Helvering v. Edison Bros.
Stores Inc., 133 F.2d 575 (8th Cir. 02/03/1943)
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UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT
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Nos. 12250, 12251
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1943.C08.40253 <http://www.versuslaw.com>; 133 F.2d 575
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February 3, 1943
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HELVERING, COM'R OF INTERNAL REVENUE,
v.
EDISON BROS. STORES, INC.; EDISON BROS. STORES, INC., V.
HELVERING, COM'R OF OF INTERNAL REVENUE.
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Petitions to review Decision of the United States Board of Tax
Appeals.
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COUNSEL
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Peter H. Husch, of St. Louis, Mo. (J. Sydney Salkey and Salkey
& Jones, all of St. Louis, Mo., on the brief), for Edison
Bros. Stores, Inc.
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Morton K. Rothschild, Sp. Asst. to Atty. Gen. (Samuel O. Clark,
Jr., Asst. Atty. Gen., and Sewall Key and Gerald L. Wallace, Sp.
Assts. to Atty. Gen., on the brief), for Guy T. Helvering,
Commissioner of Internal Revenue.
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E. H. McDermott, Wm. M. Emery, and Richard S. Oldberg, all of
Chicago, Ill., amici curiae.
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Author: Riddick
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Before SANBORN, JOHNSEN, and RIDDICK, Circuit Judges.
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RIDDICK, Circuit Judge.
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The questions presented on these petitions to review a decision
of the United States Board of Tax Appeals are whether the taxpayer
realized taxable income in either or in both of the years 1935 and
1937 from sales to its employees of shares of its capital stock,
previously acquired for that purpose, and whether, where the
taxpayer discharged a debt owing to its general counsel for
services rendered, by transfer to him of shares of its capital
stock, it was entitled to deduct as a business expense the cost of
the stock to the taxpayer at the time of its acquisition, or the
fair market value of the stock at the time of its transfer to the
general counsel, the gain to the taxpayer in the transaction not
having been reported as income. The Board of Tax Appeals held that
the taxpayer realized taxable income on profits derived from the
sales of its stock to employees in the year 1937 and sustained a
deficiency determined by the Commissioner for that year. But it
was of the opinion that profit realized by the taxpayer from sales
of its stock to its employees in the year 1935 was not taxable
income for that year and reversed the Commissioner's determination
of a deficiency. The Board decided that the taxpayer was entitled
to deduct as a business expense the market value of the shares of
its stock used in discharging its debt to its general counsel as
of the time of payment, reversing a contrary determination by the
Commissioner. Both the taxpayer and the Commissioner have brought
the decision of the Board to this Court for review.
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The contentions of the parties here arise from conflicting
opinions concerning the validity and interpretation of Articles
22(a)-6 and 22(a)-16 of Treasury Regulations 86 and 94,
respectively, explaining § 22(a) of the Revenue Acts of 1934 and
1936, 26 U.S.C.A. Int. Rev. Acts, page 669, 825. Section 22(a) of
the Revenue Act of 1934 and the corresponding provision of the Act
of 1936 are identical, defining gross income as follows:
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" § 22.Gross Income
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"(a) General Definition. 'Gross income' includes gains,
profits, and income derived from salaries, wages, or compensation
for personal service, of whatever kind and in whatever form paid,
or from professions, vocations, trades, businesses, commerce, or
sales, or dealings in property, whether real or personal, growing
out of the ownership or use of or interest in such property; also
from interest, rent, dividends, securities, or the transaction of
any business carried on for gain or profit, or gains or profits
and income derived from any source whatever."
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The corresponding treasury regulations in dispute are identical
and are as follows:
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"Acquisition or disposition by a corporation of its own
capital stock - Whether the acquisition or disposition by a
corporation of shares of its own capital stock gives rise to
taxable gain or deductible loss depends upon the real nature of
the transactions, which is to be ascertained from all its facts
and circumstances. The receipt by a corporation of the
subscription price of shares of its capital stock upon their
original issuance gives rise to neither taxable gain nor
deductible loss, whether the subscription or issue price be in
excess of, or less than, the par or stated value of such stock.
