Court Opinion

ID: 4474881
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:11:11.054781+00
Date Added: 2024-06-11T14:53:52.803090
License: Public Domain

Disney, J., dissenting: I can not agree with the majority that in determining earnings or profits accumulated after February 28, 1913, pre-March 1, 1913, operating deficits impairing capital must be restored out of subsequent earnings or profits. We are here concerned not with a corporation or its accounting methods, but with the taxation of a stockholder who has received distribution of corporate earnings which were actually earned since February 28, 1913. In my opinion, such stockholder is taxable thereon, under clear legislative mandate. The majority opinion cites various cases which in nowise involve, or decide the present question: Foley Securities Corporation, 38 B. T. A. 1036; affd., 106 Fed. (2d) 731, involved dividends paid credit of a personal holding company, and distinguishes the present situations by holding that there is no accumulation of earnings or profits until an operating loss is made good “if incurred after March 1,1913? (Italics supplied.) The corporation therein was organized in 1928, so our question could not there occur. The same is true of Arthur O. Stifel, 29 B. T. A. 1145, and Commissioner v. Farish & Co., 104 Fed. (2d) 833. In Roy J. Kinnear, 36 B. T. A. 153, there was on March 1, 1913, a paid-in surplus of about $2,500,000, and the question was the effect of later operating losses. Loren D. Sale, 35 B. T. A. 938, involved a stipulation of operating loss for the period after March 1,1913, computed on March 1, 1913, values, and it was held that such stipulation does not show that capital or paid-in surplus was ever impaired. So the present question as to restoration of lost capital out of subsequent earnings was not at issue. In Crystal Ice Co., 14 B. T. A. 682, relied on by the Sale case, supra, though the corporation was organized in 1912, there was from organization up to December 31,1914, an earned surplus of about $23,000 and the deficits involved were incurred later. In J. L. Washburn, 16 B. T. A. 1091, also cited in the Sale case, it appears that the deficit involved was incurred in 1923. Obviously, such cases do not reach our difficulty here, and I find no help in them. Hadden v. Commissioner, 49 Fed. (2d) 709, also so cited, is indeed to the contrary, for examination thereof reveals that the corporation had, as in this case, an operating deficit, up to March 1,1913, of about $500,-000, and from that date to April 30,1917, an operating loss of $329,-549.22. Yet in computing corporate earnings and profits on the question of taxability of dividends the court subtracted, from later earnings, only the $329,549.22 and not the $500,000. That this was intended is shown in the following language: * * * Operating losses sustained after March, 1,1918, must be deducted from profits realized after that date before they can be a taxable profit * * *. [Italics supplied.] The court says this, and, as above seen, does not deduct pre-March 1, 1913, operating loss, though in the previous sentence it had broadly said: “Dividends paid while there is an operating deficit should be deemed to be from capital or paid-in surplus * * This generality, shown so to be by the court’s next language, above quoted, and its action, appears to be the ratio decidendi of the majority here, i. e., that as a general proposition dividends paid in the face of an operating deficit should be regarded as from capital or paid-in surplus. With this broad concept I do not disagree. But we here have a question of the effect for income tax purposes of the date March 1, 1913, and what Congress intended. Neither the general concept, nor cases involving only post-March 1, 1913, deficits afford us light. Indeed, such cases, above distinguished, seem inherently based upon the idea that, within the intendment of “earnings or profits accumulated after February 28, 1913,” there was no accumulation, because no net accumulation, due to deficits within that period. This is shown in the references to the definition of dividend in section 115 in such cases as Foley Securities Corporation, Roy J. Kinnear, and Loren D. Sale, supra. Since the money here involved as distributed to stockholders was in fact earned by the corporation since February 28,1913, it is to be presumed that Congress, intending to use its taxing power to the fullest extent, intended to tax such funds. Irwin v. Gavit, 268 U. S. 161; Helvering v. Stockholms Enskilda Bank, 293 U. S. 84. In Frank D. Darrow, 8 B. T. A. 276, we said: Though Congress exempted from taxation as dividends or otherwise, distributions of earnings accumulated prior to March 1, 1913, at the same time it so defined taxable dividends as to include every