Court Opinion

ID: 9452966
Source: CourtListenerOpinion
Date Created: 2023-08-04 17:58:17.848726+00
Date Added: 2024-06-11T17:33:26.239257
License: Public Domain

FRIENDLY, Circuit Judge
(dissenting).
If in 1962 a revenue agent had reviewed the Gordons’ 1961 return which, as stipulated, “did not include as income any amount with respect to the sale of rights to purchase Northwest stock or with respect to the exercise of rights to purchase Northwest stock or with respect to the receipt of such stock,” he would have been justified in thinking his task was an easy one, at least so far as concerns the point here decided in favor of the taxpayers. Tender of six such rights plus $16 permitted the purchase of a share of Northwest stock at well below market price.1 Despite the majority’s belief that stockholders realize no income simply because of the receipt of “another piece of paper to evidence their same fractional ownership,” Palmer v. C. I. R., 302 U.S. 63, 58 S.Ct. 67, 82 L.Ed. 50 (1937), as interpreted by this court in Choate v. C. I. R., 129 F.2d 684 (2 Cir. 1942), taught that the sale or exercise of the Pacific rights was dividend income unless some section of the 1954 Internal Revenue Code dictated otherwise. Examining § 355, the section held by my brothers to afford a tax shelter, the agent would have encountered subdivision (a) (1) (D), which requires that:
“as part of the distribution, the distributing corporation distributes—
(i) all of the stock and securities in the controlled corporation held by it immediately before the distribution, or *511(ii) an amount of stock in the controlled corporation constituting control within the meaning of section 368 (c), and it is established to the satisfaction of the Secretary or his delegate that the retention by the distributing corporation of stock (or stock and securities) in the controlled corporation was not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income tax.”
He would readily have ascertained that Pacific had not met the test of clause (i) since, far from having distributed all the Northwest stock “held by it immediately before the distribution,” it retained 13,013,969, approximately 43% of the total of 30,460,000 shares.
By the same token Pacific had not complied with clause (ii); the 57% of the stock distributed was nowhere near the 80% “constituting control within the meaning of section 368(c).” If Mr. Gordon had displayed Pacific’s letter of February 27, 1961, requesting stockholder assent to the plan and advising “It is expected that within about three years after acquiring the stock of the New Company [Northwest], the Company [Pacific] by one or more offerings will offer for sale the balance of such stock, following the procedure described in the preceding paragraph,” the agent could have replied that § 355 is concerned with acts rather than expectations. He might also have repeated Mr. Justice Stone’s oft-quoted statement, as true today as when written: “All the revenue acts which have been enacted since the adoption of the Sixteenth Amendment have uniformly assessed the tax on the basis of annual returns showing the net result of all the taxpayer’s transactions during a fixed accounting period, either the calendar year, or, at the option of the taxpayer, the particular fiscal year which he may adopt.” Burnet v. Sanford & Brooks Co., 282 U.S. 359, 363, 51 S.Ct. 150, 151, 75 L.Ed. 383 (1931). The agent would therefore have been obliged to recommend the determination of a deficiency, so far at least as § 355 was the basis asserted for the taxpayers’ return, and this without even having to consider the Commissioner’s basic claim, recently sustained by the Ninth Circuit, C. I. R. v. Baan, 382 F.2d 485 (1967), that a distribution of rights to purchase the stock of a controlled subsidiary at less than its fair value is not within § 355 (a) (1) (A).
If a court would have sustained the agent in litigation during 1962, as it seemingly would have had to do, I fail to perceive how Pacific’s action in ridding itself of the remaining Northwest shares in 1963 can justify a different result. The 1961 taxes of the Gordons and other minority stockholders depend on what Pacific did in 1961, not on what it chose to do in 1963. Burnet v. Sanford & Brooks Co., supra; see also Healy v. C. I. R., 345 U.S. 278, 281, 73 S.Ct. 671, 97 L.Ed. 1007 (1953). When Congress has meant the events of one year to affect the tax for another, it has said so in language all can understand. See, e. g., §§ 172(b), 381, 382, 1301, 1302, 1303. Although the plan adopted by Pacific in 1961 committed it to offer its shareholders “the right to purchase all of the shares of capital stock of the New Company,” the plan also provided, subject to an exception not here material, that “the number of shares to be offered to the shareholders of the Pacific Company in any one offering, the number of offerings to be made, and the price at which said shares shall be offered to the shareholders of the Pacific Company shall be determined by the Board of Directors of the Pacific Company in its sole discretion.” The qualification was so broad as to deprive the commitment of legal significance, and while in fact the second distribution occurred within 21 months, it is not difficult to think of circumstances, such as adverse regulatory action or