Court Opinion

ID: 4480751
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:30.526052+00
Date Added: 2024-06-11T15:03:35.341488
License: Public Domain

Disney, J., dissenting: The only question here is whether the corporate distributions to petitioners were from capital or from earnings and profits. The majority opinion relies upon the Sansome case to establish earnings and profits in the distributing corporation. That case was one wherein the Court pointed out that there was mere change of stock for assets, without change in proportion of stock holdings, and no other change in the financial structure. The conclusion there reached, that earnings and profits of the. old corporation belonged to the new, is by the majority opinion here applied to a situation where more than 50 percent of the capital in the new corporation comes from sources foreign to the old and where, in addition to the exchange of stock for assets, cash is paid as to the predecessor corporation, Crandall-McKenzie, in an amount greater than its accumulated earnings and profits, and somewhat less than the accumulated earnings and profits of both corporations. Such a change in the corporate financial structure seems altogether sufficient to require distinction of the Samóme case. Although that case is based upon denial of the idea that “what was not ‘recognized’ as a salé or disposition for the purpose of fixing gain or loss should be ‘recognized’ as changing accumulated profits into capital,” it does not seem, under the facts in the instant case that there is any such change; rather, there appears in the majority opinion a conversion of purchased property into earnings and profits. Where, as here, the greater portion of the new company’s capital was raised by sale of stock having no connection with the old corporations, there clearly appears difficulty in identifying a later distribution by such new corporation as not out of such new capital, but from the earnings and profits of the old corporation, most particularly where realism seems to require a balancing of cash paid against earnings and profits allegedly acquired. The old stockholders receiving, in addition to stock in the new corporation, large amounts of cash, they seem in fact to have realized upon the earnings and profits of the former corporation to that extent. For the purpose of the present question, the result would not be different if the former corporation kept its earnings and profits, and the new corporation kept its capital in the same amount, in which case later distribution would be pro tanto from such capital. In my opinion, the record here shows the substance of a distribution of the earnings and profits of the former corporation to its stockholders to the extent that cash paid equaled such earnings and profits, and I do not think that the general idea of nonrecognition of gain or loss in connection with a reorganization should be carried so far as to brand the distributions here as from earnings and profits. Examination of all the cases cited in Campbell v. United States, 144 Fed. (2d) 177, indicates that none involves a situation where new capital is raised by the issuance of new stock and resultant change in proportion of holdings and financial structure. I make no exception of Helen V. Crocker, 29 B. T. A. 773, for therein, although the new corporation had authorized capital stock of 10,000,000 shares of $1 par each, the opening entries on its books showed capital stock of $3,169,-266, which is the aggregate par value of the shares issued to the two predecessor corporations. It appears that 900 shares were also issued to the incorporators for cash, but whether these were included in the 3,169,266 shares appears uncertain and, in any event, the number is so small by comparison with the total number issued that I can not consider the case of weight on the present question. The conclusion in Campbell v. United States, supra, is based in part upon the idea that the cash received by the old stockholders had the effect of distribution of a taxable dividend, and so a distribution of the earnings. With that idea we agreed in Knapp Monarch Co., 1 T. C. 59, a recapitalization case; also in Estate of Edward T. Bedford, 1 T. C. 478 (also recapitalization). The latter was reversed in Estate of Bedford v. Commissioner, 144 Fed. (2d) 272 (certiorari granted, Jan. 8, 1945), because the Circuit Court considered the distribution, because" of earlier stock dividends, to he in partial liquidation. In both cases we emphasized that there were earnings and profits sufficient to cover the distribution. Obviously, then, we considered that the distribution would be from, and reduce, such earnings and profits. Thus it appears that the cash received in addition to stock in reorganization does not escape tax, and that therefore the basic thought in the Sansome case, escape from tax because of reorganization-nonrecognition of gain, has no application, so far as concerns any cash also received in addition to stock, by the stockholder — an element altogether foreign to the situation in the Sansome case. I see no reason to apply that case and would hold that the distribution in 1940 here in question was from capital. I therefore dissent.