Kelley v. Commissioner

¶1dissenting:

¶21.

¶3The primary question is the meaning to be attributed to “prior to” realization as applied to sales or liquidations in order to determine whether a corporation is “collapsible.” It is by no means clear to me that the interpretation now being employed is so “obvious.”

¶4In the phrase “prior to the realization by the corporation … of a substantial part of the net income to be derived,” the liquidation or sale represents a point of time as of which we are required to inspect the entire income-producing history of the corporation. The words “to be derived” mean “which has been, and remains to be,” derived. So much the present opinion accepts.

¶5Dealing with the bare language of the statute, that point of time could hence as readily be intended to mean “while a substantial part remains unrealized,” or to be realized, as to carry the construction now being given it which is “until after a substantial part has been realized” regardless of the fact that a substantial — indeed a much greater — part still remains to be realized.

¶6Granting then that the language of the statute is wholly ambiguous, what guides do we have for construing it? First, the legislative purpose which was to prevent transformation of “substantial” amounts of ordinary income into capital gain1 could be frustrated by the present construction. Second, the Commissioner’s regulations, which are certainly not unreasonable, forbid it. And third, the only appellate court which has spoken, clearly views the critical words as meaning the opposite of what is now being accepted. Abbott v. Commissioner, (C.A. 3) 258 F. 2d 537, affirming 28 T.C. 795. And this was not a reversal of a Tax Court opinion but its affirmance. Cf. Arthur L. Lawrence, 27 T.C. 713, revd. (C.A. 9) 258 F. 2d 562.

¶7It is necessary to emphasize that the present assumption is that the corporation was “formed or availed of” “with a view to” the results which were achieved. (Emphasis added.) In other words, we are now saying that even though the purpose with which petitioners were acting was to terminate their relationship with the corporation at a time when a substantial amount of the prospective income was yet unrealized, the statute was not intended to apply to them. This is an open invitation to calculated schemes of avoidance, which it is difficult to believe Congress intentionally and purposely proffered.

¶8II.

¶9But even if that interpretation of the language is correct, it is still necessary to consider whether in the context of the legislative purpose anything less than half of the total net income should be considered as “substantial.” In the only cited case dealing with the subject, more than 50 per cent of the amount to be realized had been received as ordinary income. Levenson v. United States, (N.D. Ala.) 157 F. Supp. 244. This might well be the smallest proportion of the total which should be treated as a sufficient “view” to avoid the application of the section. But we are now holding that as little as one-third is sufficient, with two-thirds successfully converted into capital gain.