Source: http://www.chanrobles.com/usa/us_supremecourt/324/542/case.php
Timestamp: 2017-10-18 14:57:09
Document Index: 780606723

Matched Legal Cases: ['§ 113', '§ 112', '§ 112', '§ 501', '§ 501', '§ 501', '§ 112']

For purposes of determining its income tax liability on subsequent disposition of the securities, the corporation was obliged to and did use as a cost base the cost of the securities to the transferors, $304,684.49. Cf. Internal Revenue Code, § 113(a)(8). But, for its corporate accounting, the corporation set up a cost of $491,800, market value at the chanroblesvirtualawlibrary
After considering the applicability of § 112(b)(7), the stockholders duly dissolved the corporation and distributed its assets during December, 1938. They elected to be taxed on the gains on their shares pursuant to § 112(b)(7), and they reported, of course, according to the higher or market value basis for the securities acquired and disposed of by the Company. The Commissioner asserted a deficiency based on the lower cost to the transferors. In explaining his determination, he relied on § 501(a) of the Second Revenue Act of 1940, 54 Stat. 974, 1004, which provides that earnings and profits on the sale or other disposition of property shall be determined by using the adjusted basis for determining gains and by recognizing such gains to the extent that they are recognized for computing net income, and on § 501(c), which makes the provisions of § 501(a) applicable to prior years. chanroblesvirtualawlibrary
The only reason to doubt the validity of the regulation is found in certain decisions of the Board of Tax Appeals and lower courts mentioned in the Tax Court's opinion. Despite these adverse decisions, however, the Commissioner chanroblesvirtualawlibrary
We think the regulation is reasonable, and a valid exercise of the rulemaking power. The taxpayers are insisting on using as a base for tax purposes a figure that, in itself, had no relation to taxation. It was no doubt permissible, and perhaps the correct accounting for determining earned surplus for dividends and such corporate purposes, for the corporation to set up its books on the market value of its property at the time of acquisition, which determined the value of the stock it issued. But "earnings and profits" in the tax sense, although it does not correspond exactly to taxable income, does not necessarily follow corporate accounting concepts, either. [Footnote 8] Congress has determined that, in certain types of transaction, the economic changes are not definitive enough to be given tax consequences, and has clearly provided that gains and losses on such transactions shall not be recognized for income tax liability, but shall be taken account of later. §§ 112, 113. It is sensible to carry through the theory in determining the tax effect of such transactions on earnings and profits. Compare Commissioner v. Sansome, 60 F.2d 931, and see Sen.Rep. No. 2156, 74th Cong., 2d Sess., p. 19; H.R.Rep. No. 2894, 76th Cong., 3d Sess., p. 41. Indeed, Congress appears to have provided for this result in the statute chanroblesvirtualawlibrary
We therefore think that, on principles often reiterated, [Footnote 10] the regulation is valid and decisive of this issue. There is no necessity to predicate the determination of deficiency on the 1940 amendment. The 1940 amendment consequently chanroblesvirtualawlibrary