Helvering v. Edison Bros. Stores

• Decision Date: 03 March 1943
• Docket Number: No. 12250,12251.,12250
• Citation: 133 F.2d 575
• Parties: HELVERING, Com'r of Internal Revenue, v. EDISON BROS. STORES, Inc. EDISON BROS. STORES, Inc. v. HELVERING, Com'r of Internal Revenue.
• Court: U.S. Court of Appeals — Eighth Circuit

133 F.2d 575 (1943)

HELVERING, Com'r of Internal Revenue, v. EDISON BROS. STORES, Inc. EDISON BROS. STORES, Inc. v. HELVERING, Com'r of Internal Revenue.

Nos. 12250, 12251.

Circuit Court of Appeals, Eighth Circuit.

February 3, 1943.

Rehearing Denied March 3, 1943.

COPYRIGHT MATERIAL OMITTED

Peter H. Husch, of St. Louis, Mo. (J. Sydney Salkey and Salkey & Jones, all of St. Louis, Mo., on the brief), for Edison Bros. Stores, Inc.

Morton K. Rothschild, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Gerald L. Wallace, Sp. Assts. to Atty. Gen., on the brief), for Guy T. Helvering, Commissioner of Internal Revenue.

E. H. McDermott, Wm. M. Emery, and Richard S. Oldberg, all of Chicago, Ill., amici curiae.

Before SANBORN, JOHNSEN, and RIDDICK, Circuit Judges.

RIDDICK, Circuit Judge.

The questions presented on these petitions to review a decision of the United States Board of Tax Appeals are whether the taxpayer realized taxable income in either or in both of the years 1935 and 1937 from sales to its employees of shares of its capital stock, previously acquired for that purpose, and whether, where the taxpayer discharged a debt owing to its general counsel for services rendered, by transfer to him of shares of its capital stock, it was entitled to deduct as a business expense the cost of the stock to the taxpayer at the time of its acquisition, or the fair market value of the stock at the time of its transfer to the general counsel, the gain to the taxpayer in the transaction not having been reported as income. The Board of Tax Appeals held that the taxpayer realized taxable income on profits derived from the sales of its stock to employees in the year 1937 and sustained a deficiency determined by the Commissioner for that year. But it was of the opinion that profit realized by the taxpayer from sales of its stock to its employees in the year 1935 was not taxable income for that year and reversed the Commissioner's determination of a deficiency. The Board decided that the taxpayer was entitled to deduct as a business expense the market value of the shares of its stock used in discharging its debt to its general counsel as of the time of payment, reversing a contrary determination by the Commissioner. Both the taxpayer and the Commissioner have brought the decision of the Board to this Court for review.

The contentions of the parties here arise from conflicting opinions concerning the validity and interpretation of Articles 22 (a)-6 and 22(a)-16 of Treasury Regulations 86 and 94, respectively, explaining § 22(a) of the Revenue Acts of 1934 and 1936, 26 U.S.C.A. Int.Rev.Acts, pages 669, 825. Section 22(a) of the Revenue Act of 1934 and the corresponding provision of the Act of 1936 are identical, defining gross income as follows:

"§ 22. Gross Income

"(a) General Definition. `Gross income' includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever."

The corresponding treasury regulations in dispute are identical and are as follows:

"Acquisition or disposition by a corporation of its own capital stock — Whether the acquisition or disposition by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transactions, which is to be ascertained from all its facts and circumstances. The receipt by a corporation of the subscription price of shares of its capital stock upon their original issuance gives rise to neither taxable gain nor deductible loss, whether the subscription or issue price be in excess of, or less than, the par or stated value of such stock.

"But if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another. So also if the corporation receives its own stock as consideration upon the sale of property by it, or in satisfaction or indebtedness to it, the gain or loss resulting is to be computed in the same manner as though the payment had been made in any other property. Any gain derived from such transactions is subject to tax, and any loss sustained is allowable as a reduction where permitted by the provisions of the Act."

