1. Pursuant to a purported plan of "reorganization" and
"recapitalization" of a family corporation, all but one share of
which was owned by a taxpayer and his wife and which had an earned
surplus of $855,783, each old share of stock having a par value of
$100 was exchanged for five new shares of no par value, but a
stated value of $60, and new debenture bonds having a total face
value of $400,000 payable in ten years but callable at any
time.
Held:
1. The transaction was not a tax free "reorganization" within
the meaning of §§ 112(b)(3) and 112(g)(1)(E) of the Internal
Revenue Code, and the taxpayer is liable for income taxes on the
full value of the debentures. Pp.
331 U. S.
742-743.
2. The same conclusion reached as to another similar transaction
varying in some details, including the fact that there was left
undisturbed on the books of the corporation an earned surplus
account equal to the value of the debentures distributed in partial
exchange for the old stock. Pp.
331 U. S.
743-744.
3. It was not the purpose of the reorganization provisions of §
112(b) and (g) of the Internal Revenue Code to exempt from payment
of a tax what, as a practical matter, is a realized gain. P.
331 U. S.
740.
4. Since a "recapitalization" within the meaning of §
112(g)(1)(E) is one form of "reorganization," nothing can be a
recapitalization for this purpose unless it partakes of those
characteristics of a reorganization which underlie the purpose of
Congress in postponing the tax liability. P.
331 U. S.
741.
5. In the case of a corporation which has undistributed
earnings, the creation of new corporate obligations which are
transferred to stockholders in relation to their former holdings,
so as to produce, for all practical purposes, the same result as a
distribution of cash earnings of equivalent value, cannot obtain
tax immunity because cast in the form of a recapitalization
reorganization. P.
331 U. S.
742.
155 F.2d 237 and 155 F.2d 246, affirmed.
Page 331 U. S. 738
No. 287. The Tax Court sustained a determination of the
Commissioner of Internal Revenue that a taxpayer was liable for
income tax on the full value of debentures received under a
purported "reorganization" of a family corporation. 4 T.C. 897. The
Circuit Court of Appeals affirmed. 155 F.2d 237. This Court granted
certiorari. 329 U.S. 701.
Affirmed., p.
331 U. S.
744.
No. 209. The Tax Court sustained a determination of the
Commissioner of Internal Revenue that a taxpayer was liable for
income tax on certain debenture bonds received under a purported
"reorganization" of a corporation of which he owned all but a few
shares. 5 T.C. 351. The Circuit Court of Appeals affirmed. 155 F.2d
246. This Court granted certiorari. 329 U.S. 695.
Affirmed, p.
331 U. S.
744.
MR. JUSTICE FRANKFURTER delivered the opinion of the Court.
The proper construction of provisions of the Internal Revenue
Code relating to corporate reorganizations is involved in both
these cases. Their importance to the Treasury, as well as to
corporate enterprise, led us to grant certiorari, 329 U.S. 695.
While there are differences in detail to which we shall refer, the
two cases may be disposed of in one opinion.
Page 331 U. S. 739
In the
Bazley case, No. 287, the Commissioner of
Internal Revenue assessed an income tax deficiency against the
taxpayer for the year 1939. Its validity depends on the legal
significance of the recapitalization in that year of a family
corporation in which the taxpayer and his wife owned all but one of
the Company's one thousand shares. These had a par value of $100.
Under the plan of reorganization, the taxpayer, his wife, and the
holder of the additional share were to turn in their old shares and
receive in exchange for each old share five new shares of no par
value, but of a stated value of $60, and new debenture bonds,
having a total face value of $400,000, payable in ten years but
callable at any time. Accordingly, the taxpayer received 3,990
shares of the new stock for the 798 shares of his old holding, and
debentures in the amount of $319,200. At the time of these
transactions, the earned surplus of the corporation was
$855,783.82.
