Opinion ID: 1484104
Heading Depth: 1
Heading Rank: 1

Heading: Is Petitioner Subject to the Tax?

Text: Petitioner frankly admits that it falls within the literal words of Section 351, and that it completely satisfies the objective criteria therein set out. But, as was said in the opinion of the Board (47 B.T.A. 280): It is argued that the intent and purpose of Congress in the enactment of that section was to force distributions of earnings by personal holding companies so that surtax might be laid upon and collected from such distributions upon their receipt by the stockholders. Upon this premise it is urged that the application of this section to a corporation whose stockholders are not subject to surtax is to extend the meaning of the section beyond the Congressional intent. Petitioner admits that it is within the definition of a personal holding company, as set out in subsection 351(b) (1), supra, because (1) its earnings are of the character there specified and (2) more than 50 percent of its capital stock was owned during the described period by not more than five individuals. It is obvious, concededly so, that petitioner is included in the unrestricted purview of `any corporation' as provided by that subsection. In short, petitioner in effect admits it is within the taxed class if the language of the statute is controlling. It is urged, however, that in order to stay within the manifest purpose and policy of the legislation, as established by its history, the term `any corporation' must be construed to mean `any corporation whose stockholders would be subject to surtax on distributed corporate earnings.' It is contended that the ascertainment of the Congressional intent by reference to the history and purpose of the legislation which points to this construction, is justified by reason of the injustice and hardship of a literal application of the statute. Such application places on a foreign corporation, which could have no purpose in its organization or operation of avoiding surtax upon its nonresident foreign stockholders, a burden greater than that imposed on one organized and operated for that purpose. The argument that the literal meaning of Section 351, so as to bring petitioner within its ambit, would accomplish a harsh and inequitable result, does not, in itself, justify us in giving to Section 351 the restricted meaning for which petitioner contends. That argument, we think, is adequately answered in the O'Sullivan Rubber Company case, 42 B.T.A. 721, affirmed by the Circuit Court of Appeals for the Second Circuit in 120 F.2d 845. See, also, the cases of Foley Securities Corporation, 38 B.T.A. 1036, affirmed 8 Cir., 106 F.2d 731; Porto Rico Coal Co., 44 B.T.A. 221, affirmed 2 Cir., 126 F.2d 213. A much stronger argument is that the petitioner, an alien corporation, does not come within the evil which Section 351 sought to prevent  the so-called incorporated pocket-book  since petitioner's distributions of dividends to its stockholders (also aliens) would not be subject to tax by the United States. A careful reading of the Congressional debates, and a study of the background and history of Section 351 fail to convince us that this was the sole purpose of that section. That it was a primary and major purpose is hardly open to doubt. Thus, in the Preliminary Report of the House Subcommittee, submitted by its Chairman, Honorable Samuel Hill, we find, at page 7: The effect of this system recommended by your subcommittee is to provide for a tax which will be automatically levied upon the holding company without any necessity for proving a purpose to avoid surtaxes. And, again in the report of the House Subcommittee on Proposed Revision, submitted by its Chairman, Honorable Fred Vinson, we find, with reference to Section 351, at page 21: Liability is made automatic upon corporations which come within specified objective standards, relating to percentage of investment and similar income received, and to limited stock ownership. No proof of intent to avoid surtax is necessary. (Italics ours.) We hold no brief for the anathema so often visited, in connection with the meaning of statutes, upon what Austin called Intensive Spurious Interpretation. Statutory universals are sometimes not what they seem. General terms describing a class of persons subject to a statute should be limited when a strictly literal (and purely analytic) application would encompass absurd results and would defeat, rather than subserve, the clear and manifest purpose of the statute. Qui haeret in litteris, haeret in cortice. And statutes should be construed in the newness of the spirit, not in the oldness of the letter. See, United States v. Palmer, 3 Wheat. 