Opinion
Docket No. 3054.
1945-02-13
CROSSETT WESTERN COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Carl E. Davidson, Esq., for the petitioner. Wilford, H. Payne, Esq., for the respondent.
1. Held, section 718(b)(3), Internal Revenue Code, being clear and unambiguous, does not justify resort to Congressional reports for interpretation
2. Held, further, application of the section requiring the deduction of the amount of earnings and profits of another corporation which previously at any time were included in the accumulated earnings and profits of a corporation by reason of a tax-free reorganization is mandatory, irrespective of the fact that became of operating losses in the intervening years taxpayer had no accumulated earnings and profits at the beginning of the taxable years. Carl E. Davidson, Esq., for the petitioner. Wilford, H. Payne, Esq., for the respondent.
The respondent determined deficiencies against Crossett Western Co. income and excess profits taxes for the years 1940 and 1941, as follows:
+---------------------------------------+ ¦ ¦1940 ¦1941 ¦ +------------------+---------+----------¦ ¦Income tax ¦$7,789.14¦ ¦ +------------------+---------+----------¦ ¦Excess profits tax¦266.98 ¦$86,807.49¦ +---------------------------------------+
The petitioner concedes that the deficiency in income tax for 1940 was correctly determined and the full amount thereof has been assessed and paid since the filing of the petition herein. Of the total deficiency in excess profits tax for 1941, the petitioner admits that $51,679.31 was properly asserted, and that amount has been assessed, with the consent of the petitioner, since the deficiency notice was issued. The deficiency in excess profits tax for 1940 is in dispute in its entirety.
The single issue for our determination is whether, in determining the petitioner's equity invested capital for excess profits tax for the years 1940 and 1941, the earnings and profits which the petitioner acquired from other corporations in 1923 in connection with a nontaxable reorganization and which were subsequently eliminated by operating losses prior to the taxable years here involved, should be applied pursuant to the provisions of section 718(b)(3) of the Internal Revenue Code in reduction of the amounts included in equity invested capital under the provisions of section 718(a) of the code.
FINDINGS OF FACT.
The facts are all stipulated. In so far as material to the issue herein, they are as follows:
The petitioner is a corporation organized November 19, 1923, under the laws of the State of Delaware, with principal office at 1024 American Bank Building, Portland, Oregon. Its corporation income, declared value excess profits and defense tax return for the year 1940, its corporation excess profits tax return for the taxable year 1940, and its corporation excess profits tax return for the taxable year 1941 were filed with the collector of internal revenue for the district of Delaware.
The authorized capital stock of the petitioner at the time of its organization was as follows:
Preferred stock - 10,000 shares of a par value of $100 per share.
Common stock - 90,000 shares of a par value of $100 per share.
On November 23, 1923, a plan of reorganization was adopted by petitioner and three other corporations, namely: Big Creek Logging Co., Crossett Western Lumber Co., and Crossett Timber Co., whereby the latter three corporations were to be consolidated into the petitioner by conveying all of their net assets, except certain cash which was to be distributed to their respective stockholders, to the petitioner solely in exchange for the petitioner's stock. The plan of reorganization was consummated in accordance with its terms as of December 31, 1923. The stock of the petitioner which was received by the three corporations above named upon the consolidation was exchanged by them with their respective stockholders in redemption of all the stock of the corporations, which were thereupon duly dissolved.
The assets received by the petitioner from its transferors upon the exchange, pursuant to the plan of reorganization, were received without recognition of gain or loss under the internal revenue laws and the bases of the assets in the hands of the petitioner were the same as the bases of the assets in the hands of the petitioner's transferors.
