The opinion
Disney,
dissenting: The majority opinion seems to me to be based upon inconsistency, for the reason that what is termed a mere incident is utilized to defeat the deferment of taxation, which is inherent in and is the basic idea underlying the principle of nonrecognition of gain or loss in reorganization. The reorganization itself, in its very nature, would only defer taxation. In this instance taxation is definitely and permanently prevented, not merely deferred. Something outside the pale of reorganization must work this effect, since reorganization does not do so. Thus it appears that the so-called incident emerges as the controlling factor here. That it is outside of and no part of the reorganization is demonstrated not only by the fact that reorganization alone can not effect the tax-prevention result obtained by the majority opinion, but by the obvious fact that in order for the transaction between General Motors and the General Motors Securities Co. to be so completely a part of the reorganization as to be under the mantle of its nonrecognition of gain or loss, the General Motors Secu- ( rities Co. must be a party to the reorganization — which beyond argu- J ment it is not, and I do not understand that anyone contends it to be. ¡ Thus it is discerned that a principle applicable to the reorganization only is extended to include a transaction which is no part of the reorganization and otherwise would demand our examination as to the applicability of the revenue law. I believe that such examination of the nature of the transaction between General Motors and the General Motors Securities Co. demonstrates that it entails such economic betterment as constitutes income. Mr. Arnold has set this forth in terms to which I subscribe. It wfill not do to dismiss this transaction under the appellation of mere incident, or with the categorical statement that shares were borrowed to be used for a few days and returned in kind. These shares were not merely used, but were wholly disposed of and were replaced by an equivalent. Had the stock obtained from the General Motors Securities Co. not been completely owned by General Motors, to be merged in the reorganiza-' tion, it could not be said that it constituted stock or securities in a corporation a party to a reorganization, within the terminology and purview of the statute. Patently this was not merely use of the. stock.
I believe, too, that analogy to a short sale leads to the same conclusion as above expressed, and denies the conclusion reached by the majority. The essential nature of a short sale has been well examined in Provost v. United States, 269 U. S. 443 . It is there demonstrated that it consists essentially of two transactions, one between the buyer and seller, which is closed by the delivery of borrowed stock to the buyer, and one, succeeding the first, consisting of the incurrence of contractual obligation between the lender and borrower of stock, and *532 its satisfaction. It is in this transaction that the gain or loss occurs, for the buyer has been satisfied almost contemporaneously with the purchase, by the delivery of the borrowed stock, and with him the transaction is closed. Meyer on Stock Brokers and Stock Exchanges, p. 186. Plainly there is no appreciable profit or loss in that very brief transaction. It is in the “contractual relations”, as Meyer terms it, between borrower and lender that the profit is made or loss is sustained. Referring to the situation immediately after delivery of the borrowed stock to the purchaser, Provost v. United States, supra, says:
The original short sale is thus completed and there remains only the obligation of the borrowing broker, terminable on demand, either by the borrower or the lender, to return the stock borrowed * * *.
Montgomery on Federal Income Tax, p. 240, says:
In the case of a short sale, the stock considered to be sold is the stock used to cover and close out the sale. The period this stock is held is the governing factor. * * *
In Frances Bartow Farr, Executrix, 38 B. T. A. 557, 559, we said:
* * * The transaction which originated in the short sale may be closed by the return of stock purchased just for that purpose. This is called a “covering purchase.” * * * [Italics supplied.]
The above expressions indicate plainly that the transaction taxed in connection with the short sale is the second transaction involved* i. e., the profit, if any, made in the return of the borrowed stock. The stock acquired to satisfy the lender is the stock, according to Montgomery, supra, which is considered sold, aild it is significant that in the above quotation from Frances Bartow Farr, Executrix, reference is made not to the short sale, but to “The transaction which originated in the short sale.” The profit or loss, obviously, depends upon whether the borrowing can be repaid by the expenditure of an amount more or less than the amount of the obligation to the lender. Montgomery’s statement that “The period this stock is held is the governing factor” can mean nothing else.
It is true that in the Farr case, supra, relying upon but not quoting Robert W. Bingham, 27 B. T. A. 186, we said:
The gain or loss from a short sale is ascertained by matching the short sale price against the cost or other basis of the stock used to close the transaction. * * *
In those cases, however, we did not have before us the present question, that of examining the precise nature of the obligation to the lender of stock, and no query was raised, in considering what amount was to be matched “against the cost” of the stock used to close the transaction, as to whether such amount was the price received from the purchaser, or the amount of obligation to the lender. In the light of *533 the Provost case, tlio proper amount is seen to be the latter, and the obligation to the lender appears as the basic factor. Ordinarily, short sale price (i. e., price paid by the buyer of the stock sold “short”) and amount of obligation to the lender of stock are the same, calling for no distinction, since the stock is borrowed practically at the same time the short sale is made (ordinarily within 24 hours), so that no distinction was made in the Farr or Bingham cases. But herein it becomes important to ascertain what it is, in fact, that causes loss or gires rise to profit in the short sale, for if the cost of satisfaction of obligation to lender is the determining factor there, analogy to short sale should assist us here, since plainly there is such obligation to discharge in this case.
