Court Opinion

ID: 4495281
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:14:14.988629+00
Date Added: 2024-06-11T08:49:27.302403
License: Public Domain

Adams,
dissenting: I am unable to agree with the opinion of the majority in this proceeding.
The question here is, Can one in control of all the stock of a corporation so deal with the corporation by buying from it or selling to it as to establish gains or losses at his pleasure which must be recognized for purposes of taxation?
The petitioner here is a creature of the laws of Illinois. The statutes of that state provide that a corporation may be organized by three or more persons, and further that the business of the corporation shall be controlled by a board of directors. At the time of this transaction, D’Ancona was the owner of all the stock of petitioner except two qualifying shares which were controlled by him.
We have before us the corporation, and in order to determine its tax liability it becomes necessary to examine its transaction with its sole owner. The respondent asks us to disregard the corporate entity and to look through the form of the transaction to its substance and to determine the tax status of petitioner from this viewpoint. He contends that for the purposes of this proceeding the corporation and its sole owner are one and the same. Petitioner, on the other hand, contends that its taxable status must be determined as would that of any other corporation, and that its transactions with its sole owner must be judged as though they were ordinary and normal business transactions; as though they were strangers and dealt at arm’s length.
Petitioner bases its contention and the majority report is grounded on the holding in the case of Burnet v. Commonwealth Improvement Co., 287 U.S. 415. That case is readily distinguishable from the situation here. It will be noted that in that case we had before *927us the corporation which was seeking to deny its own existence for its own purposes. Here, we have the corporation asserting that it and its sole owner are separate entities for the purposes of this case. Here the corporation petitioner asserts that the reasoning in that case denies to the Commissioner the right to disregard its corporate entity. Although a corporation cannot deny its own existence, it does not follow, that its corporate entity may not he disregarded upon the application of other interested parties, such as the Commissioner in this case.
Corporations are legal fictions authorized for the benefit and convenience of the individual citizen, and are, under our economic conditions, necessary in order that commercial enterprises requiring large capital may be promoted and at the same time the liability of the individuals associated therein may be limited.
It is recognized that a corporation is an entity distinct from its stockholders and ordinarily, when used for the legitimate business purposes for which it was created, it must be so dealt with, but the law has never lost sight of the fact that the juridical personality of the corporation is but a collective expression of the real personality of the true owners, and it has always been competent, in a proper case, to disregard the corporate fiction and determine the true owners, who, acting through their representative directors, manage and control the affairs of the corporation. United States v. Phellis, 257 U.S. 156; Labrot v. Burnet, 57 Fed. (2d) 413; Reed v. United States, 51 Fed. (2d) 931; 112 West 59th St. Corp. v. Helvering, 68 Fed. (2d) 397; Southern Pacific Co. v. Lowe, 247 U.S. 330; Gulf Oil Corp. v. Lewellyn, 248 U.S. 71; Superior Oil Co. v. Mississippi, 280 U.S. 390; Shotwell v. Moore, 129 U.S. 590; Hamilton Ridge Lumber Sales Corp. v. Wilson, 25 Fed. (2d) 592. Fundamentally a corporation must, after all, be considered as a collection of human beings, and where, as here, it is owned and controlled by one person, we must recognize that it is in point of fact the alter ego of the individual when it is so used as to make it merely an instrumentality or conduit of the individual for the accomplishment of ends which he would not be permitted to accomplish without it. Cf. Interstate Telephone Co. v. Baltimore & Ohio Telephone Co., 51 Fed. 49; aff'd., 54 Fed. 50; United States v. Milwaukee Refrigerator Transit Co., 142 Fed. 247; Linn & Lane Timber Co. v. United States, 236 U.S. 574. There is a limitation to the doctrine of separate existence and “ it is propei’ly disregarded in cases of fraud, circumvention of contract or statute, public wrong, monopoly and like instances.” Fletcher, Private Corporations, sec. 42. Although corporate entity is more commonly disregarded in cases where the transaction is tainted with fraud, it is by no means limited to such transactions. *928In Hamilton Ridge Lumber Sales Corp. v. Wilson, supra, the court said:
This principle has not been more clearly stated, perhaps, than by the Supreme Court of Ohio, in State v. Standard Oil Co., 49 Ohio St. 137, 30 N.E. 279, 15 L.R.A. 145, 34 Am. St. Rep. 541, where it is said Í
“ On a question of this kind, the fact must constantly be kept in view, that the metaphysical entity has no thought or will of its own; that every act ascribed to it emanates from and is the act of the individuals personated by it; and that it can no more do an act, or refrain from doing it, contrary to the will of these natural persons, than a house can be said to act independently of the will of its owner; and where an act is ascribed to it, it must be understood to be the act of the persons associated as a corporation, and whether done in their capacity as corporators or as individuals, must be determined by the nature and tendency of the act.”

