Court Opinion

ID: 4480500
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:20.49984+00
Date Added: 2024-06-11T14:53:07.664127
License: Public Domain

Dawson, J., dissenting in part: At the outset let me emphasize that I am in accord with all the findings of fact on all issues and the opinion of Chief Judge Tietjens with respect to the second and third issues. However, as to the first issue pertaining to the claimed capital loss on the Nu-Way Supply Co. stock, I must dissent from the majority opinion of my respected colleagues. In my judgment the majority opinion on this issue is faulty and incorrect. It misconstrues the prohibition of section 267 (a) (1); it ignores with cavernous silence pertinent legislative history; it stretches the tentacles of McWilliams v. Commissioner, 331 U.S. 694 (1947), to encompass a situation neither intended nor contemplated by the Supreme Court; and it literally flies in the face of what I regard as two sound and well-reasoned opinions by Courts of Appeals for the Fourth Circuit in McNeill v. Commissioner, 251 F. 2d 863, and the Seventh Circuit in McCarty v. Cripe, 201 F. 2d 679. Consequently, I feel compelled to express my views on these points. The intent of Congress is not mystifying. It is plainly revealed by the legislative explanation of section 24(a) (6) of the Revenue Act of 1934 where the House Ways and Means Committee said in H. Kept. No. 704, 73d Cong., 2d Sess., p. 23: Experience shows that the practice of creating losses through transactions between members of a family and close corporations has been frequently utilized for avoiding the income taw. It is believed that the proposed change will operate to close this loophole of taw avoidance. [Emphasis supplied.] Moreover, the discussion of section 24(a) (6) in the House of Representatives, as contained in volume 78 of the Congressional Record, was as follows: MR. DOUGHTON OF NORTH CAROLINA. * * * Another important change recommended, by the committee relates to losses from sales or exchanges of property, directly or indirectly, between members of a family, or between an individual and a corporation. Many instances have been brought to light where transactions of this character have taken place for the sole purpose of avoiding payment of taxes, and it is believed that the suggested change will effectively close this loophole, [p. 2511] ******* MR. SAMUEL B. HILL. * * * We have also provided in this bill that transfers between members of the family for the purpose of creating a loss to be offset against ordinary income shall not be recognized for such deduction purposes. This will meet the Mitchell tax-avoidance case. [p. 2662] ******* MR. SAMUEL B. HILL. * * * * * * Also, since we have provided in this bill against transactions between members of the same families, whereby a man may transfer to his wife, to his daughter, his son, or father, or any member of his family in direct line of ascent or descent, we have removed the temptation from tax dodgers who transfer securities or other property from one member of a family to another in order to deduct a capital loss against ordinary income, [p. 2663] [Emphasis supplied.] Any interpretation of the statutory language “losses from sales * * * of property, directly or indirectly, * * * between” members of a family must be made against the backdrop of this very specific legislative history if we are to ascertain the true intent of Congress. Delusive exactness in a statute is oftentimes a source of fallacy. To quote Judge Learned Hand, “the duty of ascertaining the meaning of a statute is difficult enough at best, and the one certain way of missing it is by reading it literally, for words are such temperamental beings that the surest way to lose their essence is to take them at their face.” It is now established beyond successful challenge that a court may seek out any reliable evidence as to legislative purpose regardless of whether the statutory language appears to be clear. United States v. Amer. Trucking Assns., 310 U.S. 534, 543-544. Hence, as I view the statutory language beneath the illuminating skylight of the legislative purpose, Congress did not intend to prohibit by section 267 (a) (1) loss deductions on involuntary sales of property by governmental bodies which result in the passing of property between related taxpayers. It only prohibits losses on those sales, directly or indirectly, prearranged or predesigned by members of the intrafamily group in which such members are able to control and time the losses. I believe this view is fortified, not negated, by the Supreme Court’s opinion in McWilliams v. Commissioner, supra. The Mc-Williams case did not involve an involuntary sale. It only involved a voluntary sale prearranged by members of an intrafamily group. The statements quoted from the McWilliams opinion by the majority here must be read in conjunction with the following comments: It is clear, however, that this difficulty is one which arises out of the close relationship of the parties, and would be met whenever, 5y prearrangment, one spouse sells and another buys the same property at a common price, regardless of the mechanics of the transaction. * *■ * * * * * * * * We conclude that the purpose of § 24(b) was to put an end to the right of taxpayers to choose, by intra-family transfers and other designated devices, their