Source: https://supreme.justia.com/cases/federal/us/374/65/
Timestamp: 2019-04-24 18:11:04+00:00

Document:
In 1948, three taxpayers received a commitment from the Federal Housing Administration to insure loans for the construction of a multiple-dwelling apartment project. Two corporations were formed to carry out the project, and each of the three taxpayers was issued one-third of the stock in each corporation. After the costs of the construction had been paid, each of the corporations had an unused amount of mortgage loan funds remaining, and, in 1950, the taxpayers sold their stock at a profit, receiving as part of the sale transaction distributions from the corporations which included the unused funds.
Held: Under § 117(m) of the Internal Revenue Code of 1939, the resulting gains to the taxpayers must be treated as ordinary income, instead of long-term capital gains, since the corporations were "collapsible" within the meaning of that section. Pp. 374 U. S. 65-73.
a maximum rate of 25%, must be reported as ordinary income.
"Whether Section 117(m) of the Internal Revenue Code of 1939, which provides that gain 'from the sale or exchange . . . of stock of a collapsible corporation' is taxable as ordinary income, rather than capital gain, is inapplicable in circumstances where the stockholders would have been entitled to capital gains treatment had they conducted the enterprise in their individual capacities without utilizing a corporation."
We have concluded that petitioners' contentions must be rejected. Their argument is wholly inconsistent with the plain meaning of the language of § 117(m), and we find nothing in the purpose of the statute, as indicated by its legislative history, to warrant any departure from that meaning in this case.
As to the language used, § 117(m) defines a collapsible corporation as embracing one formed or availed of principally for the manufacture, construction, or production of property with a view to (1) the sale or exchange of stock prior to the realization by the corporation of a substantial part of the net income from the property and (2) the realization "of gain attributable to such property." The section is then expressly made inapplicable to gain realized during any year "unless more than 70 percentum of such gain is attributable to the property so manufactured, constructed, or produced." If used in their ordinary meaning, the word "gain" in these contexts simply refers to the excess of proceeds over cost or basis, and the phrase "attributable to" merely confines consideration to that gain caused or generated by the property in question. With these definitions, the section makes eminent sense, since the terms operate to limit its application to cases in which the corporation was availed of with a view to profiting from the constructed property by a sale or exchange of stock soon after completion of construction, and in which a substantial part of the profit from the sale or exchange of stock in a given year was, in fact, generated by such property.
There is nothing in the language or structure of the section to demand or even justify reading into these provisions the additional requirement that the taxpayer must, in fact, have been using the corporate form as a device to convert ordinary income into capital gain. If a corporation owns but one asset, and the shareholders sell their stock at a profit resulting from an increase in the value of the asset, they have "gain attributable to" that asset in the natural meaning of the phrase, regardless of their desire, or lack of desire, to avoid the bite of federal income taxes.
Nor is there anything in the legislative history that would lead us to depart from the plain meaning of the statute as petitioners would have us do. There can, of course, be no question that the purpose of § 117(m) was, as petitioners contend, to close a loophole that Congress feared could be used to convert ordinary income into capital gain. See H.R.Rep.No.2319, 81st Cong., 2d Sess.; S.Rep.No.2375, 81st Cong., 2d Sess.. But the crucial point for present purposes is that the method chosen to close this loophole was to establish a carefully and elaborately defined category of transactions in which what might otherwise be a capital gain would have to be treated as ordinary income. There is no indication whatever of any congressional desire to have the Commissioner or the courts make a determination in each case as to whether the use of the corporation was for tax avoidance. Indeed, the drawing of certain arbitrary lines not here involved -- such as making the section inapplicable to any shareholder owning 10% or less of the stock or to any gain realized more than three years after the completion of construction -- tends to refute any such indication. It is our understanding, in other words, that Congress intended to define what it believed to be a tax avoidance device, rather than to leave the presence or absence of tax avoidance elements for decision on a case-to-case basis.
basis in either the terms or the history of § 117(m) for concluding that Congress intended the Commissioner and the courts to enter this thicket and to arrive at ad hoc determinations for every taxpayer. Accordingly, the judgments below must be affirmed.
"(1) TREATMENT OF GAIN TO SHAREHOLDERS. -- Gain from the sale or exchange (whether in liquidation or otherwise) of stock of a collapsible corporation, to the extent that it would be considered (but for the provisions of this subsection) as gain from the sale or exchange of a capital asset held for more than 6 months, shall, except as provided in paragraph (3), be considered as gain from the sale or exchange of property which is not a capital asset."
"(A) For the purposes of this subsection, the term 'collapsible corporation' means a corporation formed or availed of principally for the manufacture, construction, or production of property, or for the holding of stock in a corporation so formed or availed of, with a view to --"
"(i) the sale or exchange of stock by its shareholders (whether in liquidation or otherwise), or a distribution to its shareholders, prior to the realization by the corporation manufacturing, constructing, or producing the property of a substantial part of the net income to be derived from such property, and"
"(ii) the realization by such shareholders of gain attributable to such property."
"(3) LIMITATIONS ON APPLICATION OF SUBSECTION. In the case of gain realized by a shareholder upon his stock in a collapsible corporation --"
"(A) this subsection shall not apply unless at any time after the commencement of the manufacture, construction, or production of the property, such shareholder (i) owned (or was considered as owning) more than 10 percentum in value of the outstanding stock of the corporation, or (ii) owned stock which was considered as owned at such time by another shareholder who then owned (or was considered as owning) more than 10 percentum in value of the outstanding stock of the corporation;"
"(B) this subsection shall not apply to the gain recognized during a taxable year unless more than 70 percentum of such gain is attributable to the property so manufactured, constructed, or produced; and"
"(C) this subsection shall not apply to gain realized after the expiration of three years following the completion of such manufacture, construction, or production. . . ."
Petitioners Benjamin and Harry Neisloss are builders; petitioner Braunstein, an architect. Their wives are parties only by virtue of the filing of joint returns.
The parties have agreed that the distributions from the corporations and the amounts received directly from the buyers of the stock may be considered together, as if the entire amount had been received from the buyers.
The Government has assumed for purposes of its argument here, but does not concede, that petitioners would have been entitled to capital gains treatment had they conducted the enterprise without utilizing a corporation.
Int.Rev.Code, 1954, § 341(e), added by the Technical Amendments Act of 1958, § 20(a), 72 Stat. 1615.
"petitioners contributed their services to create a valuable property for the corporation[s], and then realized upon that value by selling their stock."
Thus, the Government concludes the petitioners claim as capital gain "what ought to have been (and, in an arm's-length transaction, would have been) taxed as compensation for services."

References: § 117
 § 117
 § 117
 § 117
 § 117
 § 341
 § 20