251 F.2d 764 | 7th Cir. | 1958
Lead Opinion
Petitioners, Sicanoff Vegetable Oil Corporation and Sicanoff Tallow Corporation, appeal from a decision of the Tax Court of the United States which sustained the Commissioner of Internal Revenue’s determination that 80% of their gross income for 1950 consisted of gains from futures transactions in commodities subject to the rules of a board of trade or commodity exchange, none of which gains resulted from bona fide hedging transactions reasonably necessary in the conduct of their business, and that, therefore, both were personal holding companies as defined by the Internal Revenue Code of 1939, 26 U.S.C.A. § 500 et seq. (I.R.C.1939), (hereinafter referred to as the 1939 Code). The Sicanoff Vegetable Oil Corporation was additionally found to have had such gains from commodity futures transactions amounting to over 70% of its gross income for the years 1951 and 1952 and was held to be a personal holding company in those years. Deficiencies totaling $1,094,384.35 were assessed against the two corporations. The cases were consolidated for trial and for review by this court, and the only issue raised on appeal is whether or not the Tax Court erred in considering only the futures transactions of petitioners which resulted in gains in determining petitioners’ gross income and in computing the percentage of the gross income which could be termed personal holding company income.
The facts indicate that Sicanoff Vegetable Oil Corporation was an Indiana corporation with offices in Indianapolis. Its books were maintained on an accrual method of accounting and on the basis of a fiscal year ending the last day of February. Its entire outstanding stock was owned by not more than four individuals. The corporation engaged in the buying and selling of soybean and cocoanut oil (actual transactions), and also dealt extensively in futures transactions in commodities on, or subject to, the rules of boards of trade or commodity exchanges, and for the most part on the Chicago Board of Trade. The dealings in “actuals”, (purchases and sales of soybean oil and crude cocoanut oil), were
The other taxpayer, Sicanoff Tallow «Corporation, was similarly an Indiana ■corporation with offices in Indianapolis. It was controlled and operated by substantially the same persons. Its books .and records were kept on an accrual ■method on the basis of its fiscal year ■ending July 31. This corporation’s business was much like that of the other taxpayer except that it dealt in tallow and -edible grease rather than vegetable oils. It also engaged extensively in futures 'transactions in commodities on, or subject to, rules of a board of trade or commodity exchange. Neither petitioner questions the Tax Court’s finding that none of the gains from futures transactions by either corporation for any of 'the fiscal years involved arose out of hona fide hedging transactions within the meaning of § 502(c) of the 1939 Code.
At the outset it would be well to indicate that the surtax imposed upon a personal holding company is made upon the undistributed subchapter A net income after certain deductions, including deductions for losses from sales of capital assets, are allowed. The section we are dealing with merely defines personal holding company income and sets up requirements for classification of a given corporation as a personal holding company.
The language of the 1939 Internal Revenue Code brought in question here is that part of § 502 which defines personal holding income as “the portion of the gross income which consists of * * * [grains from futures transactions * * The respondent’s contention is that only futures transactions resulting in gains are a part of gross income and that only such transactions are to be considered in determining whether 80% of the taxpayer corporation’s gross income is personal holding company income. The petitioners claim the statute requires a netting or offsetting of those futures transactions resulting in gain and those resulting in loss with the inclusion of the single composite gain in gross income. There are no decided cases in point. The precise question may never recur since Congress in enacting the 1954 Internal Revenue Code added a section at this point specifically providing that gross income would include only the excess of gains over losses from futures transactions, see 26 U.S.C.A. § 543b(2) (I.R.C.1954). It is petitioners’ position that this act of Congress amounted to a clarification of existing law. The respondent, on the other hand, urges that the section’s meaning was already clear and unambiguous and that the 1954 Code provision definitely effected a change which was not made retroactive.
It is respondent’s position that the general statutory scheme of the Revenue Code supports his view. The gains and losses from transactions in commodity futures which are not true hedges are
Respondent’s outline of the Code structure as it bears on the language to be construed in this case is correct as far as it goes. The question arises, however, whether the statutory definition of “gross income” is as narrow and fixed as he would have it. Petitioners make reference to several specific instances in which a “special” meaning was imparted to the concept of gross income. In the case of United States v. Benedict, 1950, 338 U.S. 692, 70 S.Ct. 472, 94 L.Ed. 478, for example, the Supreme Court held that only 50% of the long term gain of a certain trust should be added to gross income. The trustees in that case had permanently set aside a charitable contribution to be made from the proceeds of the trust estate’s long term capital gains. The issue was whether in computing a deduction from gross income the entire amount of capital gains should be included or merely 50%. The problem arose since § 117(b) of the 1939 Code provided that only 50% of the long term gains or losses from sales would be recognized in computing net capital gain. The decision of the Court was intended to give effect to the provisions of § 117(b) and, as the respondent points out, that special section is inapplicable to corporations. However, the case does point out the ambiguity and' lack of clarity inherent in the Revenue Code’s general provisions. As Mr. Justice Frankfurter, in a separate opinion, stated: “The contrariety of views expressed by the Tax Court, the Court of Appeals for the Second Circuit, the Court of Claims and now by this Court in the-task of harmonizing §§ 22(a), 117(b) and 162(a) of the Internal Revenue Code * * * conclusively proves the opaqueness, if not inherent incongruity of those provisions.” Id. 338 U.S. at page 699, 70 S.Ct. at page 476.
