1. A loss resulting from the sale in 1926 of securities in
respect of which a distribution pursuant to a plan of
reorganization had been made,
held properly determined,
for the purpose of computing income tax under the Revenue Act of
1926, by the method prescribed by Art. 1599 of Treasury Regulations
65, as amended April 3, 1928, rather than by the original
regulation promulgated August 28, 1926, where the effect of
applying the original regulation would be to credit the taxpayer
with a loss greatly disproportionate as between the stock in
respect of which the distribution was made and the stock
distributed, contrary to the provision of the statute which
requires that the basis shall be "apportioned" between the old and
the new stock. P.
297 U. S.
132.
2. To apportion is "to divide and assign in just proportion,"
"to distribute among two or more a just part or share to each." P.
297 U. S.
134.
3. The validity of an administrative regulation depends on
whether it is consistent with the statute and reasonable. P.
297 U. S.
134.
4. Since the original regulation could not lawfully be applied
in the circumstances of this case, because inconsistent with the
statute and unreasonable, the amended regulation in effect became
the
Page 297 U. S. 130
primary and controlling rule in respect of the situation
presented, and was not void as retroactive. P.
297 U. S. 135.
76 F.2d 892 affirmed.
Certiorari,
296 U. S. 559, to
review a judgment affirming a decision of the Board of Tax Appeals,
29 B.T.A. 395, sustaining determinations of deficiencies in income
taxes in two cases. The cases were consolidated before the Board of
Tax Appeals and disposed of by a single decision both by the Board
and by the Circuit Court of Appeals.
MR. JUSTICE SUTHERLAND delivered the opinion of the Court.
These cases involve identical facts and questions of law, and
were disposed of by the court below in one opinion. 76 F.2d 892.
The facts, so far as they concern the question here, are taken from
the statement of that court:
"The petitioners are affiliates of United Brokerage Company.
That corporation filed income tax returns for itself and its
affiliates for 1925 and 1926, and the petitioners seek to review
tax deficiencies attributed to them by the Commissioner, which the
Board of Tax Appeals has affirmed. . . ."
"On June 30, 1925, the United Brokerage Company purchased for
$3,414,345.63 in cash, all the capital stock of Artemas Ward, Inc.
(a New York corporation), that was
Page 297 U. S. 131
issued and outstanding, consisting of 4,964 shares of no par
value. . . ."
"On December 31, 1925, pursuant to a plan of reorganization,
Artemas Ward, Inc. (N.Y.) transferred to Artemas Ward, Inc. (a
Delaware corporation), in exchange for 100 shares of stock of the
latter company of no par value, all its assets, then of a net book
value of $1,246,920.07, with the exception of cash and accounts
receivable aggregating $284,967.21 -- that is to say, the New York
corporation transferred to the Delaware corporation assets of the
value of $961,952.86. Immediately after the transfer, and on
December 31, 1925, Artemas Ward, Inc. (N.Y.) distributed to United
Brokerage Company the 100 shares of stock of Artemas Ward, Inc.
(Del.) and accounts receivable amounting to $234,967.21. In
December, 1926, United Brokerage sold the entire 4,964 shares of
Artemas Ward, Inc. (N.Y.) for $49,640. That stock had cost the
United Brokerage $3,414,345.63, and the total must be apportioned
between the 100 shares of the Delaware corporation (which it still
owns) and the 4,964 shares of Artemas Ward, Inc. (N.Y.) in order to
determine the loss suffered by the United Brokerage Company through
its sale of the 4,964 shares at $49,640. . . ."
"Upon the reorganization, the New York corporation had left
among its assets, valued at $1,246,920.07, accounts receivable and
cash aggregating $284,967.21, or approximately 22.85% thereof,
after $961,952.86 had been transferred to the Delaware Company.
Under Art. 1599(2) (as amended,
infra) the portion of
$3,414,345.63 paid by the United Brokerage Company for the stock of
Artemas Ward, Inc. (N.Y.) represented by that stock after the
reorganization was $780,303.97. If from this be deducted
$234,967.21 accounts receivable and the $49,640 realized from the
sale in December, 1926, there
Page 297 U. S. 132
would be a loss of $495,696.76. This loss the Commissioner
allowed in assessing the income tax for 1925. The second point
raised on this appeal is whether the loss, for the year 1926, to
which the United Brokerage Company and its affiliates were entitled
was only the sum of $495,696.76 or was the sum of $2,167,785.56
which would arise through deducting from $3,414,345.63 (the cost of
the stock of the New York company) the value at the time of the
reorganization of the Delaware stock which was $961,952.86 and
$234,967.21 realized from accounts receivable and $49,640 realized
from sale of the 4,964 shares."
