Opinion ID: 262423
Heading Depth: 1
Heading Rank: 1

Heading: facts

Text: 19 South Lake Farms, Inc., hereafter referred to as the Old Corporation was a California corporation, engaged in the business of farming; was on an accrual basis and its fiscal years ended on April 30th. The years in question are the fiscal year ending April 30th, 1955; the fiscal year ending April 30th, 1956, and that portion of a year from May 1st, 1956, through October 3rd, 1956, the date of its liquidation. 20 South Lake Farms, hereafter referred to as the Purchasing Corporation is a California corporation, its fiscal year running 7/1/56-6/30/57. Occasionally herein the two corporations will be referred to as the Farm Companies. 21 The Old Corporation had been engaged in farming in Tulare, Kings and Kern counties, in the San Joaquin Valley, California. During the summer of 1956, its farm operations were conducted on owned and leased land, totaling in excess of 76,000 acres. The Old Corporation was on an accrual basis and crops unharvested at the end of each fiscal year were not inventoried or otherwise included in gross income until the following year, when they were harvested. 22 The stock of the Old Corporation as of September 1956 was owned by approximately thirty individuals, most of them members of the Hill family. On September 7th, 1956, Carl and Kenneth Quandt made an offer to the owners of all the capital stock of the Old Corporation to purchase, either by them, or by a corporation to which their rights might be assigned, all of the capital stock of the Old Corporation and in addition the interest in two partnerships, for $5,000,000. The offer was conditioned on the accomplishment of all necessary steps to the dissolution of the Old Corporation on or before October 5th, 1956. The offer was accepted. 23 Both the offerors and the offerees expected that the harvest of the Old Corporation's 1956 cotton crop would commence on or shortly after October 5th, 1956. 24 The Tax Court found that the estimated value of the Old Corporation's unharvested crops and land preparation were taken into account by the parties in fixing the purchase price of the Old Corporation stock. And found also that the possibility of a substantial refund of federal income tax to the Old Corporation, as the result of an anticipated net operating loss sustained by the Old Corporation during its final taxable period was also taken into account by the parties in fixing the purchase price of the stock of the Old Corporation. 25 The Quandts and some associates other than the stockholders of the Old Corporation organized a new corporation, the Purchasing Corporation referred to above, South Lake Farms, and assigned their rights to the new corporation, which on September 29th, 1956, purchased all the outstanding shares of the Old Corporation stock. The purpose of the Purchasing Corporation was to immediately dissolve the Old Corporation and take over its assets. 26 The sole shareholder of the Old Corporation was now the Purchasing Corporation, and on October 2nd, 1956, a plan of dissolution and complete liquidation of the Old Corporation was adopted. 27 All necessary steps were taken for dissolution of the Old Corporation, and on October 3rd, 1956, all the assets of the Old Corporation were distributed and transferred to the Purchasing Corporation, subject to the debts and liabilities of the Old Corporation, without any payment to the Old Corporation by the Purchasing Corporation. Thereupon the Old Corporation had no assets. 28 The assets distributed to the Purchasing Corporation consisted in part, of lands and leaseholds, and the unharvested 1956 cotton crop, and the preparation made on certain lands for a later planting of a barley crop to be harvested in 1957. THE COTTON CROP 29 The cotton crop of 5,100 acres of land, including 3,925 acres leased land had been planted before April 30th, 1956. Expenses in the amount of $497,641.93 had been incurred in connection with its planting and growth. This figure was made of two items: 30 (1) $254,566.91, representing expenses incurred during the period May 1st, 1956 through October 3rd, 1956, the final fiscal period of the Old Corporation, and this amount had been included in deductions taken by the Old Corporation for that period in its income tax returns. 31 (2) The sum of $243,075.02 incurred during the fiscal year May 1st, 1955 — April 30th, 1956, which were taken as deductions in the Old Corporation's income and tax return for that period. 32 The cotton crop was then harvested by the Purchasing Corporation between October 4th, 1956 and December 17th, 1956, at a cost of $271,505.56. The gross proceeds from the crop were $1,855,518.68. 