*1 REVENUE, INTERNAL HIGGINS, COLLECTOR OF v. SMITH. January 8, Argued December
No. 146. 1939. Decided Clark, with Attorney General whom Solicitor Assistant Key, Raum, Messrs. Sewall Arnold Jackson General brief, petitioner. M. Jones were Joseph respondent. Sher for David Mr. opinion delivered the Court.
Mr. \ Reed Justice judgment from the was allowed1 Cir- Certiorari Circuit2 on account for the Second Court cuit decision below between conflict an asserted 1 Post, p. 536.
2 102 F. 2d Circuit in Appeals for the Seventh of the Circuit Court of Commissioner v. Griffiths.3 *2 taxpayer considered here is whether a under issue
The of this case is entitled to deduct a loss the circumstances corporation wholly arising from the sale securities to § taxpayer. (e) owned statute involved is Act of 1932.4 Revenue Corporation wholly The Innisfail was owned by the taxpayer, organized Mr. It was in 1926 Smith. under the Jersey. laws of New and directors of the officers taxpayer. were subordinates of the Its trans- were carried on under actions his direction and were largely operations buying restricted securities from selling taxpayer. or them the While its accounts were kept completely separate from those of the taxpayer, corporate there no doubt that Innisfail was self. As dealings by corporation opportunities offered for income savings, and estate tax Innisfail was created to these its advantages for stockholder. One first of its was acts option belonging to take over an taxpayer for the exchange acquisition by of a block Chrysler common Through stock. mutual in buying transactions and sell- ing securities, receiving dividends, the balance of accounts between Innisfail taxpayer and the resulted, on 29, 1932, December in an from him indebtedness to Innis- Commissioner, ante, affirmed sub nom. 3 103 F. 2d Griffiths p. 355. 179-80. “Sec. 23. Deductions from Stat. Gross Income. computing income “In net there shaL he as allowed deductions: Subject “(e) provided Losses to the limitations Individuals. — (r) section, this subsection in the case of individual, losses sus- during year compensated tained the taxable and not for insurance otherwise— or
“(1) business; incurred trade “(2) any if incurred in profit, though transaction entered into for business; not. connected with the trade or ...” date, payment nearly $70,000. partial fail On were number of shares of stock indebtedness, at market. The corporation by taxpayer sold to the than taxpayer price had cost the more securities sold carrying and in out the trans- corporation, charged to the consequences had in mind the tax action the himself. the tax- net taxable income computing his as a loss the difference between cost deducted
payer their to his price of these securities Internal Revenue The Commissioner of corporation. against claim, whereupon respondent paid ruled for refund the United States brought tax and this suit York. New Southern District of District Court the. jury and the verdict The case was tried before *3 claim that the sales taxpáyer’s purported adverse realization to Innisfail marked of these securities the On purchase. appeal on their the judgment loss to Court for case remanded the Distrio- reversed the the Court of opinion trial. It was the a new law, above, as a matter estab- that the facts as detailed an Innisfail as of the securities to lished the transfer determining loss. event losses (e) permitted are § deductions
Under is during year.” taxable The loss sus- “sustained the by a transaction deter- completed when-realized tained jury In this case the was instructed amount.5 mining its to Innisfail taxpayer find' these sales the to whether property transfers of Mr. Smith actual were “put him” from something separata apart that existed into “a transfer they regarded simply to be as whether were hand, into hand, being by Mr. Smith’s left his’individual in truth that corporate hand, his so right hand, being jury agreed no all.” there was transfer at and fact There was sufficient evidence latter situation existed. Huff, Burnet S. 288 U. domination taxpayer’s continued and control of through ownership securities, Innisfail though even owner- Corporation, support verdict, this corporation had ship in the securities passed which the was the stockholder. taxpayer sole Indeed in wholly domination and control is so obvious a corporation require peremptory instruction as to no statutory loss