C. A.) 298 F. 229. * * *

The corporation therefore was allowed to offer evidence contradictory of its books. Here the petitioner is urging that its methods of bookkeeping render further evidence unnecessary.

Petitioner cites Mason v. Routzahn, 275 U. S. 175. That case nowhere states that booh records alone can be relied upon. It merely holds that the entire year’s earnings will be prorated, not because the boohs fail to show the condition at distribution dates, but “in the absence of circumstances showing that there were no earnings actually accimmlated during the fractional period.” (Italics supplied.) The idea that silence in the corporate books is sufficient showing is definitely negatived. In fact the year’s prorated net earnings may not have been ascertained from books alone. The test is definitely facts, not book records nor blanks in them.

We think Edwards v. Douglas, supra, refutes petitioner’s theory that proration, as such, applied to a year’s earnings, can be so utilized by petitioner as, in case of a year’s net loss, to raise presumption of lack of earnings or profits at all times during the year. Since the limited statutory use of proration was repealed by section 201 (f) of the Revenue Act of 1921 it is obvious that proration of the year’s earnings by the Commissioner has been sustained only because he had utilized it, in arriving at the deficiency, as he would any other method of determination, and proof to overcome the correctness of his determination had not been adduced, nor the determination shown to be arbitrary under Helvering v. Taylor, 293 U. S. 507. This does not justify the use of a presumption instead of facts by the petitioner. This is demonstrated in those cases where plaintiff or petitioner has sought to use the principle, such as in Donahue v. United States, 58 Fed. (2d) 463, wherein the collector had relied on proration of earnings and.taxpayer was required to make an affirmative showing that the actual earnings prior to distribution were insufficient to cover it, and was not permitted to prorate receipts and expenditures throughout the year where they were not ascertainable from the books. As to such effort, the court said: “The compilation being in part an approximation of the monthly earnings does not reflect the actual monthly earnings. * .* * The compilation does not show the actual earnings of the Woolworth Company during the year 1917, prior the payments of the dividends, and manifestly the plaintiff cannot make such a showing, as the official of the company who made the compilation stated that the company had no complete records of any hind from which monthly earnings could he accurately calculated.” (Italics supplied.) In Acme Manifolding Co., 24 B. T. A. 429, the Commissioner apportioned earnings, and we upheld the respondent’s determination, and though section 201 (e) of the Revenue Act of 1918 and section 201 (f) of the Revenue Act of 1921, were in effect, we refused to approve petitioner’s attempted proration of yearly sales and profits on a ratio of profits to gross sales.

Harry A. Moody, 9 B. T. A. 681, involved dividends paid January 10 and February 1. Evidence showed that business was at its lowest ebb during the first part of the year, that inventories were taken only at the end of the year, and that the heavy expense was not determinable until that time. The Commissioner apportioned the yearly net earnings. We said:

The petitioner lias not submitted sufficient evidence to convince the Board that the company did not have sufficient current profits for the year 1917 on the dates when the dividends were paid out of which to pay them. The company made no attempt to determine its current earnings on the several dates and nothing has been proved in this proceeding which would indicate what the profits for 1917 on these dates were or that the earnings available were less than the amount determined by the Commissioner. In the absence of proof of a better method of determining the available current profits the Commissioner’s method must be accepted by the Board. * * * [Italics supplied.]

We understand petitioner to rely largely upon Atlas Tack Co., 12 B. T. A. 3, and Continental National Bank & Trust Co., Executor, 20 B. T. A. 829. The first was, however, not a case of prorating losses, and involved reduction of invested capital. We think it not helpful on the present problem. In Continental National Bank & Trust Co., Executor, supra, the petitioner having closed its books on June 30 and December 31, arid showing a net loss for the six months ending June 30, but a net profit for the year, from profit in the remainder of the year, this loss was prorated to absorb the amounts paid in dividends at certain dates prior to June 30. Without discussion or citation of authority, referring to loss on the first half and profit on the last half of the year, it was “assumed, in the absence of evidence to the contrary, that the above loss and profit accrued ratably during the respective periods.” Apparently the only issue presented in the Continental case (except for an alternative theory not here pertinent) was as to whether the theory that a net profit for the entire year greater than the distributions raised a conclusive presumption that all distributions were from current earnings or profits—as held by the Circuit Court, but denied by the Supreme Court, in Mason v. Routzahn, supra. Respondent obviously did not rely as he does herein either upon a presumption from his determination that in fact current earnings and profits were available at the date of each distribution made, or upon any evidence to disprove ratable incurrence of loss. The case has not since been followed by us, save for one obvious miscitation. It is the only case we find of proration of losses to determine avails for distribution, and since the determinative issue herein was not there presented, since it is not consonant with either Mason v. Routzahn, supra, or the other cases by the Board above set forth, in particular Acme Manifolding Co., supra, a later case, as well as Donahue v. United States, supra, which do involve the present question, we think the Oontinental proceeding is not controlling in the instant case. See also Norwich Woolen Mills Corporation, 18 B. T. A. 303; Paso Robles Mercantile Co., 12 B. T. A. 750; Peter W. Rouss, 4 B. T. A. 516.

Another reason appears, we think, why petitioner’s idea of prorating losses appearing at the year’s end does not suffice to prove that there were no avails for distribution at any time during the year. Petitioner’s witness, testifying as to the methods of finance and accounting by Straight Securities Corporation, and necessarily referring to it since otherwise the testimony would have been without point, said that in a corporation of this nature there is a generally recognized practice, toward the close of the year, to review the results of securities sales during the year, ascertain whether there had been gain or loss, and decide which securities to sell, for the reason that it would not be fair to a corporation to pay income taxes on capital gains while suffering losses in other securities realizable only by selling the securities and offsetting the previous gains. Though such loss-taking, even for tax purposes, is held legitimate in proper cases, nevertheless it is plain that upon the present question of earnings and profits at earlier dates throughout the year, a presumption herein that there are not such losses, but that the year’s net loss is to be prorated throughout the year, would be contrary to fact and should not be entertained. The evidence of the practice applies generally to 1934 as well as 1932 and 1933, and the income tax returns for 1932 and 1933 tend to bear out this practice, for in general the greater losses appear in the latter part of each year.

In Norwich Woolen Mills Corporation, supra, respondent prorated the income from the year’s operations and we refused to approve a proration by petitioner including later losses not affecting that fraction of the year which was involved.

