District of Columbia v. Hyman Goldman and Yetta D. Goldman, Hyman Goldman and Yetta D. Goldman v. District of Columbia ( 1964 )

DANAHER, Circuit Judge.

The Tax Court here decided that certain distributions of net earnings by the named corporations were dividends subject to tax. It also held that yet other amounts of depreciation reserves distributed to the petitioner-stockholders were capital distributions and nontaxable. We agree with the result reached and the treatment set forth in the opinion of the Tax Court.¹

We could affirm without more were it not for the suggestion that a distribution of depreciation reserves is income to the stockholders under the definition of gross income in section 47-1557a of the District of Columbia Code.² Our acquiescence in such a construction would be tantamount to acceptance of the District’s argument that the words “gross income” take meaning quite apart from what Congress has actually said. The term would be redefined to mean, without more, “income derived from any source whatever.” Were that construction correct, the section could have been written thus: “The words ‘gross income’ include income derived from any source whatever.” We think any such proposition is untenable. It is respectfully submitted that no such all-embracing significance may be attached to the clause. We think that this particular language is to be read as meaning that gross income shall include income derived from any source whatever except such “sources” as have been excluded ³ or are excludable by virtue of the sense in which Congress has defined the terms which have been used.

For example, as to the latter point, we may note that the gross income section relates the word “dividends” to D.C. Code § 47-1551c(m) (1961) which limits that term to a distribution out of a corporation’s earnings, profits, or surplus “whenever earned by the corporation.” This court specifically held in District of Columbia v. Oppenheimer ⁴ that unrealized appreciation does not constitute earnings and profits. A distribution of such assets accordingly was not a dividend, we said, and so the proceeds were not income “derived” from a gross income source.

Again, a majority view asserted ⁵ that a “sale” not involving “a distribution by a corporation of its earnings and capital in liquidation” lacks the elements of a dividend, and the proceeds of such a sale are not taxable. Had the sales of stock in Berliner been sales to third persons, even the maj'ority there would have been bound to recognize that the proceeds would not be gross income derived from that source. The plain fact is that our code has built-in exceptions which definitely limit the scope of what items of “gross income” are to be attributed to “any source whatever.”

For another and perhaps significantly specific instance of purposeful limitation of the language, we may turn to the gross income section itself,⁶ which reads, as pertinent:

“The words ‘gross income’ include * * * income derived from * * * sales or dealings in property, whether real or personal, Other Than Capital Assets As Defined in This Subchapter, growing out of the ownership, or sale of, or interest in, such property * * ⁷ (Emphasis added.)

Surely there is no mistaking the congressional purpose with respect to capital assets. Unlike the federal tax scheme, under the District’s 2-year retention period such holdings as may qualify, mature into capital. Lest there be some doubt on the point Congress specifically excluded capital gains from “gross income” by D.C.Code § 47-1557a (b) (11) (1961) which reads:

“The words ‘gross income’ shall not include * * * :

“11. Capital gains. — Gains from the sale or exchange of any capital assets as defined in this subchapter.”

Such gains can not be counted as coming within “gross income,” for they become and are capital. The plain fact is that Congress has thus sought to give different treatment to taxpayers in the District of Columbia than to those who might be liable to capital gains taxes under the federal scheme. Encouragement of an investor in the economic life of the District is thus afforded, with complete exemption from tax on the capital gain where the sale or exchange of the property takes place with reference to property held for two years or more. The speculator trading out in less than two years is taxed; the investor is not.

In the instant cases the District tax authorities had ruled that the entire amounts of distributions were taxable, whether earned or not,' or whether such distributions in part derived from an impairment of capital, or otherwise. But the Code had authorized the taxpayers in calculating net income to deduct depreciation computed as provided in D.C.Code § 47-1583e (1961). The Tax Court reviewing the whole problem ruled correctly that distributions from earnings were dividends, fully taxable. Otherwise, citing authorities entitled to respect,⁸ the Tax Court concluded the distributions from depreciation reserves were not income subject to tax.⁹ Our study of the respective contentions presented in our case No. 17,352 has convinced us that the several decisions¹⁰ must be affirmed.

