ARROWSMITH et al., EXECUTORS, et al. v. COMMISSIONER OF INTERNAL REVENUE.
No. 51.
Argued October 24, 1952.
Decided November 10, 1952.
George R. Sherriff argued the cause for petitioners. With him on the brief was Joseph C. Woodle.
Helen Goodner argued the cause for respondent. With her on the brief were Acting Solicitor General Stern, Assistant Attorney General Lyon, Philip Elman, Ellis N. Slack and Harry Baum.
Briefs of amici curiae supporting petitioners were filed by Norman D. Keller for Edgar J. Kaufmann; and by John W. Burke.
Mr. Justice Black
delivered the opinion of the Court.
This is an income tax controversy growing out of the following facts as shown by findings of the Tax Court. In 1937 two taxpayers, petitioners here, decided to liquidate and divide the proceeds of a corporation in which they had equal stock ownership. Partial distributions made in 1937, 1938, and 1939 were followed by a final one in 1940. Petitioners reported the profits obtained from this transaction, classifying them as capital gains. They thereby' paid less income tax than would have been required had the income been attributed to ordinary business transactions for profit. About the propriety of these 1937-1940 returns, there is no dispute. But in 1944 a judgment was rendered against the old corporation and against Erederick R. Bauer, individually. The two taxpayers were required to and did pay the judgment for the corporation, of whose assets they were transferees. See Phillips-Jones Corp. v. Parmley, 302 U. S. 233, 235-236. Cf. I. R. C., § 311 (a). Classifying the loss as an ordinary business one, each took a tax deduction for 100% of the amount paid. Treatment of the loss as a capital one would have allowed deduction of a much smaller amount. See I. R. C., § 117 (b), (d) (2) and (e). The Commissioner viewed the 1944 payment as part of the original liquidation transaction requiring classification as a capital loss, just as the taxpayers had treated the original dividends as capital gains. Disagreeing with the Commissioner the Tax Court classified the 1944 payment as an ordinary business loss. 15 T. C. 876. Disagreeing with the Tax Court the Court of Appeals reversed, treating the loss as “capital.” 193 F. 2d 734. This latter holding conflicts with the Third Circuit’s holding in Commissioner v. Switlik, 184 F. 2d 299. Because of this conflict, we granted certiorari. 343 U. S. 976.
I. R. C., § 23 (g) treats losses from sales or exchanges of capital assets as “capital losses” and I. R. C., § 115 (c) requires that liquidation distributions be treated as exchanges. The losses here fall squarely within the definition of “capital losses” contained in these sections. Taxpayers were required to pay the judgment because of liability imposed on them as transferees of liquidation distribution assets. And it is plain that their liability as transferees was not based on any ordinary business transaction of theirs apart from the liquidation proceedings. It is not even denied that had this judgment been paid after liquidation, but during the year 1940, the losses would have been properly treated as capital ones. For payment during 1940 would simply have reduced the amount of capital gains taxpayers received during that year.
It is contended, however, that this payment which would have been a capital transaction in 1940 was transformed into an ordinary business transaction in 1944 because of the well-established principle that each taxable year is a separate unit for tax accounting purposes. United States v. Lewis, 340 U. S. 590; North American Oil v. Burnet, 286 U. S. 417. But this principle is not breached by considering all the 1937-1944 liquidation transaction events in order properly to classify the nature of the 1944 loss for tax purposes. Such an examination is not an attempt to reopen and readjust the 1937 to 1940 tax returns, an action that would be inconsistent with the annual tax accounting principle.
The petitioner Bauer’s executor presents an argument for reversal which applies to Bauer alone. He was liable not only by reason of being a transferee of the corporate assets. He was also held liable jointly with the original corporation, on findings that he had secretly profited because of a breach of his fiduciary relationship to the judgment creditor. Trounstine v. Bauer, Pogue & Co., 44 F. Supp. 767, 773; 144 F. 2d 379, 382. The judgment was against both Bauer and the corporation. For this reason it is contended that the nature of Bauer’s tax deduction should be considered on the basis of his liability as an individual who sustained a loss in an ordinary business transaction for profit. We agree with the Court of Appeals that this contention should not be sustained. While there was a liability against him in both capacities, the individual judgment against him was for the whole amount. His payment of only half the judgment indicates that both he and the other transferee were paying in their capacities as such. We see no reason for giving Bauer a preferred tax position.
Affirmed.
At dissolution the corporate stock was owned by Frederick P. Bauer and the executor of Davenport Pogue’s estate. The parties here now are Pogue’s widow, Bauer’s widow, and the executor of Bauer’s estate.
What follows is an opinion from the Supreme Court of the United States. Your task is to determine the bases on which the Supreme Court rested its decision with regard to the legal provision that the Court considered in the case. Consider "judicial review (national level)" if the majority determined the constitutionality of some action taken by some unit or official of the federal government, including an interstate compact. Consider "judicial review (state level)" if the majority determined the constitutionality of some action taken by some unit or official of a state or local government. Consider "statutory construction" for cases where the majority interpret a federal statute, treaty, or court rule; if the Court interprets a federal statute governing the powers or jurisdiction of a federal court; if the Court construes a state law as incompatible with a federal law; or if an administrative official interprets a federal statute. Do not consider "statutory construction" where an administrative agency or official acts "pursuant to" a statute, unless the Court interprets the statute to determine if administrative action is proper. Consider "interpretation of administrative regulation or rule, or executive order" if the majority treats federal administrative action in arriving at its decision.Consider "diversity jurisdiction" if the majority said in approximately so many words that under its diversity jurisdiction it is interpreting state law. Consider "federal common law" if the majority indicate that it used a judge-made "doctrine" or "rule; if the Court without more merely specifies the disposition the Court has made of the case and cites one or more of its own previously decided cases unless the citation is qualified by the word "see."; if the case concerns admiralty or maritime law, or some other aspect of the law of nations other than a treaty; if the case concerns the retroactive application of a constitutional provision or a previous decision of the Court; if the case concerns an exclusionary rule, the harmless error rule (though not the statute), the abstention doctrine, comity, res judicata, or collateral estoppel; or if the case concerns a "rule" or "doctrine" that is not specified as related to or connected with a constitutional or statutory provision. Consider "Supreme Court supervision of lower federal or state courts or original jurisdiction" otherwise (i.e., the residual code); for issues pertaining to non-statutorily based Judicial Power topics; for cases arising under the Court's original jurisdiction; in cases in which the Court denied or dismissed the petition for review or where the decision of a lower court is affirmed by a tie vote; or in workers' compensation litigation involving statutory interpretation and, in addition, a discussion of jury determination and/or the sufficiency of the evidence.