We hold that the petitioner herein has not met her burden of proof and has not shown error by the respondent as to the determinations of deficiency, in so far as same depend upon the amounts of current earnings and profits available for distribution.

In addition, as to the years 1932 and 1933, only, respondent by evidence affirmatively demonstrated that the losses were not incurred ratably over the year. The income tax returns of the corporation for 1932 and 1933 were introduced in evidence. That for 1932 shows the corporation claiming a net loss of $436,429.78 by virtue of sale of securities in February. Since petitioner herself on brief only claims a total loss for the year of $1,570,893.32, it is obvious that by her own computation more than one-fourth of the year’s loss was incurred in February. The return also shows that there was no loss in January. The business of the corporation was “investing in stocks and bonds”, and losses were claimed from no other source. In 1933 the situation is in essence the same, the return showing net loss of $380,317.50 from sale of stocks in November, against a claim of only $1,051,110 losses reflected by the books for the entire year — approximately one-third of the year’s loss occurring in a single month. Our question here is whether at dates of certain distributions current earnings or profits were available to cover them. Such proof, in our opinion, contradicts any theory of a presumption of ratable incur-rence of a yearly net loss throughout the year, and the burden being upon petitioner, we think respondent should be, and he is, sustained on this additional ground as to the years 1932 and 1933. However, as to both of such years, respondent made detailed requests for findings of fact, itemized according to the dates of distributions, that certain amounts distributed were earnings of the year 1927, and, therefore, apparently conceded that certain amounts distributed -in those years were not from current earnings or profits of the years 1932 and 1933. Analysis of the requested findings and comparison with the stipulated distributions disclose that respondent, in effect, concedes (as to 1932) that of the $43,793.80 paid by the corporation upon petitioner’s income taxes $8,208.88 was not paid out of current earnings; also that $29,155.54 of distributions upon preferred stock was not paid out of current earnings or profits. But since the total amount of the distributions on preferred stock was $92,761.50 and only $41,303 is involved herein as distributed by the trusts to beneficiaries, and the date of distribution of such amounts thereof is not known, the $29,155.54 may be a part of the $51,458.50 remainder of the $92,761.50 distributed, and we can not say that any admission is made that the $29,155.54 affects the $41,303 .here involved, and respondent is, therefore, considered in the position of conceding that only $8,208.88 of the amounts involved is not from current income. With that exception, therefore, the Commissioner’s contention that distributions were from current earnings in 1932 is sustained. As to 1933, the respondent made similar requests for findings, and is considered therefore as, in effect, conceding that $285,180.97 distributed on common stock to the petitioner and $46,838.07 distributed on preferred stock to the trusts set up by petitioner was not from current income. The amounts considered conceded to be not from current earnings are divided as between common stock and preferred stock, except as to distribution of January 3, 1933, and as to it we have divided between common stock and preferred stock the amount considered conceded not current earnings in the ratio the amounts distributed bore to each other. However, the $46,838.07 conceded as not from current income (out of $95,544 distributed on preferred stock), may in part not be out of the $54,790 here involved as received by the beneficiaries of the trusts holding the preferred stock, but may in part be from the remaining portion of the $95,544 distributed to the trust, and not here involved, i. e., $40,754, and is only to the extent of $6,084.07 (the difference between $40,754 and $46,838.07) identifiable as concededly not from current earnings. We, therefore, hold that of the $54,790 here involved as from preferred stock, only $6,084.07 is conceded to be not from current earnings, and hold that amount and the item of $285,180.97 to be not from current income of the taxable years. As to the remainder of the $46,838.07, i. e., $40,754, we approve respondent’s contention that distributions were from current earnings.

III As above seen, the respondent relies only in part upon the burden of proof and upon the showing that loss was not ratably incurred to sustain his determination, as to the years 1932 and 1933. As to the remainder of the amounts involved for those years, he asks finding that in certain amounts the distributions were from earnings and profits of 1927, contending that this was the first year in which “most recently accumulated earnings or profits” can be found available for dividends, that in that year such funds are found in a fund of $1,021,961.66, which petitioner did not report, and that, therefore, distribution therefrom is not tax free. Obviously, if 1927 is the nearest previous year disclosing “most recently accumulated earnings or profits”, and petitioner did not report for such year the entire net income, under section 220 (e), Revenue Act of 1926, distribution to her in 1932 and 1933 of such earnings and profits is not tax-exempt, since she relies upon section 220 (e), later section 104 (d), which grant exemption of earnings and profits from the year of report. That the fund of $1,021,961.66 was not reported by her in 192T is not denied. She reported slightly less than the net income as defined by section 104 (c) in 1928, and the parties do not disagree that there were no earnings or profits of 1931 available for the distributions made in 1932,1933, and 1934. The petitioner’s contention is that the distributions were from the years 1929 and 1930 when she did report the entire corporate net income as defined by section 104 (c); to which respondent counters that under the language of section 104 (d) the amount available in 1929 and 1930 for dividends is to be considered diminished by the amount included by petitioner in her income tax return as sole stockholder, since the statute provides that: “Any amount so included in the gross income of a shareholder shall be treated as a dividend received.” He argues that the deduction of such reported amount from the earnings and profits of 1929 and 1930 reduces the amount available for dividends and leaves less available than the amount of distributions received by petitioner in 1932, 1933, and 1934, and that she must therefore find amounts available for dividends in the year 1927. We think this view overlooks the clear intent and language of the statute. The intention is stated, page 22 of the Finance Committee Eeport on section 220 (e) of the Eevenue Act of 1926:

The Committee recommends the addition of a provision that the tax shall not apply in any year if all the stockholders include in their gross income, and pay surtax upon, their entire distributive share, whether distributed or not, of the earnings of the corporation for such year. If the surtax is thus paid the failure to distribute the earnings has not resulted in any avoidance of tax and the reason for the imposition of the 50 per cent tax on the corporation no longer exists.

