Higgins v. Smith , 60 S. Ct. 355 ( 1940 )

Mr. Justice Roberts,

dissenting.

I think the judgment should be affirmed. To reverse it is to disregard a rule respecting the separate entity o" corporations having basis in logic and practicality and which has long been observed in the administration of the revenue acts.

Since the inception of the system of federal income taxation, capital gains have been taxed and certain capital losses have been allowed as credits against such gains. In order that this system might be practical it has been necessary to select some event as the criterion of realization of gain or loss. The revenue laws have selected the time of the closing of a capital transaction as the occasion! for reckoning gain or loss on a capital asset. A typical¹ method of closure is a sale of the asset.

As the sale is voluntarily made by the taxpayer, his determination when he shall sell affects hiss capital gain or loss. He, therefore, in a sense, controls the question. whether, in a given taxable year, he must pay tax on a realized gain or may claim credit for a realized loss. Of course such a sale must be bona fide and title must pass absolutely. In the present instance the sale and transfer were such, and, as the Circuit Court of Appeals held, jhere was' not a scintilla of evidence to the contrary for the' jury’s consideration. A taxpayer who pretends he has made a sale when in fact he has a secret agreement which leaves him stillr for all practical purposes, the owner of the thing sold, is but committing a fraud upon the revenue. . ■

If the sale is bona fide, if title in fact passes irrevocably to another, that other takes as his basis, in .reckoning his gain and loss, the price he paid for the asset; and upon his future disposition of it there will be a new reckoning of gain or loss, with respect to such disposition. Here, if Innisfail either sold to the respondent or to a third party it would have to reckon gain or loss on the sale. If it distributed the asset in liquidation the respondent would be subject to a tax liability on the receipt of his.dividend. The sole question, then, is whether, as matter of law, a ' bona fide and absolute sale to a wholly owned corporation can constitute a completed transaction, determining a loss.

The problem ás to how a sale to a corporation wholly owned or wholly controlled by. an individual taxpayer is to be treated is not a new one. The existence of such corporations and the dealings between them and their stockholder or stockholders have long been understood. Congress was not ignorant of the problem.¹ At the outset Congress might well have adopted the policy that a sale by the stockholder tó the corpóration, or vice versa, should be disregarded, and the stockholder treated as in effect the owner of the capital asset imtil its sale to a stranger. On the other hand, it would be a practical policy to recognize the separate entity of the corporation, tó treat a transfer at current value for adequate considr eration occurring between it and its sole stockholder as. closing a transaction for the purpose of reckoning either «gain or loss, and then to tax the vendee upon his or its gain or loss upon a subsequent transfer by comparison,, of the basis on which the asset was acquired and the amount realized on final disposition by the vendee. In fact, the latter course was adopted and was consistently followed until 1934 when Congress dealt with the subject.

This court, speaking by Mr. Justice Holmes, said, in Klein v. Board of Supervisors, 282 U. S. 19, 24: “ . . . But it leads nowhere to call a corporation a fiction. If it is a fiction it is a fiction created by law with intent. that it should be acted on as if true. The corporation is a person and its ownership is a nonconductor that makes it impossible to attribute an interest in its property to its members.”

In this view assets received on the liquidation of a one-man corporation constitute taxable income to the sole stockholder.² Likewise, losses sustained by a corporation wholly owned by one individual may. not be reported and claimed in the individual tax return of the latter.³ And the sole stockholder and his controlled corporation may not tack successive periods of ownership to make up the two years required for an asset to become, within the meaning of the statute, a capital asset.⁴

This court has found that a taxable gain was realized in a case where a wholly owned corporation sold securities to its sole stockholder.⁵ Every element appearing in that case is paralleled here, as a comparison of the facts stated in the opinions in the two cases will demonstrate. This court said, in the earlier case, referring to the corporation: “The fact that it had only one stockholder seems of no legal significance,” and held the corporation a separate taxable entity. It is now said, however, that there is no inequity in not applying the same rule to losses as to gains because the taxpayer who exercises the option to conduct a portion of his business through the instrumentality of a wholly owned corporation does so in the full knowledge that, if he does, gains shown on sales by him to the corporation will be taxed whereas losses oh such sales will not be allowed as deductions. As hereafter will be' shown, this is now true in virtue of the amendment embodied in the Revenue Act of 1934 but it was not true as the law stood before the adoption of that amendment.

In 1921 the Treasury was first called upon to deal with a loss deduction arising out of a sale to a wholly owned corporation. In that year it published Law Opinion 1062.⁶ It was held that if the sale was bona fide and passed title absolutely to the controlled corporation, even though the sale was made with the intent of reducing the tax liability of the vendor it fell within the provisions of the revenue act concerning the reckoning of gain or loss upon a closed transaction. So far as I am informed, the Treasury followed this rule in administering the various revenue acts for years after it was issued. The' first evidence of a change in its position was the refusal of the Commissioner of Internal Revenue to recognize losses resulting to taxpayers from a bona fide sale of bonds owned by them to a wholly owned corporation at the current market price.⁷ The-Board of Tax. Appeals sustained the Commissioner, but the Court of Appeals of the District of Columbia .reversed the Board in Jones v. Helvering, 71 F. 2d 214. The decision was rendered April 23, 1934. The Commissioner sought certiorari which was denied October 8, 1934.⁸ The same result has been reached by three other .Circuit Courts of Appeal.⁹- The Board of Tax Appeals followed these decisions.¹⁰ In the .meantime the Circuit Courts of Appeal nad decided numerous cases which are, in principle, indistinguish-. able.¹¹

This court having denied certiorari in Jones v. Helver-ing, supra, decided Gregory v. Helvering, 293 U. S. 465, in the following January. It cited the Jones case with approval, at p. 469, saying: “. . . The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.”