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"But if a corporation deals in its own shares as it might
in the shares of another corporation, the resulting gain or loss
is to be computed in the same manner as though the corporation
were dealing in the shares of another. So also if the corporation
receives its own stock as consideration upon the sale of property
by it, or in satisfaction or indebteness to it, the gain or loss
resulting is to be computed in the same manner as though the
payment had been made in any other property. Any gain derived from
such transactions is subject to tax, and any loss sustained is
allowable as a reduction where permitted bys the provisions of the
Act."
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The defintion of gross income in § 22(a) of the Revenue Acts of
1934 and 1936 has remained substantially unchanged since the
passage of the Revenue Act of 1913. For more than fourteen years
prior to the promulgation of the regulation quoted above, the
interpretation placed by the Treasury Department upon the meaning
of § 22(a) of prior revenue acts has been uniform and unchanged
to the effect that a corporation realizes no taxable gain or
deductible loss from the purchase and sale of its own stock. See
Articles 542 and 563 of Regulations 45, and articles 666 and 176
of Regulations 76 of the Treasury Department. Following a decision
of the Treasury Department on May 2, 1934, one day before the
passage by Congress of the Revenue Act of 1934, the prior
interpretation of § 22(a) was abandoned in favor of the one
quoted above.
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The argument on behalf of the taxpayer runs as follows: The
treasury regulations interpretating revenue acts prior to the Act
of 1934, under which a corporation was held not to realize taxable
income from the purchase and sale of its own stock, have acquired
the force of law by repeated reenactments of the income tax laws
by Congress without change in the definition of gross income. The
regulation in question thus having acquired the force of law, the
taxpayer contends, the Treasury Department is without power to
change it in the absence of a change in the definition of gross
income by Congress itself. In the view of the taxpayer it follows
that Articles 22(a)-6 and 22(a)(-16 of Treasury Regulations 86 and
94 are void. The argument is pressed further by the contention
that the interpretion of § 22(a) of the Revenue Acts of 1934 and
1936, now advanced by the Treasury Department, is beyond the power
of either the Department or Congress as conflicting with the
meaning of the word "income" as used in the Sixteenth
Amendment to the Constitution; and finally, the taxpayer contends
tht if valid the treasury regulations in question here are not
applicable to the taxpayer's purchase and sale of its own stock in
the circumstances of this case. The Commissioner contends for the
reverse of these propositions. Accordingly, the taxpayer seeks
reversal of the decision of the Board of Tax Appeals affirming the
determination of a deficiency in its income tax for 1937, and the
Commissioner, a reversal of the Board's decision reversing the
determination of a deficiency against the taxpayer for the year
1935.
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The facts are stipulated. Before the incorporation of the
taxpayer, the incorporators entered into an agreement with
underwriters whereby they subscribed to the total issue of the
common stock of the corporation, agreeing, however, to resell to
the corporation through the underwriters 5,000 shares of the stock
for the purpose of sales by the corporation to its employees. The
agreement was carried out and the taxpayer upon its organization
acquired 5,000 shares of its own stock at a price of $15 per
share. During the year of its incorporation the taxpayer sold a
number of the shares so acquired to various employees at cost
under a stock subscription plan, permitting payment by employees
in installments over a period of time. During the year 1935 the
taxpayer sold to employees 980 shares of its original purchase of
5,000 shares at $25 per share, although the market price of the
stock at that time was $30 a share. Also in 1935 it transferred
100 shares of its stock to its general counsel in payment of a
bill for $3,000 for services rendered.
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In 1937 there was a reorganization of the taxpayer's capital
structure, resulting in a split-up of its common stock on the
basis of three new shares of par value common stock for one share
of the old no par value common stock, reducing the cost of a share
to the taxpayer to $5.00. In 1937 the company, pursuant to another
employees' stock subscription plan, sold 3,660 shares of the new
stock to its employees at a price of $15 per share. The
Commissioner assessed deficiencies in income taxes against the
taxpayer for the years 1935 and 1937 on the ground that the
company should have included in its gross income for those years
the profit of $10 per share realized by its on the sales of stock
to its employees, and also on the ground that the taxpayer was not
entitled to deduct the full market value of the shares which it
used in 1935 to discharge its debt to its general counsel, but was
limited to the cost of the shares to the taxpayer at the time of
acquisition.
