*1 v. CENTRAL TABLET MANUFACTURING CO. STATES UNITED 25-26, Argued 19, 1974 March 1974 Decided June No. 73-593. J., opinion delivered Court, Blackmun, in which Burger, J., C. JJ., joined. Stewart, Marshall, Rehnquist, White, J., dissenting opinion, filed a in which Douglas, BrennaN, JJ., joined, post, p. 691. Powell, Snyder Larry argued H. the cause and filed briefs for petitioner. *2 argued
Stuart A. Smith the cause for the United States. him Bork, With on the brief were Solicitor General Attorney Assistant General Crampton, and David English Carmack.
Mr. Justice Blackmun opinion delivered the Court. (a)
Section 337 of the Internal Revenue 1954, Code of 26 U. S. C. 337 (a),1 provides, with stated exceptions, for the nonrecognition of or gain loss from corporation’s a “sale or exchange” property of place takes during period 12-month following the corporation’s adoption of plan complete a of liquidation that is effectuated within period. The issue in this case is whether, a destroys when fire corporate prior property to the adoption plan of a of complete liquidation, but the fire proceeds are received plan’s after the adoption, gain realized is or is not to be recognized to the corporation.
I The facts are contested. Taxpayer, Central Tab- let Manufacturing Company, an Ohio corporation, 1 337. Gain or loss on exchanges sales or Ҥ in connection with cer liquidations. tain
“(a) General rule.
“If— “(1) corporation a adopts complete a liquidation on or after 22, 1954, June and “(2) within the period 12-month beginning on the date of the plan, of such all of the corporation assets of the are distrib- complete uted in liquidation, less 'assets retained to meet claims, “then no or recognized loss shall be to such from exchange sale it of within period.” such 12-month (a). S.U. C. §337 May many years prior 14, engaged at Co- Ohio, writing the manufacture and sale tab- lumbus, art and related items. It lets, supplies, materials, school accrual filed its federal income tax returns on the basis year and for the accounting fiscal ended October 31. 1965, majority taxpayer’s pro- On August 13, employees duction maintenance on strike. As went production consequence, was reduced to about 5% normal September volume. On 10, during strike, destroyed an accidental fire largely taxpayer’s plant, its equipment and manufacturing machinery, its business offices. The damage was never repaired, strike was never never settled, taxpayer again engaged manufacturing.
At the time of the taxpayer carried fire and fire, extended insurance coverage on its building, machinery, inventory. and It also carried in- interruption business surance. Negotiations taxpayer’s to the claim relating for interruption business began loss about October 8, and those on its for personal claims and building property losses began about November 1. There was dispute period as to the estimated of loss to be covered by interruption business insurance; prob- as to the able duration of the strike had the fire not taken place; as applicability to the policy’s building co- insurance clause; to the extent of as the equipment loss due to the fire rather than to rain; toas the value of the building equipment and at the time of the fire; and as to the cost of repair repairable of machinery and equip- ment. The liability threshold of the insurance carriers, however, despite their not unusual rejection of the initial formal proofs of claim, was seriously never questioned.
Eight after the fire, months at a special on meeting May 14, 1966, the shareholders Central Tablet decided to dissolve adopted and plan of disso-
676 complete to Ohio Rev. liquidation pursuant
lution and (1964). App. days Ann. 1701.86 38. six § Code About taxpayer later, building insurers settled the payment claim; was received in mid-June. claim In taxpayer settled its August, personal payment claim received on it in November. On May 3, 1967, remaining all assets after liquidating distri- butions to the shareholders were to a conveyed Columbus bank in trust pending payment shareholders and the taxes collection of remaining insurance and other claims. On the date, taxpayer same filed a cer- tificate of dissolution with Ohio Secretary of State. Ohio Rev. Code Ann. §§ 1701.86 (H) (I) (1964). All this accomplished within of the adop- months tion of May on 14,1966. interruption business claim was settled in August and payment thereof was in September received year.
The fire
proceeds
the taxpayer’s
exceeded
adjusted income tax basis in the
property.
insured
Gain,
was realized
therefore,
and ordinarily would be recog-
nized and taxed to the corporation.
