Document: 336 U.S. 410 69 S.Ct. 616 93 L.Ed. 771 COMMISSIONER OF INTERNAL REVENUEv.PHIPPS. No. 83. Argued Dec. 9, 1948. Decided March 14, 1949. Mr. Stanley M. Silverberg, of Washington, D.C., for petitioner. Messrs. Montgomery Dorsey and W. Clayton Carpenter, both Denver, Colo., respondent. Justice MURPHY delivered the opinion Court. 1 This case involves a tax-free liquidation by parent corporation some its subsidiaries. At time had earnings profits available distribution, subsidiaries an aggregate net deficit. The issue now before us is whether rule Commissioner v. Sansome, 2 Cir., 60 F.2d 931, requires subtraction subsidiaries' deficit from parent's profits, in determining subsequent distribution constituted dividends or return capital to stockholders. Sansome case, supra, arose reorganization which transferor surplus distribution. It was there held that those purposes transferee stockholders, retain their status as are taxable recipients dividends. has been include liquidations subsidiary parent. Robinette Commissioner, 9 148 513; U.S.Treas.Reg. 101, Art. 115—11, promulgated under Revenue Act 1938, 26 U.S.C.A.Int.Rev.Acts, page 1001 et seq., made retroactive. 3 facts were stipulated, so found Tax So far relevant, they follows: In December, 1936, Nevada-California Electric Corporation liquidated five wholly owned distributing itself all assets, subject liabilities, redeeming canceling outstanding stock. No gain loss on recognized income tax § 112(b)(6) pages 855, 856.1 On date liquidation, one accumulated after February 28, 1913, amount $90,362.77. four others deficits aggregated $3,147,803.62. December 31, $2,129,957.81, does not reflect 1937, $390,387.02. years 1918 1933 inclusive filed consolidated returns.2 4 Respondent owner 2,640 shares o preferred stock Nevada-California. During 1937 prorata cash stockholders $802,284, respondent received $18,480. determined dividend 115 868,3 ordinary entirety. 5 Of approximately 49% chargeable year. Consequently, conceded Court percentage her share, about $9,000, 115(a)(2). favor balance out theory Nevada-California's plus surplus, erased other subsidiaries.4 8 T.C. 190. Appeals, 10 affirmed divided court, 167 117. We brought here writ certiorari, 335 807, 33, because importance administration revenue laws, alleged conflict decision below with Appeals Ninth Circuit Cranson United States, 146 871. 6 thus: A sold assets B Corporation, organized laws New Jersey. assumed liabilities issued without change proportions holdings. only charter gave it slightly broader powers. reorganization, books large undivided profits. new no profit company soon dissolved. liquidating distributions 1923, year when dissolution begun, did exhaust predecessor corporation, contended not, claimed them, capital. Second agreed since nontaxable 202(c)(2) 1921, 42 Stat. 230, retained character such h nds consequently 201 same Act, 228.5 view court thus expressed Judge Learned Hand: 'Hence we hold corporate results 'gain loss' section (42 230) toll company's life continued venture 201, what 'earnings profits' original, subsidiary, remain, successor, parent, liquidation.' 933. consistently followed judicially6 explicit Congressional approval.7 7 rationale 'continued venture' doctrine often repeated cases, them fact successor differed merely identity form8 lent plausibility. Other however, demonstrate analysis accurately indicate basis decisions. do lose virtue applied where more than absorbed liquidated,9 'split-off' reorganization,10 resulted substantial changes proprietary interests.11 Munter, 331 210, 67 1175, 91 1441, this reversed Third Circuit, 157 132, taxpayer ground ownership different two predecessors sufficient continuity entity apply doctrine. stated our unanimous rule: 'A basic principle long should be taxed distributed who own corporation. * Thus unless corporations undistributed deemed have acquired upon it, would escape taxation Congress intended. congressional purpose receive cannot frustrated any leaves whole part.' at 214, 215, 1177, 1441. See Murchison's Estate 76 641, 642; Putnam 149 721, 726; Samuel L. Slover, 884, 886. concluded cases grounded enterprise but necessity prevent taxation. Harter Helvering, 79 12, inconsistent view. situation each merged form C Corporation. By operation rule, hands C. Some later, D C, thereafter transaction recognized. held, dividends, deducted subsidiary. vigorously logic compels allowance deduction believe product inadequate analysis.12 difference