1. A corporation which was organized for the purpose of
liquidating the properties of another corporation, and which, since
its organization, has been carrying on negotiations for the sale of
the properties, selling them from time to time as satisfactory
offers are received, and renting unsold properties under short term
leases in an attempt to earn the carrying charges pending ultimate
sale, was "carrying on
Page 316 U. S. 70
or doing business" within the meaning of provisions of the
Revenue Act of 1935, and subsequent Revenue Acts, imposing a tax on
the capital stock of every domestic corporation "carrying on or
doing business" during the tax year. P.
316 U. S.
71.
2. The provision of the Treasury Regulations that "doing
business" within the meaning of the capital stock tax provisions of
the Revenue Act of 1935, and subsequent Revenue Acts, includes
activities of a corporation engaged in "liquidation . . . of
properties taken over from another corporation" is valid and
applicable to the corporation here involved. P.
316 U. S.
72.
120 F.2d 441, reversed.
Certiorari, 314 U.S. 601, to review the affirmance of a judgment
for the taxpayer, 35 F. Supp. 340, in a suit for refund of capital
stock taxes.
MR. JUSTICE MURPHY delivered the opinion of the Court.
This is a suit for refund of capital stock taxes paid by
respondent for the years ending June 30, 1936, through 1939. We are
asked to determine whether respondent was "carrying on or doing
business" within the meaning of § 105(a) of the Revenue Act of
1935, c. 829, 49 Stat. 1017, and subsequent acts, which
provide:
"For each year ending June 30, beginning with the year ending
June 30, 1936, there is hereby imposed upon every domestic
corporation with respect to carrying on or doing business for any
part of such year an excise tax of $1.40 for each $1,000 of the
adjusted declared value of its capital stock. [
Footnote 1] "
Page 316 U. S. 71
Respondent was organized in 1935 with broad corporate powers
under the laws of Maryland by the protective committee for the
bondholders of the defunct Washington, Baltimore & Annapolis
Railway Company. It was formed for the purpose of liquidating
certain properties formerly belonging to the Railway Company which
the committee had acquired through foreclosure. Among the
properties received by respondent from the committee were certain
rights of way, easements, terminal properties, and other real
estate located in Baltimore, Annapolis, and Washington, as well as
at the other points along the line of the railroad, and the stock
of a realty holding company which owned another realty company,
both of which had been subsidiaries of the Railway Company for the
purpose of holding legal title to real estate. The value of the
properties received in 1935, as shown by respondent's balance
sheet, was $419,250.
Since its incorporation, respondent has been carrying on
negotiations for the sale of the properties acquired, selling them
from time to time as satisfactory offers were received, and renting
unsold properties under short term leases in an attempt to earn the
carrying charges pending ultimate sale. Receipts from sales during
the four year period here in question were approximately $675,000,
and rentals amounted to $136,000. At the end of this period,
respondent's books still showed properties worth $122,000. All net
income, except small reserves for contingencies, was distributed as
received to the stockholders, former bondholders of the Railway
Company.
Respondent paid capital stock taxes for the four years in
question and then brought this suit for refund of the payments in
the District Court. The court held that, because respondent was a
liquidating corporation, it was
Page 316 U. S. 72
not "carrying on or doing business" within the meaning of the
capital stock tax, and was therefore exempt. In so holding, the
court refused to give effect to the Treasury regulation claimed to
be applicable. [
Footnote 2] 35
F. Supp. 340. The Circuit Court of Appeals affirmed. 120 F.2d 441.
We granted certiorari because of the importance of the question in
the administration of the revenue acts. 314 U.S. 601.
The regulation, Article 43(a)(5), provides:
"ART. 43.
Illustrations. -- (a)
General. -- In
general, 'doing business' includes any activities of a corporation
whether it engages in --"
"
* * * *"
"(5) the orderly liquidation of property by negotiating sales
from time to time as opportunity and judgment dictate and
distributing the proceeds as liquidation is effected -- for
example, the liquidation of an estate, or of properties taken over
from another corporation, or of the shareholders' fractional
interests in particular property;"
If the regulation is both applicable and valid, respondent
manifestly cannot prevail.
On the question of applicability, there can be no doubt for the
language of the regulation precisely describes respondent's
activities. We find without substance respondent's assertions that
Article 43(b)(2) [
Footnote 3]
is inconsistent with Article 43(a)(5), and that it more exactly
fits the facts
Page 316 U. S. 73
of this case. During the period in question, respondent did not
fall into that state of quietude, covered by the specific language
of Article 43(b)(2), in which it was merely owning and holding
specific property and distributing the resulting proceeds.
