1941 BTA LEXIS 1310 | B.T.A. | 1941
Lead Opinion
The sole question is whether in the computation of the surtax imposed by section 14 of the Revenue Act of 1936 petitioner is entitled under section 27 (f) to a dividends paid credit of $54,130.38, the amount of its earned surplus at the time of the transfer of all its assets to the new corporation. Under section 14 undistributed net income, on which the surtax is based, is computed by subtracting from adjusted net income the “dividends paid credit provided in section 27.” The provisions of section 27, in so far as pertinent to the present question, are set forth in the margin.
Respondent contends that petitioner is not entitled to any dividends paid credit under subsection (f). He argues that no gain to petitioner’s stockholders from the receipt of the shares of stock of the new corporation was recognized by law; that thus under section 115 (h) of the Revenue Act of 1936 the distribution by petitioner of such stock did not constitute “a distribution! of earnings or profits of any corporation”; and that thus no part of such stock distributed by petitioner was “properly chargeable to the earnings or profits accumulated after February 28, 1913” within the meaning of subsection (f). The provisions of section 115 (h), in so far as pertinent to the present question, are set forth in the margin.
Respondent also makes the somewhat related argument that on the exchange by petitioner of all its assets for the shares of stock of the new corporation the earned surplus of petitioner was not convertible into capital of the new corporation, but still remained earned surplus in the hands of the new corporation, and that thus no part of the stock of the new corporation subsequently distributed by petitioner to its stockholders in complete liquidation was properly chargeable to earnings or profits. In support of this argument he cites Commissioner v. Sansome, 60 Fed. (2d) 931; certiorari denied, 287 U. S. 667; United States v. Kauffman, 62 Fed. (2d) 1045; Murchison v. Commissioner, 76 Fed. (2d) 641.
In our opinion respondent’s determination is correct.
Under section 27 (f) not all distributions in liquidation are to be treated as a taxable dividend paid for the purposes of computing the dividends paid credit. Only amounts distributed or the part of such distribution which is “properly chargeable to the earnings or profits accumulated after February 28, 1913”, shall be treated as a taxable dividend paid. Petitioner has not presented any argu
Furthermore, petitioner has stipulated that all of the parties concerned in the exchanges made pursuant to a plan of reorganization treated the exchanges as not involving gain or loss. Petitioner did not report gain or loss from the exchange of its assets for stock of the new corporation and petitioner’s stockholders did not report gain or loss from receipt of stock of the new corporation in exchange for petitioner’s stock.
The first step taken by petitioner pursuant to a plan of reorganization was to exchange all of its assets solely for the stock of the new corporation. Under section 112 (b) (4) no gain or loss was recognized by law. The second step, taken a few months later, was the exchange of the stock of the new corporation for petitioner’s own stock, in pursuance of the plan of reorganization. No gain or loss was recognizable at law upon this exchange under section 112 (b) (3). Section 115 (h) deals specifically with the kind of distribution with which we are concerned here. It refers to a distribution by one corporation of stock in another corporation and it provides that such distribution “shall not be considered a distribution of earnings or profits of any corporation—(1) if no gain to such distributee from the receipt of such stock * * * was recognized by law, * * (Italics supplied.) Clearly, the distribution by petitioner of the stock of the new corporation to its stockholders falls squarely within
It is hardly a possibility that section 27 (f) was drafted without cognizance of the provisions of section 115 (h), which is entitled “Effect on Earnings and Promts of Distributions of Stock.” It is clear from the report of the Senate Committee on Finance to accompany the Revenue Bill of 1936
To apply the express provisions of section 115 (h) in determining whether or not the distribution (in liquidation of the old corporation) of stock of the new corporation in exchange for stock of the old corporation can be treated as a taxable dividend paid,' does not in our opinion result in any modification of section 27 (f). Rather, section 115 (h) aids in the application of section 27 (f), for it limits the dividends paid credit to a distribution which is properly chargeable to accumulated earnings and profits, and section 115 (h) states what kind of distribution can not be said to be a distribution of earnings and profits. But, even so, it does not appear to be necessary to rely on the bare terminology of section 115 (h) except to
^Another question is, what happened to the accumulated earnings of the old corporation ? Has there been any distribution of them to petitioner’s stockholders? If a merger contemplates that the interests of the stockholders of the old corporation shall be retained in the newly created corporation it is difficult to visualize that there has been any distribution of the accumulated earnings of the old corporation, upon its liquidation, which were transferred to the new corporation, with other assets, in exchange for its stock, particularly since it appears to be an established rule that in such reorganization as we have here the accumulated profits of the old corporation do not become capital of the new corporation, but remain earnings and profits in its hands even though earned by the trans-feror or old corporation. Murchison v. Commissioner, supra.
