Court Opinion

ID: 9449889
Source: CourtListenerOpinion
Date Created: 2023-08-04 16:26:58.165459+00
Date Added: 2024-06-11T17:32:02.522757
License: Public Domain

WASHINGTON, Circuit Judge
(dissenting) .
These cases concern the individual income taxes payable under the District of Columbia laws,1 by certain stockholders of a group of corporations, for the years 1959 and 1960. The corporations built and operated large apartment houses. In the taxable years the stockholders received dividends, plus other *524distributions which came from the depreciation reserves set up by the corporations.
I am of the view that the Tax Court erred in holding that the parts of the distributions in excess of the corporations’ earnings and profits are not taxable. To be sure, such distributions are not taxable as “dividends,” but I think in the circumstances here they unquestionably are taxable as income to the stockholders under the broad definition of gross income (see footnote 1) in Section 47-1557a of the D.C.Code.2
The stockholders invested in the stocks of the corporations to derive profit or gain. They have already in previous years had returned to them in the form of tax free distributions the amounts they invested in such stocks. Everything in excess of that investment, which they thereafter receive from the corporations —including dividends, although they are separately treated in the definition — must represent to them, and from their standpoint be, a profit flowing from their investment. It is “gains or profits, and income” derived from an investment and hence is gross income within the statutory definition.3 Cf. Commissioner of Internal Revenue v. Glenshaw Glass Co., 348 U.S. 426, 429-431, 75 S.Ct. 473, 99 L.Ed. 483 (1955). There is no provision in the law which can be construed as exempting from the definition of gross income distributions by a corporation which do not qualify as dividends under the statutory definition of that term but which are in excess of the investment in the stock. I conclude that after the stockholder’s investment in the corporation has been returned to him tax free, the profits on his investment are taxable as thereafter received, whether or not they be “dividends.”
From the corporation’s standpoint, of course, the amounts distributed from depreciation reserves do not in a tax bookkeeping sense represent its earnings and profits available for distribution as dividends. That is, although they were derived from apartment rentals and were gross income to the corporation in the years earned, they were not counted as net income in those years for tax pur*525poses because they were deductible as an allowance for depreciation of the apartment buildings. The distributions in issue came out of the reserves created by these deductions. But the nature or classification in the corporation’s hands of the amounts distributed is irrelevant for our purposes. We are required to determine their proper nature or classification from the stockholder’s standpoint, once he has received them. As stated, I think the conclusion is inescapable that to the stockholder the amount he receives is income derived from his investment, once the amount represented by his investment has been returned, and hence to him is taxable income.
My view has solid support in the provisions relating to corporate distributions in the Internal Revenue Code of 1954. Under Sections 301(c) (1) and 316(a) of the Revenue Code a distribution is includible in gross income as a "dividend” to the extent that the corporation has earnings and profits to cover it, as is true also under the District law. Beyond that, a distribution is under Section 301(c) (2) first treated as a return ■of the stockholder’s investment in the corporation, and is applied against and reduces the adjusted basis (cost) of his stock. Section 301(c) (3) (A) then provides:
“Except as provided in subparagraph (B) [relating to distributions out of increase in value accrued before March 1, 1913], that portion of the distribution which is not a dividend, to the extent that it exceeds the adjusted basis of the stock, shall be treated as gain from the sale or exchange of property.” (Emphasis supplied.)
No sale or exchange of property has in fact occurred and the provision merely prescribes for Federal tax purposes the method of treating the distribution so received.4
This provision clearly is a congressional recognition that corporate distributions which do not qualify as dividends, to the extent that they exceed the amount invested by the stockholder, represent a profit and income to the stockholder.5 For Federal income tax purposes Congress has prescribed that it shall be treated and taxed in a certain way. Congress has not given such a prescription for District tax purposes, but this does not militate against the fact that the amount represents to the stockholder “gains or profits, and income” derived from his investment and hence is gross income as Congress has defined it.6 In the absence of some specific provision that such income is to be excluded from taxable gross income for District tax purposes, it cannot be assumed that Congress intended that a distribution, recognized by it to be income and taxable as such for Federal tax purposes, should not be deemed to be income for District tax purposes.7
*526In the appeals of the stockholders (No. 17,354) I would affirm the Tax Court. Its determination as to the amount of the earnings and profits available for dividends is, I think, correct.