33 The Purchasing Corporation, pursuant to section 334(b) (2) of the Internal Revenue Code of 1954 allocated its adjusted basis of the stock of the Old Corporation to various assets. The adjusted basis of the stock allocated to the cotton crop was $1,616,667.73. To make the allocation the Purchasing Corporation made estimates of the fair market value as of the date of liquidation of the assets of the Old Corporation and thus estimated the fair market value of the cotton crop as of October 3rd, 1956, as $1,593,619.44. The Purchasing Corporation for this fiscal year, July 1st, 1956 — June 30th, 1957, included in gross receipts the proceeds from the cotton crop $1,855,518.68 and offset against these gross receipts — 34 (1) The cost of harvesting the cotton, $271,505.56 and (2) the portion of its adjusted basis for the stock allocated to the cotton crop, $1,616,667.73. THE BARLEY LAND 35 The Old Corporation had prepared approximately 13,000 acres of land, 1000 of which were leased, for the planting of a 1956-1957 barley crop. The barley crop was planted by the Purchasing Corporation at an undisclosed expense, after its receipt of the assets of the Old Corporation and between November 5th and December 15th, 1956. However, the Old Corporation had incurred expenses in preparing the land, totaling $215,060.50. This figure consisted of two items — 36 (1) $170,223.91 incurred during the last fiscal period of the Old Corporation May 1st, 1956 — October 3rd, 1956, which had been included in the deductions taken in the Old Corporation's federal income tax return. 37 (2) $44,836.59 incurred during the fiscal year of the Old Corporation, May 1st, 1955 to April 30th, 1956. This likewise had been included in the deductions taken by the Old Corporation in its federal income tax return for that fiscal year. 38 The Purchasing Corporation, in making its adjustment, allocated to its adjusted basis of the stock of the Old Corporation $218,156.73 for the land preparation for the barley crop. It estimated the fair market value of such preparation as of October 3rd, 1956, to be $215,060.50. 39 The barley crop was harvested at an undisclosed cost by the Purchasing Corporation which had planted it. The harvest occurred between May 26th, 1957 and July 10th, 1957, and brought in an undisclosed amount. However, the Purchasing Corporation included in its gross receipts, the sale from the barley crop and offset against the gross receipts, two items — 40 (1) Its cost of planting, growing and harvesting barley; 41 (2) A portion of its adjusted basis of the stock of the Old Corporation relating to the land preparation, namely $218,156.73. 42 THE INCOME TAX RETURNS OF THE OLD CORPORATION AND THE PURCHASING CORPORATION. 43 (a) The Purchasing Corporation. 44 For its fiscal year July 1st, 1956 to July 30th, 1957, the Purchasing Corporation reported a net loss of $1,440,363.08. 45 (b) The Old Corporation. 46 For its last fiscal period May 1st, 1956 through October 3rd, 1956, the Old Corporation reported a net operating loss of $150,618.26. The Old Corporation also filed with the Commissioner an application for carry-back losses as follows: 47 (a) Fiscal year ending April 30th, 1955 a loss of $77,941.38; 48 (b) Fiscal year ending April 30th, 1956 $72,676.88. Each was originally allowed. THE ACTION OF THE COMMISSIONER 49 The Commissioner determined there was a deficiency in the Old Corporation's income tax for the last fiscal period, May 1st, 1955 to October 3rd, 1956. He took two alternative positions: 50 (1) He determined that the Old Corporation's taxable income in its last fiscal period, 5/1/56-10/3/56, should be increased by $1,808,679.94 but then offset the reported net loss of $156,618.26 and determined a net taxable income of $1,658,061.68 for that taxable period. He explained his action by pointing out that growing crops (cotton crop and land preparation) valued at $1,808,679.94 were distributed by the Old Corporation. Costs and expenses allocated to these growing crops had been deducted by the Old Corporation; that the method of accounting employed did not properly reflect income under the 1954 Code and accordingly increased the income by the value of the growing crops at the date of liquidation. 51 (2) Alternatively, if it was finally determined that the value of the crops was not includable in the Old Corporation's return for its final fiscal period, he determined the income for such period should be increased by the amount of $847,632.58, representing the determined expenses attributable to such crops and previously deducted by the Old Corporation. This figure was later corrected by the government in its brief, to $712,702.43. 52 Finally, the Commissioner, having determined that the Old Corporation had no taxable loss under either alternative for the period May 1st, 1956 through October 3rd, 1956, disallowed a net loss carry-back for the two preceding fiscal years ending April 30th, 1955 and April 30th, 1956, and determined the deficiencies involved herein for those years. THE SHOCKING RESULTS The results are as follows: 53 (1) The Old Corporation deducted in its income tax returns $497,641.93 for the cotton crop and $215,060.50 for preparing the barley land. ___________ Total $712,702.43. 54 It reported an operating loss in the last partial fiscal year and claimed a carry-back loss to the two prior years. The losses were in connection with crops it never harvested. 