Document: 41 L.Ed.2d 398 94 S.Ct. 2516 417 U.S. 673 CENTRAL TABLET MANUFACTURING CO., Petitioner,v.UNITED STATES. No. 73—593. Argued March 25—26, 1974. Decided June 19, Syllabus When a fire destroys insured corporate property prior to the corporation's adoption of complete plan liquidation, but insurance proceeds are received within 12 months after plan's adoption, gain realized from excess such over taxpayer's adjusted income tax basis in must be recognized and taxed corporation, is not entitled nonrecognition under § 337(a) Internal Revenue Code 1954, which provides, with certain exceptions, for or loss 'sale exchange' that takes place during 12-month period following liquidation effectuated period. Pp. 677—691. (a) The involuntary conversion by fire, as 337(a), when occurs plan, at some postplan point, subsequent settement claims their payment, since single irrevocable event fixes contractual obligation precipitating transformation property, corporation possesses all incidents ownership, into chose action against insurer. 685—683. (b) Section was enacted order eliminate technical formalistic determinations identity vendor, between liquidating its shareholders, and, therefore, reasons applying present situation where there no question owner. 686—687. 481 F.2d 954, affirmed. Larry H. Snyder, Columbus, Ohio, petitioner. Stuart A. Smith, Washington, D.C., respondent. Mr. Justice BLACKMUN delivered opinion Court. 1 26 U.S.C. 337(a),1 stated issue this case whether, corporation. 2 * facts contested. Taxpayer, Central Tablet Manufacturing Company, an Ohio many years May 14, 1966, engaged manufacture sale writing tablets, school supplies, art materials, related items. It filed federal returns on accrual accounting fiscal year ended October 31. 3 On August 13, 1965, majority production maintenance employees went strike. As consequence, reduced about 5% normal volume. September 10, strike, accidental largely destroyed plant, manufacturing equipment machinery, business offices. damage never repaired, strike settled, taxpayer again manufacturing. 4 At time carried extended coverage building, inventory. also interruption insurance. Negotiations relating claim began 8, those building personal losses November 1. There dispute estimated covered insurance; probable duration had taken place; applicability policy's co-insurance clause; extent due rather than rain; value fire; cost repair repairable machinery equipment. threshold liability carriers, however, despite unusual rejection initial formal proofs claim, seriously questioned. 5 Eight special meeting shareholders decided dissolve adopted dissolution pursuant Rev.Code Ann. 1701.86 (1964). App. 38. About six days later, insurers settled claim; payment mid-June. In August, it November. 3, 1967, assets remaining distributions were conveyed Columbus bank trust pending taxes collection other claims. same date, certificate Secretary State. §§ 1701.86(H) (I) All accomplished 1966. 6 1967 thereof year. 7 exceeded property. Gain, ordinarily would 1033(a)(3) 1954 Code, 1033(a)(3); Tobias v. Commissioner, 40 T.C. 84, 95 (1963). taxpayer, resorting did report any part 1965 January 1968, upon audit, Service asserted deficiency 1965. This attributable Service's inclusion gross capital equal basis, 1965's pro rata share (c) amount here. A 1963 asserted; decrease operating carryback 1966 because adjustments treatment proceeds.2 paid deficiencies, refund, time, instituted court recover amounts so paid. 8 District Court followed decision United States Morton, 387 441 (CA8 1968), concerned cash, accrual, held available taxpayer. 339 F.Supp. 1134 (SD 1972).3 Judgment entered. appeal, Appeals Sixth Circuit, refusing follow reversed remanded. 954 (1973). view indicated conflict decisions Eighth Circuits, we granted certiorari. 414 1111, 839, 38 737 II 9 only before us whether has application where, here, occasioned preceded liquidation.4 depends exchange,' referred took occurred settlement claims, payment. 10 Stated simply, position Government destructive effected (and, exchange') thereby rendering inapplicable. hand, all, incident series events—the preparation filing preliminary rejection; negotiations; ultimate dollar agreement way settlement; submission final acceptance; payment—that stretched came meaningful conclusion that, consequently, applicable. 11 keep narrow perspective, desirable necessary examine background history 337. taxable entity separate distinct shareholders. Ordinarily, it. course, benefit realization consequent increase assets. shares, theory, enhanced. increment value, point shareholder. His transaction he disposes his shares. it, may said subject 'second' is, shareholder nothing this. reality law, separateness entities. 