Cranson v. United States
| Decision Date | 26 February 1945 |
| Docket Number | No. 10644.,10644. |
| Citation | 146 F.2d 871 |
| Parties | CRANSON v. UNITED STATES. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Leon DeFremery and Morrison, Hohfeld, Foerster, Shuman & Clark, all of San Francisco, Cal., for appellant.
Samuel O. Clark, Jr., Asst. U. S. Atty. Gen., and Sewall Key, Helen R. Carloss, Courtnay C. Hamilton, and Helen Goodner, Sp. Assts. to Atty. Gen., and Frank J. Hennessy, U. S. Atty., and Esther B. Phillips, Asst. U. S. Atty., both of San Francisco, Cal., for appellee.
Before GARRECHT, DENMAN, and HEALY, Circuit Judges.
The question here is whether the distribution of $450 to the taxpayer from the Honolulu Oil Corporation, Ltd., hereinafter referred to as Honolulu constituted a taxable dividend. The taxpayer is suing to recover income taxes paid on this distribution in 1936.
The facts are stipulated and were adopted by the court below as its findings of facts.
On August 31, 1936, Honolulu liquidated three wholly owned subsidiaries and took over their assets subject to their liabilities, in complete cancellation and redemption of all their issued and outstanding capital stock. When Honolulu took over these subsidiaries, they had an aggregate operating deficit of $1,205,451.61.
In 1936, Honolulu paid cash distributions of $1 for each share of its capital stock. Honolulu's earnings during 1936 amounted to $931,553.82 before deducting any portion of the above loss.
The appellant urges that the lower court erred in its judgment and contends that if the earnings are reduced by the operating deficits taken over from the liquidation of the subsidiaries, the distribution of $450 to the taxpayer was one of capital and not income. To support his position the taxpayer is relying on the doctrine of the Commissioner of Internal Revenue v. Sansome, 2 Cir., 60 F.2d 931, 933, which has been consistently followed. There are no cases to the contrary. The principle established therein is that a tax free exchange, pursuant to reorganization, does not break "the continuity of the corporate life", and that where the reorganization "does not toll the company's life as a continued venture" the earnings and profits of the transferor corporation are transferred intact over to the transferee corporation and shall be considered earnings of the transferee for tax purposes. The Sansome rule did not deal with the liquidation of a subsidiary as in the instant case, but Article 115-11 of Regulations 94 recognized that the same rule would apply to a tax free liquidation of a subsidiary, but did not extend the rule to embrace operating deficits.
This is an open question. If Honolulu itself had at the beginning of 1936 the same operating deficit, the deficit could not have been deducted. Long Beach Improvement Co. v. Commissioner of Internal Revenue, 5 B.T.A. 590; Foley Securities Corporation v. Commissioner of Internal Revenue, 38 B.T.A. 1036. An operating deficit is a bookkeeping convenience, which enables an individual to determine at a glance the present financial position of his business — he can readily see at what point his earnings have or will wipe out his losses. The equation of operating deficit for tax purposes is the loss sustained within the taxable year. As to the...
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