Petitioner also relies on the case of Woodside Acres, Inc. v. Commissioner of Internal Revenue, 2 Cir., 1943, 134 F.2d 793. The issue there, analogous to the one in the instant case, was whether or not a corporation engaged in farming operations, but which also received a
In Garrett Holding Corp. v. Commissioner of Internal Revenue, 1947, 9 T.C. 1029, 1034, which involved a situation similar to that in the Woodside case the Tax Court in following Woodside stated:
“The petitioner contends that in determining its gross income under section 501(a) (1) the costs of its farm production should not be subtracted from its gross receipts; in short, that gross income means gross receipts. Such procedure appears to be followed in reporting the gross income of farmers for income tax purposes, whether on a cash or accrual basis. See section 29.22(a)-7 of Regulations 111. The petitioner argues that the same procedure should be applied in determining the gross income of farmers for personal holding purposes. Its argument was fully discussed and rejected in Woodside Acres, Inc., 46 B.T.A. 1124, [affirmed 2 Cir.], 134 Fed (2d) 793. There we deducted the costs of production from the gross sales of dairy products in determining gross income for personal holding company purposes.” (Emphasis added.)
The court in the Woodside case very aptly pointed out that, generally, it matters very little whether a taxpayer treats certain allowable deductions as a deduction from gross income in arriving at net income or as an amount to be subtracted from gross receipts. For that reason it refused to consider as controlling sections of the Code and applicable regulations ordinarily followed in the compu
The wording of Section 502 in the 1939 Code was not changed by Congress. The 1954 Code instead added a section, supra, stating, in effect that losses and gains are to be netted. The Tax Court opinion refers to a special unpublished ruling of the Bureau of Internal Revenue dated March 4, 1942 which stated with regard to the interpretation of § 502(b): “[Ajggregate gain from sale or exchange of stock or securities is to be included in gross income as defined in section five hundred two without adjustment or diminution on account of loss transactions.” 1957, 27 T.C. 1056, 1072. That court aptly points out that the unpublished ruling amounts to no more than an earlier expression of Commissioner’s view on this section’s meaning. Nor can much weight be given to the views of text writers on the meaning or effect of the law prior to 1954. The House Ways and Means Committee and the Senate Finance Committee both commented on the amendment involved. The Ways and Means Committee report contained a statement that “[u]nder present law there is included in gross income and personal holding income the gains from such transactions without regard to losses occurring in similar transactions.”
After enactment of the 1954 Code, the Joint Committee on Internal Revenue Taxation, published and issued a booklet entitled “Summary of the New Provisions of the Internal Revenue Code of 1954,” which, at page 75, characterized the amendment as one of clarification in the following words:
“A second amendment to the definition of personal holding company income makes it clear that gains from the sale of securities or commodities are not to be considered as gross income to the extent of losses*770 on such sales.” (Emphasis supplied.)
In construing the language of Section 502 here involved, we have considered it within the framework of the applicable Revenue Code’s provisions. We also looked to the legislative history of the provision limiting the section to be construed, and we have noted that the precise question raised in this case has never been passed upon by any court; and that the Commissioner can cite no general administrative policy or ruling applicable thereto-, except the special unpublished ruling of the Bureau dated March 2, 1942, supra. Finally to be considered is the Congressional purpose behind enactment of the personal holding company provisions. This purpose has been defined as one of preventing the use of the “incorporated pocketbook” to accumulate income and thus avoid individual surtax rates. No proof of shareholders’ intent to avoid income taxes is necessary if the corporation comes within the definition of a personal holding company. “The rates were avowedly ‘pressure’ rates, intended not so much to produce revenue as to cause an abandonment of the use of personal holding companies by compelling them to distribute their total income, to abandon the characteristics which made them holding companies, or to dissolve.” Mertens, Law of Federal Income Taxation, Vol. 7, § 40.03 (1956). In Pembroke Realty & Securities Corp. v. Commissioner, 2 Cir., 1941, 122 F.2d 252, 253, that court indicated: “The [personal holding company] legislation was enacted for the purpose of inducing personal holding companies to distribute current income by laying a penal surtax upon income which they retained.” See also Knight Newspapers v. Commissioner, 6 Cir., 1944, 143 F.2d 1007, 1010, 154 A.L.R. 1267. The personal holding company surtax is generally acknowledged to be a penalty imposed on these corporations coming clearly within the definitive language of Congress.
In the instant case, as a result of respondent’s interpretation of the provision involved, Sieanoff Vegetable Oil Corporation is classified a personal holding company in a tax year ending February 28, 1950, when it had gains from futures-transactions in the amount of $234,172.-96 and losses of $273,790.52. Thus, there was no “personal holding company income” to distribute in that year. The-losses are allowed to be deducted, of course, in the assessment of the surtax on the undistributed subchapter A net income of the corporation but only to the-extent of gains. The surtax is imposed, therefore, on the total income of the corporation from “actuals” transactions, no part of which income comes within the definition of “personal holding company income.” Congress surely did not intend this result.
It is our conclusion that the purpose-of the 1954 amendment, permitting am “adjustment” of gross income by allowing a netting of gains and losses from commodities futures transactions, was to-clarify existing law rather than make new law.
We hold that the Tax Court erred in adjudging each of the petitioners to be a personal holding company within the meaning of Sections 500 and 501 of the 1939 Code during each of the fiscal years for which a deficiency in personal holding company surtax was determined.
The judgment is reversed, with directions to proceed in accord with this opinion.
. H.Rept. No. 1337, 83rd Cong., 2d Sess. (1954), p. A176.
. S.Rept. No. 1622, 83rd Cong., 2d Sess. (1954), p. 74.
Concurrence Opinion
(concurring) .
This separate opinion serves as a reservation of my views concerning those provisions of the Internal Revenue Code of 1954 mentioned in Judge HASTINGS’ opinion. My brothers reached a result under the Internal Revenue Code of 1939 which I approve.