Petition for Review of Decision of the Tax Court of the United States.
Before SPARKS, KERNER and MINTON, Circuit Judges.
The taxpayer petitioned for review of a decision of the United States Tax Court denying it claim to a dividends paid credit in the amount of its adjusted net income for the year 1937 under § 27(f) of the Revenue Act of 1936, 26 U.S.C.A. Int. Rev. Acts, page 838, relating to amounts distributed in liquidation.
There is no controversy as to the facts. The Tax Court stated them substantially as follows: In November 1937, the taxpayer, in pursuance of a plan of reorganization, transferred all its assets, including its earnings for the period from January 1, 1937, to a group of new corporations organized in Michigan, Ohio and Nevada, in exchange for the stock of the new corporations. It then distributed this stock in complete liquidation to its stockholders in exchange for their stock in the taxpayer, and was dissolved in December, 1937. Under the provisions of § 112(b) (4) and (3) of the Revenue Act of 1936, 26 U.S.C.A. Int. Rev. Acts, page 855, these transactions constituted non-taxable reorganizations, and no gain or loss was recognized on them.
As of January 1, 1937, the taxpayer had a deficit of $36,988. For purposes of the computation of the surtax imposed by § 14 of the Act of 1936, 26 U.S.C.A. Int. Rev. Acts, page 823, the taxpayer's adjusted net income for the taxable year of 1937 was $195,262.
The sole question raised here is whether or not the taxpayer is entitled to a dividends paid credit in the full amount of its adjusted net income for the year because of its distribution of the stock of the new corporations to its own stockholders in liquidation.
Petitioner claimed the credit by virtue of § 27(f) of the Act of 1936 which provides: "In the case of amounts distributed in Liquidation the part of such distribution which is properly chargeable to the earnings or profits accumulated after February 28, 1913, shall, for the purposes of computing the dividends paid credit under this section, be treated as a taxable dividend paid."
The Commissioner denied the credit, and the court sustained him by reason of the provision of § 115(h), 26 U.S.C.A. Int. Rev. Acts, page 870:
"The distribution (whether before January 1, 1936, or on or after such date) to a distributee by or on behalf of a corporation iof its stock or securities or stock or securities in another corporation shall not be considered a distribution of earnings or profits of any corporation -
"(1) if no gain to such distributee from the receipt of such stock of securities was recognized by law, or
"(2) if the distribution was not subject to tax in the hands of such distributee because it did not constitute income to him within the meaning of the Sixteenth Amendment to the Constitution or because exempt to him under section 115(f) of the Revenue Act of 1934 or a corresponding provision of a prior Revenue Act."
In reaching its conclusion, the Tax Court relied upon its own decision in the case of Reed Drug Co. v. Commissioner of Internal Revenue, 44 B.T.A. 573, since affirmed by the Court of Appeals for the Sixth Circuit, 130 F.2d 288. Petitioner here relies upon two cases decided by other Circuit Courts of Appeals which it asserts reached a different result as to similar states of facts. See Helvering, Comm'r, v. Credit Alliance Corp., 4 Cir., 122 F.2d 361, since affirmed, 316 U.S. 107, 62 S. Ct. 989, 86 L. Ed. 1307; Helvering, Comm'r, v. Kay Mfg. Co., 2 Cir., 122 F.2d 443.
The Credit Alliance case, supra, involved the right of a taxpayer which had distributed all its assets including cash and property constituting surplus earned after February 28, 1913, to its parent corporation and thereupon completely liquidated, to the dividends paid credit claimed by the taxpayer in the case at bar under the same statutory provision, - § 27(f). There also the Commissioner asserted that the credit was barred by § 115(h), and also by § 27(h). The supreme Court, in affirming the decision of the Board of Tax Appeals and the Court of Appeals for the Fourth Circuit, held that § 27(f) clearly and unambiguously justified the deduction claimed, and that § 115(h) was totally irrelevant in view of the fact that the liquidating distribution was in property and not in stock or securities. It also held that § 27(h)*fn1 did not create and exception to the rule provided by § 27(f) for the reason that the two sections dealt with entirely different subjects, and, in effect, that they were mutually exclusive. The ...