Knowlton v. Comm'r of Internal Revenue

• Decision Date: 06 February 1985
• Docket Number: Docket No. 22639-81.
• Citation: 84 T.C. No. 11,84 T.C. 160
• Parties: JOHN F. KNOWLTON and BETTY W. KNOWLTON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

84 T.C. 160

84 T.C. No. 11

JOHN F. KNOWLTON and BETTY W. KNOWLTON, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 22639-81.

United States Tax Court

Filed February 6, 1985

Non-Nitrol Issues

Petitioners received as part of a liquidating distribution from Dunmovin Corp. 24,950 shares of General Motors common stock, which Dunmovin had received after 1953 as a result of the court-ordered divestiture by E.I. duPont de Nemours & Co. of its interest in General Motors. Dunmovin acquired its interest in duPont prior to 1954. HELD, the General Motors stock was, for purposes of sec. 333(e)(2), I.R.C. 1954, acquired by Dunmovin after Dec. 31, 1953. ROBERT W. WEST and JILLENA A. WARNER, for the respondent.

HERBERT L. CAMP, for the petitioners.

OPINION

TANNENWALD, JUDGE:

Respondent determined deficiencies in petitioners' Federal income tax for the taxable years ending December 31, 1977 and December 31, 1978 of $61,924 and $63,281, respectively, In his answer, respondent asserted an increased deficiency for 1978 of $10,451. These deficiencies concern the ‘Nitrol issues‘ arising from respondent's adjustments to petitioners' Schedules C, and were the subject of a trial held before Judge Nims on December 12, 1983. In his amended answer, respondent alleged an additional increased deficiency for 1978 of $585,034.66, all of which concerns the treatment of stock received in a corporate liquidation (the ‘Non-Nitrol issue‘). By orders of December 5, 1983 and March 20, 1984, the Court granted the parties' joint motion to sever the Nitrol and Non-Nitrol issues for purposes of trial, briefing, and opinion. The Non-Nitrol issue, the sole subject of this opinion, was submitted to the Court fully stipulated pursuant to Rule 122 ¹ on December 12, 1983. The only issue for our decision is whether certain stock distributed to petitioner Betty W. Knowlton ² during taxable year 1978 in liquidation of a corporation of which she was a shareholder was ‘acquired by the corporation after December 31, 1953‘ within the meaning of section 333(e)(2).

The stipulation of facts and attached exhibits are incorporated herein by this reference. At the time they filed their petition, petitioners resided in St. Petersburg, Florida. Petitioners filed a joint tax return for 1978.

Prior to June 1978, petitioner owned 975 shares of non-voting common stock in the Dunmovin Corporation (Dunmovin), a personal holding company having its principal place of business in Dover, Delaware. Dunmovin was liquidated during June 1978 pursuant to section 333, and petitioner was a ‘qualified electing shareholder‘ of Dunmovin within the meaning of section 333(c). Petitioner received from Dunmovin a liquidating distribution of $75,723.59 in cash and $5,795,740.02 in marketable securities (at fair market value). Included in the distribution of marketable securities to petitioner were 24,950 shares of common stock in General Motors Corporation (the GM stock or shares).

Dunmovin had received the GM stock from E.I. duPont de Nemours & Co. (duPont) during the taxable years 1962, 1964, and 1965 as a result of the divestiture order by the United States Supreme Court in the antitrust decisions in United States v. E.I. duPont de Nemours & Co., 353 U.S. 586 (1957), 366 U.S. 316 (1961), Dunmovin, a passive shareholder of duPont, had no role in the management of duPont, was not a party to the antitrust litigation resulting in duPont's distribution of the GM stock, and did not initiate, consent to, or approve the distribution. Dunmovin acquired the duPont stock with respect to which it received the antitrust distribution prior to 1954, and duPont acquired the GM stock prior to 1954. DuPont was itself eligible to be liquidated under section 333.

At the time duPont distributed the GM stock to Dunmovin, the distribution was taxed to Dunmovin as a dividend in the amount of the adjusted basis of the GM stock in the hands of duPont, see section 301(b)(1)(B), and was eligible for the 85 percent dividends received deduction under section 243. Pursuant to section 301(d)(2), the adjusted basis of the GM stock in the hands of Dunmovin was carried over from that of duPont. Consequently, Dunmovin's holding period for the GM stock included the period duPont had held such stock. Section 1223(2).