The General Motors Corporation entered into transactions essentially analogous to a short sale. On June 4, 1926, the contract between the General Motors Corporation and Fisher Body Corporation was perfected by acceptance, and thereupon the General Motors Corporation wTas just as much obliged to deliver 935,280 shares of its ( stock to the Fisher Body Corporation as is the short seller to deliver^ stock certificates to his purchaser. The General Motors Corporation did not own the necessary stock. It did not acquire such stock until June 23, when the necessary stock was acquired by “borrowing” from the General Motors Securities Co. This stock wTas effectually and wholly disposed of to the Fisher Body Corporation, in compliance with the contract between that company and the General Motors Corporation. The General Motors Corporation was obliged to return equivalent stock to the General Motors Securities Co. Meeker on Short Selling defines a short sale as a sale which creates a debt “in terms of goods.” This seems exactly to describe the position of the General Motors Corporation with reference to the General Motors Securities Co. Equivalent stock was, in fact, later secured by the General Motors Corporation and the obligation discharged by the delivery thereof. At the date of such delivery, the value of the stock delivered was $137,603,070. This stock had been secured through a transaction with the Fisher Body Corporation, of such a nature that it took the base of the stock of the Fisher Body Corporation, which had been exchanged for it, to wit, a base of $31,254,825, which was therefore the cost of fulfillment of the obligation to return equivalent stock to the General Motors Securities Co. If the above analogy to a short sale is valid and ascertainment of profit and loss is logically based upon the fulfillment of obligation to the lender of stock, then we have, in the discharge of the obligation to the General Motors Securities Co., accrual of income and a taxable transaction.
A. F. Osterloh, 13 B. T. A. 713, was affirmed by the Ninth Circuit, in 37 Fed. (2d) 277. Therein Osterloh borrowed from Seiberling shares of common stock of the Goodyear Tire & Rubber Co., the original *534 shares to be returned, or, if borrower should be unable to do so, he would return cash or property in an amount equal to the fair market value of the stock at the date of receipt thereof. Osterloh used the stock as collateral, the value thereof declined, and as he was unable to pay his loans to certain banks, the stock was sold by the banks. He claimed a loss of the difference between what was realized out of the stock upon sale by the banks and the amount of the fair value of the stock when obtained by him.
The Board and the Circuit Court held, in effect, that he could not claim a loss until he had actually repaid the lender. The Board said that when the bank sold the stock, Osterloh “* * * became legally liable to Seiberling for the payment of a definitely ascertainable amount, because he could not return the stock unless he purchased it * * *.”
There seems no essential difference in this respect between the position of Osterloh and that of the General Motors Corporation, for Osterloh was to return the borrowed stock, but, if unable to do so, would return in lieu thereof cash or property eqxial to fair market value of the stock. As the Circuit Court pointed out, “The obligation to return the original stock was absolute and unconditional, if in the power of the petitioner so to do.” This was the same as the obligation of the General Motors Corporation. Osterloh could have done just as General Motors did — pay his obligation in property. Both the General Motors Corporation and Osterloh disposed of the stock borrowed, Osterloh by permitting it to be sold as collateral and the General Motors Corporation by assignment to the Fisher Body Corporation. Neither was able to return the stock. Either could return an equivalent (if obtainable) — at an expense of the price or outlay necessary to obtain it. Just as Osterloh “could not return the stock unless he purchased it” so the General Motors Corporation could not return the stock unless it purchased it — or, of course, otherwise acquired it. • It did acquire the necessary stock, not by purchase, which would have taken $137,603,070 from its treasury, but by an exchange, and that which was received in exchange, and used for the satisfaction of this “debt in terms of goods”, which was “of a definitely ascertainable amount” (the fair market value of the stock), was used to discharge the obligation. Its base was $31,254,825. I am unable to see why this transaction is not equally as taxable, upon the difference between the $31,254,825 base and $137,603,070 amount of obligation discharged, as was the loss of Osterloh deductible in the proper year. (The rationale of that decision necessarily is that the loss was in replacement of the stock or its value.) It is true that the amount of obligation in the Osterloh case was set as the value of the stock at the time of receipt thereof, whereas in the instant case, the *535 dissenting opinion of Mr. Arnold sets tlie amount of tlie obligation as tlie value of tlie stock upon the date of delivery. This, however, is a mere matter of contract between the parties, subject to any terms they may agree upon. The General Motors Securities Co. allowed the General Motors Corporation thirty days in which to return the equivalent of the stock, and plainly estopped itself from claiming return, or basing claim for damages in case of nonreturn, upon values at a date earlier than thirty days from delivery of the stock. The General Motors Corporation having a right to discharge its obligation, as it did, on July 1, the obligation is “definitely ascertainable” as the value of the delivered stock on that date merely because of the contract between lender and borrower. But regardless as to whether the amount of obligation is to be fixed at the date of borrowing of stock, or the day of return of equivalent, there is clear obligation. The difference is one only in amount, a detail not important to the general question here.