55 (2) The Purchasing Corporation in its fiscal year 7/1/56-6/30/57 as to the cotton crop alone offsets against its cotton crop receipts of $1,855,518.68 — the following: 56 $ 271,505.56 cost of harvesting $1,616,667.73 Adjusted bases of cotton crop _____________ $1,888,173.29 57 which alone means a loss of $32,654.61. 58 We do not have the figures as to the barley crop but we know the adjusted basis as to barley crop — $218,156.76 — was deducted and we know the purchasing corporation showed a total operating loss of $1,440,363.08. 59 The purchasing corporation received the benefits of the making of the cotton crop and the barley land preparation without having to pay for them. 60 (3) The stockholders of the Old Corporation paid a capital gain tax on the capital assets distributed and their appreciation. This was proper. 61 However, the Tax Court found that part of the consideration paid for the assets distributed was for the growing cotton crop and the preparation of the barley land. The purchasing corporation fixed fair market value as to these at 62 $1,593,619.44 cotton crop $ 215,060.50 barley land _____________ $1,808,679.94 63 as of the date of liquidation on October 3, 1956. 64 Regardless of whatever amount was considered in the bargaining as the value of these so-called assets, they were taxed to the shareholders of the Old Corporation at capital gain rates. 65 It is obvious the tax on these items which were part of the purchase price paid, was smaller in amount than had they been taxed as income. 66 In addition, the shareholders having rid them of this income, also benefited from the loss of the Old Corporation in its last fiscal year and the carry-back loss to the two prior years. 67 To say the least, these results are absurd, not within the contemplation of Congress in adopting the 1954 Code and certainly called on the Commissioner to exercise the discretion given him under sections 446 and 482, to make returns properly reflect income or to utilize Tax Benefit and Assignment of Income principles of Tax Law. 68 These results, with equal force, called up the Tax Court and this Court to utilize the case law of taxation and the provisions of the 1954 Code to prevent such results. THREE TAX PRINCIPLES 69 There are three tax principles which appear throughout the case law of taxation: 70 1. The Tax Benefit principle, namely that he who receives the benefit must pay the tax; 71 2. The Assignment of Income principle, in short that the burden of the tax may not be avoided by the assignment of income; 72 3. The application of proper accounting principles or methods. ASSIGNMENT OF INCOME and TAX BENEFIT 73 The main stream of tax law on the principles of Assignment of Income and Tax Benefit are not hard to follow. 74 Lucas v. Earl, (1930) 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731, held that a contract by a husband giving to his wife portions of his income from personal services would not result in a shift of the tax burden from himself to his wife. Judge Holmes uses the oft' quoted phrase,    anticipatory arrangements    by which the fruits are attributed to a different tree from that on which they grew will not shift the tax. 75 There were intermediate cases, but in 1940 Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75, was decided, holding that a father could not shift the burden of a tax on interest by giving away a bond coupon prior to its due date. Helvering v. Eubank, (1940) 311 U.S. 122, 61 S.Ct. 149, 85 L.Ed. 81, relied on Horst and concerned renewal commissions on insurance policies. Here the future income was contingent but no further services were required. 76 Subsequently the Supreme Court in Commissioner of Internal Revenue v. Culbertson, (1949) 337 U.S. 733 at 739-740, 69 S.Ct. 1210, at 1213, 93 L.Ed. 1659, referred to the first principle of income taxation: that income must be taxed to him who earns it. The foregoing cases in general distinguished gifts of property from gifts of right to income. The next step was to apply the same rule to commercial transactions with a slightly different question — not who was taxable but whether the rate should be that of ordinary income or capital gain. 77 In Commissioner of Internal Revenue v. P. G. Lake, Inc., (1958) 356 U.S. 260, 78 S.Ct. 691, 2 L.Ed.2d 743, the Supreme Court refused to permit a claim of capital gain tax on a sale of oil payments, where they had been carved out of retained working or royalty interests. The Court considered the money received as a mere substitute for future ordinary income. 78 The article Assignment of Income: Fruit and Tree as Irrigated by the P. G. Lake Case, 1 by Charles S. Lyon and James S. Eustace, 17 Tax Law Review, 295 at 300, states: Assignment doctrine extends beyond sales and gifts. It may reach corporate distributions to shareholders,    non-recognition type of transfers in corporate organization or reorganization, and possibly also sales by corporations relying on section 337,   . Assignment doctrine merges into several other vague but important principles and provisions. There is much overlap with tax benefit and proper accounting principles.    