Court Opinion

ID: 9419068
Source: CourtListenerOpinion
Date Created: 2023-08-02 22:45:34.314176+00
Date Added: 2024-06-11T12:43:44.465191
License: Public Domain

Mr. Justice Reed
delivered the opinion of the Court. \
Certiorari was allowed1 from the judgment of the Circuit Court of Appeals for the Second Circuit2 on account of an asserted conflict between the decision below and that *474of the Circuit Court of Appeals for the Seventh Circuit in Commissioner v. Griffiths.3
The issue considered here is whether a taxpayer under the circumstances of this case is entitled to deduct a loss arising from the sale of securities to a corporation wholly owned by the taxpayer. The statute involved is § 23 (e) of the Revenue Act of 1932.4
The Innisfail Corporation was wholly owned by the taxpayer, Mr. Smith. It was organized in 1926 under the laws of New Jersey. The officers and directors of the corporation were subordinates of the taxpayer. Its transactions were carried on under his direction and were restricted largely to operations in buying securities from or selling them to the taxpayer. While its accounts were kept completely separate from those of the taxpayer, there is no doubt that Innisfail was his corporate self. As dealings by a corporation offered opportunities for income and estate tax savings, Innisfail was created to gain these advantages for its stockholder. One of its first acts was to take over an option belonging to the taxpayer for the acquisition by exchange of a block of Chrysler common stock. Through mutual transactions in buying and selling securities, and receiving dividends, the balance of accounts between Innisfail and the taxpayer resulted, on December 29, 1932, in an indebtedness from him to Innis-*475fail of nearly $70,000. On that date, as a partial payment on this indebtedness, a number of shares of stock were sold to the corporation by the taxpayer at market. The securities sold had cost the taxpayer more than the price charged to the corporation, and in carrying out the transaction the taxpayer had in mind the tax consequences to himself.
In computing his net taxable income for 1932, the taxpayer deducted as a loss the difference between the cost of these securities and their sale price to his wholly owned corporation. The Commissioner of Internal Revenue ruled against the claim, whereupon respondent paid the tax and brought this suit for refund in the United States District Court for the. Southern District of New York. The case was tried before a jury and the verdict was adverse to the taxpáyer’s claim that the purported sales of these securities to Innisfail marked the realization of loss on their purchase. On appeal the judgment was reversed and the case remanded to the Distrio- Court for a new trial. It was the opinion of the Court of Appeals that the facts as detailed above, as a matter of law, established the transfer of the securities to Innisfail as an event determining loss.
Under § 23 (e) deductions are permitted for losses “sustained during the taxable year.” The loss is sustained when-realized by a completed transaction determining its amount.5 In this case the jury was instructed to find' whether these sales by the taxpayer to Innisfail were actual transfers of property “put of Mr. Smith and into something that existed separata and apart from him” or whether they were to be regarded as simply “a transfer by Mr. Smith’s left hand, being his’individual hand, into his right hand, being his corporate hand, so that in truth and fact there was no transfer at all.” The jury agreed the latter situation existed. There was sufficient evidence *476of the taxpayer’s continued domination and control of the securities, through stock ownership in the Innisfail Corporation, to support this verdict, even though ownership in the securities had passed to the corporation in which the taxpayer was the sole stockholder. Indeed this domination and control is so obvious in a wholly owned corporation as to require a peremptory instruction that no loss in the statutory sense could occur upon a sale by a taxpayer to such an entity.
It is clear an actual corporation existed. Numerous transactions were carried on by it over a period of years. It paid taxes, state and national, franchise and income. But the existence of an actual corporation is only one incident necessary to complete an actual sale to it under • the revenue act. Title, we shall assume, passed to Innis-fail but the taxpayer retained the control. Through the corporate forms he might manipulate as he chose the exer-. cise of shareholder’s • rights in the various corporations, issuers of the securities, and command the disposition of the securities themselves. There is not enough of substance in such a sale finally to determine a loss.
The Government urges that the principle underlying Gregory v. Helvering6 finds expression in the rule calling for a realistic approach to tax situations. As so broad and unchallenged a principle furnishes only a general direction, it is of little value in the solution of tax problems. If, on the other hand, the Gregory case is viewed as a precedent for the disregard of ,a transfer of assets without a business purpose but solely to reduce tax liability, it gives support to the natural conclusion that transactions, which do not vary control or change the flow of economic benefits, are to be dismissed from consideration. There is no illusion about the payment of a tax exaction. Each tax, according'to a legislative plan, raises funds to carry *477on government. The purpose here is to tax earnings and profits less expenses and losses. If one or the other factor in any calculation is unreal, it distorts the liability of the particular taxpayer to the detriment or advantage of the entire tax-paying group.7