So well settled had the judicial interpretation become that the Treasury determined to recommend that Congress amend the statute.¹² The result, was the adoption of § 24 (a) (6) of the Revenue Act of 1934.¹³ The committee reports disclose that Congress thought it necessary to change the statute in order to render nondeductible a loss claimed on a sale to a wholly owned or a controlled corporation.¹⁴ Subsequent hearings before the Joint Commission on Tax Evasion and Avoidance, 1937, p. 207, indicate the same understanding on the part of the Bureau of Internal Revenue and of Congress that the rule of law in effect prior to the adoption of the amendment in 1934 was changed by that legislation. The amendment lists among items not deductible the following:

“(6) Loss from sales or exchanges of property, directly or indirectly, (A) between members of a family, or (B) except in the case of distributions in liquidation, between an individual and a corporation in which such individual owns, directly or indirectly, more than 50 per centum in value of the outstanding stock. For the purpose of this paragraph — (C) an individual shall be considered as owning the stock owned, directly or indirectly, by his family; and (D) the family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.”

Plainly, prior to 1934, taxpayers were justified in relying, first, upon the Treasury ruling on the subject and, secondly, upon the uniform decisions of the courts in claiming deductions for losses on sales to controlled corporations. After the passage of the amendment they were on notice that this was no longer permissible.

I turn then to the situation here presented. The claims of this taxpayer, as I have said, had been sustained for prior years by the Board of Tax Appeals.¹⁵ The Congress had enacted that subsequent to 1934 the taxpayer coijld not claim such losses. Notwithstanding the earlier decisions of the respondent’s case and those of other taxpayers against the Government’s present contention, the Commissioner of Internal Revenue, after the adoption of the Act of 1934, namely on March 11, 1935, served a notice of deficiency upon the respondent respecting losses . claimed in his return for the year 1932 on sales to Innis-fail. Thus the Treasury repudiated the position it had taken in asking that the law be amended to cover cases of this kind; reversed its position in acquiescing in the adjudication of the respondent’s tax liability for earlier years and sought, now that it had obtained an amendment of the law operating prospectively, to reach back into sundry unclosed ones, — this one amongst others, — and to attempt to obtain decisions reversing the settled course of decision. I think this pourt should not lend its aid to the effort.

I am of opinion that where taxpayers have relied upon a long unvarying series of decisions construing and applying a statute, the only appropriate method to change, the rights of the taxpayers is to go to Congress for legislation. In. my view, the resort to Congress, on the one hand, for amendment, and the appeal to the courts, on the other, for a reversal of construction, which, if successful, will operate unjustly and retroactively upon those who have acted in reliance upon oft-reiterated judicial decisions, are wholly inconsistent.

. I am of opinion that the courts should not disappoint the well-founded expectation of citizens that, until Congress speaks to the contrary, they may, with confidence, rely upon the uniform judicial interpretation of a statute. The action taken in this case seems to me to make it impossible for a citizen safely to conduct his affairs in reliance upon any settled body of court decisions.

Mr. Justice McReynolds joins in this opinion.

2 France Co. v. Commissioner, 88 F. 2d 917; Coxe v. Handy, 24 F. Supp. 178; John K. Greenwood, 1 B. T. A. 291.

3 Dalton v. Bowers, 287 U. S. 404; Menihan v. Commissioner, 79 F. 2d 304.

4 Webber v. Knox, 97 F. 2d 921.

5 Burnet v. Commonwealth Improvement Co., 287 U. S. 415.

6 4 C. B. 168,"cited with approval in G. C. M¡ 3008 VII-1 C. B. 235.

7 Jones v. Commissioner, 18 B. T. A. 1225 (1930).

8 293 U. S. 583.

9 Commissioner v. Eldridge, 79 F. 2d 629 (C. C. A. 9); Commissioner v. McCreery, 83 F. 2d 817 (C. C. A. 9); Helvering v. Johnson, 104 F. 2d 140 (C. C. A. 8); Foster v. Commissioner, 96 F. 2d 130 (C. C. A. 2); Smith v. Higgins (the instant case), 102 F. 2d 456 (C. C. A. 2).

10 David Stewart, 17 B. T. A. 604; Corrado & Galiardi, Inc., 22 B. T..A. 847; Ralph Hochstetter, 34 B. T. A. 791; John Thomas Smith, 40 B. T. A. 387, involving prior years of the taxpayer in this case.

11 Iowa Bridge Co. v. Commissioner, 39 F. 2d 777; Taplin v. Commissioner, 41 F. 2d 454; Commissioner v. Van Vorst, 59 F. 2d 677; Marston v. Commissioner, 75 F. 2d 936; St. Louis Union Trust Co. v. United States, 82 F. 2d 61; Sawtell v. Commissioner, 82 F. 2d 221; Commissioner v. Edward Securities Co., 83 F. 2d 1007, affirming 30 B. T. A. 918.

12 In the Hearings before the Joint Committee' on Tax Evasion and Avoidance, 1937, p. 206, it appears that the Solicitor General considered the law so well settled that he refused to apply for certiorari in the Eldridge case, supra, note 9, although the Treasury recommended such action.

13 48 Stat. 680, 691.

14 See the report of the Committee on Ways and Means of the House of Representatives, H, R. 704, 73d Cong., Second Sess., p. 23; Senate Report 588, 73d Cong., Second Sess., p. 27; see also the hearings before the Committee on Ways and Means, Revenue Revision, 1934, p. 134. ’

15 Supra, note 10.