restrictions on the procurement of telephone plant due to national emergency, that might have postponed Pacific’s need for funds and consequent further distribution of Northwest stock for many years. Moreover, if the 1961 distribution of some 57% of the stock can be metamorphosed into a distribution of *512100% by what occurred two years later, I assume my brothers would also give the 1963 distribution of 43%, which clearly would not qualify on its own since Northwest was not then a “controlled corporation” within § 355(a) (1) (A), see § 368(c), the color now attributed to its predecessor. Furthermore, under my brothers’ view that a corporation satisfies § 355(a) (1) (D) if it ultimately rids itself of all the stock of the controlled corporation, the shelter of § 355 would extend to a 1961 Pacific stockholder who sold his stock before 1963 and to a 1963 stockholder who had not owned Pacific stock in 1961. How this jibes with the recognized purpose of § 355 to give tax-free treatment where there is “a continuity of the entire business enterprise under modified corporate forms and a continuity of interest in all or part of such business enterprise on the part of those persons who, directly or indirectly, were the owners of the enterprise prior to the distribution,” Regulations § 1.355-2(c), passes my understanding.
The inspiration for the magic whereby two distributions of 57% and 43% in different years become one of 100% is my brothers’ belief that at the end of the process the position of most Pacific stockholders with respect to Northwest shares they had acquired had changed only in their having paid $16 per share to retain what they had owned all along, a feeling — which I share — that the instant transaction was motivated by business considerations and not by a desire for tax avoidance, and an apparent view that § 355(a) (1) (D) was an unnecessary or at least a redundant requirement. Yet the stockholders’ investment status would also have been unchanged and the Company’s motive equally pure if Pacific had never made the second distribution or if Northwest had been only 79% owned from the outset, and, despite the majority’s apparent distaste for the view that distribution of rights to purchase corporate property below market value normally constitutes a dividend, I cannot imagine any court would consider that in such event rights offerings like those here made by Pacific were protected by § 355.
Congress has simply not seen fit to exempt all distributions where stockholders’ investments remain unchanged from a practical standpoint and no tax avoidance motive is manifest; instead it has chosen to lay down extremely specific conditions which a corporation must follow at its peril if it desires to achieve nonrecognition for its stockholders. Complicated tax statutes particularly invite application of Mr. Justice Holmes’ precept, “Men must turn square corners when they deal with the Government,” Rock Island, Ark. & La. R. R. v. United States, 254 U.S. 141, 143, 41 S.Ct. 55, 56, 65 L.Ed. 188 (1920). In § 355 (a) (1) (D) Congress elected to convert a vague guideline contained in the Regulations under the 1939 Code that “Ordinarily, the business reasons (as distinguished from any desire to make a distribution of earnings and profits to the shareholders) which support the reorganization and the distribution of the stock will require the distribution of all of the stock received by the transferor corporation in the reorganization,” Regs. § 39.112(b) (ll)-2(c), into a specific statutory requirement: Distribute all at once with no questions asked, or, if you prefer, distribute not less than 80% of the stock of the controlled corporation and satisfy the Commissioner that any retention was not for a forbidden purpose. When Pacific chose not to comply for what it considered valid business reasons, its stockholders must take the conequences.
The Supreme Court has pertinently instructed us to approach revenue acts with the attitude that “the plain, obvious and rational meaning of a statute is always to be preferred to any curious, narrow, hidden sense that nothing but the exigency of a hard case and the ingenuity and study of an acute and powerful intellect would discover.” Old Colony R. R. v. C. I. R., 284 U.S. 552, 560, 52 S.Ct. 211, 213, 76 L.Ed. 484 (1932), citing Lynch v. Alworth-Stephens Co., *513267 U.S. 364, 370, 45 S.Ct. 274, 69 L.Ed. 660 (1925). It has also told us that “the words of statutes — including revenue acts — should be interpreted where possible in their ordinary, everyday senses,” Crane v. C. I. R., 331 U.S. 1, 6, 67 S.Ct. 1047, 1051, 91 L.Ed. 1301 (1947); Hanover Bank v. C. I. R., 369 U.S. 672, 687, 82 S.Ct. 1080, 8 L.Ed.2d 187 (1962). A requirement that a corporation distribute all of a controlled corporation’s stock held by it “immediately before the distribution,” when read against the basic concept of annual tax accounting, can only mean to distribute all at one time 2 — not to distribute 53'% and plan to distribute the rest in a later year or years when and as that suited.3 With all respect, my brothers seem to be emulating Humpty Dumpty when they say that the words of the statute in “their everyday import” authorize such a course,4 and that the only basis for believing the words mean what they say is the view of a distinguished professor, now