Court Opinion

ID: 4488416
Source: CourtListenerOpinion
Date Created: 2020-01-17 22:01:17.655531+00
Date Added: 2024-06-11T15:04:08.627030
License: Public Domain

Trammell,
dissenting: I am unable to follow the reasoning upon which this opinion is based. The result of the decision is that the greater the value of the assets or the greater amount paid for the stock, the less the invested capital represented thereby. This seems to me to be wholly incorrect. On this theory, if the stock had been practically worthless and only $100 had been paid for it, then the difference between that amount and $60,000 would be included in consolidated invested capital, but if the business had prospered and the stock had sold for par or in excess thereof, then no amount whatever could be included in the consolidated invested capital with respect to the acquisition of this stock. I think that the mere statement of this result shows the fallacy of the theory upon which the decision is based.
It seems to me to be erroneous to say that when the corporation purchased stock in another corporation with which it was not at that time affiliated, any stock was being retired or any cash was withdrawn by the stockholders from the corporation. There was no affiliated group of corporations when this transaction occurred. The affiliation did not occur until after the purchase of the stock.
The stockholders in the corporation which became the subsidiary after the transaction sold their stock to the present corporation. The parent corporation then simply took the place of the former stockholders. A mere change of stockholdings by purchase and sale does not, in my opinion, amount to a retirement of stock. The actual fact is that the capital stock was not reduced. It remained what it was. I do not believe the separate entities should be so disregarded. Even if the corporation had been affiliated at the time of the transaction and the parent company had bought some minority stock, I can see no sound basis for holding that the stock acquired was retired.
The taxpayer and the Commissioner have presented two bases for the determination of the invested capital. The taxpayer determined the invested capital of the two companies separately and added the two together, while the Commissioner substituted the purchase price of the stock as representing the investment in assets. It seems to me that neither theory is correct. The funds with which the parent company bought the stock of the subsidiary were already included in invested capital of the parent unless they were earnings of the year. This fact we do not know, however. If the stock was not purchased with current earnings there would be a duplication which should not, in any event, increase invested capital.
*701We are not now concerned with a determination of earned surplus as affected by the deficit.