There is much overlap in function also with the principle that substance prevails over form and the special sub-principle thereof associated with the Gregory case. (Gregory v. Helvering, 1935, 293 U.S. 465 [55 S.Ct. 266, 79 L.Ed. 596, 97 A.L.R. 1355]). In fact one might think of assignment doctrine as a part of the substance-over-form principle. 79 The Assignment of Income, etc., article, (supra) states further at 303, At the very minimum Lake (Commissioner v. P. G. Lake Inc., 356 U.S. 260 [78 S.Ct. 691, 2 L.Ed.2d 743]) has served to refuel the assignment of income doctrine and the canons of statutory construction that `Capital gains are the exception to the general rule of ordinary income treatment, and therefore the definition of capital asset must be narrowly applied and its exclusions interpreted broadly.' Citing Corn Products Refining Co. v. Commissioner, (1955) 350 U.S. 46, 76 S.Ct. 20, 100 L.Ed. 29. 80 Assignment of Income etc., (supra) further states at P. 396: 81 It is clear from the cases that assignment of income principles can apply with respect to corporate distributions to shareholders. Behind this simple statement lies a rich historical background and a tie-in with numerous complexities of tax doctrine and policy: our system of `double taxation' of corporation and shareholder; the rate differential between capital gain and ordinary income; the general pattern for treating corporate liquidations; the special pattern for `collapsible corporations' in section 341; the Court Holding Company approach in cases not covered by section 337; the doctrine of Burnet v. Logan [283 U.S. 404, 51 S.Ct. 550, 75 L.Ed. 1143] as to `ascertainable' value; tax benefit principles; and broad provisions of the Code calling for proper tax accounting, notably section 446 requiring a `method of accounting' that will `clearly reflect income,' and section 482 requiring proper allocation of business income and deductions between related taxpayers. SECTIONS 311, 334, 336 and 337 82 We turn to the question of the application of the Assignment and Tax Benefit principles in situations between a corporation and its shareholders and in situations where Non-recognition of gain statutes are involved. 83 Section 336 of the Internal Revenue Code of 1954 provides    no gain or loss shall be recognized to a corporation on the distribution of property in partial or complete liquidation. This was a codification of the case law as it then stood, holding that a corporation should not be taxed upon the appreciation in value of its property when distributed to its shareholders. Section 311 of the Internal Revenue Act of 1954 applied a similar rule to non-liquidating distributions to shareholders. 84 Each of the sections uses the word property. Section 311 also refers to stock distributions. Neither section refers to income. The committee report on section 311, Senate Report No. 1622, 83rd Congress, 2nd Sess. 247, U.S. Code Cong. and Admin.News 1954, p. 4884 states that section 311 was not intended to change existing law with respect to attribution of income of shareholders to their corporation as exemplified for example in the case of Commissioner [of Internal Revenue] v. First State Bank of Stratford, (5 Cir. 1948, 168 F.2d 1004, 7 A.L.R.2d 738). 85 As to section 336, the same view was taken in Williamson v. United States, in the Court of Claims, (1961) 292 F.2d 524. 86 The easiest way to sell an incorporated business has always been to have the corporation sell its assets for cash or equivalent and then to distribute the proceeds to its shareholders in liquidation. In such a case before the 1954 Code, where the corporation had a low basis for its assets and the stockholders had low bases for their stock, this method involved a double tax — one on the corporation on its gain and a second on the shareholders on their gain. 87 Attempt was then made to have stockholders liquidate their corporation first, securing to them direct ownership of its assets and then sell the assets to a purchaser. Commissioner of Internal Revenue v. Court Holding Co., (1945) 324 U.S. 331, 65 S.Ct. 707, 89 L.Ed. 981 held that this did not avoid the double tax if the corporation had first negotiated the sale. Subsequently, United States v. Cumberland Public Service Co., (1950) 338 U.S. 451, 70 S.Ct. 280, 94 L.Ed. 251 held that if the corporation at all times refused to negotiate for the sale to the ultimate purchaser, and the stockholders themselves had only agreed to sell to the ultimate purchaser and the stockholders themselves had only agreed to sell the assets after receiving them in liquidation, then there was only one tax on the stockholders and none on the corporation. 