Since the petitioner reported and paid tax in accordance with the above, we think the intendment of the statute has been satisfied, and that Congress did not intend to go further and make special provision as to effect of report and payment of tax upon amounts available for future distributions. The statute does in effect state that the amount included in gross income shall be treated as a dividend received. It does not say dividend paid, and we think it means only that it is to be considered received so far as the taxpayer, her report and payment of income tax, is concerned, and that the language does not justify respondent’s view that amounts reported constitute distributions made, for the purpose of diminishing amounts available for future distribution. Such a view nullifies the intent of the statute, preventing the taxpayer at any time subsequently receiving the same amounts tax free — except only in the conceivable case where the “earnings and profits” of the year of report {all of which, and not mere net income, is subject to claim of exemption to the extent of the amount reported, when distributed subsequently) include above the net income as specifically defined by section 104 (c), an amount equal thereto. We think it plain that the statute was intended to procure a tax effect, the same as in case of distribution to shareholders, and was not designed to deprive the taxpayer of later tax-exempt distribution, except dependent upon such mathematical considerations, as amount of earnings and profits above net income as defined by section 104 (c). We hold that the amount reported does not, for purposes of subsequent claim of exempt distribution thereof, effect a reduction of earnings and profits available for distribution. This is not to say that the amount accumulated and reported by the taxpayer is, as petitioner argues, to be held intact for her and may not be exhausted, as by subsequent losses, prior to the time of claim of exempt distribution. If so dissipated (because by the corporation left subject to later exigencies) it would obviously not be available for later distribution, exempt or otherwise. We merely hold that the amount treated as distributed in the year of report does not merely, because of such report, cease to be available for future claim of distribution exempt from tax.

Respondent also suggests that section 104 of the 1932 Act and section 102 of the 1934 Act are not retroactive, that the provisions of the 1928 and 1926 Acts were repealed, and that, therefore, petitioner had no source of exemption for the distributions in 1932, 1933, and 1934. We can not agree. We find no repeal. Respondent cites no pertinent authority and we find none. We think the provisions involved were effective in the years here considered.

We, therefore, conclude that the years 1929 and 1930, as to which petitioner reported section 104 (c) net income, were the years of most recently accumulated earnings and profits, which were conceded not to be from the taxable years, that such earnings or profits are not to be considered diminished by the amounts reported as income by petitioner, and that as to distributions in 1932 and 1933, to the extent to which the avails for distribution are conceded by respondent not to be from earnings and profits of those years, they were from 1929 and 1930 and respondent erred in contending that they were from 1927. The amounts are, as above seen, $8,208.88 in 1932 and $285,180.97, in 1933, distributed on common stock to petitioner; also $6,084.07 distributed in 1933 on preferred stock to beneficiaries of trusts. To that extent we, therefore, hold to be tax-exempt the amounts distributed to petitioner herself in those years, i. e., $8,208.88 and $285,180.97. This does not apply to the year 1934, all of the income of which is held not to be shown accumulated from other than that year.

IV. The next question requiring our consideration is as to taxability of the $6,084.07 above referred to which was distributed in 1933 by Straight Securities Corporation upon preferred stock owned by trusts created by petitioner and paid to the beneficiaries thereof, which funds are not denied to have been used for the maintenance, education, and support of petitioner’s children. Petitioner concedes that such payments satisfied legal obligations of the petitioner, and relies upon the thought expressed in Jay C. Hormel, supra, to the effect that in the absence of a requirement in the trust instrument that the income should be used for the support, maintenance, or education of a child, the trustor is not taxable thereon under the general doctrine of Douglas v. Willcuts, supra. She says there is no such mandate in the trust instrument here involved. We can not so agree, and find a situation different from that in Jay C. Hormel, supra. There the trust was merely for “the use and benefit” of minor children, with no mention of maintenance, education, or support. Herein, each trust specifically provides, as to the child named as beneficiary, that the trustees are to hold, manage, invest, etc., “and to pay to the Beneficiary, or apply to his education, maintenance and support, the net rents, * * * as the Trustees in their discretion may deem proper.” Later the instrument provides: “The trustees are directed to pay over the net income of all trusts hereby created at least quarterly, unless otherwise herein specifically provided”; and there is therein no specific or other provision to the contrary. Thus there is a mandate to pay, or to apply upon education, support, or maintenance, limited only by trustees’ discretion. Discretion in trustee did not prevent application of Douglas v. Willcuts, supra, in Alfred C. Berolzheimer, 40 B. T. A. 645. We conclude and hold that the doctrine of Douglas v. Willcuts, supra, applies to the distributions by the trusts.

Petitioner contends, however, that notwithstanding the principles of Douglas v. Willcuts, supra, the funds were received by her in 1933 from corporate gains and profits of 1929-1930, in which years report was made by her under section 104 (d), and that, therefore, the exemption applies. She argues that the test of exemption is identity of the recipient of the distribution and the person who previously reported the earnings; while respondent contends that herein the stockholders receiving the distributions in 1932, 1933, 1934 were not in existence when the earnings were reported, that the distributions were not made to stockholders who in the Statutory expression had “so included in their gross income” any part of the earnings and profits later distributed, and that, therefore, the exemption does not apply. Was petitioner, who reported the income, the distributee of the distributions in later years? We think she was. In Mead Corporation, 38 B. T. A. 687, we held that the stockholders of a corporation which owned all of the stock of a second corporation were the stockholders of the second corporation within the meaning of section 104 of the Revenue Act of 1928 and subject to the penalty thereby prescribed. Here a trust, instead of a corporation, owned the corporate stock. Petitioner, as trustor, we hold above to be taxable upon the income of that trust (so far as here involved), because by Douglas v. Willcuts, supra, she is in effect to that extent put into the position of the trust. Petitioner is charged with the income distributed by the corporation; she is thus in effect made the distributee. She can not, therefore, logically be denied the position of distributee under section 104 (d). The word “distributee” therein is not a narrow term. We think it includes petitioner, just as in Mead Corporation, supra, the words “its stockholders” applied to recipients of dividends from a corporation entirely owning another, the source of the distributions. We, therefore, hold that the petitioner is under section 104 (d) of the Revenue Acts of 1928 and 1932 (section 102 (d), Revenue Act of 1934), entitled to exemption of the $6,084.07 distributed to her children as beneficiaries under the trust set up by her.

