1. Under Internal Revenue Code §§ 22(a), 115(a), (b), upon a
reorganization of two corporations into a new corporation,
accumulated earnings and profits of the predecessor corporations
which are undistributed in the reorganization are deemed to be
acquired by the successor corporation and, upon distribution by it,
are taxable as income, notwithstanding the participation of new
investors in the successor corporation. Pp.
331 U. S.
215-216.
Page 331 U. S. 211
2. To what extent the accumulated earnings and profits of the
predecessor corporations have been retained by the successor in
this case is for the Tax Court to determine upon a factual
analysis. Pp.
331 U. S.
216-217.
157 F.2d 132 reversed.
The Tax Court sustained the Commissioner's determination of
deficiencies in respondents' income taxes. 5 T.C. 108. The Circuit
Court of Appeals reversed. 157 F.2d 132. This Court granted
certiorari. 329 U.S. 709.
Reversed and remanded, p.
331 U. S.
217.
MR. JUSTICE BLACK delivered the opinion of the Court.
The Commissioner assessed deficiencies against respondents for
failure to report as 1940 income dividends paid to them on stock of
Crandall-McKenzie & Henderson, Inc., which respondents had
bought earlier in that year. [
Footnote 1] These dividends are taxable as income to the
respondents if the corporation paid them out of its earnings and
profits. Int.Rev.Code §§ 22(a), 115(a), (b). Since its organization
in 1928, the corporation had not accumulated earnings and profits
sufficient to pay the 1940 dividend in full. [
Footnote 2] But the Commissioner found that
the
Page 331 U. S. 212
two old corporations which were merged in 1928 to form this new
corporation had at that time, and turned over to the new
corporation, accumulated earnings and profits sufficient to cover
these dividends. One of these old corporations, L. Henderson &
Sons, Inc., had about $75,000 in earnings and profits accumulated
since 1913; the other, Crandall-McKenzie Company, had about
$330,000. Liability of respondents for these deficiencies depends
upon whether the new corporation acquired and retained a sufficient
amount of these earnings and profits of its predecessors to cover
the 1940 dividends.
The 1928 merger took place under the following circumstances.
Stockholders of Henderson and certain stockholders of
Crandall-McKenzie agreed together with a firm of underwriters to
effect a merger of the two corporations into a new one. The
underwriters agreed to buy for cash 52% of the stock of the new
corporation for public sale. In execution of this agreement, the
new corporation was formed, and acquired all the assets of
Henderson and Crandall-McKenzie. The six stockholders of Henderson
accepted stock in the new corporation as full payment for
surrendering their old company stock. Holders of nearly one-half of
the stock of old Crandall-McKenize did not accept new corporation
stock, but were paid some $355,000 in cash for their old stock.
[
Footnote 3] The other old
Crandall-McKenzie stockholders
Page 331 U. S. 213
were satisfied to accept only new corporation stock. When the
reorganization was complete, the new corporation stock had been
distributed as follows: 14,607 shares to old Crandall-McKenzie
stockholders, 9,524 shares to old Henderson stockholders, and
25,869 shares to the general public through the participating
underwriters.
The Tax Court found that there was a failure of proof that the
earnings and profits of the old corporations had been distributed
in 1928. Relying upon the rule of
Commissioner v. Sansome,
60 F.2d 931, which, for tax purposes, treats a reorganized
corporation as but a continuation of its predecessors, the Tax
Court determined that the new corporation acquired all the earnings
and profits of its predecessors in 1928. Then, without analyzing
the earnings and distribution history of the new corporation after
its inception in 1928 and prior to the 1940 distribution, the Tax
Court concluded that the new corporation's accumulated earnings and
profits were sufficient in 1940 to make the questioned dividends
taxable to respondents as income. 5 T.C. 108. The Circuit Court of
Appeals for the Third Circuit reversed, 157 F.2d 132, following its
earlier decision in
Campbell v. United States, 144 F.2d
177, which had narrowly limited the
Sansome rule. The
theory of the
Campbell decision, so far as relevant to the
only question directly presented here, was that change in ownership
brought about by the participation of new investors in the
reorganization made the new corporation such an entirely different
entity that it could not properly be called, even for tax purposes,
a continuation of its
Page 331 U. S. 214
predecessors. [
Footnote 4]
Thus, it was concluded, earnings and profits of the predecessors
were not acquired by the new corporation.
