Court Opinion

ID: 9651182
Source: CourtListenerOpinion
Date Created: 2023-08-23 16:09:45.306978+00
Date Added: 2024-06-11T18:12:30.684065
License: Public Domain

JONES, Circuit Judge
(dissenting).
I should affirm the judgments of the-District Court on the basis of the rule enunciated in Commissioner v. Sansome, 2 Cir., 60 F.2d 931, 933, certiorari denied sub. nom. Sansome v. Burnet, 287 U.S. 667, 53 S.Ct. 291, 77 L.Ed. 575, which I think fits the facts disclosed by the record now before us. While the majority of the Court do. not reject the ruling of the Sansome case,. *183they say that its application should not be extended beyond the precise facts of that case. It does not seem to me, however, that any extended application of the Sansome rule is involved where the additional facts, as in the instant cases, do not derogate the rationale of the rule laid down in the San-some case. That such is the situation seems readily apparent from the facts and decision in that case.
There, a newly organized corporation acquired, in a tax-free reorganization, the entire assets of another corporation, subject to its liabilities, for which the new corporation transferred all of its stock to the stockholders of the predecessor in the same proportional interests as their stockholdings in the old company. The old company was then dissolved. The new company, after operating for slightly more than a year without net earnings, discontinued business and made distribution to its stockholders in ostensible partial liquidation. The Court of Appeals for the Second Circuit, reversing the Board of Tax Appeals, sustained the Commissioner’s contention that, to the extent of the surplus and undivided profits of the old company on hand at the time of the reorganization, the later distributions by the successor company to its stockholders in excess of its own earnings constituted ordinary dividends and were taxable as such.
In so deciding, Judge Learned Hand, who spoke for the Court, said (60 F.2d at page 933) that “what was not ‘recognized’ as a sale or disposition for the purpose of fixing gain or loss [i. e., the reorganization exchange], should [not] be ‘recognized’ as changing accumulated profits into capital * * As it was the intent of Congress, as evidenced by the Revenue Acts, to tax as dividends corporate distributions of earnings accumulated since February 28, 1913, manifestly, to accord such distributions freedom from taxation, when ultimately received by stockholders, merely because of coincidental bookkeeping attendant upon a successor corporation’s acquisition of a predecessor’s business and assets as the result of a reorganization, would be violative of the congressional intent. It necessarily followed, therefore, as a corollary, that the non-recognition of gain or loss allowed by the reorganization provision there involved (Sec. 202(c) (2) of the Revenue Act of 1921) should, in the words of Judge Hand, “be read as a gloss upon section 201” (the taxable dividend definition of the Revenue Act of 1921). Accordingly, it was held in the Sansome case, 60 F.2d at page 933), as a matter of statutory construction, “that a corporate reorganization which results in no ‘gain or loss’ under section 202(c) (2) (42 Stat. 230) does not toll the company’s life as continued venture under section 201, and that what were ‘earnings or profits’ of the original, or subsidiary, company remain, for purposes of distribution, ‘earnings or profits’ of the successor, or parent, in liquidation.” The same can be no less true as to a distribution in ordinary course. Sec. 112(b) and (c)(1) of the Revenue Act of 1928 and Sec. 115 of the Revenue Acts of 1932 and 1934 here involved are substantially the same as the cognate provisions of the Revenue Act of 1921 dealt with in the Sansome case.
The suggestion that “its earnings or profits accumulated after February 28, 1913”, as employed in Sec. 115(a) in defining taxable dividends, was not meant to include other than the distributing corporation’s own separate earnings from the date of its incorporation was sufficiently answered by the Sansome case where the corporation, whose distributions were held taxable as dividends within the meaning of Sec. 201 of the 1921 Act, had no net earnings of its own whatsoever during the entire period of its operations. Speaking directly to the same point, the Court of Appeals for the Fifth Circuit said in Murchison's Estate v. Commissioner, 76 F.2d 641, 642, that “Too much meaning is sought to be attributed to the word ‘its’. * * * Unquestionably the profits here involved although earned by the predecessor belong to the new corporation and were in that sense ‘its earnings and profits’ when distributed, * *
The reason underlying the rule of the Sansome case would seem to be that, where the assets of a corporation (or substantially all of them) are acquired by another corporation by merger or consolidation in what amounts under the Revenue Acts to a tax-free reorganization which, incidentally, does not serve to break the continuity of the business enterprise, the relief from taxation enjoyed by virtue of such a transfer implies, as a" matter of congressional intent, that the earnings and profits of the transferor companies (accumulated after February 28, 1913) become the earnings and profits of the acquiring company for distributional purposes to stockholders. *184The fact that, under approved bookkeeping practices, a successor corporation’s acquisition of a predecessor’s properties and assets are shown as capital and not as earnings or profits is immaterial to the question of the congressional intent to tax as a dividend a distribution of such part of the apparent capital of the successor corporation as actually reflects earnings and profits of the predecessor corporations accumulated after February 28,' 1913.
