Helvering v. Rebsamen Motors

• Decision Date: 27 May 1942
• Docket Number: No. 12154.,12154.
• Citation: 128 F.2d 584
• Parties: HELVERING, Com'r of Internal Revenue, v. REBSAMEN MOTORS, Inc.
• Court: U.S. Court of Appeals — Eighth Circuit

128 F.2d 584 (1942)

HELVERING, Com'r of Internal Revenue, v. REBSAMEN MOTORS, Inc.

No. 12154.

Circuit Court of Appeals, Eighth Circuit.

May 27, 1942.

Louise Foster, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and J. Louis Monarch and Joseph M. Jones, Sp. Assts. to Atty. Gen., on the brief), for petitioner.

John P. Ohl, of New York City (Wright, Gordon, Zachry, Parlin & Cahill and John A. Reed, all of New York City, on the brief), for respondent.

Before SANBORN and WOODROUGH, Circuit Judges, and TRIMBLE, District Judge.

SANBORN, Circuit Judge.

The question in this case is whether the words "gains from the sale of stock" as used in § 351(b) (1) (A) of the Revenue Act of 1934 defining a "personal holding company," c. 277, 48 Stat. 680, 751, 26 U.S. C.A. Int.Rev.Acts, pages 757, 758, include gains derived by a corporation from the final liquidation of a subsidiary corporation.

Congress in the Revenue Act of 1934, § 351(a), imposed a heavy surtax on the adjusted net income of every personal holding company. It was provided, § 351 (b) (1), that a corporation was a "personal holding company" if - "(A) at least 80 per centum of its gross income for the taxable year is derived from royalties, dividends, interest, annuities, and * * * gains from the sale of stock or securities, and (B) at any time during the last half of the taxable year more than 50 per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals."

It is conceded that if a distribution received by respondent in October, 1935, from the final liquidation of a wholly owned subsidiary was a gain "from the sale of stock," the respondent was a "personal holding company," but that if the distribution was not such a gain, the respondent was not a "personal holding company."

The respondent is an Arkansas corporation. For some time prior to October 16, 1935, it owned all of the capital stock of the Union Savings Building & Loan Association. The Association was liquidated during 1935, and on October 16, 1935, respondent received all the net assets of the Association, consisting of cash, real estate, real estate mortgages, and accounts receivable. The fair market value of the assets was $146,061.11. The cost basis to respondent of the entire capital stock of the Association was $128,111.62. The respondent therefore derived a gain of $17,949.49 from the liquidation of this subsidiary. On September 15, 1937, the respondent paid to the Collector of Internal Revenue $4,510.28 for the taxable period May 1, 1935, to December 31, 1935, of which amount $4,157.83 was on account of the surtax imposed by § 351 of the Revenue Act of 1934, and $352.45 was interest thereon. The petitioner determined a deficiency of $725.76. The respondent filed a claim for refund of the entire tax paid and interest, on the ground that it was not a "personal holding company" as defined in § 351(b) (1) of the Revenue Act of 1934. The claim for refund was denied, and the deficiency was assessed. The respondent appealed to the Board of Tax Appeals, which sustained the contention of the respondent. This petition for review followed.

The Commissioner of Internal Revenue and the Board have been unable to see eye to eye with respect to the meaning of the words "sale of stock or securities" contained in the Congressional definition of a "personal holding company." Section 351 (b) (1) (A) of the Revenue Act of 1934. Treasury Regulations 86, promulgated under the Revenue Act of 1934, contains the following pertinent paragraph:

"Art. 351-2. Classification of a personal holding company. * * * *

* * * * *

"(5) Gains from the sale of stock or securities. — The term `gains from the sale of stock or securities' applies to all gains (including gains from liquidating dividends and other distributions from capital) from the sale or exchange of stock or securities includible in gross income under Title I. * * * *"

The first difference of opinion between the Commissioner and the Board over the meaning of "gains from the sale of stock or securities" arose in Montague, Miles & Co., Inc. v. Commissioner, 38 B.T.A. 144. The taxpayer in that case had received a gain of $700 from a payment to it on a note which it had purchased. If that gain was from a "sale of stock or securities" the taxpayer was a "personal holding company." The Board ruled that the word "sale," as used in § 351(b) (1) of the Revenue Act of 1934, means sale in its ordinary sense, and that the Commissioner was without authority to extend the meaning to include exchange.¹ In the instant case the Commissioner made substantially the same contention before the Board that he made in the Montague, Miles & Co. case, and the Board adhered to its former ruling. 44 B.T.A. 36.