distribution of earnings accumulated since February 28,1913, in whatever form the distribution might be made. The intention of Congress to tax as dividends, distributions, however made, of earnings since February 28, 1913, is evident from the broad and comprehensive language of the definition and the specific inclusión of stock dividends to the extent of such earnings. * * * Eisner v. Macomber, 252 U. S. 189, held stock dividends nontaxable. After March 1,1913, “dividends declared and paid * * * whether out of current earnings or profits accumulated prior to that date [not here involved] constituted income to the stockholders and not capital and were taxable as income if the Congress saw fit to impose the tax.” Helvering v. Canfield, 291 U. S. 163. Did Congress so intend? The petitioner here is seeking immunity from tax, that is, is seeking an exemption, a matter of legislative grace. She has, therefore, the burden of showing a clear and unambiguous statutory right to such exemption from tax. Wright v. Georgia R. R. & Banking Co., 216 U. S. 420; New Colonial Ice Co. v. Helvering, 292 U. S. 435; White v. United States, 305 U. S. 281. Exemptions can not rest on implication, doubt, or ambiguity; United States v. Stewart, 311 U. S. 60; or inference, Pacific Co., Ltd. v. Johnson, 285 U. S. 480. The majority view here is seen as resting on nothing else. The most that appears to be relied on is possible ambiguity in the word “accumulation,” in section 115 of the Internal Revenue Code. Section 115, defining dividends, not only fails to provide for exemption from taxation of dividends to the extent there were pre-March 1,1913, operating or capital deficits, but affirmatively defines dividend as being, inter alia, a distribution out of “earnings or profits accumulated after February 28, 1913”; and, what is even more significant, in providing exemption from tax, as to the period before March 1, 1913, carefully limited itself to providing that “any earnings or profits accumulated, or increase in value of property accrued before March 1, 1913, may be distributed exempt from tax * * * .” "Inclusio unius est exclusio alterius” never applied more clearly. The exemption desired by the petitioner is excluded. The statute, instead of showing the clear right to exemption which petitioner must show, to the contrary clearly negatives such right. It is to be noted also, in the language last quoted, the recognition of “earnings or profits accumulated * * * before March 1,1913” — a plainly intended contrast to “earnings or profits accumulated after February 28, 1913,” in the preceding subsection, 115 (a). Yet the majority view, in so far as it is able to rely on section 115 at all, is that (because of general ideas of corporate profit existing only after repairment of capital and because the cited cases above mentioned hold that post-February 28,1913, operating losses may be recouped out of earnings and profits before accumulation of profits to pay taxable dividends) “there can be no accumulation of post-February 28, 1913, profits for the purpose of distributing taxable dividends, until impaired capital at March 1, 1913, has been restored.” But this only amounts to the argument that on this tax question, before taxable dividends can be paid, there must be net profits from the inception of the corporation, and that, though Congress defined a dividend as from accumulations after February 28, 1913, and used “accumulated” to refer to two distinct periods, before and after that date, yet the word must be held to refer to and encompass the whole corporate life so that, for present tax purposes, there is no accumulation of earnings and profits because of capital impairment in the earlier period. But the statute does not say “profit” or “net profit” or “net profit [or net accumulations] over corporate life,” but only “earnings or profits accumulated after February 28,1913.” The text of the Canfield case indicates that the petitioner there made the same argument as here, for the Court says: “The argument for the stockholders stresses the word ‘accumulated.’ We think that the expression is made to carry too heavy a burden.” In my opinion, the language of section 115 obviously and affirmatively refutes the majority view. It subjects all of the net accumulations of earnings or profits after February 28, 1913, to taxable distribution. Under the Canfield case, where deficits apply against March 1, 1913, surplus, later lost, and not against later earnings, we see even more than the post-March 1, 1913, net so subjected to tax. It does not carve out or except any amount equivalent to operating deficits or capital losses prior to that date. The only provision of that nature, or as to the earlier period, is as to tax-free distribution of earnings or profits as to the time before February 28, 1913. In addition to the above reasons for so believing, I note that section 115 (b) also states that “for the purposes of this chapter every distribution is made * * * from the most recently accumulated earnings or profits”; further, that earnings or profits accumulated before March 1, 1913, may be distributed only after distribution of those accumulated after that date. It is clear that Congress had a concept of “accumulation” as being in three chronological categories, completely contrary to the majority’s idea of considering the corporate life, even prior to March 1,1913, as one continuous period of accumulation. It seems to me impossible to read section 115 (a) and to conclude that “accumulated after February 28, 1913,” means accumulated both before and after that time, when the word is used as to three distinct periods. Accumulation may be recent, may be back to February 28, 1913, and may be before that date. And, as far as the phrase “earnings or profits” is concerned, a corporation has profits, taxable profit, despite earlier deficits. Long Beach Improvement Co., 5 B. T. A. 590. There it was held that, although net income of a corporation for 1920 was insufficient to wipe out a preexisting deficit (“for several years prior to 1919”), nevertheless, such income was taxable to the corporation. This can only^mean that the corporation actually had “earnings or profits” for 1920 despite its previous deficit. How then can it be said that such corporation did not have “earnings or profits” within the definition of dividend in section 115 ? In the Long Beach case the Court disagreed with the petitioner’s contention that net income was something different when applied to a corporation from “gain, net gain, profit, net profit.” Thus we see that that corporation had net profit for 1920 despite earlier capital deficits. It would in that respect be immaterial whether those deficits were before or after March 1,1913. In Cranson v. United States, 146 Fed. (2d) 871, Long Beach Improvement Co., supra, was cited and approved. It is relied on for the above conclusion in Foley Securities Corporation, supra (one of the cases relied on by the majority here), where we said: * * * There is no doubt that the term “income” as used in the Sixteenth Amendment is broad enough to cover current corporate income even though a deficit may exist. Congress can and does impose a tax on such income. * * * In my view, not only is there within section 115 accumulation, but accumulation of “earnings or profits” after February 28,1913, though there is capital impairment prior to that date. In Helvering v. Canfield, supra, the Court had, as it said, no case of impairment of capital, but it also said, “We are dealing with a distribution of accumulated profits.” This referred to profits accumulated from 1917 to 1923. The Court continued: * * * When a corporation continued in business after March 1, 1913, the dividends it later declared and paid to its stockholders, whether out of current earnings or from profits accumulated prior to that date, constituted income to the stockholders, and not capital, and were taxable as income if the Congress saw fit to impose the tax. Lynch v. Hornby, 247 U. S. 339. * * * I suggest that Congress has clearly, in section 115, seen fit to impose the tax, and that the majority has not demonstrated otherwise. In the Canfield case the Court had the question of whether earnings or profits actually earned in 1917-1923 should be distributed tax-free, because of a theory that they should go to replace earlier losses of surplus which had existed on March 1, 1913. The Court held that the surplus, embarked in the business after March 1, 1913, had actually been lost and, referring to the contention that later distributions should replace the loss, as “immunity is sought from the taxation of an equivalent amount of profit subsequently earned,” denied the immunity. The following language from the Court is highly pertinent here: Paragraphs (a) and (b) of section 201 disclose a single purpose, and are to be construed in harmony with each other. They show that the Congress was careful to arrange its plan so that the right to receive, free of tax, a distribution of surplus accumulated prior to March 1, 1913, should not be exercised in such a fashion as to permit profits accumulated after that date to escape taxation. To that end the Congress provided that “every distribution is made out of earnings or profits, and from the most recently accumulated earnings or profits, to the extent of such earnings or profits accumulated since February 28, 1913.” Then follows the exemption which is strictly limited to a distribution of profits aoeumulated prior to March 1,1918. Nothing is said as to a restoration of those profits out of subsequent