Court Opinion

ID: 9445844
Source: CourtListenerOpinion
Date Created: 2023-08-03 21:39:02.262355+00
Date Added: 2024-06-11T17:30:25.405584
License: Public Domain

LEARNED HAND, Circuit Judge
(dissenting).
The Tax Court found that Gilbert’s advances to Gilbor, Inc., did not create “bona fide debts,” and to that I cannot agree, for I can find no evidence that would support that conclusion, if by “bona fide debts” one means debts that are valid as between the petitioners and the corporation. Whatever may have been the earlier doctrine it is, I think, now settled that a debt to the holder, or holders, of all the shares of a corporation will in case of insolvency be on a parity *411with debts to outsiders. It is true that in Flynn v. Loewer Realty Co., 2 Cir., 167 F.2d 318, 320, we said that a sole shareholder who lends money to the corporation, is at an advantage over outside creditors in that he controls the conduct of the enterprise, and is actuated by the hope of more than the return of his principal and interest; but that alone is no reason for imposing upon him a fiduciary relation vis-a-vis other creditors. In any event, whatever may have been the effect of the earlier decisions, in Comstock v. Group of Institutional Investors, 335 U.S. 211, 229, 68 S.Ct. 1454, 1463, 92 L.Ed. 1911, the Supreme Court declared that some abuse of the shareholder’s control must appear before his debt loses its parity with other debts: “In the case before us there was domination of the subsidiary, a relationship between corporations which the law has not seen fit to proscribe. * * * It is not mere existence of an opportunity to do wrong that brings the rule into play; it is the unconscionable use of the opportunity afforded by the domination to advantage itself at the injury of the subsidiary that deprives the wrongdoer of the fruits of his wrong.” Our latest decisions have been in accord with this doctrine,1 and I can see no distinction between a case of two corporations, one holding all the other’s shares, and a corporation and two individuals, who between them hold all its shares and act in common. Hence it follows that, if Gilbert and Borden in fact meant to make their advances debts of the corporation there was nothing to defeat their purpose.
However, it is also settled that, although the rights of a taxpayer may be absolute as between himself and his corporation, the law will at times refuse to regard those rights in assessing his income tax. That doctrine stems from Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596; at least that is the source usually ascribed to it. It is a corollary of the universally accepted canon of interpretation that the literal meaning of the words of a statute is seldom, if ever, the conclusive measure of its scope. Except in rare instances statutes are written in general terms and do not undertake to specify all the occasions that they are meant to cover; and their “interpretation” demands the projection of their expressed purpose, upon occasions, not present in the minds of those who enacted them. The Income Tax Act imposes liabilities upon taxpayers based upon their financial transactions, and it is of course true that the payment of the tax is itself a financial transaction. If, however, the taxpayer enters into a transaction that does not appreciably affect his beneficial interest except to reduce his tax, the law will disregard it; for we cannot suppose that it was part of the purpose of the act to provide an escape from the liabilities that it sought to impose. Gregory v. Helvering, supra; Griffiths v. Helvering, 308 U.S. 355, 60 S.Ct. 277, 84 L.Ed. 319; Higgins v. Smith, 308 U.S. 473, 478, 60 S.Ct. 355, 84 L.Ed. 406; Bazley v. Commissioner, 331 U.S. 737, 741, 67 S.Ct. 1489, 91 L.Ed. 1782. When a taxpayer supposes that the transaction, in addition to its effect on his tax, will promote his beneficial interests in the venture, he will of course secure the desired reduction, for it would be absurd to hold that he must deny himself an economic advantage unless he pay the tax based upon the facts that have ceased to exist. Moreover, he will also be relieved, if he supposes that the transaction will, or may, cause him a loss, although in that event it is true that his only motive will be to avoid the tax. For instance, if a very rich man sells shares of stock and invests the proceeds in municipal bonds, he will not be taxed on the dividends of the shares, although his only motive was to avoid the tax upon his dividends. It might have been possible in such situations, when the only motive was to reduce taxes, to assess a tax, measured by the difference between the tax still due, and that that would have been due but for the transaction. However, there is not *412the slightest intimation of such a doctrine in any of the decisions; it covers only those transactions that do not appreciably change the taxpayer’s financial position, either beneficially or detrimentally.
I am not sure that this differs from what my brothers mean; but I do not agree with the form of the test that, as I understand it, they wish the Tax Court to adopt; and, indeed, I am not clear as to what it is. To say that it is whether the transaction has “substantial economic reality,” or “is in reality what it appears to be in form,” or is a “sham” or a “masquerade,” or “depends upon the substance of the transaction”: all of these appear to me to leave the test undefined, because they do not state the facts that are to be determinative.
I would therefore substitute this which seems to me to avoid that defect and at the same time state the doctrine adequately :
“When the petitioners decided to make their advances in the form of debts, rather than of capital advances, did they suppose that the difference would appreciably affect their beneficial interests in the venture, other than taxwise?”
The burden will be on them to prove that they did so suppose.

. Schwartz v. Mills, 192 F.2d 727; Gannett Co. v. Larry, 221 F.2d 269; Kraft Foods Company v. Commissioner, 232 F. 2d 118, 126.