It so happens that in the Sansome case the old stockholders received through the reorganization nothing but stock in the new corporation for their stock in the old in the same proportional interests while in the instant reorganization the old stockholders received in exchange stock in the new corporation in a reduced proportional interest and cash which was the proceeds of the new corporation’s sale of some of its stock to outsiders, the stock thus sold being the cause for the reduction of the old stockholders’ proportional stock interest in the new company. It is because of this difference that the majority hold the rule of the Sansome case to be inapplicable. I think the indicated difference is without material legal significance to the pertinency of the rule in the Sansome case. See Crocker v. Commissioner, 29 B.T.A. 773, 777. It is true that, because the exchange was not solely in kind, the old stockholders were taxable on any gain realized to the extent of the cash received in distribution (Sec. 112(c) (1). But, it is also true that that provision established the transaction as an otherwise tax-free reorganization. With respect to this very Sharp & Dohme transaction, the Court of Appeals for the Fourth Circuit - held in Starr v. Commissioner, 82 F.2d 964, 966, certiorari denied 298 U.S. 680, 56 S.Ct. 948, 80 L.Ed. 1401, that new Sharp & Dohme, Inc., had acquired all of the properties and assets of the predecessor companies in a. permissible reorganization (See Sec. 112(i) (1) from which no gain or loss was to be recognized except for the cash distributed to the stockholders of the predecessor companies (Sec. 112(c) (1) and, hence, otherwise tax-free. Cf. also Helvering v. Minnesota Tea Co., 296 U.S. 378, 383, 56 S.Ct. 269, 80 L.Ed. 284.
Such being the case, I am unable to see how the congressional intent of similar relevant provisions of the Revenue Acts, as construed in the Sansome case, can be said to vanish where, in a tax-free reorganization, a stockholder receives in exchange, in addition to new stock, some cash (Cf. Helvering v. Minnesota Tea Co., supra, 296 U.S. at page 386, 56 S.Ct. at page 272, 80 L.Ed. 284) on which he is taxable for any gain realized from the cash received, without regard for other possible paper profits. I think the congressional intent of the same provisions of the Revenue Acts remains the same for one tax-free reorganization as for another.
The ruling in the Sansome case has heretofore been uniformly recognized as authority. Save for this Court’s decision in the instant cases, the rule of the Sansome case has never been departed from or qualified in any circuit (including our own) in which the question has been passed upon. See Georday Enterprises, Limited, v. Commissioner, 4 Cir., 126 F.2d 384, 389; Corrigan v. Commissioner, 3 Cir., 103 F.2d 1010, certiorari denied 308 U.S. 576, 60 S.Ct. 91, 84 L.Ed. 482, ruled on the authority of Baker v. Commissioner, 2 Cir., 80 F.2d 813, 815, which followed Sansome; Harter v. Helvering, 2 Cir., 79 F.2d 12, 13; Murchison’s Estate v. Commissioner, supra, 5 Cir., United States v. Kauffmann, 9 Cir., 62 F.2d 1045, 1047; Barnes v. United States, D.C.E.D.Pa., 22 F.Supp. 282, 283, 284; Crocker v. Commissioner, supra. As Judge Dobie pointed out in the Georday Enterprises case, supra, 126 F.2d at page 389, the principle which the courts thus enunciated and have uniformly followed would seem to have congressional approval as evidenced by the committee reports which he cites.