could occur sense by taxpayer entity. such an sale It is clear actual existed. corporation an Numerous years. transactions were carried on it over a period paid It taxes, national, state and and income. franchise the existence of actual only But one (cid:127) necessary complete incident an actual to it sale under Title, act. we assume, passed the revenue shall to Innis- fail but retained Through the control. corporate might forms he chose manipulate as the exer-. (cid:127) rights corporations, cise shareholder’s the various securities, and command disposition issuers securities themselves. enough There is not of sub- finally in such a stance to determine a loss. The Government urges principle underlying Gregory Helvering6 expression finds rule calling approach for a realistic tax situations. As so broad and unchallenged a principle only general furnishes direc tion, it is of little value tax problems. solution of If, hand, on the Gregory other case is viewed ,a precedent disregard of transfer of assets without *4 purpose a business solely but reduce tax to liability, it gives to the support natural conclusion that transactions, vary change which do not control or the flow of economic benefits, are to be dismissed from consideration. There is no payment illusion about the of a tax exaction. Each tax, according'to legislative plan, raises funds carry to 465. U. S. and earnings is tax The here purpose government. factor If or the other one and losses. expenses profits less liability unreal, distorts any calculation is advantage of the taxpayer to detriment particular group.7 tax-paying entire Improve- v. Commonwealth Burnet cites taxpayer taxpayer treating for precedent
ment Company8 as In entities. separate corporation solely and his sole stock- corporation sold that case the transaction B. Widener. of P. A. holder, the Estate ruling sought a corporation and the profit a book showed in a result not could its sole stockholder that a sale held and concluded otherwise This Court profit. taxable pur- taxpayer distinct identity corporation Improvement Commonwealth taxation.9 poses satisfactory to for reasons taxpayer, Company case, employ the voluntarily had chosen itself or- adopt free to such A operations. its having may as he choose affairs' for his ganization must corporation, as a business to do some elected disadvantages.10 accept the tax may not the Government hand, the other
On taxpayer’s election of in the acquiesce required to advantageous is most which doing business form for look at actualities may The Government him. doing business employed form that the
determination unreal or tax event is challenged out carrying fiction as effect disregard the sustain or may sham hold tax statute. To purposes serves best super- taxpayers the schemes permit would otherwise of the time and determination legislation sede 532, 537. White, S. Cf. Stone U. 415. 287 U. S. 19; Dalton v. Supervisors, 282 U. S. Board Klein v. also 9 See Clark, 287 U. S. 404; Burnet v. S. Bowers,287 U. Co., Copper 270 U. S. Chile Edwards Cf.
478
manner of taxation.
is command
income
It
and its
which
benefits
marks the real owner of property.11
a conclusion, urges
Such
is inconsistent
respondent,
interpretations
with the
prior
the income tax laws and
consequently unfair
him. He points
to the decisions
four
appeals
courts of
which have held losses deter
mined
sales
controlled corporations allowable12 and
calls attention
further
to the fact that
the Board
Tax
consistently
has
reached the same conclusion.13
judicial
But this
no
administrative construction
has
significance
respondent.
for the
The' Bureau of Internal
Revenue
insistently urged
February 18, 1930,
has
since
the date of the
Tax
Appeals'
Board of
decision
Jones
Helvering,14
v.
that a transfer from a
to a con
trolled
was ineffective
close
transaction
the determination
Every
loss.
case cited
respondent
appeals
courts of
and before
Board
of Tax Appeals
supporting
found the Government
ruling
contention. The
Board’s
Jones case
11
Earl,
Bowers,
Lucas v.
376;
Corliss v.
111;
281
281
S.
U. S.
U.
Commissioner, ante, p.
v.
Griffiths
12
Helvering,
23,
Jones v.
App.
204;
(April
214
D. C.
71 F. 2d
cert,
reversing
February
18,
1934,
1225,
1930),
18 B. T. A.
decided
Eldridge,
Commissioner v.
8, 1934',
583;
denied
October
U. S.
(November
4;
affirming
1322,
1935,
2d 629
30 B. T. A.
decided
F.
McCreery,
13,
July 31,
(May
Commissioner v.
