OF COURSE, INC., (Formerly: the Isaac Hamburger & Sons Company), a Maryland corporation in Dissolution, Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Appellant.
No. 73-1495.
United States Court of Appeals, Fourth Circuit.
July 2, 1974.
499 F.2d 754
Before HAYNSWORTH, Chief Judge, BOREMAN, Senior Circuit Judge, and WINTER, CRAVEN, BUTZNER, RUSSELL, FIELD and WIDENER, Circuit Judges, sitting en banc on resubmission.
“In brief the vessel had been loaded without thinking that it had to go to sea (the Atlantic) in a season when weather broke.”
Beyond peradventure, this report establishes that the stowage at Costanza was improper, and we have a firm and definite conviction that a mistake was committed below in failing so to find.
Finally, the district court was further unable to perceive how the impending expiration of the International Load Line Certificate had any “bearing on the resolution of the issues presented by this claim.” The bearing, we believe, is obvious. The Ionic was racing against the clock to clear Augusta by midnight of August 31, 1966. If she were successful in meeting this deadline, her Certificate would be automatically extended and would remain in force until she reached Charleston. Failure would mean that extensive, and expensive, repairs would have to be undertaken in order to obtain an extension. The impending expiration of the Certificate explains why the ingots were stowed so hurriedly and, as it turns out, so negligently, at Costanza. When the Ionic failed to meet the deadline it had set for itself, the vessel-owner then attempted to force Philipp to share in the costs of correcting the perilous condition of the stowage and also in the costs of “a series of verifications and works which the vessel should have done before loading at Costanza but which were not done.” Exhibit 12. (Emphasis inserted).
Reversed.8
George W. Liebmann, Baltimore, Md. (George Gump, Shale D. Stiller and Frank, Bernstein, Conaway & Goldman, Baltimore, Md., on brief) for appellee.
DONALD RUSSELL, Circuit Judge:
This appeal poses for determination the deductibility as a business expense, qualifying under
After a careful review of the authorities, we are persuaded that, contrary to the rule stated in Pridemark, attorneys’ fees directly related to a sale of capital assets, as concededly the attorneys’ fees claimed as a business expense in this case were, are not deductible as a business expense under
It is suggested, however, that the result reached in Pridemark may be justified on two grounds. First, reference is made to the provision in
The argument of the taxpayer would disregard the clearly stated legislative purpose behind the enactment of
“Section 337 was embodied in the Internal Revenue Code of 1954 to allow liquidating corporations to avoid a double incidence of capital gains taxation—once when capital assets are sold by the corporation, and again on distribution of the proceeds to the shareholders.”8
It sought to accomplish this purpose and to avoid the inequity of double taxation by eliminating the tax at the corporate level and by imposing only a single tax at the stockholder level.9 The fact that, in such shift of tax liability, “the gain to the shareholders may be measured by a different basis than the gain to the corporation is of no significance. The gain realized when a liquidating corpo-
“* * * For the Courts to thus create a tax inequity from legislation designed to correct a tax inequity would be not only to disregard the express terms of the statute but to read into the statute a purpose expressly contrary to that stated at the time of its enactment.”
Secondly, it seems to have been the thought of Pridemark that a corporate liquidation is to be treated as an entity, of which the sale of capital assets is an integral part, and, just as other expenses of the liquidation are concededly deductible as business expenses,11 so should the expenses, including attorneys’ fees or brokerage commissions connected with the sale of capital assets in the course of that liquidation. The reasoning behind this theory was set forth succinctly in United States v. Mountain States Mixed Feed Co. (10th Cir. 1966) 365 F.2d 244, 245-246:12
“It is difficult to determine any reason in the authorities or in the statutes for any distinction as to the type or purpose of the legal work involved. It is probable that the attorneys could account for the time they devoted to the corporate dissolution as compared with the sale of assets, but there is no reason why this sale of assets is not as much a part of the liquidation as the dissolution of the corporation. Certainly if the costs of distribution in kind may be deducted as ordinary expenses, the legal cost of
It is true, as Pridemark and Mountain States hold, that expenditures connected with the dissolution and liquidation of a corporation have been found deductible as a business expense. Such characterization, however, has been characterized as “sui generis“.13 The reason commonly given for this “sui generis” result is stated in a leading text to be that, “[A]mounts expended, including legal and accounting fees, in connection with the dissolution and liquidation of a corporation, do not create a capital asset and are deductible as business expenses“; but the text-writer hastens to add, “[T]his principle has no application where the expenses involved were not costs of dissolving the corporation but arose in connection with the sale of its principal asset.” 4A Mertens, Law of Federal Income Taxation, sec. 25.35, at pp. 173-4 and 182-3 (1972 rev.) As the Court said in Lanrao, Inc. v. United States, supra (422 F.2d at p. 484):
“* * * That expenses incurred in the dissolution of a corporation may be rationalized as being both ordinary and necessary business expenses, as was demonstrated in the Pacific Coast Biscuit Co., case, supra, [32 B.T.A. 39] does not furnish a rational basis for the argument that capital selling expenses are converted into ordinary and necessary business expenses if they are incurred at the time of a corporate dissolution.”
