Verkouteren v. District of Columbia

• Decision Date: 06 February 1969
• Docket Number: No. 20889-20894.,20889-20894.
• Citation: 433 F.2d 461,139 US App. DC 303
• Parties: John H. VERKOUTEREN, Petitioner, v. DISTRICT OF COLUMBIA, Respondent. Herman OSHINSKY, Petitioner, v. DISTRICT OF COLUMBIA, Respondent. Mary OSHINSKY, William Oshinsky and Clara Sennet, Executors of the Estate of Charles Oshinsky, Deceased, Petitioners, v. DISTRICT OF COLUMBIA, Respondent. William OSHINSKY, Petitioner, v. DISTRICT OF COLUMBIA, Respondent. Herman FENICHEL, Petitioner, v. DISTRICT OF COLUMBIA, Respondent. Bernard MARGOLIUS and Lilyan Margolius, Petitioners, v. DISTRICT OF COLUMBIA, Respondent.
• Court: U.S. Court of Appeals — District of Columbia Circuit

139 US App. DC 303, 433 F.2d 461 (1970)

John H. VERKOUTEREN, Petitioner, v. DISTRICT OF COLUMBIA, Respondent.

Herman OSHINSKY, Petitioner, v. DISTRICT OF COLUMBIA, Respondent.

Mary OSHINSKY, William Oshinsky and Clara Sennet, Executors of the Estate of Charles Oshinsky, Deceased, Petitioners, v. DISTRICT OF COLUMBIA, Respondent.

William OSHINSKY, Petitioner, v. DISTRICT OF COLUMBIA, Respondent.

Herman FENICHEL, Petitioner, v. DISTRICT OF COLUMBIA, Respondent.

Bernard MARGOLIUS and Lilyan Margolius, Petitioners, v. DISTRICT OF COLUMBIA, Respondent.

Nos. 20889-20894.

United States Court of Appeals District of Columbia Circuit.

Argued November 8, 1967.

Decided February 6, 1969.

Reargued June 19, 1969.

Decided June 11, 1970.

As Amended January 6, 1971.

Mr. Joel N. Simon, Washington, D. C., with whom Mr. Albert E. Arent, Washington, D. C., was on the brief, for petitioners.

Mr. Henry E. Wixon, Asst. Corporation Counsel, with whom Messrs. Charles T. Duncan, Corporation Counsel, Hubert B. Pair, Principal Asst. Corporation Counsel, and Robert C. Findlay, Asst. Corporation Counsel, were on the brief, for respondent.

Mr. David E. Birenbaum, Washington, D. C., filed a brief on behalf of Watergate Realty, Inc., as amicus curiae.

Before FAHY, Senior Circuit Judge, and WRIGHT, McGOWAN, TAMM, LEVENTHAL, ROBINSON, MacKINNON and ROBB, Circuit Judges, sitting en banc.

Reargued en banc June 19, 1969.

ON REHEARING EN BANC

PER CURIAM:

The court, by a divided vote, reinstates the decision of the panel issued February 6, 1969. The issue is one of local law, and the rule for the future has in any event been specified by the amendments effected by the District of Columbia Revenue Act of 1969, 83 Stat. 176 (1969). While the various issues discussed by counsel in their briefs and argument en banc have been carefully considered, we think the case is an appropriate one for invoking Local Rule 13(c), and for announcing the judgment en banc without detailed exposition en banc of the legal points beyond that already provided in the majority and minority opinions of the panel.

Before FAHY, Senior Circuit Judge, and LEVENTHAL and ROBINSON, Circuit Judges.

SPOTTSWOOD W. ROBINSON, III, Circuit Judge.

Capitol Hotel Enterprises, Inc. (Capitol) was organized in 1948 and, until its dissolution in 1960, owned and managed investment properties situated in the District of Columbia. At its inception, petitioners, by investment of $720 of Capitol's $1,200 total capitalization, became holders of three-fifths of its common stock,¹ and this stock they retained until its liquidation. During 1948, Capitol purchased stock in Chastleton Hotel, Inc. (Chastleton) for $20,480,² and until dissolution carried it on its books at that figure.

When Capitol dissolved in 1960, the book value of its assets was $101,021.30, consisting of notes receivable, accrued interest, and the Chastleton stock.³ With no liabilities, Capitol's net worth appeared on its books at $1,200 in paid-in capital and $99,821.30 in earned surplus. Book values of the notes and interest were equal to their fair market values,⁴ but over the twelve years since its purchase the Chastleton stock had appreciated from $20,480 to a fair market value of $390,000.

Petitioners acquired on Capitol's liquidation three-fifths of its assets actually worth $282,324.78, including three-fifths of the Chastleton stock having a market value of $234,000.⁵ Three days thereafter, they joined with Capitol's other former stockholders in a sale, at the price of $390,000, of all of the Chastleton stock Capitol had previously owned. From the sale petitioners received $234,000⁶ as their pro rata portion of its proceeds.