We granted certiorari because of an alleged conflict with the
Sansome rule. 329 U.S. 709. In the state of the record
presented, we find it necessary to decide no more than whether the
distinction of the
Sansome rule made by the
Campbell case is correct.
A basic principle of the income tax laws has long been that
corporate earnings and profits should be taxed when they are
distributed to the stockholders who own the distributing
corporation.
See Int.Rev.Code §§ 22, 115(a), (b). The
controlling revenue acts in question, however, exempt from taxation
distributions of stock and money distributions at least in part,
made pursuant to a reorganization such as transpired here in 1928.
See Revenue Act of 1928, § 112(b), (c), (i)(1)(A); §
115(c)(h), 45 Stat. 791, 816-818, 822-823. Thus, unless those
earnings and profits accumulated by the predecessor corporations
and distributed in this reorganization are deemed to have been
acquired by the successor corporation and taxable upon distribution
by it, they would escape the taxation which Congress intended.
See § 112(h), Revenue Act of 1928;
Murchison's Estate
v. Commissioner, 76 F.2d 641;
United States v.
Kauffmann, 62 F.2d 1045.
In
Commissioner v. Sansome, supra, it was held that
implicit in the tax exemption of reorganization distributions was
the understanding that the earnings and profits
Page 331 U. S. 215
so exempt were acquired by the new corporation and were taxable
as income to stockholders when subsequently distributed. Congress
has repeatedly expressed its approval of the so-called
Sansome rule as a correct interpretation of the purpose of
the tax laws governing reorganizations. [
Footnote 5] And Congress has apparently been satisfied
with Treasury Regulations which follow the
Sansome
doctrine. [
Footnote 6]
Of course, when, as in the
Sansome case, all the
stockholders of the old corporation swap all their old stock for
identical proportions of the new, there can be no doubt that the
earnings and profits of the old have not been distributed and are
passed on to the successor corporation. But if the predecessors'
earnings and profits are not distributed in the course of the
reorganization, they do not disappear simply because the successor
corporation has some assets and owners in addition to those of the
old corporation or corporations.
See Putnam v. United
States, 149 F.2d 721, 726. The congressional purpose to tax
all stockholders who receive distributions of corporate earnings
and profits cannot be frustrated by any reorganization which leaves
earnings and profits undistributed in whole or in part. Insofar
Page 331 U. S. 216
as accumulated earnings and profits have been distributed
contemporaneously with the reorganization so as to become taxable
to the distributees, they, of course, cannot be said to have been
acquired by the successor corporation. But insofar as payments to
the predecessor corporations or their stockholders do not actually
represent taxable distributions of earnings and profits, those
earnings and profits must be deemed to have become available for
taxable distribution by the successor corporation.
It would be inappropriate for us to make the factual analysis of
this record necessary to trace the earnings and profits involved in
the 1928 reorganization in the absence of such a determination by
the Tax Court and review by the Circuit Court of Appeals.
See
Helvering v. Rankin, 295 U. S. 123,
295 U. S.
131-132;
Helvering v. Safe Deposit & Trust
Co., 316 U. S. 56,
316 U. S. 66-67;
Commissioner v. Scottish American Investment Co.,
323 U. S. 119,
323 U. S. 124.
It might be that, upon a full factual analysis, the Tax Court would
conclude that the new corporation acquired and had retained
earnings and profits of Henderson sufficient to cover the 1940
distribution. Or the Tax Court may find it necessary to make
further analysis of the 1928 distributions to Crandall-McKenzie's
old stockholders. In this connection, it is urged that the cash
paid for part of the Crandall-McKenzie stock in 1928 constituted a
taxable distribution of some or all of the accumulated earnings and
profits. The Tax Court, however, has previously declined to
consider these cash payments as such a distribution of earnings and
profits in the absence of proof that the recipients had been taxed
for them. But even if it were proved that old Crandall-McKenzie
stockholders had been so taxed, the face amount of that tax would
not necessarily reflect the earnings and profits distribution they
received. For example, part or all of their tax may have
represented capital gain, as
Page 331 U. S. 217
distinguished from earnings and profits. [
Footnote 7] Or the distribution may be found to
have constituted a liquidation under § 115 of the Revenue Act of
1928. [
Footnote 8] It may be
necessary on remand, therefore, for the Tax Court to consider, in
the light of §§ 112(c) and 115 of the Revenue Act of 1928, how
much, if any, of the 1928 cash distribution to Crandall-McKenzie
stockholders represented earnings and profits deductible from the
earnings and profits transferred to the new corporation available
for the 1940 dividend payments.
