Source: https://supreme.justia.com/cases/federal/us/323/141/case.html
Timestamp: 2017-05-26 22:47:01
Document Index: 581863682

Matched Legal Cases: ['§ 276', '§ 268', '§ 268', '§ 276', '§ 77', '§ 77', '§ 77', '§ 268', '§ 270', '§ 268', '§ 270', '§ 268', '§ 268', '§ 268', '§ 270', '§ 268', '§ 270', '§ 270', '§ 276', '§ 268', '§ 77', '§ 268', '§ 276', '§ 268', '§ 276', '§ 268', '§ 268', '§ 77', '§ 77', '§ 276', '§ 276', '§ 276', '§ 276', '§ 276', '§ 77', '§ 276', '§ 276', '§ 276', '§ 77', '§ 268', '§ 276', '§ 276', '§ 268', '§ 276', '§ 276', '§ 276', '§ 276', '§ 276', '§ 276', '§ 276', '§ 268', '§ 268', '§ 276', '§ 268', '§ 268', '§ 276', '§ 276', '§ 268', '§ 268']

Claridge Apartments Co. v. Commissioner (full text) :: 323 U.S. 141 (1944) :: Justia U.S. Supreme Court Center Log In
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Claridge Apartments Co. v. Commissioner 323 U.S. 141 (1944)
U.S. Supreme CourtClaridge Apartments Co. v. Commissioner, 323 U.S. 141 (1944)Claridge Apartments Co. v. Commissioner of Internal RevenueNos. 28 and 29Argued October 19, 20, 1944Decided December 4, 1944323 U.S. 141CERTIORARI TO THE CIRCUIT COURT OF APPEALS
Certiorari, 321 U.S. 759, to review the reversal of a decision of the Tax Court, 1 T.C. 163, setting aside, in part, deficiency assessments of income and excess profits taxes. Page 323 U. S. 142
The issues arise out of deficiency assessments made in respect to petitioner's federal income and excess profits taxes for the years 1935 to 1938, inclusive. They involve the applicability of Section 270 of the Bankruptcy Act, as amended, [Footnote 1] so as to require reduction of depreciation allowances claimed. Page 323 U. S. 143
This difference has been the basic one between the parties in proceedings before the Tax Court, [Footnote 3] the Circuit Court of Appeals, and here. Others include a similar question with respect to the extinction of the debtor's liability for the accrued unpaid interest on the bonds and whether Section 270 is made applicable retroactively to the years prior to 1938, by virtue of the provisions of Section 276c(3) of the Chandler Act. [Footnote 4] Page 323 U. S. 144
The Tax Court decided the principal issue on the merits in favor of the taxpayer, except with respect to the accrued interest. Cf. also Capento Securities Corp. v. Commissioner, 47 B.T.A. 691, aff'd, 140 F.2d 382. It likewise limited the application of Section 270 to the year 1938 and succeeding years. 1 T.C. 163. The Court of Appeals reversed the Tax Court's decision in both respects, holding there was a cancellation of indebtedness with respect to the unpaid principal, [Footnote 5] and that Section 270 was applicable retroactively to require the prescribed reduction in basis for each of the tax years in question. 138 F.2d 962. Certiorari was granted, 321 U.S. 759, because of the importance of the questions presented and a conflict on the question of retroactivity. [Footnote 6] The facts are stated shortly in the margin, to give concrete perspective. [Footnote 7] Page 323 U. S. 145
Petitioner earnestly argues that the Tax Court's decision, so far as this was in its favor, should be affirmed on the authority of Dobson v. Commissioner, 320 U. S. 489, though in other respects it seeks a reversal of that court's judgment. [Footnote 8] For reasons presently to be stated, we think the case must be disposed of in its entirety by the application of § 276c(3), which determines the extent to which §§ 268 and 270 are applicable in point of time. Accordingly, we are not required to pass upon the merits of the other interesting issues or whether they fall within the Dobson admonition. On the other hand, the question of the applicability of §§ 268 and 270, under the terms of § 276c(3), to the transactions involved in this case obviously is one of law, and of a sort not requiring the specialized experience of the Tax Court to determine. Furthermore, it involves making an accommodation between the conflicting policies, in part, of the bankruptcy laws and the revenue enactments. Sections 268 and 270 are integral parts of the former, though related in subject matter to the latter, and were so placed for purposes relevant primarily to that legislation. For these reasons, the issue falls beyond the scope of the Dobson case. Page 323 U. S. 146
Some of the obscurity has been created by the very legislation enacted to remove it. This has been true of the successive "reorganization" provisions, including those for "nonrecognition" and for transfer of "basis," which have appeared in the various revenue acts from 1918 (cf. 40 Stat. 1057) forward. Closely related, as these have been, to the problem whether income is realized by the cancellation or reduction of indebtedness in connection with a reorganization, they have tended to obscure, if not to blot Page 323 U. S. 147 out, that problem altogether in situations covered by their terms. [Footnote 11]
In some respects, as compared with the preexisting legislation, the 1934 provisions broadened, but in others they restricted, the scope of application of the principles of nonrecognition and transfer of basis. [Footnote 15] Nevertheless, Page 323 U. S. 148 they were applicable to all exchanges falling within their terms, whether or not the plan was executed in connection with a judicial proceeding. Consequently, when, in June, 1934, § 77B was adopted, the 1934 revenue provisions became applicable to reorganizations under that section, but only if they met the tests prescribed in the revenue acts, including such judicially interpolated matters as "continuity of interest" and "business purpose." [Footnote 16] Many 77B reorganizations did not qualify under these tests, or, on substantial grounds, were thought not to do so.
