Case Name: MANHATTAN GENERAL EQUIPMENT CO. v. COMMISSIONER OF INTERNAL REVENUE; COLLIER SERVICE CORPORATION v. SAME
Court: United States Court of Appeals for the Second Circuit
Jurisdiction: United States
Decision Date: 1935-04-15
Citations: 76 F.2d 892
Docket Number: Nos. 162, 163
Parties: MANHATTAN GENERAL EQUIPMENT CO. v. COMMISSIONER OF INTERNAL REVENUE. COLLIER SERVICE CORPORATION v. SAME.
Judges: 
Reporter: Federal Reporter 2d Series
Volume: 76
Pages: 892–900

Head Matter:
MANHATTAN GENERAL EQUIPMENT CO. v. COMMISSIONER OF INTERNAL REVENUE. COLLIER SERVICE CORPORATION v. SAME.
Nos. 162, 163.
Circuit Court of Appeals, Second Circuit.
April 15, 1935.
MANTON, Circuit Judge, dissenting.
Laurence Graves, of Washington, D. C., and A. M. Kracke, of Chicago, Ill. (Caruthers Ewing, of New York City, of counsel), for petitioners.
Frank J. Wideman, Asst. Atty. Gen. (Sewall Key and Helen R. Carloss, Sp. Assts. to Atty. Gen., of counsel), for respondent.
Before MANTON, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

Opinion:
AUGUSTUS N. HAND, Circuit Judge.
The first question before us is whether there was any deductible loss in 1925 because of the cancellation of the contract between Artemas Ward and Interborough Rapid Transit on November 1, 1925. This depends on whether the deductions for exhaustion allowed to Artemas Ward between March 1, 1913, and March 13, 1922, when the latter transferred the contract to Artemas Ward, Inc. (N. Y.), in exchange for all the stock of.that corporation, should be added to the deductions for exhaustion allowed to Artemas Ward, Inc. (N. Y.), between, the date of transfer and the time of cancellation. If the allowances granted to Artemas Ward and to his transferee Artemas Ward, Inc. (N. Y.), may all be taken into account, no part of the March 1, 1913. value of the contract would remain, so that there would be no deductible loss due to the cancellation on November 1, 1925.
The contract transferred by Artemas Ward to Artemas Ward, Inc. (N. Y.), was acquired by the latter pursuant to such a nontaxable exchange as is described in section 203 (b) (4) of the Revenue Act of 1926, 26 USCA § 934 (b) (4), which provides that: "(4) No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely m exchange for stock in such corporation, and immediately after the exchange such person or persons are in control of the corporation. "
Section 204 (a)' (8) of the same act, 26 USCA § 935 (a) (8), provides that:
"The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
"(8) If the property was acquired after December 31, 1920, by a corporation by the issuance of its stock in connection with a transaction described in paragraph (4) of subdivision (b) of section 203 [section 934], then the Basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made."
In spite of the fact that the transfer of the contract from Artemas Ward to Arte-mas Ward, Inc. (N. Y.), was under section 203 (b) (4), supra, á nontaxable exchange and the basis for determining the disposition of the contract was under section 204 (a) (8), the same as it would be in the hand of the transferor, the petitioners argue that the basis should only be diminished by the amount of the deductions for exhaustion which were allowable after Artemas Ward, Inc. (N. Y.), acquired the contract. This argument is founded on section 202 (b) (2) of the Revenue Act of 1926, 26 USCA § 933 (b) (2), which says that in computing the amount of gain or loss from the disposition of property: "(2) The basis shall be diminished by the amount of the deductions for exhaustion, wear and tear, obsolescence, amortization, and depletion which have since the acquisition of the property been allowable in respect of such property under this Act [title] or prior income tax laws."