The definition of gross income in § 22 (a) of the Revenue Acts of 1934 and 1936 has remained substantially unchanged since the passage of the Revenue Act of 1913. For more than fourteen years prior to the promulgation of the regulation quoted above, the interpretation placed by the Treasury Department upon the meaning of § 22(a) of prior revenue acts has been uniform and unchanged to the effect that a corporation realizes no taxable gain or deductible loss from the purchase and sale of its own stock. See Articles 542 and 563 of Regulations 45, and Articles 666 and 176 of Regulations 76 of the Treasury Department. Following a decision of the Treasury Department on May 2, 1934, one day before the passage by Congress of the Revenue Act of 1934, the prior interpretation of § 22(a) was abandoned in favor of the one quoted above.

The argument on behalf of the taxpayer runs as follows: The treasury regulations interpreting revenue acts prior to the Act of 1934, under which a corporation was held not to realize taxable income from the purchase and sale of its own stock, have acquired the force of law by repeated reenactments of the income tax laws by Congress without change in the definition of gross income. The regulation in question thus having acquired the force of law, the taxpayer contends, the Treasury Department is without power to change it in the absence of a change in the definition of gross income by Congress itself. In the view of the taxpayer it follows that Articles 22(a)-6 and 22(a)-16 of Treasury Regulations 86 and 94 are void. The argument is pressed further by the contention that the interpretation of § 22(a) of the Revenue Acts of 1934 and 1936, now advanced by the Treasury Department, is beyond the power of either the Department or Congress as conflicting with the meaning of the word "income" as used in the Sixteenth Amendment to the Constitution; and finally, the taxpayer contends that if valid the treasury regulations in question here are not applicable to the taxpayer's purchase and sale of its own stock in the circumstances of this case. The Commissioner contends for the reverse of these propositions. Accordingly, the taxpayer seeks reversal of the decision of the Board of Tax Appeals affirming the determination of a deficiency in its income tax for 1937, and the Commissioner, a reversal of the Board's decision reversing the determination of a deficiency against the taxpayer for the year 1935.

The facts are stipulated. Before the incorporation of the taxpayer, the incorporators entered into an agreement with underwriters whereby they subscribed to the total issue of the common stock of the corporation, agreeing, however, to resell to the corporation through the underwriters 5,000 shares of the stock for the purpose of sales by the corporation to its employees. The agreement was carried out and the taxpayer upon its organization acquired 5,000 shares of its own stock at a price of $15 per share. During the year of its incorporation the taxpayer sold a number of the shares so acquired to various employees at cost under a stock subscription plan, permitting payment by employees in installments over a period of time. During the year 1935 the taxpayer sold to employees 980 shares of its original purchase of 5,000 shares at $25 per share, although the market price of the stock at that time was $30 a share. Also in 1935 it transferred 100 shares of its stock to its general counsel in payment of a bill for $3,000 for services rendered.

In 1937 there was a reorganization of the taxpayer's capital structure, resulting in a split-up of its common stock on the basis of three new shares of par value common stock for one share of the old no par value common stock, reducing the cost of a share to the taxpayer to $5.00. In 1937 the company, pursuant to another employees' stock subscription plan, sold 3,660 shares of the new stock to its employees at a price of $15 per share. The Commissioner assessed deficiencies in income taxes against the taxpayer for the years 1935 and 1937 on the ground that the company should have included in its gross income for those years the profit of $10 per share realized by it on the sales of stock to its employees, and also on the ground that the taxpayer was not entitled to deduct the full market value of the shares which it used in 1935 to discharge its debt to its general counsel, but was limited to the cost of the shares to the taxpayer at the time of acquisition.

The principles controlling in the decision of the questions stated are established. The Treasury Department cannot, by interpretative regulations, make income of that which is not income within the meaning of the revenue acts of Congress, nor can Congress, without apportionment, tax as income that which is not income within the meaning of the Sixteenth Amendment. Eisner v. Macomber, 252 U.S. 189, 40 S.Ct. 189, 64 L.Ed. 521, 9 A.L.R. 1570; M. E. Blatt Co. v. United States, 305 U.S. 267, 59 S.Ct. 186, 83 L. Ed. 167. But Congress, in defining gross income in the various revenue acts, manifested its intention to use to its fullest extent the power granted it by the Sixteenth Amendment. Douglas v. Willcuts, 296 U.S. 1, 9, 56 S.Ct. 59, 80 L.Ed. 3, 101 A.L.R. 391; ...