(a)
§ 1033
(3) of the
Code, U. S. C. 1033 (a)
(3); Tobias v. Commis-
sioner,
677 was attributable asserted; this 1963 tax was also fiscal 1966 be- carryback from in operating decrease loss of the insurance in the treatment adjustments cause of deficiencies, filed taxpayer paid The proceeds.2 present in and, time, claims for due instituted refund, paid. so federal court to recover the action amounts decision in United District Court followed The Morton, States v. (CA8 F. 441 which con- 1968), 387 2d rather than the taxpayer accrual, cerned a on cash, 337 to the tax- (a) § and held that was available basis, payer. Supp. (SD 1972).3 F. 1134 Judgment 339 Ohio taxpayer for the entered. the United appeal, On Appeals for the refusing States Court Sixth Circuit, Morton, to follow reversed remanded. 481 F. 2d and 954 (1973). In view of the indicated conflict in the decisions Eighth Circuits, granted Sixth we certiorari. 1111 (1973). 414 U. S. II only The ap- issue before us is whether 337 has (a) § plication in a where, involuntary situation as here, conversion occasioned preceded the fire complete liquidation.4 upon depends This whether the “sale or exchange,” referred to in 337 (a), §
2 deficiencies, including interest, $70,051.30 amounted $11,930.30 fiscal 1965 and for fiscal 1963. 3Kinney States, v. (ND United 73-1 U. S. Tax Cas. 9140 Cal. ¶ 1972), ruling decided before present case, the Sixth Circuit’s in the appeal Circuit, now on to the Ninth also followed Morton. The corporate taxpayer Kinney was on the accrual basis. (a) Because the applica District Court ruled that had § situation, tion to Central Tablet’s there was no occasion for it to year determine in what taxable to the accrued ultimately if (a) it were applicable. decided that was not § question upon That remains for resolution remand. We intimate generally no view 2 Mertens, as to that issue. See J. Law of Federal (Malone p. 1967). Income Taxation 12.65 rev. *5 place took when only fire or at post- occurred some plan such as the point, subsequent settlement of in- surance or claims, payment. their
Stated simply, position is the of the Government that the fire awas single destructive event that effected (and, conversion therefore, “sale exchange”) prior thereby liquidation, rendering (a) inapplicable. § It is the position of the taxpayer, on the other the fire was not hand, such a single destructive event at all, only but initial in incident a series of events —the fire; prepa- ration and filing proofs of claim; their preliminary rejection; the negotiations; ultimate dollar agreement by way of settlement; preparation and submission of proofs final their claim; formal acceptance; pay- ment —that a period stretched over of time and came to a meaningful only conclusion the adoption of the after ' plan, and that, consequently, 337 (a) is applicable.
In order to keep this narrow issue in it is perspective, desirable and necessary to examine the background and the history of § 337.
A corporation ais entity taxable separate and distinct from its shareholders. Ordinarily, a capital gain realized by taxable to it. The shareholders, of course, by benefit that realization of gain and the conse- quent increase their corporation’s assets. The value of their shares, theory, is thereby enhanced. This increment in value, however, is not taxed at point to the shareholder. His taxable transaction when occurs disposes he of his shares. The capital gain realized the corporation, and taxed to may it, be said to be subject ato “second” tax later, that is, when the shareholder dis- poses of his shares. There is nothing unusual about this. It is reality of tax law, and it is due to the separateness of the corporation and the shareholder as taxable entities. *6 took on technical possibility aspects, tax” This “double at about the capital was realized gain when the however, liquida corporation’s a with, or in connection of, time place taken If to have liquidation was deemed tion. there was a “second” exchange, to the sale or subsequent gain to tax on in addition tax to the shareholder a cor corporation. the other because to the On hand, purposes no for income tax poration gain itself realizes of its assets upon liquidation the mere and distribution Code, 311; § 311 of the 1954 26 U. S. C. shareholders, Helvering, General Utilities Co. v. see 296 U. S. preceded if deemed to liquidation was have (1935), there no “first” tax exchange asset, the sale corporation. Thus, to the trans timing gain corporation’s in relation to the had action, liquidation, important consequence's. generally tax B. Bittker See & J. Eustice, Federal Taxation of Corporations Income (3d 1971). Shareholders 11-53 In short, ed. before 337§ came into the Internal Revenue the overall Code, income tax burden for corporate taxpayer the liquidating and its corporation clearly shareholders was less if the made its distribution of prior assets to the sale or ex change any of them a gain. at
All
simple
this seemed
and straightforward.
ap-
plication of the
however, as fact
varied,
situations
rule,
profound
engendered
confusion which
by
was enhanced
by
two decisions
this Court approximately
years
ago.
In Commissioner v.
Holding Co.,
Court
U. S. than rather shareholders, where in a case conclusion distributed the sale negotiated had corporation, had liquidation, corporation’s to the and, prior assets ac- had offered purchaser with the been in touch Mr. purchaser. it to sell quire in both court unanimous wrote who Black, Justice between distinction sales that “the cases, recognized in kind fol- compared with distribution corporation as *7 shadowy may particularly be by sales lowed shareholder id., closely held,” corporation is when the and artificial determined that nonetheless, Court, but the 454-455, at by Code: mandated the the distinction was emerge consequences in tax “The oddities be controlling appear here provisions from the tax corpora- pattern. tax For a present in the inherent physical properties if it sells all its tion is taxed divi- proceeds liquidating distributes the cash as is not if is distrib- dends, yet property taxed by uted in kind and is then sold the shareholders. In both instances interest the shareholders in pur- the business has been transferred . Congress chaser. . determined that differ- having . ent consequences tax shall flow from different by closely methods which the of a shareholders held corporation may dispose corporate property, we accept Id., its mandate.” at 455-456. obviously two
These created a cases situation where consequences tax dependent upon were the resolu- tion of often indistinct facts as to whether negotia- tions leading to sale had been by conducted or Particularly shareholders. in closely case of a held where corporation, there was if little, any, significant difference between management and ownership, analytical this formalism was unsatis- factory indeed, trap unwary. was a for the and, Rep. S. No. 83d 2d Cong., Sess., (1954); Rep. R. No. H. 1337, 83d 2d Cong., The Sess., Cary, See (1954). a106 Effect of on Corporate Taxation Out a Selling Business Cash, Ill. L. Rev. (1950).
