Opposition Brief — Jeffries v. Commissioner

OF CERTIORARI TO THE UNITED

OF APPEALS FOR THE FIFTH

CIRCUIT COURT

OW PETITION FOR A WRIT

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Statute and regulations involved_______.._...-...-----.---. 2

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CITATIONS

Cases:

Allport v. Commissioner, 4 T. C. 401, dismissed and affirmed

I : BE Ritka hecankedtsGnockacecenndieacans 9

Alpers v. Commissioner, 126 F. 2d 58__.-...-...----.--- 9

Beretta v. Commissioner, 141 F. 2d 452, certiorari denied,

SS a ae ee ee en eeereed te 9

Britt v. Commissioner, 40 B. T. A. 790, affirmed, 114 F

DE Kins RnKKbhhhdenskaethonksathnens chasse xetacs 9

Bynum v. Commissioner, 113 F. 2d 1___--__..-__----__- 9

Citizens & Southern Nat. Bank v. Commissioner, 136 F.

ke NO a ee ee 9

Cohen, Amelia H., Trust v. Commissioner, 121 F.2d 689_... 9,12

Commissioner v. Moline Properties, 131 F. 2d 388, affirmed,

Ree aCe, URS ch anh AUhbbehnndndoheecdeunndennk ll

Commissioner v. Quackenbos, 78 F. 2d 156____......----- 9

Dopp w. Oa Pom, OOS U. GB; SOB... cons cece cnn 14

Dodd v. Commissioner, 131 F. 2d 382__.....-...-...---- 9

Haiamans v. Commissioner, 121 F. 2d 4____.__.------- 9, 12, 13

Higgins v. Smith, 308 U. 8S. 473............-----.------ 1t

Hill v. Commissioner, 126 F. 2d 570_.....-..------- 2... 9,12

Irvine v. Commissioner, 46 B. T. A. 246_........-.-..--- 9

Malone v. Commissioner, Ra ae 9, 12

Mittelman v. Commissioner, 5 T. C. 932__...._....-.---- 9

Salt Lake Hardware Co. v. Commissioner, 27 B. T. A. 482__- 9

Stern v. Harrison, 152 F. 2d 321, certiorari denied, 327

J RAE SS ey Gn re ON 9, 12,13

Te OA eae ee mae 14

Thornton v. Commissioner, (C. C. A. 7th) decided January

Be, SEER GREEN CEARERRCACAUR CHAR RRCeduan enone eke qt 9, 12

United States v. Emory, 314 U. S. 423.........-...------ 14

Yankey v. Commissioner, 151 F. 2d 650__.__.__.-------- 9, 12

734875—47——_1 (1)

If

Statutes: Page

Internal Revenue Code:

Sec. 111 (26 U. 8. C. 111)-.----------------------- 12

Sec. 112 (26 U. 8. C. 112)------------------------- 12

Sec. 115 (26 U. S. C. 115)--------------- 7, 8, 10, 11, 12, 15

Sec. 117 (26 U. S. C. 117)------------------------- 12, 16

Revenue Act of 1942, c. 619, 56 Stat. 798:

Sec. 147 (26 U. S. C. Supp. V, 115)----------------- 13

Miscellaneous:

H. Rep. No. 2333, 77th Cong., 2d Sess., pp. 49, 93 (1942-2

Cum. Bull. 372, 412, 442-443) ----------------------- 13

1 Mertens, Law of Federal Income Taxation. Sec. 9.83 ---- 9

S. Rep. No. 1631, 77th Cong., 2d Sess., p. 116 (1942-2 Cum.

Bull. 504, 501).....-.------------------------------ 13

Treasury Regulations 103, Sec. PRIOR. cocks ccc 8, 12,17

Inthe Supreme Gourt of the Hnited States

OctToBER TERM, 1946

No. 1000

LILLIAN JEFFRIES, PETITIONER

v. :

CoMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES CIRCUIT COURT OF APPEALS FOR THE FIFTH

CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW

The opinion of the Tax Court (R. 16-28) and

its dissenting opinion (R. 28-29) are reported at

5 T. C. 1338. The opinion of the Circuit Court

of Appeals (R. 39-42) is reported at 158 F. 2d

225.