The taxpayer cites Burnet v. Commonwealth Improvement Company8 as a precedent for treating the taxpayer and his solely owned corporation as separate entities. In that case the corporation sold stock to the sole stockholder, the Estate of P. A. B. Widener. The transaction showed a book profit and the corporation sought a ruling that a sale to its sole stockholder could not result in a taxable profit. This Court concluded otherwise and held the identity of corporation and taxpayer distinct for purposes of taxation.9 In the Commonwealth Improvement Company case, the taxpayer, for reasons satisfactory to itself voluntarily had chosen to employ the corporation in its operations. A taxpayer is free to adopt such organization for his affairs' as he may choose and having elected to do some business as a corporation, he must accept the tax disadvantages.10
On the other hand, the Government may not be required to acquiesce in the taxpayer’s election of that form for doing business which is most advantageous to him. The Government may look at actualities and upon determination that the form employed for doing business or carrying out the challenged tax event is unreal or a sham may sustain or disregard the effect of the fiction as best serves the purposes of the tax statute. To hold otherwise would permit the schemes of taxpayers to supersede legislation in the determination of the time and *478manner of taxation. It is command of income and its benefits which marks the real owner of property.11
Such a conclusion, urges the respondent, is inconsistent with the prior interpretations of the income tax laws and consequently unfair to him. He points to the decisions of four courts of appeals which have held losses determined by sales to controlled corporations allowable12 and further calls attention to the fact that the Board of Tax Appeals has consistently reached the same conclusion.13 But this judicial and administrative construction has no significance for the respondent. The' Bureau of Internal Revenue has insistently urged since February 18, 1930, the date of the Board of Tax Appeals' decision in Jones v. Helvering,14 that a transfer from a taxpayer to a controlled corporation was ineffective to close a transaction for the determination of loss. Every case cited by respondent in the courts of appeals and before the Board of Tax Appeals found the Government supporting that contention. The Board’s ruling in the Jones case was *479standing unreversed at the time of the transaction here involved, December 29,1932. It was only after the transactions here involved and after the reversal of the Board in the Jones case on April 23, 1934, or this Court’s refusal of certiorari on October 8, 1934, that the Board of Tax Appeals and the courts of appeals, over Government protests, ruled in line with the opinion of the. Court of Appeals of the District of Columbia in the Jones case. If the Bureau’s stand in the Jones case represented a change in administrative practice, there can be no doubt that the change operated validly at least from 1930 on.15 After the Jones defeat the Government sought relief in Congress and after the judgment in Commissioner v. Griffiths, supra, certiorari here on a conflict in principle between circuits. Certainly there was no acquiescence by the Government which would justify the taxpayer in relying upon prior interpretations of the law.16.
Respondent makes the further point that the passage of § 24(a)(6) of the Revenue Act of 193417 which explicitly forbids any deduction for losses determined by sales to corporations controlled by the taxpayer is convincing proof that the law was formerly otherwise. This *480does not follow. At most it is evidence that a later Congress construed the 1932 Act to recognize separable taxable identities between the taxpayer and his wholly owned corporation. As the new provision goes much farther than the former decisions in disregarding transfers between members of the family it may well have been passed to extend as well as clarify the existing rule. The suggestion is not sufficiently persuasive to give vitality to a futile transfer.
The taxpayer has preserved two objections to the district judge’s rulings on the evidence. He claims that evidence as to transactions between the taxpayer and the corporation which took place prior to the sale here involved was remote and highly prejudicial. We thir1' it apparent that this evidence was entirely relevant to the present issue; the history of the taxpayer’s relations with the corporation shed considerable light on the actual effect of the sale in question. The second contention is that the district judge charged the jury to give less effect to the book entries of Smith and the corporation than they were entitled to under the applicable book entry statute.18 The alleged departure from the statute has but dubious support in the record, resting on a single statement of the judge lifted from its context as part of an extended colloquy with counsel. In the circumstances there is no merit in the claim of prejudice to the taxpayer.
The judgment of the Circuit Court of Appeals is reversed and that of the District Court affirmed.

