Source: https://www.legalcrystal.com/case/100537/braunstein-vs-commissioner
Timestamp: 2017-05-30 04:35:08
Document Index: 42707502

Matched Legal Cases: ['§ 117', '§ 117', '§ 117', '§ 117', '§ 117', '§ 117', '§ 117', '§ 117', '§ 117', '§ 117', '§ 117']

Braunstein Vs Commissioner - Citation 100537 - Court Judgment | LegalCrystal
Save as PDF Add a Tag Add a Note Semantics Visualize BraunsteIn Vs. Commissioner - Court Judgment	LegalCrystal Citationlegalcrystal.com/100537CourtUS Supreme CourtDecided OnJun-10-1963Case Number374 U.S. 65AppellantBraunsteinRespondentCommissionerExcerpt:.....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
§ 117(m) of the internal revenue code of 1939. [
] these provisions require that, under certain circumstances, gain from the sale of stock which would otherwise be considered as long-term capital gain, and accordingly taxed at
a maximum rate..... Judgment:
Braunstein v. Commissioner - 374 U.S. 65 (1963)
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.
The three taxpayers who are petitioners here became associated in 1938, and have since participated in a number of construction projects, usually through corporations in which the stock was equally divided. [
] In 1948, the petitioners received a commitment from the Federal Housing Administration to insure loans for the construction of a multiple-dwelling apartment project in Queens County, New York. Two corporations were formed to carry out this project, and each petitioner was issued one-third of the stock in each corporation. After the costs of construction had been paid, the corporations each had an unused amount of mortgage loan funds remaining, and, in 1950, the petitioners sold their stock at a profit, receiving as part of the sale transaction distributions from the corporations which included the unused funds. The petitioners reported the excess of the amounts received over their bases in the stock as long-term capital gains of $313,854.17 each. [
The Commissioner asserted a deficiency, treating the gain as ordinary income on the ground that the corporations were "collapsible" within the meaning of § 117(m). The Tax Court sustained the Commissioner, 36 T.C. 22, and the Court of Appeals affirmed the Tax Court, 305 F.2d 949, holding that (1) the taxpayers had the requisite "view" during construction of the property (
); (2) more than 70% of the gain realized by the taxpayers was attributable to the constructed property (
); and (3) § 117(m) applies even if the constructed buildings would have produced capital gain on a sale by the taxpayers had no corporations been formed. This last holding was in response to an argument by the taxpayers based on a theory similar to that adopted by the Court of Appeals for the Fifth Circuit in
United States v. Ivey,
294 F.2d 799. In view of the conflict between the decision below and that in
on this point, we granted certiorari,
371 U. S. 933
, stating that the grant was limited to the following question:
primarily for sale to customers in the ordinary course of his trade or business, any gain from the sale of the asset would be ordinary income; [
] but if that same individual were to form a corporation to construct the property, intending to sell his stock on the completion of construction, it was at least arguable prior to the enactment of § 117(m) that the proceeds of the ultimate sale of the stock were entitled to capital gains treatment. It was this and similar devices that § 117(m) was designed to frustrate, but it was not intended to have the inequitable effect of converting into ordinary income what would properly have been a capital gain prior to its enactment even in the absence of any corporate form. Thus, it is argued, the phrase "gain attributable to such property," as used in § 117(m), must apply only to profit that would have constituted ordinary income if a corporation had not been utilized, for only in such cases is the corporation made to serve as a device for tax avoidance. In the present case, neither the corporation nor the individual petitioners were in the trade or business of selling apartment buildings, and thus the corporations were not used to convert ordinary income into capital gain, and the provisions of § 117(m) are inapplicable. [
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.
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
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.
We are reinforced in this conclusion by the practical difficulties -- indeed, the impossibilities -- of considering without more legislative guidance than is furnished by § 117(m) whether there has in fact been "conversion" of ordinary income into capital gains in a particular case. For example, if we were to inquire whether or not the profit would have been ordinary income had an enterprise been individually owned, would we treat each taxpaying shareholder differently, and look only to
or business, or would we consider the matter in terms of the trade or business of
or at least a substantial number, of the shareholders? There is simply no basis in the statute for a judicial resolution of this question, and, indeed, when Congress addressed itself to the problem in 1958, it approved an intricate formulation falling between these two extremes. [
As a further example, what if the individual in question is not himself engaged in any trade or business, but owns stock in varying amounts in a number of corporate ventures other than the one before the court? Do we pierce
of the corporate veils, regardless of the extent and share of the individual's investment, and charge him with being in the trade or business of each such corporation? Again, there is no basis for a rational judicial answer; the judgment is essentially a legislative one, and, in the 1958 amendments, Congress enacted a specific provision, designed to deal with this matter, that is far too complex to be summarized here. [
These examples should suffice to demonstrate the point: the question whether there has in fact been a "conversion" of ordinary income in a particular case is far easier to state than to answer, and involves a number of thorny issues that may not appear on the surface. [
] We find no
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
determinations for every taxpayer. Accordingly, the judgments below must be affirmed.