Court Opinion

ID: 4481215
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:46.375641+00
Date Added: 2024-06-11T14:54:00.433989
License: Public Domain

TaNNENWald, J., dissenting: The majority decision herein is founded upon two principles: (1) that “earnings and profits” are not coextensive with “taxable income” and (2) that the earnings and profits of members of an affiliated group are not consolidated, notwithstanding the consolidation of taxable income during consolidated return periods. I have no quarrel with these principles, which have generally been accepted by the courts. But they are not, in my opinion, determinative and must be applied within the context of an equally accepted principle recognized by the majority, namely, that an item of income, the taxability of which is deferred until a later year, does not enter into earnings and profits at the time of receipt. Commissioner v. South Texas Co., 333 U.S. 496 (1948); Bangor & Aroostook Railroad Co., 16 T.C. 578 (1951), affd. 193 F. 2d 827 (C.A. 1, 1951); see Sid Luckman, 50 T.C. 619 (1968), on appeal (C.A. 7, Jan. 8, 1969). It is in the application of this principle that I believe the majority has erred. Concededly, the $1,065,313.09 profit made by Management was not simply deferred as to Management. Under the rules in existence during the period in question, that profit would never be taxed to Management (respondent’s current regulations, as the majority points out, provide otherwise). But, since this intercompany profit was eliminated from the consolidated return, Homes and Development were required to exclude the amount of that profit from the cost basis of the property to them. Sec. 1.1501-31A(b) (1) and sec. 1.1501-38A(b), Income Tax Regs.; see Kentucky Farm & Cattle Co., 30 T.C. 1355, 1367 (1958); Rev. Rul. 60-289, 1960-2 C.B. 268. Consequently, that profit represented potential income to Homes and Development at such time as the property was disposed of.1 Thus, although the amount in question may have been permanently excluded from Management’s income, it was only deferred when the tax position of the consolidated group is viewed in its entirety.2  If the majority herein is correct, the same amount of profit will be subject to a double inclusion in earnings and profits — in that of Management at the time of receipt of the payment and that of Homes and Development when the property is sold. This double counting is precisely what concerned this Court and the Court of Appeals in Bangor & Aroostook Railroad Co., 16 T.C. at 586 and 198 F. 2d at 833, and it was an underlying consideration in Henry C. Beck Builders, Inc., 41 T.C. 616 (1964). See concurring opinion of Drennen, J., 41 T.C. at 634. Cf. also Oscar E. Baan, 45 T.C. 71, 93 (1965), reversed and remanded 382 F. 2d 485 (C.A. 9, 1967), reversed and affirmed 382 F. 2d 499 (C.A. 9, 1967), affirmed, reversed, and remanded sub nom. Commissioner v. Gordon, 391 U.S. 83 (1968). I am not aware of any provision of law or any decided case which would permit Homes and Development to receive credit, in the computation of their earnings and profits, for the amount which the majority has decided should be included in the earnings and profits of Management. To be sure, the double inclusion could be avoided by a sale of the stock of Homes and Development and a liquidation, with an accompanying step-up in basis under section 334(b) (2), but that would be the result of the independent action of that section and should not affect our analysis of the issue involved herein. See Henry C. Beck Builders, Inc., 41 T.C. at 628. I think it is also significant that, under the current regulations, the profit would not be included in earnings and profits until such time as the deferred amount is taken into income. Sec. 1.1502-33(a), Income Tax Regs.; see fn. 1, supra. Granted that these regulations are not made retroactive, it does not follow that, at least with respect to the problem of timing, they cannot be used as a guide to the principle to be applied in the judicial filling of a void in respondent’s prior regulations.3  I would hold that the $1,065,313.09 did not enter into the earnings and profits of Management for 1954 and consequently its distribution in 1955 did not constitute a dividend to Management’s shareholders. Since the majority found it unnecessary to reach the collapsible issue and made no findings of fact with respect thereto, I am unable to express any opinion as to the considerations involved therein. Rattm, J., agrees with this dissent.   under the current regulations, a portion of that profit, when and if realized, would be allocated to Management, but those regulations are not applicable to the years involved herein. See fn. 4 to the majority opinion, supra at p. 11. Note also that any balance of the deferred profit would have to be taken into income of Management at the time Management (or Homes or Development) ceased to be a member of the group. See. 1.1502-13(f) (1) (iii), Income Tax Regs.    Salem, “The Consolidated Return Regulations Revision: Its Genesis and Objectives,” 17 Tax Exec. No. 2 (Jan. 1965), pp. 166-168.    under the current regulations, the deferred amount would enter into the earnings and profits of Management (rather than Homes or Development) at the later date. See fn. 1, supra.