1934);
13 David 17 B. T. A. Corrado & Ga 847; Inc. v. liardi, 22 B. T. A. Edward Securities Commissioner, Cor 918; Commissioner, Ralph T. A. Hochstetter poration B. v. Commis 791; Commissioner, John Thomas 34 B. T. A. Smith supra, sioner, 40 B. T. A. T, rehearing May 26, 1932, unpublished. affirmed A. 18 B. standing unreversed at the time of the transaction here *6 involved, December 29,1932. It was only after the trans here involved and after the reversal of the Board actions April Jones case on or this Court’s refusal of certiorari on October 8, 1934, that the Board of Tax Appeals and the courts of over appeals, Government pro tests, in line with opinion ruled Court of the. Appeals of the District Columbia in the If Jones case. stand in case represented Bureau’s the Jones a change in there practice, administrative no doubt that the can change operated validly at least from 1930 on.15 After sought the Jones defeat the Government relief in Con in gress judgment Griffiths, and after the Commissioner v. in supra, certiorari here on a conflict principle between no Certainly acquiescence circuits. was by there the Gov justify taxpayer relying ernment which would in prior interpretations of the law.16. further
Respondent point makes the the passage Act of 24(a)(6) §of of the Revenue 193417 which ex- any deduction losses plicitly forbids determined corporations taxpayer sales to controlled is con- vincing formerly the law was otherwise. This proof that 15Helvering Co., ante, p. Wishire Oil 90. Commissioner, ante, p. Cf. Estate 39. Sanford Items not Deductible. 17 48 Stat. “Sec. computing net income
“(a) no deduction Rule. —In shall General respect any of— case be allowed directly property,
“(6) from sales or or exchanges Loss indi- family, (B) except or rectly, (A) members of case between liquidation, between an individual corpora- and a of distributions directly owns, indirectly, individual more than which such tion in outstanding purpose in value stock. For the per centum owning individual shall be considered as paragraph (C) — family; (D) family owned, directly indirectly, his and only (whether include his brothers and Sisters shall of an individual ancestors, blood), spouse, and lineal half descendants.” by the whole or not follow. At most it is evidence a later does Con- recognize 1932 Act to gress separable construed the tax- taxpayer able identities between provision goes new much farther corporation. As the than disregarding former decisions transfers between may family passed well have been members clarify existing rule. The sugges- extend well as sufficiently vitality tion to futile persuasive give is not transfer. objections taxpayer preserved has two the dis- He judge’s rulings
trict on the evidence. claims that evidence as transactions between place prior which took the sale here highly prejudicial. We involved remote thir1' *7 entirely it relevant to apparent that this evidence history taxpayer’s of the relations present issue; on the light shed considerable actual with the The is question. in second contention effect jury less judge charged give the district effect that the corporation of Smith and than book entries applicable entry to under book they were entitled departure The from the alleged statute has statute.18 record, resting on a single support but dubious from its part context as judge of the lifted statement In with colloquy counsel. the circumstances extended of prejudice no merit the claim is there taxpayer. Appeals Court Circuit is judgment Court affirmed. and that the District
reversed
Reversed. Roberts, dissenting. Mr. Justice be To judgment I think the should affirmed. reverse separate entity o" respecting rule disregard a is logic having practicality basis corporations C. 695. S.U. § utat. 18 49
T—1 oo long which has been observed in the administration of the revenue acts. inception
Since the of the system of federal income taxation, capital gains have capital been taxed and certain losses have against been allowed as credits gains. such In might order this system practical it has been necessary to select some event as the criterion of realiza- gain tion loss. revenue laws have selected the capital the closing time of aof transaction occasion! reckoning gain for or loss a A capital on asset. typical1 method closure sale of is a the asset. voluntarily the sale
As is made the taxpayer, his determination when he shall sell affects capital hiss He, therefore, or loss. sense, a controls question. whether, given in a must tax year, pay taxable gain or realized claim credit loss. Of may realized pass such sale must be bona and title must course fide absolutely. present the sale and transfer instance such, and, were as the Circuit held, Court of jhere a scintilla evidence to the contrary was' not for the' A who jury’s pretends consideration. he has agreement sale when in fact he which has a secret made practical purposes, him leaves all the owner of stillr thing sold, committing is but fraud n . revenue. fide, if passes title in fact irrevocably
If the sale bona another, basis, .reckoning takes as his other *8 paid upon loss, price asset; the gain and it be a disposition reckoning there will new future loss, disposition. respect Here, with to such if or gain respondent or a either to third party Innisfail sold to gain reckon or loss on the If it have to sale. it would liquidation respondent in the asset would distributed liability receipt tax on the to a his.dividend. subject be ' then, question, whether, law, is as matter a The sole and absolute sale to a owned wholly fide corporation bona completed transaction, determining a a constitute can loss. corporation wholly ás how sale a problem a by. an individual is controlled or is not a one. The existence of be treated such new dealings between them and the and their
corporations long or have been stockholder stockholders understood. problem.1 not At Congress ignorant the out- adopted might well a Congress policy that set have or by corpóration, versa, the stockholder vice sale tó disregarded, treated as be should stockholder imtil its capital owner of asset a effect it would a stranger. hand, practical On be other entity recognize separate corporation, policy for adequate transfer at current value treat a tó considr it and occurring its sole stockholder between as. eration purpose for the of reckoning transaction closing a either loss, upon then to tax or the vendee his or its «gain subsequent transfer comparison,, or loss gain acquired on which the asset was the basis and the disposition by on final realized vendee. amount was adopted latter and was fact, course consistently Congress until 1934 when dealt with the followed subject. Justice court, speaking Holmes, Mr. said, This “ Supervisors, U. S. 24: .
