Perthur Holding Corp. v. Commissioner of Int. Rev., 23.

• Decision Date: 07 November 1932
• Docket Number: No. 23.,23.
• Citation: 61 F.2d 785
• Parties: PERTHUR HOLDING CORPORATION v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Second Circuit

61 F.2d 785 (1932)

PERTHUR HOLDING CORPORATION v. COMMISSIONER OF INTERNAL REVENUE.

No. 23.

Circuit Court of Appeals, Second Circuit.

November 7, 1932.

Brison Howie, of New York City, for petitioner.

G. A. Youngquist, Asst. Atty. Gen., and Sewall Key and Francis H. Horan, Sp. Assts. to Atty. Gen. (C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and J. Arthur Adams, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for respondent.

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

L. HAND, Circuit Judge.

The taxpayer was a corporation with an authorized capital of $260,000, none of which had been issued. In December, 1925, it issued $250,000 of its shares to one, Kuttroff, in exchange for land in New York which at the time was worth that amount, and which it sold in 1926 at a small loss. This is deducted in its return for that year, but the Commissioner struck out the deduction, and in its place assessed as a deficiency, a tax levied upon the difference between the proceeds of the sale in 1926 and the value of the land on March 1, 1913, Kuttroff having bought before that date. The case concededly falls within section 203 (b) (4) and section 204 (a) (8) of the Revenue Act of 1926, 26 USCA §§ 934 (b) (4), 935 (a) (8), so that the only question raised is of the constitutionality of those two sections. The Court of Claims (Newman, Saunders & Co. v. U. S., 36 F.(2d) 1009), and the Ninth Circuit (Osburn California Corp. v. Welch, 39 F.(2d) 41), have decided the point in favor of the Treasury under the Revenue Act of 1924 (43 Stat. 253), and this effort to secure an opposite ruling is no doubt in the hope of carrying the question to the Supreme Court.

The taxpayer's theory is that Kuttroff's conveyance so changed his relation to the land that he realized a taxable income at once, measured by the difference between the value of the shares and that of the land on March 1, 1913. This income could be taxed against him, but not against the company, for that would be to tax one person upon the income of another (Hoeper v. Wisconsin, 284 U. S. 206, 52 S. Ct. 120, 76 L. Ed. 248). Furthermore, Kuttroff will be personally liable to a tax upon the same amount, if he sells his shares at an advance corresponding to the company's profit, in which event the "basis" for his calculation must be the value of the land on March 1, 1913. Section 204 (a) (6), Revenue Act of 1926, 26 USCA § 935 (a) (6).

Two questions arise: (1) Whether there was an income to tax at all; (2) whether the company may be taxed upon it. The answer to the first is easy. When Kuttroff exchanged the land for shares, the increase could have been taxed as his income; until 1921 it was (section 202 (b), Revenue Act of 1918, 40 Stat. 1060), for it was only in that year that the law first refused to "recognize" such transactions as creating income (section 202 (c) (3), Revenue Act of 1921, 42 Stat. 229). When section 204 (a) (8) of the Revenue Act of 1926, taxed the increase up to the exchange along with any which arose afterwards, there was therefore no defect in subject-matter under the Sixteenth Amendment. Eisner v. Macomber, 252 U. S. 189, 40 S. Ct. 189, 64 L. Ed. 521, 9 A. L. R. 1570, throws no doubt upon that. Marr v. U. S., 268 U. S. 536, 45 S. Ct. 575, 69 L. Ed. 1079; Insurance, etc., Co., v. Commissioner, 36 F.(2d) 842 (C. C. A. 2). In Taft v. Bowers, 278 U. S. 470, 49 S. Ct. 199, 73 L. Ed. 460, 64 A. L. R. 362, this was not so clear. The increase in value in the donor's hands was not income at all, and became such only when the donee sold. But the court held that it was indubitably income after it was realized, and that was enough so far as concerned the subject-matter.

The answer to the second question is not so obvious. The exchange took place after the Revenue Act of 1924 had thrown upon the company the tax on Kuttroff's income; it was a consequence with notice of which the company was charged and which it could escape. The only possible objection is under the Fifth Amendment, on the notion that the tax takes property without due process of law; and it has indeed been sustained when the result was to affect transactions which took place before the tax was imposed (Nichols v. Coolidge, 274 U. S. 531, 47 S. Ct. 710, 71 L. Ed. 1184, 52 A. L. R. 1081; Blodgett v. Holden, 275 U. S. 142, 48 S. Ct. 105, 72 L. Ed. 206). But, so far as we know, it never has been, when the tax impinges prospectively, for the root of the evil is the...