Helvering v. Reynolds Tobacco Co, No. 328

• Court: United States Supreme Court
• Writing for the Court: ROBERTS
• Citation: 59 S.Ct. 423,83 L.Ed. 536,306 U.S. 110
• Docket Number: No. 328
• Decision Date: 30 January 1939
• Parties: HELVERING, Com'r of Internal Revenue, v. R. J. REYNOLDS TOBACCO CO

306 U.S. 110 59 S.Ct. 423 83 L.Ed. 536 HELVERING, Com'r of Internal Revenue,

v.

R. J. REYNOLDS TOBACCO CO.

No. 328. Argued Jan. 6, 1939. Decided Jan. 30, 1939.

Page 111

Mr. Paul A. Freund, of Washington, D.C., for petitioner.

Mr. J. G. Korner, Jr., of Washington, D.C., for respondent.

Mr. Justice ROBERTS delivered the opinion of the Court.

The sole question for decision is whether gain accruing to a corporation consequent on the purchase and re-

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sale of its own shares constitutes gross income within the meaning of Section 22(a) of the Revenue Act of 1928.¹

The respondent, a New Jersey corporation, on occasions between 1921 and 1929, purchased its own Class B common stock for reasons of policy, such as the elimination of a very large single holding, the broadening of the ownership of the stock, and the support of the market to protect the investments of employee shareholders. This stock was resold from time to time. While held it was treated as treasury stock and the cost of it was entered in the accounts as 'Investments in Non-competitive Companies'. The books showed no increase or reduction of capital stock on account of purchases or sales. During 1929 the company sold shares acquired in that and prior years for a sum which exceeded cost by $286,581.21, which amount was entered in the books as a cash item and added to surplus. In its income tax return for 1929 the company listed this gain under the caption 'Other Items of Non-Taxable Income', as 'Profit R.J.R. Stock'.

The Commissioner determined a deficiency in the tax paid for 1929 involving items not here in controversy and the company appealed to the Board of Tax Appeals where those items were adjusted. Before the case was closed the Commissioner by amended answer alleged that the taxpayer's net income should be increased by the amount of the 'net profit realized * * * through trafficking in Class B common stock of the * * * company', and claimed a resulting deficiency. He based his claim upon Treasury Regulation 74, Article 66, as amended by a Treasury decision of May 2, 1934,² which states 'where a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss

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is to be computed in the same manner as though the corporation were dealing in the shares of another.'

The Board, after finding the facts in detail, sustained the Commissioner.³ The Circuit Court of Appeals reversed the Board's ruling.⁴ Because of asserted conflict we granted the writ of certiorari,⁵ 305 U.S. 587, 59 S.Ct. 101, 83 L.Ed. —-.

Section 22(a) is: '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.' Section 62, 26 U.S.C.A. § 62, directs the Commissioner, 'with the approval of the Secretary' of the Treasury, to 'prescribe and publish all needful rules and regulations for the enforcement of this title (chapter).' Article 66 of Treasury Regulations 74, promulgated under the Act of 1928, so far as material, is: 'If * * * the corporation purchases any of its stock and holds it as treasury stock, the sale of such stock will be considered a capital transaction and the proceeds of such sale will be treated as capital and will not constitute income of the corporation. A corporation realizes no gain or loss from the purchase or sale of its own stock.'

Petitioner contends that, as Congress must be taken to have exercised its constitutional power to the fullest extent in laying the tax, Section 22(a) should be held to include the gain realized from sales of a corporation's own

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stock, and the quoted regulation cannot restrict the scope of the statutory definition. The respondent replies that such gain is capital gain and not income, as is demonstrated by the theory and practice of accounting⁶ and by court decisions.⁷ The court below found it unnecessary to decide this issue, holding that whether the increment is income is at least a debatable question and the regulation was, therefore, proper as an interpretation of the meaning of the section. We agree that Section 22(a) is so general in its terms as to render an...