The petition asserts that the Board is wrong and that Congress clearly intended the words "gains from the sale of stock" to include gains from exchanges and liquidations of stock. It seems to be agreed that the words of the statute are not ambiguous, but the petitioner argues that "sale of stock" means sale or exchange of stock, while the Board and the respondent are of the opinion that "sale of stock" means sale of stock.

The argument of the petitioner is, in substance, as follows: That, since § 351 (b) (4) of the Revenue Act of 1934 provides: "The terms used in this section shall have the same meaning as when used in Title I," and § 115(c) of the Act³ (which is in Title I) provides: "Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock * * *," this means that a gain to a stockholder from the liquidation of a corporation has been given the legal effect of a gain from the sale of stock, and therefore Article 351-2 of Treasury Regulations 86 did not exceed statutory limits in providing that the words "gains from the sale of stock or securities" as used in § 351(b) (1) (A) should apply to all gains from the sale or exchange of stock or securities (including gains from liquidating dividends). The petitioner points out that the Supreme Court in White v. United States, 305 U.S. 281, 291, 59 S.Ct. 179, 184, 83 L.Ed. 172, ruled that "§ 115(c) requires the tax in case of liquidations to be computed upon the same basis as in case of sales of the stock, * * *" and that that Court used similar language in Hellmich v. Hellman, 276 U.S. 233, 237, 48 S.Ct. 244, 72 L.Ed. 544, 56 A.L.R. 379; and the petitioner argues that Congress in defining a "personal holding company" and referring to "dividends" and "gains from the sale of stock or securities" was using the terms in a broad sense to identify the kind of income which should distinguish such a company for the purpose of the imposition of the surtax; that, since the legal effect for purposes of taxation of the gain received from the liquidation of its subsidiary was the same as though the respondent had sold the stock, the gain must be considered as having arisen from a sale of the stock both under the applicable regulation and the statute; and that when used in a taxing statute the word "sale" may be entitled to a broad meaning. Helvering v. Hammel, 311 U.S. 504, 61 S.Ct. 368, 85 L.Ed. 303, 131 A.L.R. 1481; Helvering v. Nebraska Bridge Supply & Lumber Co., 312 U.S. 666, 61 S.Ct. 827, 85 L.Ed. 1111, reversing 8 Cir., 115 F.2d 288. There is, no doubt, much force in the petitioner's contentions. The reasoning of the Board in the Nebraska Bridge Supply & Lumber Co. case, 40 B.T.A. 40, which this Court affirmed and the Supreme Court reversed, was substantially that which led the Board to disagree with the Commissioner in the instant case. In the Nebraska Bridge Supply & Lumber Co. case, both the Board and this Court thought that the words "losses from sales or exchanges of capital assets," as used in § 117(d) of the Revenue Act of 1934 (relating to deductions for capital losses), 48 Stat. 714, 26 U.S.C.A. Int.Rev.Acts, page 708, did not cover losses resulting from the forfeiture of lands in Arkansas for nonpayment of taxes.

We followed the rule that the use by a legislative body of words having definite meanings creates no ambiguity and that such words are to be taken and understood in their plain, ordinary and popular sense. We have come to realize that that rule is not always a safe guide to follow in construing the language of a taxing statute. United States v. Armature Rewinding Co., 8 Cir., 124 F.2d 589, 591. It is our understanding, however, that the rule is still to be applied unless it can clearly be seen that Congress used the words in question in a broader or different sense than that which would ordinarily be attributed to them. See Foley Securities Corp. v. Commissioner, 8 Cir., 106 F.2d 731, 734, 735.

It may be that, in defining a "personal holding company" in the Revenue Act of 1934, Congress intended the words "gains from the sale of stock" to include gains from the liquidation of a corporation, and that the Board has given the words "gains from the sale of stock" too restricted a meaning. On the other hand, it is apparent that Congress was attempting to segregate from corporations generally, those which were to be regarded as personal holding companies, for the purpose of the imposition of a surtax in the nature of a penalty to prevent such companies from being used to retain income which, if distributed to stockholders, would increase their taxes. See Foley Securities Corp. v. Commissioner, 8 Cir., 106 F.2d 731, 734. It is not unreasonable to believe that Congress, in defining a "personal holding company," spoke with precision and did not intend that corporations which fell outside of the definition of § 351(b) (1) (A), when read literally, should be subjected to the surtax. There is nothing in the pertinent legislative history which demonstrates that Congress clearly intended in 1934 that gains from the exchange of stock or from distributions received in liquidation of...