The consequence was seriously to clog the use of the 77B procedure. Obstacles were imposed not only by the differences in the two statutory definitions of "reorganization," but also by ambiguities in each definition which in themselves created considerable areas of uncertainty. [Footnote 17] And underlying these remained the mystery of when income would be regarded as realized, which continued to haunt reorganizers unsure of whether they could bring themselves within the statutory exemptions. In short, the necessity of squaring the reorganization first with § 77B, then with the different terms of the revenue provisions, and the uncertainties involved under each statute in doing this, added to the puzzle of "realized income," made the process of creditors' reorganization under the former act a highly dubious adventure. To an undetermined extent, Page 323 U. S. 149 the effect of the revenue act's provisions was to nullify or make impossible of realization the objects of § 77B.
The relieving effect of § 268 was confined in three ways -- namely, (1) to transactions occurring in a Chapter X reorganization; (2) to transactions involving a modification or a cancellation, in whole or in part, of the debtor's indebtedness, and (3) its benefits were limited to the debtor corporation, the trustee, if any, provided for in the plan, and the successor or transferee corporation. Within these limitations, the section provided that "no income or profit, taxable under any law . . . shall . . . be deemed to have accrued to or to have been realized by . . ." the parties specified, and thus removed Chapter X transactions from incidence of the uncertainties characterizing the general "reorganization" provisions. One who followed the procedure could be assured he would Page 323 U. S. 150 not thereby run into tax consequences which would be worse than the economic illness requiring that cure.
Accordingly, the Treasury, and others, made various proposals, [Footnote 19] which eventuated in the adoption of § 270 in its original form. This provided for transfer of basis, as did the code provisions, but required that it be decreased by the amount of the reduction of indebtedness, a measure at variance with the terms of the code. It was from the requirement of reduction, and the measure provided for it, that new difficulties were derived. Although the only occasion for making a further provision concerning basis arose from the adoption of § 268, and although the legislative history discloses the purpose of Congress exactly Page 323 U. S. 151 contrary to placing Chapter X reorganizations at radical disadvantage from others, the literal effect of the original § 270 came near, if not entirely, to wiping out the whole benefit conferred by § 268. [Footnote 20] Soon it was realized that literal application of the specified new measure of reduction would require decrease of basis in many instances to zero, or even to a point below zero, because the amount of the debt cancelled or reduced would equal or exceed the value of the property or that assigned to the basis transferred. Thus, any tax benefit derived from § 268 in such cases would be more than offset by the higher taxes resulting in later years from the absence of any depreciation base and in case of sale of the property acquired. And, in cases where no benefit could be derived from § 268, the effect of applying § 270 was, if not to impose a capital levy, [Footnote 21] then to deny the new owners equal treatment not only with other transferees under the code provisions, but with all other taxpayers.
Congress, in view of its original object in adopting § 268, could not possibly have intended such consequences for § 270. The cure was worse than the disease. [Footnote 22] The legislative history gives the clear impression that adoption of the original § 270 was a plain blunder, the consequences of which were not foreseen, understood, or intended by those who finally gave it the form of law. [Footnote 23] Page 323 U. S. 152
With this background, we turn to § 276c(3). By their own terms, §§ 268 and 270 apply only to transactions arising in connection with proceedings "under this chapter" -- that is, Chapter X of the Chandler Act. The instant transactions arose in proceedings not under Chapter X, but under § 77B, which had been closed by final decree Page 323 U. S. 153 March 1, 1937. The Chandler Act became effective September 22, 1938. Accordingly, §§ 268 and 270, of their own force, are not applicable to these transactions. If they are so at all, it is by virtue of § 276c(3), which the Government says must be construed to extend their operation retroactively to include these facts. This petitioner disputes.