It response direct Holding-Cum- to the Court berland confusion disparate treatment that Congress produced 337§ of the Internal Code of 1954. Revenue report of the House Committee Ways on on the (H. Means bill R. 8300) which became the 1954 Code explained purpose of 337:
“Your committee’s bill questions eliminates aris- ing as result necessity of determining whether a corporation process of liquidating made a sale of assets whether the shareholder receiving the assets made the sale. Compare Commissioner v. Court Holding Company (324 331), U. S. with S. v. U. Cumberland Public Service Company (338 451). U. S. last decision This indicates that if the actually distributee makes the after receipt sale then there will be no on the tax sale at *8 corporate level. In order to eliminate questions resulting only from your formalities, committee has provided if a corporation in process of liquida- tion sells assets there will be no tax at the corporate level, but any gain realized will be taxed to the dis- tributee-shareholder, as ordinary income or capital gain depending on the character of the asset sold.” H. Rep. R. No. 83d Cong., 2d 1337, 38-39 Sess., (1954). id.,
See also at a106-a109, where was said, at a106: “Your committee intends in section [337] to provide a definitive rule which will eliminate any uncertainty.” See Rep. S. No. 1622, 83d Cong., 2d Sess., 48-49, 258-260 (1954). history
There is
nothing
legislative
indicating
enacted in ordér to
tax-
§
was
eliminate “double
ation” as
designed
such.
statute was
to
Rather,
recognized
per-
eliminate
formalistic distinctions
haps
by
Holding
in Court
encouraged
the decisions
Cumberland.
Kovey,
See
When Will Section 337 Shield
Fire
A
Proceeds?
Loss
Current Look at a
Issue, 39
Burning
J. Taxation 258,
(1973);
259 n. 2
Note,
Tax-Free Sales
Liquidation Under
337,
Section
L.
Harv.
Rev. 780
(1963). See also West Street-Erie Boulevard Corp. v.
States,
United
Inasmuch as 337§ was drafted to meet and deal with the Court Holding-Cumberland where there situation, had been a sale, statute on its face only relates “the sale exchange” of property. It is not surprising, therefore, that further confusion resulted when the In- ternal Revenue Service found itself confronted liqui- dating corporate taxpayers who sought 337 (a) § treat- ment casualty gains. Following the Court's decision in Helvering v. William Flaccus Oak Co., Leather U. S. 247 (1941),5 the Internal Revenue Service at first refused to consider applicable § 337 as casualty situ- ation at all. Rul. Rev. 56-372, 1956-2 Cum. Bull. 187. 5In Flaccus the Court held that fire proceeds did not result in from a exchange” “sale or capital assets within the meaning (d) of 117 the Revenue Act of This 48 Stat. 715. *9 result was statutorily overcome by the enactment (b) of 151 of the § Revenue Act 1942, 56 846, Stat. now carried over (a) into 1231 § of the Code, 26 U. S. (a). C. 1231 § When rejected this was in the courts,6 the Service reversed its position and treated an involuntary conversion that oc- curred after adoption plan a of complete liquidation as a “sale or exchange” with resulting nonrecognition. Rev. Rui. 1964-1 64-100, (Part Cum. Bull. I) 130.
It is point at this that the issue of the instant case emerges and comes into focus. Although it is now set- tled that an involuntary by conversion fire is sale exchange under § 337 (a), question that is determina- tive here remains unresolved: When does the involuntary by conversion a preplan fire place? take Since the stat- prescribes ute a strict postplan 12-month period, crucial for the taxpayer that the conversion be deemed to have occurred after the plan of liquidation adopted.
Ill
Predictably,
the taxpayer analogizes the involuntary
conversion to a true sale, and it argues that
the conver-
Textiles,
Towanda
Inc. v. United States, 149 Ct.
Cl.
180 F.
Supp. 373 (1960);
Mfg.
