Services, Inc. v. Neill

• Decision Date: 06 January 1953
• Docket Number: No. 7886,7886
• Citation: 252 P.2d 190,73 Idaho 330
• Parties: SERVICES, Inc. v. NEILL et al.
• Court: Idaho Supreme Court

Page 190

252 P.2d 190

73 Idaho 330

SERVICES, Inc. v. NEILL et al.

No. 7886.

Supreme Court of Idaho.

Jan. 6, 1953.

Robert E. Smylie, Atty. Gen. and J. N. Leggat, Asst. Atty. Gen., for appellants.

Richards, Haga & Eberle, Boise, for respondent.

THOMAS, Justice.

The State Tax Collector fixed and assessed a proposed deficiency of $7,288.19 in the income tax of Services, Inc., a corporation, respondent herein, for the fiscal year ending November 30, 1947. The taxpayer filed a protest with the State Tax Commission and therein sought a redetermination of such deficiency. Upon review, the Commission affirmed the action of the tax collector. Upon appropriate proceedings for review of such action, the Court below reversed and modified the order of the Commission by reducing the deficiency to $36.89. From such judgment of the District Court this appeal was taken by the State Tax Commission.

The transaction and the controlling facts out of which the controversy arose are substantially as follows:

Prior to October 30, 1947, Services, Inc., a corporation, owned and operated a laundry and dry cleaning establishment in Boise, Idaho, including certain lands, buildings and equipment having an admitted tax base of $197,147.18, subject to a mortgage indebtedness of $105,527.50. On October 30, 1947, Services, Inc., sold an undivided one-half interest therein to one M. E. Toliver for $107,000, plus the assumption by Toliver of one-half of the pre-existing mortgage indebtedness, making the total purchase price to Toliver for such interest $159,763.75; Toliver paid respondent $50,000 cash at the time; the payment of the balance of $57,000 was to be taken care of by deferred installments. There is no tax liability problem involved herein with reference to the transaction between respondent and Toliver.

Pursuant to a pre-arranged plan, on the following day both respondent and Toliver transferred their respective interests in the assets to Troy-Capital, Inc., a new corporation, in exchange for securities of the new corporation consisting of 500 shares of its capital stock, with a par value of $100 per share, and $164,000 of its debenture bonds, the new corporation assuming the mortgage which was a lien upon the assets transferred. Each party received stock of the par value of $25,000 and debenture bonds of the face value of $82,000. $57,000 of the bonds, conceded to belong to Toliver, were issued directly to respondent as a pledge to secure payment of the balance of the purchase price owing by Toliver to respondent. Immediately following such exchange of their respective and equal interests in these assets for the stock and securities of the new corporation, Toliver and respondent were in control of such corporation.

Respondent, for income tax purposes, reported the profit arising from the sale of an undivided one-half interest in the assets to Toliver but made no report concerning the transaction with the new corporation.

It is the contention of appellant that the transfer by respondent of its one-half interest in the assets to the new corporation resulted in a gain, presently taxable. On the other hand, respondent contends that such transaction did not result in a presently recognized gain and that a gain, if there be any, is not recognized for income tax purposes until the investment in the new corporation is finally liquidated and the securities sold. Both parties primarily rely upon Section 63-3006, I.C., which has never been judicially construed. The question is one of first impression here.

The Income Tax Act of Idaho, known as the Property Relief Act of 1931, was enacted in 1931. S.L.1932 (E.S.) Chap. 2. At that time the Federal Income Tax Act, commonly known as the Revenue Act of 1928, was in force. The Federal Revenue Act of 1928 was adopted in substantial part by this state in 1931. At the time of such adoption many sections of the Federal Act had been construed and interpreted, including Section 112, the counterpart of Section 63-3006, I.C.