between problem may perhaps clarified comparing taxwise if neither occurred. Briefly stated, either current prior losses, receiving until excees actual losses erased. Mertens, Law Federal Income Taxation 9.30, cited therein n. 44 seq. instant situation, absent liquidation. intent prevented intervening liquidation.13 into high relief consideration economic relation accumulated, thereof distribution.14 If choice methods 'realize' surplus. cause declare dividend, liquidate interest part former course insofar income, represented it. uses second method, alternatives again available: take sale outright, performed within framework sections Internal Code acts. former, realized, also purposes. note passing, connection, will correspond, all, coincidence latter, shall time, recognition deferred. 'realized' present surplus: sale, 112. Again, realized And Code, deferred mandate later time. 11 combined via effect simply this: transaction. Respondent's contention subtracting corollary carrying over superficial plausibility; plausibility disappears noted obtain advantage way 'declare' deficit, method realization open parallel declaration dends mode realizing 12 urged subtracted order make consequences correspond accounting practice. answer brief. itself, never thought controlled concepts; uniform treat properly considered many most purposes, commonplace law similar divergences occur. Wheeler, 324 542, 546, 65 799, 801, 89 1166; op. cit. 9.33; Rudick, op, 878—906.15 13 facilitate simplification financial structures, further provided certain intercorporate transactions free immediate corporations. There judicially superimposed ratification Congress, reorganizations disturb otherwise Since allow these recognize effects explicitly deferred, judgment reversed. 14 Reversed. 15 DOUGLAS concurs result. 'Sec. Recognition Gain Loss '(a) General rule.—Upon exchange property entire loss, 111, recognized, except hereinafter section. '(b) Exchanges solely kind.— '(6) Property complete another.—No receipt another *' appear occurred deficits, extent set off against years. To set-offs exist, reduced availed U.S.Treas.Reg.94, art. 113(b)—1, 1936. 115. Distributions Corporations Definition dividend.—The term 'dividend' used title (except 203(a)(3) 207(c)(1), relating insurance companies) means shareholders, money property, (1) (2) (computed close diminution reason during year), regard made. Source distributions.—For every thereof, recently Any increase value accrued, 1, exempt tax, distributed, reduce adjusted 113.' agrees become, whatever ultimate treatment Section 1921 specifies dividends; provides nonrecognition reorganizations. 1441; States Kauffmann, 62 1045; 641; 12; Georday Enterprises, Ltd. 126 384; Reed Drug Co. 130 288; 721. Coudon Tait, 61 904, decided few months reached result independently. Senate Finance Committee Report 115(h) S.Rep.No.2156, 74th Cong., 2d Sess., p. 19 (1939—1 Cum.Bull. (part 2) 678, 690), said amendment intended existing law, added clarity. 94, 1936 incorporates substance report. 1938 amended extending application 'property money' well 'stock securities'; harmonize (7); Regulations conform. contains substantially unchanged. 501 1940, U.S.C.A. Int.Rev.Acts, 56, 115(1) elaborate reports accompanying bill H.R.Rep.No.2894, 76th 3d 41 (1940—2 Cum. Bull. 496, 526), S.Rep.No.2114, 25 528, 546—547), 'the become transferee.' Ibid., 25. mention deficits. See, e.g., Commissioner; 6. Helvering; Baker Barnes 22 F.Supp. 282; McClintic, 47 B.T.A. 188; Stella K. Mandel, 684. n Note, Effect Tax-Free Reorganizations Subsequent Corporate Distributions, 48 Col.L.Rev. 281; Atlas, Case Disappearing Earnings Profits, Seventh Annual Institute Taxation, 1155; cf. 9.58 ( 942); Montgomery, Taxes Partnerships 1948—49, 154 (1948); Green, Recent Trends Under Rule, Sixth 338; 'Dividends' 'Earnings Profits' Law: Non-Liquidating U.Pa.L.Rev. 865, 896. Senior Investment Co., 124, involve question us, concerned applicability, computing surtax §§ 26(c)(1) 26(c)(3) 836, latter 501(a)(2) 1942, 344, reorganization. 'inheritance' issue. 341. restricted, course, 215—216, 884. Cf. U.S.Treas.Reg.111, 29.112(b)(6)—4 minority merits, respondent's argument convincing. fails account concept summary operations reporting, taxfree itself. various possible permutations combinations factors equivalence accounts mere coincidence. Consider example acquires liquidated, still large, realize little first texts supra.

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