JURISDICTION

The judgment of the Circuit Court of Appeals

was entered on November 22, 1946. (R. 42.) A

petition for rehearing (R. 43-55) was denied on

December 24, 1946 (R. 56). The petition for a

writ of certiorari was filed on February 10, 1947.

(1)

2

The jurisdiction of this court is invoked under

Section 240 (a) of the Judicial Code, as amended

by the Act of February 13, 1925.

QUESTION PRESENTED

Whether a distribution in 1940 of corporate

assets to taxpayer in complete cancellation of one-

half of the corporation’s stock was a distribution

in partial liquidation, as defined in Section 115 (i)

of the Internal Revenue Code, with the result

that the gain on the distribution was includible

in taxpayer’s income in its entirety under Section

115 (c) of the Code.

STATUTE AND REGULATIONS INVOLVED

The applicable statute and Regulations are

printed in the Appendix, infra, pp. 15-18.

STATEMENT

The facts found by the Tax Court (R. 17-25)

may be summarized as follows:

The Girard Realty Company (hereinafter re-

ferred to as “‘corporation’’) was organized to own

and sell lands in the Everglades section of Florida.

Prior to 1932 its 25 shares of common stock were

owned equally by taxpayer’s husband, J. B. Jef-

fries, and by William H. Austin. In 1932 Austin

died and his estate, which was administered in

Pennsylvania, succeeded to the 12% shares owned

by him. (R. 18.)

In 1936 Jeffries died and in 1937 the taxpayer

acquired the 121% shares of stock formerly owned

ee Wiles oo. he, a

—

3

by him. Both the taxpayer and the Commissioner

have accepted $2,750 as her basis for computing

gain or loss on disposition of the stock. (R. 18.)

From 1936 to 1940, the assets of the corporation

consisted of undeveloped lands which were held

for sale, but none of which were sold during this

period, although 55,000 acres had been disposed

of prior to 1932. Some rent was received during

the period but it was not sufficient to pay taxes on

the land. (R. 18.)

After 1937 taxpayer was president of the cor-

poration and manager of its affairs. The Austin

estate did not maintain representation on the

board of directors or among its officers. Prior to

1940, taxpayer asked for contribution from the

Austin estate to pay accumulated taxes against

the lands which the corporation had no funds to

pay, but the estate refused to contribute. Tax-

payer then advanced the money to pay the taxes

and took mortgages on the corporation’s property

to secure the amounts advanced. (R. 18-19.)

On January 24, 1940, the taxpayer filed a suit

to foreclose the mortgages and on February 5,

1940, a decree pro confesso was entered against

the corporation. On the same day the Austin

estate and heirs petitioned for, and on February

19, 1940, were granted, leave to intervene, and

the decree was vacated. Among other things, the

Austin estate alleged in its answer that the tax-

payer had been guilty of fraud and that the

mortgages were not valid. It requested that an

4

accounting be had and that a receiver be appointed

to manage and control the corporate affairs for

the purposes of liquidating the assets of the

corporation, paying its indebtedness, and protect-

ing the interests of stockholders. (R. 19.)

Thereafter, negotiations for settlement of the

litigation were entered into by taxpayer and the

Austin estate, and on March 27, 1940, they signed

an agreement settling the issues. The agreement |

provided for sale of some lands to raise funds

to pay expenses of the litigation and the amount

advanced by taxpayer for payment of taxes; re-

cited that it was desirable to effect a fair division

of the remaining lands of the corporation among

the stockholders; and that the parties would at-

tempt to arrive at an agreed plan for a fair

division beforé™ settlement day. As originally

drafted the agreement provided for complete

liquidation of the corporation, but representatives

of the Austin estate redrafted it, inserting a pro-

vision that the corporation should not be liqui-

dated completely or dissolved; that the lands allo-

cated to the Austin estate should not be trans-

ferred to it, except as it requested; but that this

did not qualify or limit the right of taxpayer to

have distributed the lands allocated to her upon

surrender to the corporation of the stock held by

her. (R. 19-20.)

