1. The Court does not undertake to determine points not raised
or considered below. P. 287 U. S.
2. The taxpayer, a corporation wholly owned by the estate of a
decedent who had set it up and transferred securities to it as a
medium for avoiding multiple death duties and insuring the safety
of a charitable endowment, was assessed a deficiency in its return
for 1920 on account of a gain arising out of an exchange of
securities between it and the estate. It contended that there could
be no true gain or loss in transactions between it and the estate
because they were the same entity. Held:
the record fails
to disclose circumstances sufficient to require disregard of the
corporate form. P. 287 U. S.
57 F.2d 47 reversed.
Page 287 U. S. 416
Certiorari, 286 U.S. 541, to review a judgment reversing a
decision of the Board of Tax Appeals, 20 B.T.A. 1189, determining a
deficiency in income taxes. Cf.
the two cases next
MR. JUSTICE McREYNOLDS, delivered the opinion of the Court.
Respondent, Commonwealth Improvement Company, all of whose
shares are owned by the estate of P. A. B. Widener (he died in
1915), made return concerning income and excess profits taxes for
1920 wherein it claimed deduction for loss occasioned by transfer
of British-American Tobacco Company stock to the estate. The
Commissioner refused to allow the deduction, and found that,
rightly regarded, the transaction had yielded gain to the taxpayer.
A deficiency assessment followed.
The Board of Tax Appeals approved the Commissioner's action, but
the Circuit Court of Appeals, Third Circuit (57 F.2d 47), held
Having acquired control of the Commonwealth Improvement Company,
incorporated under an old Pennsylvania charter, Mr. Widener caused
an increase of its capital stock and authorization of $20,000,000
script and debentures. He then, May 1, 1912, conveyed to the
corporation sundry stocks valued at $25,000,000, taking in payment
all its shares and $20,000,000 in debentures and script. He was
old, and the double purpose was to avoid multifold death duties or
transfer taxes and to insure the safety of an endowment which he
Page 287 U. S. 417
donate to a favorite charity -- School for Crippled Children.
$4,000,000 of the debentures so received were promptly deposited in
trust for the benefit of that school.
Among the securities transferred by Widener to respondent were
225,000 shares British-American Tobacco Company. Their market value
March 1, 1913, was $5,315,625 -- $23.625 per share.
In 1919, the improvement company, under privilege extended to
stockholders, subscribed for and received 75,000 new shares then
issued by the British-American Company, paying therefor $326,437.50
-- $4.3525 per share -- much less than market value.
In 1920, the trustees of the estate acquired the $4,000,000 of
respondent's debentures theretofore deposited for benefit of the
school. These were transferred to respondent, and, in part payment,
it transferred to the estate the original block (the identical
certificates) of 225,000 British-American Tobacco Company shares
valued at $5,287,500 -- $23.50 per share. The apparent result was
sale of the whole block at 12 1/2 cents per share under the March
1, 1913, value with consequent net loss of $28,125. For this sum,
respondent claimed deduction upon its 1920 tax return.
When the Commissioner audited the return, he decided that the
base value per unit (for taxation purposes) of the 225,000 shares
British-American Tobacco Company, transferred as shown, should be
ascertained by adding to their total market value March 1, 1913 --
$5,315,625.00 -- the total paid for the 75,000 shares acquired in
1919, $326,437.50, and dividing the resulting sum by $300,000. The
quotient, $18.806,875, he held was the base cost of each
transferred share. Accordingly, he found a gain by respondent of
$1,055,953.12, and made an appropriate deficiency assessment.
In brief and argument here, respondent advances two points:
first, it is said the Commissioner improperly
Page 287 U. S. 418
reckoned the base value of the British-American Tobacco Company
shares. Second, that, under the peculiar facts or the cause, the
transaction under consideration resulted in no true loss or gain.
Respondent was merely the agency or instrumentality of the trustees
of the estate in administering their trust. Practically considered,
the improvement company and the estate are the same entity.
