Hercules Powder Company v. The United States

administratively. open Conse- left been quently, plaintiff’s petition we now treat say alternative, if is to en- deduction which under our for 1956 is titled carry-back to a loss sufficient to create 1954, taxpayer, nevertheless, entitled might ato refund such a deduction which Richmond, Washington, David W. D. year create for C., Graves, plaintiff. for Frederick O. Kipps, Jr., Accordingly, T. judgment Clarence and Miller & for is entered Chevalier, Washington, C., any, plaintiff. recovery, D. were The amount of pursuant is to be briefs. determined Rule 47 (c) (2) of the Rules of this court. Reese, Jr., Washington, J. Mitchell D. C., Acting Atty. with whom was Asst. Gen., Jones, Jr., John B. defendant. Smith, Lyle

Edward Turner S. M. Miller, Philip Washington, C., R. D. were on the brief. JONES, Judge, Before Senior WHIT-

AKER, Judge, LARAMORE, Senior DURFEE, Judges.1 DAYIS, HERCULES POWDER COMPANY WHITAKER, Judge, Senior delivered following opinion DUR- The UNITED STATES. FEE, Judge, concurs, and announced the No. 251-61. judgment of the court: Plaintiff sues for States Court of refund of income Claims. year 1953, taxes taxable Oct. which defendant asserted ground liable on the it dealt might shares stock as it have done the shares of another 39.22(a)-15 Treasury Reg- Section 118, applicable ulations to taxable 1953, provides corporation that “if deals in its own shares as it corporation, shares of another the result-

ing gain computed or loss is to be though another.” purchased shares, had during period January 2, 1930, September 21, 1932, from its During and on the market. question (1953), it dis- tributed these certain key employees pursuant of its to its stock place adopted 1. The findings trial of this case took before as the basis for Judge However, Chief Judge Wilson Cowen when he was fact. Chief Cowen did part Trial Commissioner the court. As take the consideration and de Commissioner, respect. Trial Chief Cowen cision of this case in report rendered a which the court 644 disparity to avoid an undue in the plan. tax returns re- Plaintiff’s bonus liability. adjust- impact of A income tax ported difference between taxpayer may secure a de- and its market for this stock ed basis gains. distributed, of a tax

