Legal Document

483 U.S. 89 107 S.Ct. 2729 97 L.Ed.2d 74 COMMISSIONER OF INTERNAL REVENUE, Petitioner,v.Peter R. FINK, et ux. No. 86-511. Argued April 27, 1987. Decided June 22, Syllabus In an unsuccessful effort to increase the attractiveness of their financially troubled corporation outside investors, respondents voluntarily surrendered some shares corporation, thereby reducing combined percentage ownership from 72.5 percent 68.5 percent. Respondents received no consideration for shares, and other shareholders any stock. The eventually was liquidated. On 1976 1977 joint federal income tax returns, claimed ordinary loss deductions full amount adjusted basis in shares. Commissioner Internal Revenue disallowed deductions, concluding that stock a contribution corporation's capital, that, accordingly, surrender resulted immediate consequences respondents' should be added remaining Tax Court sustained Commissioner's determination, but Appeals reversed, ruling were entitled deduct immediately as less resulting value Held: A dominant shareholder who surrenders portion his retains control does not sustain deductible purposes. Rather, rule applicable contributions capital applies, so surrendering must reallocate he retains, loss, if any, when disposes This is rendered inapplicable simply because strict accounting sense, or because, unlike typical reduces shareholder's proportionate interest corporation. Where, here, closely held are traded on open market, often will meet requirement actually during taxable year, since there reliable method determining whether has until Moreover, treating losses might encourage failing corporations convert potential by before fails, avoiding requiring treatment becomes worthless. Similarly, encouraged transfer corporate rather than property order realize current loss. Pp. 95-100. 789 F.2d 427 (CA 6 1986), reversed. POWELL, J., delivered opinion Court, which REHNQUIST, C.J., BRENNAN, WHITE, MARSHALL, O'CONNOR, JJ., joined. filed concurring opinion, post, p. ----. SCALIA, judgment, BLACKMUN, concurred result. STEVENS, dissenting Alan I. Horowitz, Washington, D.C., petitioner. Matthew J. Zinn, respondents. Justice POWELL Court. 1 question this case control, may 2 * Peter Karla Fink principal Travco Corporation, Michigan manufacturer motor homes. had one class common outstanding preferred Mr. owned 52.2 percent, Mrs. 20.3 shares.1 urgently needed new result financial difficulties it encountered mid-1970's. Finks "increase investors." Brief 3. 116,146 December 1976; 80,000 January 1977. As result, Finks' reduced attract investors unsuccessful, 3 totaling $389,040, shares.2 deductions. He concluded capital. Accordingly, determined consequences, 4 unpublished determination reasons stated Frantz v. Commissioner, 83 T.C. 162, 174-182 (1984), aff'd, 784 119 (CA2 cert. pending, 86-11. stockholder's non pro rata produce court reasoned "[t]his conclusion . necessarily follows recognition purpose transfer, is, bolster position [the corporation] and, hence, protect make more valuable stockholder's] retained shares." T.C., at 181. Because "to decrease avoid overall investment," "unable conclude [he] time transaction." Ibid. "Whether shareholder] would so, thereof, could only subsequently disposed intended valuable." recognized taxpayer's series prior cases.3 Id., 174-175. But these decisions incorrect, part they "encourage[d] conversion eventual into losses." 182.4 5 case, divided panel Sixth Circuit reversed (1986). proper type turns choice between "unitary" "fragmented" views ownership. Under "fragmented view," "each share considered separate gain computed separately sale disposition each share. 429. According "unitary "the 'stockholder's entire investment viewed single indivisible unit,' " ibid. (citation omitted), produces "an ascertainable stockholder 432. observed both generally adhered fragmented view, facts instant [do not] present sufficient justification abandoning" it. 431. It therefore except extent increased remanded increase, attributable surrender. Judge Joiner dissented. taxpayers' "sole motivation disposing certain benefit hold[,] [v]iewing termination individual ignores very reason surrender." 435. concluded: "Particularly cases such this, where diminution equity minute illusory, regarded capital." 7 We granted certiorari resolve conflict among Circuits,5 479 960, 454, 93 401 (1986), now reverse. II A. 8 settled voluntary consequences. 26 U.S.C. § 263; CFR 1.263(a)-2(f) Instead, transferred See 1016(a)(1). When later reflected smaller larger applies transfers cash tangible property, also forgiveness debt owed him 1.61-12(a) Such treated even proportionately contributions, all. See, e.g., Sackstein 14 566, 569 (1950). rules governing reflect general principle claim outlays made Deputy Du Pont, 308 488, 60 363, 84 L.Ed. 416 (1940); Eskimo Pie Corp. 669, 676 (1945), 153 301 (CA3 1946). decide controlling shares.6 B 9 contend upon By parting with gave up entitling them future dividends, appreciation, assets event liquidation, voting rights.7 Therefore, contend, deduction. §§ 165(a) (c)(2). addition, argue transaction "give[s] rise results." 