Opinion ID: 292838
Heading Depth: 2
Heading Rank: 2

Heading: Consideration of Our Precedents

Text: 61 The foregoing analysis of the tax significance of corporate distribution of capital assets, on-going or in liquidation, is not only expressly responsive to doctrine set forth in precedents such as the 1963 Goldman ruling, but also establishes a line of harmony that makes meaningful our entire string of applicable precedents — including 1958 Berliner and its progeny (see supra note 8); the 1962 ruling in Oppenheimer I; and the 1965 ruling in Snow. 62 In Snow the taxpayer purchased all of the stock of a corporation and shortly thereafter liquidated it, receiving all of the assets. The cost of the stock was $1,000,000. The corporation's earned surplus at distribution was $300,000. The value of the assets distributed was $1,000,000. Accordingly, the taxpayer became liable for taxes on a dividend of $300,000, but he received non-inventory assets in kind with a fair market value of $1,000,000, leaving $700,000 of distribution unaccounted for. We held that this $700,000 was to be treated as a return on taxpayer's investment, to be treated as gain or loss on the basis of the cost of the stock ($1,000,000). Thus, the taxpayer suffered a loss on his investment which was fully realized at the time of the distribution. This loss — of $300,000 — was fully deductible (although the assets were in kind) since the property out of which the loss grew was held for less than two year by the taxpayer. 63 As the court observed in Snow, 64 If Snow had paid only $500,000 for the stock, surely the District would urge that when he received $700,000 [less than two years later] for that stock he owed a tax on $200,000. Indeed its counsel admitted as much in oral argument. (Emphasis supplied.) 65 124 U.S.App.D.C. at 73, 361 F.2d at 527. 66 My approach would establish a line of consistency with Snow, and also Berliner and Oppenheimer I. The point is, simply, that part of the liquidating distribution is taxable as a dividend included in ordinary income (by virtue of the express provision relied on in Berliner ) and the rest of the distribution is taxable like any other return of capital. 67 Conversely, the ruling of Oppenheimer I, that distribution of an asset reflecting unrealized appreciation does not permit taxation of that appreciation in value as ordinary income as a dividend, 17 is consistent with recognition that distributions on stock (not held for inventory) are taxable like any other return of capital. Under District of Columbia law return of capital is taxable in full if the stock has been held two years or less, but is exempt, as appears from Goldman, if the stock is long term. In Oppenheimer I, the liquidating distribution came on stock held more than two years. The court properly rejected the inclusion of the value of the distribution in income. 68 For convenience in presentation, our depreciation rulings, notably Oppenheimer II, will be discussed separately below. I interject that I think they are also consistent with my approach. C. Further Probing of Intent of Congress, as Indicated in Language of D.C.Code and Further Illuminated by Federal Tax Legislation 69 My analysis is fully supported, I think by a careful probing of the language of the D.C.Code and the policy or intention of Congress as reflected therein and as illuminated by the relevant concepts that have been identified in regard to Federal tax legislation. 70 Perhaps a fair note to strike at this juncture is one of caution against exaggerating the significance of the difference between the provisions of the D.C. and Federal tax laws. Where these differences expressly or by fair implication signal a difference in policy they must be respected, as Berliner makes clear. But where a question of interpretation arises under the D.C. law because it is skeletal or silent, it is not inadmissible to take as an assumption, in the absence of contrary indicia, that filling in the gaps of the D.C. law with a doctrine reflecting working concepts of tax theory and analysis of a kind approved by Congress for Federal tax purposes is not so destructive of legislative policy as to be contrary to sound construction of the D.C. tax provisions. 18 71 My analysis is supported, however, by more than a general presumption of harmony. It is supported by close examination of what Congress has done in fashioning tax policy and tax wording for the kind of fact situation under consideration. 72 It is first appropriate to recall and emphasize how Congress excluded distributions of assets reflecting unrealized appreciation from the scope of ordinary income. In the original 1913 Federal income tax law the word dividend was used broadly enough to include all corporate distributions to shareholders (with exceptions, e. g., distributions from paid-in capital). Use of the term dividend without qualification was apparently broad enough to include distributions reflecting the unrealized increment in the value of property owned by the corporation. 19 73 The 1916 Federal act defined dividends in a more restricted way to mean any distribution made or ordered to be made by a corporation    out of its earnings or profits accrued since    [1913] and payable to its shareholders, whether in cash or in stock of the corporation    to the amount of its cash value. 20 74 This provision of the 1916 Federal law is obviously similar to the current D.C. Code definition of dividends. The similarity between the two statutes becomes more complete with the 1921 Federal law. Prior to 1921 the Federal law taxed gains from the sale of capital property in the same way as other income. In 1921 Congress responded to the problem raised concerning those realizations of income that were not fruit from the tree, but really represented conversions of the form and nature of the capital tree, where the gain realized was often a large gain that had accrued over a long period of time, rather than a share of the annual crop of earnings, and the inclusion of the gain resulted in high surtaxes. These considerations led Congress to the familiar Federal capital gain tax provisions, which provided lower rates for gains on capital-type assets held more than two years. Burnet v. Harmel, 287 U.S. 103, 106, 53 S.Ct. 74, 77 L.Ed. 199 (1932). 75 The D.C. tax law gives the separation of speculators from investors somewhat different characteristics from those in the Federal law. Under the D.C. law long term gains and losses are excluded from tax entirely and not merely in part. Also Congress has amended the Federal law, but not the D.C. law, to make six months the dividing line rather than two years. These are differences of detail. The broad policy enlivening both D.C. and Federal statutes since 1921 is a deliberate removal of any disincentive or deterrence to conversion of the form of capital wealth that might result from taxing the transaction as a realization of income to be treated in the same way as ordinary income. 