The petitioners contend that the word "acquisition" means acquisition to the taxpayer. But where there has been a nontaxable exchange we think the "acquisition" referred to is that of the transferor. It is impossible to see why different rules should be employed for determining profit or loss where items of exhaustion are or are not allowable and where property that has been the subject of a nontaxable exchange is sold or otherwise disposed of. The purpose of the statutory provisions we have quoted was to disregard the corporate intervention when computing gain or loss in such cases. Under section 204 (a) (8) the basis is "the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor." To allow deductions for exhaustion under a different principle or in a more limited way would contravene the entire theory applicable to nontaxable exchanges. Perthur Holding Corp. v. Commissioner, 61 F.(2d) 785 (C. C. A. 2); American Compress & Warehouse Co. v. Bender (C. C. A.) 70 F.(2d) 655. The Board of Tax Appeals properly took into account items allowed for exhaustion when the contract was in the hands of the trans-feror and rightly disallowed any loss through cancellation because the value had already been exhausted.
It is now necessary to deal with the second point raised by the taxpayer. That is whether the loss on the sale of the 4,964 shares of Artemas Ward, Inc. (N. Y.), which the United Brokerage Company and its affiliates were entitled to, was $2,167,-785.56 as claimed, or was only $495,696.76, the loss allowed by the Board. This depends on what portion of the amount paid for the stock by United Brokerage Company is allocable to the stock of Artemas Ward, Inc. (N. Y.), and what portion to the stock of Artemas Ward, Inc. (Del.). This in turn depends on whether Article 1599 (2) of Regulations 69 should be applied in its original form or as it stood after amendment in 1929.
Section 203 (c) of the Revenue Act of 1926, 26 USCA § 934 (c), provides that, if there is distributed, to a shareholder in a corporation, a party to a reorganization, stock in such corporation or in another corporation, a party to the reorganization, without the surrender by the shareholder of the stock originally held, no gain to the stockholder shall be recognized. Section 204 (a) (9) of the act, 26 USCA § 935 (a) (9), provided that where (as here) such distribution was made afjer December 31, 1923, "the basis in the case of the stock in respect of which the distribution was made shall be apportioned, under rules and regulations prescribed by the Commissioner with the approval of the Secretary, between such stock and the stock or securities distributed."
The question is whether Article 1599 (2), supra, applies in its earlier form or as later amended on November 13, 1929. Before the amendment, Article 1599 (2) read thus: "Where the stock distributed in reorganization is in whole or in part of a character or preference materially different from the stock in respect of which the distribution is made, the cost or other basis of the old shares of stock shall be divided between such old stock and the new stock in proportion, as nearly as may be, to the respective values of each class of stock, old and new, at the time the new shares of stock are distributed, and the basis of each share of stock will be the quotient of the cost or other basis of the class with which such share belongs, divided by the number of shares in the class. The portion of the cost or other basis of the old shares of stock to be'attributed to the shares of new stock shall in.no case exceed the fair market value of such-shares as of the time of their distribution."
Where the new stock is stock of a corporation different from the old, it has been treated as stock of "a character or preference materially different" within the meaning of' the foregoing regulation. Accordingly, • if Article 1599 (2) as it read at the time of the sale of the 4,964 shares of Artemas Ward, Inc. (N. Y.), be applied, the last sentence of (2) would entitle the United Brokerage Company to a loss of $2,-167,785.56. This is because the portion of the cost of the old stock to be attributed to the new stock could not exceed the fair market value of the 100 shares of stock of Artemas-Ward, Inc. (Del.), at the time of the distribution of the latter. As we have shown in the statement of facts, the value of the latter stock at that time was $961,-952.86. If $961,952.86 be deducted from $3,414,345.63 (the cost of the shares of Artemas Ward, Inc. [N. Y.], to United Brokerage Company), there would remain $2,452,392.77 as the base or proportion of the cost of the old stock applicable thereto after the reorganization. If from $2,452,-392.77 be deducted $234,967.21 of accounts receivable distributed by Artemas Ward, Inc. (N. Y.), to United Brokerage Company, and $49,640 realized by the United Brokerage Company from the sale of the 4,964 shares of stock of Artemas Ward, Inc. (N. Y.), we have a balance amounting to $2,167,785.56 — the loss claimed by the taxpayer.
