JC Penney Company v. CIR

• Decision Date: 12 December 1962
• Docket Number: Docket 27611.,Cal. No. 64
• Parties: J. C. PENNEY COMPANY, Transferee, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Second Circuit

312 F.2d 65 (1962)

J. C. PENNEY COMPANY, Transferee, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Cal. No. 64, Docket 27611.

United States Court of Appeals Second Circuit.

Argued November 16, 1962.

Decided December 12, 1962.

Richard L. Braunstein, Washington, D. C. (Bernard J. Long, Washington, D. C., on brief), of Dow, Lohnes & Albertson, Washington, D. C., for petitioner.

Harold C. Wilkenfeld, Washington, D. C. (Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson and Meyer Rothwacks, Attorneys, Department of Justice, Washington, D. C.), for respondent.

Before SWAN, WATERMAN and FRIENDLY, Circuit Judges.

FRIENDLY, Circuit Judge.

This petition for review presents the rare case in which it is as clear as anything ever can be that Congress did not mean what in strict letter it said. The contretemps arose through a cross-reference in a section inserted in the Internal Revenue Code of 1954 during a late stage of its passage. Relying on the letter, petitioner asserts that its wholly owned subsidiary, which sold real estate in 1954, prior to enactment of the Code, for a gain of $1,808,632.05 that would have been taxable to the subsidiary as the law stood at the time, and which thereafter liquidated on the tax-free basis for the parent provided in prior Revenue Acts and continued by the Code, was also freed from tax on the gain from the sale. A unanimous Tax Court disagreed. So do we.

J. C. Penney Building and Realty Corporation, a wholly owned subsidiary of petitioner, owned an office building and warehouse in New York City and two warehouses elsewhere. On February 2, 1954, it entered into a contract to sell the New York warehouse at a substantial gain; it delivered the deed on August 3, 1954. On November 24, 1954, the directors of the parent and the subsidiary adopted a plan of complete liquidation whereby all the subsidiary's assets were to be distributed to the parent in exchange for the cancellation of its stock and in satisfaction of its indebtedness to the parent. On November 30, the assets were distributed; nine days later the subsidiary was dissolved. In its final tax return the subsidiary elected to have § 392(b) of the 1954 Code apply to the sale — with the result, as claimed, that the gain of $1,808,632.05 would not be taxable to it although, by virtue of § 332, the parent would pay no tax on the gain from the liquidation. The Commissioner, holding § 392(b) to be inapplicable in a situation where § 332 gave tax immunity to gain on the liquidation, determined a deficiency of $471,029.11 (along with an over-assessment of $171.17 for the preceding taxable year) in the subsidiary's tax return, and asserted this liability against petitioner as transferee. The Tax Court, in an able opinion by Judge Train reviewed by the full court, sustained the Commissioner without dissent, disagreeing with the contrary ruling in Diversified Services, Inc. v. United States, 192 F.Supp. 571 (S.D.Fla.1961), now on appeal to the Fifth Circuit.

Petitioner's argument is this. Section 392(b) (1) of the 1954 Code provides:

"(1) Nonrecognition of gain or loss. — If —

"(A) all of the assets of a corporation (less assets retained to meet claims) are distributed before January 1, 1955, in complete liquidation of such corporation; and

"(B) the corporation elects (at such time and in such manner as the Secretary or his delegate may by regulations prescribe) to have this subsection apply,

then no gain or loss shall be recognized to such corporation from the sale or exchange by it of property during the calendar year 1954."

It is not disputed that what J. C. Penney Building and Realty Corporation did fits (A) and (B) of subdivision (1). The fly in petitioner's ointment is a provision in the next subdivision:

"(2) Certain provisions of section 337 made applicable. — For purposes of paragraph (1) —

* * * * * *

"(B) the limitations of section 337(c) shall apply."

Section 337, new in the 1954 Code, was designed to provide a method for escaping the two-fold taxation that had previously occurred when a corporation sold property at a gain to itself and then liquidated at a gain to its stockholders. Subdivision (a) provided:

"(a) General rule. — If —

"(1) a corporation adopts a plan of complete liquidation on or after June 22, 1954, and

"(2) within the 12-month period beginning on the date of the adoption of such plan, all of the assets of the corporation are distributed in complete liquidation, less assets retained to meet claims,

then no gain or loss shall be recognized to such corporation from the sale or exchange by it of property within such 12-month period."

