Nathan and Joanne T. Cummings v. Commissioner of Internal Revenue

J. JOSEPH SMITH, Circuit Judge

(concurring in the result):

I concur in the reversal of the judgment, but respectfully differ from the rationale adopted.

I do not agree that this case is controlled by Arrowsmith v. C.I.R., 344 U.S. 6 , 73 S.Ct. 71 , 97 L.Ed. 6 (1952) and United States v. Skelly Oil Co., 394 U.S. 678 , 89 S.Ct. 1379 , 22 L.Ed. 642 (1969). Both of those cases held that, when income is taxed at a reduced rate when received, it cannot be deducted at a more favorable rate if for some reason it has to be repaid. At the heart of those cases is the repayment of an amount which had previously been included in income. Indeed, in Skelly Oil, the Court was doing nothing more than applying a statute, 26 U.S.C. § 1341 , which by its terms is limited to the repayment of an “item included in gross income in the year of receipt.” 394 U.S. at 683 , 89 S.Ct. at 1382 .

This case, involving a probable sale and repurchase violation of § 16(b), simply does not present that kind of sit *454 uation. The mere fact that there could be no liability under § 16(b) were there not a sale which (in this case) resulted in taxable income is irrelevant, because the money paid out by Cummings to MGM cannot be treated as an item previously included in income. The amount of income on the sale (determined by the difference between the original purchase price and the sale price) has no bearing on the calculation of the insider’s profit (determined, roughly, by the difference between the sale price and the repurchase price). In fact, it is perfectly clear that there can be an insider’s profit even if the sale resulted in a loss, because the sale assumes relevance for tax purposes only when linked with the original purchase and the repurchase will not have tax significance until a subsequent sale occurs. The sale and repurchase, which result in § 16(b) liability, do not constitute a transaction with any tax significance whatever, and the insider’s profit is not income for tax purposes, regardless of whether it may be considered, as my brother Kaufman considers it, as “gain in the economic sense.” Ante at 451.

I also disagree with the characterization of the payment to MGM as an adjustment to the sale price of the stock. I cannot subscribe to the view that “the capital gain appears to include the profits from the sale and purchase,” ante at 451, because the transaction resulting in capital gain terminated with the sale, and the purchase was the initiation of a new transaction that should be considered entirely separate and independent for tax purposes. In any event, transactions are to be treated as they actually occurred, not in accord with what might have occurred. C.I.R. v. National Alfalfa Dehydrating and Milling Co., 417 U.S. 134 , 94 S.Ct. 2129 , 40 L.Ed.2d 717 (1974).

This reasoning applies, of course, only to sale and repurchase violations of § 16(b). The tax significance of a purchase and sale violation would be entirely different. In that case, the insider’s profit obviously should be treated as the repayment of an amount included in income. But the fact that one kind of violation of § 16(b) leads to Arrowsmith/Skelly Oil treatment does not require that all kinds of violations of § 16(b) be so treated. The income tax provisions of the Internal Revenue Code are not to be construed in pari materia with the estate and gift tax provisions, Farid-es-Sultaneh v. Commissioner, 160 F.2d 812, 814-815 (2d Cir. 1947); there is no more reason why they must be construed in pari materia with the 1934 Securities and Exchange Act.

Nor do I think Tank Truck Rentals, Inc. v. C. I. R., 356 U.S. 30 , 78 S.Ct. 507 , 2 L.Ed.2d 562 (1958) relevant to the litigation before us. That decision — which is to be applied only in a “sharply limited and carefully defined category” of cases, Commissioner v. Tellier, 383 U.S. 687, 694 , 86 S.Ct. 1118 , 16 L.Ed.2d 185 (1966) — involved the payment of punitive fines assessed after an adjudication of liability. Since the payment here— made in contemplation of potential liability — was remedial and not punitive, Feder v. Martin Marietta Corp.; 406 F.2d 260, 266 (2d Cir. 1969); Adler v. Klawans, 267 F.2d 840, 844 (2d Cir. 1959), this is not an appropriate case for applying a policy designed to avoid the dilution of punishment. See Tellier, supra, 383 U.S., at 694 , 86 S.Ct. 1118 .

For these reasons, I would not hold that the ordinary loss deduction should be disallowed and treated instead as a capital loss deduction. These transactions should more properly be treated in accordance with the opinion of Judge Drennen below: For tax purposes, the proper treatment would be to add to the repurchase price as the basis for the new shares the amount paid over, and to recognize neither capital gain or loss nor ordinary business expense until the tax year in which the shares are sold.