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The principles controlling in the decision of the questions
stated are established. The Treasury Department cannot, by
interpretative regulations, make income of that which is not
income within the meaning of the revenue acts of Congress, nor can
Congress, without apportionment, tax as income that which is not
income within the meaning of the Sixteenth Amendment. Eisner v.
Macomber, 252 U.S. 189, 40 S. Ct. 189, 64 L. Ed. 521,
9 A.L.R. 1570; M. E. Blatt Co. v. United States, 305 U.S. 267,
59 S. Ct. 186, 83 L. Ed. 167.
But Congress, in defining gross income in the various revenue
acts, manifested its intention to use to its fullest extent the
power granted it by the Sixteenth Amendment. Douglas v. Willcuts,
296 U.S. 1,
9, 56 S. Ct. 59, 80 L. Ed. 3,
101 A.L.R. 391; Helvering v. Clifford, 309 U.S. 331, 341,
60 S. Ct. 554, 84 L. Ed. 788.
What is or is not income within the meaning of the Sixteenth
Amendment must be determined in each case "according to truth
and substance, without regard to form." Eisner v. Macomber,
supra [
252 U.S. 189,
40 S. Ct. 193, 64 L. Ed. 521,
9 A.L.R. 1570]. The meaning of the word "income" in the
Sixteenth Amendment and in the acts of Congress pursuant to the
Amendment is that given it in common speech and every day usage.
Old Colony R. Co. v. Commissioner, 284 U.S. 552, 52 S. Ct. 211,
76 L. Ed. 484;
United States v. American Trucking Ass'ns, 310 U.S. 534,
60 S. Ct. 1059, 84 L. Ed. 1345.
In the construction of the revenue acts in question here, and of
the administrative regulations interpreting them, we may put aside
as not controlling the meaning of income in the language of
accountancy and economics. Nor can the ruling of one administrative
department of the government concerning income accounting control
that of another department made for an entirely different purpose
under another act of Congress. Old Colony R. Co. v. Commissioner,
supra.
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Recent decisions of the Supreme Court of the United States and
other federal courts, applying the principles stated, compel the
decision here that the questioned treasury regulations pursuant to
the Revenue Acts of 1934 and 1936 are valid administrative
interpretations applicable to taxpayer's sales of its stock in
both 1935 and 1937. It is true that in Helvering v. R. J. Reynolds
Tobacco Co., 306 U.S. 110, 59 S. Ct. 423, 83 L. Ed. 536,
where the Court had under consideration § 22(a) of the Revenue
Act of 1934 and the treasury regulation made under it which is
involved here, the Court held that within the limits of
permissible administrative interpretation, a department regulation
interpreting an act of Congress, by repeated reenactment by
Congress of the act unchanged, acquires the force of law. In that
case the Court, while sustaining the power of the Treasury
Department to change its interpretative regulations so as to
operate prospectively, denied it the power to apply a new or
amended regulation retroactively. The precise question before the
Court was whether the corporate taxpayer had realized taxable
income by sales of its own stock in the year 1929. The Court said
that the question was governed by the treasury regulations in
force in 1929, under which it was provided that a corporation
realized no taxable income from sales of its own stock. It denied
the power of the Treasury Department to apply to transactions
completed in 1929, a regulation adopted in 1934.Here the
questioned treasury regulations were made under and for the very
revenue acts controlling the disputed tax liabilities, a fact
which sharply distinguishes this case from the Reynolds case.
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The Court in the Reynolds case expressly declined to decide
whether an act of Congress was necessary to change an
administrative interpretation which had acquired the force of law
by repeated reenactments by Congress of the section of the act
interpreted by the regulation. But in Helvering v. Wilshire Oil
Co., 308 U.S. 90,
100, 101, 60 S. Ct. 18, 84 L. Ed. 101,
it said that the doctrine of acquired legislative approval of an
administrative regulation by reenactment unchanged of the act
interpreted does not apply to preclude changes in administrative
interpretations through the exercise of appropriate rulemaking
powers, and in Helvering v. Reynolds, 313 U.S. 428,
432, 61 S. Ct. 971, 85 L. Ed. 1438,
134 A.L.R. 1155, it expressly held that an act of Congress was not
necessary to the amendment or change in an interpretative
departmental regulation which had acquired the force of law by
repeated legislative reenactment of the acts interpreted. In
Morrissey v. Commissioner, 296, U.S. 344,
355, 56 S. Ct. 289,
294, 80 L. Ed. 263,
the Court said that the authority of the Treasury Department to
promulgate administrative constructions of revenue acts could not
be deemed to be "so restricted that the regulations, once
issued, could not later be clarified or enlarged so as to meet
administrative exigencies or conform to judicial decision."
