Court Opinion

ID: 4491752
Source: CourtListenerOpinion
Date Created: 2020-01-17 22:03:02.527706+00
Date Added: 2024-06-11T08:49:23.414040
License: Public Domain

Phillips,
dissenting: The sole question involved in this case is whether the purchase by C. B. Van Vorst (petitioner’s decedent) from the C. B. Van Vorst Company of cértain real estate constituted taxable income to the extent that the fair market value of the property exceeded the purchase price. It is stipulated that the property was acquired by the corporation subsequent to February 28, 1913, at a cost of $54,590.60, that it had on the day of purchase the fair market value of $154,590.60, and that it was sold to Van Vorst for a price precisely equal to cost.
The Revenue Act of 1924 imposes a tax upon net income, which is defined in section 212(a) as gross income less allowable deductions. Section 213 (2) defines the term “ gross income ” as follows:
(2) The term “ gross income ” includes gains, profits', and income derived from salaries, wages, or compensation for personal service * * * of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business *636carried on for gain or profit, or gains or profits and income derived from any source whatever. The amount of all such items shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period.
Commenting on this definition, the.Supreme Court in Eisner v. Macomber, 252 U. S. 189, said: “Here we have the essential matter, not a gain accndng to capital; not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value, proceeding from the property, severed from the capital, however invested or employed, and coming m, being derived — that is, received or drawn by the recipient for his separate use, benefit and disposal — that is income derived from property.”
The stipulation in the present case leaves no doubt that the petitioner received from the corporation property having a fair market value of $100,000 in excess of the price paid by him for it. Ordinarily a purchase of property gives rise to neither gain nor loss, no matter how good may be the bargain. But the situation presented by the facts before us is not ordinary. The income arises not because petitioner has a bargain, but because a corporation in which he is a stockholder has distributed a part of its assets in the form of a sale. That a transaction in form a sale may be a distribution of surplus was expressly held in Continental Insurance Co. v. United States, 259 U. S. 156, where the Court said:
We come now to tbe issue upon wbicb these appeals.were brought here. It concerns the respective rights of the common stockholders and the preferred stockholders in the assets of the Reading Company. They all, under the plan, will receive the benefit of the difference between the real value of the privilege of disposing of their distributive certificates of interest in stock in the new Coal Company, and the payment of $2.00 or such other sum as may be fixed, per share held by them of the Reading Company stock. Such difference has already been the subject of sale and quotation on the market in New York and has varied from $11 to $20. This might have been expected in view of the disparity between par of the capital stock of the Reading Coal Company and the far greater actual value of its properties. The disparity shows that while the transfer of certificates of interest in the new Coal Company stock is denominated a sale, it is only a distribution of the surplus or assets of the Reading Company to its stockholders made necessary by the decree of this court in taking the Reading Company out of the coal business and restricting it to that of owning and operating a railroad system.
*' * * # * * *
The distribution of certificates of interest in the new Coal Company shares was evidently given the form of a sale to enable the new Reading Company to realize out of it $5,600,000 in cash to give it additional working capital enough properly to operate the Reading Railway System. But this does not change its real nature as a mere distribution of forbidden assets in kind to stockholders. (Italics supplied.)
See also Metcalf's Estate v. Commissioner, 32 Fed. (2d) 192.
*637It has repeatedly been held that dividends paid by a corporation in property other than its own stock are income (Peabody v. Eisner, 247 U. S. 347) and that profits distributed in property in partial or complete liquidation are subject to the tax. It would seem to make no difference in principle whether property is distributed to stockholders without any payment being made by them or whether they pay for such property an amount which is unquestionably much less than the market value of the property received.
It is obvious that decedent’s favorable purchase was a substantial fruit of his ownership of stock in the corporation. Cf. Rockefeller v. United States, 257 U. S. 176. It was a benefit growing out of his investment, for there is no reason to suppose that any corporation will sell property to a stranger at one-third of its market value. Having regard to the substance rather than the form (Western Maryland Ry. Co. v. Commissioner, 33 Fed. (2d) 695 and cases cited) there is no substantial difference in so far as the stockholders are concerned between the sale of property here involved for the price of $154,559.60 and the distribution of the net proceeds of $100,000 to the decedent and the conveyance to him of the property at a price equal to cost, which clearly was a wholly inadequate consideration.