The Commissioner charged to the taxpayer as income the full
value of the debentures. The Tax Court affirmed the Commissioner's
determination, against the taxpayer's contention that, as a
"recapitalization," the transaction was a tax-free
"reorganization," and that the debentures were "securities in a
corporation a party to a reorganization," "exchanged solely for
stock or securities in such corporation" "in pursuance of a plan of
reorganization," and, as such, no gain is recognized for income tax
purposes. Internal Revenue Code, §§ 112(g)(1)(E) and 112(b)(3). The
Tax Court found that the recapitalization had "no legitimate
corporate business purpose," and was therefore not a
"reorganization" within the statute. The distribution of
debentures, it concluded, was a disguised dividend, taxable as
earned income under §§ 22(a) and 115(a) and (g). 4 T.C. 897. The
Circuit Court of Appeals for the Third Circuit, sitting en banc,
affirmed, two judges dissenting. 155 F.2d 237.
Page 331 U. S. 740
Unless a transaction is a reorganization contemplated by §
112(g), any exchange of "stock or securities" in connection with
such transaction, cannot be "in pursuance of the plan of
reorganization" under § 112(b)(3). While § 112(g) informs us that
"reorganization" means, among other things, "a recapitalization,"
it does not inform us what "recapitalization" means.
"Recapitalization," in connection with the income tax, has been
part of the revenue laws since 1921. 42 Stat. 227, 230, §
202(c)(2). Congress has never defined it, and the Treasury
Regulations shed only limited light. Treas.Reg. 103, § 19.112(g).
One thing is certain. Congress did not incorporate some technical
concept, whether that of accountants or of other specialists, into
§ 112(g), assuming that there is agreement among specialists as to
the meaning of recapitalization. And so recapitalization, as used
in § 112(g), must draw its meaning from its function in that
section. It is one of the forms of reorganization which obtains the
privileges afforded by § 112(g). Therefore, "recapitalization" must
be construed with reference to the presuppositions and purpose of §
112(g). It was not the purpose of the reorganization provision to
exempt from payment of a tax what, as a practical matter, is
realized gain. Normally, a distribution by a corporation, whatever
form it takes, is a definite and rather unambiguous event. It
furnishes the proper occasion for the determination and taxation of
gain. But there are circumstances where a formal distribution,
directly or through exchange of securities, represents merely a new
form of the previous participation in an enterprise, involving no
change of substance in the rights and relations of the interested
parties one to another or to the corporate assets. As to these,
Congress has said that they are not to be deemed significant
occasions for determining taxable gain.
Page 331 U. S. 741
These considerations underlie § 112(g), and they should dominate
the scope to be given to the various sections, all of which
converge toward a common purpose. Application of the language of
such a revenue provision is not an exercise in framing abstract
definitions. In a series of cases, this Court has withheld the
benefits of the reorganization provision in situations which might
have satisfied provisions of the section treated as inert language,
because they were not reorganizations of the kind with which § 112,
in its purpose and particulars, concerns itself.
See Pinellas
Ice & Cold Storage Co. v. Commissioner, 287 U.
S. 462;
Gregory v. Helvering, 293 U.
S. 465;
Le Tulle v. Scofield, 308 U.
S. 415.
Congress has not attempted a definition of what is
recapitalization, and we shall follow its example. The search for
relevant meaning is often satisfied not by a futile attempt at
abstract definition, but by pricking a line through concrete
applications. Meaning frequently is built up by assured recognition
of what does not come within a concept the content of which is in
controversy. Since a recapitalization within the scope of § 112 is
an aspect of reorganization, nothing can be a recapitalization for
this purpose unless it partakes of those characteristics of a
reorganization which underlie the purpose of Congress in postponing
the tax liability.
No doubt there was a recapitalization of the Bazley corporation
in the sense that the symbols that represented its capital were
changed, so that the fiscal basis of its operations would appear
very differently on its books. But the form of a transaction as
reflected by correct corporate accounting opens questions as to the
proper application of a taxing statute; it does not close them.