Indeed, the very reason assigned for allowing normal costs of liquidation to be treated as a business expense (i. e., because they are related neither to the acquisition nor disposition of a capital asset)14 would seemingly have as its logical corollary that, if the expense did qualify as a capital expenditure, it was not deductible as a business expense. And this is what we conceive to be the proper view.
As a commentator has suggested, any decision to the contrary could give rise to a wholly irrational situation. Suppose, in order to make a profitable sale of a capital asset during the liquidation period, considerable sums were expended in renovating or repairing that asset. Could the sums so expended be deducted as business expenses because they were made as an incident to liquidating the asset? Obviously, they could not. In similar fashion, attorneys’ fees incurred specifically in connection with the sale of a capital asset during the period of liquidation may not qualify as a business expense.15
To sum up, we feel constrained to abandon the rule announced in Pridemark and to adopt the rule supported by the weight of authority that the claim to a deduction for attorneys’ fees incurred by the corporate taxpayer in connection with the sale of capital assets in a
Finally, the taxpayer urges that, even should we conclude to depart from the ruling made in Pridemark, we should do so only prospectively. We might find such argument persuasive were it evident that the rule in Pridemark had been a determining factor in the procedure followed by the taxpayer in the corporate liquidation. It seems plain that the taxpayer was not influenced in any action taken by it by our decision in Pridemark. Its decision to
The decision of the Tax Court sustaining the claim herein is accordingly reversed.
Reversed.
BOREMAN, Senior Circuit Judge (concurring in part and dissenting in part):
Somewhat reluctantly and not without some hesitation I concur and join my brothers in the decision to overrule our earlier holding in Pridemark, Inc. v. Commissioner, 345 F.2d 35 (4 Cir. 1965). However, I respectfully state my disagreement with the majority in its denial of prospective application of the change in the rule.
Rule 35 of Fed.R.App.P. provides that an appeal may be heard by the Court of Appeals in banc and a party may suggest the appropriateness of a hearing in banc. This Circuit has deemed it unseemly, presumptuous and an unacceptable practice for one panel to assume to overrule a decision of another panel of this court; the decision of a panel becomes the law of the Circuit until it is overruled by the court sitting in banc.
Until 1970 the Tax Court of the United States had not followed automatically the decisions of the Court of Appeals to which its determination would be appealable. But that practice was abandoned by the Tax Court in its decision in Golsen v. Commissioner, 54 Tax Court 742, 757 (1970):
[W]e think that where the Court of Appeals to which appeal lies has already passed upon the issue before us, efficient and harmonious judicial administration calls for us to follow the decision of that court.
Consistent with that pronouncement the Tax Court, while criticizing Pridemark, recognized that decision as representing the law of this Circuit and admittedly felt bound to follow it.
The Government, too, recognized the fact that Pridemark represented the law of this Circuit but it was obvious from the Government‘s approach to the prosecution of its appeal that its real objective was to persuade this court that Pridemark had been incorrectly decided, that it was against the weight of authority and that it should be overruled. It now appears that the Government has been successful in attaining its objective.
But at the same time the Government interposes strenuous objection to prospective application of the new rule. It would fault the taxpayer for following the law of the Circuit as determined and established by this court. Ordinarily, where there has been a division of the Circuits on a question with which the Government is concerned it properly seeks resolution of the conflict by the Supreme Court of the United States.
