Court Opinion

ID: 9442900
Source: CourtListenerOpinion
Date Created: 2023-08-03 19:03:20.8931+00
Date Added: 2024-06-11T17:29:16.616693
License: Public Domain

JOSEPH C. HUTCHESON, Chief Judge.
Involving excess profits taxes for the years 1942-1943, the single question, this appeal presents, is whether the taxpayer corporation, which in June, 1940, acquired substantially all of the properties of a sole proprietorship operated under the name of A. C. Burton & Co., was an “acquiring corporation”, within the meaning of Sec. 740(a)(1)(D),1 and thus was entitled to compute its excess profits credits by the income method.
The question arises in this way. In its returns for 1942 and 1943, the corporation computed its excess profits credits on the basis of the net income experience of the proprietorship for the years 1936 through 1939, and paid the taxes so computed. In determining the deficiencies in controversy, the commissioner determined that the corporation was not an “acquiring corporation” within the provisions of Sec. 740(a) (1)(D) of the Internal Revenue Code, 26 U.S.C.A. § 740(a)(1)(D), and the Tax Court, with two judges dissenting, affirmed the commissioner’s determination.2
Because the stipulation on which the case was decided below appears fully in the majority opinion of the Tax Court, and be*116cause the references to, and quotations from, the majority and minority opinions which follow will sufficiently point up the matter, and the reasons, for our decision, we will not here set out, or summarize, the facts. We will only say that the fact, which the majority regarded as crucial, and the minority as of no real significance, is that in proceeding to form the corporation, Burton took two steps instead of one.
Submitted to the Tax Court, as it was, on a stipulation, the case presented there, it presents here, for decision no controverted question of fact, but only a question of law or mixed question of law and fact, as to which this court is free to make its own decision.3
This is especially so here since the view of the majority of the Tax Court as to what was actually intended to be, and was, done by the taxpayer is, in our opinion, clearly erroneous.
The opinion of the minority4 sets out with clarity and precision, not only the basic premise of the majority’s decision, but the nature of its error. It is brief and to the point, and we are in entire agreement with it.
Quotations from, and a summary of the holding of the majoi'ity opinion will serve to show the dry bones character of the reasoning on which the decision rests, that it is legalistic, technical and literal, indeed a very sticking in the bark. The opinion frankly states: “The respondent does not dispute the acquisition by A. C. Burton & Co. of the business of the proprietorship or that Burton acquired all of the A. C. Burton & Co. stock and as owner thereof was in complete control of the corporation. He 'does contend, however, that A. C. Burton and Co. did not acquire the assets of the business of the proprietorship in such a manner as to 'bring the transaction within the provisions of Sec. 740(a)(1)(D).”
It then goes on to point out that in applying for a corporate charter for the company which was formed to, and did, take *117over the business of the proprietorship, Mr. Burton, instead of furnishing affidavits showing that the value of the property which the corporation had formed to be taken over was at least $100,000, and accompanying this by the usual affidavit of the incorporators showing that they had subscribed for the entire capital of $100,000 and had paid for it with the property, chose to comply with the statutory requirements for obtaining the charter by borrowing $50,000 and paying that into the company in cash as payment for half of the stock. So pointing, it concludes that when the assets were actually transferred to the corporation, as shown by journal entry dated July 1, made on the Corporation’s books, they were transferred not for all but for half of the stock, one half of it having been acquired by the $50,000 paid in by Burton on June 4th, and withdrawn by him to the extent of $49,000 on June 25th.
After discussing the requirements of the code sections here involved, and stating that it is necessary for a 740(a)(1)(D) transaction that a corporation must acquire not just a part, but all, of the assets of the proprietorship in exchange for its stock, the majority, in an excess of legalism, then goes on to say:
“There can be no dispute that as the transaction herein occurred or was carried out, it did not meet the literal requirements of sec. 740(a)(1)(D). A. C. Burton & Co. did receive in some manner substantially all of the assets which had belonged to the sole proprietorship but it did not, according to the record made at the time, receive ‘substantially all’ of the sole proprietorship assets for stock in a 112(b)(5) transaction or in that part of a 112(c) exchange which is covered by 112(b)(5). (emphasis supplied)
“At the time of the acquisition the net assets of the sole proprietorship amounted to $102,124.08, and of that amount, and according to the record made at that time, $49,000 was used not to acquire stock of A. C. Burton & Co., but for the satisfaction of Burton’s personal indebtedness in that sum covering the prior borrowing by him from the new corporation.”
Proceeding then, in complete disregard of the actualities of the situation to present as a separated and independent transaction, the borrowing 'of the $50,OCX), which was in fact borrowed as an integral part of the formalities for obtaining the charter, the majority primly concludes: “Nowhere is it shown that there was any preconceived plan that in the beginning the transactions were to be carried out in such a manner that the new corporation was to have received only the assets of the sole proprietorship in exchange for its stock, $1000 in cash as described above being excepted. Neither are there any writings or resolutions, corporate or otherwise, to show that the deposit of the $50,000 cash by Burton on June 4th to the credit of the corporation then being organized and its subsequent application in payment for one-half of the authorized stock were intended to be mere formalities lacking in substance rather than what they appeared to be.”
In Tennessee, A. & G. Ry. Co. v. Comm., 187 F.2d 826, 829, in affirming an opinion of the Tax Court, which, unlike the majority opinion here, had seen and given effect to the substance, the reality, of the facts as they were presented, the Court of Appeals for the Sixth Circuit quoted with approval from the opinion of the Tax Court:
“The evidence shows the chronology and details of the steps whioh were taken, but those facts do not prove that the various steps were not all a part of one plan. * *
“Transactions should be looked at as a whole and consideration given to substance rather than to form when the possible application of any of the non-recognition provisions of section 112(b) is in question. (Citing cases.)”
After quoting the above, the Court of Appeals went on to say:
“And without regard to whether the result is imposition (of) or relief from taxation, the courts have recognized that where the essential nature of a transaction is the acquisition of property, it will be viewed as a whole, and closely related steps will not be separated either at the instance *118of the taxpayer or the taxing authority. * * *
“In Helvering v. New Haven & S. L. R. Co., Inc., 2 Cir., 121 F.2d 985, 988, it was held in relation to section 112(b)(5) of the Internal Revenue Act [26 U.S.C.A. § 112 (b)(5)] that for income tax purposes a transaction cannot be separated into its several steps and the last step treated as though it stood alone. Judge Learned Hand said: ‘As for the effort of the Commissioner to atomize the plan, as it were, i. e. to separate it into its several steps and treat the last as though it stood alone, it has been repeatedly repudiated.’ (Citing cases.)”
In Howell Turpentine v. Commissioner, 5 Cir., 162 F.2d 319 and in Wurtsbaugh v. Commissioner, 5 Cir., 187 F.2d 975,5 reaffirming that decision, this court has had recent occasion to decline to affirm decisions of the Tax Court based on an unrealistic approach like that exhibited here.
We are in no doubt, that in denying the petitioner the right to compute its excess profits credits by the income method, the decision of the majority was wrong, and that it must be reversed and the case remanded with directions for the computation of the excess profits credits based on income.
In view, however, of the alternative claim of the commissioner, that if the taxpayer is held -to be an “acquiring corporation” and entitled to compute its excess profits credits by the income method, the case should be remanded to the Tax Court for the determination of issues bearing on such computation, it will be so ordered.