. District of Columbia Income and Franchise Tax Act of 1947, 61 Stat. 328, ch. 258, as amended. See in particular Section 2(a) of Title III of the Act, as amended (D.C.Code § 47-1557a(a) (1961)), stating that “The words ‘gross income’ include” inter alia “dividends * * * or gains or profits, and income derived from any source whatever.” Congress of course provided in Section 1557a (b) that the words “gross income” shall not include 16 specified items but this case is not concerned with any type of receipt so excluded.

. District of Columbia v. Oppenheimer, 112 U.S.App.D.C. 239, 301 F.2d 563 (1962), is not pertinent on this point. That case was concerned with a distribution in kind in liquidation, the fair market value of which exceeded the corporation’s earnings and profits and the stockholders’ investment. The only issue presented to us by the District on appeal was whether that excess was taxable as a dividend by virtue of the provision in Section 47-15S3c of the D.C.Code that where property other than money is paid as a dividend, the basis to the recipient shall be the market value of the property at the time of distribution. Our opinion in that case held only that the excess, representing appreciation unrealized by the corporation, did not constitute its earnings and profits and was not a dividend. The basis section therefore had no application by its very terms. The opinion did not purport to decide that the amount in issue could not be income at all, and such a holding is not there suggested.

. There were of course no sales or other dealings in the stock itself, and it is therefore irrevelant for present purposes whether or not the taxpayers had held their stock for more than two years so that the stock would qualify as a capital asset. See D.C.Code § 47-1551c (Í). Of course, if stock has been held for more than two years, a gain from the sale or exchange of such stock is a capital gain and is not includible in gross income, under Section 47-1557a(b) (11). But if stock has been held for less than two years, it is not a capital asset, and any gain on its sale or exchange would be includible to the full extent as gross income under Section 47-1557a(a) as “income derived from any * * * sales or dealings in property * * * other than capital assets as defined in this subehapter, growing out of the ownership, or sale of, or interest in, such property * * As already stated, here there were no sales, exchanges, or “dealings” in the stock itself. Nor has Congress provided for District tax purposes, unlike the statute enacted for Federal tax purposes (see infra), that distributions by the corporation to stockholders, which are not dividends, shall to the extent they exceed the cost or other basis of the stock Be treated as a gain from the sale or exchange of property.

. Tlie U. S. Tax Court has taken the position that the distribution shall be treated as capital gain, i. e., one from the sale or exchange of a capital asset, and that the holding period for the stock determines the distribution’s classification as long term or short term capital gain. See George M. Gross, 23 T.C. 756, 767-768 et seq. (1955), affirmed, 236 F.2d 612 (2d Cir. 1956). The Commissioner of Internal Revenue has acquiesced. Rev.Rul. 57-357, 1957-2 Cum.Bull. 900.

. Were it not income Congress would be powerless to treat it as gain subject to income tax under the Sixteenth Amendment. See Commissioner of Internal Revenue v. Obear-Nester Glass Co., 217 F.2d 56, 58 (7th Cir. 1954), cert. denied, 348 U.S. 982, 75 S.Ct. 570, 99 L.Ed. 764 (1955), reh. denied, 349 U.S. 948, 75 S.Ct. 870, 99 L.Ed. 1274 (1955).

. Congress may not bave provided tbe Federal capital gain treatment for tbe District because it was unwilling to make tbe changes in the definition of capital asset which seemingly would have been necessary, or it may have wished a distribution in excess of the investment in the stock to be taxable as ordinary income.

. The definition of gross income in Section 22(a) of the Internal Revenue Code of 1939 was very similar to that contained in Section 47-1557a(a) of the D.C.Code. It included the provision found in the District Code that gross income includes “gains or profits, and income derived from *526any source whatever.” It was this provision, which first appeared in the Revenue Act of 1913, with which the Supreme Court was concerned in Commissioner of Internal Revenue v. Glenshaw Glass Co., supra, the Court pointing out (348 U.S. at 430, 75 S.Ct. at 476, 99 L.Ed. at 483) that “content” must bo ascribed to it. Although Section 61 of the Internal Revenue Code of 1954 revised the gross income definition, the provision that “gross income means all income from whatever source derived, including (but not limited to) the following items * * * ” remains.