White v. United States White v. Same

• Decision Date: 05 December 1938
• Docket Number: No. 96,97,96
• Citation: 59 S.Ct. 179,305 U.S. 281,83 L.Ed. 172
• Parties: WHITE et al. v. UNITED STATES. WHITE v. SAME
• Court: U.S. Supreme Court

305 U.S. 281

59 S.Ct. 179

83 L.Ed. 172

WHITE et al.

v UNITED STATES. WHITE v. SAME.

No. 96, 97.

Argued Nov. 16, 17, 1938.

Decided Dec. 5, 1938.

Mr. John P. Ohl, of New York City, for petitioners.

Mr. Edward J. Ennis, of New York City, for the United States.

Mr. Justice STONE delivered the opinion of the Court.

The question decisive of this case is whether, under §§ 23 and 101 of the Revenue Act of 1928, 45 Stat. 791, 799, 811, 26 U.S.C.A. §§ 23, 101, upon a liquidation of a corporation, stockholders' losses from their investment in its stock held for more than two years are ordinary losses deductible in full from gross income, or capital losses, 12 1/2% of which is deductible under § 101 from the tax as computed without regard to such losses.

The decedent in each of these cases made an investment represented by shares of stock in a corporation. Upon complete liquidation of the corporation, more than two years later, the total liquidating dividends on the stock amounted to less than the cost of the investment. In their income tax returns for 1929 petitioners deducted from gross income the losses of their respective decedents. The commissioner ruled that the losses were capital net losses of which only 12 1/2% was deductible, as provided by § 101, and he accordingly found deficiencies, which petitioners paid.

In the present suits, brought by petitioners in the Court of Claims to recover the payments of the deficiencies as overpayments of 1929 tax, recovery was denied. 21 F.Supp. 361. We granted certiorari, 305 U.S. 581, 59 S.Ct. 69, 83 L.Ed. —-, to resolve a conflict between the decision below and that of the Circuit Court of Appeals for the Ninth Circuit in Chester N. Weaver Co. v. Commissioner, 97 F.2d 31, certiorari granted, 305 U.S. 585, 59 S.Ct. 95, 83 L.Ed. —-, which arose under related sections of the 1932 Revenue Act.

Section 23(e) of the 1928 Act, 26 U.S.C.A. § 23, declares that 'In computing net income there shall be allowed as deductions * * * losses sustained during the taxable year * * * (2) if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *.' And subsection (g), 45 Stat. 800, provides: 'The basis for determining the amount of deduction for losses sustained * * * shall be the same as is provided in section 113 for determining the gain or loss from the sale or other disposition of property.'

These provisions of § 23 are qualified and restricted by § 101, which prescribes rates of tax applicable to capital net gains and the extent to which capital net losses are deductible in arriving at net taxable income. Section 101(c)(1) and (2) of the Revenue Act of 1928, 26 U.S.C.A. § 101, defines 'capital gain' as a 'gain from the sale or exchange of capital assets' and 'capital loss' as a 'deductible loss resulting from the sale or exchange of capital assets.' Section 101(c)(3) and (4), 26 U.S.C.A. § 101, declares: "Capital deductions' means such deductions as are allowed by section 23 for the purpose of computing net income, and are properly allocable to or chargeable against capital assets sold or exchanged during the taxable year * * *;' and " ordinary deductions' means the deductions allowed by section 23 other than capital losses and capital deductions.' By § 101(c)(5) and (6), 26 U.S.C.A. § 101, a 'capital net gain' or 'loss', results from the sale of 'capital assets', which are defined by § 101(c)(8), 26 U.S.C.A. § 101, as 'property held by the taxpayer for more than two years', not including 'stock in trade * * * or other property' held by the taxpayer 'primarily for sale in the course of his trade or business.'

Sections 23 and 101 place capital gains and losses as thus defined on a different basis from other types of gains and losses for the purpose of computing the tax. By § 101(a), 26 U.S.C.A. § 101 a capital net gain as defined by § 101(c)(5) may, at the option of the taxpayer, be assessed at the rate of 12 1/2% in lieu of all other taxes, and by § 101(b), 26 U.S.C.A. § 101, a capital net loss, defined by § 101(6) as 'the excess of the sum of the capital losses plus the capital deductions over the total amount of capital gain,' may be deducted, only to the extent of 12 1/2%, from the tax as computed without regard to the capital net loss. These sections, read together with §§ 12, 21 and 22, 26 U.S.C.A. §§ 12, 21, 22, presently to be discussed, thus provide a complete scheme for ascertaining capital gains and losses from the sale or exchange of property and for bringing them into the computation of the tax on net income, a scheme distinct from that applicable to other types of gains and losses resulting in ordinary net income, including those from sales and exchanges of property not capital assets.