value, termination matter, as when may plaintiff however, a which recur Subsequently, filed a matter alleging refund, for realized without substantial variation that it claim years a upon The some But sub- thereafter. the transaction. no income sig- sequent denied, modification of followed. suit claim was develop- nificant facts or a Except that another fact controlling prin- ment in the involved, issues is facts and ciples make that determination virtually presented are iden- this suit erroneous, at least obsolete presented in the with those to us tical purposes. If future such a deter- of Hercules Powder Co. v. case perpetuated mination is each 180 succeeding year as to the plain- (1960). In that case we held original litigation, he as in its own shares tiff was is accorded a tax treatment of an- in the shares given taxpayers from that to other corporation and that it therefore other * * of the same class. years taxable income for the realized no « n “ * -x- jU(jiciai- distributing treasury declaration [¶] 1948-1952 case, pro- In the between the two under its earlier bonus ceedings Regulation applicable to so the taxable 39.22(a)-15 atmosphere as to render the rule of 1952 was also section Regulations estoppel inapplicable. Treasury 118. Section * * -x-» Regulations Treasury 29.22(a)-15 of governed con- which 599, 600, Id. at 720. 68 S.Ct. language, as this identical insofar tained says that the facts The Government 39.22(a)- concerned, section case cases diffei-ent and that two are has atmos- been a determination our earlier phere.” First, be- is there distinction collaterally estops from re- defendant The cases? tween the facts litigating facts in since the gave underlying rise to both events has same and there the two cases are the first occurred controversies applicable law. We no been only suit are variance identical. and, estopped defendant to which the facts the two cases hence, hold, did in the we points cor- is that the several defendant plaintiff recover. is entitled to porate implemented resolutions which plan estop several case on collateral The landmark course, course, not identical. pel is, of In Commissioner Sunnen, U.S. ternal Revenue v. 333 plan first institu- was Plaintiff’s (1948). 92 L.Ed. 898 plan pro- time, the At that ted in 1912. “matters Court said that payable be all vided that bonuses litigated deter which were company. in stock of the proceeding later first cannot mined permit be bonuses amended fought relitigated. party Once be or a com- paid or cash in stock either litigation with the- a matter in Bonuses were two. bination duel.” party, he renew cannot later began plaintiff when While U.S. at permit- subscription program that this doctrine was held that the Court purchase its shares ted litiga applicable as other to tax as well payments de- plan, with the installment tion, it also said: From salaries. fi-om their ducted solely in plaintiff paid doc- is a to 1936 “But collateral exigencies being of the De- applied capable cash because trine pression had increased the cash needs Plaintiff held in its and, bought employees. resumed after it. more paying Instead, plaintiff surplus and cash. bonuses both stock invested its cash thereafter, except corporations It did so in when stock in and during paid, bonds, no bonuses the war were Government which it sold when payments prices when all-cash made increased. were 1932 and personnel buy plaintiff to its enable to Govern- used some its during acquire ment bonds. After the war and to control of two other business- years suits, involved in es. these Since it has distributed this plaintiff high-level paid only pursuant plan.2 bonuses to to its bonus employees executives and in says Defendant that the fact that payments stock and Cash were cash. corporate authorizing resolution employees to made enable who received necessity, must, issuance of bonuses pay imposed on income tax have been a different act from the bonuses, they their that identity resolutions and fact have to sell the stock in order meet to recipients of the as well as the their tax liabilities. amount of cash and stock each received During question different, the tax render the doctrine estoppel inapplicable, bonuses were in cash and stock. but de- signifi- employees The fendant sole difference was in the has failed to show what who received cance and the amount these on new factual elements have legal question problem them. So far as solution before posed concerned, they is there is difference us. We think none. The have irt the facts. factual differences must be material ones. They legal significance. must have The bought observed, plaintiff As we have plaintiff before is us whether all the stock which it later distributed to dealing in its own stock as it during employees period the stock of another cor- Depression, January 2, 1930, from to poration. We see no reason to September 21, 1932. reason The question simply our determination of this purchases bought was twofold —it about plaintiff’s carry because resolution to shares from its who plan the bonus for 1953 named different were unable to fulfill their commitments recipients and allocated amounts subscription plan, under its stock and it persons to each from the and amounts purchased approximately 23,000 shares specified in the 1952 resolution those market, support in order to gone that had before it. It is admitted price for its stock. The stock market persons benefited, e., the class of i. place debacle that took at the onset of key employees, executives and did not Depression prevented plaintiff’s stock- periods as between the two holders, who wished to sell their to get purpose time. Nor were cash, buy- effect finding much-needed ers, plan any Hence, of the possibility and the disastrous different. a reject price drop prompted further plaintiff drastic we must defendant’s contention purchases significant to make selective there is factual distinc- provide orderly order “to an retreat tion between the two cases. [Finding the market.” 14.] Our com- Defendant does not assert finding sup- missioner’s to this effect is has been a in the statutes or the ported by the evidence. regulations, it an inter- provide carrying vening To means for out its decision of this court has so alter- part plaintiff’s was no atmosphere require ed as to us purchasing collaterally this stock. estopped. that it is not During 1953, $446,828, together this $1,373,- value of suit, gave 6,571 shares, having 1,240 employees. 787 in corporate said, note, atmosphere” expression is in a it “was held for purposes.” Court’s taken case, supra. suppose the Sunnen say: facts led All these us expression meant circumstances, is “Under some construction law corporation’s true, that a own stock applied or similar facts. asset. held an regula applicable is the law it, Upon acquisition absent stating by a tion is derived property, intention to use it as other corporation from in its own stock equity corporation’s it of it deals it as could stock by But, of reduced amount it. corporation. corporation acquires another not That law has it for where a holding temporarily purpose of it changed, if, but,. after the Hercules might it and later as it use decision, we had held in some corporation, of as it stock might another materially case, facts other whose use it would seem Hercules, corpora as the same is of it the same character as it tion had dealt its stock as would might corporation other stock the corporation, have in the of stock another acquire. case, corpora- In such “legal atmosphere” would have equity tion’s in fact changed, and collateral should treasury reduced, because the stock corporations apply, for all should be disposition. is earmarked future treated same. Defendant Gen It is somewhat the same status as States, eral Electric v. 299 Co. United outstanding other stock while held denied, treasury pending disposition 371 156 cert. F.2d Ct.Cl. its as, purpose, for a such L.Ed.

