Helvering v. Credit Alliance Corporation

• Decision Date: 27 April 1942
• Docket Number: No. 708,708
• Citation: 86 L.Ed. 1307,62 S.Ct. 989,316 U.S. 107
• Parties: HELVERING, Com'r of Internal Revenue, v. CREDIT ALLIANCE CORPORATION
• Court: U.S. Supreme Court

316 U.S. 107

62 S.Ct. 989

86 L.Ed. 1307

HELVERING, Com'r of Internal Revenue,

v CREDIT ALLIANCE CORPORATION.

No. 708.

Argued April 7, 1942.

Decided April 27, 1942.

Mr. J. Louis Monarch, of Washington, D.C., for petitioner.

Mr. Newell W. Ellison, of Washington, D.C., for respondent.

Mr. Justice ROBERTS delivered the opinion of the Court.

The Commercial Credit Company, a Delaware corporation, acquired and owned over 99% of the capital stock of the respondent, a New York corporation actively engaged in business. In 1936 the respondent's stockholders and directors resolved to liquidate the corporation and to make distribution to its stockholders in liquidation. Part of the distribution so made in 1936 was of cash and property constituting surplus earned after Feb- ruary 28, 1913, of the value of $950,734. Of this Commercial Credit Company's share was $947,228. Further distributions were made in 1937 and final distribution in 1938, and the corporation was legally dissolved. The liquidation complied with the provisions of § 112(b)(6) of the Revenue Act of 1936,¹ under which no gain or loss for tax purposes was attributable to Commercial Credit Company as a result of the distribution. That corporation did not, in 1936, distribute to its stockholders any of the distribution received by it from the respondent and did not apportion or allocate any part thereof to the respondent.

The question is, to what dividends paid credit is the respondent entitled under the applicable sections of the Revenue Act of 1936.²

By § 14 there was imposed for the first time a tax upon 'undistributed net income'. In order to compute the base for this levy the dividends paid credit is to deducted from adjusted net income.

Section 27 deals with the credit for dividends paid. Subsection (a) provides that, for the purposes of Title I of the Act, the dividends paid credit shall be the amount of dividends paid during the taxable year. Each of the additional subsections deals with a separate topic relating to the computation and allowance of the credit. The only ones here of importance are (f) and (h).

'(f) Distributions in Liquidation. In the case of amounts distributed in liquidation the part of such distribution which is properly chargeable to the earnings or profits accumulated after February 28, 1913, shall, for the purposes of computing the dividends paid credit under this section, be treated as a taxable dividend paid.'

'(h) Nontaxable Distributions. If any part of a distribution (including stock dividends and stock rights) is not a taxable dividend in the hands of such of the shareholders as are subject to taxation under this title for the period in which the distribution is made, no dividends paid credit shall be allowed with respect to such part.'

The taxpayer insists that the distribution in question is governed by the provisions of (f). The Government asserts that it is not, for these reasons: that the phrase 'which is properly chargeable to the earnings or profits accumulated after February 28, 1913' takes the distribution out of the purview of the section; that (h) denies the benefit of (f) to the taxpayer if the money or property transferred is not taxable to the distributee; that the policy of the Act, and the purpose underlying provisions other than § 27, require that (f) be not construed as permitting the credit where the distribution gives rise to no tax upon the distributee, and that an applicable regulation precludes the credit.

The Government's second contention has been sustained by the Circuit Court of Appeals for the Fifth Circuit,³ but both the first and the second have been overruled by the Circuit Court of Appeals for the Second Circuit,⁴ and by the Board of Tax Appeals and the court below in the instant case.⁵ In view of the conflict we granted certiorari. 314 U.S. 604, 62 S.Ct. 301, 86 L.Ed. —-.

1. Although a distribution in liquidation of earnings which accrued subsequently to February 28, 1913, does not constitute a dividend in the proper sense of the term,⁶ subsection (f) categorically declares that a liquidating distribution, to the extent it is composed of such earnings, shall, for the purposes of computing the dividends paid credit 'be treated as a taxable dividend paid.' Plainly the section intends that a distribution of such earnings shall be considered a dividend. Further it provides that the distributing corporation may use the amount in computing its credit for dividends paid. And, to put the matter beyond cavil, the section also says that the distribution shall be treated as the payment to the distributee of a taxable dividend.

The Government, however, contends that the clause 'properly chargeable to the earnings or profits accumulated after February 28, 1913,' means properly chargeable to the distributee as such earnings or profits. The argument has, we think, rightly been rejected by all the courts which have considered it. The line drawn in all of the revenue acts between profits accumulated before the enactment of the first income tax act and after that date for distinguishing capital and income furnishes the reason for the insertion of the clause in subsection (f). Section 27 deals with a credit to the distributing corporation and the phrase finds its proper office in limiting the amount of the distribution in liquidation which may be considered a dividend from earnings or profits as distinguished from one composed of capital. We, therefore, conclude that (f), standing alone, justifies the deduction claimed by the respondent.

2. It is urged that the sweeping provision of (h) precludes the application of (f) in the circumstances disclosed, because (h) denies the credit unless the amount distributed is taxable to the distributee. By concession the distribution here does not result in gain or loss to the parent company. The argument is in effect that (h) creates an exception to the rule formulated by (f).

As above said, each of the subsections of § 27 deals with a specific and particular topic. Subsection (f) deals with 'distributions in liquidation' while subsection (h) deals with 'nontaxable distributions'. If (f) applies in this case, (h) is left to cover a substantial field of other sorts of distributions. We should, of course, read the two sections as consistent rather than conflicting, if that be possible. Here it is not only possible but begets no absurd or impractical result. We hold that (h) is not applicable to the...