Source: https://m.openjurist.org/331/us/210
Timestamp: 2020-02-23 21:03:13
Document Index: 529137461

Matched Legal Cases: ['§ 22', '§ 112', '§ 115', '§ 112', '§ 115', '§ 112', '§ 115', '§ 115', 'art. 115', '§ 19', '§ 112']

331 US 210 Commissioner of Internal Revenue v. Munter | OpenJurist
331 U.S. 210 - Commissioner of Internal Revenue v. Munter
MUNTER. COMMISSIONER OF INTERNAL REVENUE v. SAME.
The Tax Court found that there was a failure of proof that the earnings and profits of the old corporations had been distributed in 1928. Relying upon the rule of Commissioner of Internal Revenue v. Sansome, 2 Cir., 60 F.2d 931, which, for tax purposes, treats a reorganized corporation as but a continuation of its predecessors, the Tax Court determined that the new corporation acquired all the earnings and profits of its predecessors in 1928. Then, without analyzing the earnings and distribution history of the new corporation after its inception in 1928 and prior to the 1940 distribution, the Tax Court concluded that the new corporation's accumulated earnings and profits were sufficient in 1940 to make the questioned dividends taxable to respondents as income. 5 T.C. 108. The Circuit Court of Appeals for the Third Circuit reversed, 157 F.2d 132, folloing its ea rlier decision in Campbell v. United States, 3 Cir., 144 F.2d 177, which had narrowly limited the Sansome rule. The theory of the Campbell decision, so far as relevant to the only question directly presented here, was that change in ownership brought about by the participation of new investors in the reorganization made the new corporation such an entirely different entity that it could not properly be called, even for tax purposes, a continuation of its predecessors.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, 67 S.Ct. 369. 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, 26 U.S.C.A. Int.Rev.Acts, pages 377, 378, 379, 385. 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, 26 U.S.C.A. Int.Rev.Acts, page 379; Murchison's Estate v. Commissioner of Internal Revenue, 5 Cir., 76 F.2d 641; United States v. Kauffmann, 9 Cir., 62 F.2d 1045.
In Commissioner of Internal Revenue v. Sansome, supra, it was held that implicit in the tax exemption of reorganization distributions was the understanding that the earnings and profits so exempt were acquired by the new corporation and were taxable as income to stockholders when subsequently distributed. Congress has repeatedly expressed its approval of the so-called Sansome rule as a correct interpretation of the purpose of the tax laws governing reorganizations.5 And Congress has apparently been satisfied with Treasury Regulations which follow the Sansome doctrine.6
Of course, when, as in the Sansome case, all the stockholders of the old corporation swap all their old stock for identical proportions of the new, there can be no doubt that the earnings and profits of the old have not been distribued and are passed on to the successor corporation. But if the predecessors' earnings and profits are not distributed in the course of the reorganization, they do not disappear simply because the successor corporation has some assets and owners in addition to those of the old corporation or corporations. See Putnam v. United States, 1 Cir., 149 F.2d 721, 726. The congressional purpose to tax all stockholders who receive distributions of corporate earnings and profits cannot be frustrated by any reorganization which leaves earnings and profits undistributed in whole or in part. Insofar 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.
It would be inappropriate for us to make the factual analysis of this record necessary to trace the earnings and profits involved in the 1928 reorganization in the absence of such a determination by the Tax Court and review by the Circuit Court of Appeals. See Helvering v. Rankin, 295 U.S. 123, 131, 132, 55 S.Ct. 732, 736, 79 L.Ed. 1343; Helvering v. Safe Deposit & Trust Co., 316 U.S. 56, 66, 67, 62 S.Ct. 925, 930, 86 L.Ed. 1266, 139 A.L.R. 1513; Commissioner v. Scottish American Investment Co., 323 U.S. 119, 124, 65 S.Ct. 169, 171, 89 L.Ed. 113. It might be that upon a full factual analysis the Tax Court would conclude that the new corporation acquired and had retained earnings and profits of Henderson sufficient to cover the 1940 distribution. Or the Tax Court may find it necessary to make further analysis of the 1928 distributions to Crandall-McKenzie's old stockholders. In this connection it is urged that the cash paid for part of the Crandall-McKenzie stock in 1928 constituted a taxable distribution of some or all of the accumulated earnings and profits. The Tax Court, however, has previously declined to consider these cash payments as such a distribution of earnings and profits in the absence of proof that the recipients had been taxed for them. But even if it were proved that old Crandall-McKenzie stockholders had been so taxed, the face amount of that tax would not necessarily reflect the earnings and profits distribution they received. For example part or all of their tax may have represented capital gain as distinguished from earnings and profits.7 Or the distribution may be found to have constituted a liquidation under § 115 of the Revenue Act of 1928.8 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.
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 plus per share; others were paid $315.53 per share for identical stock.
The Senate Committee recommending adoption of § 115(h) of the Revenue Act of 1936, 26 U.S.C.A. Int.Rev.Acts, page 870, 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, 26 U.S.C.A. Int.Rev.Acts, page 1057; 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, 357, 58 S.Ct. 891, 895, 82 L.Ed. 1393, 116 A.L.R. 346; Helvering v. Winmill, 305 U.S. 79, 83, 59 S.Ct. 45, 46, 83 L.Ed. 52; Douglas v. Commissioner, 322 U.S. 275, 281, 282, 64 S.Ct. 988, 992, 88 L.Ed. 1271; Boehm v. Commissioner, 326 U.S. 287, 291, 292, 66 S.Ct. 120, 123.
Section 112(c)(1) of the Revenue Act of 1928 provides in effect if a cash or property distribution is made in the course of a reorganization '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.