Klein Board . . corporation to call leads If nowhere fiction. But it is fiction created law with a fiction it is intent. acted on as if true. it should 169, 196, (b) Act of c. (5), Revenue Stat. 1 The § recognized “No or loss shall be provided: property is trans corporation by persons solely one or more exchange ferred to corporation, securities such and immediately after the exchange person persons corpora such are control of the tion; .” . .
483 person a ownership its ais nonconductor that makes it impossible to attribute an interest in its property its members.”
In this view assets received on the liquidation of corporation one-man constitute taxable income to the sole stockholder.2 Likewise, losses corpo sustained wholly ration owned individual may. one not be reported and claimed in the individual tax return of the latter.3 And the sole stockholder his cor controlled poration may tack not successive periods ownership up make years the two required become, asset to within the meaning of statute, capital asset.4
This court has found that
a taxable
was realized
in a case
wholly
where a
corporation
owned
sold securities
to its sole stockholder.5
Every element appearing
that
is paralleled here,
comparison
case
of the facts stated
in the opinions in the two cases will demonstrate. This
court said,
referring
earlier
case,
corporation:
only
“The
fact
it had
one stockholder seems of no
legal significance,”
corporation
and held
a separate
entity.
said,
It
now
however,
taxable
is no
there
applying
inequity
not
rule to losses as to
same
gains
who
option
exercises
because
through
business
portion
conduct
instrumen
tality
corporation
of a
does so in the full
him
knowledge that,
does, gains
shown on
sales
taxed
oh
will be
whereas losses
such sales
deductions.
not be allowed as
As hereafter will be'
will
this is now true
virtue of the
shown,
amendment
2
917;
F. 2d
v.
F.
v.
Commissioner,
Handy,
Coxe
France Co.
Greenwood, 1 B. T.
Supp. 178;
K.
A. 291.
John
404;
287 U. S.
79 F.
Bowers,
Commissioner,
Dalton v.
v.
Menihan
2d 304.
Knox,
embodied in
Revenue Act
that
adoption
as the law
before the
of
amendment.
stood
with
to deal
upon
In 1921
was first called
Treasury
wholly
owned
arising
of
sale to
loss
out
deduction
year
published
Opinion
In
Law
corporation.
was
fide and
1062.6 It
held that
the sale
bona
was
title
even
passed
absolutely
corporation,
to the controlled
reducing
the sale
made with the intent of
though
was
liability
provisions
of
fell
the tax
the vendor it
within
reckoning
concerning
of the revenue act
of
informed,
transaction. So far as I
loss
closed
am
Treasury
administering the vari
followed this rule in
after it was issued.
first
years
ous revenue
acts
The'
change
of
in its
refusal of
position
evidence
recognize
Commissioner of Internal Revenue to
losses
bona fide
resulting to
from a
bonds
taxpayers
to a
by them
owned
at
Appeals
The-Board of
sus
price.7
current market
Tax.
Commissioner,
Appeals
but
Court
tained
Columbia .reversed the
Jones v.