A statute which is adopted from another jurisdiction, including Federal statutes adopted by a state will be presumed to be adopted with the prior construction placed upon it by the courts of such other jurisdiction. This rule has been recognized and applied with reference to the Federal Revenue Act, Girard v. Defenbach, 61 Idaho 702, 106 P.2d 1010, and is further fortified by the provisions of Section 63- 3085, I.C., which has never been amended, providing as follows:

'Rule of decision.--For the purpose of determining gross and net income, depletion, depreciation and obsolescence, in all cases not expressly provided for in this chapter, the provisions of the most recent act of the congress of the United States, commonly known as the Federal Income Tax Act, and the rules, regulations and decisions thereunder, in so far as same are applicable and pertinent and not repugnant to or inconsistent with the express provisions of this chapter, shall be the rule of decision in all courts of this state and by the tax commissioner.'

Additionally, the then Tax Commissioner, in May 31, 1941, promulgated, adopted, and published an extensive set of regulations relating to and construing the income tax laws of this state, including therein Article 6.1, page 11, and Article 6.9, page 14, which will be further considered later in this opinion. In the preface of such publication is found the following:

'Since the Property Relief Act of 1931 followed very closely the provisions of the Federal Revenue Act of 1928, the regulations as set forth herein follow the administrative and judicial interpretations adopted under the Federal Acts wherever possible. Many of the sections contained in Regulations 103 issued by the Commissioner of Internal Revenue under the Internal Revenue Code in 1940 have been adopted by specific reference as the official regulations for interpretation of the Idaho Act.'

Each party looks to and invokes the provisions of Section 63-3006, I.C., to support its position, particularly Section 63-3006 b.4 and d.1. No part of this entire section has been amended. Section 63-3006, I.C., in pertinent part provides as follows:

'a. Upon the sale or exchange of property the entire amount of the gain or loss, * * *, shall be recognized, except as hereinafter provided in this section.

'b. * * * 4. No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange

* * *

* * *

'd. 1. If any exchange would be within the provisions of paragraph 1, 2, or 4 of subdivision b, if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, than (then) the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.'

The Commission claims that the exchange of Services, Inc., property for Troy-Capital stock and securities does not come within Section 63-3006 b.4., the controlled corporation section, because the property transferred to the corporation must be solely in exchange for stocks or securities of such corporation and that the assumption of the mortgage debt constitutes and is regarded as 'money or other property', additionally, under subsection d.1. taking the transaction out of the operation of subsection b.4. and subjecting Services, Inc., to a gain presently taxable because, in substance, it is as if Services, Inc., had, through the new corporation, paid the mortgage obligation.

On the other hand, it is the contention of respondent that Section 63-3006 b.4. and d.1., I.C., as it has been construed by the State Tax Commission and as Section 112 of the Federal Revenue Act, its counterpart, has been construed administratively and in the Federal courts, both before and after the Idaho act was adopted, either a gain or a loss on such transaction is not recognized for tax purposes until the investment is finally liquidated and the securities sold; that the gain or loss is deferred or postponed so long as the original investment is continued and unliquidated, and that the encumbrance of the property transferred or the assumption of such encumbrance is not treated or considered as 'other property or money' upon which a gain or loss is presently recognized for tax purposes.

The State act, in substance, being an adoption of the Federal Act of 1928, it is proper, if necessary, to look to the administrative rulings and decisions of the Federal Act prior to its adoption by the State, as an aid in construing the meaning prior to such adoption, Girard v. Defenbach, supra; Caldwell v. Thiessen, 60 Idaho 515, 92 P.2d 1047, because it will be presumed that it was adopted with the construction placed upon it by the federal courts prior to its adoption, Hanson v. Rogers, 54 Idaho 360, 32 P.2d 126; furthermore, a construction given to a statute by executive and administrative officers of states is entitled to great weight and will be followed unless there are cogent reasons for a change. Breckenridge v. Johnston, 62 Idaho 121, 108 P.2d 833.

In 1929, in the case of Tsivoglou v. U. S., 1 Cir., 31 F.2d 706, the court refused to allow the taxpayer to take a loss on a transaction where he had transferred all of his assets to the corporation which assumed all of his business liabilities in exchange for all the stock of the corporation except three qualifying shares; the taxpayer claimed the stock had a value below that of the assets transferred...