In reality, the instant reorganization was as complete a distribution among the stockholders of the predecessor companies of the whole capitalization of the new company as it was in the Sansome case. Not one penny of new capital came in to new Sharp & Dohme. The successor company’s entire assets, even after its stock sale, consisted solely of the properties and assets transferred to it by the predecessor companies. What happened was that under the contracts for the reorganization, as agreed to by the stockholders of the old companies, the new company was authorized to sell a portion of its stock to the public and to-distribute the cash so received among the old stockholders. That, the new company did, making distribution of the proceeds from its stock sale directly to the old stockholders, in the case of Mulford, and jindirectly, in the case of old Sharp & *185Dohme, through the medium of the old company. In other words, the stockholders of the predecessor companies authorized and obtained a cash conversion of a part of their proportional interest in the assets transferred to the new company. This is by no means to suggest that the integral parts of the reorganization should have been considered separately, contrary to the ruling in Starr v. Commissioner, supra, and that a capital gain should have been determined for the old stockholders from their sale of a portion of their former stock interests. It only goes to confirm that what the old stockholders received in cash in connection with the reorganization bore no relation to the predecessor companies’ undistributed earnings. I, therefore, think it is a mistake to say that the cash distribution made to the old stockholders in the reorganization exchange, being in excess of the accumulated earnings and profits of .the transferor companies, must be considered to have been a distribution of such earnings and profits.
Incidentally, by so reducing the proportional interest of the old stockholders in the successor company to less than the maximum percentage of control specified in the Revenue Act (Sec. 113(a) (7) of the Act of 1928, 26 U.S.C.A. Int. Rev. Acts, page 382), new Sharp & Dohme was enabled to and did obtain the Commissioner’s approval of its step-up of the book values of the assets lately transferred to it by the old companies. Thus, the capitalization of new Sharp & Dohme was arbitrarily augmented and the new company was thereby put in a position to sell a portion of its stock to the public and distribute the proceeds to the stockholders of the predecessor companies without accounting for the stock proceeds as contributed new capital of the new company.
But, the majority, by treating the cash received by the stockholders of the old companies in connection with the reorganization as a distribution of the accumulated earnings and profits of the transferor companies on hand at that time, conclude that the distribution in connection with the reorganization in 1929 was taxable to the stockholders as a dividend under the ruling of this Court in Love v. Commissioner, 3 Cir., 113 F.2d 236, and say that the Commissioner’s failure then so to tax can furnish no justification for his claim now that the distributions by the new company to stockholders in 1933 and 1934 were a part of the accumulated earnings and profits of the old companies. I can find no basis in the record for imputing any such oversight to the Commissioner. The complete answer is that in Starr v. Commissioner it was held that the Sharp & Dohme transaction was a tax-free reorganization under Sec. 112(c) (1) and that the old stockholders’ tax liability, because of the property other than kind received in the exchange, was limited to the actual gain realized in cash.
If the Love case is to be given the effect which the majority now accords it, then the Sharp & Dohme stockholders have escaped a tax which the taxpayers in the Love case were required to pay, viz., a tax on the reorganization cash distribution as an ordinary dividend to the extent of the old companies’ earned surpluses — a tax which the ruling in the Starr case precluded. That case has long since settled the taxability of the cash received by the stockholders of the predecessor corporations in connection with the Sharp & Dohme reorganization. But, we are not now concerned with that distribution. What we are here concerned with are the distributions to stockholders by New Sharp & Dohme, four and five years after the reorganization, in excess of the new company’s earnings from the date of its incorporation. In such instance, the new company being the result of a tax-free reorganization, it is my opinion that, under the rule of the Sansome case, the distributions are taxable as dividends to the extent that the earnings of the new company and the undistributed earnings of the old companies at the time of the reorganization were sufficient' to cover the subsequent distributions. Such seems to me to be also the clear implication of the decisions in the Baker, Murchison and other cases herein-above cited.
Even the taxpayers in the instant cases cited the Love case only by way of reply brief in connection with a supposititious set of circumstances contrary to the actual fact. Thus, the taxpayers argue from the Love case (p. 3 of their reply brief) that — “If in that case [Starr v. Commissioner] the Commissioner had taken the position that distribution of the cash to the old stockholders [in the reorganization exchange] was equivalent to a taxable dividend, as he later did successfully in this court in Love v. Commissioner, 3 Cir., 113 F.2d 236 (June 27, 1940), it would seem clear that *186as to the cash received, to the extent of the earned surplus of the old company, the old stockholders would have been considered to have received the earnings and profits of the old company as a taxable dividend.” The fact is, however, that the Commissioner did not take that position in the Starr case and for a very obvious reason. What the stockholders in the Love case had received in distribution they received out of the assets of the old company as shown by its books while what the old Sharp & Dohme and Mulford stockholders received by way of cash distribution in connection with the reorganization was not out of the assets of the old companies as shown by their books. Neither was it out of the assets of the new company as already appears. The latter material circumstance would seem to distinguish the instant case from the cases cited and relied upon in Love to which the majority again make reference.
I, therefore, continue to believe that the decision in the Sansome case furnishes the rule dispositive of the question here involved.