"* * * *" "(3) sections 268 and 270 of this Act shall apply to any plan confirmed under section 77B before the effective date of this amendatory Act and to any plan which may be confirmed under section 77B on and after such effective date, except that the exemption provided by section 268 of this Act may be disallowed if it shall be made to appear that any such plan had for one of its principal purposes the avoidance of income taxes, and except further that, where such plan has not been confirmed on and after such effective date, section 269 of this Act shall apply where practicable and expedient."
Three constructions have been advanced. Shortly stated, they are that §§ 268 and 270 apply to transactions involved in 77B proceedings (1) only if the proceedings were pending September 22, 1938; (2) only for 1938 and later tax years, but including transactions in proceedings closed before September 22, 1938; (3) for all tax years from 1934 forward as to transactions in all proceedings in which a plan had been or should be confirmed, regardless of whether the proceedings were pending or had been closed on September 22, 1938. Page 323 U. S. 154
The Government concedes there is force in this Page 323 U. S. 155 view, though it suggests, we think untenably, [Footnote 26] that the question is doubtfully open. The Court of Appeals accepted the Government's view, the Tax Court the alternative or second view advanced by the taxpayer. We think neither can be accepted, and that the effect of § 276c(3) is to confine the application of §§ 268 and 270, in 77B proceedings, to proceedings pending when the Chandler Act became effective.
If §§ 268 and 270 were to be applied to all reorganizations completed under § 77B, literally they would cover all such transactions running back to 1934, when the latter section was enacted. As to proceedings closed when the Chandler Act took effect, this would involve disturbance of tax consequences already settled for five years, unless cases are excepted where the statute of limitations had run. [Footnote 27] We have no means of knowing how much resurrection of old claims or generation of new ones in respect to settled matters this would create. Nor did the authors of Page 323 U. S. 156 the Chandler Act. But, from the circumstances of the time and the very necessities which brought about adoption of § 77B, the volume must have been considerable.
The language does not require such unlimited construction. The words are not directed expressly to past tax years. Nor are they focused upon transactions in closed proceedings. It is true that § 276c(3), if construed as though it were entirely independent of the remainder of § 276c, does not refer explicitly to pending 77B proceedings, except in its concluding clause. Yet it is part and parcel of that section, which in all other respects deals only with pending and future proceedings, not with closed ones. And the concluding clauses of (3) afford additional evidence that it was intended to apply only to plans confirmed or to be confirmed in pending proceedings, as does also its setting in the context of § 276 as a whole. [Footnote 29] Page 323 U. S. 157
Thus, § 276, in subsections a, b and c (excepting only § 276c(3)), deals exclusively with pending or future proceedings. Congress' concern in "a" was that Chapter X should apply notwithstanding the substantive rights of debtors, creditors and others had arisen before the effective date of the Act. In "b," it was that the pendency of bankruptcy and receivership proceedings should not defeat resort to the Chandler Act's provisions; in "c," it was with an accommodation of the provisions of §§ 77A and 77B and those of the Chandler Act as to pending proceedings. Apart from § 276c(3), therefore, the whole Page 323 U. S. 158 problem treated in § 276 was to give the Chandler Act as wide room as possible for future operation, notwithstanding the previous vesting of substantive rights or institution of bankruptcy or reorganization proceeding. Congress was concerned with the Act's future operation, as a remedial provision, not as a method of creating new and retroactive substantive rights and liabilities.
This is borne out by the concluding clauses of § 276c(3) itself, which provide for exceptions to its operation. The second exception in terms relates only to pending proceedings. It contemplated future confirmation exclusively. The first exception, standing alone, literally could be applied in the case of a closed proceeding. But reaching such cases was not a necessary reason for including it. Such a reason existed, however, in the necessity for covering plans already confirmed in pending proceedings, unless parties then reorganizing under § 77B were to be treated differently from others reorganizing at the same time under Chapter X. The two exceptions thus dovetailed to provide complete coverage for disallowing the exemption given by § 268 in pending proceedings. They comprehended distinct situations and provided different Page 323 U. S. 159 sanctions, [Footnote 30] all however consistent with application only in pending proceedings. Thus, the entire language of § 276c(3) was capable of full and complete application, although confined to pending proceedings. To give it greater scope, retroactively, is required neither by the terms nor by the purposes of the specific provision or others related to it in context or by reference.