For the present I am not concerned with the question whether this was a distribution of earnings or profits of the corporation, taxable only at surtax rates, or such a receipt of income as would be taxable at both normal and surtax rates. Nor am I concerned with the question whether there was a dividend in the technical sense. In view of the large surplus, all earned subsequent to March 1, 1913, it is clear that there was no tax-exempt distribution and no liquidation. That there was in form a sale can not change the fact that there was an undisputed gain flowing from the ownership of the stock and set apart to the separate use of the stockholder. It is also clear beyond question that this was more than a situation where one purchases property at a bargain price or where there might be a difference of opinion as to whether the price was adequate. All such thoughts are eliminated by the stipulation of a market value substantially three times the price paid.
The petitioner relies principally upon the decision in Taplin v. Commissioner, 41 Fed. (2d) 454, reversing our decision in Frank E. Taplin, 12 B. T. A. 1264. We do not understand the decision of the Court to be that the principle urged by the Commissioner is not sound, but rather that the facts in that case negatived the determination that the transaction involved a distribution of profits. There the persons who bought the assets at their cost to the corporation had loaned the money with which the purchase was made. *638The property had been acquired by the corporation for a special purpose and not for use in its business. There is no similar testimony in this case.
In petitioner’s brief emphasis is placed on the question of fraud, and on the fact that all the stockholders did not participate in the purchase involved. As we view the matter, fraud is not involved. Respondent does not seek a fraud penalty. He does not charge fraud. We can not presume it. So long as creditors are not adversely affected, there is nothing illegal or fraudulent or reprehensible in such a transaction. No fraudulent act would occur unless and until the parties involved made income tax returns which failed to disclose the precise nature of the transaction. So long as creditors are protected and stockholders satisfied, a corporation may dispose of its assets as it chooses. The only question is whether such a transaction is or is not successful in distributing the property of the corporation without subjecting the recipient to tax. Respondent’s case is bottomed not on the invalidity, but on the validity of the purchase. If the transaction was void or voidable, a very serious question would be presented whether there had been any income. The question is not whether the transaction was invalid, but whether, being valid, taxable income resulted. That a distribution of the property of a corporation may take the form of a sale for a valuable consideration is the decision in Continental Insurance Co. v. United States, supra, a case where no fraud was involved. See also Botany Worsted Mills v. United States, 278 U. S. 282, where the Court said with respect to an agreement between a corporation and its officers for salary of the latter:
Even if binding upon tbe parties, such, an agreement does not change the character of the purported compensation or constitute it, as against the Government, an ordinary and necessary expense.
With reference to the contention that the minority stockholders (less than 8 per cent of the total stockholdings) did not participate' in the benefits of the sale, it may be pointed out that it is laid down by eminent authorities that, where all the stockholders consent, the profits of a corporation may be divided and distributed other than rateably according to the stockholdings. 6 Fletcher on Corporations, p. 6114, sec. 3674; 14 C. J. 815; Breslin v. Fries-Breslin Co., 70 N. J. L. 274; 58 Atl. 313; Barnes v. Spencer & Barnes Co., 162 Mich. 509; 127 N. W. 752; Kearneysville Creamery Co. v. American Creamery Co. (W. Va.), 137 S. E. 217; Freeman v. Rogers White Lime Co., 138 Ark. 312; 211 S. W. 146. This is but one aspect of the rule that, all the stockholders agreeing and no creditors being involved, a private corporation may dispose of its property much as it pleases. Cook on Corporations, 8th Ed., sec. 3, and cases cited. It must be *639presumed that all the other stockholders with full knowledge consented or else the presumption indulged in that the decedent was guilty of bad faith.
For the reason stated, I am of the opinion that the decedent is chargeable with the receipt of income in the amount of $100,000. •
MoRRis, AruNdell, and Black agree with this dissent.