Source: https://supreme.justia.com/cases/federal/us/331/210/
Timestamp: 2019-04-25 04:39:51+00:00

Document:
1. Under Internal Revenue Code §§ 22(a), 115(a), (b), upon a reorganization of two corporations into a new corporation, accumulated earnings and profits of the predecessor corporations which are undistributed in the reorganization are deemed to be acquired by the successor corporation and, upon distribution by it, are taxable as income, notwithstanding the participation of new investors in the successor corporation. Pp. 331 U. S. 215-216.
2. To what extent the accumulated earnings and profits of the predecessor corporations have been retained by the successor in this case is for the Tax Court to determine upon a factual analysis. Pp. 331 U. S. 216-217.
The Tax Court sustained the Commissioner's determination of deficiencies in respondents' income taxes. 5 T.C. 108. The Circuit Court of Appeals reversed. 157 F.2d 132. This Court granted certiorari. 329 U.S. 709. Reversed and remanded, p. 331 U. S. 217.
two old corporations which were merged in 1928 to form this new corporation had at that time, and turned over to the new corporation, accumulated earnings and profits sufficient to cover these dividends. One of these old corporations, L. Henderson & Sons, Inc., had about $75,000 in earnings and profits accumulated since 1913; the other, Crandall-McKenzie Company, had about $330,000. Liability of respondents for these deficiencies depends upon whether the new corporation acquired and retained a sufficient amount of these earnings and profits of its predecessors to cover the 1940 dividends.
were satisfied to accept only new corporation stock. When the reorganization was complete, the new corporation stock had been distributed as follows: 14,607 shares to old Crandall-McKenzie stockholders, 9,524 shares to old Henderson stockholders, and 25,869 shares to the general public through the participating underwriters.
predecessors. [Footnote 4] Thus, it was concluded, earnings and profits of the predecessors were not acquired by the new corporation.
We granted certiorari because of an alleged conflict with the Sansome rule. 329 U.S. 709. In the state of the record presented, we find it necessary to decide no more than whether the distinction of the Sansome rule made by the Campbell case is correct.
A basic principle of the income tax laws has long been that corporate earnings and profits should be taxed when they are distributed to the stockholders who own the distributing corporation. See Int.Rev.Code §§ 22, 115(a), (b). The controlling revenue acts in question, however, exempt from taxation distributions of stock and money distributions at least in part, made pursuant to a reorganization such as transpired here in 1928. See Revenue Act of 1928, § 112(b), (c), (i)(1)(A); § 115(c)(h), 45 Stat. 791, 816-818, 822-823. Thus, unless those earnings and profits accumulated by the predecessor corporations and distributed in this reorganization are deemed to have been acquired by the successor corporation and taxable upon distribution by it, they would escape the taxation which Congress intended. See § 112(h), Revenue Act of 1928; Murchison's Estate v. Commissioner, 76 F.2d 641; United States v. Kauffmann, 62 F.2d 1045.
as accumulated earnings and profits have been distributed contemporaneously with the reorganization so as to become taxable to the distributees, they, of course, cannot be said to have been acquired by the successor corporation. But insofar as payments to the predecessor corporations or their stockholders do not actually represent taxable distributions of earnings and profits, those earnings and profits must be deemed to have become available for taxable distribution by the successor corporation.
distinguished from earnings and profits. [Footnote 7] Or the distribution may be found to have constituted a liquidation under § 115 of the Revenue Act of 1928. [Footnote 8] It may be necessary on remand, therefore, for the Tax Court to consider, in the light of §§ 112(c) and 115 of the Revenue Act of 1928, how much, if any, of the 1928 cash distribution to Crandall-McKenzie stockholders represented earnings and profits deductible from the earnings and profits transferred to the new corporation available for the 1940 dividend payments.
The decision of the Circuit Court of Appeals is reversed with directions that the cause be remanded to the Tax Court for proceedings not inconsistent with this opinion.
* Together with No. 675, Commissioner v. Munter, also on certiorari to the same Court.
The Tax Court incorporated by reference a fact stipulation of the parties as its finding of fact. Each of the respondents had bought 10,000 shares of the 38,922 shares of the corporation then outstanding. The dividends declared in 1940 amounted to $35,166.25, of which each of the taxpayers received $12,500.
At one point in the stipulation, it was indicated that the new corporation had "no earnings and profits accumulated from December 4, 1928, to December 31, 1939," and no earnings or profits in the taxable year 1940. But, elsewhere in the stipulation, it appears there may have been some $32,000 earnings and profits accumulated between 1928 and 1940. The Tax Court apparently did not resolve these contradictory statements.
Some of the Crandall-McKenzie stockholders were paid $356.00 plus per share; others were paid $315.53 per share for identical stock.
A part of the old Crandall-McKenzie stock for which cash was paid was bought for $300,000 cash by one old Crandall-McKenzie stockholder from another while the reorganization was being transacted. The stockholder who made this purchase thereupon surrendered his original Crandall-McKenzie holdings, together with his recently purchased shares, to the new corporation in exchange for shares in the new corporation and $300,000 cash. We do not decide whether the sale from one old stockholder to another represents a transaction separate from the reorganization. Whatever may be the ultimate significance of this point, it does not affect the result we reach here.
There were two independent grounds for the decision in the Campbell case. One ground was that the earnings and profits of the predecessor corporation there had actually been distributed in the course of the reorganization. The Circuit Court of Appeals stated expressly that it did not rest its decision in the instant case on this theory.
The Senate Committee recommending adoption of § 115(h) of the Revenue Act of 1936 cited the Sansome case with approval. It described the new section as not changing "existing law." The Committee recommended the amendment only "in the interest of greater clarity." S.Rep. No.1256, 74th Cong., 2d Sess., (1936) 19. See also § 115(h) Revenue Act 1938, 52 Stat. 447; H.R.Rep. 2894, 76th Cong., 3d Sess. (1940) 41; S.Rep. 2114, 76th Cong., 3d Sess. (1940) 25.
U.S.Treas.Reg. 94, art. 115-11 (1936); U.S.Treas.Reg. 103, § 19, 115-11 (1940). See Taft v. Commissioner, 304 U. S. 351, 304 U. S. 357; Helvering v. Winmill, 305 U. S. 79, 305 U. S. 83; Douglas v. Commissioner, 322 U. S. 275, 322 U. S. 281-282; Boehm v. Commissioner, 326 U. S. 287, 326 U. S. 291-292.
"then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property."
But § 112(c)(2) makes taxable as dividend income that portion of the gain which represents the distributee's share of the distributing corporation's earnings and profits.
Section 115(c) of the Revenue Act of 1928 governs the taxability of distributions in liquidation.

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