Burnet v. Commonwealth Improvement Co

• Decision Date: 12 December 1932
• Docket Number: No. 95,95
• Parties: BURNET, Commissioner of Internal Revenue, v. COMMONWEALTH IMPROVEMENT CO
• Court: U.S. Supreme Court

287 U.S. 415

53 S.Ct. 198

77 L.Ed. 399

BURNET, Commissioner of Internal Revenue,

v COMMONWEALTH IMPROVEMENT CO.

No. 95.

Argued Nov. 14, 1932.

Decided Dec. 12, 1932.

The Attorney General and Mr. G. A.Youngquist, Asst. Atty. Gen., for petitioner.

Messrs. Schofield Andrews and Ellis Ames Ballard, both of Philadelphia, Pa., for respondent.

Mr. Justice McREYNOLDS, delivered the opinion of the Court.

Respondent—Commonwealth Improvement Company—all of whose shares are owned by the estate of P. A. B. Widener (he died in 1915), made return concerning income and excess profits taxes for 1920 wherein it claimed deduction for loss occasioned by transfer of British-American Tobacco Company stock to the estate. The Commissioner refused to allow the deduction, and found that, rightly regarded, the transaction had yielded gain to the taxpayer. A deficiency assessment followed.

The Board of Tax Appeals approved the Commissioner's action; but the Circuit Court of Appeals, Third Circuit (57 F.(2d) 47), held otherwise.

Having acquired control of the Commonwealth Improvement Company, incorporated under an old Pennsylvania charter, Mr. Widener caused an increase of its capital stock and authorization of $20,000,000 script and debentures. He then—May 1, 1912—conveyed to the corporation sundry stocks valued at $25,000,000, taking in payment all its shares and $20,000,000 in debentures and script. He was old, and the double purpose was to avoid multifold death duties or transfer taxes and to insure the safety of an endowment which he wished to donate to a favorite charity—School for Crippled Children. $4,000,000 of the debentures so received were promptly deposited in trust for the benefit of that school.

Among the securities transferred by Widener to respondent were 225,000 shares British-American Tobacco Company. Their market value March 1, 1913, was $5,315,625—$23.625 per share.

In 1919 the improvement company, under privilege extended to stockholders, subscribed for and received 75,000 new shares then issued by the British-American Company. Paying therefor $326,437.50—$4.3525 per share—much less than market value.

In 1920 the trustees of the estate acquired the $4,000,000 of respondent's debentures theretofore deposited for benefit of the school. These were transferred to respondent, and in part payment it transferred to the estate the original block (the identical certificates) of 225,000 British-American Tobacco Company shares volued at $5,287,500—$23.50 per share. The apparent result was sale of the whole block at 12 1/2 cents per share under the March 1, 1913, value with consequent net loss of $28,125. For this sum respondent claimed deduction upon its 1920 tax return.

When the Commissioner audited the return, he decided that the base value per unit (for taxation purposes) of the 225,000 shares British-American Tobacco Company, transferred as shown, should be ascertained by adding to their total market value March 1, 1913 $5,315,625.00—the total paid for the 75,000 shares acquired in 1919, $326,437.50, and dividing the resulting sum by $300,000. The quotient, $18.806,875, he held was the base cost of each transferred share. Accordingly he found a gain by respondent of $1,055,953.12, and made an appropriate deficiency assessment.

In brief and argument here respondent advances two points: First, it is said the Commissioner improperly reckoned the base value of the British-American Tobacco Company shares. Second, that under the peculiar facts or the cause the transaction under consideration resulted in no true loss or gain. Respondent was merely the agency or instrumentality of the trustees of the estate in administering their trust. Practically considered, the improvement company and the estate are the same entity.

The Board of Tax Appeals expressed no opinion concerning the Commissioner's method of reckoning—it was not requested so to do. There the respondent relied entirely upon the second point. The Circuit Court of Appeals ruled only on the same point. In such circumstances, we do not undertake to determine what was not considered below.

Upon the second point we think the Board of Tax Appeals reached the right conclusion; the judgment of the Circuit Court of Appeals must be reversed.

Among other things, the Board well said:

'The petitioner does not now argue before the board that the method of computing the gain was incorrect, but relies entirely upon its contention that the corporation and the estate are the same entity. If this...