Document: 391 U.S. 83 88 S.Ct. 1517 20 L.Ed.2d 448 COMMISSIONER OF INTERNAL REVENUE, Petitioner,v.Irving GORDON et ux. Oscar E. BANN ux., Petitioners, v. REVENUE. Nos. 760, 781. Argued April 4, 1968. Decided May 20, Solicitor General, Erwin N. Griswold for petitioner in No. 760 and the respondent Harry R. Horrow, San Francisco, Cal., respondents petitioners Mr. Justice HARLAN delivered opinion of Court. 1 These cases, involving interpretation § 355 Internal Revenue Code 1954, have an appropriately complex history. 2 American Telephone Telegraph Company (hereafter A.T. & T.) conducts its local communications business through corporate subsidiaries. Prior to July 1, 1961, services California, Oregon, Washington, Idaho were provided by Pacific Pacific). T. held about 90% common stock at all relevant times. The remainder was widely distributed. 3 Early it decided divide into two separate subsidiaries plan create a new corporation, Northwest Bell Northwest) conduct telephone Wahington, Idaho, leaving California hands Pacific. To this end, would transfer assets liabilities first three States Northwest, return debt paper. Then, sufficient shareholders pass control parent company, 4 had, however, objectives other than fission. It wanted generate cash pay off existing meet needs capital, but not excess left over. also feared that simple distribution encounter obstacles under corporation law.1 Consequently, 'Plan Reorganization' submitted Pacific's on February 27, had special features. only 56% be offered immediately after creation Northwest. that, instead simply distributing pro rata shareholders, distribute transferable rights entitling their holders purchase from amount specified Board Directors, expected below fair market value common. 5 In 27 statement said seeking ruling Service 6 'with respect tax status which will issued connection with offerings capital New Company. * *' 7 warned, '(t)axable income such shares may result rights.' 8 approved March 24, 1961. transferred ceased those June 30, On September 29, stockholders one right each outstanding share stock. exercisable until October Six plus payment $16 required 1961 57% 9 By ruled who sold realize ordinary sales price, exercised difference between paid value, measured as date exercise, received. prospectus accompanying distributed informed ruling. 10 12, 1963, remaining 43% shareholders. This second offering structured much been, except eight 11 Gordons, Baans, 781, minority occurred day Gordons received 1,540 plan. They 1,536 5, paying $4,096 obtain 256 price six per share. average Stock Exchange $26 5. same day, four odd $6.36. Baans 600 them 11, receiving 100 $1,600. agreed $26.94. 12 federal returns neither nor reported any upon receipt or exercising less value. did report sale rights. Commissioner asserted deficiencies against both sets taxpayers. He contended, joint proceeding Tax Court, taxpayers sum they contended further realized $6.36, 13 Court upheld taxpayers' contention met requirements Code, no gain loss should recognized exercise held, Gordons' resulted them. appealed Baan case Appeals Ninth Circuit, Gordon Second Circuit; latter, cross-appealed. Circuit reversed holding spread taxable Baans. disagreed, sustaining point case, Judge Friendly dissenting. went hold rather income, reversing piont. 14 Because conflict, we granted certiorari. 389 1033, 1034, 775, 778, 19 821, 822. We affirm decision reverse points. 15 Under §§ 301 316 subject specific exceptions qualifications property out accumulated earnings profits is dividend income.2 Every property, again otherwise specifically provided, 'is made extent thereof.'3 here 28, larger total contends dividend—the amount, share, purchasers. 16 Whether actual occurs moment when valuable are clear sells assigness thus diminishing net worth engaging 'distribution property' term used 316.4 Such results unless some exception qualification applies. particular, present nonrecognition stated 355, 354, 346(b) Code.5 Since concluded been met, reach alternative contentions. disposition make question, these contentions remain open proceedings 17 Section provides certain distributions securities corporations controlled do distributee shareholders.6 section detailed specific, must applied precision. doubt true, emphasized, general purpose distinguish fission profits. However, although court reference there genuine question meaning Congress has imposed, free disregard because considers redundant unsuited achieving particular case. abundant power provide wishing spin subsidiary must, however bona fide intentions, conform details set rules. 18 failed qualify several respects.7 need, one. 355(a)(1)(D) requires order that. 'as part distribution, distributes— '(i) before '(ii) constituting within 368(c), *.' 21 368(c) 22 'the 'control' means ownership possessing least 80 percent combined voting classes entitled vote number corporation.'8 23 owned class company issued. contemplated transferring, succeeded therefore could clearer 'all' prior it, defined 368(c). 