J.C. Penney Co. v. Comm'r of Internal Revenue, Docket No. 73872.

• Decision Date: 06 March 1962
• Docket Number: Docket No. 73872.
• Citation: 37 T.C. 1013
• Parties: J. C. PENNEY COMPANY, TRANSFEREE, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

37 T.C. 1013

J. C. PENNEY COMPANY, TRANSFEREE, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 73872.

Tax Court of the United States.

Filed March 6, 1962.

Bernard J. Long, Esq., for the petitioner.

Theodore E. Davis, Esq., for the respondent.

LIQUIDATION OF SUBSIDIARY— RECOGNITION OF GAIN— SEC. 392 AND SEC. 337, I.R.C. 1954.— In 1954, J. C. Penney Building and Realty Corporation, a wholly owned subsidiary of J. C. Penney Company, sold part of its assets, then adopted a plan of complete liquidation and completely liquidated before January 1, 1955. Held: The gain on the sale is recognized. Petitioner's contention that the recognition of gain depended on whether or not the sale was made prior to or following the adoption of the plan of liquidation rejected.

OPINION.

TRAIN, Judge:

The Commissioner determined an overassessment of $171.17 for the taxable year ended December 31, 1953, and a deficiency of $471,029.11 for the period January 1, 1954, to November 30, 1954.

The sole question is whether the gain from the sale of certain property by J. C. Penney Building and Realty Corporation is to be recognized in view of its election to have section 392(b) of the 1954 Code apply.

All of the facts have been stipulated and are hereby found as stipulated.

The petitioner, J. C. Penney Company (hereinafter sometimes referred to as J. C. Penney), is a corporation organized and existing under the laws of the State of Delaware, with its principal offices at 330 W. 34th Street, New York City, New York.

J. C. Penney Building and Realty Corporation (hereinafter referred to as Penney Building and Realty) was organized January 13, 1925, under the laws of the State of New York. Penney Building and Realty filed a Federal income tax return for the taxable period January 1, 1954, to November 30, 1954, with the district director of internal revenue for the Lower Manhattan District of New York. From the date of its incorporation to the date of its dissolution, Penney Building and Realty was a wholly owned subsidiary of J. C. Penney.

On February 2, 1954, Penney Building and Realty entered into a contract with Sommer Bros. Construction Co., Inc. (hereinafter referred to as Sommer Bros.), for the sale of its property located at 45 W. 18th Street, New York City, New York. The contract was assigned by Sommer Bros. to Eleanor Estates, Inc., which acquired title to the property by transfer of deed from Penney Building and Realty on August 3, 1954. The gross sales price of the property was $3,304,555, and the expenses of the sale were $52,242. The adjusted cost basis of the property at the date of the sale was $1,443,680.95.

On November 24, 1954, the board of directors of J. C. Penney adopted a plan for the complete liquidation of Penney Building and Realty. This plan of complete liquidation was adopted by Penney Building and Realty on November 24, 1954, pursuant to a resolution of its board of directors. On November 30, 1954, all the assets of Penney Building and Realty were distributed in complete liquidation to the petitioner. The distribution by Penney Building and Realty of its assets was made in exchange for the complete cancellation or redemption of all of its stock and in satisfaction of all its indebtedness to petitioner. Penney Building and Realty was dissolved on December 9, 1954.

In its Federal income tax return filed on February 10, 1955, for the taxable period January 1, 1954, to November 30, 1954, an election was made by Penney Building and Realty to have section 392(b) of the Internal Revenue Code of 1954 apply to the aforesaid sale of property consummated on August 3, 1954.

On May 9, 1958, a statutory notice of deficiency was mailed to petitioner advising it that the election made by Penney Building and Realty under section 392(b) of the Internal Revenue Code of 1954 was inapplicable to the sale of the property on August 3, 1954; that Penney Building and Realty realized a taxable gain in the amount of $1,808,632.05 on the sale; that the income tax liability of Penney Building and Realty disclosed an overassessment of $171.17 for the taxable year ended December 31, 1953, and a deficiency in income tax in the amount of $471,029.11 for the taxable period January 1, 1954, to November 30, 1954; and that the petitioner as transferee of the assets of Penney Building and Realty was liable for payment of the deficiency, plus interest. Petitioner concedes that if it is held that section 392(b) of the Internal Revenue Code of 1954 is not applicable to the sale of property on August 3, 1954, that Penney Building and Realty realized a taxable gain in the amount of $1,808,632.05 on the sale; that the deficiency in income tax of $471,029.11 determined by respondent to be due from Penney Building and Realty for the taxable period January 1, 1954, to November 30, 1954, is correct; and that the petitioner, J. C. Penney, is liable for payment of the deficiency in income tax, plus interest, as transferee of the assets of Penney Building and Realty.

