Court Opinion

ID: 9448546
Source: CourtListenerOpinion
Date Created: 2023-08-03 23:39:13.173181+00
Date Added: 2024-06-11T17:31:28.523499
License: Public Domain

ALDRICH, Circuit Judge
(dissenting in part).
It seems to me that the court has painted with too broad a tar brush, obliterating some important distinctions.
There are the following significant dates. March 1, 1954, hereinafter “acquisition date,” taxpayer contracted to buy 1200 of the 1400 outstanding shares of Priscilla, with an option as to the balance.1 Shortly before May 21, 1954, taxpayer determined to sell Priscilla’s plant and equipment. May 21, 1954, hereinafter “affiliation date,” taxpayer exercised its option and acquired the balance of the Priscilla stock. June 25, 1954,. taxpayer contracted to sell the assets, andón July 29, 1954, did so. In 1955 Priscilla engaged in a new, and profitable business. Hence we have three separate losses, with possibly varying consequences: Operating loss, March 1-May 21, post-acquisition, pre-affiliation, before it was determined to liquidate; operating loss, May 21-July 29, post-affiliation, after it was determined to liquidate; capital loss, July 29. Taxpayer could not claim the pre-affiliation operating loss on its consolidated return for the year ending August 31,1954, see 1939 Code, § 141 (d), but it did there claim its post-affiliation operating loss. Also on this return it claimed the book loss on the sale of Priscilla’s capital assets. In a subsequent return it sought to carry forward the March 1-May 21 operating loss and offset it against Priscilla’s own later income. The court condemns, as unrealistic, taxpayer’s attempts to segregate these losses and says they are essentially unitary, both in conception and in impact,, and all part of a single “overall purpose.” In the process of so doing I believe the court has made findings which the district court did not make, including one which it could not have made, and has, in addition, misconstrued the statute.
I can find no support for the court’s, statement that the taxpayer had a single-overall purpose. The district court did' not find that there was “no substantial' business purpose for the transfer” apart from the tax motive. True, it found that the tax motive was the “principal purpose.”2 But it did not find, and could *148not have found, that there were not, in addition, two substantial business purposes. The first of these was not even related to a tax loss, and the second was at least separable.
In spite of some attempt by the district court to gloss over the operating loss from March 1 to the date in May when taxpayer decided to liquidate, the evidence is uncontradicted that there was no intent to incur this loss even within the broad definition of necessary incurrence adopted by this court. On the contrary, Seaman risked—and lost—a considerable amount of his own money in the belief that, with the changes to be made and an expected market recovery, Priscilla could return to her former profitable ways. Collins, on behalf of the taxpayer, testified to the same thing, and risked the taxpayer’s money to no other purpose. It is true that Collins was less optimistic, and said he proposed to give the matter only a short trial. But it is inescapable that taxpayer acquired Priscilla with no immediate intent to liquidate, but hopefully to operate, in which event none of the losses for which deductions are now sought would have been sustained. Taxpayer’s initial purpose, in other words, was not only a business purpose, but was totally independent of any tax motive. It was an intent not to secure deductions, but to avoid them. Nor was this undesired loss “necessarily incurred” within the court’s test “as a necessary incident to the overall purpose” of liquidating, because the initial purpose, not abandoned until May, was not to liquidate at all, and even on the basis of ultimate liquidation, this interim operation served no function.
I find no answer to this in the court’s opinion, in the findings of the district court, or in the evidence were we to examine it de novo. To cut off all consideration of this unintended loss would go far beyond the policy of a statute designed to obviate tax-avoidance, and would constitute a penalty rather than a cure. Furthermore, it would go contrary to the statutory language itself. The only deductions struck down are “such” deductions, namely, the ones found to have motivated the acquisition. The statement in the government’s brief that this first operation was with the “hope and desire to reduce taxation” is nonsense. The government’s argument is really that taxpayer exercised poor business judgment in trying to operate successfully. Viewed after the event, this may be correct. But that is not the same thing as a hope and desire, or principal purpose to sustain a loss. To the contrary, it was a purpose not to.
On the assumption that taxpayer had an impermissible purpose of sustaining the built-in book loss upon the sale of the capital assets, a conclusion I agree with for reasons hereinafter discussed, I turn to the court’s ruling that the operating loss incurred after the decision to liquidate is not deductible because it was “necessarily incurred” or a “necessary incident” to that overall purpose. I pass the fact that the district court made no such finding. I am willing to assume it to be so, to the extent that this activity was a necessary incident to an orderly liquidation in the sense that anything else would have involved an even greater loss. My difficulty is in seeing why it is to be charged against taxpayer’s intent to secure the impermissible book loss. This operating loss was incurred as a necessary expense in connection with realizing the cash value of the assets pursuant to taxpayer’s co-existing purpose to make a cash profit quite apart from any tax benefit. The record shows that taxpayer realized $115,000 from the sale of the assets. If it had incurred expenses, such as an auctioneer’s fee, in connection with the sale, would it be contended that such expenses, since necessary, were impermissibly intended and could not be deducted?
I think the court fundamentally misconstrues the statute, carrying on, in an*149other fashion, the penalty notion previously referred to. I believe the purpose of the statute is to frustrate a motive of acquiring built-in losses, to which taxpayer was a stranger, by striking down “such” losses. The purpose cannot be to prevent profitable transactions in liquidatable corporations so long as such tax benefits are eliminated, or to tar and feather the taxpayer if he attempts them. Making money requires expenditures. The court now strikes down actually incurred expenses, which would normally be allowed, because it finds that taxpayer wished to realize certain tax benefits in addition to the cash profit.