Petitioners, all individual residents of the District during 1960, filed cash-basis District income tax returns for that year, but omitted Capitol's liquidating shares. Upon a subsequent examination of their returns, the assessing authority revised each petitioner's tax liability by adding to the taxable income reported, in the ratio of his ownership of Capitol's stock, a portion of Capitol's earned surplus and a portion of the profit on the Chastleton stock sale. The aggregate gain on that sale was computed at $369,520, being the sale price of $390,000 minus the $20,480 originally paid for it. Tax deficiencies were assessed accordingly and were paid.

Petitioners then filed suit in the District of Columbia Tax Court challenging so much of the additional assessments as was based on the gain from sale of the Chastleton stock.⁷ The Tax Court upheld the assessments upon a finding that for tax purposes the stock had been constructively sold by Capitol and not by the stockholders. That finding contravened a stipulation by the parties that the stockholders had effected the sale. For that reason, upon earlier appeals here, we reversed and remanded the cases to the Tax Court for its decision on petitioners' additional taxability on the premise stipulated.⁸ On remand, the Tax Court again affirmed the assessments, and the cases are back for further review.

Thus once again we are brought face-to-face with the need to construe and apply the District of Columbia income tax laws in the resolution of difficult questions of far-reaching significance. In the performance of this duty, we take the statutory provisions as we find them, utilize our past interpretive decisions as we understand them and, "albeit with Congressional illumination of a very faint order indeed,"⁹ arrive at the conclusions that seem to achieve the underlying legislative objectives. That process leads us to affirmance of the decisions from which the appeals before us were taken.

I

To the extent that Capitol's liquidating shares represented its earned surplus, they were properly considered to be "dividends" constituting gross income to the recipient stockholders. By statute it is so provided,¹⁰ our decisions so hold,¹¹ and petitioners concede the validity of so much of the assessments.¹²

But the Chastleton stock which Capitol distributed in kind falls into a different category. The increase in the stock's value while in Capitol's portfolio was unrealized, and never became a part of its "earnings, profits, or surplus."¹³ The Chastleton stock, then, did not become a dividend upon its receipt by Capitol's stockholders, even to the extent of its appreciation in value after Capitol's acquisition.¹⁴ For the treatment it was properly to be given, we must consult other relevant provisions of the tax laws.

The District's income tax is imposed generally upon the entire net income of a resident individual in excess of his personal exemptions and credits for dependents.¹⁵ Net income is defined as gross income less allowable deductions.¹⁶ Gross income includes "income derived from * * * sales or dealings in property, whether real or personal, other than capital assets * * *, growing out of the * * * sale of * * * such property * * *."¹⁷ The single exclusion from gross income at all pertinent to this case is of "gains from the sale or exchange of any capital assets."¹⁸ A capital asset, with exceptions immaterial here, is "any property * * * held by the taxpayer for more than two years * * *."¹⁹ Thus the gain from petitioners' sale of the Chastleton stock was gross income unless they held stock as a capital asset.

Had petitioners sold or exchanged their Capitol stock at a profit, the gain would not have been includible as gross income. Had Capitol itself made a profitable sale or exchange of the Chastleton stock, the profit would have been nontaxable to it. The result in each instance would flow from the fact that the subject of the disposition, while in the ownership of the disposer, was a capital asset, gains from the sale or exchange of which are excluded from gross income.

But our case is different. It involves neither a sale or exchange by Capitol of the Chastleton stock nor a sale or exchange by petitioners of their Capitol stock. It is concerned with petitioners' sale of the Chastleton stock after its untaxed distribution to them. We conclude that the Chastleton stock, having been held by petitioners for only three days before the sale, was not a capital asset in their hands.

Capitol was not the alter ego of its shareholding community, but a tax entity distinct from its stockholders.²⁰ Assets demand independent tax treatment — perhaps differing treatment — according to whether they belong to the corporation, ongoing or dissolved, or to its stockholders. We find nothing in the District's tax statute purporting to classify, from the stockholder's standpoint, distributed property as a capital asset simply by reason of its prior tax status as such while in corporate ownership. Nor did the fact that the Capitol stock was retained by the stockholders for more than two years, and thus became a capital asset, mean that the Chastleton stock, which they kept for only three days, also was a capital asset to them.

The words "capital assets" are defined in terms of property "held by the taxpayer."²¹ That description characterizes aptly Capitol's proprietorship of the Chastleton stock before Capitol's dissolution. But Capitol's stockholders, merely because they held the aggregate beneficial interest in the corporate enterprise, did not bear that degree of relationship to the corporate assets prior to the liquidation. As we see it, Capitol's stockholders acquired the Chastleton stock in the type of ownership prerequisite to a capital asset holding only upon its distribution to them, three days before they sold it.

Unlike our dissenting colleague,²² we do not find support for a contrary position in our Goldman decision.²³ There the majority of the court held that distributions from corporate depreciation reserves, irrespective of whether they exceeded investments in the corporation's stock, were capital payments and not gross income to the distributees under Section 47-1557a.²⁴ That determination is inapposite, for it treats an issue not before us ...