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

Heading: corporate distribution out of earned surplus is expressly taxable as a dividend.

Text: 42 I pass over the facts of the particular case, which are stipulated. 4 The central question is whether and to what extent petitioners were subject to taxation in 1960, when the stock they held since 1948 yielded them a return in the form of property received in liquidation, which three days afterward they sold for $234,000. 5 43 My approach to the tax consequences flowing from the 1960 distribution by Capitol of its unearned surplus can best be begun by reference to the part of the taxpayer's receipts in 1960 ascribable to Capitol's earned surplus of $99,821.30 6 at the time of the liquidating distribution. The taxing authority determined that petitioners were liable for a tax for dividends in the amount of $59,892.78, their 60% of earned surplus. 44 Petitioners did not protest this redetermination, which was clearly required by our 1958 opinion in 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). But it will be helpful to revert to the decision in Berliner to review the setting of the present decision. 45 In Berliner the taxpayer urged that Congress intended corporate liquidations under D.C. tax law to be governed by the same principle as that used in the Federal tax law. 46 The basic approach (with refinements) to complete liquidations under the Federal statute is, and has long been, to treat the transaction as an exchange of stock by the shareholder for assets from the corporation. 7 Under this total exchange theory the shareholder receives capital gain or loss depending upon his cost for the stock and the fair market value of the assets distributed, and the holding period, that determines whether he is entitled to the special benefits attaching to long term capital gains, is reckoned by the length of time the shareholder owned the underlying stock. 47 This court ruled in Berliner that the history of the Federal law, and the language of the District law, would not support such a result, despite the logical appeal the pattern possessed. This ruling has been consistently followed. 8 I hasten to interject that this is an instance where the D.C. law is so clear on its face that it simply does not permit supposing that the intent of Congress was the same as that underlying the Federal law. 48 In Berliner the liquidating corporation distributed its accumulated earnings and the taxpayer-distributee argued that what he received was not dividends but gain derived from the exchange of his stock. The court held that the D.C. tax law specifically provides for full taxation of such earnings as a dividend, and failed to contain the express provision whereby the Federal law conferred special capital gains treatment. It was pointed out that the District of Columbia statute expressly provides for taxation of dividends, a term defined as meaning any distribution made by a corporation    to its stockholders    out of its earnings, profits, or surplus (other than paid-in surplus), whenever earned by the corporation    whether distributed prior to, during, upon, or after liquidation or dissolution of the corporation. 9 The court noted that the more favorable exchange treatment for distribution of the earnings was introduced into Federal law by express provision of the 1918 Revenue Act. 10 It was observed that prior to and in the absence of this provision, Federal law had required distribution from corporate earnings to be taxed as dividends even for corporate distributions in liquidation. 49