Kent
Corp. v. Commissioner,
There to considered nothing Congress is indicate that problem this when 337 (a) adopted. § was The fact that invariably attention focused on an actual was would sale casualty indicate that legislatively situation not Textiles, States, anticipated. Towanda Inc. v. United 149 Ct. 123, 129, Supp. (1960). Cl. 180 F. Re- legislative course to history, therefore, is somewhat cir- cumstantial nature. There is, however, one guiding fact, namely, the above-mentioned purpose clear of Con- in its enactment gress, of 337 Court (a), § to avoid the Holding-Cumberland formalities. taxpayer’s
The analogy ordinary to the sale transac- tion superficial has some appeal. It fails, however, give sufficient consideration to the underlying purpose (a). §337 To be sure, under normal circumstances, a true sale complete not is until the mutual obligations (if precise not the terms) are fixed. The Internal Reve- nue Service has recognized this explicitly in the Regula- by tions making (a) 337 § available where a sale is nego- tiated the corporation prior to plan but is completed not until after plan is adopted. Treas. Reg. (a).7 § 1.337-2 This merely acknowledges Regulations make the date of the dependent sale “primarily upon the parties intent of the gathered to be from the terms of the contract and the surrounding (a). circumstances.” 1.337-2 They § provide that an “executory contract distinguished to sell is to be from a contract of sale.” recognizes This distinction significance point parties time where the longer can opt no out of a trans Certainly, action. a fire right insurer has no opt out of its coverage and liability basic after the fire place; takes in this re spect, executory contract situation referred Regulations to in the distinguishable. is executory con- sales to avoid an are parties free If transaction is final. is made tract until adopted, is liquidation until after the completed (a) treat- entitled to 337 rightfully *11 aim of fully consistent with the ment. result is This led factual determination that to to avoid the Congress fact Hólding-Cumberland dichotomy. Court The the are this given the and its that shareholders prior to opportunity plan, preliminary limited to disposal of assets does not mean that the liquidation, opportunity intended to make this available in Congress every conceivable fact situation. a pay upon
With fire the arises the loss, obligation to executory casualty sell, fire.8 Unlike an contract cannot be Details, including rescinded. even the basic question may of be liability, but the funda contested, mental contractual obligation precipitates that the trans formation from tangible property into a chose in action of a claim for consisting proceeds fixed fire. parties Although remain free to at an arrive acceptable obligation itself has settlement, come into being, and it is the value of the insured at that point governs the claim. In other the terms words, of the obligation cannot be changed unilaterally by the insurer once the fire has occurred.
The fact the ultimate of may extent the gain not known be or final settlement reached until some
8 formality purposes, filing usually For tax proof of a of claim change does not any event, the substance of this conclusion. In adjuster formalities were observed here. The insurer’s was in at tendance even progress. App. while the fire was in 42. Notice was immediately given companies proofs the insurance of loss were promptly Id., Negotiations began submitted. at 13-14. within a making adjusters, rejection month. The the not uncommon proofs claim, extent, hardly initial denied fact, but coverage. Id., at 14^15. prevent later not the occurrence of a “sale or time does context of normal exchange” commercial even g., Logan, e. Burnet v. transaction. U. S. See, (1931). taxpayer’s The efforts to draw an analogy true utility. sale is therefore of limited In- Note, See voluntary Conversions and 337 of the Internal Revenue § Code, 31 &Wash. Lee L. (1974). Rev. 427-428
When casualty during period occurs 12-month after the of liquidation is (a)’s appli- adopted, cability as follows a matter of course. presence § 337 (a) creates an expectation in the cor- liquidating poration that will not taxed gains be on from sales or exchanges corporate assets during the 12-month period. The taxpayer corporation then need be con- cerned with the formalities of disposal sale and in order to avoid tax capital on gains. Put another once way, *12 the plan is adopted, corporate property is colored with the reasonable expectation that if it is sold or exchanged within 12 any months, resulting gain will not be taxed to corporation. the It that if, follows after plan the is adopted, property destroyed by is casualty, with conse- quent replacement by insurance proceeds, (a) § treat- ment is available. property by colored expec- the tation replaced has been by insurance proceeds.
When, however, the casualty prior occurs to the adop- tion of the plan and corporation’s the commitment none liquidate, of these considerations attaches. More- over, there is nothing purpose the of § 337 which dic- tates the extension of its benefits to this preplan situa- tion. the adoption Before plan has no expectation of avoiding tax if it disposes of prop- erty at a gain. The corporation, course, is the bene- ficiary of the insurance, and both at the the policy time is executed and at the time of the fire, destroyed property is an asset of corporation. Prior to the (a)’s “expectation” plan, simply is § present. For all practical disposal purposes, property Central Tablet's insured occurred at the time of its fire. that time the taxpayer possessed At all inci- of ownership. dents It had evidenced no intention to liquidate. The fire was irremediable. Regardless of the and negotiations prefaced formalities that in- actual settlements, surance parted with at the time of its destruction. casualty When the prior occurs to the corporation’s committing itself to no liquidation, Court Holding-Cumberland problem presented. is
IV
interpretation
This
fully
is
consistent with
manner
in which condemnation,
the other principal form of in
voluntary conversion,
is treated under § 337.
