Chester N. Weaver Co. v. Commissioner

HANEY, Circuit Judge. Review is sought of a decision of the Board of Tax Appeals' which sustained a determination of respondent that there was a deficiency in the income tax paid by petitioner for the year 1933. Petitioner, a California corporation, on August 9, 1932, purchased from Jeff R. Townsend Company, Inc., a California corporation, hereinafter referred to as the Townsend Company, 1,000 shares of the latter’s preferred stock, paying therefor $100 per share'. The Townseixf Company’s articles of incorporation provided that, in the event of liquidation, its preferred stockholders would be entitled to receive a sum equal t.o 105 per cent of the par value of the preferred stock before any amount would be distributed to the holders of its common stock. In 1933, the Townsend Company be-, came financially involved and unable to continue its business. On September 17, 1933, in order to dissolve and liquidate, it sold all its assets for $26,280.50, which on the next day was distributed pro rata to its preferred stockholders, who at the same time surrendered their certificates for preferred stock. Petitioner received a liquidating dividend in the sum of $13,140.25. In its income tax return for the year 1933, petitioner claimed a deduction of $86,-859.75 as a loss on such preferred stock, being the difference between the amount paid by petitioner for the stock, and the amount of the liquidating distribution. Respondent disallowed the deduction because “the loss sustained in connection with the stock is held to be from an exchange of stock held less than two years” and petitioner “had no gain from sales or exchanges of assets held less than two years”." Respondent relied on § 23 (r) of the Revenue Act of 1932 (47 Stat. 169, 26 U.S.C.A. § 23 note). On petition to redetermine the deficiency the Board sustained respondent, holding that “this disposition of the stock, under the provisions of the statute considered above, was a sale or exchange and the deduction of the losses sustained is barred by the provisions of section 23 (r) (1)”. Five members of the Board dissented. The instant petition to review the decision of the Board, entered pursuant to its holding, was then filed. Section 21 of the act provides: “‘Net income’ means the gross income computed [33] under section 22, less the deductions allowed by section 23.” 26 U.S.C.A. § 21. Section 22 provides in part: “(a) ‘Gross income’ includes * * * income derived from * * * sales, or dealings in property * * *. “(d) Distributions by corporations shall be taxable to the shareholders as provided in section 115.” 26 U.S.C.A. § 22 (a, d). Section 23 provides in part: “In computing net income there shall be allowed as deductions: * * * “(f) Subject to the limitations provided in subsection (r) of this section, in the case of a corporation,, losses sustained during the taxable year and not compensated for by insurance or otherwise. * * * ” 26 U.S.C.A. § 23 (f). “(r) (1) Losses from sales or exchanges of stocks and bonds * * * which are not capital assets (as defined in section 101) shall be allowed only to the extent of the gains from such sales or exchanges * * *.” 26 U.S.C.A. § 23 note. Section 115 provides in part: “(c) Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112 * * * ” 26 U.S.C.A. § 115 note. We think that petitioner is entitled to deduction by virtue of §§ 22 (d), 115 (c) and § 112, 26 U.S.C.A. § 112. The amount received by petitioner was a liquidating dividend. Under § 22 (d); that dividend is taxable as provided in § 115 (c). Under the latter section, the gain or loss is to be computed under § 111, 26 U.S.C.A. § 111, but the amount arrived at by the computation shall be recognized to the extent provided in § 112. Under § 112, the entire amount of the loss must be recognized. Petitioner contends that the deduction is authorized by § 23 (f), and argues that the limitation in § 23 (r) (1) is not applicable. Section 23 (f) is a general statute relating to losses, whereas §§ 22 (d), 115 (c) and 112 are special with respect to the particular situation. Where there are two statutes, one being a general statute, and the other being a specific statute, and both cover the same subject matter, the specific statute should control. Therefore, we think § 23 (f) should not be applied. Respondent contends that § 23 (r) (1) prohibits the deduction. It is asserted, as the Board held, that in effect there was an exchange of the stock for money. Petitioner argues as the dissenting opinion of the Board members points out, that the legislative history of § 23 (r) (1) was not intended to apply to such a situation as is present here. We think § 23 (r) (1) is not applicable. First. Section 23 (r) (1) is broader and includes more transactions than §§ 22 (d), and 115 (c) and 112. As compared with those sections, it again is general. The specific statute should control rather than the general statute. Second. By its terms § 23 (r) (1) applies only to “sales or exchanges”. We think the liquidating dividend here is neither, within the ordinary and accepted meaning of those terms. A “sale or exchange” implies, we think, that each party to the transaction shall obtain something. We do not believe that the Townsend Company received anything. There is no inconsistency with the application of § 115 (c), because it does not say a liquidating distribution is an “exchange”, but says it “shall be treated” as such for the purpose of applying §§ 111 and 112. It does not say that a liquidating distribution shall be treated as an “exchange” for the purpose of § 23 (r) (1). Third. Had there been no liquidating dividend on the stock, petitioner could have deducted the entire loss. Reg. 77, Art. 174. (Same rule applies to bonds. Art. 194.) The rule announced by the Board leads to the conclusion that a holder of $100,000 of stock who gets a liquidating dividend of ten cents, cannot deduct his $99,999.90 loss. Such construction should be avoided, we think, on the authority of United States v. Katz, 271 U.S. 354, 357, 46 S.Ct. 513, 514, 70 L.Ed. 986, where it is said: “All laws are to be given a sensible construction; and a literal application of a statute, which would lead to absurd consequences, should be avoided whenever a reasonable application can be given to it, consistent with the legislative purpose. $ ^ Fourth. The most that can be said for respondent is that it is doubtful whether [34] §§ 22 (d), 115 (c) and 112, on the one hand, or § 23 (r) (1) on the other hand is applicable. The rule announced in Gould v. Gould, 245 U.S. 151, 152, 153, 38 S.Ct. 53, 62 L.Ed. 211, is applicable, we think, and is: “In case of doubt they [taxing statutes] are construed most strongly against the government, and in favor of the citizen.” Therefore, § 23 (r) (1) should be construed as not applicable to petitioner. We beiieve it is unimportant whether the “deduction may be taken in the form of a minor or negative item of gross income”, as mentioned by the Board, or whether it is taken as an outright deduction. Decision reversed.