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Two recent decisions of circuit courts of appeals expressly deny
the contention of the taxpayer here. Allen v. National Manufacture
& Stores Corp., 5 Cir., 125 F.2d 239,
certiorari denied 316 U.S. 679, 62 S. Ct. 1106, 86 L. Ed. 1753;
Commissioner v. Air Reduction Company, 2 Cir., 130 F.2d 145,
certiorari denied 63 S. Ct. 201,
87 L. Ed. . In the first case mentioned, the purchase of the
taxpayer's own stock was made with the intention of retiring it,
but later the stock was resold at a profit. In the second case,
the corporation sold its won stock to certain of its officers,
realizing a profit. In this case the sale was made in 1935 and the
validity of the treasury regulation involved here was sustained.
In
the first case, the corporate taxpayer sold its own shares in the
year 1937, realizing a profit on the transaction. The Court
sustained the validity and the application of Article 22 (a)-16 of
Treasury Regulations 94 under the Revenue Act of 1936.
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We find nothing against the conclusion announced above in Morgan
v. Commissioner, 309 U.S. 78,
81 626, 60 S. Ct. 424, 84 L. Ed. 585;
Helvering v. Janney, 311 U.S. 189,
194, 61 S. Ct. 241, 85 L. Ed. 118,
131 A.L.R. 980; and Helvering v. Oregon Mutual Life Ins. Co.,
311 U.S. 267,
270, 61 S. Ct. 207, 85 L. Ed. 180.
The holding of these cases is not, as the taxpayer claims, that an
administrative regulation which through repeated reenactment by
Congress of the act to which it applies has acquired the force of
law, can only be amended by an act of Congress. On the contrary,
each of these cases sustains the proposition that the act of
Congress alone fixes rights which a governmental department, by
administrative regulation, cannot take away nor destroy.
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Moreover, the earlier federal cases involving earlier and
different regulations, relied on by the taxpayer, must give way to
the later decisions based on later regulations. Nor does it appear
that the treasury regulation providing that a corporation realized
neither gain nor loss from the purchase and sale of its own stock
has received at the hands of the courts the uniform approval which
the taxpayer claims for it. It has been held that the apparent
weight of authority in income tax cases arising under the earlier
revenue acts and the corresponding treasury regulations took the
view that the regulation denying deductible loss or taxable gain
to a corporate taxpayer on sales of its own stock was intended to
"apply only to original issues or to purchases and sales
which were in fact capital transactions." Investment Corp. of
Philadelphia v. United States, D.C., 43 F.Supp. 64, 65;
Commissioner v. S. A. Woods Co., 1 Cir., 57 P.2d 635; Commissioner
v. Boca Ceiga Development Corp., 3 Cir., 66 F.2d 1004.
And see First Chrold Corp. v. Commissioner, 3 Cir., 97 F.2d 22,
reversed 306 U.S. 117, 59 S. Ct. 427, 82 L. Ed. 542,
under authority of Helvering v. R. J. Reynolds Tobacco Co., supra.
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In E. R. Squibb & Sons v. Helvering, 2 Cir., 98 F.2d 69,
70, 71, upon the reasoning of which the taxpayer places great
reliance here, although distinguished if not overruled by the same
Court's decision in Commissioner v. Air Reduction Co., supra, the
Court decided under the reenactment doctrine that the prior
regulation involved had acquired the force of law and had become
so firmly embedded in the revenue acts that it could only be
dislodged by an act of Congress. But the Court was careful to
point out that it did not hold that the regulation then in force
was on its face invalid or was not a justifiable interpretation of
§ 22(a) of the Revenue Act of 1932. It said: "We need not
say that no other interpretation could have been made: it is not
uncommon, when a corporation buys its own shares, to regard them
as stock existing in a kind of limbo, so that when it sells them
again, it does not reissue them de novo, but sells its own
property. That convention may be sufficient constitutional basis
for a statute which should tax as income the difference between
the amount paid to buy in 'treasury shares' and that received on
their sale; we do not mean to suggest the opposite, for in such
matters convention may be conclusive."