earnings if the former have been lost. [Italics supplied.] I emphasize that the Court not only refers to the matter as an exemption, but also that it says that it is strictly limited to distribution of pre-March 1, 1913, profits. Nothing is said in section 115 (a) as to restoration of lost profits or about subsequent earnings, or as to restoration of lost pre-March 1,1913, capital therefrom. Again the Court: “But the actual course of events is not to be ignored.” It seems clear that the case stands for the proposition that corporate profits actually accumulated after March 1, 1913, were by Congress subjected to tax. Just as the right to receive, free of tax, surplus accumulated before March 1, 1913, “should not be exercised in such fashion as to permit profits accumulated after that date to escape taxation,” so, in my view, the general concept of capital repairment should not be so strained (here as to a period prior to February 28, 1913) as to overthrow the text and intendment of section 115, and cause exemption from tax. Exemption from tax “strictly limited” can not encompass such an end. I can not conceive why, if loss of surplus accumulated on March 1, 1913, is not in the Canfield case permitted to work such an effect, a still earlier loss of capital, prior to March 1, 1913, should be accorded a different result, and profits admittedly earned since the inception of income tax be freed from tax. In Hoffman v. United States, 53 Fed. (2d) 282, the corporation had a pre-March 1, 1913, operating loss of about $211,000, and a profit of $132,000 from March 1,1913, to December 31,1913. In the course of the opinion the court says: * * * If the profit of 1913 had been distributed in that year, we think it would have been taxable, notwithstanding there was an operating deficit prior to March 1 of that year. * * * The corporation’s assets had increased in value, prior to March 1, 1913, and the opinion holds that such increase was distributable free of tax in 1917, but nowhere do I find the taxable amount, of a dividend paid in 1917, affected by the $211,000 pre-March 1,1913, operating loss, though other distributions and profits and losses after 1913 had to be considered in fixing the amount. The majority finds Chapman v. Anderson, 11 Fed. Supp. 913, in point. The petitioner on brief called this “the only case in which this case has been squarely decided.” Yet there the court was concerned only with whether an entry on corporate books writing up assets by $274,838.97 to reflect value on March 1,1913, was earnings or profits applicable to reduce an operating deficit of that date so as to affect taxability of distribution on stock in 1925-1926 — and the Court held it was not. The present question seems not to have been presented. “The only point at issue is the interpretation to be given to the write-up of the sum of $274,838.97.” The court did no more than assume, without analysis of the problem, that pre-March 1, 1913, operating deficits must be restored, the same as post-March 1, 1913, deficits. In Frank D. Darrow, supra, we held that because there was in the Revenue Act of 1921 no provision excluding liquidating distributions from earnings or profits since February 28, 1913, from general statutory definition of dividend, they were above capital to be taxed as dividends.. We said: Again we find clearly expressed the Intention of Congress to tax as a dividend every distribution of earnings accumulated since February 28, 1913, in whatever form or manner made, and in the absence of a contrary intent appearing from the Act, a liquidating distribution of such earnings would be taxable as other dividends. * * * The Barrow case is cited and approved in McCaughn v. McCahan, 39 Fed. (2d) 3, and various other cases to the same effect. Thus it is seen that a definite statutory provision (such as has been in the revenue acts since 1924, as to liquidating distributions) is necessary to exclude any dividend from the broad sweep of Congressional intent and the language found in section 115 (a). The majority points to no statute, except to the extent that it interprets “accumulated” in section 115 (a), but relies on general ideas not related to the revenue acts since 1913. Again, I note that the regulations, e. g., Regulations 94, section 115, have long set forth the requirements of a dividend, and among other statements we find that a distribution of earnings or profits accumulated prior to March 1,1913, is not a dividend; also that, in determining source of a distribution, earnings or profits accumulated prior to March 1.1913, are to be considered only “after all the earnings or profits of the taxable year and all the earnings or profits accumulated since February 28.1913, have been distributed.” Again: “A loss sustained for a year prior to