Y. The deficiency for 1934 arose in part because of the disallowance of a contribution of preferred stock of a fair value of $4,000,000 to an alleged charitable trust. Though earlier suggesting that the trust was revocable, upon brief, respondent abandons his previous position and urges only that it is subject to the limitation of 15 percent of gross income. We, therefore, allow the contribution, to the extent of 15 percent of petitioner’s net income (less the amounts of other charitable deductions allowed). It is stipulated that the petitioner had not made gifts or contributions in each of the 10 preceding years such as to bring her within the provisions of section 120 of the Kevenue Acts of 1932 and 1934, removing the 15 percent limit set by section 23 (o) upon contributions. Contributions as to the years 1932 and 1933 are also allowed, only to the extent of 15 percent of the net income as redetermined in accordance with the above.

Petitioner suggests that if held liable for tax on any distributions of earnings reported in prior years, she is entitled to set off the Federal income taxes paid by her on account of such prior inclusion of earnings. We do not hold her to be taxable upon distributions of such reported earnings, but upon later earnings, not reported.

Keviewed by the Board.

Decision will he entered wider Bule 50.

Opper concurs only in the result.

Leech,

concurring: I disagree with the necessity for and the conclusion expressed in the majority opinion that petitioner is taxable on the income from the trusts created for the benefit of her minor children.

The trusts were irrevocable and authorized the trustees to pay the income to each child outright, without restriction as to its use, or, in their discretion, to use it for the education, maintenance, and support of the children. There was thus, I think, no mandate to but only a discretion in the trustees to apply the income to the legal obligation of the petitioner of supporting her minor children.

The question, then, is whether any part of such income was taxable to the petitioner, settlor. The decisions of the courts and the Board do not seem to support a consistent answer to the query. Hudson v. Jones, 22 Fed. Supp. 938; E. E. Black, 36 B. T. A. 346; Martin F. Tiernan, Trustee, 37 B. T. A. 1048; dismissed without opinion, C. C. A., 3d Cir., June 12, 1939; J. S. Pyeatt, 39 B. T. A. 774; Alfred C. Berolzheimer, 40 B. T. A. 645; Jay C. Hormel, 39 B. T. A. 244. See also G. C. M. 18972, C. B. 1937-2, p. 231. In Douglas v. Willcuts, 296 U. S. 1, the Supreme Court held that income of a trust is taxable to a grantor, as constructively received by him, where the application of the trust income to a legal obligation of the settlor is mandatory. But that decision goes no further. It does not reach the case where such application is discretionary in the trustee. See also Helvering v. Fitch, 309 U. S. 149. Unless, therefore, this theory that may be called constructive receipt which supports the Douglas v. Willcuts decision, is applied in construing sections 167 (a) (2) of the Revenue Acts of 1932 and 1934,1 see no legal ground for taxing any of such income to the petitioner, regardless of the fact that it was used to meet her obligation. See Hoeper v. Wisconsin, 284 U. S. 206; Frederick K. Barbour, 39 B. T. A. 910; Estate of Paul F. Donnelly, 38 B. T. A. 1234 (on appeal C. C. A., 8th Cir.); George Washington, Sr., 36 B. T. A. 74. If section 167 (a) (2) can be so construed, then, it seems to me, all of such income is taxable to petitioner, whether the trustees were the settlors or third parties. Reinecke v. Smith, 289 U. S. 172. And that is true, under the unambiguous meaning of the section, whether or not any of the income was so used.

Can this doctrine of constructive receipt be applied in the construction of section 167 (a) (2) ? I think not. The Commissioner apparently does not think so either. See G. C. M. 18972, supra. To so apply it would seem to be an unwarranted disregard of the trust entity. Estate of Paul F. Donnelly, supra; George Washington, Sr., supra; Frederick K. Barbour, supra. If Congress had meant to have this theory applied generally in the construction of section 167, it would seem that it would have said, simply, that the income of a trust should be taxed to the settlor when it could be applied against any legal obligation of the settlor. But nothing in section 167 indicates such an intent. In fact, an intention to limit the application of this rule of constructive receipt to those cases, only, where the income can be used for the payment of premiums on policies of insurance on the life of the settlor, seems to be disclosed by the fact that the section specifically taxes such income to the settlor. See section 167 (a) (3). Expressio vmius est exclusio adterius.


source: Caselaw Access Project

author: HaeRon:

license: Public Domain

text:
    J. D. & A. B. Spreckels Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90390.
    Promulgated February 14, 1940.

      Herbert' W. Olarh, Esq., and Leon de Fremery, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

HaeRon:

The principal issue for determination is whether or not the Tire Co. was a member of the affiliated group of corporations of which petitioner was the parent, within the intent of section 141 of the Revenue Act of 1932, during the last 10 months of 1933. In the consolidated return filed by petitioner and its affiliated corporations for the calendar year 1933, a deduction was taken for a net loss of $191,268.52, claimed to have been sustained by the Tire Co. during the period in question. The respondent disallowed the deduction on the ground that the Tire Co. was not a member of the affiliated group, within the intent of the statute, during the period in question.

The provisions of section 141 of the Revenue Act of 1932, in so far as they are pertinent to the question here presented, are as follows:

(a) Privilege to File Consolidated Betukns, — An affiliated group of corporations shall, subject to the provisions of this section, have the privilege of making a consolidated return for the taxable year in lieu of separate returns. * * *
*******
(d) Definition or “Affiliated Group”. — As used in this section an “affiliated group” means one or more chains of corporations connected through stock ownership with a common parent corporation if—
(1) At least 95 per centum of the stock of each of the corporations (except the common parent corporation) is owned directly by one or more of the other corporations; and
(2) The common parent corporation owns directly at least 95 per centum of the stock of at least one of the other corporations.

Petitioner contends that it was the owner of all of the capital stock of the Tire Co. during the period from February 20 to December 31, 1933, and that, therefore, the sole test of affiliation provided by the statute was satisfied. The parties litigant have stipulated that on February 20, 1933, petitioner acquired all of the capital stock of the Tire Co. from the Securities Co. for $1, and that petitioner “remained the owner” of the stock until the Tire Co. was dissolved on December 23,1935. For the purpose of this proceeding, it is assumed that petitioner was the owner, both in fact and in law, of all of the capital stock of the Tire Co. during the period in question.

Respondent asserts that the Tire Co. was not a member of the affiliated group within the intent of the statute, because of the fact that petitioner’s ownership of the stock of the Tire Co. did not serve a business purpose, as distinguished from a tax-reducing purpose.

