Source: http://www.chanrobles.com/usa/us_supremecourt/483/89/case.php
Timestamp: 2017-11-23 00:08:27
Document Index: 286436012

Matched Legal Cases: ['§ 263', '§ 1', '§ 1016', '§ 1', '§ 165', '§ 1211']

CIR V. FINK, 483 U. S. 89 (1987) - US SUPREME COURT DECISIONS ON-LINE
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Held: A dominant shareholder who voluntarily surrenders a portion of his shares to the corporation, but who retains control of the corporation, does not sustain an immediate loss deductible for income tax purposes. Rather, the rule applicable to contributions to capital applies, so that the surrendering shareholder must reallocate his basis in the surrendered shares to the shares he retains, and deduct his loss, if any, when he disposes of the remaining shares. This rule is not rendered inapplicable simply because a stock surrender is not a contribution to capital in the strict accounting sense, or because, unlike a typical contribution to capital, a surrender reduces the shareholder's proportionate interest in the corporation. Where, as here, a closely held corporation's shares are not traded on an open market, a stock surrender to that corporation often will not meet the requirement that an immediately deductible loss must be actually sustained during the taxable year, since there will be no reliable method of determining whether the surrender has resulted in a loss until the shareholder disposes of his remaining shares. Moreover, chanroblesvirtualawlibrary
POWELL, J., delivered the opinion of the Court, in which REHNQUIST, C.J.,and BRENNAN, WHITE, MARSHALL, and O'CONNOR, JJ., joined. WHITE, J., filed a concurring opinion, post p. 483 U. S. 100. SCALIA, J., filed an opinion concurring in the judgment, post p. 483 U. S. 100. BLACKMUN, J., concurred in the result. STEVENS, J., filed a dissenting opinion, post p. 483 U. S. 101.
Respondents Peter and Karla Fink were the principal shareholders of Travco Corporation, a Michigan manufacturer of motor homes. Travco had one class of common stock outstanding, and no preferred stock. Mr. Fink owned 52.2 percent, and Mrs. Fink 20.3 percent, of the outstanding chanroblesvirtualawlibrary
In an unpublished opinion, the Tax Court sustained the Commissioner's determination for the reasons stated in Frantz v. Commissioner, 83 T.C. 162, 174-182 (1984), aff'd, 784 F.2d 119 (CA2 1986), cert. pending, No. 86-11. In Frantz, the Tax Court held that a stockholder's non-pro rata surrender of shares to the corporation does not produce an chanroblesvirtualawlibrary
Ibid. The Tax Court recognized that it had sustained the taxpayer's position in a series of prior cases. [Footnote 3] Id. at 174-175. But it concluded that these chanroblesvirtualawlibrary
It is settled that a shareholder's voluntary contribution to the capital of the corporation has no immediate tax consequences. 26 U.S.C. § 263; 26 CFR § 1.263(a)-2(f) (1986). Instead, the shareholder is entitled to increase the basis of his shares by the amount of his basis in the property transferred to the corporation. See 26 U.S.C. § 1016(a)(1). When the shareholder later disposes of his shares, his contribution is reflected as a smaller taxable gain or a larger deductible loss. This rule applies not only to transfers of cash or tangible property, but also to a shareholder's forgiveness of a debt owed to him by the corporation. 26 CFR § 1.6112(a) (1986). Such transfers are treated as contributions to capital, even if the other shareholders make proportionately smaller contributions, or no contribution at all. See, e.g., Sackstein v. Commissioner, 14 T.C. 566, 569 (1950). The rules governing contributions to capital reflect the general principle that a shareholder may not claim an immediate loss for outlays made to benefit the corporation. Deputy v. Du Pont, 308 U. S. 488 (1940); Eskimo Pie Corp. v. Commissioner, 4 T.C. 669, 676 (1945), aff'd, 153 F.2d 301 (CA3 1946). We must decide whether this principle also applies to chanroblesvirtualawlibrary
Finally, the Finks contend that their stock surrenders were not contributions to the corporation's capital. They note that a typical contribution to capital, unlike a non-pro rata stock surrender, has no effect on the contributing shareholder's proportionate interest in the corporation. Moreover, the Finks argue, a contribution of cash or other property increases the net worth of the corporation. For example, a shareholder's chanroblesvirtualawlibrary
A shareholder who surrenders a portion of his shares to the corporation has parted with an asset, but that alone does not entitle him to an immediate deduction. Indeed, if the shareholder owns less than 100 percent of the corporation's shares, any non-pro rata contribution to the corporation's capital will reduce the net worth of the contributing shareholder. [Footnote 10] A shareholder who surrenders stock thus is similar to one who forgives or surrenders a debt owed to him by the corporation; the latter gives up interest, principal, and also potential voting power in the event of insolvency or bankruptcy. But, as stated above, such forgiveness of corporate debt is treated as a contribution to capital, rather than a current deduction. Supra, at 94. The Finks' voluntary surrender of shares, like a shareholder's voluntary forgiveness of debt owed by the corporation, closely resembles an investment or contribution chanroblesvirtualawlibrary