The General Motors Corporation, by the use of stock which had a base of $31,254,825, avoided an expenditure of $137,603,070, or avoided decreasing its surplus in that amount, in order to satisfy its obligation to the General Motors Securities Co. This transaction is separated by a clear line of cleavage from the reorganization with the Fisher Body Corporation, and the nonrecognition therein inherent can not logically be stretched to include the transaction with the General Motors Securities Co. That transaction was the conclusive and ultimate disposition of the proceeds of Fisher Body stock. There was, in fact, a saving and a profit to the General Motors Corporation in that transaction. In my opinion, it should be taxed. If transactions merely incidental to, but not a part of, a reorganization, can be brought within the nonrecognition provision, -where are we to stop ? The principle of nonrecognition within and as an integral part of reorganization is intended only to defer taxation because taxation would unfairly burden what is in fact a continuity of business. Without that principle, tax would be payable on the exchange between the Fisher Body Corporation and the General Motors Corporation. But I find it wholly impossible to believe that it should be used to prevent the incidence of tax in a matter neither in terms nor in logic within the reorganization.
Can it be doubted that there was economic betterment when stock costing $31,254,285 was substituted for stock of a definitely and easily ascertainable value of $137,603,070? There was obligation. It is immaterial -whether it was in money or property. Its discharge was effected in a manner which saved the obligor some $107,000,000, in money or in stock of that value. Had it cost the obligor more than *536 $137,603,070 to replace tbe stock there would have been a deductible loss. The “short” seller deducts a loss taken on a rising market. Economic betterment giving rise to income can not in logic depend upon whether the transaction involves money, provided there is a “gain * * * derived from * * * dealings in property * * to use the statutory expression, and provided there is realization and not mere unrealized appreciation. Such gain can inhere in discharge of loan or bailment. Herein there was clear realization. I do not believe that the petitioner should be allowed through its arrangement •with the General Motors Securities Co. to contract away the right of the sovereign to collect tax upon income, otherwise ultimately collectible. Such is the effect of that “borrowing” as viewed in the majority opinion.
The majority opinion observes that it is not necessary or proper to conclude how this reorganization may affect the taxes of the participants for future years. So far as the reorganization is concerned, its nature, intent, and effect are settled beyond cavil — it passes taxation to the future, and I can detect no impropriety in so noting or, rather, merely stating the law. Moreover, it is surely both necessary and proper to observe this inherent quality of reorganization, when the gain or loss in an “incidental” transaction indubitably outside the perimeter of the reorganization is identified as the same as that within it, and to reorganization is ascribed an effect which is the antithesis of its essential nature and object. The very ratio decidendi of the majority opinion requires the inquiry as to whether taxation is prevented, or whether it is only deferred. If it is prevented, reorganization has been exceeded. The transaction between the General Motors Corporation and the General Motors Securities Co. can not be infused into the reorganization without rendering relevant the inquiry as to whether a result is given which is contrary to the nature and effect of reorganization.
Finally, I1 suggest, on the principle of Gregory v. Helvering, 293 U. S. 465 , that in order to get the benefit of nonrecognition of gain the General Motors Corporation must be shown in its transaction with the General Motors Securities Co. to be clearly within the intent of the reorganization statute. Gould v. Gould, 245 U. S. 151 , holds:
In the interpretation of statutes levying taxes it is the established rule not to extend their provisions, by implication, beyond the clear import of the language used, or to enlarge their operations so as to embrace matters not specifically pointed out. * * *
It is true that the above citation goes on to state that in case of doubt, statutes are construed most strongly against the Government and in favor of the citizen, and it is also true that the ordinary application of the above principle involves construction in favor of the taxpayer. *537 Nevertheless, the logic of the above language is equally applicable in a situation sucli as the one here at hand, where the taxpayer is, in effect, seeking to broaden the effect of a statute, that is, the reorganization statute. Woolford Realty Co. v. Rose, 286 U. S. 319 , lays down the rule:
Taxpayer, claiming deduction for losses suffered in earlier year, must point to specific provision of statute permitting deduction, and bring liimself within its terms.
Exemption clauses are to be strictly construed. .We do not here have precisely the question of a deduction or exemption, but the basic idea in this case is the same as in those cited immediately above — the taxpayer seeking to except himself from the general terms of the taxing statute, or to bring himself within the purview of such a provision as nonrecognition of gain or loss entailed in reorganization, must show himself to be within that classification. It can not be said that the loan transaction between the General Motors Corporation and the General Motors Securities Co. is, under the statute and its obvious intent, any part or parcel of the reorganization with the Fisher Body Corporation. I dissent.