88 Under case law there arose the Kimbell-Diamond Rule, starting from Kimbell-Diamond Milling Co. (1950) 14 T.C. 74, affirmed (5 Cir. 1951) 187 F.2d 718, cert. den. 342 U.S. 827, 72 S.Ct. 50, 96 L.Ed. 626, where the purchasing corporation for tax purposes is to be treated as the direct purchaser for full value of the business and assets of the old corporation; and permitting a single capital gains tax. Despite sections 112(b) (6) and 113(a) (15) of the 1939 Code the rule became settled in case law by the time of the 1954 Revision of the Internal Revenue Code. 89 It will be noted that in each of these situations there was involved only the matter of assets and not income. PROVISIONS OF 1954 CODE 90 In the 1954 Code, the Congress passed three sections that dealt with this general problem. 91 (1) One section was sec. 334(b) (2), I.R.C. of 1954. This permitted the taxpayer primarily interested in the corporation's assets to first purchase the stock and then liquidate the corporation in order to secure the desired assets. The matter would be treated as a single transaction with a single capital gain tax. 92 House Report 1337, 83rd Congress, 2nd Sess. p. A-109 states section 334 will permit the taxpayer to retain (with exceptions) as the basis for the assets received in complete or partial liquidation, the adjusted basis for his stock thus effectuating the principles of Kimbell-Diamond Milling Co. v. Commissioner. See U.S.Code Cong. and Admin.News 1954, p. 4247. 93 (2) Section 336, I.R.C. of 1954, which was really a codification of United States v. Cumberland Public Service, Inc., (supra) permitted stockholders to sell corporate properties after liquidation at a single capital gain. 94 (3) Section 337, I.R.C.1954, which permitted a corporation after adopting a plan to liquidate, to sell its assets without recognition of gain, on condition that the liquidation be substantially completed within one year. Here again there was only a single tax on capital gain rates. 95 It will be noted that all of these sections apply to corporate assets and not to income. 96 The Farm companies spend 14 pages of their brief (part One, I and II) to prove that Congress intended only one capital gain tax when a corporation distributed its properties in liquidation; and that such tax be paid by the old shareholders on the sale of their stock. They then state — 97 Therefore, we assert without any qualification that in the 1954 Code, which applies to the 1956 sale of the incorporated business here involved, Congress intended to permit the sale with only a single capital gain tax on the selling stockholders, regardless of which of the three methods should be followed. 98 Then counsel argue that therefore the one capital gain tax should mean that there should be no income tax nor any consideration of any income tax problem. As the learned Professor said to his law class, I understand everything but the `therefore'. THE CASE LAW 99 We agree that the law provides for one capital gains tax on the sale of assets or appreciated assets but what about income? Various cases have held that assigned income is taxable. Often the decision is based upon one or more of the principles of — 100 (a) Assignment of income, 101 (b) Tax benefit, or 102 (c) Tax accounting principles. 103 Commissioner of Internal Revenue v. First State Bank of Stratford, (5 Cir. 1948) 168 F.2d 1004, 7 A.L.R.2d 738. Here the bank had charged off notes as wholly worthless and distributed the notes as dividends. The notes later appeared collectible. The Court held that the Bank could not avoid the tax, relying at length on the assignment of income cases, including the Horst case (supra), (311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75). Tax benefit principles are referred to in the concurring opinion approved by a majority of the judges, (p. 1011 of 168 F.2d.). The court inferentially refers to tax accounting principles in its statement that [c]onsistency is essential to fairness in income-tax accounting. (p. 1009 of 168 F.2d). 104 In Williamson v. United States, (C.Cl. 1961) 292 F.2d 524, accounts receivable were distributed to shareholders. The opinion relied on assignment of income principles and cited Horst, (supra). It also cites cases based on proper methods of accounting. 105 Carter (1947) 9 T.C. 364, affirmed on other issues, (2d Cir. 1948) 170 F.2d 911, like Williamson (supra), involved distribution of receivables, namely oil brokerage commissions. The corporation was on a cash basis but the Tax Court required the items to be reported as income in the year of liquidation as if the corporation was on an accrual basis. The Court relies upon proper methods of accounting, but also talks in terms of assignment of income.    The corporation had fully earned the income    the contracts had been fully performed    the corporation had sent out bills for its earnings. (9 T.C. at 373-374). 106 Jud Plumbing & Heating, Inc. v. Commissioner, (5 Cir. 1946) 153 F.2d 681 and Standard Paving Co. v. Commissioner, (10 Cir. 1951) 190 F.2d 330, involved liquidating distributions of construction contracts using the completed contract method of reporting. After the contracts were completed by the shareholders, the Commissioner allocated between the corporations and the shareholders on a basis of a percentage of completion method. The Court of Appeals sustained the Commissioner, relying on section 446 and section 482. The Court said that a    corporation being a separate legal entity, its net earnings, whether ascertained or not, belong to it, and that it cannot avoid taxes by the simple expedient of not completing its contracts. (p. 685 of 153 F.2d). Thus, reliance was on a mixture of assignment of income and proper accounting principles. 