Court Opinion

ID: 9650989
Source: CourtListenerOpinion
Date Created: 2023-08-23 16:00:00.659281+00
Date Added: 2024-06-11T18:12:28.426943
License: Public Domain

EVAN A. EVANS, Circuit Judge
(dissenting) .
The determinative words of' the statute quoted in the majority opinion are: “if cm interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any of them, then, etc.”
The object of the legislation is obvious. Inasmuch as income tax rates were in part dependent upon the ratio of earnings to invested capital, the incentive to reorganize, that a larger capital investment might be secured, was great. To make its revenue more certain and to prevent abuse through fictitious reorganizations of large corporations, this section 331 of the Revenue Act of 1918 was enacted. Generally speaking, the statute permitted an increase in invested capital only where the bona fide transfer left less than 50 per cent, of “the trade or business or property” in the possession of the seller. In the present case, less than 50 per cent, remained in the vendor who previously held more than 50 per cent, of the stock of the company. But the majority holder here transferred his stock to minority stockholders. Had the transferees been strangers to the company’s ownership, there would have been no doubt about the non-applicability of the statute. The precise question then is: Must the sale of “an interest or control” be to outsiders or does the statute embrace bona fide transactions whereby such interest is transferred from the holder or holders of the control to mindrity interests in the same corporation. ,
It seems to me that the purpose of the legislation was not to exclude an interpretation which included the larger group. True, the Congress used the words “same persons or any of them” and the word “persons” is plural and may include holders of minority as well as majority stock. But in construing “persons” it is important to look to the verb, which is “remain.” When the Congress spoke of the interest or control in whom 50 per cent, or more remained, it was defining “same persons” and hooking up the control or an interest with the expression “same persons.” The verb, to a certain extent, defines “interest or .control” and “in the same persons or any of them.” At least it excludes the thought that the interest -or control referred to is any other than “the persons” who held before and after the sale 50 per cent, of the stock. !
To illustrate, A owns 52 per cent, of the stock, and X, V, and Z own together 48 per cent, of the stock. Who owns control? Obviously, A. It is not A and X, V, and Z.
Again the persuasive word is “remain.” If A, who had control, sells out and, after the sale, 50 per cent, or more of the stock does not remain in him, then such a change in interest or control has occurred which will permit of a restatement of invested capital.
If a different construction be given to the statute, absurd results would follow. To illustrate, in a corporation of many stockholders, A holds 75 per cent, of the stock. B, C, and D, increase their holdings from 1 per cent, to 52 per cent. Upon respondent’s theory, the statute applies. If A sold to X, V, Z, heretofore non-stockholders, then a restatement of invested capital could be made.
The figure “59 per cent.” is likewise significant. Why was this percentage chosen? The answer lies in the fact that more than 50 per cent, indicates control. Just even 50 per cent, indicates control has not been divested.
By stressing both the words “50 per cent.” and the word “remain” the construction of the words “an interest or control” is simplified. Concerning the meaning of these words no doubt exists as to the meaning of the word “control.” But respondent construes the words “an interest” to mean any interest, large or small, and not limited to a single stockholder or group of stockholders who together own the control. A better construe*420tion would be given, it seems to me, if one approached the words “an interest” in the light of the verb and the percentage. How could “an interest” he one that did not represent the majority stockholders in view of the reference to 50 per cent, thereof remaining after the sale.
- Under respondent’s construction, if fifteen small and unassoeiated stockholders hold more than 50 per cent, of the stock and sell their holdings to one or more outsiders, the statute does not apply and a restatement of capital invested may be made. My conclusion is that a restatement of the invested capital should not turn solely upon the introduction of outside stockholders, but rather depends upon the existence of an interest which had control and which sold that interest or at least did not retain 50 per cent, of the stock.