1. In computing under § 115(a) of the Revenue Act of 1934 the
amount of "earnings or profits" distributed by a family investment
corporation with respect to securities which it had acquired by
tax-free exchanges for its own stock, the basis is the transferor's
cost, rather than the value of the securities at the time of their
acquisition by the corporation.
Commissioner v. Wheeler,
324 U. S. 542. P.
327 U. S.
514.
2. Where a distribution of assets by a family investment
corporation to one of its stockholders in 1934 imposed a tax
liability on him under the Revenue Act of 1934, as interpreted in
Commissioner v. Wheeler, 324 U. S. 542, the
taxpayer (whose liability was pending before the Tax Court on
September 20, 1940) was not exempted from liability by the proviso
of § 501(c) of the Second Revenue Act of 1940 to the effect that
nothing therein
"shall affect the tax liability of any taxpayer for any year
which, on September 20, 1940, was pending before . . . the Board of
Tax Appeals, or any court."
P.
327 U. S.
514.
(a) That proviso does not grant a special tax exemption to
taxpayers who happened to have tax litigation pending in September,
1940. P.
327 U. S.
514.
(b) It means that the enactment of the 1940 Act was not to
affect the tax liability of those who had cases pending before the
Board or courts, whatever that tax liability may have been under
the earlier revenue laws. P.
327 U. S. 515.
150 F.2d 198 reversed.
The Commissioner of Internal Revenue assessed an income tax
deficiency against respondents. The Tax Court overruled the
Commissioner. The Circuit Court of Appeals affirmed. 150 F.2d 198.
This Court granted certiorari. 326 U.S. 710.
Reversed, p.
327 U. S. 515.
Page 327 U. S. 513
MR. JUSTICE BLACK delivered the opinion of the Court.
In 1934, the Senior Investment Corporation, organized in 1929 by
one Fisher and his wife for family investment purposes, distributed
to Fisher 43,300 shares of General Motors stock valued at
$1,723,881.25. Fisher and his wife made a joint tax return, but did
not report this amount as income. The taxpayers contended that,
since the Senior Investment Corporation showed a book deficit for
1934, the distribution in question was a "capital distribution,"
and not a corporate dividend from "earnings and profits," which
latter was the type of distribution taxable under Section 115(a) of
the then controlling tax law. 48 Stat. 680, 711. The Commissioner
decided that the following circumstances justified a finding that
the distribution was taxable as a dividend from "earnings or
profits": when the Senior Investment Corporation was organized,
Fisher and his wife paid for their shares of stock with securities
which had cost them $14,500,000, but had, by the date of
organization, acquired a market value of $88,000,000. To show that
the corporation had a deficit and that consequently the
distribution of General Motors stock was not from "earnings or
profits," the taxpayers used the corporation's computation based on
the $88,000,000, rather than the $14,500,000 figure. The
Commissioner decided that the $14,500,000 cost to Fisher and his
wife of the securities they transferred to the corporation in
exchange for shares of its stock was the proper base for
ascertaining whether the corporation could make a distribution from
profits; that the use of that figure would show a surplus in 1934,
and that the distribution of the General Motors
Page 327 U. S. 514
stock was therefore a taxable dividend from "earnings or
profits." On review, the Tax Court, following its prior holdings,
rejected the Commissioner's argument and decided for the
respondents. The Circuit Court of Appeals affirmed. 150 F.2d
198.
Since Section 112 of the Revenue Act of 1934 did not tax the
gain resulting from transfers of property to a corporation in
exchange for stock in that corporation, it is obvious that
rejection of the Commissioner's contention would result in
permitting the Section 112 exemption to be used as a device for
evading taxes Congress intended to impose on many gains actually
realized from sales of property. But we upheld the views urged by
the Commissioner here in
Commissioner v. Wheeler,
324 U. S. 542,
decided on the same day that the Circuit Court of Appeals handed
down its decision in this case. In that case, we held that, in the
second Revenue Act of 1940, 54 Stat. 974, 1004-1005, Congress
clarified its original purpose in enacting the 1934 Act and others
to require that corporate earnings be computed on a basis of cost
of the property to transferors like Fisher. That decision would
have controlled the disposition of this case were it not for the
fact that, on rehearing, the Circuit Court of Appeals held that a
proviso in the second Revenue Act of 1940 excepted taxpayers like
Fisher from liability under the Revenue Act of 1934. That proviso
stated that the 1940 Act should not
"affect the tax liability of any taxpayer for any year which, on
September 20, 1940, was pending before, or was theretofore
determined by the Board of Tax Appeals, or any court of the United
States."
Section 501. This case was pending before the Tax Court on
September 20, 1940, and respondents here contend that the proviso
was intended to exempt Fisher from the tax liability to which he
would otherwise be subject.
In other words, respondents assert that Congress intended by the
proviso to pick out a small group of taxpayers
Page 327 U. S. 515
and award them special tax exemptions which the whole Act was
designed to deny all other taxpayers who did not happen to have tax
litigation pending on September, 1940. The proviso indicates no
such purpose. The proviso means what it says -- that the enactment
of the 1940 Act was not to affect the tax liability of those who
had cases before the Board or Courts, whatever that tax liability
under the earlier revenue laws. Under those earlier laws as
interpreted by us in the
Wheeler case, the distribution of
General Motors stock to Fisher imposed on him a tax liability which
remained unaffected by the enactment of the 1940 statute.
Reversed.
MR. JUSTICE MURPHY and MR. JUSTICE JACKSON took no part in the
consideration or decision of this case.