107 In the Standard Paving case, (supra), the Commissioner had relied on proper accounting methods under section 41 (the predecessor of section 446). The Court sustained the Commissioner but in its opinion relied both upon the principles of proper accounting and assignment of income. The Court said, a method should be adopted either by the taxpayer or by the Commissioner whereby the income is taxed to the person who earns it. (pp. 332-333 of 190 F.2d, citing Eubank, (supra), 311 U.S. 122, 61 S.Ct. 149, 85 L.Ed. 81; Horst, (supra), 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75; Lucas v. Earl, (supra), 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731, and Jud Plumbing, (supra)). 108 In Idaho First National Bank v. United States, (9 Cir. 1959) 265 F.2d 6, certain assets acquired by the liquidating company were notes receivable, upon which neither principle nor interest were due or payable at the time of liquidation. The liquidating bank had deducted expenses incident to these accounts. The Commissioner included the old Bank's income on the notes and the Court affirmed the action of the Commissioner, holding in substance that the liquidating bank realized income in the amount of accrued interest and that the interest was really collected as part of the purchase price of the stock. The Court relied upon both assignment of income and methods of accounting principles. The Court cited Horst, (supra), Jud Plumbing, (supra) and Standard Paving, (supra). 2 109 Assignment of Income: etc. (supra) summarizes at pp. 411-412: — 110 When the distribution of a potential income item avoids corporate tax thereon, should the corporation nevertheless be allowed the tax benefit of deductions for the costs of producing the item? This general question is most prominent in connection with distributions of dealer property, i. e., crops, inventory, or other property held primarily for sale to customers, since, as we have seen, this represents the broad category of potential ordinary income as to which there is a general rule of non-recognition on corporate distributions. One would think the general question would be easy to answer in the negative on one or more of the following grounds: 111 1. The corporate costs should not be deemed `costs of goods sold,' since the goods are not in fact sold. 112 2. They should not be allowed as trade or business expenses under section 162, since they are not in fact paid or incurred `in carrying on any trade or business' of the corporation. Though previously in the business of producing and selling goods for a profit, the corporation has abdicated by distributing the goods to its shareholders. 113 3. There is obviously no `method of accounting' that will `clearly reflect income,' in the words of section 446, if deductions are taken despite exclusion of the income to which they relate. 114 4. The corporation and its shareholders are related `organizations, trades, or businesses,' within the meaning of section 482. Thus, the deductions should be denied to the corporation `in order    clearly to reflect the income' of the related parties. 115 5. Where the costs have been deducted in prior years, tax benefit principles should require the corporation to report a corresponding income item in the year of distribution. As may happen in the case of deductions for bad debts or taxes, a deduction has been taken on a premise — in this case, that the property will be sold in the course of the corporate business — which later proves incorrect. 116 6. It is a cardinal principle of assignment doctrine that income should be taxed `to him who earns it,' and this principle would be frustrated unless applied to net income. 117 SECTIONS 446(b) AND 482 OF INTERNAL REVENUE CODE OF 1954. 118 Sections 446(b) and 482 of the Internal Revenue Code of 1954 are carryovers from sections 41 and 45 respectively of the Internal Revenue Code of 1939. 119 The intent of each section is clear, to give the Commissioner of Internal Revenue the power to require the use of a method of accounting which will clearly reflect income. 120 Section 446(b) states in part    if the method used [by the taxpayer] does not clearly reflect income, the computation of taxable income shall be made under such method as, in the opinion of the Secretary or his delegate, does clearly reflect income. 121 The section applies to all taxpayers and is therefore broader than section 482. 122 § 482. Allocation of income and deductions among taxpayers 123 In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary or his delegate may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses. Aug. 16, 1954, 9:45 a.m. E.D.T., c. 736, 68A Stat. 162. [Emphasis supplied.] 124 Section 482 is limited by the emphasized words above and applies when there exists such type of control. 