The only point of contention between the parties is the legal issue of whether the GM stock, distributed to Dunmovin in 1962, 1964, and 1965 with respect to its duPont stock acquired before 1954, was ‘acquired‘ by Dunmovin ‘after December 31, 1953‘ within the meaning of section 333(e)(2). ³ If it was, then petitioners realized long-term capital gain for 1978 by virtue of the distribution of the GM shares. If, however, the shares were ‘acquired‘ by Dunmovin before 1954, the GM shares were properly excluded from petitioners' gain computation under section 333(e)(2). ⁴ Respondent contends that with minor exceptions, not applicable herein, the date stock or securities are ‘acquired‘ within the meaning of section 333(e)(2) is the date they are received. Petitioners contend that the date of acquisition within the meaning of section 333(e)(2) should relate back where there is a substitution of basis and a tacking of holding period with respect to the stock or securities acquired ⁵ or where they have been acquired involuntarily.

The issue is a narrow one, i.e., the meaning of the word ‘acquired‘ in section 333(e)(2), and, aside from 1/2 interpretative rulings by respondent hereinafter discussed (see infra pp. 11-16), the case is one of first impression. For the reasons hereinafter set forth, we hold for respondent.

The Supreme Court in Commissioner v. Brown, 380 U.S. 563 (1965), set forth the guidelines for our decision. The Court pointed out, on the one hand, that the ‘common and ordinary meaning (of a word) should at least be persuasive of its meaning as used in the Internal Revenue Code,‘ but, on the other hand, that the courts have some leeway in interpreting a statute if the adoption of a literal or usual meaning of its words ‘'would lead to absurd results * * * or would thwart the obvious purpose of the statute.’‘ See 380 U.S. at 571 (quoting Helvering v. Hammel, 311 U.S. 504, 510-511 (1941)).

Turning to the first guideline, it seems to us that, in common parlance, one cannot be said to ‘acquire‘ property before one obtains ownership, possession, or control over it. Applying this standard, it seems clear that Dunmovin did not ‘acquire‘ the GM stock until after December 31, 1953. We are reluctant, however, to go so far as to equate what we believe to be the common and ordinary meaning of the word ‘acquired‘ in section 333(e)(2) unqualifiedly with the ‘plain meaning‘ of that word. There may be situations where, as respondent himself has ruled, the ‘acquired‘ shares represent no more than a substitution for, or additional shares of the same type as, shares previously acquired. See Rev. Rul. 56-171, 1956-1 C.B. 179, discussed at p. 11, infra. Given our reluctance, we think there is room to examine the legislative history and policy which underlie the statutory provisions involved in the instant case. See, e.g., Abdalla v. Commissioner, 647 F.2d 487, 496-499 (5th Cir. 1981), affg. 69 T.C. 697 (1978).

Section 333(e)(2) was originally enacted in 1938, as a temporary relief measure designed to facilitate the liquidation of personal holding companies. Insofar as the instant case is concerned, the language utilized was the same as is presently contained in section 333(e)(2), except that the operative date with respect to stock or securities ‘acquired‘ (the ‘cut-off date‘) was April 9, 1938. See Seidman's Legislative History of Federal Income Tax Laws 1938-1861, at 49-52 (1938). The provision was reenacted as a temporary measure in 1943, 1950, and 1951 and was the subject of unsuccessful attempts at reenactment in 1942 and 1948. For the details of the various committee reports and comments on the floor of Congress, see I. Seidman's Legislative History of Federal Income and Excess Profits Tax Laws 1953-1939, at 1541-1550 (1954). When the Internal Revenue Code was enacted, the temporary relief provision was made permanent in section 333 with a cut-off date of December 31, 1953. For the legislative history, see S. Rept. 1622, 83d Cong., 2d Sess. 48, 256 (1954); Conf. Rept. 2543, 83d Cong., 2d Sess. 41 (1954). Our examination of the legislative history unfortunately reveals, with one possible exception, nothing which would cast light on any purpose behind these recurring legislative actions other than to continue to facilitate personal holding company liquidations. The exception, upon which petitioners seize to support their position, is the following statement in the 1950 Senate Finance Committee Report: ‘To avoid conversion of the assets of the corporation into stock or securities which could be distributed tax-free in anticipation of legislative action restoring section 112(b)(7) (of the 1939 Internal Revenue Code) the basic (cut-off) date * * * is made August 15, 1950, the date when this legislation was approved by your committee.‘ S. Rept. 2375, 8lst Cong., 2d Sess. 63 (1950). We think this language does no more than to exhibit legislative concern with an obvious means of tax avoidance which, if not covered, could frustrate the requirement of section 333 that a stockholder's gain be recognized to the extent of cash received. See B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders, par. 11.21, at 11-25 (4th ed. 1979). See also Rev. Rul. 76-392, 1976-2 C.B. 249; Burke, ‘Section 333 Liquidations—Boom or Bust?,‘ 21 Baylor L. Rev. 185, 191 (1969). It cannot be transformed, as petitioners argue, into a legislative manifestation that transactions not involving such conversion were of no concern to the Congress and therefore should be exempted from the ‘acquired‘ condition of section 333(e)(2).

Similarly, we are not prepared to accept petitioners' argument that a...