However, that Act itself created another problem -- namely, how far its terms should apply in pending 77B proceedings. Congress decided that the Chandler procedure should be followed as far as possible, though not to the extent of displacing the 77B procedure in reorganizations far advanced. [Footnote 31] The same policy was framed for other chapters. Consequently, §§ 276c(1) and (2) were Page 323 U. S. 160 included, as were also comparable provisions in other chapters. [Footnote 32] With them in, the problem was presented whether the Chandler Act's tax relief provisions, including §§ 268 and 270, should apply also in the pending 77B proceedings and, if so, to what extent -- only to those converted into Chandler Act proceedings by § 276c(1) or also to those partially converted under § 276c(2) by an exercise of judicial discretion and those falling within 276c(2), but so nearly completed or otherwise situated that application of the Chandler Act in any respect would be impracticable, and therefore 77B would continue exclusively effective.
In view of these considerations both of context and of consequence, we do not think § 276c(3) can be regarded as applicable to closed proceedings. The purpose, rather, as in the other provisions of § 276, was to look to the future, and, in doing so, to make the necessary adjustment, so far as was possible, between the provisions of the Chandler Page 323 U. S. 161 Act and preexisting laws as to proceedings pending when the former took effect. Thus, construed, § 276c(3) becomes consistent, both in form and in the purpose and effects of applying the new tax provisions, with the other provisions of § 276 and with the general policy of the Chandler Act as to applicability of its terms. [Footnote 33] Any other view would make § 276c(3) a unique provision in the statute's setting, and one inconsistent with, if not also contradictory to, the Act's general purposes and the limited objects of the particular provisions immediately in issue.
Further support for this view would seem to be afforded when the consequences of applying it or the contrary one to similar provisions appearing in other chapters of the Chandler Act [Footnote 34] are taken into account. If those provisions Page 323 U. S. 162 are to be given retroactive application comparable to what the Government says should be given to §§ 268, 270, and 276c(3), the disruption of settled tax situations by virtue of the Chandler Act's adoption may be multiplied many times over what would follow from giving such an effect only to §§ 268, 270, and 276c(3). Although the immediate consequences of decision in this case are limited to the specific effects of these sections, it is at least doubtful that they could be given a different construction, as to retroactive application, from what might be given to the comparable sections of other chapters. The possibility that uniform interpretation may be required gives pause, at least, before adopting a view in this case which, if extended to the other provisions, would open so wide a door for retroactive taxation.
The answers are obvious. In the first place, the wording of § 276c(3) does not require the Government's construction. Page 323 U. S. 163 That view can be taken only if subdivision (3) is torn, formally and substantively, from its context in the statute and the problems with which these surrounding provisions, including §§ 268 and 270, undertook to deal. Thus to treat the provision not only would disregard the purposes of all these related provisions. It would convert subdivision (3), in its practical application, into an entirely independent tax measure, solely in the nature of an amendment to the general revenue legislation, and with the harshest retroactive tax consequences. This, in fact, seems to be the Government's view of the character of the legislation. [Footnote 35] But that view wholly disregards the fact that neither §§ 268 and 270 nor § 276c(3) had any purpose originally or later merely to produce larger revenues, or to operate exclusively as revenue measures. It is true they modified the preexisting revenue provisions, so far as they were applicable by their terms to do so. But this was a function of their primary object, which was to give relief to parties undertaking reorganization, not simply to impose new and different taxes upon them, much less to do so with respect to transactions long since settled Page 323 U. S. 164 both as to taxes and as to reorganization. The objects of § 276c(3) cannot be ignored or distorted by thus stripping the provision, formally and substantively, from its statutory setting and the limitations this clearly imposes.
So far as respects the Government's concern over the possible discriminations which will be created between taxpayers by acceptance of petitioner's view, it is perhaps enough to say that some such discrimination is inevitable with whatever solution may be accepted, and we think what follows from applying §§ 268 and 270 only to "pending proceedings" not only is preferable to any other, but is most consistent with the normal course of legislation. Retroactivity, even where permissible, is not favored except upon the clearest mandate. It is the normal and usual function of legislation to discriminate between closed transactions and future ones or others pending but not completed. The discrimination which the Government fears will follow from acceptance of the taxpayer's view admittedly will result. But it is one consistent with the normal consequences of legislation in the drawing of a line between the past or the present and the future. It also was one necessary for Congress to make if it were not to make another or others equally bad or worse. The Government's concern in this case is not that the taxpayer will suffer harsher discrimination under petitioner's construction than under its own. It is, rather, that he will not suffer it. For, as interpreted by the Government, [Footnote 36] §§ 268, 270, and 276c(3), applied in conjunction, would be much more likely to produce new, and retroactive, tax burdens than tax benefits. The present case in an illustration. To this the Government might be entitled if the statutory mandate were clear. It cannot have that Page 323 U. S. 165 advantage by dubious construction which ignores so much of the statute's setting, purpose, and history. The letter does not require this. The consequences forbid it.
The section is set forth in 323 U. S. [Footnote 5]
Cf. 323 U. S. [Footnote 29]