125 The impact or purported conflict of these sections with other sections of the Internal Revenue Code of 1954 have been considered in various cases and the better reasoned cases held that the Commissioner's action will be sustained if he has properly exercised his discretion and has not acted arbitrarily or capriciously. 126 (a) Section 446(b) cases — Automobile Club of Mich. v. C. I. R., (1957) 353 U.S. 180, 77 S.Ct. 707, 1 L.Ed.2d 746; reh. den. 353 U.S. 989, 77 S.Ct. 1279, 1 L.Ed. 2d 1147; Whitaker's Estate v. C. I. R., (5 Cir. 1958) 259 F.2d 379; Wood v. C. I. R., (5 Cir. 1957) 245 F.2d 888. 127 (b) Section 482 cases — Peacock v. C. I. R., (5 Cir. 1958) 256 F.2d 160; Rooney v. United States, (9 Cir. 1962) 305 F.2d 681. 128 There are other cases which severely limit the power and authority of the commissioner under these sections. We would not follow these cases — Simon J. Murphy Co. v. C. I. R., (6 Cir. 1956) 231 F.2d 639; Tillotson v. McCrory, (D.C. Neb.1962) 202 F.Supp. 925. 129 The fact that sections 446(b) and 482 appear to run afoul of other sections providing for non-recognition of tax in certain situations, does not bar their application. 130 This has been clearly held in section 446(b) cases — Fort Pitt Brewing Co. v. C. I. R., (3 Cir. 1954) 210 F.2d 6; Jud Plumbing & Heating Co. v. C. I. R., (5 Cir. 1946) 153 F.2d 681; C. I. R. v. Kuckenberg, (9 Cir. 1962) 309 F.2d 202, cert. den. 373 U.S. 909, 83 S.Ct. 1296, 10 L.Ed.2d 411; Family Record Plan v. C. I. R., (9 Cir. 1962) 309 F.2d 208, cert. den. 373 U.S. 910, 83 S.Ct. 1297, 10 L. Ed.2d 411; and likewise in section 482 cases — Aiken Drive-In Theatre Corp. v. United States, (4 Cir. 1960) 281 F.2d 7; Rooney v. United States, (9 Cir. 1962) 305 F.2d 681. METHODS OF ACCOUNTING 131 Section 446 is entitled General rule for methods of accounting; subdivision (c) thereof lists the following methods of accounting — 132 (1) The cash receipts and disbursement methods 133 (2) The accrual method 134 (3) Any other method permitted by this chapter 135 (4) Any combination of the foregoing methods permitted under rules prescribed by the Secretary or his delegate. 136 My colleagues say that a change to the cash method would not bring, in this case, a different result. There are other approved methods of accounting besides the cash and the accrual method. See C. I. R. v. Kuckenberg, (9 Cir. 1962) 309 F.2d 202 at 207. Here the Circuit affirmed the Commissioner and the Tax Court on a change from a completed contract method to a percentage of completion of contract method. The Circuit relied on Jud Plumbing & Heating v. Commissioner, (5 Cir. 1946) 153 F.2d 681, and Standard Paving Co. v. Commissioner, (10 Cir. 1951) 190 F.2d 930. 137 Here is authority for two other methods in addition to the cash or accrual methods. 138 Halstead, Federal Income Taxation on Farmers (1956) published by the Committee on Continuing Legal Education of the American Bar Institute collaborating with the American Bar Association, on pages 25 and 26 discussed the crop method which ordinarily applies to a farmer producing crops which take more than a year from planting to harvest. Proceeding further, the author states that the provision in Regulations 118 concerning the crop method is not authority for and has nothing to do with the practice followed in some farm operations of deferring expenses incurred in producing a crop which, although it will be harvested within twelve months of the planting date, will be harvested in a taxable year following the year in which the date of planting falls. While this latter practice may be sound accounting and may be acceptable to the Treasury on audit on the ground that it clearly reflects income, and is consistently followed by the taxpayer, there is no provision in the code or regulations, and no published rulings which may be cited as clear authority for the practice. 139 Here we have another method of accounting which although as yet not expressly authorized by the code or by regulation is apparently in use and apparently not seriously questioned. THE TAX COURT OPINION 140 The opinion of the Tax Court lists the position of the Commissioner as contending that section 446(b) was applicable in that the method used by the Old Corporation did not clearly reflect income. 141 As to the positions of the Farm companies, the Tax Court states: 142 The petitioners take the position that section 446(b) and the cases relied on by the respondent [Commissioner] are inapplicable here   but is an attempt by respondent to disregard the provisions of Sec. 336 of the Code, which prohibits the recognition of any gain or loss to the old corporation on the distribution of its property to the purchasing corporation in complete liquidation. [Emphasis supplied.] 143 Thus, although the Tax Court opinion states that the Commissioner urges that consideration of the applicability of section 336 to the distribution by the old corporation is not essential to a determination of the correctness of his exercise of his powers under Sec. 446, [Emphasis supplied] the Tax Court never met this issue. 