The taxpayer at first refused to sign the agree-

ment as redrafted, because she understood that

there was to be a complete dissolution of the cor-

—

5

poration. Upon being assured by attorneys and

an income tax advisor that the retention of the

corporation by the Austin estate would not affect

her legal or income tax status, she executed the

agreement. (R. 20-21.)

The corporation was not a party to the nego-

tiations between the taxpayer and the Austin

estate for the division of its lands. The settle-

ment was made by the stockholders as a division

of the property to which the corporation held

title and as a settlement of the foreclosure suit.

On April 3, 1940, the foreclosure suit was dis-

missed by court order pursuant to stipulation.

(R. 21.)

At a meeting of the board of directors of the

corporation on April 4, 1940, resolutions con-

firming the settlement were adopted. The min-

utes set out an involved accounting, the effect of

which was that taxpayer and the Austin estate

each received $12,951.69 in cash or property; the

attorneys and auditors received $12,201.62; tax-

payer was reimbursed for advances aggregating

$22,181.27; and she received one-half of the re-

maining lands of the corporation, having a value

of $87,802. The Austin estate became entitled to

receive the other half of the lands having approxi-

mately the same value. The title to the lands not

transferred to taxpayer remained in the corpora-

tion. (R. 21-22.) ;

A resolution adopted at the meeting provided

for the issuance to taxpayer of a warranty deed

6

to such lands of the corporation as she should

direct, provided she delivered to the corporation

a written statement from the Austin estate agree-

ing that the lands so demanded were a fair divi-

sion of the corporation’s lands. It was resolved

that upon issuance of the deed taxpayer should

surrender to the treasury of the corporation for

cancellation the 121% shares of stock held by her,

and the consideration for issuance of the deed

was in exchange for the surrender and cancella-

tion of the stock held by taxpayer. It was further

resolved that the cash amounts of $12,974.80 paid

to taxpayer and to the Austin estate were deter-

mined to be a return of capital investment and

in no sense to be considered a dividend out of

profits. Finally it was resolved that the money

payments and the issuance of the deed were de-

termined to have been made for the purpose of

liquidating and dividing the assets of the corpora-

tion. (R. 22-24.) 5

Taxpayer received a deed from the corporation

for the portion of the property she was to receive

under the agreement with the Austin estate and

surrendered her 1214 shares of stock to the cor-

poration. (R. 24.)

In her income tax return for 1940 the taxpayer

reported the gain on receipt of the property trans-

ferred to her as a long-term capital gain, 50 per-

cent of which was taken into account in computing

her net income. The Commissioner determined

7

that the gain resulted from a distribution in par-

tial liquidation of the corporation, and that it was

to be treated as a short-term capital gain, ail of

which was to be taken into account in computing

net income. (R. 24-25.)

The Tax Court affirmed the Commissioner’s

determination (R. 25-28), four judges disssenting

(R. 28-29).

The Cireuit Court of Appeals affirmed the deci-

sion of the Tax Court, one judge dissenting (R.

39-42).

ARGUMENT

The judgment below is correct and is not in con-

flict with any decision. No other sufficient reason

for issuing a writ of certiorari has been suggested

by the taxpayer.

(1) The Tax Court’s findings show that in 1940

the corporation distributed to the taxpayer certain

of its lands in exchange for one-half of its entire

stock which the taxpayer surrendered for cancel-

lation. The remainder of the corporation’s lands

was not distributed and the one-half of the cor-

poration’s stock owned by the Austin estate was

not surrendered for cancellation but continued to

be held by the estate. (R. 22-24.) The distri-

bution to the taxpayer by the corporation was one

made ‘‘in complete cancellation or redemption of

a part of its stock’’; it thus fits exactly within the

first part of the definition of ‘‘amounts distrib-

uted in partial liquidation’”’ in Section 115 (i) of

784875—47——_-2

8

the Internal Revenue Code (Appendix, infra)’ and

also within Section 19.115-5 (c) of Treasury Reg-

ulations 103 (Appendix, infra), which provides

that a complete cancellation of a part of the cor-

porate stock may be accomplished, inter alia, by

the complete retirement of any part of the stock,

whether or not pro rata among the stockholders.

The court below therefore correctly decided that

the distribution to the taxpayer was one in partial

liquidation within the meaning of Section 115 (i).