District of
Board
Helvering,
.meantime the Circuit Courts Appeal nad decided numerous which cases are, indistinguish-. principle, able.11
This having court denied certiorari in Helver- Jones v. ing, supra, Gregory Helvering, decided U. S. in the following January. cited It the Jones case with approval, at p. 469, . saying: legal right “. . a taxpayer decrease the amount what otherwise would taxes, altogether them, avoid means which the law permits, cannot be doubted.”
So well settled judicial had the interpretation become the Treasury determined to recommend that Con- *11 result, gress amend the statute.12 The adoption was the 24 (a) §of (6) of the Revenue 1934.13 Act of The com- mittee reports disclose that Congress thought it necessary change in order to statute render nondeductible a loss on claimed a sale to a owned or a controlled corporation.14 Subsequent hearings before the Joint Commission on Tax 1937, Evasion and Avoidance, p. 207, indicate the understanding part same on the of the Bureau of Internal Congress Revenue that the rule 11 Bridge Taplin Commissioner, Iowa Co. v. Com 777; 39 F. 2d v. missioner, Vorst, Commissioner 454; 677; 41 F. 2d v. Van 2d F. Commissioner, St. Marston Louis Union Trust 936; 75 F. 2d v. Co. States, Commissioner, United Sawtell 61; 221; F. 2d 82 F. 2d affirming Co., Commissioner v. Edward 1007, 2d Securities F. B. T. A. 918. Hearings before the on Tax Joint Committee' Evasion and Avoidance, 1937, appears p. the Solicitor General cons apply so idered the law well settled that refused for certiorari Eldridge case, supra, although Treasury note 9, in recom such mended action.
13 48 Stat. Ways report Committee 14 See on and Means of the H, Cong., 23; Representatives, p. R. Second Sess., House of 73d Sess., 27; Report 588, Cong., p. 73d Second see also the hear Senate Ways ings Means, before the Committee Revenue Revision, ’ 1934, p. 134. amendment adoption prior law in effect The amendment changed by legislation. in 1934 following: among items deductible lists not directly “(6) exchanges property, Loss from or sales ex- family, (B) or indirectly, (A) members or between between liquidation, cept the case of distributions individual in which such individual and a per more than 50 centum owns, directly indirectly, purpose For this outstanding value of the stock. as own- considered paragraph (C) an individual shall be — family; ing owned, indirectly, directly only his (D) family of an shall include individual blood), half (whether by the whole or brothers and sisters ancestors, and lineal spouse, descendants.” justified rely- Plainly, prior 1934, taxpayers were ruling ing, Treasury subject and, on the first, upon the uniform of the courts secondly, decisions claiming corpo- deductions for losses on sales to controlled passage After they rations. amendment were no longer permissible. on notice that this was presented. I turn then here situation claims I said, taxpayer, have had been sustained years by Appeals.15 the Board of Tax prior Congress coijld subsequent enacted that the taxpayer had claim Notwithstanding not such losses. the earlier de- *12 and respondent’s cisions of the case those of other tax- present against the Government’s payers contention, the Revenue, of Internal Commissioner the adoption of after 1934, namely Act on March 11, 1935, the of served a no- deficiency of upon respondent the tice respecting losses . in his for year claimed return the 1932 on sales to Innis- Treasury repudiated position Thus fail. it had asking taken law be amended to cover cases kind; this position acquiescing reversed its 15 Supra, note
adjudication respondent’s tax for liability earlier years sought, and now that had obtained amendment law operating prospectively, to reach back into sundry unclosed ones, amongst one to others, —this —and attempt reversing to obtain decisions the settled course I think its aid should not lend to pourt decision. effort. am of opinion that where taxpayers upon have relied
I long unvarying construing apply- series decisions statute, ing only appropriate change, method to rights go taxpayers Congress legislation. for my In. view, Congress, resort hand, on one amendment, appeal the courts, other, construction, which, a reversal of successful, operate will unjustly retroactively upon who those have acted judicial upon oft-reiterated decisions, are reliance inconsistent. I am opinion courts disappoint should not
. expectation that, the well-founded citizens until Con- speaks to the contrary, they may, confidence, with gress judicial interpretation rely uniform of a statute. action taken in this case seems to me to make it safely for a citizen impossible conduct his affairs in upon any settled body decisions. court reliance McReynolds joins in this opinion. Mr. Justice