13 'double tax' possibility aspects, of, connection with, liquidation. If deemed have exchange, addition itself realizes purposes mere distribution 311 311; see General Utilities Co. Helvering, 296 200, 56 185, 80 L.Ed. 154 (1935), if exchange asset, 'first' Thus, timing transaction, relation important consequences. See generally B. Bittker & J. Eustice, Federal Income Taxation Corporations Shareholders 11—53 (3d ed. 1971). short, 337 overall burden less clearly made them gain. 14 seemed simple straight-forward. rule, fact situations varied, engendered profound confusion enhanced two approximately 25 ago. Commissioner Holding Co., 324 331, 65 707, 89 981 (1945), could escape taxation sole asset arranged even though consummated distribution. Subsequently, Cumberland Public 338 451, 70 280, 251 (1950), reached exactly opposite negotiated distributed been touch purchaser offered acquire sell purchaser. Black, who wrote unanimous both cases, 'the distinction sales compared kind particularly shadowy artificial closely held,' id., 454—455, S.Ct., 282, Court, nonetheless, determined mandated Code: 15 'The oddities consequences emerge provisions here controlling appear inherent pattern. For sells physical properties distributes cash dividends, yet then sold instances interest transferred . Congress having different shall flow methods dispose accept mandate.' Id., 455—456, 282. 16 These cases obviously created dependent resolution often indistinct negotiations leading conducted Particularly little, any, significant difference management analytical formalism unsatisfactory indeed, trap unwary. S.Rep.No.1622, 83d Cong., 2d Sess., 49 (1954); H.R.Rep.No.1337, A106 (1954). Cary, Effect Selling Out Corporate Business Cash, 45 Ill.L.Rev. 423 (1950). 17 direct response Holding-Cumberland disparate produced 1954. House Committee Ways Means bill (H.R. 8300) became explained purpose 337: 18 'Your committee's eliminates questions arising result necessity determining process receiving sale. Compare Company (324 707 (89 981), (338 280 (94 251)). last indicates distributee actually makes receipt will level. resulting formalities, your committee provided level, distributee-shareholder, ordinary depending character sold.' 38—39 (1954), U.S.Code Cong. Admin.News pp. 4025, 4064. 19 A106—A109, said, A106: intends section (337) provide definitive rule uncertainty.' 48—49, 258—260 p. 4629. 20 legislative indicating taxation' such. Rather, statute designed distinctions perhaps encouraged Cumberland. Kovey, Will Shield Fire Loss Proceeds? Current Look Burning Issue, 39 J.Taxation 258, 259 n. (1973); Note, Tax-Free Sales Liquidation Under 337, 76 Harv.L.Rev. 780 West Street-Erie Boulevard Corp. States, 411 738, 740—741 (CA2 1969). meant establish strict clear specified limitation, planners might rely serve bring certainty stability area. recognizes statutory purpose. Brief Petitioner 6—7; Tr. Oral Arg. 3—4. 21 Inasmuch drafted meet deal situation, sale, face relates surprising, further resulted found confronted taxpayers sought casualty gains. Following Court's Helvering William Flaccus Oak Leather 313 247, 61 878, 85 1310 (1941),5 first refused consider applicable all. Rev.Rul. 56—372, 1956—2 Cum.Bull. 187. rejected courts,6 treated nonrecognition. 64—100, 1964—1 (Part i) 130. 22 instant emerges comes focus. Although now determinative remains unresolved: does preplan take place? Since prescribes period, crucial adopted. III 23 Predictably, analogizes true argues convension occur until obligations finally essentially reasoning employed Morton case. 24 indicate considered problem attention invariably focused actual legislatively anticipated. Towanda Textiles, Inc. 180 373, 376, 149 Ct.Cl. 123, 129 (1960). Recourse history, somewhat circumstantial nature. one guiding fact, namely, above-mentioned Congress, enactment avoid formalities. analogy superficial appeal. fails, give sufficient consideration underlying 337(a). To sure, circumstances, mutual (if precise terms) fixed. explicitly Regulations making completed Treas.Reg. 1.337—2(a).7 merely acknowledges parties free executory contract final. adopted, rightfully treatment. fully consistent aim factual determination led dichotomy. given limited opportunity disposal mean intended make every conceivable situation. With loss, pay arises fire.8 Unlike sell, cannot rescinded. Details, including basic liability, contested, fundamental precipitates tangible consisting fixed fire. remain arrive acceptable settlement, come being, governs claim. words, terms changed unilaterally insurer once occurred. 27 known later prevent occurrence context commercial transaction. See, eG., Burnet Logan, 283 404, 51 550, 75 1143 (1931). efforts draw therefore utility. Involuntary Conversions 31 Wash. Lee L.Rev. 417, 427—428 (1974). 