own time for realizing tax losses on investments which, for most practical purposes, are continued uninterrupted. X.t * * * * * * Precisely the same difficulty may arise, however, in the case of an intra-family transfer through an individual intermediary, who, 6y pre-arrangement, buys from one spouse at the market price and a short time later sells the identical certificates to the other at the price prevailing at the time of sale. * * * [Emphasis supplied.] In my optic this is simply a case where the majority has fired the Gatling gun of McWilliams off target. This is borne out by Judge Hand’s pointed observation in his dissenting opinion in Commissioner v. Ickelheimer, 132 F. 2d 660, 662 (C.A. 2, 1943), when he said, “Here we can have no doubt of the purpose, of what Congress was aiming at; * * * transactions by which, in accordance with a preexisting design, property passes by whatever combination of moves” from one member of a family to another. This purpose was also recognized by Circuit Judge Allen in Commissioner v. McWilliams, 158 F. 2d 637, 639 (C.A. 6, 1946), where it is stated that: If losses from these sales are permitted to be deducted the purpose of the statute will he frustrated. These sales were admittedly for the purpose of establishing tax losses, and the broker was so informed. There was no other purpose in the transaction. [Emphasis supplied.] Before the Supreme Court’s decision in the McWilliams case, this Court held in Thomas Zacek, 8 T.C. 1056 (1947), that a deduction claimed by a mortgagor of his loss on an involuntary foreclosure and judicial sale of the mortgaged property to members of his family was prohibited by section 24(b) (1) (A) of the 1939 Code. It is not apparent from the Zacek opinion whether the legislative history of the statute was ever considered when we declared that “it is also broad enough to include involuntary sales” and reached the conclusion that “there was a sale of property indirectly between members of a family.” Even then, Judges Murdock, Arnold, and Kern signaled the error in a dissenting opinion which reads as follows (8 T.C. at 1058) : The statute disallows losses from sales, directly or indirectly, between brothers. Here the petitioner did not make the sale or control it directly. It was made by the sheriff, who was in no way influenced or controlled by the petitioner. It was made to the highest 'bidder. This sale was not the kind which the statute was intended to Teach and is not within the letter of the statute. The loss should he allowed. The scope and purpose of section 24(b) (now sec. 267) with respect to involuntary sales, viz, contested and adverse foreclosure proceedings, judicial sales, or tax sales, was first considered, in the light of the legislative history and the McWilliams decision, in the case of McCarty v. Cripe, supra. There the taxpayer owned real estate against which the county instituted proceedings to foreclose its tax liens. The land was sold by the county sheriff at public auction. The highest bidder was a trustee who had been loaned the funds on open account by the taxpayer and who conveyed the real estate to a corporation in which the taxpayer owned over 50 percent in value of the outstanding stock. In holding that the deduction of the loss was not prohibited by section 24(b) (1) (B), the Court of Appeals for the Seventh Circuit said (201 F. 2d at 682) : It is difficult to conceive that the purpose thus stated could encompass an involuntary sale or transfer. The transaction in controversy obviously was involuntary insofar as the decedent was concerned. The property was taken from him and sold by operation of law. He was without choice as to the time when the state would proceed against the property and, consequently, could not have selected the time for the realization of a taxable loss * * * There is not even a suspicion that his neglect or refusal was any part of a scheme or device having to do with the incidence of taxation. This Court again faced the same issue in Robert H. McNeill, 27 T.C. 899 (1957). Adhering to our prior opinion in the Zaceh case and attempting to distinguish McCarty v. Cripe, we disallowed the deduction of a loss realized by the taxpayer upon the seizure and sale for nonpayment of county real estate taxes to a corporation wholly owned by the taxpayer and his immediate family. The Court of Appeals for the Fourth Circuit reversed us (251 F. 2d 863), holding that the taxpayer was not precluded by the provisions of section 24(b) (1) (B) from deducting the loss since it was sustained because of the separate and independent action of the county authorities in the collection of overdue taxes. The Court of Appeals stated (251 F. 2d at 865-866) : The statute was designed to put an end to the right of taxpayers to choose their own time for realizing tax losses on investments by intra-family transfers and other designated devices. McWilliams v. Commissioner, 331 U.S. 694, 67 S.Ct. 1477, 91 L.Ed. 1760; Commissioner of Internal Revenue v. Kohn, 4 Cir., 158 F.2d 32. The fact is. however, that the loss was not occasioned by the transfer of the property to the Royal Village Corporation. It was brought about by the seizure and sale of the property for taxes after unsuccessful efforts by the county authorities during a six-year period. Of course the true nature of the transfer