Even if it were reasonable to infer from the Tax

Court’s findings, which it is not, that the distribu-

tion was intended to be in effect a complete liqui-

dation as taxpayer contends (Pet. 18-16) rather

than a partial liquidation, the lower court would

not have been warranted in concluding that Sec-

tion 115 (i) did not apply. The controlling fact

is that the corporation did not cancel all of its

stock but only a part of it. The settled construc-

tion of the first definition in Section 115 (i) is

that it is complete in itself for tax purposes, that

no limitations or additional criteria are to be sup-

plied, and that it applies to corporate distribu-

tions falling precisely within its terms, even though

there was no intent, as such, partly to liquidate

the corporation. See Stern v. H arrison, 152 F. 2d

1 The second part of the statutory definition is not involved

here, since, as the Tax Court pointed out (R. 25), no previ-

ous or subsequent distributions in cancellation of stock

appear to have been made, and hence the distribution to the

taxpayer was not one of a series of distributions.

321 (C. C. A. 7th), certiorari denied, 327 U. 8S.

807; Yankey v. Commissioner, 151 F. 2d 650

(C. C. A. 10th) ; Citizens & Southern Nat. Bank

v. Commissioner, 136 F. 2d 406 (C. C. A. 5th);

Dodd v. Commissioner, 131 F. 24 382 (C. C. A. 5th) ;

Malone v. Commissioner, 128 F. 2d 967 (C. C. A.

5th) ; Hill v. Commissioner, 126 F. 2d 570 (C.C. A.

5th) ; Alpers v. Commissioner, 126 F.2d 58 (C. C. A.

2d); Amelia H. Cohen Trust v. Commissioner, 121

F. 2d 689 (C. C. A. 3d); Hammans v. Commis-

sioner, 121 F. 2d 4 (C. C. A. 2d) ; Commissioner v.

Quackenbos, 78 F, 2d 156 (C. C. A. 2d); Mittel-

man Vv. Commissioner, 5 T. C. 932, 939-940; All-

port v. Commissioner, 4 T. C. 401, 403, dismissed

and affirmed January 29, 1946 (C. C. A. 7th);

Irvine v. Commissioner, 46 B. T. A. 246; Britt v.

Commissioner, 40 B. T. A. 790, 795-796, affirmed

on other grounds, 114 F. 2d 10 (C. C. A. 4th) ; Salt

Lake Hardware Co. v. Commissioner, 27 B. T. A.

482. See, also, 1 Mertens, Law of Federal Income

Taxation, Section 9.83.2 Cf. Thornton v. Commis-

sioner, decided January 31, 1947 (C. C. A. 7th)

(1947 P-H, par, 72,357).

* Beretta v. Commissioner, 141 F. 2d 452 (C. C. A. 5th),

certiorari denied, 323 U. S, 720, contains language suggesting

that an intention to liquidate corporate business is required

to make a distribution one in partial liquidation within the

meaning of the first definition in Section 115 (i). This view

is not consistent with other decisions of the same court, cited

above. The Beretta opinion cited Bynum v. Commissioner,

113 F.2d 1 (C.C. A. 5th), as support for the view there taken,

but the Bynum Case was not apposite, since it was not con-

cerned with the first definition of partial liquidation in Sec-

10

As indicated, the taxpayer argues (Pet. 13-16)

that the transaction should be treated as a com-

plete liquidation on the basis of what she con-

ceives the intention of the parties to have been.

The meaning of the term “complete liquidation,”’

for purposes of taxing the gain on a distribution

in complete liquidation, is defined in Section 115

(c) (Appendix, infra), and the procedure fol-

lowed here does not fall within that definition.

Moreover, the Tax Court found (R. 27) that the

stockholders did not intend to effect a complete

liquidation of the corporation and the record fully

supports that determination. The Austin estate

expressly refused to liquidate the corporation and

distribute all its assets. Instead, it redrafted the

contract, which taxpayer signed, to provide for

only a partial distribution of assets in cancella-

tion of part of the stock. (R. 20.) The final

agreement reflects the stockholders’ intention.