24 Nevertheless, contend, agreed, subsection (a)(1)(D) 1963. 'in way single distribution.'9 apparently so long appears, time issue arises, fact subsidiary, (a)(1)(D)(i) satisfied. 25 forced disagree. distribution' divest controlling of, 80% corporation. Clearly, if initial interest treated purposes mere step divestiture control, identifiable made. Absent directions Congress, provisions interpreted basic premise annual accounting.10 wholly inconsistent essential character transaction, impact, undeterminable unfixed indefinite unlimited period future, awaiting events might happen. requirement transaction determinable does mean entire necessarily occur year. does, characterized 'first step' binding commitment take later steps.11 26 Here, little more fortuity suit brought alleging deficiency returns, reorganization promised immediately. on, 'It years acquiring Company, offer balance stock, following procedures described preceding paragraph. proceeds repay advances then including expenditures extensions, additions improvements plant. 28 'The prices pursuant referred determined Directors offering.' 29 subsequent '(a)t times related (Pacific's) need capital.' Although language preventing management dealing eventual obviously promise sell time, price. If played what proved not, either divestiture. 30 Accordingly, taxpayers, having recognize year exercised. 31 presented petition whether $6.36 gain, all, require extended discussion light our view question. produced rights, merely route realization, rates. Helvering Horst, 311 112, 61 144, 85 L.Ed. 75; Gibson Revenue, 133 F.2d 308 (C.A.2d Cir.). 32 judgment reversed. affirmed. ordered. 33 MARSHALL took consideration cases. record indicates attorneys advised without charged earned surplus; insufficient surplus purpose, difficulty avoided reduction surplus, would, law, redeem preferred shares. 301(a) follows: 'Except chapter, (as 317(a)) shareholder shall manner (c).' 317(a) 'property' money, securities, 301(c) 'portion 316) included gross income.' says 'dividend' shareholders—(1) 1913, 316(a) subtitle, every thereof See, e.g., Choate 129 684 Palmer 302 63, 69, 58 67, 70, 82 50, said: 'While is, literal sense, fall statutory definition dividend. For diminution cannot 'On hand sale, substantially sold, effective among formal declaration dividend.' Palmer, another Finding represented reasonable committed itself them, found authoritatively settled constitutes dividend, purchase. decided. important begin premise. view, erred approach problem assumed, outset, essentially sought 'income' practice abstract, looking 355. Any sense 'owns' fraction he holds reflect earnings. Earnings taxed accrue passed individually dividends. Consequently help note, did, changed form enjoyed increase wealth. very roughly true best, rough ends up 'more' change his represents him, reflecting There theoretical representing fission, separating owns smaller similar parts, qua individual. difference, objectively workable tests, supplied Neither suggested identifying Sec. Distribution (a) Effect distributees. (1) General rule. If— (A) (referred 'distributing corporation')— (i) distributes shareholder, (ii) security holder, exchange solely 'controlled corporation') controls (B) principally device (but exchanged distributees (other arrangement negotiated distribution) construed device), (C) (b) (relating active business) satisfied, (D) established satisfaction Secretary delegate retention (or securities) pursuance principal avoidance Federal tax, (and includible of) holder securities. (2) Non distributions, etc. Paragraph regard following: surrenders (within 368(a)(1)(D)). (3) Limitation. apply if— exceeds surrendered distribution. paragraph (1)(D) subsection) 356 relates section, acquired reason whole part, property. (4) Cross reference.— treatment permitted (including over surrendered), see 356. Requirements business.— general. Subsection either— (or, distributed, corporations), engaged trade business, business. Definition. (1), consist (immediately engaged, actively conducted throughout 5-year ending subparagraph (at acquisition control) conducting business— directly corporations) (B), period, transactions acquisitions beginning period. contends, first, 'solely securities' 355(a)(1)(A), second, 'to stock' 355(a)(1)(A)(i), consideration. third, quantity parted arguments, established, support seeks. perforce rejected three. accepted last. argue rested arguments applying When raised well Courts Appeals. Both considered merits, dividing others. applicability since inception, contend properly leaves disputed find proper decide trier fact. 382 499, 507. See Burnet Sanford Brooks Co., 282 359, 363 365, 51 150, 151—152, 75 383. multistep presents problems bailouts recognizing potential problems, can dealt (a)(1)(B), appears may, course, chosen leave created divestitures adjudication 'device' subsection, unitary requirement. prohibit limit outset series steps reach.

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