Limitation by the last sentence of subdivision (2), supra, to the fair value of stock of Artemas Ward, Inc. (Del.), at the time of distribution would make the proportion of cost to United Brokerage Company represented by that stock only about 28 per cent., though the Delaware Company had received 77.15 per cent, of the assets of the old company. Doubtless, because such a limitation was thought to attribute in situations like the present too small a proportion of the basic cost to the stock of the new corporation distributed to stockholders through a reorganization, the Commissioner amended Article 1599 (2) on November 13, 1929, by omitting the last sentence of subdivision (2). Applying the regulation as amended, he computed the loss on the sale of the stock of Artemas Ward, Inc. (N. Y.), at $495,696.76. The Board by employing that loss in determining the income of the affiliated corporations arrived at the income tax deficiencies under review. We cannot see that the method of apportionment required by the amendment was unreasonable, and if the Commissioner had the right to apply the Regulation, as amended in 1929, to prior transactions under which the taxpayers would be entitled to deduct a larger loss, the decisions of the Board were right.
The taxpayers argue that the Commissioner had ho right to apply the Regulations, as amended, to prior transactions, and cite Arizona Grocery Co. v. Atchison, T. & S. F. R. Co., 284 U. S. 370, 52 S. Ct. 183, 76 L. Ed. 348, in support of their contention. But Great Northern R. Co. v. Sunburst Oil & Refining Co., 287 U. S. 358, 53 S. Ct. 145, 77 L. Ed. 360, 85 A. L. R. 254, indicates that the former decision does not govern the present situation. The latter decision shows that if under power to adopt Regulations delegated by. Congress to the Commissioner authority is given to change the Regulations, the Regulations are to the extent • of that power tentative - as to any matters affected, and that the changed Regulations, if reasonable, may be applied retroactively. In Great Northern R. Co. v. Sunburst Oil & Refining Co., 287 U. S. 358, 53 S. Ct. 145, 77 L. Ed. 360, 85 A. L. R. 254, this principle was applied in the case of freight rates which had been charged under a power to fix and to change the same delegated by the state of Montana to its Board of Railroad Commissioners. The rates were afterwards lowered by the State Board and the shipper was allowed to recover the excess from the carrier. In Titsworth v. Commissioner, 73 F.(2d) 385 (C. C. A. 3), the very argument presented here of the inability of the Commissioner to apply amended Article 1599 (2) retroactively was made without avail. Cf. Burnet v. S. & L. Bldg. Corp., 288 U. S. 406, 53 S. Ct. 428, 77 L. Ed. 861.
There can be no doubt that Congress nas power to make income tax laws retroactive. Brushaber v. Union Pac. R. Co., 240 U. S. 1, 11, 36 S. Ct. 236, 60 L. Ed. 493. This is especially true where they only af- feet deductions that may be taken from income, which are always matters of legislative favor. Under the Revenue Acts of 1924 and 1926 the Commissioner was given discretion to apply his regulations without retroactive effect if the reversal of a former ruling was not immediately occasioned by a decision of a court of competent jurisdiction. Revenue Act 1924, § 1008 (a), and Revenue Act 1926, § 1108 (a), 26 US CA § 1251 note. Under the Revenue Act of 1928, § 605 (26 USCA § 1251 (a), the Commissioner was given the same discretion without the limitation as to how the change in his former ruling was occasioned. Under the Revenue Act of 1934, § 506 (26 USCA § 1251 (a), the 1928 provision was practically reiterated. Each of these enactments shows that the Regulations of the Commissioner are to be regarded as tentative for the reason that amendments are retroactive unless stated to be otherwise. Accordingly the Regulations in question are to be treated as retroactive to the date of the law to which they are applicable.
Orders affirmed.
MANTON, Circuit Judge, dissenting in a separate opinion.