U.S. discharging g., purpose e. for the agree. (1962), is such a case. do not We obligation likely an incurred or to be Electric, In we held that General incurred.” acquired corporate taxpayer its that had Ct.Cl. pur- and had used it stock thought that all of factual among giving things, of pose, other circumstances in tinguished dis- employees pursuant its its that case from our it in such stock as bonus might decision in Powder and that Hercules have dealt in another was no conflict between Elec- The facts in General did cases. We not overrule Hercules tric in Hercules were not same as thought Powder but facts the two acquired its Electric Powder. General require cases were as so different through treasury open- stock, supply of different conclusions. by liquidatiqn purchases and market Corp. v. United subsidiary, In Penn-Texas for the of meet- of a (1962), obligations plan. ing under its bonus gain taxability of acquisitions had was the Hercules Powder’s alleged derived from to have been In addi- its bonus relation to exchange 8,927 tion, frequently Electric used General defray obligations (acquired for resale persons arising plan; as the board or such other its bonus than those under advisable) deem directors for charitable contribu- used the stock agreements patents of Walter and license issued to its subsidiaries tions also Industries, carrying held Inc. We Jacob out their own P. their use in gain. acquisitions no taxable had realized plans. It carried the both support we cited (more of our decision than its own stock Powder, acquired Electric and Hercules shares), it had over General application of period authoritative each on sheet its balance peculiar heading facts. law its under the “investments” distinguishing opinion from the decisions in said: Hercules we Powder and General Electric are not inconsistent and that the General “Our conclusion the Jacob did not exchange did not lead to atmosphere.” already consistent, indicated, It collaterally follows Electric Co. defendant is estopped relitigating States, supra, No. Ct.Cl., 1962, that it imposing was in 299 F.2d 942. Neither error in the tax acquisition disposition that it plaintiff. nor collected is entitled to General Electric’s shares is recover. comparable taxpayer’s. to the Gen- Judgment plaintiff’s will be entered in large portion eral Electric received a favor and the case is remanded for fur- stock, liquidation of its proceedings ther pursuant 47(c) to Rule subsidiary, in return for the latter’s (2) to establish the amount of the refund parent; stock held this trans- to which is entitled. action was deemed covered Treasury Regulation part of the LARAMORE, Judge (concurring in specifically providing ‘if the result): the its own stock as receives by Judge I concur in the result reached upon prop- sale consideration erty by the of opinion, Whitaker that, his I since believe it’ or loss must be the merits, on the case is controlled major into account. The taken case, supra. the first Hercules Powder cases is that difference between original my I adhere to belief that regularly used its Electric case, supra, was errone- recurring satisfy needs. ously decided. through The shares not received deliberately liquidation ac- DAVIS, Judge (dissenting): obliga- quired in order to fulfill agree I do not that defendant is bar- company and its parent tions of relitiga- estoppel red collateral employee under various affiliates ting the issued in Hercules decided compensation plans for charit- and Powder Co. v. United (which could have able contributions 363, (1960). This suit in- par- cash, at least been satisfied in year. volves a different such tially)- treasury shares were —and us, has told Court regularly disposed pur- of for those estoppel inapplic- doctrine poses under what was in effect con- (a) able if facts in “the relevant tinuing findings, program. On these though they separable, are he cases even court concluded that General (Commissioner or similar identical” engaged in Electric ‘was the enter- Sunnen, Internal 333 U.S. Revenue v. prise acquiring own stock] [its (1948), emphasis 68 S.Ct. using in the for the charge dis- added); (b) or there has been “a obligations, in lieu of controlling legal development or in the payment of them in cash or 720), principles” (id. at at 68 S.Ct. discharge them’; and other stock “a declaration be- regularly and used proceedings tween the two [which] acquired in lieu of so legal atmosphere as to corporations. or cash stock in ‘other estoppel in- render the rule of collateral pattern That circumstanc- those 720), applicable” (id. 600, 68 S.Ct. at at do es not exist in [158 Colt’s case.” or “a in the cli- sufficient 575, 585, Ct.Cl. 581.] (id. mate” to render the bar unavailable pattern my view, “That circum- and those at at stances” no in Hercules’ are fulfilled more existed both these alternatives they case than are still did Colt’s. We here. opinion points phere” This As Whitaker’s and the climate.” out, many pre- earlier facts are standard does not mean the relevant cisely same, separable from, lim- those decision must have been overruled litigation. strictly facts, But that is ited to its or that facts, ruling necessarily incon-

