Court Opinion

ID: 4479952
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:13:57.583219+00
Date Added: 2024-06-11T12:59:39.903053
License: Public Domain

Dkennen, J., concurring: I agree with the views set forth in the maj ority opinion. Since the dissenting opinion would reach the opposite result upon a theory which was not discussed in the majority opinion and was not argued by either party, I feel constrained to make these few remarks concerning the dissenting opinion. While there would appear to be a gain realized by Management which is not being taxed to Management, the fault, if any, lies with respondent’s regulations which fail to deal with the problem presented here. Moreover, given the broad regulatory authority with which the Congress undeniably has vested the respondent in this area and given the failure to use that authority, I cannot accept any theory which would find the respondent to have an inherent power to prevent avoidance of tax by an ad hoc determination such as is here involved. Further, I am persuaded by the record, particularly the promulgation of Rev. Rul. 60-245, 1960-2 C.B. 267, that respondent has long been aware of the problem presented by this case. His failure to deal with it by amended regulations is due most probably to his inability to develop an acceptable solution and I believe this points up the danger of a judicial interference in what is essentially a legislative and administrative matter. The dissenting opinion states that the term “unrealized” as used in the regulations1 “is obviously the reverse of the ‘Intercompany profits and losses which have been realized by the group through final transactions with persons other them, members of the group’ ” (emphasis added in the dissent), which are not to be eliminated. If the use of “reverse” is intended to indicate that all eliminated inter-company profits and losses of years prior to the taxable year are to be reversed and included in income in the year in which the transaction with an outsider occurs, then I must disagree. It is for such cases that the regulations provide a carryover basis. In such cases, the individual member of the affiliated group is treated as having realized a gain measured by the difference between its receipts on the transaction and the basis of its transferor, together with whatever adjustments (such as depreciation) may be appropriate. I find nothing in the law or regulations which would permit Homes to add to its basis in the project the amount of the gain respondent would now tax to Management in 1951. Had Homes sold the project to an outsider it presumably would have realized the gain attributable to the unrealized profits of Management.2 True, this method for preserving and ultimately taxing the gain (albeit as a capital gain and not as ordinary income) tends to produce distortion because Homes is treated as having realized all the gain even though at least a part of it should be apportioned to Management. Nevertheless, such distortion has been accepted by both the Government and those affiliated groups choosing to file consolidated returns (sec. 1.1502-1 (a), Income Tax Regs.). As the excerpt from the House report appearing in footnote 1 of the dissent indicates, this was done in order to avoid “the necessity of examining the bona fides of thousands of intercorporate transactions.” The dissent would decide the case on the theory that “when the [mortgage] obligation of the group was satisfied and liquidated — -in this instance by eliminating Homes as a group member — the gain measured by the amount collected earlier from the mortgagee was, for the first time, a free asset and includable in computing gain as part of the ‘money received’ for the property previously owned by the group,” citing Lutz & Schramm Co., 1 T.C. 682 (1943); R. O'Dell & Sons Co., 8 T.C. 1165 (1947), affd., 169 F. 2d 247 (C.A. 3, 1948); and Mendham Corporation, 9 T.C. 320 (1947), in support of the application of this theory to the instant case. In each of those oases the taxpayer disposed of the mortgaged property itself and, as part of the transaction, the mortgage obligation to the taxpayer (in Mendham the taxpayer acquired the property in a tax-free transaction subject to the mortgage, which remained an obligation of the taxpayer’s transferor) was eliminated. In each case, we held that the elimination of the obligation constituted part of the taxpayer’s receipts from the transaction. But this gives no recognition to the distinction that in those cases the owner of the property not only transferred the property itself, but an obligation of either the owner or of the property transferred was discharged, whereas in the case before us the group transferred stock and not the underlying assets or obligations. Neither was the mortgage satisfied nor did a technical defense arise to the mortgage obligations as a result of the transaction. Immediately after the stock transfer, Homes still owned the property and was still liable on the mortgage. Were Homes to then sell the property for an amount equal to the unpaid balance on the mortgage and use the proceeds to satisfy the mortgage obligation, Homes would be taxable on the difference between its new carryover basis and its proceeds. Homes would get no benefit from the respondent’s proposed tax on Management. In effect, the same excess of mortgage proceeds over cost of construction would be taxed twice. It is argued that unless the profit of Management is taxed to Management at this time it will escape taxation altogether because the purchaser of the Homes’ stock was able by virtue of the provision of section 334(b)(2), I.R.C. 1954, to avoid taxation on this profit. If so, this is only because of an unrelated provision of the Internal Keve-nue Code over which petitioners had no control. Furthermore, the profit actually realized by Management on the construction of the project presumably would be taxed to its stockholders upon distribution thereof to them. In my opinion the theory advanced in the dissent does not compel nor justify a different conclusion than reached by the majority. It seems to me to be an effort to apply an inapplicable theory to this particular situation to prevent what the dissenters consider would be an avoidance of tax, with no support in the law or regulations. Fisher, Train, Fay, and Dawson, JJ., agree with this concurring opinion.   Sec. 1.1502-31(b)(1) Tamable income. * * * (i) There shall be eliminated unrealized profits and losses in transactions between members of the affiliated group and dividend distributions from one member of the group to another member of the group (referred to in the regulations under section 1502 as intercompany transactions) ;    Assuming that there would have been a profit on the transaction.