The first question raised by respondent’s contention is one of statutory construction as to whether or not the framers of the statute intended that the privilege of making consolidated returns may be enjoyed in cases where the affiliation does not serve a business purpose, as distinguished from a tax-reducing purpose. If it should be decided that the framers of the statute intended that the privilege may be enjoyed in such cases, it will not be necessary to pass upon the remaining question of fact as to whether or not the affiliation which is involved here served a business purpose, as distinguished from a tax-reducing purpose.

The privilege to make a consolidated return, granted to an affiliated group of corporations, is “akin” to an exemption. Commissioner v. Manus Muller & Co., Inc., 79 Fed. (2d) 19, 20. The purpose for the granting of the privilege is stated in the Report of the Senate Finance Committee on the Revenue Bill of 1928, 70th Cong., 1st sess., S. Rept. 960, p. 14, as follows:

The permission to file consolidated returns by affiliated corporations merely recognizes the business entity as distinguished from the legal corporate entity of the business enterprise. Unless the affiliated group as a whole in the conduct of its business enterprise shows net profits, the individuals conducting the business have realized no gain. The failure to recognize the entire business enterprise means drawing technical legal distinctions, as contrasted with the recognition of actual facts. The mere fact that by legal fiction several corporations owned by the same stockholders are separate entities should not obscure the fact that they are in reality one and the same business owned by the same individuals and operated as a unit. To refuse to recognize this situation and to require for tax purposes the breaking up of a single business into its constituent parts is just as unreasonable as to require a single corporation to report separately for tax purposes the gains, from its sales department, from its manufacturing activities, from its investments, and from each and every one of its agencies. It would be just as unreasonable to demand that an individual engaged in two or more businesses treat each business separately for tax purposes.
Much, of the misapprehension about consolidated returns will be removed when it is realized that it is only when the corporations are really but one corporation that the permission to file consolidated returns is given, amd that no ultimate advantage under the taso laws really results. * * * [Italics supplied.]

The purpose for the granting of the privilege is restated succinctly in the Report of the Senate Finance Committee on the Revenue Bill of 1932,72d Cong., 1st sess., S. Rept. 665, p. 9, as follows:

The provisions for consolidated returns under the present law and regulations recognize sound accounting practices and require tax liabilities to be determined on the basis of the total net income of the enterprise as a whole. No improper benefits a/re obtained from the privilege. [Italics supplied.]

The intent which underlies the granting of the privilege finds some expression in the provisions of subdivision (b) of section 141 of the Eevenue Act of 1932, which provides as follows:

(b) Regulations. — The Commissioner, with the approval of the Secretary, shall prescribe such regulations as he may deem necessary in order that the tax liability of an affiliated group of corporations making a consolidated return and of each corporation in the group, both during and after the period of affiliation, may be determined, computed, assessed, collected, and adjusted in such manner as clearly to reflect the income and to prevent avoidance of tax liability.

It is apparent that the privilege was granted in order that the tax liability of a group of corporations which were combined for business purposes into one business unit might be based upon the true net income of the business unit. The framers of the statute evidently believed and intended “that no ultimate advantage under the tax laws really results” from the granting of the privilege to make consolidated returns and that “No improper benefits are obtained from the privilege.” It is believed that they did not intend that the privilege be enjoyed in cases where the affiliation relied upon as the basis for the privilege to make a consolidated return is without a business purpose.

The next question raised by respondent’s contention is a question of fact as to whether or not the affiliation which is relied upon here served a business purpose, as distinguished from a tax-reducing purpose. In our determination of this question, the close relationship between the time when petitioner acquired the stock of the Tire Co. for $1, and the time when the Tire Co. sustained the loss of $192,8£9.80 on the sale of its plant, seems very pertinent. In the deficiency notice respondent determined that the Tire Co. sustained the loss on the sale ■of its plant to the Brewing Co. prior to petitioner’s acquisition of the stock of the Tire Co. The fact that the parties to the sale of the plant agreed that the Tire Co. was to pay the first installment, and the Brewing Co. was to pay the second installment, of the 1932-1933 state, county, and city taxes, and the fact that they agreed, also, that the note to be delivered by the Brewing Co. was to be dated December 1, 1932, and bear interest from that date, indicate that it was the intention of the parties to the sale that the Brewing Co. was to take possession of the Tire Co.’s plant prior to February 20, 1933, the date when petitioner acquired the stock of the Tire Co. Thus, although at the time of petitioner’s acquisition of the stock of the Tire Co. the deed to the plant had not yet been delivered to the Brewing Co. and the Brewing Co. had not yet paid the balance of the selling price, there is some foundation for respondent’s contention that the Tire Co. sustained the loss on the sale of its plant prior to the date of petitioner’s acquisition of the stock of the Tire Co. See Commissioner v. Union Pacific Railroad Co., 86 Fed. (2d) 637; Walter M. Hort, 39 B. T. A. 922.

However, for present purposes, it is sufficient that at the time of petitioner’s acquisition of the capital stock of the Tire Co., it was reasonably certain that the Tire Co. would sustain a loss on the sale of its plant in the immediate future. Prior to the date on which petitioner acquired the stock of the Tire Co., the Brewing Co. had made a payment of $5,000 on account of the selling price; the Securities Co. had released the general mortgage on the plant of the Tire Co. and thus enabled the Tire Co. to perfect its title to the plant; and a policy of title insurance had beén issued. On the very same day on which petitioner acquired the stock of the Tire Co., the Tire Co. executed a deed conveying the plant to the Brewing Co. and delivered the deed to the escrow agent, and the Brewing Co. executed a mortgage on the plant in favor of the Tire Co. and delivered the mortgage to the escrow agent. Within six weeks after the date of petitioner’s acquisition of the stock, the sale of the plant had been consummated in full; the full consideration had been paid to the Tire Co. in cash and in notes; the deed to the plant had been delivered to the Brewing Co.; and the mortgage on the plant had been delivered to the Tire Co.