rather than the form which is [sic] took is controlling, but there is nothing in the evidence to warrant the inference that McNeill controlled the Pennsylvania authorities so that in effect the seizure and sale for taxes were his actions and not theirs, or that their subsequent attempts to sell th.e land were not genuine efforts to satisfy üie tax lien, or that their final offer to sell the property to the taxpayer was made in collusion with him to serve his purposes. In the instant case there were outstanding Federal income tax assessments against James which dated back to 1952. These were not self-assessed taxes. They were involuntarily assessed against James and tax liens against all his property and rights to property were irwolimtariVy filed. To collect on these assessments the Internal Revenue Service had to levy upon James’ Hu-Way stock in 1960 and sell it at public auction in accordance with the provisions of sections 6331, 6335, 6338, and 6339, I.R.C. 1954. The stock was purchased by his wife, Amanda, at the public sale. Although Amanda had obtained the financing for her purchase through a note on which James was coguarantor, there was no collusion by petitioners which reflected an attempt to force the levy at that given time so as to utilize losses for tax purposes. Granted that petitioners worked together to permit family retention of the Hu-Way stock, there was clearly an involuntary sale by the Federal tax authorities,, and such sale was not made by or on behalf of James. The attempt in the majority opinion to bootstrap this into a voluntary sale, with the Internal Revenue Service acting as James’ agent in selling the stock, strains credulity. This was an mvolwntary sale pure and simple. There was no agency relationship whatsoever. James had no control over -the forced sale of his stock by the Internal Revenue Service. The control and the timmg about which the Supreme Court spoke in McWilliams v. Commissioner, supra, are in no way present here. Indeed, since the stock was sold at public auction, there was no certainty that petitioners would be able to retain control of all the Hu-Way stock despite their desire to do so. The sale of the stock was wholly involuntary insofar as James was concerned because he did not plan, initiate, or control the seizure, the sale, or the transfer of title. A bona fide transfer of title to the stock was accomplished by an independent third party (the Internal Revenue Service) and not by James or Amanda. Even respondent acknowledges in his brief that if the Internal Revenue Service had bid in the stock at the distraint sale, had taken title thereto, and had then sold the stock to Amanda Merritt, this case would be factually similar to the McCarty and McNeill cases. Is it of any real consequence here that title to the stock did not pass to the Government as purchaser? I think not. It was the certificate of sale issued by the Internal Revenue Service under section 6339(a) that transferred James’ right, title, and interest in the stock to Amanda. This was a direct sale between the Internal Revenue Service and Amanda — not an indirect sale between James and Amanda. And surely it was not a sale prearranged by an intrafamily group for tax avoidance. The record in this case, contrary to the statement made in the majority opinion, does not support any prearrangement. The majority’s effort to cast aside the circuit court opinions in McOcurty and McNeill as failing accurately to interpret McWilliams, or distinguish them on the ground that the title to the property passed from the taxpayers to the taxing authorities, does not persuade me one iota. I agree with the interpretation given the McWilliams opinion by the Courts of Appeals and I think that passage of title is a difference without substance. What is crucially important is the invohmtary nature of the sale. The majority opinion also alludes to the fact that “the loss was not genuinely realized in the economic sense” and that “they suffered no actual economic loss.” It is clear that if James had sold his stock to an unrelated third party for $25,000 he would have sustained an economic loss of $110,000. Does it become any less genuinely realized in the economic sense where it is involuntarily taken from him by the taxing authority and sold at the same price? Plainly James has lost separate control of and title to his stock and he and his wife are out of pocket $25,000.1  Looking at this entire problem from a practical standpoint, I visualize no tax-avoidance scheme by the Merritts here or, for that matter, any substantial tax windfall. In conclusion I reiterate my belief that the opinions of the Courts of Appeals provide the right answer to this question. I agree with the appellate courts that Congress did not express, and I see no reason to suppose that it entertained, any intention to disallow losses realized through bona fide sales by Federal, State, or local taxing authorities. Under these circumstances I would hold that the loss deduction is not prohibited by the provisions of section 267(a) (1). FoRebster, Fay, Hoyt, and Simpson, //., agree with this dissent.   If Amanda should, later sell the stock for less than, she paid for it at the distraint sale, the amount of her loss will be limited to the difference between $25,000 and what she receives for it. See sec. 267 (d), I.R.C. 1954.