251 F. 211 | 2d Cir. | 1918
Lead Opinion
(after stating the facts as above). [1, 2] The act in question has been authoritatively held to be an excise upon the.right to do business in corporate form, Anderson v. Forty-Two Broadway Co., 239 U. S. 69, 36 Sup. Ct. 17, 60 L. Ed. 152; Stratton’s Independence v. Howbert, 231 U. S. 399, 34 Sup. Ct. 136, 58 L. Ed. 285. As such the income is the measure of the tax upon the right, and not the property upon which the tax is assessed. If persons choose the corporate form for business, we think that the corporate income may be estimated upon .the assumption that the form is to be regarded as the reality. Indeed, this is nearly a corollary from the premise that the tax is upon the right to do business in that form. We are not, therefore, disposed to say that a sole stockholder’s release of a debt against the corporation is mere matter of bookkeeping. As the stockholder views it, that is no doubt the case, at least while the corporation stays solvent; indeed, it is no more than if a mortgage were changed into a debt. Viewed from the corporation’s side, we cannot, however, agree that the increased value of the stockholder’s shares is to be deemed a charge upon the corporation equivalent to the canceled debt. His right as stockholder is, it is true, a chose in action; but it is, of course, not to be taken as a claim upon the corporation when its net assets are in question, else it could never get any increase of assets, for shares are always proportionally increased in value as the assets increase. At least when we have, as here, a question turning upon the right to use the corporate form, we must treat the release as involving an actual addition to the corporate assets.
However, the tax, though it includes income “from all sources,” nevertheless includes “income” only, and the meaning of that word is not to be found in its bare etymological derivation. Its meaning is rather to be gathered from the implicit assumptions of its use in common speech. The implied distinction, it seems to us, is between permanent scources of wealth and more or less periodic earnings. Of course, the term is not limited to earnings from economic capital; i. e., wealth
Now, it seems to us hardly arguable that the cancellation of the debt in question was not in the category of capital. The corporation had just commenced its business; the cancellation of the debt was a means of contribution to its capital account, quite as though the money had been contributed by the stockholder only to enhance the value of his stock. The financial relief, so given, will, it is true, be eventually reflected in the income, since the defendant will no longer be entitled under the act to deduct the interest on the debt; but that only brings out more clearly its character as capital contribution. We regard the difference as precisely equivalent to the difference between the cancellation of a portion of the mortgage bonds and a cancellation of an equal proportion of their coupons. Common usage would, if we are right, unfailingly allocate the first as an increase in capital assets and the second as an increase in income. That, as we view it, is the proper test of the act.
Nor does Stratton’s Independence v. Howbert, supra, look to the contrary. The court divided in that case upon the propriety of regarding as income the whole of each yearly extraction of minerals from a deposit necessarily limited in amount; but the decision proceeded upon the assumption that the common understanding of the term “income” did not cut so fine, but lumped together the whole gross output. Our present decision depends altogether upon the correctness of our own interpretation of the same common usage, when applied to a case like this.
The judgment is affirmed, with costs.
Dissenting Opinion
(dissenting’). I quite agree with the majority of the court that the credit given by the Short Dine upon the defendant’s indebtedness to it was a gift, and not a mere bookkeeping entry.