610, 4 L.Ed. 471; United States v. Katz, 271 U.S. 354, 46 S.Ct. 513, 70 L.Ed. 986. We are familiar with many outstanding cases in which the United States Supreme Court did, in no uncertain terms, restrict the meaning of broad general terms in statutes. Among these are United States v. Kirby, 7 Wall. 482, 19 L.Ed. 278; Holy Trinity Church v. United States, 143 U.S. 457, 459, 463, 12 S.Ct. 511, 36 L.Ed. 226; Lau Ow Bew v. United States, 144 U.S. 47, 59, 12 S.Ct. 517, 36 L.Ed. 340; American Banana Co. v. United Fruit Co., 213 U.S. 347, 359, 29 S.Ct. 511, 53 L.Ed. 826, 16 Ann.Cas. 1047; United States v. Goelet, 232 U.S. 293, 34 S.Ct. 431, 58 L.Ed. 610; United States v. American Trucking Association, 310 U.S. 534, 543, 60 S.Ct. 1059, 84 L.Ed. 1345. In each of those cases, however, was present a rather clear-cut reason for limiting the apparent generality of the statutory term involved. We cannot discern such a reason in the instant case. In these cases, it was, in general, impracticable by express language to incorporate the restricted meaning which the Supreme Court upheld. That is not the situation here. Congress well knew of the classification of corporations, on the fundamentum divisionis of the place of incorporation, into alien corporations and domestic corporations. This is readily apparent from even a cursory reading of federal revenue statutes. Had Congress, then, intended to apply Section 351 only to domestic corporations, nothing would have been simpler than to employ in this section the words any domestic corporation rather than the words, actually used, any corporation. And, further, which was not true in those cases, Congress here specifically set out definite objective criteria to indicate crisply which corporations came within the statutory ambit. It is admitted that petitioner perfectly satisfied each and every one of those criteria. Again courts should be extremely cautious not to add words to a statute that are not found in the statute  and should be careful, too, not to decrease deliberately the extension of a word or phrase by increasing its intension. Statutory Intensive Spurious Interpretation is the very rare exception, certainly not the rule. Shadowy though it may sometimes be, and however difficult may be its tracing, there is, though, a line, very real indeed, between the legislative function and the judicial function. Caminetti v. United States, 242 U.S. 470, 37 S.Ct. 192, 61 L.Ed. 442, L.R.A.1917F, 502, Ann.Cas.1917B, 1168; La Belle Iron Works v. United States, 256 U.S. 377, 393, 41 S.Ct. 528, 65 L.Ed. 998; Smietanka v. First Trust & Savings Bank, 257 U.S. 602, 607, 42 S.Ct. 223, 66 L.Ed. 391; Iselin v. United States, 270 U.S. 245, 251, 46 S.Ct. 248, 70 L.Ed. 566; Crooks v. Harrelson, 282 U.S. 55, 51 S.Ct. 49, 75 L.Ed. 156. Section 351, literally interpreted, does not, we think, lead to absurd results or arbitrary discrimination. The alien corporation, as to its activities within the United States, is treated in the same general manner as the domestic corporation. We see no adequate reason, under these circumstances, why Section 351 should be given an unusual and somewhat forced interpretation in order to tax the domestic corporation and to permit the alien corporation to escape the tax. Our views in this connection, we think, are strengthened by the fact that the surtax of Section 351 falls only on the personal holding corporation. The distinction between such a corporation, on the one hand, (particularly when, as here, the term is defined and limited by precise, objective criteria) and the active business corporation, on the other hand, is an adventure in the realm of stark realism. Certainly, it is no forced figment of financial fancy. We do not mean to imply that personal holding corporations fall instinctively into the category of mala in se; yet they have been so often attuned to baser uses that Congress may well have singled them out for special treatment. And the only corporate classification undertaken by Section 351 might well be a dichotomy  personal holding corporations and non-personal holding corporations  rather than, as petitioner asserts, a classification into alien corporations and domestic corporations. Petitioner further urges that the inclusion of alien corporations within the surtax imposed by Section 351 violates treaties solemnly entered into between the Republic of Switzerland and the United States and is, in addition, beyond the taxing power of Congress, since it is a bold attempt to give extraterritorial effect to Section 351. This contention was not made before the Board. It seems to have been an afterthought, and we think not a very happy one, on the part of counsel for petitioner. We find nothing in Articles I and II of the Treaty between Switzerland and the United States, 11 Stat. 587, that would forbid the tax imposed by Section 351 upon the petitioner; for there is present here no such discrimination as this treaty forbids. And, as is stated in the brief of the Commissioner: The condemnation of a tax upon income of a foreign corporation derived from sources within the United States, upon the ground stated (i. e. that Congress has no power to levy the surtax here in question, since this would amount to giving extraterritorial effect to the taxing statute) would carry in its wake a condemnation of tax upon income on all nonresident aliens derived by them from such sources. None of the cases cited by petitioner is authority for the proposition that the surtax imposed by Section 351 on alien corporations solely upon income derived from sources within the United States is beyond the taxing power of Congress.