endorsed by another court of appeals, who, while thinking that Congress could have been more liberal without seriously affecting the revenue, recognized that “Whatever the validity of the reasons for its existence, § 355(a) (1) (D) must of course be complied with.” Bittker and Eustice, Federal Income Taxation of Corporations and Shareholders § 11.07 at 479 (1966). And we do not satisfactorily answer the Commissioner’s claim of administrative difficulties by chiding him for failure to have promulgated regulations that would partially seal up the breach in the statute we are attempting to create today. Unless the words used by Congress lead to absurd results, are inconsistent with its apparent purpose, or are filled by history with a meaning different from the ordinary one, none of which can be successfully asserted here, a court’s job is to apply what Congress has said.
Since I am in full accord with the Ninth Circuit that Pacific’s decision to bypass the requirement of § 355(a) (1) (D) prevents § 355 from immunizing the income realized on the exercise of the rights,5 I find it unnecessary to decide whether that court or the instant majority is right as to the transaction’s meeting the basic test, § 355(a) (1) (A), of being a distribution solely of stock or securities of a controlled corporation with respect to stock of the distributing corporation. Certainly the words have an uneasy fit to the transaction here in question. What Pacific distributed “with respect to its stock” was not “solely stock or securities” of a controlled corporation but rights to purchase such stock below market price, and the stock of the controlled corporation was distributed “with respect to” the rights rather than the Pacific stock. But even if the distribution of Northwest stock qualified under § 355, I could not agree to reversal of the Tax Court’s *514decision that the proceeds of the sale of rights to purchase Northwest stock constituted ordinary income. Palmer v. C. I. R., supra, along with Choate v. C. I. R., 129 F.2d 684 (2 Cir. 1942), and Gibson v. C. I. R., 133 F.2d 308 (2 Cir. 1943), instruct us that the value of the rights on receipt would be taxable as ordinary income upon their exercise or sale but for some exemptive provision in the Code. Vaulting the language barriers that seem to prevent the issuance of Northwest stock on the exercise of rights from coming within § 355, would not help Pacific’s stockholders as to rights they sold. As Judge Raum correctly said, the argument “fails to take into account the nature of Section 355, which is a nonrecognition provision, and can be utilized only by those shareholders who come within its terms”' — ■ namely, on the majority’s view, shareholders who received a distribution of Northwest stock “in respect of” their Pacific stock. The majority’s references to § 1234 and to Rank v. United States, 345 F.2d 337 (5 Cir. 1965), are inapposite; what is here sought to be taxed is the initial value of the rights, not a gain on their sale. Taxpayers argue that the Tax Court’s holding creates an unjustifiable distinction between a stockholder who sells rights to purchase stock of a controlled corporation and one who sells the stock of the latter on a when-issued basis and exercises rights to cover the sale. But “the Commissioner is justified in determining the tax effects of transactions on the basis in which taxpayers have molded them,” Television Industries, Inc. v. C. I. R., 284 F.2d 322, 325 (2 Cir. 1960). Moreover, the actual answer may well be that, for reasons heretofore noted, neither the real nor the hypothetical taxpayer is entitled to the benefit of § 355.
On the Commissioner’s appeal I would reverse the decision as to § 355 and remand for consideration of the other grounds advanced by the taxpayers and not dealt with by the Tax Court; on the taxpayers’ appeal I would affirm.

. During the offering period the price of the Northwest shares ranged from $28.25 to $25.25. In determining the value of the rights and consequent dividend income the Commissioner used $26, the average price on October 5, 1961, the day the Gordons exercised their warrants. Taxpayers make no claim that the value of the rights on the day of receipt was less than the amount thus determined.

. It is setting up a straw man to suggest that this means that the mechanics of a large distribution must be fulfilled “in a single day.”

. There is the further point, noted in Judge Hamley’s able opinion in Baan, supra, 382 F.2d 485, 498 n. 22, that the concept of seriatim distributions might often be inconsistent with the requirement of § 355(b) (1) (A) and (2) (B) that the distributing and controlled corporations shall have actively conducted a trade or business “throughout the 5-year period ending on the date of such distribution.”

. This comment applies also to such statements as that “The quoted language in no way requires a single distribution,” that “there is nothing on the face of this subsection that relates to the number of transactions, or their timing, which may be contained in a distribution,” and that “it is fairly apparent that neither the Code nor the Regulations require, at least by their terms, a single distribution.”

. Taxpayers’ arguments based on decisions under predecessors of § 351(a) are answered in the opinion in Baan, supra, 382 F.2d at 492.