Opinion ID: 292838
Heading Depth: 1
Heading Rank: 3

Heading: tax significance of subsequent sale of the assets received in liquidating distribution.

Text: 89 In my view the liquidating distribution by Capitol to petitioners resulted in (1) a taxable dividend of $59,892.78; (a) a return of capital of $720, the cost (adjusted basis) of the Capitol stock; and (2) an additional return of capital, constituting $221,712.00 on the stock of petitioners which is excluded under the District of Columbia Code since at the time of the distribution to them petitioners had owned the stock for more than two years. 90 I now consider the tax consequences attaching to the subsequent sale by the stockholders of the property received in the corporate distribution. 91 Respondent District contends that taxable gain was realized by petitioners when they sold their property at fair market value three days after distribution. The District would determine the amount of gain by ascribing a basis to the Chastleton stock of $12,288, computed by adding the dividend portion of the 1960 distribution of the Chastleton stock, to the cost basis of the Capitol stock in petitioner's hands. The District's brief in support of this calculation adds the qualification that it was made [w]ithout regard to the de minimis amount of capital investment included in the book value of the [Capitol] stock. 26 92 If the District really believed in its analysis it would tax the entire proceeds of the sale, to the extent exceeding cost of the Capitol stock, since the statute is explicit that basis equals cost, and provides no justification for increasing basis to the extent of dividends received. This provision does not contain the latitude for reasonable adjustments provided in the provision for a depreciation deduction. 93 The District argues that its approach is justified in order that the gain to the stockholder be caught and taxed. I have already discussed the means by which such gains are caught at the time of distribution (if realized by a short-term speculator), and if they are not taxed at that time, it is because of countervailing sections of the statute (applicable when the gain is realized by a long term investor). 94 The sound analysis pertaining to property distributed by a corporation to its stockholders is that it has a basis in the hands of a stockholder equal to the fair market value at the time of distribution. The Code is explicit as to property constituting a dividend. As to property constituting a return of capital, we are remitted to the general doctrine that the fundamental basis of property is cost. Basic tax law concepts, expressly confirmed by both D.C. and Federal statutes, makes it clear that the cost concept translates in the case of property acquired on exchange to the fair market value of the property received at the time of receipt. The same rule applies when a distribution of property is not an exchange but a return of capital, constituting gross income, whether by an on-going corporation (like the distribution considered in Goldman ) or by a corporation in dissolution ( cf. Berliner v. District of Columbia, supra note 2). 95 In terms of tax concepts the property received has a cost equal to its fair market value because that amount is forthwith and instantaneously applied in reduction of the cost basis of the stock. That reduction of cost basis exposes a shareholder to increase in present or future tax liability. 27 96 This analysis is in accordance with the history of the construction of the Federal statute. At the present time, pursuant to a 1954 amendment, the Federal Internal Revenue Code expressly provides that fair market value is the basis of property received in a distribution without differentiation between distributions to shareholders constituting dividends or return of capital. 28 But the same result was reached even in the absence of express language, as a corollary of the core cost concept of basis. 29 97 Accordingly, the property distributed to Capitol's stockholders had a basis in their hands of fair market value at time of distribution. Since petitioners sold that property within two years after receipt, gain or loss would have been recognized in full if the property had increased or decreased in value between the date of receipt as a corporate distribution and the date of subsequent disposition. Here, of course, there was no change in value in that three-day period, and accordingly, in my view, no gain or loss was realized at the time of disposition. 98 For the foregoing reasons I would have granted the petition for review, and reversed the determination of the Tax Court. Notes: 1 See Lenkin v. District of Columbia, CCH D.C.TAX REP. ¶ 200-113, at 10378 (D.C. Tax Ct. October 11, 1967). 2 Berliner v. District of Columbia, 103 U.S. App.D.C. 351, 258 F.2d 651, cert. denied, 357 U.S. 937, 78 S.Ct. 1384, 2 L.Ed.2d 1551 (1958) 3 Snow v. District of Columbia, 124 U.S. App.D.C. 69, 361 F.2d 523 (November 22, 1965), rehearing en banc denied (February 1, 1966). Oppenheimer v. District of Columbia, 124 U.S.App.D.C. 221, 363 F.2d 708 (June 17, 1966), rehearing en banc denied (August 17, 1966) (so-called Oppenheimer II or Second Oppenheimer ), decided after Snow, does not mention Snow, but cites Berliner with approval. 4 See Verkouteren v. District of Columbia, 120 U.S.App.D.C. 361, 346 F.2d 842 (1965). 5 The record does not indicate who negotiated the sale, Capitol or petitioners See Verkouteren v. District of Columbia, supra note 4. 6 This figure is stipulated to be correct See Verkouteren v. District of Columbia, supra note 4, where respondent unsuccessfully attempted to enlarge this amount in the teeth of a stipulation. 