Court Opinion

ID: 9650739
Source: CourtListenerOpinion
Date Created: 2023-08-23 15:50:45.427873+00
Date Added: 2024-06-11T13:22:35.716259
License: Public Domain

*1011SIBLEY, Circuit Judge
(concurring).
I concur in the judgment of reversal and he reasoning of the majority opinion, but 1 wish to express an additional view which ms to me simpler and more fundamental.
t is true that a corporation which is conmplating a sale of its property by which gain will be realized may, before anying is done by way of sale, decide to disibute the property in kind to its stocklders and escape taxation for the gain "hich it did not realize. This was successully done through a dividend in kind, each Stockholder receiving his share of property actually divided, in General Utilities Co. v. Helvering, 296 U.S. 200, 56 S.Ct. 185, 80 L. Ed. 154. It was successfully done by a distribution to stockholders in liquidation of the corporation in Howell Turpentine Co. v. Commissioner, 5 Cir., 162 F.2d 319. Where, however, the corporation made a contract to sell the property and afterwards called the sale off and conveyed the property to its stockholders as a liquidating dividend and the stockholders carried out the sale as made by the corporation, it was held that a finding was justified that the stockholders were in fact carrying out the corporation’s sale. Commissioner v. Court Holding Co., 324 U.S. 331, 65 S.Ct. 707, 89 L.Ed. 981.
But the present case involves no sale by a corporation or by its stockholders, but involves the proper tax treatment of a large aggregate of debts due to the corporation which in past years the corporation, on its representation that they were bad debts and a loss, had been permitted to deduct as such with a full resulting tax benefit. This deduction was not of constitutional right, but of legislative grace, and was allowed on terms stated in applicable Regulations. Beginning in 1918 Article 52 of Regulation 45 said: “Bad debts or accounts charged off because of the fact that they were determined to be worthless, which are subsequently recovered, whether or not by suit, constitute income for the year in which recovered, regardless of the (jate when the amounts were charged off.” This language was continued down through Regulation 103, Sect. 19.42-1, under the Internal Revenue Code, when the deductions were made and allowed which are now in controversy. The restoration to income of all subsequent recoveries was a condition of the deductions. The making of this adjustment in its tax accounts with the Government became the legal and the moral duty of this corporation. When in the tax year it found it was making collections on these charged-off debts, and would likely collect considerable sums, it was not free in law or morals to evade its tax duty by turning the bad debts over to its stockholders for them to collect. The directors picked out only debts that were regarded as likely to yield collections, keeping those that were wholly bad. They did not divide them among the stockholders, but the five directors turned the hopeful debts over to one of themselves, he being vice-president and cashier of the bank, and he collected in the name of the bank, deposited the collections in the bank, and then later distributed the money to the stockholders. The stockholders returned nothing for taxation till each got his money in later years. I think there was in reality nothing divided as a dividend to the stockholders till the money was paid them, and in reality the bank made the recoveries on the charged-off debts, and the Tax Court ought to have so held. But if this were a real distribution of undivided property to the stockholders, the bank could not thus free itself of the accounting obligation which it assumed in taking the bad debt deductions. For this purpose the receipt of payments by the-stockholders is receipt by their corporation. All that was said in United States v. Joliet & Chicago R. Co., 315 U.S. 44, 62 S.Ct. 442, 86 L.Ed. 658, as to the force of Regulations and the ineffectualness of anticipating arrangements to evade taxes made between stockholders and their corporation, may be applied to this case. Another instance in which Regulations were held to inhere in deductions so as to require a restoration to income accordingly, though nothing was received in the tax year, is Sneed v. Commissioner, 5 Cir., 119 F.2d 767. Certiorari denied. This bank had no option to avoid incurring a tax by a lawful course. The course it took was not lawful because of the obligation assumed in taking the deductions with full tax benefits at the time.
*1012McCORD and LEE, Circuit Judges, also concur in the additional views expressed in the above opinion.