the taxable year does not -affect the earnings or profits of the taxable year” (with discussion of exceptions not here pertinent. No exception is made as to pre-March 1,1913, capital impairment). These provisions of the regulations seem to me to show that dividends are there construed as not to require consideration of capital losses in the pre-March 1,1913, period. The idea approved by the majority is not set forth in the regulations, just as it is found lacking in the statute. The repeated reenactment of the statute so construed by the regulations gives to them the effect of law, and precludes the interpretation given by the majority. Helvering v. Reynolds Tobacco Co., 306 U. S. 110. Congress, in my view, did not contemplate immunity from taxability of earnings after March 1, 1913, by deduction of capital invested, but already lost by that date. The capital as it stood at that date appears to me properly the source of later income. Income is “fruit born of capital.” United States v. Safety Car Heating & Lighting Co., 297 U. S. 88. The part earlier lost was not risked in the business after February 28, 1913, as was the March 1, 1913, surplus in the Canfield case. Under section 113 (a) (14) the stockholder may take either cost or March 1, 1913, fair market value, whichever is greater, as his basis for determining gain, and the section provides that in determining such value due regard shall be given to value of the corporate assets. The stockholder can be taxed with gain only above his pre-March 1, 1913, cost, and not above value on that date, if less than cost. Goodrich v. Edwards, 255 U. S. 527. He is, therefore, both by the statute and the constitutional principle as laid down in the Goodrich case, protected against pre-March 1,1913, depreciation in value in his stock, in the computation of profit or loss, upon sale. I, therefore, discern no reason for allowing him nontaxability, with the attendant adjustment downward of his base, when he receives a dividend, suificient to override the plain statutory definition of dividend as distribution of post-February 28,1913, profits. He is, in effect, not affected, in the end, by the pre-February 28,1913, operating deficit affecting value of his stock, since he may take cost, at an earlier date, as basis, and the majority view would merely accelerate recovery of a part of his basis, deferring tax until disposition of the stock. Ground therefor, contrary to the text of section 115, does not appear. March 1, 1913, has a definite meaning for income tax purposes, and general ideas of corporate accounting are subject thereto and to the language of section 115. I am not assisted, on this question, by Willcuts v. Milton Dairy Co., 275 U. S. 215, as to invested capital and excess profits. It states specifically that Long Beach Improvement Co., supra, “is not of moment. The deductions from gross income allowed by that Title [Title 2 of the Eevenue Act, of 1918, as to income tax] do not refer to invested capital, surplus or undivided profits, and its provisions throw no light upon the meaning of those terms as used in Title 3 providing for an excess profits tax.” Lynch v. Hornby, 247 U. S. 339, though based on the Act of 1913, and with no reference to the particular question here, is opposed to the majority view, though therein cited; for it stands for the principle that, under the broad definition of income, Congress was at liberty to tax all dividends declared and paid in the ordinary course “after taking effect of the act (March 1, 1913),” even though derived from pre-March 1,1913, earnings, unless, as later in the Income Tax Acts of 1916 and 1917, Congress saw fit specifically to except such pre-March 1,1913, earnings from taxation. So here, without a statute of similar import, it is submitted that operating deficits prior to the effective date of the first income tax act have not been given tax-immunizing effect, in the face of the broad definition of dividend in section 115 (a) and the Congressional intent to use its full taxing power. To point up my view, above expressed, that “accumulation” is separately applied to the post-February 28, 1913, period, Lynch v. Hornby itself does so; for, discussing undivided profits before declaration of a dividend, it is said: This treatment of undivided profits applies only to profits permitted to accumulate after the taking effect of the act, since only with respect to these is a fraudulent purpose of evading the tax predicable. Corporate profits that accumulated before the act took effect stand on a different footing. * * * [Emphasis supplied.] I would not diminish earnings or profits in fact accumulated since February 28, 1913, by capital deficits prior thereto, and, therefore, I respectfully dissent. Arnold and Opper, JJ., agree with this dissent.