13. For example, dividend increases recipient's Koshland Helvering, 298 441, 445, 56 767, 769, 80 1268 (1936).8 analogy, 10 Finally, They note surrender, effect contributing argue, net worth decreases liabilities. contrast, own stock, unchanged. cannot itself exercise right vote, receive liquidation. G. Johnson & Gentry, Finney Miller's Principles Accounting 538 (7th ed. 1974).9 III 11 parted asset, alone entitle Indeed, owns 100 reduce shareholder.10 thus similar forgives corporation; latter gives interest, principal, power insolvency bankruptcy. But, above, Supra, 4. like resembles B. Bittker Eustice, Federal Income Taxation Corporations Shareholders 3.14, 3-59 (4th 1979) ("If voluntary, shareholder"). find similarity convincing case. 12 fact recorded balance sheet compel different forgive pay expense denied deduction, though neither transactions sense.11 Nor we persuaded never every change Of course, receipt event. 301, 316. usually 263. 13 concede 3.12 hoped provide long run recover through dividends appreciation If achieved its purpose, have suffered economic Johnson, Models Nonprorata Shareholder Contributions, Va.Tax.Rev. 81, 104-108 (1983). many involving whose Thus, "actually year." 1.165-1(b) fails. way 165(g)(1), provides capital-loss worthless.13 loss.14 15 hold income. retains.15 reallocation consistent "[p]ayments protecting therein [an] additional cost stock," deducted immediately. 676. Our holding today inconsistent equals difference realized particular sold exchanged. 1001(a); 1.1012-1(c)(1) forms appropriate occasion IV 16 stated, judgment 17 ordered. 18 BLACKMUN concurs 19 concurring. 20 Although I join Court's suggest little substance reservation n. causes lose involve control; understand rationale apply results control. At least do principled ground distinguishing loss-of-control one. 21 judgment. 22 believe was, resembles, Since, however, giving attractive structure, think "amount paid out betterments property," 263(a)(1), 23 dissenting. 24 predictable law underestimated. Particularly field taxation, strong enabling taxpayers predict legal proposed actions, stronger ensuring responsibility making changes rests squarely shoulders Congress. interests decisive importance me. 25 presented definitively answered Board 1941. Miller 45 B.T.A. 292, 299; Budd International 737, 755-756.1 Those consistently followed over 40 years, see, Smith 66 622, 648 (1976); Downer 48 86, 91 (1967); Estate Foster 930, 934 (1947), Service announced acquiescence decisions. 1941-2 Cum.Bull. (acquiescing ); 1942-2 ). Congress dramatically revamped Code 1954, see Pub.L. 83-591, 68A Stat. 3, did modify approach issue. (after corporation), retracted interpretation.2 instead asking reject longstanding interpretation, asked courts take another look statute. Two Courts accepted approach, without much, weight nearly half-century-old construction.3 Tilford 705 828 (CA6 1983); Schleppy 601 196 (CA5 1979). After two reversals, 1984, believing "[r]ecent appellate level disapproval renders inappropriate us continue justify solely history." 27 erred reversing interpretation Code. certainly advocate change, my requested relief body authority amend firmly "after statute been construed, either course decision judges agencies, acquires meaning clear judicial gloss drafted itself." Shearson/American Express, Inc. McMahon, 482 220, 268, 2332, 2359, 96 185 (1987) (STEVENS, part). statutory construction "has 35 years" clarity "is beyond peradventure." Herman MacLean Huddleston, 459 375, 380, 103 683, 686, 548 28 There may, situations past error sufficiently blatant overcome presumption continued validity adheres statute." Square D Co. Niagara Frontier Tariff Bureau, 476 409, 424, 106 1922, 1930, 90 413 surely case.4 makes serious demonstrate compelled by—or with—the language statute.5 mere preferable view prevailed years not, changing law. 29 lacked statutes rectify mistakes, construing accurate agency feel free erroneous replace believes correct. propositions true; ability misinterpretations, once interpreted way, institutional reliance values important initial goal interpretation. 30 relationship hand, Congress, other, dynamic process legislating inevitable leave spaces implicitly authorized fill. include lawmaking delegated after gap filled, regardless filled exactly hoped, delegation rest Even consensus lower federal-court decisions, provided answer left ambiguous original text statute, really need revisit understands manner, reexamined most extraordinary circumstances, give close scrutiny interpretations work product. structure our principles invite continuing congressional oversight interpretive process.6 31 readiness reconsider long-settled constructions takes toll well. Except rarest cases, routinely follow Cardozo's admonition: 32 "[T]he labor almost breaking point reopened lay one's bricks secure foundation courses laid others gone him." Cardozo, Nature Judicial Process 149 (1921). 