See
Zonne v. Minneapolis Syndicate, 220 U.
S. 187;
cf. Von Baumbach v. Sargent Land Co.,
242 U. S. 503,
242 U. S.
516-517. On the contrary, respondent was actively
engaged in fulfilling the purpose of its creation, the liquidation
of its holdings for the best obtainable price.
Article 43(a)(5) is both a contemporary and a longstanding
administrative interpretation, having been in effect in
substantially the same form since 1918, except for the period from
1926 to 1933 when the tax was not imposed. [
Footnote 4] We are of opinion that it is valid, as well
as applicable. The crucial words of the statute, "carrying on or
doing business," are not so easy of application to varying facts
that they leave no room for administrative interpretation or
elucidation. To be sure, in many, if not in most, instances, the
factual situation will be so extreme as to leave no doubt whether a
corporation is doing business or not. But the nuances of facts
between the two extremes
Page 316 U. S. 74
have produced a nebulous field of confusion which has been
recognized by courts striving to fit close cases into one category
or the other. [
Footnote 5]
Interpretative regulations, such as Article 43(a)(5), are
appropriate aids toward eliminating that confusion and uncertainty.
Cf. Helvering v. Wilshire Oil Co., 308 U. S.
90,
308 U. S. 102;
Textile Mills Securities Corp. v. Commissioner,
314 U. S. 326.
Reversed.
[
Footnote 1]
This language has not been changed, except for the tax periods
and the amount of the tax, in the subsequent acts covering the tax
period here in question.
See § 401, Revenue Act of 1936,
c. 690, 49 Stat. 1733; § 601, Revenue Act of 1938, c. 289, 52 Stat.
565. The provision is now incorporated in § 1200(a) of the Internal
Revenue Code.
[
Footnote 2]
Article 43(a)(5) of Treasury Regulations 64 (1936 Edition).
[
Footnote 3]
"
Exceptions. -- Ordinarily the exceptions to 'doing
business' are restricted to limited activities of a corporation,
such a --"
"
* * * *"
"(2) the distribution of the avails of property and the doing
only of such acts as may be necessary for the maintenance of its
corporate status in the case in which the corporation either was
organized for, or has reduced its activities to, the mere owning
and holding of specific property."
[
Footnote 4]
Article 5 of Treasury Regulations 38, issued under the Revenue
Act of 1916, c. 463, 39 Stat. 756, provided:
". . . A corporation formed to take over miscellaneous stocks,
bonds, and other property, to negotiate the sale of the various
items from time to time as opportunity and judgment dictate, and to
distribute the proceeds from time to time as liquidation is
effected is organized for profit, and, while engaged in such
liquidation, is carrying on business."
This provision, with minor changes in wording, was continued in
Treasury Regulations 50 (1919 ed.), Art. 18; (1920 ed.), Art. 11;
Treasury Regulations 64 (1922 ed.), Art. 12; (1924 ed.), Art. 12;
(1933 ed.), Art. 22; (1934 ed.), Art. 33. In 1936, Treasury
Regulations 64 were reorganized and the substance of the provision
quoted above was continued as Art. 43(a)(5) of the 1936 edition. No
change was made in the 1938 edition.
[
Footnote 5]
See Eaton v. Phoenix Securities Co., 22 F.2d 497, 498;
United States v. Hotchkiss Redwood Co., 25 F.2d 958;
Harmar Coal Co. v. Heiner, 34 F.2d 725, 727;
Argonaut
Consolidated Mining Co. v. Anderson, 52 F.2d 55, 56;
American Investment Securities Co. v. United States, 112
F.2d 231, 232.
The decisions of this Court illustrate the difficult problems of
classification encountered.
See Cedar Street Co. v. Park Realty
Co., 220 U. S. 107,
220 U. S. 170;
Von Baumbach v. Sargent Land Co., 242 U.
S. 503;
Edwards v. Chile Copper Co.,
270 U. S. 452;
Phillips v. International Salt Co., 274 U.S. 718 --
with which compare Zonne v. Minneapolis Syndicate Co.,
220 U. S. 187;
McCoach v. Minehill & S.H. Railway Co., 228 U.
S. 295;
United States v. Emery, Bird, Thayer Realty
Co., 237 U. S. 28.