Baker v. United States, 20353.

• Decision Date: 12 May 1972
• Docket Number: No. 20353.,20353.
• Citation: 460 F.2d 827
• Parties: Donald E. BAKER and Barbara M. Baker, Appellants, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

460 F.2d 827 (1972)

Donald E. BAKER and Barbara M. Baker, Appellants, v. UNITED STATES of America, Appellee.

No. 20353.

United States Court of Appeals, Eighth Circuit.

Submitted January 27, 1972.

Decided May 12, 1972.

Rehearing and Rehearing Denied June 23, 1972.

Jerome B. Libin, Donald V. Moorehead, Sutherland, Asbill & Brennan, Washington, D. C., for appellants.

Ernest J. Brown, Atty., Dept. of Justice, Washington, D. C., Johnnie M. Walters, Asst. Atty. Gen., Meyer Rothwacks, Stephen H. Hutzelman, Attys., Dept. of Justice, Washington, D. C., for appellee; Richard A. Dier, U. S. Atty., of counsel.

Before GIBSON, LAY and BRIGHT, Circuit Judges.

Rehearing and Rehearing En Banc Denied June 23, 1972.

PER CURIAM.

The sole issue on appeal concerns the tax treatment of ordinary distributions to corporate shareholders when a corporation with no accumulated earnings has current earnings and profits that are insufficient to cover both ordinary distributions and selective redemption distributions paid out during the fiscal year. The question of first impression to be decided here is whether either distribution is to be given priority as a charge against the current earnings and profits.

The district court held that ordinary dividends are to receive preferential treatment in reducing current earnings and profits. This court is in full agreement that the district court was correct in rejecting the taxpayers' argument that would result in a priority for redemption distributions in reducing current earnings and profits. Judges Gibson and Bright, for differing reasons, find that the Internal Revenue Code requires priority treatment be given ordinary distributions. Their separate opinions are appended. Judge Lay finds that neither distribution should be given a preference and that a pro rata reduction of the current earnings and profits account is required. The trial court is thus affirmed by a divided vote.

Taxpayers, husband and wife, reported as ordinary income the full amount of ordinary distributions ($4,025) with respect to their no par common stock received in January and May 1961 from Peter Kiewit Sons, Inc. The corporation subsequently notified shareholders that a portion of the fiscal 1961 ordinary distributions was from sources other than earnings and profits. After the government denied their claim for refund, plaintiffs instituted the present refund suit. The stipulated facts show that in fiscal 1961 Peter Kiewit Sons, Inc., redeemed part of its issued and outstanding no par common stock from certain shareholders (not including taxpayers) at a cost of $1,651,561.70.¹ During fiscal 1961, Kiewit also distributed $1,880,179.75 cash to its shareholders as distributions with respect to stock. This sum included the distribution of $4,025 to plaintiffs. During 1961 the corporation had no accumulated earnings and had current earnings of only $1,553,636.34. It is stipulated that of the $1,651,561.70 paid out as redemptive distributions $157,002.57 is properly chargeable to Kiewit's capital account.² The remainder, $1,494,550.13, was charged by Kiewit to its earnings and profits account. On this basis taxpayers urge that the balance of the earnings and profits account, i. e. $59,077.21, is all that remained available for the ordinary distribution since the redemption distributions had otherwise absorbed the earnings. Thus, it is urged the portion of their distribution which is taxable as ordinary income is limited to their share of that remainder. The government urges that the ordinary distributions ($1,880,179.75) must be given priority and charged first against the earnings and profits account ($1,553,636.34) leaving only the difference, if any, available for the redemption distributions.³ The district court, the Honorable Richard E. Robinson, affirmed the government's position and denied plaintiff's relief. D.C., 308 F.Supp. 1129. This appeal followed.

Taxpayers urge three basic arguments to support reversal of the district court: (1) that the court erred in its statutory construction of § 316(a) (2) I.R.C., (2) that the legislative history of § 316(a) (2) supports taxpayers' interpretation of the statute, and (3) that the government's theory of priority destroys the harmony between § 312(a) and (e) and § 316. We will discuss these arguments seriatim.

I. STATUTORY CONSTRUCTION

Section 316 reads:

"(a) General rule.—For purposes of this subtitle, the term `dividend\' means any distribution of property made by a corporation to its shareholders—

"(1) out of its earnings and profits accumulated after February 28, 1913, or

"(2) out of its earnings and profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made." (Emphasis added).