*******

Nor, can I agree with the contention of counsel for the bank that this doctrine is applicable only in cases where the corporate entity has been resorted to for purely fraudulent and criminal purposes. I do not find that the rule is subject to any such limitations, but, on the contrary, that it is applicable wherever reason and justice require its application, though the acts of the parties amount to constructive fraud only. 14 Corpus Juris, 59; Clark on Corporations (3d Ed.), p. 10; Marshall on Corporations, p. 16, supra.
Whenever the corporate form is used in an endeavor to evade a statute or to modify its intent, courts will disregard the corporate fiction and look at the substance of the transaction. United States v. Lehigh Valley R.R. Co., 220 U.S. 263; Miller & Lux v. East Side Canal & Irrigation Co., 211 U.S. 293. The former case is in point here. The Lehigh Valley Railroad Co. owned all the stock of the Lehigh Valley Coal Co. The commodities clause of the Hepburn Act made it unlawful for a railroad company to transport in interstate commerce any article or commodity manufactured, mined, or produced by it, or in which it might have any interest, with certain exceptions. In a proceeding brought by the United States against the railroad company, United States v. Delaware & Hudson Co., 213 U.S. 366, the Government alleged that it owned stock in the coal company whose coal it was carrying. The court held that stock ownership by a railroad company in a bona fide corporation, irrespective of the extent of such ownership, was not a violation of the statute. In an amended bill the Government then alleged facts to show that the railroad company had absolute control over the coal company through stock ownership, and was using the coal company as a device in order to evade the provisions of the statute. The Supreme Court thereupon held that while the right of the railroad company as a stockholder to use its stock ownership for the purpose of a bona fide separate administration of the affairs of a corporation in which it has a stock interest may not be denied, the use of *929such stock ownership so as to commingle its affairs with the affairs of the railroad company brought it within the prohibitions of the statute. Mr. Chief Justice White, in the opinion, said:
In other words, that by operation and effect of the Commodities Clause there is a duty cast upon a railroad company proposing to carry in interstate commerce the product of a producing, etc. corporation, in which it has a stock interest not to abuse such power so as virtually to do by indirection that which the Commodities Clause prohibits.
Here we have an analogous situation. The revenue laws provide that no deduction shall be allowed for any loss claimed from the sale or other disposition of stock where it appears that within 30 days before or after such sale or other disposition the taxpayer has acquired or entered into a contract or option to acquire substantially identical property. The intention of Congress to deny any deduction on account of wash sales of stock is clear, and it applies to all persons. Deductions are in the nature of exemptions and should be strictly construed. Cf. Cornell v. Coyne, 192 U.S. 418; Samuel S. Bloch, 16 B.T.A. 426; aff'd., 42 Fed. (2d) 1013. They are subjects of specific legislation and before a taxpayer can take a deduction he must show facts which clearly entitle him to it under the statute. The burden is on him and this burden is not sustained by the facts in the record before us. To permit a person who owns or creates a corporation which he controls to circumvent the statute by dealing with the corporation is to put him in a preferred class not intended by the statute and not justified by any theory of corporate fiction. I think that the doctrine enunciated by Mr. Chief Justice White in United States v. Lehigh Valley R.R. Co., supra, is applicable here. By the operation and effect of the revenue law there is a duty cast upon a person who controls a corporation through stock ownership not to abuse such power by his personal dealings with the corporation so as to accomplish by indirection that which the statute prohibits. In such a case courts should disregard the corporate fiction and recognize that the individual is in reality dealing with himself. I do not think it was the intention of Congress that a corporation and its sole owner could so deal with each other as to avoid the payment of taxes which either of them would otherwise owe.
Nor do I believe, in viewing transactions between a corporation and its sole owner to determine the rights of other interested parties, such as the Government in this case, that the two should necessarily be regarded as separate entities and the rights of such parties fixed by what the corporation and its sole owner do between themselves.
It is not material that the transaction is bona fide between the corporation and its sole owner, in the sense that title passes from one to the other, and that the nominal consideration was the fair market *930value, the net result being a mere transfer of assets by the sole owner from one pocket to the other, these assets remaining always under his domination and control.
In the case of Helvering v. Gregory, supra, in an opinion by L. Hand, Circuit Judge, the court says, among other things:
We agree with the Board and the taxpayer that a transaction, otherwise within an exception of the tax law, does not lose its immunity, because it is actuated by a desire to avoid, or, if one choose, to evade taxation. Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes. U.S. v. Isham, 17 Wall. 496, 606, 21 L.Ed. 728 (2 Am. Fed. Tax Rep. 2304), Bullen v. Wisconsin, 240 U.S. 626, 630, 36 Sup. Ct. 473, 60 L.Ed. 830 (3 Am. Fed. Tax Rep. 2944). Therefore, if what was done here, was what was intended by sec. 112(i) (1) (B), it is of no consequence that it was all an elaborate scheme to get rid of income taxes, as it certainly was. Nevertheless, it does not follow that Congress meant to cover such a transaction, not even though the facts answer the dictionary definitions of each term used in the statutory definition. It is quite true, as the Board has very well said, that as the articulation of a statute increases, the room for interpretation must contract; but the meaning of a sentence may be more than that of the separate words, as a melody is more than the notes, and no degree of particularity can ever obviate recourse to the setting in which all appear, and which all collectively create. The purpose of the section is plain enough; men engaged in enterprises — industrial, commercial, financial, or any other — might wish to consolidate, or divide, to add to, or subtract from, their holdings. Such transactions were not to be considered as “ realizing ” any profit, because the collective interests still remained in solution. But the underlying presupposition is plain that the readjustment shall be undertaken for reasons germane to the conduct of the venture in hand, not as an ephemeral incident, egregious to its prosecution. To dodge the shareholders’ taxes is not one of the transactions contemplated as corporate “ reorganizations.”
I think it is entirely immaterial as to whether a corporation was organized for the specific purpose of transferring to it assets and thereby establishing profit or loss, or whether a corporation already in existence was used for that purpose.
The case of Jones v. Helvering, 71 Fed. (2d) 214, seems to be in point and to sustain the prevailing opinion herein. With all due respect to that high authority, I am unable to agree with the conclusion reached in the Jones case.
Under the authorities above cited, and entertaining these views, I believe that the determination of the Commissioner in this case should be sustained.
Lansdon agrees with this dissent.1