In the deficiency notice, respondent determined that the transfer of the stock of the Tire Co. from the Securities Co. to the petitioner “served no business purposes except the reduction of tax liability.” In our opinion, the record supports the respondent’s determination. In 1927, the Tire Co. had ceased manufacturing operations. In 1931, the Securities Co. had written down its investment in the stock of the Tire Co. from $9,175,149.94 to $1, and had taken a deduction for the resulting loss in its separate income tax return for that year. In 1932, the Tire Co. had received a gross income of only $1,175. This income was from storage rentals, and after the sale of the plant there would be no further income from that source. It is pointed out that the Tire Co. was indebted to the. Securities Co. on its notes, given in exchange for its outstanding bonds, presumably in the sum of $500,000, the par value of the bonds received by the Tire Co. in exchange for its notes. The $50,000 which was to be received by the Tire Co. on the sale of the plant would fall far short of satisfying the indebtedness owed by the Tire Co. to the Securities Co. At the time of petitioner’s acquisition of the stock of the Tire Co., that stock had no economic value. The only benefit to petitioner in acquiring the stock in the Tire Co., was reduction of the tax liability of the affiliated group.

As pointed out above, respondent disallowed the claimed loss to petitioner and its affiliates on the ground that petitioner’s acquisition of the stock of the Tire Co. “served no business purpose.” There is nothing in the record to show the contrary. Eather, it is shown that at the time petitioner acquired the stock of the Tire Co. for the nominal price of $1, the Tire Co. was insolvent; it was not engaged in the business it had been conducting prior thereto; and it had contracted to sell its assets, if it had not already sold them. There is nothing to show that there was any intention of resuming the business of the Tire Co. In fact, that company was dissolved in December of 1935. Under the above facts and circumstances, it is not material that the Tire Co. received a small net income of about $1,500 in 1933 and of about $600 in 1934.

At the time petitioner acquired the stock in the Tire Co., the amount of the loss on the sale of that company’s plant was readily ascertainable. Petitioner assumed that the loss, for tax purposes, was one sustained in 1933. The Securities Co., the former owner of the Tire Co., sustained a net loss in 1933 of $1,724,419.53, as is shown on its separate return. The petitioner and its affiliates earned net income of $612,686.23, for 1933, as is shown by the consolidated return. The patent advantage to petitioner in acquiring the Tire Co. stock was to enable the offsetting of the loss of the Tire Co. against the profits of the petitioner and its affiliates.

Petitioner relies on Bishop Trust Co., Ltd., 36 B. T. A. 1173, claiming that the facts there are similar to the facts in this case. The Bishop Trust Co. case is distinguishable. In that case the stock of the subsidiary was acquired as a bona -fide business move.” One of the purposes for the acquisition of the stock of the subsidiary was to enable the parent corporation to take over the business of the subsidiary. Two years later the subsidiary was formally merged into the parent corporation. Furthermore, in the Bishop Trust Co. case, there was no evidence that “tax reduction was a motive.” The other cases cited by petitioner in support of his contention that “the sole criterion for affiliation contained in the statute is the ownership of the stock” are not in point, because they do not involve the question of whether an affiliation which does not serve a business purpose, as distinguished from a tax-reducing purpose, is within the intent of the statute.

In Woolford Realty Co. v. Rose, 286 U. S. 319, which is cited both by petitioner and by respondent, the parent corporation and the subsidiary became affiliated in 1927, and the question was whether net losses sustained by the subsidiary in the years 1925 and 1926 could be deducted in the consolidated income tax return filed by the affiliated group for the year 1927. There was no suggestion that the affiliation did not serve a business purpose. In holding that the net losses sustained by the subsidiary prior to affiliation could not be deducted in the consolidated return, the Supreme Court stated, through Mr. Justice Cardozo, in part, at pages 329 and 330, as follows:

* * * A different ruling would mean that a prosperous corporation could buy the shares of one that had suffered heavy losses and wipe out thereby its. own liability for taxes. The mind rebels against the notion that Congress in permitting a consolidated return was willing to foster an opportunity for juggling so facile and so obvious. [Italics supplied.]

In the broad sense, the same reasoning applies here. If Congress did not intend that the privilege of making a consolidated return should be enjoyed by a corporation which acquired ownership of another corporation in order to take advantage of a loss already sustained by that corporation, it seems to follow that Congress did not intend that the privilege should be enjoyed by a corporation which acquired the ownership of another corporation in order to take advantage of a loss certain to be sustained by that corporation in the immediate future, particularly where the acquisition of the ownership of the other corporation served no business purpose.

The same general problem of statutory construction, which is involved here, was involved in Gregory v. Helvering, 293 U. S. 465. The Supreme Court held in the Gregory case that a “letter perfect” reorganization which served no business purpose was not within the intent of the reorganization exemption provisions of the statute. In this case, we find a parallel. The affiliation in question, although “letter perfect”, served no business purpose, and it does not, in our opinion, come within the intent of the affiliation provisions of the statute.

Since petitioner’s ownership of the stock of the Tire Co. did not serve a business purpose, as distinguished from a tax-reducing purpose, it is held that the Tire Co. was not a member of the affiliated group within the intent of section 141 of the Revenue Act of 1932, during the period in question. Respondent’s determination is sustained.

Respondent contends, in the alternative, that if the Tire Co. was a member of the affiliated group during the period in question, the loss on the sale of its plant was sustained prior to affiliation, and, that, therefore, under the provisions of article 41 (c) of Regulations 78, the pertinent provisions of which are quoted in the margin, the amount of the net loss sustained by the Tire Co. prior to affiliation which may be taken as a deduction in the consolidated return is limited to one dollar, the cost of the stock of the Tire Co. to petitioner. Respondent’s contention, in this respect, has considerable merit. But, in view of our holding above, it is not necessary to pass upon respondent’s alternative contention.

Decision will be entered under Bule 50.

       In the Report of the Senate Finance Committee on the Revenue Bill of 1932, 72d Cong., 1st sess., S. Rept. 665, p. 10, the following statement appears:
      “Your committee made a very exhaustive study and analysis of the entire subject of tax liabilities of affiliated groups of corporations, during its consideration of the revenue bill of 1928. Its conclusions are set forth in its report upon the revenue bill of 1928. It seems unnecessary to repeat them at the present time.”

       See Paul, Studies in Federal Taxation, 1937, p. 148.

       (c) Net Loss Sustained by Separate Corporation Prior to Consolidated Return Period.

        A net loss sustained by a corporation for a taxable year prior to the taxable year in respect of which its income is included in the consolidated return of an affiliated group (including any net loss sustained for the taxable year 1931) shall be allowed as a deduction in computing the consolidated net income of such group in the same manner, to the same extent, and upon the same conditions as if the consolidated income were the income of such corporation; but in no case will any such net loss be allowed as a deduction in excess of the aggregate basis of the stock of such corporation to the members of the group.


author: Mellott: Leech,

text:
    Robert M. Morgan, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87739.
    Promulgated February 14, 1940.