. “A corporation which has acquired— * * * substantially all the properties of a partnership” [defined in section 740(h) as “including a business owned by a sole proprietorship”] “in an exchange to which section 112(b) (5), or so much of section 112(c) or (e) as refers to section 112(b) (5), or to which a corresponding provision of a prior revenue law, is or was applicable.” I. R.C.

. 14 T.C. 290.

. 26 U.S.C.A. 1141(a); Helvering v. Tex-Penn Oil Co., 300 U.S. 481, 57 S.Ct. 569, 81 L.Ed. 755; McManus’ Estate v. Comm., 6 Cir., 172 F.2d 697: Harris Stanley Coal & Land Co. v. Chesapeake & Ohio Ry. Co., 6 Cir., 154 F.2d 450; Commissioner v. Fiske’s Est., 7 Cir., 128 F.2d 487; Sheldon v. Waters, 5 Cir., 168 F.2d 483; Stubbs v. Fulton Nat’l Bank, 5 Cir., 146 F.2d 558.

. “The majority’s decision that petitioner was not an acquiring corporation is based on a recognition of the $50,000 deposited to petitioner’s credit by Burton on June 4, 1940, as a bona fide payment for petitioner’s shares. Petitioner had not been organized at that time, and the reason for the deposit was compliance with incorporation formalities. The very next day after the shares were issued, $49,000 was promptly withdrawn from the account, and petitioner was left with only $1,000 of nominal assets until July 1, 1940, when all the proprietorship’s cash and assets were recorded on petitioner’s books as transferred to petitioner.
“The majority’s view is well illustrated by the statement in the opinion: ‘ * * Nowhere is it shown that there was any preconceived plan that in the beginning the transactions were to be carried out in such a manner that the new corporation was to have received only the assets of the sole proprietorship in exchange for its stock, $1,000 in cash as described above being excepted. * * ’
“In my opinion the evidence is wholly incompatible with any other view. Burton’s only intention was to incorporate his automobile business; all of the assets of that business were tx'ansferred to petitioner and all petitioner’s stock was issued to him or his nominees within a month after he filed application to organize a corporation to engage in the automobile business. To hold, as the majority does, that the $50,000 deposit, so soon withdrawn, was intended as a substantive payment for shares and that the asset ti-ansfer, following within a few days, was not part of a preconceived plan strains credulity. After organization petitioner had the use of $49,000 of the $50,000 for only one day. It did no business with the money; it did not invest it in assets. Burton simply withdrew it, having fulfilled a prefunctory requirement of incorporation. I fail to see any substance in such act; substance inhered only in the asset-transfer and in my view petitioner’s shares were in reality issued for the assets.”

. Seiberling Rubber Co. v. Comm., 6 Cir., 169 F.2d 595; Mather & Co. v. Comm., 3 Cir., 171 F.2d 864; Labrot v. Burnet, 61 App.D.C. 47, 57 F.2d 413; Louis W. Gunby v. Helvering, 74 App.D.C. 185, 122 F.2d 203; Kuldell v. Comm., 5 Cir., 97 F.2d 725; Snowden v. McCabe, 6 Cir., 111 F.2d 743.