The Board of Tax Appeals expressed no opinion concerning the
Commissioner's method of reckoning -- it was not requested so to
do. There, the respondent relied entirely upon the second point.
The Circuit Court of Appeals ruled only on the same point. In such
circumstances, we do not undertake to determine what was not
Upon the second point, we think the Board of Tax Appeals reached
the right conclusion; the judgment of the Circuit Court of Appeals
must be reversed.
Among other things, the Board well said:
"The petitioner does not now argue before the board that the
method of computing the gain was incorrect, but relies entirely
upon its contention that the corporation and the estate are the
same entity. If this contention were logically applied, it would
follow that all income received by the corporation since its
organization was properly taxable as income of P. A. B. Widener and
his estate, and should have been added to any other income which
Widener and his estate received during these years and taxed at the
rates applicable to individuals, rather than returned by the
petitioner and taxed at the rates fixed for corporations. For the
purposes of inheritance and transfer taxes imposed by the various
States upon the transfer of the stocks owned by petitioner, the
corporate entity should have been disregarded upon the death of
Widener and these stocks treated as different things and taxed
accordingly payable had they been owned by the decedent. But
Page 287 U. S. 419
petitioner does not seek to carry its contention to such a
conclusion. Having enjoyed the benefits which resulted from its
separate existence, it seeks to perpetuate those benefits and asks
that the separate existence and tax liability of the petitioner and
its single stockholder be overlooked only with respect to
transactions which take place between them. That this is an
afterthought is plainly evidenced by the action of petitioner in
claiming a deduction upon this same transaction when it believed a
deductible loss had been sustained. . . ."
"The fact is that petitioner did have a separate legal existence
with privileges and obligations entirely separate from those of its
stockholders. The fact that it had only one stockholder seems of no
legal significance. Cannon Mfg. Co. v. Cudahy Co.,
267 U. S.
Counsel for respondent concede that ordinarily a corporation and
its stockholders are separate entities, whether the shares are
divided among many or are owned by one. Consequently they make no
effort to support any general rule under which a corporation and
its single stockholder have such identity of interest that
transactions between them must be disregarded for tax purposes.
They submit, however, the peculiar facts here disclosed suffice to
show there was really no income, nothing properly taxable as such.
They refer to Southern Pacific Co. v. Lowe, 247 U.
, and Gulf Oil Corp. v. Lewellyn,
248 U. S. 71
as controlling, but as instances where the court looked through
mere form and regarded substance.
While unusual cases may require disregard of corporate form, we
think the record here fails to disclose any circumstances
sufficient to support the petitioner's claim. Certainly the
improvement company and the estate were separate and distinct
entities; the former was avowedly utilized to bring about a change
in ownership beneficial to the latter. For years, they were
Page 287 U. S. 420
treated as different things and taxed accordingly upon separate
returns. The situation is not materially different from the not
infrequent one where a corporation is controlled by a single
stockholder. See Eisner v. Macomber, 252 U.
, 252 U. S.
-209; Lynch v. Hornby, 247 U.
, 247 U. S. 341
United States v. Phellis, 257 U.
, 257 U. S.
Southern Pacific Co. v. Lowe, supra,
and Gulf Oil
Corp. v. Lewellyn, supra,
(the latter covered in principle by
the first), cannot be regarded as laying down any general rule
authorizing disregard of corporate entity in respect of taxation.
These cases presented peculiar situations, and were determined upon
consideration of them. In the former, this Court said:
"The case turns upon its very peculiar facts, and is
distinguishable from others in which the question of the identity
of a controlling stockholder with his corporation has been raised.
Pullman's Car Co. v. Missouri Pacific Ry. Co.,
115 U. S.
, 115 U. S. 596
v. Chicago, Rock Island & Pacific Ry. Co., 205 U. S.
, 205 U. S. 391