The opinion
Disney,
dissenting: I find myself unable to agree with the majority report in its conclusion that section 115 (h) of the Revenue Act of 1936 requires the holding that the expression “properly chargeable to the earnings or profits accumulated after February 28, 1913” in section 27 (f) of the Revenue Act of 1936 does not apply to the distribution by the petitioner of stock in another corporation which in a nontaxable reorganization it secured in exchange for its earned surplus. In my opinion, the language of section 115 (h) of the Revenue Act of 1936 should not be given a meaning and application essentially different from section 115 (h) of the Revenue Act of 1934. As stated in a footnote to the majority opinion, the report of the Senate Committee on Finance, as to section 115 (h) of the 1936 Act, points out that “The rule, under existing law” (as to effect on corporate earnings or profits of a nontaxable stock dividend or a nontaxable distribution of stock in a reorganization), is that “such earnings or profits are not diminished by such distribution” and that they remain intact, available for distribution as dividends by the distributing corporation, or another which receives them in reorganization. After stating that this rule is stated only in part in section 115 (h) of the *582 Revenue Act of 1934, the report says that the rule is applied in the Samóme, case and others. The report concludes: “While making no change in the rule as applied under existing law, the recommended amendment is desirable in the interest of greater clarity.” This seems to indicate the view that no substantive change was made in section 115 (h) of the 1934 Act, but that it was only clarified. That section in the 1934 Act, however, was in part entitled “Effect on Future Distributions”, and provided that the distribution there involved “shall not be considered a distribution of earnings or profits within the meaning of this section for the purpose of determining the tax-ability of subsequent distributions by the corporation.11 (Italics supplied.) If section 115 (h) in the 1936 Act makes no essential change and merely clarifies the above language in the 1934 Act, obviously effect upon section 21 (f) and the new undistributed profits tax provisions was not within Congressional intent. It seems to me that the intent, as in 1934, was merely to provide that a nontaxable distribution of stock should not diminish earnings and profits “for the purpose of determining the taxability of subsequent distributions by the corporation”, that section 115 (h) does not determine what is “properly chargeable to the earnings or profits” under section 27 (f), and that, as stated in Regulations 94, article 27 (f)-l (b), “To determine the amount properly chargeable to the earnings or profits accumulated since February 28, 1913, there must be deducted from the amount of the distribution that part allocable to capital account”; in other words, that if the distribution represented earnings or profits and not capital, and was a part of the liquidation distribution particularly covered in section 27 (f), the dividends paid credit should result. In this matter the petitioner originally had earned surplus of approximately $54,000. This was exchanged for stock of another corporation, and was then distributed to stockholders in liquidation.
I think the fact that the exchange was in a reorganization furnishes no alchemy to change the $54,000 earned surplus into capital, that the stock, the substitute for the $54,000, remained earned surplus the same as it would have been if the $54,000 earned surplus had been invested in stock of any other corporation, and that when such stock was distributed in liquidation, it was “properly chargeable to the earnings or profits.” I can not discern that it became capital of the distributing corporation, and think that the ordinary bookkeeping transaction would have charged it to “earnings or profits.”
Further, in my opinion, the line of cases beginning with Commissioner v. Sansome, 60 Fed. (2d) 931; certiorari denied, 287 U. S. 667 , is not decisive that in this matter there was no distribution of earnings or profits to a distributee in liquidation, as covered by section 27 (f). The true test which should be followed in applying such *583 cases is, in my opinion, not whether there was merely a tax-free reorganization, but whether there was substantial identity of the two corporations. Paul and Mertens, vol. 1, ¶ 8.45. Here the facts show that there was no substantial identity of the two corporations." I therefore think that Commissioner v. Sansome, and the cases following it, interpreting other statutes than those here involved, should not be given effect under the facts here found in the interpretation of the undistributed profits tax provisions of the Revenue Act of 1986, as they are, in the reliance placed by the majority opinion upon the committee report which cites them. As I view the matter, the committee report itself indicates that section 115 (h) of the 1936 Act should be given effect only in the matter of future distribution of earnings or profits following a stock dividend, or distribution of stock or securities in a nontaxable reorganization to dictate that there has been thereby no diminution of earnings or profits; but'that it does not follow that a definition is furnished for “properly chargeable to the earnings or profits” in section 27 (f), a more particular section involving liquidations, and the new matter of undistributed profits tax under section 14, Revenue Act of 1936. I must therefore respectfully dissent.