In this court‘s positive indication of its willingness to overrule a prior decision in a tax matter adverse to the Government, in the absence of a clearly supervening determination by Congress or the Supreme Court, the effect of the determination will be to drastically accord weight on the side of the Government in the process of negotiation and settlement of tax cases, even including cases where the Circuit in question has declared clearly controlling law adverse to the Government‘s position. All questions in tax cases in which there is a split among the Circuits (and there are
The Government‘s approach to the precedential force of decisions in tax cases is strange, indeed. It has now been successful in its effort to have this court effectively hold that once a division of opinion arises between and among Circuits the rule announced in those Circuits rejecting the Government‘s position should be open to attack in connection with each case that may subsequently arise in such Circuits.
This procedure favored and adopted by the Government opens up only a one-way street. Few, if any, taxpayers who are confronted with a pre-existing decision in their particular Circuit which supports the Government, will be intrepid enough or financially strong enough to carry a case seeking an overruling decision through the Tax Court, through a regular panel, and through the Court of Appeals in banc. In the instant case the Government could have sought initially a hearing of the appeal in banc, but it elected not to do so. Thus, the taxpayer has been subjected to a three-level proceeding with all the attendant delays, burdens, costs and expenses. I venture to say that the costs and expenses are times greater than the amount of tax liability in controversy.
Counsel for the Government has opposed the proposal that, if this court were to overrule Pridemark, its judg-ment should be prospective only, apparently considering that the additional tax and the costs and expenses of the litigation here and in the Tax Court appropriately penalize the taxpayer for its intransigence in relying upon an unreversed decision of this court which established the law of this Circuit.
It is my individual opinion that changing the established rules in the middle of the game is unjust, unfair, and inconsistent with the operation of a viable system of legal precedents, particularly to a taxpayer such as this one with a relatively small amount at stake. The controlling law of this Circuit, as it existed at the time of taxpayer‘s transaction, should be applied and taxpayer should have the right to any tax benefit available to it under Pridemark. It is unconscionable to hold otherwise. In all fairness and justice I cannot be persuaded to join in placing the taxpayer in such an unfavorable and unreasonable position by a denial of prospective application of our decision which definitely changes the rules of the game.
Paulina PEREZ et al., Plaintiffs-Appellants, v. Jule M. SUGARMAN et al., Defendants, and New York Foundling Hospital and St. Joseph‘s Home of Peekskill, Defendants-Appellees.
No. 202, Docket 73-1790.
United States Court of Appeals, Second Circuit.
Argued Dec. 3, 1974. Decided June 7, 1974.
Notes
“It is intended that, during the 12-month period, sales in the ordinary course of business shall result in ordinary gain to the corporation as if the corporation were not in the process of liquidating.”
“* * * Expenses necessarily incurred to realize a capital gain reduce the amount of that gain and partake of the nature of the gain to which they relate.”
“It was not the intention of Congress, in enacting Section 337, to ‘exempt’ any gain from the tax, but rather to provide that the gain should not be taxed twice, both at the corporate and shareholder levels, where the taxpayer complies with the provisions of the Act.”
“* * * The purpose of section 337 was to eliminate the double taxation that resulted when a corporation liquidated by selling its assets and distributing the cash received from that sale, rather than by distributing the assets themselves directly to the shareholders.”
“But if the corporation in such case is permitted to deduct the selling cost from ordinary income as an ordinary and necessary business expense when it sells the property, then the corporation (and through it, the shareholder) receives an additional tax benefit in the form of the deduction against the ordinary income (the earning of which had no connection with the capital sale transaction) reported in the corporation‘s last return. The tax differential Congress sought to avoid would thus be re-created, and the purpose and objective of Section 337 wholly frustrated and defeated. Consequently, the allowance of the costs incident to the sale of capital assets as an ordinary and necessary business expense deductible from ordinary income was improper in the instant case.”
“Expenditures for organizing, recapitalizing, merging or dissolving a business enterprise may properly be said to be sui generis. On the other hand, none of them can hardly be considered as part of the cost of operating the business for the taxable year in which they were paid or incurred. On the other hand, it is arguable that no capital asset is acquired by the taxpayer which, as a business enterprise, is being organized, recapitalized, merged or dissolved.”