Corporate accounting may represent that correspondence between
change in the form of capital structure and essential identity in
fact which is of the essence of a transaction
Page 331 U. S. 742
relieved from taxation as a reorganization. What is controlling
is that a new arrangement intrinsically partake of the elements of
reorganization which underlie the Congressional exemption, and not
merely give the appearance of it to accomplish a distribution of
earnings. In the case of a corporation which has undistributed
earnings, the creation of new corporate obligations which are
transferred to stockholders in relation to their former holdings,
so as to produce, for all practical purposes, the same result as a
distribution of cash earnings of equivalent value, cannot obtain
tax immunity because cast in the form of a
recapitalization-reorganization. The governing legal rule can
hardly be stated more narrowly. To attempt to do so would only
challenge astuteness in evading it. And so it is hard to escape the
conclusion that whether, in a particular case, a paper
recapitalization is no more than an admissible attempt to avoid the
consequences of an outright distribution of earnings turns on
details of corporate affairs, judgment on which must be left to the
Tax Court.
See Dobson v. Commissioner, 320 U.
S. 489.
What have we here? No doubt, if the Bazley corporation had
issued the debentures to Bazley and his wife without any
recapitalization, it would have made a taxable distribution.
Instead, these debentures were issued as part of a family
arrangement, the only additional ingredient being an unrelated
modification of the capital account. The debentures were found to
be worth at least their principal amount, and they were virtually
cash, because they were callable at the will of the corporation,
which, in this case, was the will of the taxpayer. One does not
have to pursue the motives behind actions, even in the more
ascertainable forms of purpose, to find, as did the Tax Court, that
the whole arrangement took this form, instead of an outright
distribution of cash or debentures,
Page 331 U. S. 743
because the latter would undoubtedly have been taxable income,
whereas what was done could, with a show of reason, claim the
shelter of the immunity of a recapitalization-reorganization.
The Commission, the Tax Court, and the Circuit Court of Appeals
agree that nothing was accomplished that would not have been
accomplished by an outright debenture dividend. And since we find
no misconception of law on the part of the Tax Court and the
Circuit Court of Appeals, whatever may have been their choice of
phrasing, their application of the law to the facts of this case
must stand. A "reorganization" which is merely a vehicle, however
elaborate or elegant, for conveying earnings from accumulations to
the stockholders is not a reorganization under § 112. This disposes
of the case as a matter of law, since the facts as found by the Tax
Court bring them within it. And even if this transaction were
deemed a reorganization, the facts would equally sustain the
imposition of the tax on the debentures under Sec. 112(c)(1) and
(2).
Commissioner v. Estate of Bedford, 325 U.
S. 283.
In the
Adams case, No. 209, the taxpayer owned all but
a few of the 5914 shares of stock outstanding out of an authorized
6000, par value $100. By a plan of reorganization, the authorized
capital was reduced by half, to $295,700, divided into 5914 shares
of no par value but having a stated value of $50 per share. The
5914 old shares were cancelled, and the corporation issued in
exchange therefor 5914 shares of the new no-par common stock and 6
percent 20-year debenture bonds in the principal amount of
$295,700. The exchange was made on the basis of one new share of
stock and one $50 bond for each old share. The old capital account
was debited in the sum of $591,400, a new no-par capital account
was credited with $295,700, and the balance of $295,700 was
Page 331 U. S. 744
credited to a "Debenture Payable" account. The corporation at
this time had accumulated earnings available for distribution in a
sum not less than $164,514.82, and this account was left unchanged.
At the time of the exchange, the debentures had a value not less
than $164,208.82.
The Commissioner determined an income tax deficiency by treating
the debenture bonds as a distribution of the corporation's
accumulated earnings. The Tax Court sustained the Commissioner's
determination, 5 T.C. 351, and the Circuit Court of Appeals
affirmed. 155 F.2d 246. The case is governed by our treatment of
the
Bazley case. The finding by the Tax Court that the
reorganization had no purpose other than to achieve the
distribution of the earnings is unaffected by the bookkeeping
detail of leaving the surplus account unaffected.
See §
115(b), and
Commissioner v. Wheeler, 324 U.
S. 542,
324 U. S.
546.
Other claims raised have been considered, but their rejection
does not call for discussion.
Judgments affirmed.
MR. JUSTICE DOUGLAS and MR. JUSTICE BURTON dissent in both cases
for the reasons stated in the joint dissent of Judges Maris and
Goodrich in the court below.
Bazley v. Commissioner, 155
F.2d 237, 244.
* Together with No. 209,
Adams v. Commissioner of Internal
Revenue, also on certiorari to the same Court, argued January
9, 1947.