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The Board was right in affirming the determination by the
Commissioner of a deficiency in the taxpayer's income for the year
1937, and wrong in reversing his determination of a deficiency
resulting from stock sales for the year 1935. With respect to
stock sales in the year 1935, the Board thought it could not
presume that Congress, in the passage of the Revenue Act of 1934,
had knowledge of the Treasury's change in its interpretation of
prior revenue acts, promulgated by the Treasury's decision one day
before the passage of the Act of 1934.It thought that the doctrine
of congressional approval by reenactment could not be applied in
the circumstances stated. But we need not speculate upon whether
Congress, in the passage of the Revenue Act of 1934, had knowledge
of the amendment of the pertinent administrative interpretation
promulgated by a treasury decision on the day before the passage
of the Act, since congressional approval, under controlling
decisions, was not necessary to a change in administrative
interpretation. In Hevering v. R. J. Reynolds Tobacco Co., supra,
the Court held that the language of § 22(a) of the Revenue Act of
1934 defining gross income, substantially the same as the
corresponding section of prior revenue acts, was so general in its
terms as to justify an administrative interpretation of its
meaning. Since the Act itself, and not the interpretation, is the
ultimate source of the rights and liabilities of the taxpayers,
the Treasury Department was not precluded from correcting what it
determined was error in its prior regulation and in applying its
new interpretation prospectively, as is done here, in the case of
taxpayer's income for the year 1935, as well as for the year 1937.
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As the Board of Tax Appeals indicated in its opinion,
congressional approval of the Treasury's interpretative regulation
may be implied in the case of taxpayer's income for the year 1937,
the interpretation having been made two years before the passage
by Congress of the controlling Revenue Act of 1936. But the
question is not whether the administrative regulations have
received legislative approval, but whether they are permissible
interpretations of the respective revenue acts to which they
apply. In the light of controlling authority, the question must be
answered in the affirmative.
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With respect to the taxpayer's transfer of shares of its capital
stock to its general counsel, the Board was of the opinion that
the transaction was effective for income tax purposes as a sale of
the shares involved. The question before the Board, therefore, was
whether, where the taxpayer satisfied a debt owing to its general
counsel for services rendered by the transfer to counsel of shares
of its capital stock, it realized taxable income, the taxpayer
having acquired the stock in question at a cost less than the
price at which it was transferred. But it thought the gain to the
taxpayer in the transaction was not taxable income because of its
opinion of the invalidity of Article 22(a)-6 of Treasury
Regulations 86, as applied to sales of corporate stock in the year
1935. Since we have reached the opposite conclusion, it follows
that this decision of the Board must be reversed and the
determination of a deficiency in taxpayer's income for the year
1935 resulting from the transaction under consideration must be
sustained.
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The taxpayer also contends that if the validity of the treasury
regulations involved here should be sustained, nevertheless, the
regulations have no application under the evidence in this case.
The regulation in question provide in brief that whether a
corporation realizes gain or loss in the purchase and sale of its
own capital stock depends upon the real nature of the transaction,
to be ascertained from all facts and circumstances; and that if a
corporation deals in its own shares, as it might in the shares of
another corporation, the resulting gain or loss is to be computed
in the same manner as though the corporation were dealing in the
shares of another. The argument of the taxpayer is that the sale
of its own stock to its employees, under a plan adopted by the
corporation for the purpose of creating and sustaining employee
interest in the affairs of the corporation, is not dealing in its
own stock by the corporation as it might deal in the shares of
another corporation. The point is made that the purchase and sale
of the shares in another corporation could not satisfy the
essential purpose of the employee purchase plan. This, of course,
is true but immaterial. The material fact is that the corporation
bought and sold its won stock at a profit, dealing, in controlling
aspects of the transaction, as it might have dealt with the stock
of another corporation. The fact that these profitable sales were
made to employees is not alone determinative of the character of
the transaction viewed as a whole. We think the transaction
clearly within the department's regulations.
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On the petition of the Commissioner in No. 12,250, the decision
of the Board of Tax Appeals is reversed. Upon the petition of the
taxpayer for review in No 12,251, the decision of the Board of Tax
Appeals is affirmed.
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