Crossett Timber Co. was a corporation organized November 16, 1906. On December 31, 1923, the par value of its capital stock issued and outstanding, its paid-in surplus, and its undistributed earnings and profits were as follows:
+--------------------------------------------------+ ¦Capital stock issued and outstanding¦$1,738,250.00¦ +------------------------------------+-------------¦ ¦Paid-in surplus ¦550,000.00 ¦ +------------------------------------+-------------¦ ¦Undistributed earnings and profits ¦599,022.22 ¦ +--------------------------------------------------+
On December 31, 1923, Crossett Timber Co. distributed $769,086.25 to its stockholders, of which $599,022.22 was from earnings and profits. Thereafter, and on the same day, Crossett Timber Co. transferred all of its remaining assets to the petitioner in exchange for shares of petitioner's stock, pursuant to the plan of reorganization referred to above.
The net unadjusted basis for determining loss upon sale or exchange of the assets transferred to the petitioner on December 31, 1923, by Crossett Timber Co. in exchange for stock of the petitioner, after deducting liabilities of Crossett Timber Co. assumed by the petitioner, was $2,118,185.97. Crossett Timber Co. had no earnings and profits at the time of transfer of its assets to the petitioner, and there was no deficit in its earnings and profits at that time.
Big Creek Logging Co. was a corporation organized on May 17, 1912. On December 31, 1923, the par value of its capital stock issued and outstanding, its paid-in surplus, and its undistributed earnings and profits were as follows:
+------------------------------------------------+ ¦Capital stock issued and outstanding¦$250,000.00¦ +------------------------------------+-----------¦ ¦Paid-in surplus ¦22,500.00 ¦ +------------------------------------+-----------¦ ¦Undistributed earnings and profits ¦862,902.46 ¦ +------------------------------------------------+
On December 21, 1923, Big Creek Logging Co. distributed $70,000 to its stockholders out of its earnings and profits, and thereafter, and on the same day, transferred all of its remaining assets to the petitioner in exchange for shares of the petitioner's stock, pursuant to the plan of reorganization referred to above.
The net unadjusted basis for determining loss upon sale or exchange of the assets transferred to the petitioner on December 31, 1923, by Big Creek Logging Co. in exchange for stock of the petitioner, after deducting liabilities assumed by the petitioner, was $1,065,402.46. The earnings and profits of Big Creek Logging Co. which, under the rule of Commissioner v. Sansome, 60 Fed. (2d) 931, became earnings and profits of the petitioner upon transfer of the assets of Big Creek Logging Co. to it, amounted to $792,902.46.
Crossett Western Lumber Co. was a corporation organized on December 31, 1912. On December 31, 1923, the par value of its capital stock issued and outstanding was $439,700. Prior thereto distributions in such stock had been made from capital in the amount of $72,077. On the same date, December 31, 1923, the undistributed earnings and profits of Crossett Western Lumber Co., prior to payments on that date in redemption of a part of its stock for cash and the distribution of other cash to its stockholders, were $154,078.05.
On December 31, 1923, Crossett Western Lumber Co. redeemed $37,100 par value, of its stock for cash and distributed $23,800 in cash to its stockholders. Thereafter, and on the same day, Crossett Western Lumber Co. transferred all of its remaining assets to the petitioner in exchange for shares of the petitioner's stock, pursuant to the plan of reorganization referred to above.
The net unadjusted basis for determining loss upon sale or exchange of the assets transferred to the petitioner on December 31, 1923, by Crossett Western Lumber Co. in exchange for stock of the petitioner, after deducting liabilities assumed by the petitioner, was $460,801.05.
The earnings and profits of Crossett Western Lumber Co. which, under the rule of Commissioner v. Sansome, supra, became earnings and profits of the petitioner upon transfer of the assets of Crossett Western Lumber Co. to it, amounted to $130,278.05.
The net aggregate investment of the old stockholders in the capital stock of the three transferor corporations, parties to the reorganization referred to above, amounted to $2,721,208.97. The aggregate accumulated earnings and profits of said transferor corporations remaining as of December 31, 1923, the date the reorganization was effected, amounted to $923,180.51, which, under the rule of Commission v. Sansome, supra, became the earnings and profits of the petitioner at the time of its organization. The total net assets received by the petitioner from the three transferor corporations in exchange for the capital stock of the petitioner, in connection with the plan of reorganization, amounted to the sum of $3,644,389.48.