28 337(a)'s follows matter course. presence creates expectation gains exchanges need formalities Put another way, colored reasonable exchanged months, if, casualty, replacement proceeds, available. replaced proceeds. 29 When, commitment liquidate, none these considerations attaches. Moreover, dictates extension benefits Before avoiding beneficiary insurance, policy executed Prior 'expectation' simply present. practical purposes, Tablet's possessed ownership. evidenced intention liquidate. irremediable. Regardless prefaced settlements, parted destruction. committing presented. IV 30 interpretation manner condemnation, principal form conversion, legally operative passage title state be, condemning authority. means jurisdictions condemnation compensation possibly without advance warning 59—108, 1959—1 72. uniformly avail passed price notice proposed taking. Covered Wagon, 369 629, 633—635 1966); Likins-Foster Honolulu 285 (CA10 1969), cert. denied, 397 987, 90 1117, 395 (1970); Dwight 328 973 1964); Wendell 326 600 1964). favor exact parallel, date analogous casualty. legal nonqualifying significance, control time. unlike plan; there, either whatever preliquidation negotiations. distinguishes irrelevant insurer's uncertain. owner deprived aspects ownership much condemned passes. each triggering irrevocable. Because statutorily imposed chronology, operates favorable exemplifies, 'This harsh result, corrected act; courts power do so.' F.2d, 974. V 32 Again, although precisely parallel certainly controlling, concluding accepted method holding ascertainment long- short-term Where destroyed, terminates moment Rose 229 298 Cal.1964); Steele 52—2 Tax Cas. 9451 Fla.1952); Draper 545, 548—549 (1959). Cf. Comment, Extending Liquidations Triggered Conversion Assets, 62 Geo.L.J. 1203, 1213 55 Were argument, left anomalous 'sale' terminated purposes. VI 33 presented brought suggestion conversions.9 acted suggestion. It, relief victim permitting victim-taxpayer uses replace manner. 1033(a)(3). But disclosed permit ensuing option obtaining policy, courts, effectuate. tax-oriented tax-knowledgeable theory utilize rebuild being gain, adopt surely change result. what place, place. National Alfalfa Dehydrating Milling 134, 148—149, 2129, 2137, 717 34 Had avowed freeing whenever decides well different. accomplish broad noted, By existing doubt narrowly specifically drawn. applies short more adoption. statute's conditions fulfilled, normally prevail ensue. Indeed, always beneficial, nonrecognizable. 35 judgment 36 ordered. 37 Affirmed. WHITE, whom DOUGLAS, BRENNAN, POWELL join, dissenting. occurring poan Concededly, conversions compensated long qualifying after, before, indicates, Here, insured, negotiated, holds view, transformed 'tangible ..' Ante, 685. I disagree. That gave company policies moment. my ripen attained sufficiently definite quality require accrued books accrualbasis plain enough me accruable plan. 42 general '(t)here allowed deduction sustained otherwise.' 165(a). Without doubt, case, suffered deductible closed transactions identifiable events. Boehm 287,291, 66 120, 78 (1945). recovery uncertain unrealistic occurs. Coastal Terminals, 1053 (1956); Cahn 92 674 (CA9 1937). fair prospect recovering postponed settled. Harwick, 184 835 (CA5 1950); Boston M.R. 206 617 (CA1 1953); Jeffrey T.C.M. 534 (1953).1 43 Similar principles apply determine accrual-basis results accounting, met year: right income, quantum ascertainable limits. Anderson, 269 422, 441, 46 131, 347 (1926); Continental Tie Lumber 286 290, 297, 52 529, 531, 1111 (1932); Dixie Pine 320 516, 519, 64 364, 365, 88 270 (1944). 'It truly reflect year, events fix liability. .' Ibid. twin formalized 1.451—1(a), provides relevant part: 44 'Under includable receive can accuracy. governing covering admit quite bulk recoverable, improper.2 seek delay reporting large absorb income. advocate improper. E. T. Slider, 263 (1945) (accrual improper collectibility doubtful). neutral, inconsistent fashion minimize accrual-accounting applied held. least however file timely proof-of-loss Thalhimer Bros. 733 (1957). becomes should beginning question, acknowledged, reasonably 47 disagreement Appeals. '(a)t express admission adjusters. evidence record companies denied properly given.' 1134, 1139. admitted insufficient occurred, explored trial. Appeals, believed carrier questioned neither validity contracts nor fulfillment thereunder 956. 48 However, accepting issue, negotiation. number issues divided throughout coverage. business-interruption Disputes subsequently arose 'actual sustained.' No 25, 22, petitioner $67,000, maximum $200,000 policies, represented petitioner's request Negotiation 1, clause.3 clause reduce 43% prevailed. disagreed loss. 20, 15, $174,595.05 $225,000 maximum. 