Reversed.

 Post, p. 536.

 102 F. 2d 456.

 103 F. 2d 110, affirmed sub nom. Griffiths v. Commissioner, ante, p. 355.

 47 Stat. 169, 179-80. “Sec. 23. Deductions from Gross Income.
“In computing net income there shaL he allowed as deductions:

“(e) Losses by Individuals. — Subject to the limitations provided in subsection (r) of this section, in the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
“(1) if incurred in trade or business; or
“(2) if incurred in any transaction entered into for profit, though not. connected with the trade or business; ...”

 Burnet v. Huff, 288 U. S. 156, 161.

 293 U. S. 465.

 Cf. Stone v. White, 301 U. S. 532, 537.

 287 U. S. 415.

 See also Klein v. Board of Supervisors, 282 U. S. 19; Dalton v. Bowers, 287 U. S. 404; Burnet v. Clark, 287 U. S. 410.

 Cf. Edwards v. Chile Copper Co., 270 U. S. 452, 456.

 Lucas v. Earl, 281 U. S. 111; Corliss v. Bowers, 281 U. S. 376; Griffiths v. Commissioner, ante, p. 355.

 Jones v. Helvering, 63 App. D. C. 204; 71 F. 2d 214 (April 23, 1934, reversing 18 B. T. A. 1225, decided February 18, 1930), cert, denied October 8, 1934', 293 U. S. 583; Commissioner v. Eldridge, 79 F. 2d 629 (November 4; 1935, affirming 30 B. T. A. 1322, decided July 31, 1934); Commissioner v. McCreery, 83 F. 2d 817 (May 13, 1936, affirming B, T. A. memorandum opinion of June 19, 1935); Foster v. Commissioner, 96 F. 2d 130 (April 18, 1938, affirming B. T. A. memorandum opinion of December 23, 1935); Helvering v. Johnson, 104 F. 2d 140 (June 1, 1939, affirming 37 B. T. A. 155, decided January 21, 1938), affirmed by an equally divided Court, •post, p. 523.

 David Stewart v. Commissioner, 17 B. T. A. 604; Corrado & Galiardi, Inc. v. Commissioner, 22 B. T. A. 847; Edward Securities Corporation v. Commissioner, 30 B. T. A. 918; Ralph Hochstetter v. Commissioner, 34 B. T. A. 791; John Thomas Smith v. Commissioner, supra, 40 B. T. A. 387.

 18 B. T, A. 1225, a rehearing affirmed May 26, 1932, unpublished.

 Helvering v. Wishire Oil Co., ante, p. 90.

 Cf. Estate of Sanford v. Commissioner, ante, p. 39.

 48 Stat. 680, 691. “Sec. 24. Items not Deductible.
“(a) General Rule. — In computing net income no deduction shall in any case be allowed in respect of—

“(6) Loss from sales or exchanges of property, directly or indirectly, (A) between members of a family, or (B) except in the case of distributions in liquidation, between an individual and a corporation in which such individual owns, directly or indirectly, more than 50 per centum in value of the outstanding stock. For the purpose of this paragraph — (C) an individual shall be considered as owning the stock owned, directly or indirectly, by his family; and (D) the family of an individual shall include only his brothers and Sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.”

 49 utat. 1561, 28 U. S. C. § 695.

 The Revenue Act of 1932, c. 209, 47 Stat. 169, 196, § 112 (b) (5), provided: “No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; . . .”