Court Opinion

ID: 4483188
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:56.92328+00
Date Added: 2024-06-11T14:53:41.071807
License: Public Domain

Goffe, J., concurring: I agree with the majority that petitioner’s motion for summary judgment must be granted by reason of the policy enunciated in Jack E. Golsen, 54 T.C. 742, 757 (1970), affd. 445 F.2d 985 (10th Cir. 1971), because an appeal in the instant case would lie to the Sixth Circuit which has decided the identical issue favorably to petitioner, if. Wetter Manufacturing Co. v. United States, 458 F.2d 1033 (6th Cir. 1972). Because the majority has undertaken to express this Court’s view as to Wetter and the conflicting view of the First Circuit in Fulman v. United States, 545 F.2d 268 (1st Cir. 1976), it is incumbent upon me to express the view that Wetter is correct in order that there be no misapprehension that the view of the Tax Court is unanimous. The majority, following Fulman, bases its analysis on murky legislative history occurring in 1939. The primary fault in such analysis is that it does not go back far enough in the legislative history. Moreover, it is not consistent with the overall purpose of the personal holding company tax. An analysis of the purpose and complete history of the personal holding company tax, on the other hand, amply supports a finding that section 1.562-l(a), Income Tax Regs., is invalid in holding that the dividends-paid deduction is limited in amount to the basis of the property in the hands of the personal holding company, rather than its fair market value. Wetter, therefore, reaches the proper result and the Tax Court should follow Wetter, and Gulf Inland Corp. v. United States, an unreported case (W.D. La. 1975, 36 AFTR 2d 75-5511, 75-2 USTC par. 9620), on appeal to the Fifth Circuit. The present personal holding company tax and the accumulated earnings tax are codified in part I, subchapter G of the Internal Revenue Code of 1954, entitled Corporations Used to Avoid Income Tax on Shareholders. The dividends-paid deduction, with which we are concerned here, and the dividends-paid deduction used in computing "accumulated taxable income” for the accumulated earnings tax are both determined under section 561 of the Code. The codification under such common heading and use of the same section (561) for the dividends-paid deduction is not accidental. The two penalty taxes were enacted to prevent individuals in high surtax brackets from shielding their personal income from higher individual rates through the use of a corporate device which enabled taxation of that income at the flat corporate rates. The accumulated earnings tax, enacted in the Revenue Act of 1921, required a finding of a tax-avoidance purpose in the accumulation; thus it was inadequate to attack the "incorporated pocketbooks.” Congress responded in 1934 with the personal holding company tax. Clearly, therefore, the purpose of the personal holding company tax was to strengthen the means of taxing certain undistributed corporate earnings at rates above the corporate tax rates. Maryland Land & Transportation Corp., 40 B.T.A. 1067, 1068 (1939). The personal holding company tax, automatic and drastic in operation, sought to prevent tax avoidance described as follows by Sherman in "Taxation of Corporations Used to Avoid Taxes Upon Stockholders,” 13 Taxes 19, 20 (1935): Essentially this method of tax avoidance does not effect a complete avoidance of tax on the part of the individual stockholder, but merely a postponement or deferment of part of the tax. For, if the holding company should distribute its earnings or surplus in future years, the stockholder would then have to pay a surtax on the dividends that he received. However, a complete or partial avoidance of tax may ensue upon the happening of any of the following events: 1. If the corporation should spread the distribution of its annual income over a series of years, a real saving in tax would accrue to the stockholder from the mere fact that his distributive share of the income would fall in the lower surtax brackets. 2. If the corporation should time the distribution of its income so that it is made during a year when the stockholder has personal losses or other deductions to offset against the dividend received, a real saving in tax would result. 3. If there should be a reduction in tax rates upon individual incomes during any future year, the distribution of the corporate income in such year would result in an actual saving to the stockholder. 4. If the corporation should incur any losses on its investments or otherwise, which deplete the earnings or surplus accumulated during preceding years, there will be an avoidance of tax, for the Government will be deprived of the surtax which the stockholder would have had to pay, had the corporation made a distribution of its annual income in the year when the same was earned. * * * Sanford Corp. v. Commissioner, 106 F.2d 882, 883 (3d Cir. 1939), affg. 38 B.T.A. 139 (1938), cert. denied 309 U.S. 659 (1940). When the personal holding company tax was enacted in the Revenue Act of 1934, two deductions were allowed from "adjusted net income”: (1) An arbitrary allowance of 10 percent to allow the corporation a reserve for contingencies and (2) a deduction for dividends paid to prevent the additional tax from applying to sums actually distributed. H. Rept. No. 704, 73d Cong., 2d Sess. 11 (1934). The term "actually distributed” clearly