The opinion of the court was delivered by: BRIAN BARNETT DUFF
On September 7, 1994, Pittway Corp. ("Pittway") sued to recover $ 410,783 in income taxes, plus interest, that it paid to the government for its taxable year ended December 31, 1984. On January 26, 1995, Pittway moved for summary judgment. On February 9, the government responded to Pittway's motion and moved for judgment on the pleadings. For the reasons discussed below, we deny Pittway's motion and grant the government's.
Pittway is a Delaware corporation. Valois, S.A., is Pittway's 90%-owned French subsidiary. In turn, Perfect Ventil Valois GMBH ("PVV") is Valois' wholly-owned German subsidiary. On May 23, 1984, Valois' Board of Directors authorized the distribution of PVV stock to Pittway. On June 28, 1984, Valois' shareholders voted to approve the distribution. And on July 9, 1984, Valois made the distribution.
A. Introduction to the Statutory Issues
In 1984, Congress amended the Internal Revenue Code to provide that a corporation recognizes gain on a distribution of appreciated property to its shareholders. § 54(a)(1). According to § 54(d)(1), the amendments "apply to distributions declared on or after June 14, 1984." According to § 54(d)(3), however, § 54(d)(1) does not apply to "any distribution before January 1, 1985, to an 80-percent corporate shareholder if the basis of the property distributed is determined under section 301(d)(2)."
In this case, the issue is whether Valois, the distributing corporation, recognized gain on its distribution of appreciated stock to Pittway, its shareholder. To resolve the issue, we decide whether, pursuant to § 54(d)(1), Valois "declared" its distribution after June 14, 1984. If we decide that it did, we also decide whether, pursuant to § 54(d)(3), the basis of Valois' distributed stock is determined under § 301(d)(2).
B. The Section 54(d)(1) Issue
Although neither § 54(d)(1) nor the common law defines the term "declare," the Seventh Circuit considered similar terminology in U.S. v. Murine Co., Inc., 90 F.2d 549 (7th Cir.), cert. denied, 302 U.S. 734, 82 L. Ed. 567, 58 S. Ct. 119 (1937). In that case, on December 15, 1932, the plaintiff's Board of Directors resolved "that . . . the Treasurer . . . is authorized to pay as a dividend to the stockholders of record . . . the sum of Twenty Dollars . . . per share." Id. at 550. The Board further resolved, however, "that in the event, in his judgment, the condition of the treasury . . . shall not warrant payment of such dividends, he may omit the same or defer the payment." Id. After June 1933, the plaintiff paid the dividends to its stockholders, and the government collected taxes on those payments.
The plaintiff challenged the government's (and the lower court's) interpretation of § 213(a) of the National Industrial Recovery Act, which provided that "the tax imposed by this section shall not apply to dividends declared before [June 16, 1933]." Id. The challenge raised "the question [of]. . . whether the resolution adopted December 15, 1932, constituted a valid declaration of dividends." Id. at 551. The government argued that the resolution did not constitute a valid declaration because its language "was not definite, final and irrevocable so as to create the relation of debtor and creditor between the corporation and its stockholders." Id. The court agreed, reasoning that the resolution authorized the Treasurer to make the payments, but it also "clearly authorized [him] to do two [other] things -- either 'omit' payment or 'defer' payment." Id. The court "concluded . . . that [the] dividend payments made after the enactment of the statute . . . were properly assessed." Id.
In Carney v. Crocker, 94 F.2d 914 (1st Cir. 1938), the court considered a similar issue and reached a similar conclusion, that "the resolution voted by the trustees . . . on March 24, 1933, by its very terms was not a fully declared dividend, for it was made conditional upon the approval of the president, treasurer, and assistant treasurers." Id. at 916. "This being so, the relationship of debtor and creditor, between the association and the shareholders, did not arise before June 16, 1933, and it was within the power of the trustees, so far as this record discloses, to have rescinded the resolution . . . at any time before June 29, 1933, when the distribution was made." Id. at 916-7. Therefore, the court held that "it necessarily follows that the dividend was not fully and unconditionally declared before June 16, 1933, and was subject to the tax imposed by section 213(a)." Id. at 917.
The Carney court followed the Murine Court, which supports the Seventh Circuit's ruling, but, more importantly, the Carney court quoted the Bureau of Internal Revenue's Cumulative Bulletin XII-2, which "advised as to the construction and applicability of section 213(a)." Id. at 915. The Bulletin stated that:
In order for a dividend to be fully 'declared,' within the meaning of the statute the action taken by the board of directors must be such as to create the relationship of debtor and creditor between the corporation and the stockholder, and the debt so created must be a ...