33 addition ramifications rejecting law, fairness requires individuals' reasonable previous illustrates problem. 1976. hers well settled: repeatedly reaffirmed losses, acquiesced years.7 supra, 101. 11, 1977, nonacquiescence. Bulletin 1977-15, (April 1977). "In retroactive application fundamentally unfair constitute abuse discretion." Dickman 465 330, 353, 104 1086, 1099, 79 343 (1984) (POWELL, dissenting). 34 respectfully dissent. Fink's sister brother-in-law 4.1 mother 2.2 App. Pet. Cert. 30a. unadjusted cost. 1012. Adjustments for, things, "expenditures, receipts, items, properly chargeable account." E.g., 75 134 (1980), rev'd, (CA6), denied, 464 992, 485, 78 681 (1983); (1976), rev'd sub nom. 1979); (1947); 299 (1941); 755-756 (1941). Budd, withdrew acquiescence. 9; 3; 1977-1 2. dissent overstates disallowance contrary "settled law." Post, 105. fact, uncertain holdings "it took litigation." Note, Fink: Unitary Fractional View Non-Prorata Stock Surrenders, U.Pitt.L.Rev. 905, 908 (1987). 647-650; Duell TCM 1381 (1960). 1969, moreover, clearly majority Rev.Rul. 69-368, 1969-2 27. Finks, taxpayer knew known allowed. reason, discretion. Second affirmed agreed reasoning. 119, 123-126 Fifth Circuits supra; supra. definition shareholder, Cf. Eisner Macomber, 252 189, 64 521 (1920) (pro income). practical matter, great deal. Their declined reduction inconsequential. Travco, difficulties, paying dividends. sold. 305. Treasury stock—that issued, reacquired canceled—generally shown offset liability side sheet. 1974). assume total liquidation $100,000 $20,000 cash. Assume further assets. Prior contribution, ($20,000 plus $100,000). liquidated following $96,000 (80 $120,000). rare practice. Typically purchase true asset nevertheless contributed shareholders, treasury resold. evidenced market. concession probably nondeductible gift. 25.2511-1(h)(1) Reform Act 1986, 99-514, 311, 2216, 2219, eliminated differential rates gains remains important, individuals permitted $3,000 against 1211. limitation. discuss possibility allowing parties raise passing. note, however "sal[e] exchang[e]" asset. 1211(b)(3). consideration, seem qualify exchange. F.2d, 124. draws support sections First, "bargain sale" officer employee compensation, "bargain" element S.Rep. 91-552, pp. 123-124 (1969), 1969 U.S.Code Cong. Admin.News 1978, 2027, 2155; 1.83-6(d) Section 86 (1967), predicated adopted To sure, concerned restricted employees compensation improve condition. underlying investment. Second, redeemed—that return property—the deduction unless redemption substantial percentage. 302(a), (b), (d); 1.302-2(c) slight percentage, 302(b). direct payment compensated remained deductible. related contexts, distinguishes minimal reductions 302(b)(2) (providing "exchange" "substantially disproportionate stock" brings below 50 percent); 302(b)(3) terminates corporation). use term "control" mean half recognize, corporations—especially those listed national exchange—a person entity while owning Securities Exchange 1934, 13(d), 894, 78m(d) (requiring persons report acquisition registered security). applied dates back further. Burdick 742 (1930), 59 395 1932); Wright 471 (1929). appears begun reconsidering around 1969. 908-909 (hereafter Note). Ignoring import line stated: "We determines correctness write clean sheet." 196, 198 79). Strong arguments can split four Judges indicate. 187 (Parker, whom Fay, Goffe, Wiles, joined, Bolding, Non-Pro Rata Surrenders: Capital Contribution, Loss Ordinary Loss?, Law. 275 (1979); Whether sense enable sinking stay afloat debatable. whatever correct policy be, adhere technical decides Surely wisest arguable rule. Uncharacteristically, begin analysis quoting language, cf. Blue Chip Stamps Manor Drug Stores, 421 723, 756, 95 1917, 1935, 44 539 (1975) concurring), 165 Code, defines "losses," 1016, deals adjustments basis. launches discussion ante, 94—95, impact includes hypothetical 96, 10, supporting surprisingly mention text. adequately explained opinions cited 92—93, "The doctrine stare decisis limited precedent constitutional grounds, 'correction legislative action practically impossible.' Burnet Coronado Oil Gas Co., 285 393, 407-408, 52 443, 447-448, 76 815 (Brandeis, Mitchell W.T. Grant 600, 627, 94 1895, 1909, 406 concurring)." Thomas Washington Light 448 261, 272-273, 18, 2647, 2656-2657, 65 757 (1980) (plurality opinion). Edelman Jordan, 415 651, 671, 1347, 1359, 39 662 (1974); Boys Markets Retail Clerks, 398 235, 259-260, 1583, 1596-1597, 199 (1970) (Black, dissenting); Swift Wickham, 382 111, 133-134, 258, 270-271, 194 (1965) (Douglas, Service's Cumulative explains announcement acquiescence: public informed United States, formerly States Appeals, disallowing deficiency due, semimonthly earliest practicable date. Notice nonacquiesced relates issue issues decided adversely Government. Decisions relied officers Bureau precedents cases." iv (emphasis added).

Classification Label: 11