      Allen 8. Hubbard, Esq., and William, W. Owens, Esq., for the petitioner.

      John B. Wheeler, Esq., for the respondent.
   OPINION.

Mellott:

Petitioner contends that be did not realize any taxable income by reason of the series of steps set out in our findings and that the respondent erred in determining the deficiency in tax. Respondent justifies his determination upon the theory that the various steps were but a cloak .to obscure the real transaction; that the substance, rather than the form, of the transaction should be considered; and that the result, for tax purposes, is the same as if petitioner had traded his interest in Albert C. Field, Inc., directly to that corporation for the interest which it held in Robert M. Morgan, Inc.

The applicable sections of the Revenue Act of 1932 are set out in the margin.

Summarizing our findings, it will be noted that the following steps were taken:

(1) Petitioner transferred his 7,500 shares of Albert C. Field, Inc., stock to Monterey in exchange for all of its capital stock.

(2) Simultaneously Albert C. Field, Inc., transferred one-fourth of its assets to Morgan (1932) in exchange for all of its capital stock.

(3) Morgan (1932) and Monterey consolidated under the laws of Delaware into a new corporation, Morgan (1933) and petitioner and Albert C. Field, Inc., each received one-half of its capital stock, which consisted of 2,000 shares, or 1,000 shares.

(4) Morgan (1933) surrendered the 1,500 shares of Albert C. Field, Inc., which it had acquired as shown in steps one and three, to the issuing corporation and received the 1,000 shares of its stock (see steps 2 and 3), whereupon each corporation canceled the shares of its own stock thus acquired.

Upon brief petitioner points out that each step, examined separately, comes within some subdivision of the applicable revenue act under which gain or loss is not to be recognized. Thus, he says: In step number 1 he made a nontaxable exchange under section 112 (b) (5), supra; in step number 2 there was a nontaxable exchange of property by a corporation, a party to a reorganization, in pursuance of a plan of reorganization, solely for stock in another corporation, a party to a reorganization (section 112 (b) (4) and (i) (1) (B), supra); in step number 3 there was a statutory consolidation and hence a reorganization of two corporations (section 112 (i) (1) (A), supra), and he, in pursuance of the plan, exchanged stock in a corporation, a party to a reorganization, for stock or securities in another corporation, a party to the reorganization (section 112 (b) (3), supra); and in step 4, one corporation, Morgan (1933) acquired, by purchase — i. e. by giving up a portion of its assets consisting of stock in Albert C. Field, Inc.—1,000 shares of its own stock, which did not result in any taxable gain to it. (Art. 66, Regulations 77. Cf. Helvering v. Reynolds Tobacco Co., 306 U. S. 110.) Petitioner contends, in the alternative, that if any taxable gain were realized— which he denies — it was realized by the consolidated corporation (Morgan, Inc. (1933)) through a distribution in partial liquidation of Albert C. Field, Inc., but that no part of such gain may be imputed to him. He also asks us to find ás a fact that the cost of the securities transferred to Robert M. Morgan, Inc. (1932) by Albert C. Field, Inc., was $515,663.10, while their fair market value on December 29, 1932, was $129,838.77. The evidence indicates that the fact is as urged; but we have refrained from making any such finding because it is not relevant to the issue before us.

Respondent argues that petitioner, in taking the various steps, was merely endeavoring “to avoid by form a tax which is legally due when substance is considered” (United States v. Phellis, 257 U. S. 156; Kent Oil Co., 38 B. T. A. 528); that the “interdependent steps in the integral plan, for income tax purposes, must be treated as a single transaction” (United Light & Power Co., 38 B. T. A. 477; affd., 105 Fed. (2d) 866; certiorari denied, 308 U. S. 574; that the rule enunciated. by the Supreme Court in Gregory v. Helvering, 293 U. S. 465, should be applied since the purpose was “not to reorganize a business * * * but to transfer a parcel of” assets to petitioner — a “mere device which put on the form of a corporate reorganization as a disguise for concealing its real character”; and that the whole plan, though a bit more elaborate, can not be distinguished from the one involved in Paul L. Case, 37 B. T. A. 365 (affirmed upon the reorganization issue in Case v. Commissioner, 103 Fed. (2d) 283).

The right answer to the question is somewhat elusive. Much of petitioner’s argument is persuasive and it can not be gainsaid that many of the steps, standing alone, come within the literal wording of the sections relied upon; but we are of the opinion that respondent must be sustained.

The object which petitioner and Albert C. Field, Inc., sought to accomplish by the above steps was obviously the avoidance of tax upon petitioner. Counsel for petitioner tacitly admits as much in his opening statement. Before the steps were taken petitioner owned a minority interest in the stock of Albert C. Field, Inc. He wanted to have approximately one-fourth of the assets of that corporation and especially those which were being used in the grain business conducted by it, transferred to a corporation all of the stock of which was to be owned and controlled by him. If the assets had been transferred to petitioner in exchange for the 7,500 shares of Albert C. Field, Inc., stock owned by him, he would have realized taxable gain measured by the difference between the cost or other basis of the 7,500 shares and the value of the assets; and this would have been true even though he subsequently or contemporaneously transferred them to another corporation in exchange for its stock. Faced with this situation, the interested parties turned to the exchange and reorganization provisions of the statute and devised the series of steps enumerated above.

Petitioner now urges, in effect, that by the use of the roundabout method which was followed he succeeded in getting one-fourth of the assets of Albert C. Field, Inc., into the hands of Morgan (1933), all of the stock of which is owned by him, without the realization of any taxable gain. We are not convinced that he has done so. The Supreme Court of the United States said in Minnesota Tea Co. v. Helvering, 302 U. S. 609, 613: “A given result at the end of a straight path is not made a different result because reached by following a devious path.” Cf. Griffiths v. Helvering, 308 U. S. 355. This is especially true in tax cases because of the well settled principle that in applying the income tax laws the substance, and not the form, of the transaction controls. United States v. Phellis, supra.

