Court Opinion

ID: 9637789
Source: CourtListenerOpinion
Date Created: 2023-08-22 15:20:37.067267+00
Date Added: 2024-06-11T18:10:00.574614
License: Public Domain

L. HAND, Circuit judge
(dissenting).
I do not agree with the view apparently taken by the Tax Court that “Consolidated” was a mere continuance of “Hutner,” although the parties also seem to have so understood the transaction, for “Hutner” entered the “Holding” assets upon its own books as though they had been transferred to it. If, however, it were permissible to treat it in that way, I should have no difficulty in holding “Consolidated” for the tax. In that event, “Hutner,” being the sole shareholder of “Holding” would have taken over all of “Holding’s” assets, and so have changed its relation to them from shareholder to owner. That I think would have been a “realization” by “Hutner” of gain upon the “Holding” shares, and we should have held that the shares had been “disposed of” within the meaning of § 111(a). None of the sections relied upon would make such a gain “non-recognizable.” As I understand the law, in transactions between a sole shareholder and his corporation the Treasury has the choice of treating them as real, or as fictitious. Burnet v. Commonwealth Improvement Co., 287 U. S. 415, 53 S.Ct. 198, 77 L.Ed. 399; Higgins v. Smith, 308 U.S. 473, 60 S.Ct. 355, 84 L.Ed. 406. Hence “Hutner” would have been liable to a tax and, if so, “Consolidated” would have been liable under Article VII of the merger agreement (and § 107 of the Complied Statutes of New Jersey [N.J.S.A 14:12-5]) which reads as follows: “all debts * * * of either of said corporations * * * shall forthwith attach to said consolidated corporation and may be enforced against it to the same extent as if said debts * * * had been incurred * * * by it.”
However, “Consolidated” was in fact a new jural person, and the property of “Hut-ner” — the “Holding” shares — and of “Holding” — the “Holding” assets — passed directly to it at the instant of merger; there was no moment when “Hutner” held “Holding” assets, despite the entries on its books. For this conclusion I rely again upon Article VII of the agreement (and upon § 107 of the Compiled Statutes of New Jersey) which clearly contemplate that there shall be a new corporation and that the merging corporations — described as “former corporations” — shall “be deemed to continue in existence” only for the benefit of their creditors. Nevertheless, although for this reason “Consolidated” did not become a shareholder of “Holding” until the very instant that it became also the direct owner of “Holding’s” assets, I think that it “disposed of” the “Holding” shares within § 111 (a). Through its promoters already before the merger it had agreed to become the sole shareholder of “Holding”; that made it equitably the owner of the shares. True, it had equally agreed to become the owner of the “Holding” assets; but it had agreed to become the “Holding” shareholder only in order that it should through the merger be able to unite shares and assets, a union which if carried out by “Hutner’s” acquisi*22tion of the assets would have been a “disposition of” the shares, if I am right. I cannot consent that the parties be allowed to escape an actual liability by adopting a method in every practical sense the equivalent, merely because there was no instant of time in which “Consolidated” was not shareholder alone: i.e. not at once shareholder and owner of the assets. We must regard the transaction as a whole; if we do, the “Holding” shares were to be “disposed of” by uniting shareholder and owner. Therefore I would affirm the Tax Court as to the income tax and excess-profits tax.
As to the second point, I agree with Helvering v. Rebsamen Motors, Inc., 8 Cir., 128 F.2d 584 that § 351, 26 U.S.C.A. Int. Rev.Acts, page 757, does not cover the situation ; there was no “sale.” I would therefore reverse as to the personal holding company surtax.