In con
demnation,
legally operative
purposes
event
is the
statute
passage of title under
federal
state
law, as
may
the case
be, to the condemning authority.
This means
in many
jurisdictions the “sale or ex
change” under
337 (a)
prior
occurs
to the determina
tion of the amount of
compensation
condemnation
and,
indeed, possibly without advance warning to the corpora
tion owner. Rev. Rui. 59-108, 1959-1 Cum.
It
Bull. 72.
has been uniformly recognized
a corporate
taxpayer
may not avail itself of § 337 (a)
where its
of liqui
dation
adopted
after title
passed
has
of con
way
demnation even
no
where
settlement as to condemnation
*13
price has been
reached
where
the
had no
advance notice of
proposed
the
taking. Covered Wagon,
Inc. v. Commissioner,
y Again, although precisely parallel not certainly controlling, concluding that the “sale or exchange” takes place at the time of fire is consistent with the ac-
689 period of holding the determining for cepted method long- of its destroyed in the ascertainment consequences. or loss Where capital gain short-term period terminates at destroyed, holding the property is States, 229 Rose v. United moment of destruction. States, Steele v. United (SD 1964); F. Cal. Supp. 298 (SD 1952); Draper 9451 Fla. see v. 52-2 U. S. Tax Cas. ¶ Commissioner, (1959). 32 T. 548-549 Cf. Com 545, C. Triggered Extending Liquidations 337 to ment, Section by Involuntary Corporate of Assets, Conversion (1974). accept L. 1213 n. 55 Were we to 1203, Geo. J. taxpayer’s argument, we would be left with place “sale” take after having anomalous situation of capital gain for or loss holding period has terminated purposes.
VI
has been
presented by
The situation
the instant case
Congress
suggestion
to the attention of
with the
brought
provided
(a)
treatment
nonrecognition
preplan involuntary
be extended to
conversions.9 Con-
following
Advisory Group
In 1959 the
made the
recommenda
Ways
tion to the House
and Means:
Committee on
advisory group
appropriate
“The
desirable
ex-
considers it
nonrecognition
provided by
(a)
tend the
section 337
to all
treatment
involuntary
involuntary
conversions. Since an
conversion cannot be
require
liquidation
impractical
adoption
foreseen
it is
of the
day
conversion,
on or
proposed,
before
of the
it is
as to such
conversions,
requirements
respect
to relax the strict
of the section with
liquidation plan.
to the time of
time
of the
Since the
receipt
proceeds
involuntary
may depend
an
conversion
beyond
receipt
on factors
control of
within
period
impossible,
proposed
12-month
is often
it is
also to relax
requirements
respect
distribution
with
to such conversions.
Accordingly, involuntary
is recommended that an
conversion
meaning
within the
of section 1033
exchange
be considered a sale or
purposes
requirements
of section
and that the
paragraph
(1) (B) regarding the time
distribution,
requirement
and the
*15
gress, however, has not acted on
of
suggestion.
It,
this
course,
provided some tax relief
has
to the victim of a
casualty gain by permitting nonrecognition of the if the victim-taxpayer
proceeds
uses the
replace
to
the
destroyed
a
specified
in
manner.
(a) (3)
1033
§
of the 1954
26
Code,
U.
(a)(3).
S. C.
1033
§
But
Congress
never
has
an
disclosed
intention to
permit
corporate victim of a casualty
ensuing gain
with
have
to
option
after
liquidating
casualty
and
occurs
obtaining the benefit of nonrecognition under
337§
(a).