76 Section 202 of the 1921 Federal Revenue Act, ch. 136, 42 Stat. 229, defined basis for determining gain or loss on the sale of property. In § 201(c) Congress provided that distributions to stockholders made other than out of earnings or profits 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. 21 77 This provision applied where increase in value of property was a source of distribution to the stockholder. But it did not expressly set forth the rule applicable where the stock was not sold, so that the basis provision of section 202 had no applicability. The Senate Committee Report reflected the applicable underlying doctrine of tax law, stating that where such distributions return to the stockholder more than the cost price he is taxable    with respect to the excess in the same manner as though such stock had been sold. 22 (Emphasis supplied.) 78 Let me pause for emphasis and reiterate this point: The tax authorities and Congressional committees all understood, and regarded as fully conforming to underlying legislative intent, a situation whereby — notwithstanding the absence of specific statutory language — a return of capital (on stock) is treated as income realized as though such stock had been sold. And it is given favorable capital gain treatment! 79 In 1924 Congress did add to the Federal tax laws an express paragraph that such returns of capital, to the extent of excess remaining after reducing basis of the stock to zero, shall be taxable in the same manner as a gain from the sale or exchange of property. 23 This was not put forward as a change. It is explained in Committee Reports as merely a crystallization, in express language, of the Treasury practice under the 1921 act. 24 80 This historical background reenforces the holding of Goldman that the D.C. law exempts from taxation corporate distributions, other than distributions out of earnings, even though they return to stockholders an amount exceeding the cost of stock, where such receipt comes more than two years after purchase of the stock. 81 The matter is not expressly covered by the D.C.Code in the same way as it has been in the Federal law since 1924. But there is a framework of basic tax concepts relating to capital gain as well as to ordinary income. The materials relating to the state of the Federal tax law under the 1921 act show that these basic concepts provided consensus for the application of favored capital treatment to the case where there are distributions (not out of earnings) reflecting gain on the holding of a stock investment — even in the absence of and prior to the addition of express provision that such distributions are to be taxed in the same manner as though such stock had been sold. 82 To recapitulate my view, the stockholder who receives for his own dominion and disposition property in which he previously held only a beneficial interest, dependent on the management and disposition decided on by the corporate directors, has a realization on his stock that is included in his gross income, to the extent of fair market value of the property. If his stock holding is short term he is fully taxable on any gain — excess over cost of stock — as ordinary income. But if his holding is long term, the favored tax treatment provided by Congress, different only in details under the D.C. and Federal laws, extends to this kind of change in the form of the capital-type asset (stock plus property instead of mere stock) as constituting a return of capital, treated in the same way as the realization of gain upon a sale of the stock. D. Consistency with Depreciation Rulings 83 I now consider, and on reconsideration reject, the possibility of a contention that my approach is subject to challenge on the ground of inconsistency with our depreciation rulings, notably Oppenheimer II. 84 Oppenheimer II establishes that when property with an unrealized increment in value is distributed in liquidation of a close corporation to a stockholder its basis in the hands of the stockholder for purposes of depreciation is no greater than the basis in the hands of the corporation plus allocable earned surplus. That case, as both majority and concurring opinions recognize, turns on the peculiar depreciation provisions of the D.C. law. 85 Since depreciation involves only a deduction reducing tax payable, which essentially is a matter of legislative grace, it is subject to a narrow reading, as requiring an actual sale or exchange of property in order to increase basis. This deduction stands in contrast to the provisions relating to gain or loss on non-inventory assets, since, as was pointed out in Snow, holding these provisions applicable may result in increase as well as decrease of taxes payable. 86 Oppenheimer II did not disapprove the Tax Court's conclusion that the depreciation deduction provided by Congress permitted a reasonable step up to the extent of taxable income realized in distribution. Such reasonable step up would presumably apply not only in the case of taxable income realized by way of dividend, but also taxable income by way of return of capital exceeding the cost of stock held two years or less. Oppenheimer II refused to apply the reasonable depreciation provision to step up basis in the case of a close corporation stockholder owning the stock for a long term, and who thus realized no taxable gain. Such a taxpayer was not permitted to avail himself of all the benefits of the depreciation deductions and basis utilized by the corporation, and then claim the benefit of an increase in basis for depreciation even though there had been neither a change in beneficial ownership, nor a taxable gain. To the extent that there was some exposure to taxation (for the liquidating dividend paid out of earned surplus) the Tax Court permitted a step up in basis as reasonable, in a ruling that was neither contested by the District nor criticized in the majority opinion. 87 Snow ( supra note 3), thought a different rule was reasonable in the case of a newcomer who had to lay out considerable cash in order to acquire the depreciable asset owned by a stranger corporation. There, a change in basis for depreciation was held to accompany a change in beneficial ownership. Whether or not this depreciation ruling of Snow is retained or redefined, 25 it is manifestly consistent with a ruling that the short-term stockholders realize gain if the asset received in liquidation exceeds cost of the stock. 88