indicates an intent to allow the dividends-paid deduction to the extent of the fair market value of the property because the recipient must report that amount as dividend income. See sec. 301, I.R.C. 1954. In 1936, an undistributed profits surtax on all corporations was enacted. The House version of the bill eliminated the personal holding company tax and in the House version section 27 was proposed. It defined the dividends-paid credit for purposes of the undistributed profits tax, allowing a credit for dividends paid in the amount of the basis or fair market value of the property, whichever is lower. The House Ways and Means Subcommittee included the following example to demonstrate how tax was being avoided: Case No. 4 Corporation A owns all the stock of Corporation B. Corporation B has a surplus of $1,000,000 and included among its assets are distillers’ warehouse receipts, which cost it $100,000, but which are now worth $500,000. It is desired to sell these warehouse receipts without the payment of any tax. This can be done in the following manner: Corporation B distributes the warehouse receipts to Corporation A by declaring a dividend in kind. This being a dividend from one corporation to another, corporation A pays no tax upon its receipt. The cost basis for these warehouse receipts in A’s hands is now $500,000. A sells the warehouse receipts for $500,000 (its costs basis) and, therefore, pays no tax on the sale. [Report, Ways and Means Subcommittee, 73d Cong., 2d Sess., H. Rept. Dec. 4, 1933, at 40.] See Broenen & Preston, "Undistributed PHC Income: The Sixth Circuit in H. Wetter Mfg. Co. Is Historically Sound,” 2 J. Corporate Taxation 69, 72 (1975). It is apparent that the example does not apply to the personal holding company tax because the recipient of a dividend from a personal holding company is taxed on the dividend at its fair market value. When the bill which became the Revenue Act of 1936 reached the Senate, the personal holding company tax was restored and section 27, which was drafted to apply to the undistributed profits tax, became applicable to the personal holding company tax. Curiously, however, there is nothing in the committee reports to indicate why it was made applicable or why such an important change in the former rule was made. S. Rept. No. 2156, 74th Cong., 2d Sess. (1936). The undistributed profits tax continued until 1939 and section 27 found its way into the Internal Revenue Code of 1939 without any indication of congressional intent. It was not, however, included in the Internal Revenue Code of 1954. Indeed, section 562, I. R. C. 1954, conforms to the original personal holding company tax provisions of the Revenue Act of 1934. To hold that section 562 allows the deduction only to the extent of the basis (as sec. 1.562-l(a), Income Tax Regs., provides) because the earnings and profits of the personal holding company are reduced by the adjusted basis of the property (sec. 312(a)(3), I.R.C. 1954) is not consistent. Section 312(b)(3) provides for a reduction of earnings and profits only to the extent of the basis of the property distributed, regardless of its. fair market value. Section 321 is merely a device to provide a source for dividends at the shareholder level; it provides no useful analogy in resolving whether a tax should be levied at the corporate level. Moreover, the fallacy in the reasoning of the majority and the Court of Appeals in Fulman v. United States, supra, is, what happens if the personal holding company distributes property which has a fair market value lower than its basis? The shareholder would report the fair market value as dividend income and, applying section 1.562-l(a), Income Tax Regs., the corporation would receive a dividends-paid deduction in the amount of the basis. Thus, the personal holding company would receive a dividends-paid deduction in excess of the dividend reported by the shareholder. This demonstrates the need that the interpretation of section 562 must coincide with section 301(b)(1) and fair market value must be the measure to the personal holding company for its deduction just as it measures the amount of dividend income to the noncorporate shareholder. The precise question of distribution of property which has depreciated in value was before this Court in General Securities Co., 42 B.T.A. 754 (1940), affd. 123 F.2d 192 (10th Cir. 1941). That case involved interpretation of the personal holding company tax as it existed in 1934, which in this regard is no different from the way it exists at the present time. The taxpayer personal holding company distributed property to its shareholders having a fair market value of $1,068.33 but a basis of $110,654.64. The taxpayer claimed a dividends-paid deduction for the property distributed of $110,654.64, which the Commissioner disallowed. We held that the dividends-paid deduction was allowable only in the amount which the shareholders were required to report as dividend income, $1,068.33. We examined the legislative history and purposes of the personal holding company tax. We think the Congressional reports from which we have quoted show that it was the intent of Congress that a personal holding company coming within the provisions of the act should receive a deduction against its "adjusted net income” for ”dividends paid” of an amount equal to the amount of such dividends taxable to the stockholders. If this were not true, petitioner would receive a deduction