Court Opinion

ID: 6890345
Source: CourtListenerOpinion
Date Created: 2022-07-23 21:39:41.399976+00
Date Added: 2024-06-11T16:05:49.355952
License: Public Domain

HOLMES, Circuit Judge
(dissenting).
The majority opinion seems to derive much comfort from some supposed kinship between the 1936 statute providing for tax-free liquidations, and the credit against undistributed profits taxes provided by Section 26(c) (1). Unfortunately, the only link between the two is that each grants a credit against or exemption from a levied tax, and as such must be strictly construed against the taxpayer claiming the benefits thereof.
The purpose of Congress in enacting the former statute was to eliminate corporate holding companies. As an inducement to achieve this result, it permitted liquidations complying with the prescribed procedure to escape the tax incidence that otherwise *971would have attached. It did not provide, as an additional inducement, either expressly or by implication, that the surviving corporations should also receive special tax benefits conferred upon the extinguished corporation by Section 26(c) (1). It is strange reasoning to say that the Congress, by its action in conferring benefits, created an unreasonable hardship upon the recipient of its bounty because it did not give more.
Our problem here is simply to determine whether this taxpayer was, within the language of Section 26(c) (1), a corporation that could not pay out some of its adjusted net income as dividends “without violating a provision of a written contract executed by the corporation prior to May 1, 1936.” The questions of time and of identity are crucial. Under the exact terms of the statute, the corporation claiming the credit must be the corporation that made the contract, and the contract must have been executed prior to May 1, 1936. Neither requisite is fulfilled in this case.
Under settled law, two corporations are regarded as separate taxing entities even though one owns the entire stock of the other. At all times prior to May 1, 1936, the Texas corporation that made the contract and the Delaware corporation that Claims the credit were separate, subsisting corporate entities; and even if Delaware made a contract by assuming the obligations of Texas, such contract was entered into after May 1, 1936, too late to comply with the terms of the statute.
The effort to escape the force of these determinative facts by claiming that a merger took place such as preserved the identity of the Texas corporation in tile taxpayer is likewise without avail. Except in some instances for purposes of suit, a corporation that is wholly liquidated and dissolved is no longer existent. What took place here was a voluntary dissolution of the subsidiaries after a distribution in complete liquidation. There was no merger, consolidation, or amalgamation of any of these corporations. Moreover, even if there had been a statutory or de facto merger of the Texas corporation with the Delaware corporation, the identity of the merged corporation under the controlling laws of Delaware would either be that of the corporation surviving after the merger, or it would be a new corporation created by the consolidation of the two; in no event would it be the Texas corporation, which was the corporation that executed the contract.1
Fnriher, there is a profound difference between taking over the assets of a corporation, and absorbing its identity or corporate life as a fictitious entity. The latter is generally spoken of in America as a consolidation, and must have legislative authority or consent.2 Here a Texas corporation is said to have been drowned3 in two Delaware corporations. No facts support the argument (because no merger or consolidation was attempted), and the law refutes it. No state or federal government undertook to grant to the Delaware corporation the additional status of a Texas corporation. There was no way to transfer the Texas legal entity to the Delaware corporation.
The case of Helvering v. Metropolitan Edison Co., 306 U.S. 522, 59 S.Ct. 634, 83 L.Ed. 957, has no application here. In that case the Taxpayer had deducted certain expenses and interest paid by it. Every one conceded that, if the items paid were obligations owed by the taxpayer and were not acquired by it by purchase, the deductions were proper. There was no question either of time or of identity. In this case the all important questions are whether the taxpayer claiming the credit executed the contract restricting dividends, and if so, whether that contract was made prior to May 1, 1936.
I think the decision of the Tax Court should be affirmed.

 Sees. 2091 and 2092 of the Revised Code of Delaware (1.935).

 Thomas v. Railroad Co., 101 U.S. 71, 25 L.Ed. 950.

 The metaphor is an unfortunate one in this ease. Drown means to perish or suffocate in water or other fluid; to choke to death or stifle in water; to extinguish. In this view the Texas Company has been drowned twice: first by being immersed in tho Tool Corporation, and next by immersion in the corporate taxpayer.
A word like this leaves the lawyers in doubt as to its legal significance. Courts should use legal language in writing their opinions; then tho profession would understand what they mean.