144 The issue as stated by the Tax Court ignores the impact of Sections 446(a) and 482 on Section 336; and begs the question — suppose the adjustment by the Commissioner is proper, what then? 145 The Tax Court seems to view section 336 as an absolute that cannot be affected by other sections of the code. 146 We have seen that section 351 is not absolute but must yield to section 482, if the Commissioner's action is not an abuse of discretion, Rooney v. United States, (9 Cir. 1962) 305 F.2d 681; that section 337(a) must yield to section 446 (a) if the Commissioner's action is not an abuse of discretion, C. I. R. v. Kuckenberg, (9 Cir. 1962) 309 F.2d 202, cert. den. 373 U.S. 909, 83 S.Ct. 1296, 10 L. Ed.2d 411; Family Record Plan v. Commissioner, (9 Cir. 1962) 309 F.2d 208, cert. den. 373 U.S. 910, 83 S.Ct. 1297, 10 L.Ed.2d 411. 147 A taxpayer's accounting method under section 42 (1939 Code) Whitaker's Estate v. Commissioner, (5 Cir. 1958) 259 F.2d 379; or under Reg. 111, section 29.41-1 (1939 Code); Wood v. Commissioner, (5 Cir. 1957) 245 F.2d 888; or under section 101(9) of the Code of 1939 and a prior ruling of the Commissioner, under which the taxpayer acted, Automobile Club v. Commissioner, (1957) 353 U.S. 180, 77 S.Ct. 707, 1 L.Ed.2d 746; must each yield to a proper exercise of the Commissioner's discretion under section 41, 1939 Code (now section 446), 1954 Code. 148 The Tax Court opinion, in addition to treating section 336 as an absolute, never to be effected by section 446 or 482, also refers to the Assignment of Income cases. It distinguishes these cases by citing Blair v. Commissioner, 300 U.S. 5, 12, 57 S.Ct. 330, 81 L.Ed. 465. There the holding was that there had been an equitable transfer of the corpus, and accordingly an assignment of income from the trust caused the tax liability to fall upon the party receiving the income. Review of the Supreme Court cases citing Blair indicates that it must rest on its own facts. In addition it has been used in the dissents in Horst, (311 U.S. 112, 121, 61 S.Ct. 144, 85 L.Ed. 75) and Eubank, (311 U.S. 122, 127, 61 S.Ct. 149, 85 L.Ed. 81). It has not been a factor in the development of the case law on Assignment of Income or Tax Benefit principles. Nor did the Farm companies cite it or rely upon it. 149 The Tax Court relies almost solely on SoRelle, 22 T.C. 459 (1954). The writer would refuse to follow this case and does not think it represents the law. Apparently section 446(b) was not applied by the Commissioner. In addition the donees paid ordinary income tax on the proceeds of the crops. 150 The Farm companies state that the Commissioner has acquiesced in SoRelle, (supra). We note Rev.Rul. 55-531, 1955-2 C.B., 520 cited in the Farm Companies' appendix at 39. It refers to the acquiescence in C.B. 1955-1, 6. However, the Ruling then states, after discussing SoRelle, (2) There must be an adjustment in the opening inventory in the year of the gift effecting the removal of the cost or other basis of the donated asset. Items of cost applicable to such period are not deductible by the donor as an ordinary and necessary expense in the current or any subsequent year. [Emphasis supplied.] 151 In the Tax Court treatment of the alternative position of the Commissioner, only one case is relied upon as having considered Section 45 [present section 482]. This is Chicago & North Western Railway Co., 29 T.C. 989 (1958), which is cited for the proposition that if a distribution, apportionment or allocation is made, that the section implies a requirement for an allowance elsewhere of the disallowed deduction. We think this an artificial requirement. Nor is the case cited or relied on by the Farm companies. No other cases are cited in support of this proposition. 152 The Tax Court opinion states that the Commissioner did not rely on section 268 in his brief in the Tax Court. Here the government cites and relies on section 268. The section provides, Where an unharvested crop sold by the taxpayer is considered under the provisions of section 1231 as `property used in the trade or business', in computing taxable income no deduction (whether or not for the taxable year of the sale and whether for expenses, depreciation, or otherwise) attributable to the production of such crop shall be allowed. 153 If a farmer sold his land and the crop, he obtained capital gain treatment under section 268, but no deduction    attributable to the production of such crop shall be allowed. Here the deductions were taken. 154 Here, also, part of the land on which the crop was grown was leased and part owned. We think the leased land would not come within section 268. See Bidart Bros. v. United States, (9 Cir. 1959) 262 F.2d 607. 155 As to section 482, should it be ignored even if the government failed to discuss its application in its brief? 156 Here the Old Corporation distributed its assets to the Purchasing Corporation which had become its sole shareholder. The Old Corporation and its sole shareholder are related parties. We cannot understand the government's abandonment of any reliance on section 482.