On or about December 31, 1923, the petitioner issued shares of its own common stock of a par value of $8,411,800 and preferred stock of a par value of $164,600 to Crossett Timber Co., Big Creek Logging Co., and Crossett Western Lumber Co. in exchange for the net value of assets of said transferor corporations transferred to the petitioner in connection with the aforesaid reorganization.
The operations of the petitioner commenced on January 1, 1924, and from that date to and including December 31, 1939, the petitioner's operations resulted in an aggregate loss in excess of $923,180.51. The petitioner had no accumulated earnings and profits either from its own operations or transferred to it by a predecessor corporation under the rule of Commissioner v. Sansome, supra, as of the beginning of either of the taxable years 1940 or 1941.
The corrected excess profits net income of petitioner for the year 1940 is $119,020.32.
The excess profits tax net income of petitioner for the year 1941 is $460,990.49. Petitioner was in existence for 351 days of the year 1941.
In computing its equity invested capital for excess profits tax for the years involved, the petitioner made no deductions in respect to the earnings and profits it had acquired from its transferor corporations. The respondent determined that such deductions were necessary under the provisions of section 718(b)(3) and determined the deficiencies accordingly.
OPINION.
VAN FOSSAN, Judge:
The sole question for our determination is whether, in computing the petitioner's equity invested capital for 1940 and 1941, there must be deducted, under section 718(b)(3) of the Internal Revenue Code, the amount of the earnings and profits of other corporations which the petitioner received in a tax-free reorganization, where because of operating losses in the intervening years the taxpayer had no accumulated earnings and profits at the beginning of either of the taxable years in question.
The facts are not in dispute. The petitioner was organized to take over the assets of three transferor corporations. These assets, for which the petitioner issued its capital stock, had a net value at the time of the reorganization of $3,644,389.48, which value was used by respondent as the adjusted basis of the assets in his computations. Included in this amount was the sum of $923,180.51 representing the accumulated earnings and profits of the transferor corporations which, under the rule of Commissioner v. Sansome, supra, became earnings and profits of the petitioner for tax purposes.
In the years subsequent to the reorganization, the petitioner suffered operating losses and it had no accumulated earnings and profits at the beginning of either of the taxable years here in question.
The controversy between the parties centers about the application of section 718(b)(3), which section was enacted as a part of the Second Revenue Act of 1940.
The petitioner contends that the committee reports show the true purpose of the section to be to avoid a duplicate inclusion of the earnings and profits so transferred; that in the instant case there is no duplication, since the petitioner had no accumulated earnings and profits at the beginning of either of the taxable years involved; and that consequently no amount should be deducted under section 718(b)(3).
The respondent contends that resort may not be had to the committee reports for construction of the statute; that, standing by itself, the statute is clear and unambiguous; and that if any ambiguity exists it is caused by reference to the reports. He contends that the statute is mandatory in requiring the deduction of the earnings and profits of another corporation ‘which previously at any time‘ were included in the petitioner's accumulated earnings and profits and that, since the earnings and profits of the transferor corporations were ‘included‘ in the petitioner's earnings and profits at the time of the reorganization, the requirements of the statute have been fulfilled and the deduction must be made.
We have concluded that the respondent should be sustained. Section 718 is a directive measure, specifically indicating which items shall be included in, and which excluded from, equity invested capital. It provides, with appropriate definitions and limitations, that equity invested capital shall be the sum of: The money paid in; property paid in; distributions in stock; accumulated earnings and profits as of the beginning of the year; and any income on account of gain on tax-free liquidation— reduced by distributions not made out of accumulated earnings and profits; earnings and profits of another corporation; and loss on account of tax-free liquidation. The specific subsection of section 718 here in question is (b)(3) which, as far as pertinent, reads as follows:
(b) REDUCTION IN EQUITY INVESTED CAPITAL.— The amount by which the equity invested capital for any day shall be reduced as provided in subsection (a) shall be the sum of the following amounts
(3) EARNINGS AND PROFITS OF ANOTHER CORPORATION.— The earnings and profits of another corporation which previously at any time were included in accumulated earnings and profits by reason of a transaction described in section 112(b) to (e), both inclusive, or in the corresponding provision of a price, revenue law, * * *
The quoted language is clear and unambiguous. If the earnings and profits of another corporation were at any time previously included in the accumulated earnings and profits of the taxpayer by reason of a nontaxable reorganization under section 112(b) to (e) both inclusive, then the aggregate of the items listed in section 718(a) shall be reduced by the amount of such earnings and profits.