The losses here sustained are concededly losses on investments of capital, entitled to recognition in the computation of taxable net income, but petitioners' contention is that as the losses did not result from a sale or exchange of the stock they are not capital losses within the meaning of § 101, which limits the deduction of such losses, and that in consequence they fall into the category of ordinary losses, deductible in full under § 23. The answer to this contention turns upon the meaning and ef- fect of § 115(c), 26 U.S.C.A. § 115, which relates to distributions by corporations and appears in Supplement B of the 1928 Act. The section provides in part: 'Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. * * *' Section 111, 26 U.S.C.A. § 111, contains the provisions for computation of gain or loss from the sale or other disposition of property and refers, as does § 23(g), to § 113 as affording the basis for determining gain or loss upon sales or exchanges of property. By § 112(a), 26 U.S.C.A. § 112(a), it is provided that 'Upon the sale or exchange of property the entire amount of the gain or loss determined under section 111, shall be recognized, except as hereinafter provided in this section.'¹

Petitioners concede that the command of § 115(c) that amounts distributed in complete liquidation of a corporation 'shall be treated as in full payment in exchange for the stock' and that the 'gain or loss * * * shall be determined under section 111,' requires the gain or loss upon liquidation to be determined as are gains or losses upon sale of the stock under §§ 111, 113, 26 U.S.C.A. §§ 111, 113. The same method is adopted by 101 for determining gains or losses from sales of capital assets.² But they insist that the qualifica- tion that gain or loss 'shall be recognized only to the extent provided in section 112' and the fact that the provisions of § 101 apply only to cases of sales or exchanges exclude the stockholders' gain or loss upon liquidation, which is not a sale or exchange, from the operation of the provisions of § 101 governing the computation of the tax.

Sections 101 and 115(c) are found in the provisions supplemental to the general provisions of subtitle B of the 1928 Revenue Act, which is concerned with rates of tax and computation of net income. Section 101 appears in Supplement A, relating to rates of tax, and § 115 in Supplement B, concerning computation of net income. Both supplements serve to modify or explain the general provisions. '* * * the Supplemental Provisions are those which apply only to extraordinary classes of taxpayer or which apply only to the extraordinary transactions of ordinary classes of taxpayers.' Report, Committee on Ways and Means, No. 2, 70th Cong., 1st Sess., p. 12. From the arrangement and general plan of the Act it is evident that the effect of §§ 101 and 115 upon each other is not to be ascertained alone by the comparison of the two sections or by noting the absence of any reference to either by the other, but by noting and comparing the effect of each upon the general provisions, to which reference must be made in the first instance for all computations of income tax.

Sections 12, 21, 22 and 23, found in subtitle B, General Provisions, to which §§ 101 and 115 are supplementary, govern computation of net income and of the tax. Subsection (c) of § 12, 45 Stat. 797, which fixes the rates of surtax, refers specifically to § 101 for the rate and computation of tax on capital net gains and losses.³ Section 21, 26 U.S.C.A. § 21, declares that net income means gross income computed under § 22, less the deductions allowed by § 23. As already noted, § 23(e), (g), providing for deductions of losses on sales or exchanges of property, is restricted in its operation by the provisions of § 101. Otherwise, § 101 would have no application to deductible losses. These general provisions thus incorporate by reference those of § 101 and give to them controlling effect in the computation of the tax in cases of capital gains or losses upon the sale or exchange of capital assets. In addition, § 22(d) provides that 'Distributions by corporations shall be taxable to the shareholders as provided in section 115,' which in turn, as already noted, provides in paragraph (c) that liquidating dividends 'shall be treated as in full payment in exchange for the stock,' and that resulting gains or losses determined, as in the case of sales or exchanges of property, under § 111, are to be 'recognized only to the extent provided in section 112,' which also deals with sales and exchanges.

Section 115(c) and §§ 111 and 112, to which it refers, standing alone give no clue to the part which a stockholder's loss on liquidation is to play, in computation of the tax, more than they give in the case of gains and losses upon sales or exchanges of...