It thus appears, the New York company having parted with all its
assets except $50,000 in cash, that the assets behind the 4,964
shares when the 100-share distribution was made consisted of only
that sum, while the 100 shares of the Delaware company stock were
represented by the transferred assets of the New York company of
the value of $961,952.86. The sale of the 4,964 shares brought
$49,640, and the simple question to be determined is what method,
for the purposes of taxation, should be employed to determine the
loss in respect of the 4,964 shares under the Revenue Act of 1926,
§ 204(a)(9), c. 27, 44 Stat. 9, 14, 15? That section provides that
the basis for determining the gain or loss from such sale shall be
the cost of the property, except that:
"(9) If the property consists of stock or securities distributed
after December 31, 1923, to a taxpayer in connection with a
transaction described in subdivision (c) of § 203,** the basis in
the case of the stock in
Page 297 U. S. 133
respect of which the distribution was made shall be apportioned,
under rules and regulations prescribed by the Commissioner with the
approval of the Secretary, between such stock and the stock or
securities distributed."
At the time of the reorganization, Article 1599 of Treasury
Regulations 69, which had been promulgated on August 28, 1926, was
in force. Petitioners invoke subdivision 2 of that regulation,
which provided:
"Where the stock distributed in reorganization is in whole or in
part of a character or preference materially different from the
stock in respect of which the distribution is made, the cost or
other basis of the old shares of stock shall be divided between
such old stock and the new stock in proportion, as nearly as may
be, to the respective values of each class of stock, old and new,
at the time the new shares of stock are distributed, and the basis
of each share of stock will be the quotient of the cost or other
basis of the class with which such share belongs, divided by the
number of shares in the class.
The portion of the cost or other
basis of the old shares of stock to be attributed to the shares of
new stock shall in no case exceed the fair market value of such
shares as of the time of their distribution."
(Italics added.)
April 3, 1928, this regulation was amended by striking from it
the italicized portion. The taxpayer contended that its loss should
be computed in accordance with the original regulation. This would
have resulted in an allocation to the 4,964 shares of the New York
corporation of $2,452,392.77, and, after making certain deductions,
the allowable loss, as already appears, would have been something
over $2,000,000. The Commissioner, however, proceeding in strict
accordance with the amended regulation, determined the amount of
loss to be $495,696.76. Without pursuing the matter in further
detail, it is enough to say that the case turns entirely upon the
question
Page 297 U. S. 134
whether the loss was to be determined in accordance with the
original or the amended regulation. If in accordance with the
former, the taxpayer is right; if in accordance with the latter,
the Commissioner is right. The court below held that the amended,
and not the original, regulation furnished the applicable rule, and
affirmed the determination of the Board of Tax Appeals, which, in
turn had sustained the Commissioner. We agree with that view.
In determining a loss, the statute requires that the basis shall
be "apportioned" between the old and the new stock. To apportion is
to "divide and assign in just proportion," "to distribute among two
or more a just part or share to each,"
Fisher v. Charter Oak
Life Ins. Co., 14 Abb.N.C. 32, 36, albeit, a division may be
just without necessarily being also an exactly equal division. The
result of applying the original regulation here is to bring about
an inequitable apportionment, contrary to the intent of the
statute, and to credit the taxpayer with a loss essentially and
greatly disproportionate. On the other hand, application of the
amended regulation effectuates the legislative intent that the
basis of apportionment between the old and the new stock shall
result in a fair and just division.
The power of an administrative officer or board to administer a
federal statute and to prescribe rules and regulations to that end
is not the power to make law, for no such power can be delegated by
Congress, but the power to adopt regulations to carry into effect
the will of Congress as expressed by the statute. A regulation
which does not do this, but operates to create a rule out of
harmony with the statute, is a mere nullity.
Lynch v. Tilden
Produce Co., 265 U. S. 315,
265 U. S.
320-322;
Miller v. United States, 294 U.
S. 435,
294 U. S.
439-440, and cases cited. And not only must a
regulation, in order to be valid, be consistent with the statute,
but it must be reasonable.
Page 297 U. S. 135
International Ry. Co. v. Davidson, 257 U.
S. 506,
257 U. S. 514.
The original regulation, as applied to a situation like that under
review, is both inconsistent with the statute and unreasonable.
The contention that the new regulation is retroactive is without
merit. Since the original regulation could not be applied, the
amended regulation in effect became the primary and controlling
rule in respect of the situation presented. It pointed the way, for
the first time, for correctly applying the antecedent statute to a
situation which arose under the statute.
See Titsworth v.
Commissioner, 73 F.2d 385, 386. The statute defines the rights
of the taxpayer and fixes a standard by which such rights are to be
measured. The regulation constitutes only a step in the
administrative process. It does not, and could not, alter the
statute. It is no more retroactive in its operation than is a
judicial determination construing and applying a statute to a case
in hand.
Judgment affirmed.
* Together with No. 227,
Collier Service Corp. v.
Commissioner of Internal Revenue. Certiorari to the Circuit
Court of Appeals for the Second Circuit.
** Sec. 203(c), 44 Stat. 13 provides:
"If there is distributed, in pursuance of a plan of
reorganization, to a shareholder in a corporation a party to the
reorganization, stock or securities in such corporation or in
another corporation a party to the reorganization, without the
surrender by such shareholder of stock or securities in such a
corporation, no gain to the distributee from the receipt of such
stock or securities shall be recognized."