Quite obviously, it was this same regime that § 392(b) adopted, subject to whatever limitations § 337 contained. Since the object of § 337 was to permit avoiding two taxes on what was essentially the same gain, it was altogether natural that Congress should not wish the section to apply when only one tax would be payable in any event — importantly, for present purposes, on the complete liquidation of an at least 80% owned subsidiary, as to which, under provisions of nearly twenty years standing, Revenue Act of 1934, § 112(b) (6), as added by Revenue Act of 1935, 49 Stat. 1020; Internal Revenue Code of 1939, § 112(b) (6); Internal Revenue Code of 1954, § 332, no gain was recognized on the parent's receipt of the proceeds. The problem here arises from the language that Congress inserted into § 337 in order to carry out this purpose; this was in relevant part:

"(c) Limitations. —

* * * * *

"(2) Liquidation to which section 332 applies. — In the case of a sale or exchange following the adoption of a plan of complete liquidation, if section 332 applies with respect to such liquidation, then —

"(A) if the basis of the property of the liquidating corporation in the hands of the distributee is determined under section 334(b) (1), this section shall not apply; * * *."

In the light of this, says petitioner, what seemed the fly in its ointment turns out to be no fly at all. For § 337(c) (2) is prefixed by the words "In the case of a sale or exchange following the adoption of a plan of complete liquidation," and here the sale preceded the adoption of the plan; hence there is no "limitation of section 337(c)" that applies.

Petitioner does not deny that the results of its position are somewhat startling. Corporation A and Corporation B have wholly-owned subsidiaries, A' and B'. A' sells a capital asset on February 1, 1954, at a gain of $1,000,000, pursuant to a previously adopted plan of liquidation; on March 1 it liquidates to A. B' also sells a capital asset on February 1, 1954, at a gain of $1,000,000, but without a previously adopted plan of liquidation; on March 1, having adopted such a plan, it liquidates to B. As the law stood at the time, both A' and B' would be liable for a tax of $250,000 on the sale; neither A nor B would be subject to tax on gain in the liquidation. Months later, on August 16, 1954, the new Revenue Code becomes law. On petitioner's construction B' finds that § 392(b) allows it to relieve itself of tax on the sale by an appropriate election, although § 332 leaves B free of tax on the gain in liquidation. But no such happy consequences are enjoyed by the A corporate family across the street, since the sale by A' happened to be one "following the adoption of a plan of complete liquidation", § 337(c) (2), and "the limitations of section 337(c)" therefore apply. Although the results for the portion of 1954 after enactment of the Code are less capricious as between taxpayers, since the element of surprise is removed, they are equally unfortunate to the revenue. Although the parent remains free of tax on the gain from the liquidation, the subsidiary can avoid taxation on the gain from the sale by the simple expedient of selling before it adopts a plan of liquidation. Neither is there any true balancing effect through the applicability of § 392(b) to losses as well as gains. If the sale will involve a loss useful for tax purposes, the subsidiary can sell before adopting a plan and then not elect to have § 392(b) apply. Only with the end of 1954 is the goal of nonrecognition of gain or loss on the sale in some cases and on the liquidation in other cases, but not on both in the same case, finally attained.

With commendable candor taxpayer's counsel acknowledged, in answering a question at argument, that he could conceive of no reason why Congress should have wished to confer benefits with so lavish and discriminatory a hand. The legislative history suggests none. Congress is free, within constitutional limitations, to legislate eccentrically if it should wish, but courts should not lightly assume that it has done so. When the "plain meaning" of statutory language "has led to absurd or futile results", the Supreme Court "has looked beyond the words to the purpose of the act"; "even when the plain meaning did not produce absurd results but merely an unreasonable one `plainly at variance with the policy of the legislation as a whole'" the Court "has followed that purpose rather than the literal words." United States v. American Trucking Ass'n, 310 U.S. 534, 543, 60 S.Ct. 1059, 1063, 84 L.Ed. 1345 (1940). "Anything that is written may present a problem of meaning, and that is the essence of the business of judges in construing legislation", Frankfurter, Some Reflections on the Reading of Statutes, 47 Colum.L.Rev. 527, 528 (1947). And, as we were told long ago, "Where the mind labors to discover the design of the legislature, it seizes everything from which aid can be derived;" Marshall, C. J., in United States v. Fisher, 2 Cranch (6 U.S.) 358, 386 (1805); see United States v. Dickerson, 310 U.S. 554, 561-562, 60 S.Ct. 1034, 84 L.Ed. 1356 (1940).

The Internal Revenue Code of 1954 was the culmination of a long history; the Chairman of the Ways and Means Committee said in introducing it, "This bill represents a complete overhaul of all our revenue...