The opinion
OppeR,
dissenting: While the section which is being resisted is penal in its nature, 1 the evil Congress intended to restrict by its enactment is clearly recognizable, 2 and one may assume that the application of the statute was intended so that it would be effective for the purposes for which it was designed. See Foster v. United States, 303 U. S. 118 . What was within the manifest intention of the legislative body should be considered as much a part of legislation as what is included in its express terms. Helvering v. New York Trust Co., 292 U. S. 455 . And this rulé does not yield to any effort to make the statute bear less heavily upon those subject to its operation.' Helvering v. Stockholms Enskilda Bank, 293 U. S. 84 .
This is not to say that a technical construction of the section will fail to sustain respondent’s position in this case, but merely that overlooking the main purpose of the provision so that we permit ourselves to be lost in a maze of detail will more easily result in an erroneous conclusion. The purpose of section 104 clearly was to penalize the intentional avoidance of surtaxes upon individuals by the intervention of corporations. Congressional Becord, vol. 50, part VI, p. 5319. That precise result has been accomplished by the use of this petitioner. Since the conclusion that the section does not reach this case is at war with its evident purpose, only an unmistakable prohibition in the language of the act itself should preclude its application.
Petitioner’s sole stockholder succeeded from 1922 to 1929 in escaping all individual income tax on the earnings of the securities he transferred to petitioner. 3 This was the direct result of the plan disclosed by the present facts. It is not unreasonable to assume that *1178 a result so clear and inevitable was also a purpose, at least in the absence of countervailing proof. R. L. Blaffer & Co., 37 B. T. A. 851; affd., 103 Fed. (2d) 487 (C. C. A., 5th Cir.) ; certiorari denied, 308 U. S. 576 . He was enabled to accomplish this purpose by three elements in the plan: First, the creation of petitioner; second, the terms of the security transfers; and third, the failure to mesh the corporation’s’accrual method with the individual’s cash basis. Because all three parts of the plan were necessary to enable the shareholder to escape surtax, it does not follow that the corporation was not formed for that inhibited purpose. Its formation was as much an integral and essential part of the scheme as either of the other elements. And because that was not its only purpose it does not follow that the impact of the section is averted. R. L. Blaffer & Co., supra.
Petitioner must, therefore, it seems to me, be regarded as having been formed for the purpose of avoiding the imposition of surtax upon its shareholder, a result which so far brings the situation meticulously within the most technical reading of the first portion of the section. The majority opinion does not take a contrary view, but rejects the conclusion that this was to be done by permitting the gains and profits of petitioner to accumulate instead of being divided or distributed. That depends upon'how we define the words “gains and profits” as used in section 104. There is no express limitation to “net” gains and profits. 4 Whether the provision must be restricted to such net gains in the ordinary and natural application *1179 of the section need not be considered. Clearly petitioner here bad gains and profits before it set off against them the corresponding accrued liabilities to its shareholder. It seems obvious that Congress could not have intended the term “gains and profits”, whether net or gross, to mean those resulting from an artificial calculation pursuant to a clever device for frustrating the fundamental purpose of the very provision in which the term appears. Cf. Gregory v. Helvering, 293 U. S. 465 . It requires no more penetration than it did in that case to conclude that the organization of petitioner and its accrual of these “expenses” was a mere “disguise for concealing its real character and the sole object and accomplishment of which was the consummation of a preconceived plan * * *. To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose.” (Pp. 469, 470.)
But for the ingenious terms of the contracts there would have been no such accrued “expenses.” Without the accruals there would clearly have been gains and profits in the strictest sense. The contracts pursuant to which petitioner made book entries purporting to offset these gains and profits with “debts” to the shareholder were an integral part of the very scheme by which the shareholder was to avoid surtax. Moreover, these gains and profits were permitted — in fact, under the plan of petitioner’s organization, were required— to be accumulated instead of being divided or distributed. That the ultimate division or distribution — the payment for contributed capital — would be in the bookkeeping form of compensation rather than dividends can not change the actuality of the gains and profits, or the fact of their accumulation. See Foster v. United States, supra. Viewed from the standpoint of reality, this corporation was formed, whether or not it was also availed of, 5 for the very purpose which the intent and a fair construction of the language of section 104 will easily cover. We should not permit a long and roundabout path to lead to a different place from the one to which the straight path would take us. Minnesota Tea Go. v. HeVoering, 302 U. S. 609 .
I am of the opinion that respondent properly sought to apply section 104 to this petitioner.
Smith, SteRnhagen, Turner, Arnold, and Harron agree with this dissent.
Mead Corporation, 38 B. T. A. 687, 700.
Petitioner is obviously giving expression to a misconception when it says in its brief: “But there is no proof in this case of minimizing taxes. Thé record shows that with the exception of a small profit in 1923 ($5,264.95) the company had net losses for the first *1178 five years of its existence (Exhibit 38). During that same period Munroe’s net income was less than the losses sustained by the corporation (Exhibit 39). It follows, therefore, that if he had made the transactions which were made by the corporation and sustained the same losses, all his income for those years would have been wiped out, and he would have had large net losses to carry forward.”
The “net losses” to which petitioner refers were those taken for income tax purposes. They were evidently arrived at by deducting from gross income the accrued “liabilities” consisting not only of all of the income received on the securities contributed by Munroe, but of 20 per cent thereof in addition, or of 7 per cent interest on the proceeds of sales. Naturally these accruals could not have been deducted by Monroe if he had been receiving the income and reporting it for tax purposes. And of course the larger the income from these securities and the smaller the petitioner’s income from other sources, the greater would be its net loss, since the receipt of income from that source required it to accrue as a “liability” a greater amount than the income received.
For example, petitioner’s tax return for the calendar year 1925 shows a gross income of $179,442.17. Of this $114,346.30 is income from interest and dividends and only $14,554.84 is gross profit from its operations. The balance represents capital gains. Against this, in addition to the offsetting deduction for dividends from domestic corporations, it deducted $141,892.99 as “interest.” It was thus enabled to show a “net loss”, but its dividend and interest income was eight times as great as its operating income. If the bulk of this came from the securities contributed by Munroe or their proceeds, which seems certain, it is manifest that Munroe’s net income for 1925 of $32,024.06 would have been augmented three or four times over for surtax purposes if he had retained the securities instead of transferring them to petitioner.
See Revenue Act, 1928, section 22 (a), where “gains” and “profits” are used in the definition of gross income. Cf. G. B. R. Oil Co., 40 B. T. A. 738 dealing with the term “earnings and profits.”
See Reynard Corporation, 37 B. T. A. 652, 662.