for dividends paid of $103,898.17, which would be taxable to the stockholders only to the extent of $1,068.33. This result, we think, would be contrary to the intent of Congress. In Foley Securities Corporation, 38 B.T.A. 1036, in discussing the House committee report on H.R. 7835, we said, among other things: "But the report continues: 'The stockholders will, of course, be subject to the graduated surtaxes upon such distributions’, which demonstrates that the distributions referred to were those on which the stockholders would be taxable.” We went on to hold in that case that, of a distribution of $42,375 which the taxpayer made to its stockholders in the taxable year 1934, only $26,258.97 could be deducted in computing the taxpayer’s "undistributed adjusted net income” under section 351(b) because only that amount was a taxable dividend to the stockholders. In the instant case, regardless of the cost of the stock which petitioner distributed to its stockholders in 1934 and regardless of the way it entered it on its books, only $1,068.33 can be taxed to the stockholders, and we hold that is all that petitioner can deduct as "dividends paid” in computing its "undistributed adjusted net income.” Petitioner argues that it could have sold the stock to outsiders for $1,068.33 and distributed that amount of cash to its stockholders and in that way could have realized a loss of the difference between its adjusted cost and the selling price and could have deducted this loss on its income tax return and the same tax result would have been attained as petitioner contends for in the present proceeding. Perhaps that is true, but it takes no argument to establish the proposition that tax consequences are frequently very different on one state of facts from what they are on another state of facts. So it is in the instant case. Congress has prescribed how a personal holding company shall be taxed and what deductions it shall receive in determining its "undistributed adjusted net income” and we must give effect to those provisions even though the taxpayer personal holding company might have avoided the surtax if it had handled its transactions in some other way. [42 B.T.A. at 758. Emphasis added.] In affirming our decision the 10th Circuit specifically agreed with our analysis that the amount of the dividends-paid deduction should coincide with the amount reported by the shareholders as dividends. The reason for the allowance of the dividend deduction is that the shareholder, provided he receives income in the requisite amount, is subject to graduated surtaxes on the dividends distributed to him, and it would be unfair also to subject dividends to a surtax against the corporation.4  General Securities Co. v. Commissioner, 123 F.2d 192, 194 (10th Cir. 1941). In Foley Securities Corp., 38 B.T.A. 1036 (1938), again interpreting the 1934 personal holding company tax, we had to decide whether the personal holding company should be allowed a dividends-paid deduction for dividends which were not taxable in full to its shareholders because of the lack of earnings and profits. We held that the dividends-paid deduction provision and the provision requiring inclusion of dividends in the shareholders’ income were in pari materia and that "On such distributions out of current income as are not taxable to the shareholders because of the definition of 'dividend’ in section 115(a), that purpose can only be effectuated by giving the term dividend the same interpretation and imposing the surtax on the corporation.” (38 B.T.A. at 1038.) Finally, the Court of Appeals in Fulman and the majority herein find some justification for the result they would reach by noting that the regulations would prevent the distribution of accumulated gain; we can perceive no reason in logic or policy why such a distribution should be prevented. The personal holding company mechanism does not mandate a distribution of currently earned income; rather, a tax is imposed on "undistributed personal holding company income.” Thus a corporation with substantial taxable income may not need to make a dividend distribution if it has a section 564 dividend carryover; in the same vein a corporation with little taxable income may have to make such a distribution if its taxable income reflects a section 243 dividend-received deduction. See Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders, par. 8.25, p. 8-51 (3d ed. 1971). It is clear, therefore, that we interpreted the 1934 Act to mean that the amount of the dividends-paid deduction should equal the amount of the dividend reported by the shareholders and that the limitation on the dividends-paid deduction to the fair market value or basis, whichever is lower, was never intended to apply to the personal holding company tax. If any conclusion can be reached as to why Congress deleted the limitation when it enacted the 1954 Code, it is probably because it never should have been applied to the personal holding company tax. Accordingly, I agree with the result reached by the Sixth Circuit in H. Wetter Manufacturing Co. v. United States, 458 F.2d 1033 (6th Cir. 1972). Dawson and Wiles, JJ., agree with this concurring opinion.   Report of the Ways and Means Committee of the House, H. Rep. No. 704, 73d Cong., 2d Sess., pp. 11, 12 (1939-1 Cum. Bull., Part 2, 554, 563); Report of the Senate Committee on Finance, S. Rep. No. 558, 73d Cong., 2d Sess., pp. 13-15 (1939-1 Cum. Bull., Part 2, 586, 596).