50 Finally, $104,609.27 $450,000 'exceedingly complex difficult,' '(i)n substantial discrepancies existed offers companies, permissible coverage, ultimately negotiated.' F.Supp., Due concluded accrue 'it utter fiction conclude estimable policy. findings well-settled required received, $174,000 $104,000 maximums $450,000, respectively. bolster disagreements parties. '(t)axable computed regularly computes keeping books.' 446. Absent 'involuntary conversion' exchange.' And various owned become predictable 53 me, Government's anomalous. arguing suggested Government, remand taxable. whose affirmed, remanded thus possible already begun reach remand; nonetheless seems very odd warrant incongruous hold based nevertheless realizing realistic criterion meaning 54 tell flexibility liquidations, contemplated exchanges. perceive reason why treat accident forces convert favorably total qualifies concedes does, appears perfectly accrued. forced liquidate par realize paying tax. argues, 'conversions' accidents. He uniform appeals 1954); 629 directly odds principles. Recognition taking transfers immediate authority just compensation. amount, fixing amount. condemns files Declaration Taking deposits court. Inc., supra, 634. vests condemnee market Government.4 except represent immediately accruable. ascertainable, time; rules recognized; congealed qualify exchange. 57 add note. Treasury considerable situations. 1.337—1 'sales day adopted.' (Emphasis added.) aware pains comply Regulation over. Other inclined circumstanced contingencies foreclosed. unwary, avoid. '§ Gain liquidations. '(a) rule. 'If— '(1) adopts '(2) retained 'then period.' interest, amounted $70,051.30 $11,930.30 1963. Kinney 73—1 U.S.Tax 9140 (ND Cal.1972), Circuit's ruling appeal Ninth Morton. basis. ruled occasion remand. We intimate issue. Mertens, Law 12.65 236 (Malone rev. 1967). 117(d) Act 1934, Stat. 715. overcome 151(b) 1942, 846, 1231(a) 1231(a). 123 (1960); Kent Mfg. 288 812 (CA4 1961). relied Flaccus-inspired amendment, preceding footnote, Claims permitted observed, drawn voluntary one, attention' (emphasis supplied). Ct.Cl., 129. Kent, Fourth Circuit disallowed 816. (It upheld specially 392(b) Code.) Neither sequence us. 'primarily intent gathered surrounding circumstances.' 1.337 2(a). They 'executory distinguished sale.' significance longer opt out Certainly, respect, distinguishable. formality proof usually substance conclusion. event, observed adjuster attendance while progress. 42. Notice promptly submitted. 13—14. month. adjusters, uncommon extent, hardly 14—15. 1959 Advisory Group recommendation Means: advisory group considers appropriate extend conversions. foreseen impractical proposed, conversions, relax requirements respect depend factors beyond impossible, Accordingly, recommended 1033 paragraph (1)(B) regarding distribution, requirement (1) therein, satisfied begins 60 disposition converted defined 1033(a)(2), whichever latter.' Hearings Recommendations Subchapters C, J, K Means, 86th 1st 532 language congressional action. Nonetheless, 'to section' thereto. 1.165—1(d)(1) (2) provide: '(d) Year deduction. 165(a) sustained. purpose, disaster 165(h) 1.165—11. '(2)(i) exists reimbursement recovery, portion sustained, 165, ascertained received. Whether examination circumstances. certainty, example, adjudication abandonment reimbursement, able produce objective abandoned execution release. '(ii) $10,000 completely 1961, consists $8,000 1962, sustains $2,000 1961. automobile 1961 negligence person full person, sustain adjudicated otherwise $5,000 secures $4,000 $1,000 1962. $3,500 ever collected judgment, $500 '(iii) deducted accordance receives recompute includes 111, previously deducted.' Maryland Shipbuilding Drydock 409 1363, 187 523 (1969) contested year); Cappel Furnishing 244 525 (CA6 1957) (liability approximate unreasonable presenting approximated); Georgia Carolina Chemical (1944) (extent uncertainty clause, invoked company); Luckenbach S.S. 662 (1947) (amount war risk controversy War Shipping Administration Comptroller General); Rite-Way Products 475 (1949) loss); (1957) (where completion still uncertain); Curtis Electro Lighting 633 (1973) Kurtz B.T.A. 679 (1927) conceded claimed loss). formally termed replacement-cost-endorsement clause. trial replacement-cost endorsement bought cover, compensable lost requires carry up limit premiums justify additionally cost, reduced. seeks analogize dealing computing measuring long-term 298, 300 (S.D.Cal.1964); (S.D.Fla.1952). Rose, dealt 1960, terminate ship involved sea, test dating end peiod burdens passes, first. owners totally rights salvage relinquished relate long-term, 1960. year; settlement. Steele, recognition. 1944 1943. 1944. Even 6-month incurred 1944, 1943, vessel.

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