If this is desirable policy, it is for the Congress, not the
courts,
effectuate. The fact
a
tax-oriented and
tax-knowledgeable corporation
theory
could utilize
(a)
§ 1033
(3) and rebuild with its
proceeds
without being taxed for the
and then adopt
plan
a
gain,
of liquidation, surely does not
change
result. Tax
consequences
what
follow
has taken place, not what
might have taken place. Commissioner v. National Al-
Dehydrating Milling Co.,
&
ever is later.” Hearings Advisory on Group Recommendations on Subchapters C, J, and K of the Internal Revenue Code before the House Ways Committee on Means, Cong., 86th Sess., 1st (1959). It is true that this recommendation was made before the Internal Revenue recognized Service had casualty aas “sale or exchange,” within the language of 337 (a), and § the Service adopted has part at least of the recommendation congres- without sional action. Nonetheless, the Advisory Group clearly recognized that even if the involuntary conversion a were “sale or exchange,” (a) did not § reach the conversion that occurred prior to the of liquidation, and it proposed “to relax the requirements strict of the section” with respect thereto. purpose for the avowed 337§ enacted Congress
Had on whenever gains tax from corporation freeing result, be differ- well might here liquidate, decides to to accom- designed however, was ent. Section was noted, § been has result. As broad plish that techni- avoiding purpose for the limited designed between control as determination and formalistic cal By enact- and the shareholders. doubt any existing benefit (a), of 337 ment But taxpayer. corporate to the given that context applies It drawn. specifLally narrowly (a) 337§ *16 fully only one then to only complete liquidation ato appli- no time. It has specified in a short accomplished adoption or before exchange to a cation sale adoption. months after the more than 12 plan or to one fulfilled, the conditions are not precise If the statute’s In- normally prevail will ensue. consequences tax that always operates for it deed, beneficial, the statute is not exchange on or gain a well as a the sale make loss as nonrecognizable. of Appeals of the Court is affirmed. judgment
It is so ordered. Douglas, whom Mr. Justice White, Justice with Mr. join, Powell Brennan, Justice Justice Mr. Mr. dissenting. is corporate property
Ordinarily, gain from the sale of 337, C. how- corporation. taxed to the Under U. S. occurring within gain exchange from a sale or ever, plan is adoption liquidation months after the of a corporation. Concededly, recognized not or taxed to involuntary from conversions applies gain the section long fire as compensated by such as losses as insurance, place as the or qualifying exchange event sale takes of a after, before, liquida- rather than tion. As indicates, the Court issue sole in this case is when sale or exchange occurred.
Here, the fire place took on September 10, 1965. The plan of liquidation was not adopted until May 14, 1966. the destroyed But property was insured, and the insurance claims finally were negotiated, settled, and paid after May 14, 1966. The Court holds that sale ex- change place took the time at of the fire; for in its view, it was the fire that transformed “tangible property into chose action consisting of a claim for pro- insurance ceeds . . . Ante, .” at 685.
I disagree. That the fire gave the company a claim under its policies does not mean that the in- voluntary conversion qualifying as a sale or exchange place took at that moment. It my view such claim does ripen into a sale or exchange until it has attained a sufficiently definite quality and value to re- quire the gain or loss to be accrued on the books of an accrual-basis taxpayer. plain It is enough for me that no accruable Central Tablet until after May 14, the sale or exchange therefore took place after rather than before the adoption of the liquidation plan. *17 general rule is that shall be “[t]here allowed as a
deduction any loss sustained during the year taxable not compensated by for insurance or otherwise.” 26 U. S. C. (a). § 165 Without doubt, had there not been in- surance in this case, Central Tablet would have suffered a deductible loss from the fire and that deduction would have been taken in year the fire occurred. The ordinary rule also is, however, that deductible losses must be evidenced by closed and completed transactions and fixed by identifiable events. Boehm Commissioner, v. 326 H. 287, S. 291 (1945). In the context of an insured fire loss, where recovery of insurance is uncertain or unrealistic
693 Ter Coastal year it occurs. loss is to be taken (1956); T. 1053 Cahn minals, Commissioner, Inc. v. 25 C. Commissioner, (CA9 1937). 674 But if there 92 F. 2d v. the loss prospect recovering proceeds, is a fair of recovery until of is suffi postponed question is to be Harwich, F. 2d 835 v. ciently Commissioner settled. Commissioner, 206 F. & R. v. (CA5 1950); Boston M. Co. Commissioner, 12 M. Jeffrey v. T. C. (CA1 1953); 2d 617 (1953). (d) (1) (2) Reg. provide: 1.165-1 Treas. §§ deduc- “(d) (1) A allowed as a Year deduction. loss be shall (a) only year in which the for taxable tion under section 165 be treated as sus- purpose, For this a loss shall loss is sustained. during year in which the occurs as evidenced tained the taxable loss by by completed fixed identifiable closed and transactions and as occurring year. provisions relating events taxable to such For. a to a will be treated as situations where loss attributable disaster year immediately preceding in the the taxable sustained taxable year (h) actually occurred, in which the disaster see section 165 1.165-11.