It was pointed out in the Murchison case that, “Unless the undistributed gains of the old business are taken over by the new as wndwided profits distributable as dividends, they escape proper taxation.” (Italics supplied.) Giving attention to that factor here,
Such dilemma and contradictions as we have endeavored to indicate by the foregoing are avoided by applying the terms of section 115 (h) in construing the facts of this case under section 27 (f) and, indeed, we believe section 115 (h) can not be ignored. We believe it must be held that the distribution in question which petitioner made in liquidation, being a distribution of stock of a new corporation to which all of petitioner’s assets had been transferred, was not such distribution as is “properly chargeable to the earnings or profits accumulated after February 28,1913.”
It is held that the distribution in liquidation of the stock of the new corporation by petitioner was not a distribution chargeable to earnings or profits accumulated after February 28, 1913, and petitioner is not entitled to a credit for dividends paid under section 27 (f). Respondent is sustained.
Other contentions of respondent need not be considered.
There is no merit in petitioner’s claim that it is entitled to a dividends paid credit under article 27 (f)-l (c) of Regulations 94, because there is no evidence to show that any part of the dividends paid by the new corporation during the portion of the taxable year subsequent to the nontaxable exchange of petitioner’s assets for the new corporation’s stock was apportioned and allocated to petitioner
Reviewed by the Board.
Decision will he entered for the respondent.
SEC. 27. CORPORATION CREDIT FOR DIVIDENDS PAID.
(a) Dividends Paid Credit in General.—Eor the purposes of this title, the dividends paid credit shall be the amount of dividends paid during the taxable year.
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(f) Distributions in Liquidation..—In the case of amounts distributed in liquidation the part of such distribution which is properly chargeable to the earnings or profits accumulated after February 28, 1913, shall, for the purposes of computing the dividends paid credit under this section be treated as a taxable dividend paid.
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(h) Nontaxable Distributions.—If any part of a distribution (including stock dividends and stock righis) is not a taxable dividend in the hands of such of the shareholders as are subject to taxation under this title for the period in which the distribution is made, no dividends paid credit shall be allowed with respect to such part.
SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
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(h) Effect on Eaknings and Pkofits of Distkibdtions of Stock.—Tlie distribution (whether before January 1, 1936, or on or after such date) to a distributee by or od behalf of a corporation of its stock or securities or stock or securities in another corporation shall not be considered a distribution of earnings or profits of any corporation—
(1) if no gain to such distributee from the receipt of such stock or securities was recognized by law, * * *
Rept. No. 2156 of the Senate Committee on Finance to accompany the Revenue Bill of 1936, H. R. 12395, p. 19 :
“SECTION 115 (h). EFFECT OF DISTRIBUTIONS ON EARNINGS AND PROFITS.
“The rule, under existing law, with respect to the effect on corporate earnings or profits of a distribution which, under the applicable tax law, is a nontaxable stock dividend or a distribution of stock or securities in connection with a reorganization or other exchange, on which gain is not recognized in full, is that such earnings or profits are not diminished by such distribution. In such cases, earnings or profits remain intact and hence available for distribution as dividends by the corporation making such distribution, or by another corporation to which the earnings or profits are transferred upon such reorganization or other exchange. This rule is stated only in part in section 115 (h) of the Revenue Act of 1934, and corresponding provisions of prior acts, but is the rule which is applied by the Treasury and supported by the courts in Commissioner v. Sansome, 60 Fed. (2) 931; V. S. V. Kauffman, 62 Fed. (2) 1045; MurcMson v. Comm,, 76 Fed. (2) 641.' While making no change in the rule as applied under existing law, the recommended amendment is desirable in the interest of greater clarity.”
Dissenting Opinion
dissenting: The purpose of Congress, in imposing the surtax upon undistributed profits, as indicated by the legislative history, was to force corporations to distribute their profits or suffer the high rates imposed in section 14. Here the section is being applied in the case of a corporation which dissolved during the taxable year and, in dissolving, distributed everything which it had, including both capital and accumulated profits. This seems like an unwarranted application of the act beyond its purpose.