The Finks concede that the purpose of their stock surrender was to protect or increase the value of their investment in the corporation. Brief for Respondents 3. [Footnote 12] They hoped to encourage new investors to provide needed capital and, in the long run, recover the value of the surrendered shares through increased dividends or appreciation in the value of their remaining shares. If the surrender had achieved its purpose, the Finks would not have suffered an economic loss. See chanroblesvirtualawlibrary
Finally, treating stock surrenders as ordinary losses might encourage shareholders in failing corporations to convert potential capital losses to ordinary losses by voluntarily surrendering their shares before the corporation fails. In this way, shareholders might avoid the consequences of 26 U.S.C. § 165(g)(1), which provides for capital loss treatment of stock that becomes worthless. [Footnote 13] Similarly, shareholders may be encouraged to transfer corporate stock rather than other property to the corporation in order to realize a current loss. [Footnote 14] chanroblesvirtualawlibrary
We therefore hold that a dominant shareholder who voluntarily surrenders a portion of his shares to the corporation, but retains control, does not sustain an immediate loss deductible from taxable income. Rather, the surrendering shareholder must reallocate his basis in the surrendered shares to the shares he retains. [Footnote 15] The shareholder's loss, if chanroblesvirtualawlibrary
The Court of Appeals in this case did not discuss the possibility of allowing a capital loss, rather than an ordinary loss, and the parties raise it only in passing. We note, however that a capital loss is realized only upon the "sal[e] or exchang[e]" of a capital asset. 26 U.S.C. § 1211(b)(3). A voluntary surrender, for no consideration, would not seem to qualify as a sale or exchange. Frantz v. Commissioner, 784 F.2d 124.
I do not believe that the Finks' surrender of their shares was, or even closely resembles, a shareholder contribution to chanroblesvirtualawlibrary
It was only in 1977 (after the Finks had transferred their stock to the corporation), that the Commissioner of Internal chanroblesvirtualawlibrary
Shearson/American Express Inc. v. McMahon, 482 U. S. 220, 482 U. S. 268 (1987) (STEVENS, J., concurring in part and dissenting in part). A rule of statutory construction that "has been consistently recognized for more than 35 years" acquires a clarity that "is simply beyond peradventure." chanroblesvirtualawlibrary
If Congress lacked the power to amend statutes to rectify past mistakes, and if the only value to be achieved in construing chanroblesvirtualawlibrary
The relationship between the courts or agencies, on the one hand, and Congress, on the other, is a dynamic one. In the process of legislating it is inevitable that Congress will leave open spaces in the law that the courts are implicitly authorized to fill. The judicial process of construing statutes must therefore include an exercise of lawmaking power that has been delegated to the courts by the Congress. But after the gap has been filled, regardless of whether it is filled exactly as Congress might have intended or hoped, the purpose of the delegation has been achieved, and the responsibility for making any future change should rest on the shoulders of the Congress. Even if it is a consensus of lower federal court decisions, rather than a decision by this Court, that has provided the answer to a question left open or ambiguous in the original text of the statute, there is really no need for this Court to revisit the issue. Moreover, if Congress understands that, as long as a statute is interpreted in a consistent manner, it will not be reexamined by the courts except in the most extraordinary circumstances, Congress will be encouraged to give close scrutiny to judicial interpretations of its work product. We should structure our principles of statutory construction to invite continuing congressional oversight of the interpretive process. [Footnote 2/6] chanroblesvirtualawlibrary
In addition to the institutional ramifications of rejecting settled constructions of law, fairness requires consideration of the effect that changes have on individuals' reasonable reliance on a previous interpretation. This case dramatically illustrates the problem. Mr. Fink surrendered his shares in December, 1976. Mrs. Fink surrendered hers in January, 1977. At that time, the law was well settled: the Tax Court had repeatedly reaffirmed the right to deduct such surrenders as ordinary losses, and the Commissioner had acquiesced in this view for 35 years. [Footnote 2/7] See supra, at 483 U. S. 101. It was only on April 11, 1977, that the Commissioner announced his nonacquiescence. chanroblesvirtualawlibrary