“(2) (i) casualty may If a or a other event occurs which resultan and, year casualty event, in the loss of such or there exists a claim respect for reimbursement with to which there is a reasonable prospect recovery, portion no respect to the loss with which may sustained, reimbursement be purposes received for of section is it can be certainty until ascertained with reasonable whether or not such reimbursement will be received. Whether reasonable prospect recovery respect exists with to a claim for reimburse- question ment of a loss is a upon fact be determined an exam- ination of all facts and circumstances. Whether or not such reim- may bursement will be received be ascertained with reasonable certainty, example, by for claim, by adjudica- settlement of the an tion of claim, by an abandonment of the claim. aWhen tax- payer year claims that the taxable in which a loss sustained is by his fixed abandonment of the claim reimbursement, he must produce be able to objective evidence of having his abandoned the claim, such as the execution of a release. “(ii) year If in the casualty of the or other portion event a loss is not covered a claim for reimbursement respect with *18 694 principles apply
Similar to determine when an accrual- basis realizes income when taxpayer an insured fire loss in gain. results taxable general principles Under of accrual accounting, two conditions must be met for in come to be given accrued in a year: taxable the taxpayer must have clear right a to the income, and quantum of the income be must within ascertainable reasonable limits. Anderson, United States v. 269 U. 422, S. 441 (1926); Continental Tie & Lamber States, Co. v. United 290, 297 U. S. (1932); Commissioner, Dixie Pine v.Co. U. S. 516, (1944). “It has long been held that in truly order to reflect the given income of year, all the events occur year must in that which fix the amount and the fact of the taxpayer’s liability. . . .” Ibid. These there which is a prospect reasonable recovery, portion then such of the loss is during sustained year the taxable in casualty which or other event occurs. example, For if adjusted having an $10,000 basis is completely destroyed by 1961, fire in and if the taxpayer’s only claim for reimbursement of an consists $8,000 claim for which 1962, is settled in taxpayer sustains a loss $2,000 in 1961. However, if taxpayer’s automobile is com- pletely destroyed in 1961 as a result negligence of 'the of another person and there exists a prospect reasonable of recovery on a claim for the full value of the against automobile such person, the taxpayer does not any sustain loss until year the taxable in which the claim is adjudicated or otherwise settled. If the automobile adjusted had an $5,000 basis of taxpayer judgment secures a $4,000 1962, $1,000 is deductible for the year taxable 1962. If in reasonably becomes only $3,500 certain that can ever be collected on such judgment, $500 is deductible for year the taxable 1963. “(iii) If the taxpayer deducted a loss in accordance pro- with the visions of this paragraph and in subsequent year taxable receives reimbursement for such loss, he does recompute the tax for the year taxable in which the deduction was taken but includes the amount of such reimbursement gross' his income for the taxable year in which n received, subject provisions to the section re- lating to recovery of amounts previously deducted.”
695 Reg. Treas. by been formalized have conditions twin part: in relevant provides which (a), 1.451-1 income is accounting, method of an accrual “Under have events all the when in income gross includable income receive such right to fix the which occurred with rea- determined can be thereof the amount and accuracy. . . sonable the issue is when principles governing are the
These
covering
policies
from certain insurance
income
whether
taxpayer.
had accrued to
personal
loss
business
liabil-
does not admit
company
an insurance
Thus, where
negotia-
in
position
or takes a
loss,
year
in the
ity
bulk of
whether the
quite
uncertain
which makes
tions
improper.2
accrual
recoverable,
will be
claim
2
States,
Dry
187 Ct.
Maryland Shipbuilding
Co. v. United
&
dock
required
extent
(1969) (accrual
because
not
Cl.
If normal accrual-accounting principles were to be
applied in this case,
clear that whatever the date on
which income accrued to the corporation, it would not be
the date of the fire, as the Court of Appeals held. At
least some period of time, however short, must be allowed
for the taxpayer to determine the extent of loss and to
file a timely proof-of-loss form with the insurer. Cf.
Thalhimer Bros. v. Commissioner,
As to the issue of liability, there was some disagreement
between the District Court and the Court of Appeals.
The District Court found that
no
“[a]t
time was an
express admission of liability made by taxpayer’s insur
ance adjusters.
Indeed,
there is some evidence in the
record that
the insurance companies denied that notice
of claim was properly given.”
Finally, personal to the property policy, dispute focused on the value of machinery equipment the cost of repair repairable machinery equipment. On approximately August 25, 1966, Central Tablet ac- cepted a $104,609.27 settlement on this claim, as com- pared with the $450,000 stated maximum.
The District Court stated that these negotiations were
"exceedingly complex and difficult,” and
each case,
“[i]n
substantial discrepancies existed between the initial offers
made by the insurance companies, the maximum permis-
sible coverage, and the amounts ultimately negotiated.”
To exchange” “sale that arguing in Although alous. fire, of the on date occurred to have be deemed must in Court Government suggested in favor were decided if the issue Appeals that to deter- be in order would then a remand Government, Court taxable. The gain was year in mine which this affirmed, followed is now judgment whose Appeals, Court. case to the District remanded the suggestion already having the District Court, possible is thus It until the not realized gain was concluded once reach the begun had will period liquidation under the remand; but on conclusion same corpo- taxable will be holding nonetheless Court’s very insufficient result, odd if This seems ration. gain by warrant the accrual occurred events *23 700 taxpayer,
an it is hold incongruous accrual-basis involuntary an conversion based collectibility on the proceeds nevertheless occurred at the time of In fire. the context of the compensated fire loss, realizing time of gain is more realistic criterion of when the sale exchange place or takes within meaning of §337.