Taxpayers urge that the words "any distributions" as used in the parenthetical clause of § 316(a) (2) are limited to ordinary distributions and do not encompass redemptive distributions which allegedly reduce earnings and profits under § 312(a) on the date of distribution. Taxpayers urge that Hellmich v. Hellman, 276 U.S. 233, 48 S.Ct. 244, 72 L.Ed. 544 (1928), controls the present construction of § 316(a) (2), excluding redemptive distributions from the statutory language. It is urged that Hellmich found the words "any distribution" as used within the definition clause of the forerunner of § 316(a) do not include redemptive distributions. Consequently, the words cannot take on a broader and different meaning in the parenthetical clause of § 316(a) (2).

Prior to 1918 both ordinary distributions with respect to stock and liquidating or redemption distributions were included within the broad statutory definition of a "dividend" which encompassed "any distribution" from accumulated earnings and profits. The absence of any separate treatment of liquidating distributions resulted in the same tax treatment for all distributions from earnings.

In the Revenue Act of 1918 this situation was altered. While maintaining the same apparently all-inclusive definition of a dividend, Congress for the first time changed the statutory scheme by establishing a separate subsection which entitled a liquidating distribution to different tax treatment. At the same time, Congress altered the taxing provisions by imposing both a normal tax and a surtax on taxable income. However, a credit against the normal tax was provided for dividends received so that distributions qualifying as "dividends" would be subject only to the surtax. Thus, it was advantageous for taxpayers receiving liquidating distributions to claim that these distributions were entitled to the dividend received credit since they were clearly encompassed within the meaning of "any distribution" as used in the dividend definition.

In Hellmich v. Hellman, 276 U.S. 233, 48 S.Ct. 244, 72 L.Ed. 544 (1928), the Supreme Court was faced with the question of whether the dividend definition included liquidating distributions. The Court found that the existence of a separate section which dealt specifically with liquidating distributions removed this type of distribution from the broad general definition of a dividend. The language used by the Court is as follows:

"The controlling question is whether the amounts distributed to the stockholders out of the earnings and profits accumulated by the corporation since February 28, 1913, were to be treated under § 201(a) as `dividends,\' which were exempt from the normal tax; or, under § 201(c) as payments made by the corporation in exchange for its stock, which were taxable `as other gains or profits.\'

"It is true that if § 201(a) stood alone its broad definition of the term `dividend\' would apparently include distributions made to stockholders in the liquidation of a corporation—although this term, as generally understood and used, refers to the recurrent return upon stock paid to stockholders by a going corporation in the ordinary course of business, which does not reduce their stock holdings and leaves them in a position to enjoy future returns upon the same stock. See Lynch v. Hornby, 247 U.S. 339, 344-346 , 38 S.Ct. 543, 62 L.Ed. 1149; and Langstaff v. Lucas (D.C.), 9 F.2d 691, 694.

"However, when § 201(a) and § 201 (c) are read together, under the long-established rule that the intention of the lawmaker is to be deduced from a view of every material part of the statute, Kohlsaat v. Murphy, 96 U.S. 153, 159, 24 L.Ed. 844, we think it clear that the general definition of a dividend in § 201(a) was not intended to apply to distributions made to stockholders in the liquidation of a corporation, but that it was intended that such distributions should be governed by § 201(c), which, dealing specifically with such liquidation, provided that the amounts distributed should `be treated as payments in exchange for stock\' and that any gain realized thereby should be taxed to the stockholders `as other gains or profits.\' This brings the two sections into entire harmony, and gives to each its natural meaning and due effect." 276 U.S. at 236-237, 48 S.Ct. at 245 (emphasis added).

The taxpayers point out that the Hellmich reasoning is grounded on the fact that the existence of a specific section dealing with liquidating distributons removes these types of distributions from the scope of the general definition of a dividend. Thus, it is argued, when Congress in the Revenue Act of 1924 and in all subsequent acts, including the present Internal Revenue Code of 1954, set out a separate section dealing with redemption distributions, this type of distribution was not intended to fall within the meaning of a dividend as defined in the section dealing with that subject. We agree that the Hellmich decision must still be regarded as effective in compelling the conclusion that a redemption distribution is not within the meaning of a...