I find in the statute no such broad proscription. I believe the phrase “deduction, credit, or other allowance which such person or corporation would not otherwise enjoy” means allowances artificial to the taxpayer, not losses actually incurred by it. On this subject the legislative history is illuminating. This statute was originally enacted in 1944, and has had no material change. The Senate Report stated that the aim was to prevent “perverting deductions * * * so that they no longer bear a reasonable business relationship to the interests or enterprises which produced them and for the benefit of which they were provided.” Sen.Rep. No. 627, 78th Cong., 1st Sess. 58 (1943). The House expressed a similar objective, to prevent “reduction through artifice.” H.R.Rep. No. 871, 78th Cong., 1st Sess. 49 (1943). I do not think actually incurred operating losses fall under either description.3
Turning to the questions involved in the capital loss, taxpayer has two points. The first, already adverted to, is that the original acquisition was not made with the initial intent of liquidating so that the realization of the capital loss could not have been the principal purpose. I would agree with taxpayer that if in March there had been no thought of liquidation at any time this point might be well taken. However, the fact is that taxpayer really had two intentions. The one was to operate, but not too hopefully; the other was to liquidate in fairly short order if that hope was not realized. It seems to me that under these circumstances the second intent may be regarded as ambulatory. When it became fixed and the alternative discarded, the discard should be for all purposes. I would treat the first, tentative period as an interregnum, and look to the taxpayer’s alternative motive as of the day he finally selected it.
Even on this ambulatory basis taxpayer criticizes the finding of the district court that the realization of the capital loss was the “principal purpose” of the acquisition. It points to the fact, the evidence of which need not be recited, that it paid initially (and again, when it exercised its option for the remainder) very considerably less than liquidating value for the Priscilla stock, and stood to make a sizable profit on liquidation quite apart from any tax losses. The district court so found, and it seems to me beyond debate. This again answers to my satisfaction this court’s statement that there was no substantial business purpose in the transfer apart from taxes. The district court disposed of this point in a different manner. It stated, “No doubt the acquisition was motivated in part by the prospect of being able to liquidate Priscilla’s assets, but the more important motive was un*150doubtedly supplied by the prospectively larger benefits to be derived from utilization of the tax losses.”
It is not clear to me on what basis the court said “undoubtedly.” It must be equally undoubted that this was an excellent financial transaction even if all tax benefits were disregarded. Furthermore, it seems clear that on the state of the law in March 1954 the realization of these tax benefits, even if liquidation occurred, was anything but certain. It is true that taxpayer was aware of the possibility, but there was no evidence that its decision to purchase in any way hung on that question. And would the court’s ultimate decision have been different if instead of the book loss, if realizable, exceeding the cash profit, the figures had been reversed?
I do not think these cases should rest on what constitutes the apparently “larger” benefit in such a connection. Rather, it seems to me that regardless of what particular aspect of liquidation might be thought by a court to weigh more heavily in a taxpayer’s mind, liquidation is a single, unitary transaction, and a taxpayer should not be found to “purpose” one feature apart from another. If the principal purpose is liquidation, and liquidation involves the realization of a loss which is artificial to the taxpayer, then the realization of that loss is part of the purpose and must be condemned, and this even if the “larger” benefit might bethought to be the cash profit. That is, on this matter I go not less far than the court, but further. In interpreting this statute we should be guided by Congress when it observed at the outset that the phraseology must be general and read in the light of its purpose. “[S]pecific description tends to center attention upon the form and technical character of the scheme, and to let the substance of the tax avoidance escape. To determine what transactions constitute the condemned evasion or avoidance, section 129 must be read in its context and background.” Sen.Rep. No. 627, 78th Cong., 1st Sess. 60 (1943). I feel the court has looked only to the words.

. The district court said that March 24, the date that papers passed, was the significant date. However, taxpayer became firmly obligated on March 1, and assumed losses from then, and I believe that date must control.

. The apposite sections of the 1939 and 1954 Code (§§ 129 and 269, respectively) provide that if 50 per cent or more of the capital stock of a corporation is acquired for the “principal purpose * * * [of] evasion or avoidance of *148Federal income * * * tax by securing the benefit of a deduction, credit, or other allowance which such person or corporafión would not otherwise enjoy, then such deduction, credit, or other allowance shall not be allowed.”

. Assuming my interpretation is correct on these matters, taxpayer has further problems with respect both to consolidated returns and to the effect of Libson Shops, Inc. v. Koehler, 1957, 353 U.S. 382, 77 S.Ct. 990, 1 L.Ed.2d 924. Under the present circumstances there is no point in my reaching them. But I might observe that I seriously question the correctness of the district court’s handling of Libson Shops. The subsequent lower court cases which have been decided against taxpayers involved a change of ownership of the company along with the change in business. It would be one thing to prevent trading in tax losses by preventing a new party from acquiring a built-in tax loss for a new business, but something else to say that a taxpayer who has himself incurred a bona fide loss must lose the deduction if he changes the nature of his business.