It is stipulated that as a result of a nontaxable reorganization the taxpayer took over the assets of other corporations, including accumulated earnings and profits, and under the rule of Commissioner v. Sansome, supra, these earnings and profits became taxpayer's earnings and profits. It seems too clear to require demonstration that petitioner taxpayer fits precisely in the statutory picture. The words ‘previously‘ and ‘at any time‘ require no definition if they are accorded their everyday meaning. Petitioner, in effect, asks us to delete these words. This can not be done. Clearly the taxpayer comes within the ambit of section 718(b)(3). Any other interpretation would be a distortion of the statutory language.
Petitioner's insistence that the Congressional reports demonstrate that Congress intended, in enacting section 718(b)(3), to prevent duplication of assets and that, since it had no accumulated earnings and profits at the beginning of the year, there is no duplication calling for the application to it of section (b)(3), can not be entertained. In short, the taxpayer asks to be exempted from the application of the cited section. While resort may be had in some circumstances to the legislative history to find the Congressional intent, when Congress has spoken in clear and unambiguous language the normal and reasonable meaning of an act is not to be argued to one side in favor of a construction made possible only by the distortion or disregard of such plain language. Here we find no support for petitioner's argument in the law or in the facts. The language used in the act is so plain as to be impossible of misconstruction and to admit of no farfetched interpretation or distortion. The respondent has followed the statute explicitly. While it is true that petitioner had no accumulated earnings and profits in the taxable years, the statute makes no exception to cover such a case. There is no suggestion that the deduction depends on the fact or the amount of the taxpayer's earnings and profits in the taxable year. This is a case where, of a certainty, nothing should be added to, nor substituted for, the plain and obvious meaning of the statute by a forced construction.
We sustain the action of the respondent.
Reviewed by the Court.
Decision will be entered under Rule 50.
SMITH and DISNEY, JJ., concur only in the result.
MURDOCK, J., concurring: Equity invested capital, as defined in the statute, includes property paid in for stock. That property does into the computation under certain circumstances at its unadjusted basis for determin ing loss. See sec. 718(a)(1) and (2), I.R.C. Properties of the transferor were paid in for the stock of the petitioner. There was no gain or loss recognized on that transfer. The amount to be included in equity invested capital as property paid in for stock is the unadjusted basis of the transferred property in the hands of the transferor corporations. Equity invested capital also includes accumulated earnings and profits of a taxpayer as of the beginning of the year. The earnings and profits of the transferors, under the principle of the Sansome case, become the earnings and profits of the transferee. The assets of the transferor corporations at their book basis already reflect the earnings of those corporations. If both the assets and the earnings of the transferors go into equity invested capital of the transferee corporation, there is a duplication equivalent to the amount of the earnings and profits of the transferor corporations taken over by the transferee. Such a duplication must be eliminated. Sec. 718(b)(3). The duplication continues even though the transferee corporation loses the earnings of the transferor corporations. Because of the duplication above described, the loss of earnings works a double reduction of what makes up equity invested capital. Not only do the earnings disappear, but the asset account is correspondingly reduced. In other words, the transferee corporation, in the loss of the earnings of the transferor corporation, has lost a corresponding amount of the assets paid in for its stock which supported those earnings in the example above, so there is still necessity for an elimination. HILL, J., agrees with the above.