The statute does not tell us when an con- involuntary qualifying version as a sale exchange must be deemed to have taken place. provides It sufficient flexibility so ordinary liquidations, sales or exchanges may be negotiated completed but all the corporation before the plan adopted. is It is contemplated that the cor- porate taxpayer may plan the liquidation and the timing of gains and from losses liquidating sales and exchanges. I perceive no reason why Congress would treat those whom accident forces to convert their property into cash any less favorably than those who have total control of whether a sale is to be made at all. If compensated fire qualifies loss as a sale or exchange, as the Govern- ment it concedes appears does, perfectly consistent with the terms as well as the purpose of § 337 to hold that the qualifying event occurs when is realized and must be accrued. This place would those who are forced to liquidate on par with those who chose to liquidate and to realize gains without paying corporate tax.
The Commissioner argues, however, that there an analogy between the treatment of condemnation “conver- sions” and losses by accidents. He would apply to com- pensated fire losses the uniform rule of the courts appeals that a corporation is not entitled to the benefits of § 337 when property is prior condemned to the adoption of a liquidation plan. Wendell v. Commissioner, 326 F. 2d (CA2 1964); Dwight v. United States, 328 2dF. 973 (CA2 1964); Covered Wagon, Inc. v. Commissioner, 2dF. 629 (CA8 1966); Likins-Foster Honolulu Corp. Commissioner,
v. (CA10 1969). F. 2d 285 The rule *24 in condemnation cases, however, directly is not odds at with accrual-accounting in- principles. Recognition come is at the time required taking of a which transfers title to the property obligation and creates an immediate upon condemning authority pay just compensa- to tion. 59-108, Rev. 1959-1 Bull. 72. Rui. Cum. At time the Government takes title to the property, it offers to pay amount, certain thereby fixing liability its in a reasonably ascertainable amount. Under federal law, when the United States condemns property, it files its Declaration of Taking deposits the amount of esti- mated compensation in court. Covered Wagon, Inc., supra, 634. taking at title in vests the Government, deprived the condemnee is of his property, and he is certain to recover at least the fair market value estimated the Government.4 4 The analogize Commissioner also seeks to this case to those deal ing computing holding with period destroyed prop of lost or erty in measuring connection with gain whether the from the sale capital of a asset long-term is taxable as short-term capital or or ordinary income. Rose States, 298, See v. United Supp. 229 F. (SD 1964); Cal. Steele States, v. United 52-2 U. Tax Cas. S. (SD 1952). Bose, ¶ 9451 involuntary Fla. In which dealt with con holding period version in of the asset was found to terminate ship when the sea, was involved lost at rather than when insurance proceeds were received. The dating test for the of the end of the holding period is when the benefits ownership or burdens are transferred or when title passes, whichever occurs first. See Com ment, Extending Liquidations Section 337 to Triggered by the Invol untary Corporate Assets, Conversion of 1203, 1213 62 Geo. L. J. n. 55 (1974). Bose, In ship when the totally lost the owners aban doned it gave rights all salvage income to the insurer. Thus, rights all ownership relinquished were at the time of the loss. The case does not relate to timing of the receipt income, as does case, the instant only but period capital time a asset is held. The parties in Bose did dispute that the gain, it whether
This is not the case here. The fire an irrevocable event and except for the insurance, represent would loss immediately accruable. But with insurance cover- age, may there a gain, be the amount of which may may not be reasonably then ascertainable, either or within a short time; and until it is ascertainable, normal rules of accrual accounting require would not any gain to be recognized; and until that occurs transaction has not sufficiently congealed to qualify as a or exchange. sale
I add a final note. The controlling Treasury Regula- tions under provide § 337 considerable flexibility to the parties in liquidation Indeed, situations. Reg. Treas. § 1.337-1 provides that “sales may be made before *25 adoption of the plan of liquidation if made on the same day plan such adopted.” (Emphasis added.) Thus, even under the Court’s view that the sale or exchange oc- curs at the time of the fire, § 337 would be available to the property owner if it were sufficiently aware and took pains sufficient in advance to comply with the Regulation or was a closely held that could adopt liquidation its plan before the day the fire was over. Other taxpayers not so inclined or so circum- stanced to provide for contingencies would be fore- closed. Section 337 would remain a trap for the unwary, the precise situation Congress sought to avoid. was short-term or long-term, as determined the holding period, was to be recognized in 1960. This was largely appears because it that all relevant events occurred in year; loss, admission of liability, and settlement. In Steele, there was dispute also no as to the timing recogni- tion. The taxpayer, reporting on a basis, cash received insurance in 1944 for the loss which occurred in 1943. The Commissioner asserted deficiency 1944- Even though the court held that there was not a 6-month holding period, so that was ordi- nary income, it was still incurred in 1944, the date of the receipt of insurance proceeds, and not in 1943, the date of the loss of the vessel.