Petitioner would have us treat each of the steps taken by him and Albert C. Field, Inc., and the corporations they created .to serve as conduits, as separate and distinct transactions. If we should do this, and it could be said that each of the steps was executed for the purpose of effecting a statutory reorganization, our decision would necessarily be in favor of petitioner. But, as has often been said by the courts and this Board: “For income tax purposes the component steps of a single transaction can not be treated separately.” Bassick v. Commissioner, 85 Fed. (2d) 8; certiorari denied, 299 U. S. 592, affirming 30 B. T. A. 163; Prairie Oil & Gas Co. v. Motter, 66 Fed. (2d) 309; West Texas Refining & Development Co. v. Commissioner, 68 Fed. (2d) 77, affirming on this point, 25 B. T. A. 1254; Ahles Realty Corporation v. Commissioner, 71 Fed. (2d) 150; certiorari denied, 293 U. S. 611; Hazeltine Corporation v. Commissioner, 89 Fed. (2d) 513, affirming 32 B. T. A. 110, on this point; Schumacher Wall Board Corporation, 33 B. T. A. 1211; affd., 93 Fed. (2d) 79; Helvering v. Bashford, 302 U. S. 454; George Whittell & Co., 34 B. T. A. 1070; Starr v. Commissioner, 82 Fed. (2d) 964; certiorari denied, 298 U. S. 680; Paul L. Case, supra.

In the instant proceeding there was but a single plan and a single transaction. The plan, stripped of all camouflage, was to have petitioner’s proportionate interest in the assets of Albert C. Field, Inc., transferred to a new corporation, Morgan (1933), all of the stock of which was to be owned by petitioner. When the plan was consummated this was the net result. Petitioner owned all of the stock of Morgan (1933) and had surrendered the 7,500 shares of the stock of Albert O. Field, Inc., formerly owned by him. The substance of the transaction, therefore, was merely an exchange by petitioner of the stock of one corporation for stock of another. Unless such an exchange was made pursuant to a plan of reorganization, it is taxable.

If petitioner had taken a straight path in the instant proceeding, no statutory reorganization would have been effected, and we think it must be held that none was effected by following the devious path selected. This is so because from the inception of the transaction to its conclusion there was never any intention to reorganize a corporate business. It may be true, as petitioner argues, that the steps taken had a business purpose; but many exchanges of stock for stock have business purposes and yet are not made in connection with, or pursuant to, a reorganization within the intendment of the statute. Hor is it material to the present issue that petitioner was motivated by ;a business purpose when he arranged for the transfer of his proportionate interest in the assets of Albert C. Field, Inc., to a corporation •all of the stock of which was to be owned by him. There was no reorganization within the intendment of the statute because when the transaction was consummated neither Albert C. Field, Inc., nor its stockholders retained any interest in Morgan (1933). The continuity of interest on the part of the reorganized corporation or its stockholders which is essential to any statutory reorganization was lacking. Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U. S. 462; Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937; certiorari denied, 288 U. S. 599; Electrical Securities Corporation v. Commissioner, 92 Fed. (2d) 593; United Light & Power Co., supra. Indeed it might be said, as was said in Paul L. Case, supra, that the very purpose of the plan was to destroy the continuity of interest. True, the facts in the instant proceeding are not identical with those in the cited case; but they are sufficiently alike to justify the application of the same principle. We held that there was no reorganization in Paul L. Case even though the larger corporation, Peckham Case Co., corresponding to Albert C. Field, Inc., in the instant proceeding, exchanged a portion of its assets for the stock of the newly organized corporation. We predicated our decision upon the fact that its holding of such stock was “transitory and without real substance; [being] part of a plan which contemplated the immediate transfer of the stock” to another. The same conclusion is justified under the evidence in the instant proceeding. It was never intended that Albert C. Field, Inc., should hold the stock of the new corporation, except temporarily. The purppse of the organization of Morgan, Inc., was to segregate the assets of Albert C. Field, Inc., and to vest them either in petitioner or in a corporation whose stock he owned. He did not feel that the assets of his brother-in-law’s estate should be “invested in that [grain export] business because it was too risky.” He desired to cooperate with those interested in the estate toward making Albert C. Field, Inc., become, as it did become, “dormant as a holding company” for the' benefit of Field’s heirs. It is our conclusion therefore that the exchange here involved was not made pursuant to a plan of reorganization, and that the gain realized by petitioner was taxable to the extent determined by the respondent.

In passing it might be stated that under the recent decision of the Supreme Court of the United States in Higgins v. Smith, 308 U. S. 473, we would probably be justified in finding that the substance of the transaction here under consideration was merely a transfer of one-fourth of the assets of Albert C. Field, Inc., to petitioner, he being the owner of all of the stock of Morgan (1933), in exchange for the 7,500 shares of stock of Albert C. Field, Inc. Inasmuch, however, as such a construction necessitates a disregard of the corporate entity of Morgan (1933), we prefer to rest our decision on the ground that the substance of the transaction was an exchange of 7,500 shares of stock of Albert C. Field, Inc., for all of the stock of Morgan (1933).

Reviewed by the Board.

Judgment will Toe entered for the respondent.

Leech,

concurring: I agree that the several steps, in carrying out the obvious plan, constituted only one transaction for tax purposes. Neither Albert O. Field, Inc., nor its stockholders, retained the necessary continuing interest in Morgan (1933), in which the assets originally owned by Field, Inc., rested at the consummation of that transaction. For that reason,* therefore, I concur in the holding that there was no- statutory reorganization. LeTulle v. Scofield, 308 U. S. 415; Paul L. Case, 37 B. T. A. 365 (affirmed upon the reorganization issue in Paul L. Case v. Commissioner, 103 Fed. (2d) 283).

       SBC. 112. RECOGNITION OP GAIN OR LOSS.
      (a) General Rule. — Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall he recognized, except as hereinafter provided' in this section.
      (b) Exchanges Solely in Kind.—
      * * * * * * *
      (3) Stock for stock on reorganization. — 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 reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
      (4) Same — Gain of corporation. — 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.
      (5) Transfer to corporation controlled by transferor. — No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.
      *******
      (i) Definition of Reorganization. — As used in this section and sections 113 and 115—
      (1) The term “reorganization” means (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), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization however effected.
      (2) The term “a party to a reorganization” includes a corporation resulting from a reorganization and includes both corporations in the case of an 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.
      a * $ * * * *
      SEC. 115. DISTRIBUTIONS BX CORPORATIONS.
      **.;•.*$*<«
      (c) DisteibuiTions 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 (othex 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 account 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.