The taxpayers in cross-appeal No. 17,354 recognize that ordinarily a corporation with an accumulated deficit may not declare a dividend from subsequent profits until that deficit has been extinguished. They argue, however, that the Tax Court erroneously concluded that undistributed earnings in 1957 and 1958, utilized on the corporate books to reduce an accumulated deficit, nonetheless retained their character as earnings and became the source of possible dividends in a later year. The Tax Court’s decision on this aspect of the cases was based upon the definition of “dividends” as found in the District Code, § 47-1551c(m) (1961), which reaches a distribution out of a corporation’s earnings, profits or surplus “whenever earned” by the corporation. In the respects challenged, we are not persuaded that the Tax Court mistakenly treated the corporate accounting problem presented on this record.

No. 17,352 is affirmed.

No. 17,354 is affirmed.

1 . Opinion No. 996 (May 8,1962), 90 Washington Law Reporter 847, as amended by Opinion No. 996(A) (June 11, 1962), 90 Washington Law Reporter 1103.

2 . The section reads:

“The words ‘gross income’ include gains, profits, and income derived from salaries, wages, or compensation for personal services of whatever kind and in whatever form paid, including salaries, wages, and compensation paid by the United States to its officers and employees to the extent the same is not exempt under this sub-chapter, or income derived from any trade or business or sales or dealings in property, whether real or personal, other than capital assets as defined in this subehapter, growing out of the ownership or sale of, or interest in, such property; also from rent, royalties, interest, dividends, securities, or transactions of any trade or business carried on for gain or profit, or gains or profits, and income derived from any source whatever.”

3 . Surely it will be granted that Congress itself excluded from the definition of “gross income” no less than 16 specific categories. D.C.Code § 47-1557a(b) (1961) .

4 . 112 U.S.App.D.C. 239, 301 F.2d 563 (1962).

5 . Berliner v. District of Columbia, 103 U.S.App.D.C. 351, 356, 258 F.2d 651, 656, cert. denied, 357 U.S. 937, 78 S.Ct. 1384, 2 L.Ed.2d 1551 (1958).

6 . Supra note 2.

7 . See D.C.Code § 47-1551c(Z) (1961) defining “capital assets” to mean any property, real or personal, tangible or intangible, field by tfie taxpayer for more tfian two years.

8 . Lindheimer v. Illinois Tel. Co., 292 U.S. 151, 167, 54 S.Ct. 658, 78 L.Ed. 1182 (1934), defining the nature of a “depreciation reserve”; Douglas Hotel Co. v. Commissioner of Internal Revenue, 190 F.2d 766, 775 (8 Cir. 1951); and see Commissioner of Internal Revenue v. Gross, 236 F.2d 612, 616 (2 Cir. 1956), where the real sources of the distributions were the proceeds of certain mortgages based upon the appreciation in the value of the properties involved. In the instant case the corporations had distributed to their stockholders funds which in part exceeded current and accumulated earnings, the amounts distributed having been derived from depreciation reserves not required for mortgage amortization. Nothing we have said relates to liability of the taxpayers under federal tax law.

9 . Cf. Willcuts v. Milton Dairy Co., 275 U.S. 215, 218, 48 S.Ct. 71, 72 L.Ed. 247 (1927); Foley Securities Corp. v. Commissioner of Int. Rev., 106 F.2d 731, 733 (8 Cir. 1939).

10 . Actually there had been seventeen petitions filed by the taxpayers in the Tax Court. Petitions 1762-1770 were filed November 15, 1961; petitions 1771-1780 were filed November 16, 1961. This court granted a joint motion of the parties for leave to file a single representative pleading and Joint Appendix.