true all second must Sunnen be language confined collateral in tax sistent used cases with the first. The very rather, opinion suggests, facts and instances where Sunnen no others are second case” court freed second should be (id. 721, emphasis determination if there added). Moreover, I annual consider the has been or alter- some marked advance orientation, approach, resolutions to a critical be element ation in relevant reasoning principles. continued execution of the bonus Just such Nothing court, could be until the resolu- done has occurred within this adopted comparison tion as a in Her- apart —or from the terms that resolu- cules 1960 with that Gen- wording Penn-Texas) (and tion. Even of the res- eral also in olution for the taxable was identical 1962 will show.4 It makes no differ- prior case,3 with those in the the docu- ence that the decisions all recon- be are, quite plainly, separate facts; differing ments cilable application their that, sig- estoppel, distinct. declares if “the Sunnen of collateral proceeding may point second approach involve an instru- nificant is that the court’s with, type ment or sharply transaction identical to this of case has veered separable from, a form the one dealt with since the first Hercules Powder. proceeding,” way in the first “court is therefore for us consider proceeding issue, context, second to make present free legal' independent examination merits. (id. 601, at matters at issue” at On the merits I would principle This is illustrated defendant. Because of holding in tax issue Sunnen itself. One adjudication development, the former growing royalty payments concerned followed, prece- as a not be even need identical license contracts which were Corp. Mississippi River Fuel dent. See important respect in all with an earlier 953, States, Ct.Cl., v. United subject contract which had been the April (concurring decided the first tax decision. opinion). proceed This can de novo. squarely held income “[f]or Court that a case for the is not as clear Government purposes, one what is decided as to as I read the bal- any other contract is not conclusive as to swing against tax- ance needle does issue, is not then in how- contract which payer. dissent in the ear- Jones’ (id. ever similar or identical it be” company persuasive lier that the added). 721, emphasis at 68 S.Ct. at stock, in and dealt with the payments, around the of the my been, opinion, a There also controlling as it could and “development shares, corporation’s or with principles,” atmos- another “a major identical, Hercules fact, is that difference Another are not 3. Ia the resolutions regulation’s finding nearly Compare seems to consider Powder or so. taxability finding limited to present criterion corporation 24 in the case with “huckstering F.Supp. 363, one, 149 Ct.Cl. way any speculator in- or 93-94. any would do with vestor corporation.” thing, Hercules one For validity 82. Neither General Ct.Cl. at cast doubt on narrow a Regulation. Treasury nor Penn-Texas takes theory Both of the also, regulation. See, n. view of the ex- validity. infra. plicitly to and reaffirm refer underlined, for That conclusion is cash. CO., JACK MFG. Inc. REGENT present year (1953), implementing terms of the resolution The directors determined The UNITED STATES. portion of the bonus fund allo Nos. 259-62. en cated individual consist Court of Claims. United States tirely treasury stock, entirely Oct. cash, partly stock and 22, 1965. Rehearing Jan. Denied partly all in the discretion of the (finding 29). equation, President” minds, in the directors’ between cash stock is thus made

plain on the of the So face resolution. policy-making far as the con board was cerned, the entire bonus could as well have been For cash. think, nullifies, effectively I assumption give bonus, part, was to at least recipients I a stake say taxability simply do results desired, company, if it had

because the could have substituted cash for stock. My point company is that affirmatively

.contemplated cash and in which

decided that it was immaterial paid.

coin the bonus was This is a con

trolling showing circumstance

taxpayer, fact, dealt in its own shares

as it an cash or the other firm. See Electric Co. v. 942, 948-949,

United 299 F.2d (1962),

156 Ct.Cl. 627-629 cert. de

nied, 371 U.S. L.Ed. (1962); Corp.

2d 275 Penn-Texas (1962).5

158 Ct.Cl. 581-585 JONES, Judge, joins Senior

dissenting opinion. payment entirely a bonus ration. The facts are majority tbe said that the facts from those in the Hercules cases and was, course, of that case and of tbe first Hercules no occasion to re- closely alike”; opinion Powder “are consider the first Hercules decision. But differentiating specifies opinion clearly departs or fac facts the Penn-Texas saying approach opin- tors but contents itself with from the restricted ease, believe, “the facts of the instant ion in the first Hercules. That decision bring regulations” (299 only accepted proposition it within the is cited 156 Ct.Cl. at certain factors are not conclusive Penn-Texas, general which the court decided and of themselves. ra- against taxability, approach, although not concern bonus did tionale and holds one exchange payments against, isolated and the other property stock for owned in- is far closer which were terests proprietary anxious to obtain a Her- Electric than to the earlier taxpayer-corpo- cules. stake

Case Details

Case Name: Hercules Powder Company v. The United States

Court Name: United States Court of Claims

Date Published: Oct 16, 1964

Citation: 337 F.2d 643

Docket Number: 251-61

Court Abbreviation: Ct. Cl.