7 INT.REV.CODE of 1954, § 331 8 See Doyle v. District of Columbia, 124 U.S.App.D.C. 207, 363 F.2d 694 (1966); Estate of Uline v. District of Columbia, 124 U.S.App.D.C. 5, 360 F.2d 820 (1966); Snow v. District of Columbia, 124 U.S. App.D.C. 69, 361 F.2d 523 (1965); District of Columbia v. Oppenheimer, 112 U.S.App.D.C. 239, 301 F.2d 563 (1962) 9 47 D.C.Code § 1551c(m) (1967) 10 That law provided: Amounts distributed in the liquidation of a corporation shall be treated as payments in exchange for stock or shares, and any gain or profit realized thereby shall be taxed to the distributee as other gains or profits. Rev.Act of 1918, ch. 18, § 201(c), 40 Stat. 1059 (now INT.REV.CODE of 1954, § 331) 11 See 112 U.S.App.D.C. at 240, 301 F.2d at 564. 12 This section taxes: gains, profits, and income derived from salaries, wages, or compensation for personal services of whatever kind and in whatever form paid    or income derived from any trade or business or sales or dealings in property, whether real or personal    also from rent, royalties, interest, dividends, securities or transactions of any trade or business carried on for gain or profit,    and income derived from any source whatever. 13 D.C.Code § 1551c( l ): The words `capital assets' mean any property, whether real or personal, tangible or intangible, held by the taxpayer for more than two years (whether or not connected with his trade or business), but do not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the end of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. 14 See 47 D.C.Code § 1557a (1967): (b) The words `gross income' shall not include the following:    (11) Capital Gains. — Gains from the sale or exchange of any capital assets as defined in this subchapter. 15 See 47-1557b (1967): (b) Deductions not allowed — In computing net income, no deductions shall be allowed in any case for —    (6) Capital losses. — Losses from the sale or exchange of any capital asset as defined in this subchapter. 16 The ruling in Goldman is that distributions out of capital (depreciation reserves) are not taxable when received by stockholders who have held their stock for more than two years. The court relied on the provisions of Sections 1557a, 1557a(b) (11), 1551c( l ), defining gross income as including income from sales or dealings in property other than capital assets (property, other than inventory, held for more than two years), and pointed out that the exemption of capital income held by investors, rather than short term speculators, afforded encouragement of an investor in the economic life of the District. The court did not expressly focus on the taxability of distributions out of capital within two years or less. Nor did it advert to the tax significance of such distributions as first reducing basis and then constituting income (taxable if short term). However this analysis was set forth in precedents quoted by the D.C. Tax Court and the treatment and opinion of that court, as well as the result, were expressly approved by this court ( see 117 U.S.App.D.C. at 220, 328 F.2d at 521). 17 Distribution to stockholders does not of itself effect realization of income to the corporation, and hence is not taxable as a dividend See also General Util. & Operating Co. v. Helvering, 296 U.S. 200, 56 S.Ct. 185, 80 L.Ed. 154 (1935); cf. S. REP. No. 2114, 76th Cong., 3d Sess. 25 (1940): Of course, mere increase or decrease in value (after February 28, 1913) of property owned by a corporation does not increase its earnings profits. 18 Broadcasting Publications, Inc. v. District of Columbia, 114 U.S.App.D.C. 163, 166, 313 F.2d 554, 557 (1962) 19 See Lynch v. Hornby, 247 U.S. 339, 344, 38 S.Ct. 543, 545, 62 L.Ed. 1149 (1918): Dividends are the appropriate fruit of stock ownership, are commonly reckoned as income, and are expended as such by the stockholder without regard to whether they are declared from the most recent earnings, or from a surplus accumulated from the earnings of the past, or are based upon the increased value of the property of the corporation.  (Emphasis added.) 20 See Rev.Act of 1916, ch. 463, § 2(a), 39 Stat. 757. 21 Rev.Act of 1921, ch. 136, § 201(c), 42 Stat. 228 Any distribution (whether in cash or other property) made by a corporation to its shareholders or members otherwise than out of (1) earnings or profits accumulated since February 28, 1913, or (2) earnings or profits accumulated or increase in value of property accrued prior to March 1, 1913, shall be applied against and reduce the basis provided in section 202 for the purpose of ascertaining the gain derived or the loss sustained from the sale or other disposition of the stock or shares by the distributee. 22 S.REP. No. 275, 67th Cong., 1st Sess. 9-10 (1921) 23 Rev.Act of 1924, ch. 234, § 201(d), 43 Stat. 255 24 S.REP. No. 398, 68th Cong., 1st Sess. 12 (1924); H.R.REP. No. 179, 68th Cong., 1st Sess. 12 (1924) 25 I am not called upon to reconsider Snow or indicate its limitations. It suffices here to say that the depreciation ruling in Snow is not inconsistent on its facts with the depreciation ruling in Oppenheimer II. 26 Brief for Respondent p. 3, n. 2 27 A short-term holder has this exposure under present provisions of D.C. law — either at time of distribution, if the return of capital exceeds the cost of the stock, or at the time the stock is sold. A long-term holder currently has the benefit of an exemption under D.C. law, unless before the stock is sold legislation causes this exemption to be modified, say to provide only the partial benefit of lower rates of taxation for long-term capital gains, or even removed 28 INT.REV.CODE of 1954, § 301(d) (1). A special provision is inserted where the shareholder is a corporation 29 See MERTEN, LAW OF FEDERAL INCOME TAXATION, Commentary § 301(d) (1968), citing Estate of Isadore L. Myers, I.T.C. 100 (1942). There was no express provision prior to 1954 in the case, e. g., of a distribution of property that operated in the stockholder's hands as a partial reduction in the cost basis of his stock.