Court Opinion

ID: 9467668
Source: CourtListenerOpinion
Date Created: 2023-08-05 01:53:33.458113+00
Date Added: 2024-06-11T17:40:27.409818
License: Public Domain

GARZA, Circuit Judge,
dissenting:
After carefully reading the majority’s opinion, I find that I must respectfully dissent. Unlike my Brothers, who apparently feel that it is their duty to “plug loopholes”, I would remain content in applying the tax law as it reads leaving the United States *902Congress to deal with the consequences of the tax law as it has been drafted. The only issue before this Court on appeal is whether or not IUS transferred “substantially all of its assets” to TIL. Instead of dealing with this straightforward question, the majority has made a case of evil against liquidation-reincorporation abuses and, in an attempt to remedy every such perceived abuse, they have relieved the Congress of its burden to change the law heretofore requiring that “substantially all” of a corporation’s assets be transferred to now read that “only those assets necessary to operate the corporate business” be transferred in order to meet the “D reorganization” requirements. Essentially, the majority has changed the definition of “substantially all assets” to mean only “necessary operating assets.” I believe if Congress had meant “necessary operating assets” it would have said so instead of specifically requiring that “substantially all” of the assets be transferred. In my mind “substantially all” plainly means all of the assets except for an insubstantial amount. Under such a definition, the sale of 15% of IUS’s assets to TIL could hardly be defined as “substantially all” of IUS’s assets.
However, even after having redefined “substantially all” to mean “necessary operating assets”, the IUS liquidation still falls short of the “D reorganization” requirements because the stipulated facts are that absolutely none of the assets sold from IUS to TIL were necessary operating assets for either corporation. Faced with an absence of a proper factual setting, the majority goes on to define necessary operating assets as including a corporation’s intangible assets. Now while a sale of intangible assets might be an appropriate consideration in determining whether or not “substantially all” assets of a corporation have been transferred, such a consideration simply has no bearing in this case. All of the assets transferred to TIL were depreciated tangible objects sold at book value after which IUS completely ceased all business operations. There simply was no other transfer of IUS’s intangible assets as a continuing business.
The majority has placed great emphasis on the fact that three of IUS’s route salesmen were subsequently employed by TIL and that Mr. Smothers’ managerial services were available to TIL. Regardless of whether or not these facts enhanced TIL’s business, the fact remains that neither the route salesmen or Mr. Smothers’ services were transferred as assets from one corporation to another. After IUS ceased business its route salesmen were free to seek any employment they desired. Likewise, Mr. Smothers was never obligated to perform services for TIL. From these facts I cannot agree that there was a transfer of a continuing business. The majority imputes adverse tax consequences to IUS’s stockholders simply because TIL offered new employment to the route salesmen who were unemployed upon cessation of IUS’s business operations. The majority places future stockholders, in Mr. Smothers’ position, of choosing between unfavorable tax consequences and helping secure future employment to loyal and deserving employees whom otherwise would be unemployed.
Although the Internal Revenue Service has never questioned the bona fides of IUS’s liquidation, the majority has gone beyond the stipulated facts by characterizing the liquidation as a tax avoidance scam. I simply cannot agree. After starting from scratch, Mr. Smothers worked for over a dozen years refraining from drawing salary in order that IUS could pay its taxes, employees and other operating expenses and in order for IUS to become a successful self-sustaining business enterprise. Mr. Smothers was successful but, now that he no longer could devote his service to IUS, his years of labor are now labeled by the majority as a mere “paper shuffle.” I do not share the majority’s attitude.
The reasons for my position can be more easily understood by a simple review of the bottom-line facts. After IUS began showing a profit and started accumulating a cash surplus, instead of immediately investing in a building or in other equipment for its operations, it continued its operations as before. Now, if IUS had purchased real *903property or depreciable personal property for its operations (instead of leasing as it had been) and had sold these properties pursuant to its plan of liquidation, certainly no argument would be made that the money initially invested in those properties should have been declared by IUS as dividends. However, instead of investing its accumulations, IUS simply put them in its bank account as the tax laws allow and presumably faced any tax consequences posed by such an accumulation.
After IUS ceased operations, was liquidated, and its assets distributed to its stockholders in exchange for their stock, the I.R.S. issued a deficiency, not because IUS was reorganized within the meaning of 26 U.S.C. § 368(a)(1)(D), but rather because the I.R.S. felt the accumulated earnings of IUS coupled with long-term capital gains rates applicable to the stock exchange provided an undesirable windfall to IUS’s stockholders. In essence, the I.R.S. sought to expand the “D reorganization” provisions, lessen the availability of long-term capital gains treatment to corporate stockholders, and totally ignore the purpose of the tax upon improperly accumulated surplus as provided in 26 U.S.C. § 531. The majority seeks to do equity for the I.R.S. position by “treating” the IUS liquidation as a “D reorganization.” I do not believe the taxpayers or the tax laws are served by upholding an I.R.S. deficiency for the sole purpose of “plugging loopholes.” The lesson to be learned from the majority’s opinion is clear — future corporations faced with similar circumstances need only invest their otherwise accumulated surplus in some method other than savings. In the process of liquidation they need sell whatever assets exist to third parties unrelated to their stockholders and their stockholders should make no effort to find future employment for the corporation’s employees.
It seems to me that in its attempt to “plug” a perceived “loophole,” the majority is giving this Court’s imprimatur to a variation of the same so-called “mockery” of the tax laws sought to be prevented by its opinion.
For these reasons, I respectfully dissent.