The decision of the Circuit Court of Appeals is reversed with
directions that the cause be remanded to the Tax Court for
proceedings not inconsistent with this opinion.
So ordered.
* Together with No. 675,
Commissioner v. Munter, also
on certiorari to the same Court.
[
Footnote 1]
The Tax Court incorporated by reference a fact stipulation of
the parties as its finding of fact. Each of the respondents had
bought 10,000 shares of the 38,922 shares of the corporation then
outstanding. The dividends declared in 1940 amounted to $35,166.25,
of which each of the taxpayers received $12,500.
[
Footnote 2]
At one point in the stipulation, it was indicated that the new
corporation had "no earnings and profits accumulated from December
4, 1928, to December 31, 1939," and no earnings or profits in the
taxable year 1940. But, elsewhere in the stipulation, it appears
there may have been some $32,000 earnings and profits accumulated
between 1928 and 1940. The Tax Court apparently did not resolve
these contradictory statements.
[
Footnote 3]
Some of the Crandall-McKenzie stockholders were paid $356.00
plus per share; others were paid $315.53 per share for identical
stock.
A part of the old Crandall-McKenzie stock for which cash was
paid was bought for $300,000 cash by one old Crandall-McKenzie
stockholder from another while the reorganization was being
transacted. The stockholder who made this purchase thereupon
surrendered his original Crandall-McKenzie holdings, together with
his recently purchased shares, to the new corporation in exchange
for shares in the new corporation and $300,000 cash. We do not
decide whether the sale from one old stockholder to another
represents a transaction separate from the reorganization. Whatever
may be the ultimate significance of this point, it does not affect
the result we reach here.
[
Footnote 4]
There were two independent grounds for the decision in the
Campbell case. One ground was that the earnings and
profits of the predecessor corporation there had actually been
distributed in the course of the reorganization. The Circuit Court
of Appeals stated expressly that it did not rest its decision in
the instant case on this theory.
[
Footnote 5]
The Senate Committee recommending adoption of § 115(h) of the
Revenue Act of 1936 cited the
Sansome case with approval.
It described the new section as not changing "existing law." The
Committee recommended the amendment only "in the interest of
greater clarity." S.Rep. No.1256, 74th Cong., 2d Sess., (1936) 19.
See also § 115(h) Revenue Act 1938, 52 Stat. 447; H.R.Rep.
2894, 76th Cong., 3d Sess. (1940) 41; S.Rep. 2114, 76th Cong., 3d
Sess. (1940) 25.
[
Footnote 6]
U.S.Treas.Reg. 94, art. 115-11 (1936); U.S.Treas.Reg. 103, § 19,
115-11 (1940).
See Taft v. Commissioner, 304 U.
S. 351,
304 U. S. 357;
Helvering v. Winmill, 305 U. S. 79,
305 U. S. 83;
Douglas v. Commissioner, 322 U. S. 275,
322 U. S.
281-282;
Boehm v. Commissioner, 326 U.
S. 287,
326 U. S.
291-292.
[
Footnote 7]
Section 112(c)(1) of the Revenue Act of 1928 provides in effect
if a cash or property distribution is made in the course of a
reorganization
"then the gain, if any, to the recipient shall be recognized,
but in an amount not in excess of the sum of such money and the
fair market value of such other property."
But § 112(c)(2) makes taxable as dividend income that portion of
the gain which represents the distributee's share of the
distributing corporation's earnings and profits.
[
Footnote 8]
Section 115(c) of the Revenue Act of 1928 governs the taxability
of distributions in liquidation.