The petitioner contends that there can be no question as to the nontaxability of the proceeds received by Penney Building and Realty as a result of the sale of its property. Petitioner argues that all the requirements of section 392(b) (1)¹ were satisfied; namely, the sale occurred in 1954, all the assets of the company were distributed before January 1, 1955, in complete liquidation of the corporation, and the corporation elected to have the nonrecognition provisions of section 392(b)(1) apply. Petitioner also contends that the provision of section 392(b)(2)(B),² namely, the limitation of section 337(c)(2)(A),³ is not applicable. Petitioner points out that the sale occurred before the plan of complete liquidation was adopted. Petitioner contends that the limitation of section 337(c)(2)(A) only applies if there is a liquidation to which section 332 applies, the basis of the property in the hands of the distributee is determined under section 334(b)(1), and the sale or exchange occurred following the adoption of the plan of complete liquidation. Petitioner contends that the language of the statute is clear and unambiguous. Petitioner also relies on Diversified Services, Inc. v. United States, 192 F.Supp. 571 (S.D. Fla. 1961), on appeal (C.A. 5).

Respondent contends that petitioner's position is inconsistent with the legislative intent implicit in sections 337 and 392. It is respondent's position that since no plan of liquidation is required by section 392(b)(1), the introductory language of section 337(c)(2)(A) (‘In the case of a sale or exchange following the adoption of a plan of complete liquidation’) is necessarily surplusage and should be disregarded where the limitation is considered in connection with an election under section 392(b).

We agree with respondent's determination that the gain from the sale in question should be recognized. From the legislative history of section 337 and section 392 and the interrelation of those sections with sections 332, 333, 334, and 341, it is clear that the interpretation contended for by petitioner is contrary to the intent of Congress.

Petitioner's contention that section 392 is clear and unambiguous is evidently aimed at preventing the Court from looking to the legislative history of that section and those related to it. Petitioner's argument is without merit. Section 392(b)(2) provides that the limitations of 337(c) are applicable to section 392(b)(1). Since a plan of complete liquidation is not required in order to come within the ambit of section 392(b)(1) but section 337(c)(2)(A) speaks in terms of the existence of such a plan, the ambiguity of the sections when considered together, becomes apparent. It is well settled that resort may be had to legislative history where a statute is ambiguous. Furthermore, it is now established beyond successful challenge that a court may seek out any reliable evidence as to legislative purpose regardless of whether the statutory language appears to be clear. See Max Carasso, 34 T.C. 1139, 1142 (1960), affd. 292 F.2d 367 (C.A. 2, 1961); United States v. Amer. Trucking Ass'ns, 310 U.S. 534, 543-544 (1940).

In the interpretation of statutes, the function of the courts is easily stated. It is to construe the language so as to give effect to the intent of Congress.⁴ There is no invariable rule for the discovery of that intention. We may look to the reason for the enactment and inquire into its antecedent history and give it effect in accordance with its design and purpose, sacrificing, if necessary, the literal meaning in order that the purpose may not fail.⁵

Since section 392 and section 337 must be construed together and, as will be shown below, section 392(b) was based on the provisions of section 337, we must start with an analysis of the latter section.

Prior to the 1954 Code, it was necessary to determine whether a corporation in the process of complete liquidation made a sale of assets or whether the shareholders receiving the assets made the sale. This determination was important because a sale by the shareholders subsequent to a distribution of property in complete liquidation of a corporation resulted in a single tax— at the shareholder level.⁶ However, where the shareholders did not in fact effect the sale, a tax was imposed at both the corporate and shareholder levels.⁷ Accordingly, under prior law, the tax consequences arising from sales made in the course of a corporate liquidation depended primarily upon the formal manner in which the transactions were arranged. The possibility that double taxation could occur in such cases created a trap for the unwary.⁸ Section 337 of the 1954 Code was intended to provide a definitive rule which would eliminate these uncertainties.⁹

Had section 337(a)¹⁰ been applicable to every situation falling within its terms, it is apparent that it would have nullified certain provisions of the Code (sec. 341) or, if used in conjunction with...