The prevailing opinion, in order to reach this result, holds that the special provision of section 27 (f) is modified by section 115 (h), a general provision of the act. The Board, in the case of Credit Alliance Corporation, 42 B. T. A. 1020, held that section 27 (f) was not modified by section 27 (h), even though the latter related specifically to surtax on undistributed profits and seemed on its face to apply. Here, we go much farther than we were asked and refused to go in the Credit Alliance case. • ■
■ Section 115 (h) appeared for the first time in the Revenue'Act of 1934. It was there entitled “Disteibtttion of Stock on Reoeganization—Effect on Futuee Disteibutions.” It provided that a distribution of stock or securities by a corporation, pursuant to a plan of reorganization, where no gain or loss to the distributee was recognized, should not be considered a distribution of earnings or profits within the meaning of section 115 “for the purpose of determining the taxa-bility of subsequent distributions by the corporation.” Thus, the whole purpose was to make sure that future distributions by the corporation would be from earnings or profits accumulated after February 28,1918, in so far as the corporation had any such earnings. Clearly, the section was not intended to apply in the case of the complete liquidation of a corporation where there could be no subsequent distributions by the corporation. Congress could not have had in mind the provisions of the undistributed profits tax because those provisions were not enacted until a later revenue act. The changes made in section 115 (h) of the Revenue Act of 1936 were merely for the purpose of clarification. Furthermore, it seems to me that Congress did not have section 115 (h) in mind when it enacted section 27 (f) of the Revenue Act of 1936, and it did not intend that reference should be made to section 115 (h) (which has no purpose in the case of a complete liquidation), in order to determine what part of the
The meaning of the phrase “properly chargeable to the earnings or profits accumulated after February 28,1913”, as used in section 27 (f), was determined in the Credit Alliance case. We pointed out that cases like Commissioner v. Sansome, 60 Fed. (2d) 931; certiorari denied, 287 U. S. 667, had no application. We said that the quoted words merely make a distinction between a charge to capital and a charge to earnings, so that no credit may be allowed for any distribution which should be charged to earnings or profits accumulated prior to March 1, 1913, or as a return of capital, and a'dividends paid credit is allowed only for that portion of a distribution which is properly allocable to earnings or profits accumulated after February 28,1913. “The intent, in our opinion, went no farther.” The regulation of the Commissioner and the legislative history of the provision were cited in support of the above conclusions. Obviously, the accounting for a complete liquidation requires that charges be made wiping out both capital and all accumulated profits, and under such circumstances, the amount properly chargeable to the earnings or profits accumulated after February 28, 1913, is the entire amount of those earnings or profits.
Dissenting Opinion
dissenting: I find myself unable to agree with the majority report in its conclusion that section 115 (h) of the Revenue Act of 1936 requires the holding that the expression “properly chargeable to the earnings or profits accumulated after February 28, 1913” in section 27 (f) of the Revenue Act of 1936 does not apply to the distribution by the petitioner of stock in another corporation which in a nontaxable reorganization it secured in exchange for its earned surplus. In my opinion, the language of section 115 (h) of the Revenue Act of 1936 should not be given a meaning and application essentially different from section 115 (h) of the Revenue Act of 1934. As stated in a footnote to the majority opinion, the report of the Senate Committee on Finance, as to section 115 (h) of the 1936 Act, points out that “The rule, under existing law” (as to effect on corporate earnings or profits of a nontaxable stock dividend or a nontaxable distribution of stock in a reorganization), is that “such earnings or profits are not diminished by such distribution” and that they remain intact, available for distribution as dividends by the distributing corporation, or another which receives them in reorganization. After stating that this rule is stated only in part in section 115 (h) of the
I think the fact that the exchange was in a reorganization furnishes no alchemy to change the $54,000 earned surplus into capital, that the stock, the substitute for the $54,000, remained earned surplus the same as it would have been if the $54,000 earned surplus had been invested in stock of any other corporation, and that when such stock was distributed in liquidation, it was “properly chargeable to the earnings or profits.” I can not discern that it became capital of the distributing corporation, and think that the ordinary bookkeeping transaction would have charged it to “earnings or profits.”
Further, in my opinion, the line of cases beginning with Commissioner v. Sansome, 60 Fed. (2d) 931; certiorari denied, 287 U. S. 667, is not decisive that in this matter there was no distribution of earnings or profits to a distributee in liquidation, as covered by section 27 (f). The true test which should be followed in applying such