The decision of the court below does not deny that

the purpose of the stockholders was to divide com-

pletely the corporate assets; it merely declares

that the method employed to achieve the purpose

tion 115 (i), but solely with the second definition, in

connection with which an intention to liquidate may be

pertinent to show that a particular distribution is one of a

series in complete cancellation of all the stock. The Beretta

case, however, correctly decided that there was no partial

liquidation in that case, as first defined in Section 115 (i),

because there was not a complete cancellation of any part

of the stock, but only a reduction in par value of all of the

stock.

ll

conformed to the statutory definition of a par-

tial liquidation, rather than that of a complete

liquidation.

There is, likewise, no basis for the view that

the substance of the transaction was different

from its form (Pet. 16-20). None of the

eases cited by taxpayer (Pet. 17) are apposite to

the facts here. In this case the form selected

fully carried out the purposes of the taxpayer and

the Austin estate as reflected in their agreement

and in the resolutions adopted by the corporation.

The fact that the taxpayer, alone of the two

stockholders, would have preferred to divide the

corporation’s assets through the mechanics of a

complete liquidation does not demonstrate that

the partial liquidation agreed upon amounted in

substance to a complete liquidation. Also, since

the corporation and its stockholders elected to

complete the transaction as a partial liquidation,

they are bound to accept the tax consequences of

the plan. See Higgins v. Smith, 308 U. S. 473,

477-478; Commissioner v. Moline Properties, 131

F, 2d 388, 389 (C. C. A. 5th), affirmed, 319 U. S.

436.

(2) Since the distribution to the taxpayer was

an amount distributed in partial liquidation as

defined in Section 115 (i), it is, as the lower

court held, subject to be taxed as provided in

Section 115 (c). That is, the lands received by

taxpayer are to be treated as received in exchange

for the stock surrendered, and the gain thereon

12

to the extent recognized * is to be considered as a

short-term capita] gain (defined in Section 117

(a) (2) (Appendix, infra)) with the result that

all of it is to be included in gross income under

Section 117 (b) (Appendix, infra). All of the

cases have constrhed the language of Section 115

(ce) as conclusive that the gain on any distribu-

tion in partial liquidation, made prior to 1942, is

taxable in its entirety. See, also, Section 19.115-5

(c) of Treasury Regulations 103 (Appendix, infra).

The taxpayer’s assertion (Pet. 11-13) that this

provision of Section 115 (c) was intended to

apply, not to bong fide cancellations of stock, but

solely to distribytions of earnings disguised as

liquidating distributions, was properly rejected by

the lower court.’ Section 115 (g), rather than

Section 115 (c), is the section which is concerned

specifically with distributions of earnings in can-

’There is no dispute as to the computation of the gain

under Section 111 or that all of it is to be recognized uncer

Section 112 (a). The taxpayer's agreed basis for the stock

was $2,750 (R. 18) and the fair market value of the lands

received was $87,802 (R. 22). Her gain was thus $85,052.

* Stern v. Harrison, 152 F. 2d 321 (C. C. A. 7th), certiorari

denied, 327 U. S. 807; Yankey v. Commissioner, 151 F. 2d 650

(C. C. A. 10th); Malone v. Commissioner, 128 F. 2d 967

(C. C. A. 5th) ; Hilly, Commissioner, 126 F. 2d 570 (C. C. A.

bth); Amelia H. Cohen Trust v. Commissioner, 121 F. 2d

689 (C. C. A. 3d); Hammans v. Commissioner, 121 F. 2d 4

(C. C. A. 2d).

® Thornton v. Commissioner, decided January 31, 1947

(C. C. A. 7th) (1947 P-H 4 72,357) contains language which

would appear to afford some basis for this assertion. Ex-

amination of the opinion indicates that the statement is dic-

tum and that the derision is based on a strict construction of

the language of the statute.

—

13

cellation of stock, which are essentially equivalent

to a taxable dividend. The contention, moreover,

is contrary to the unambiguous language of Sec-

tion 115 (c), to the regulation, to express rulings

in Stern v. Harrison, supra, and Hammans v.

Commissioner, supra, to the reasoning of the other

decisions cited in footnote 4, supra, and to state-

ments in H. Rep. No. 2333, 77th Cong., 2d Sess.,

pp. 49, 93 (1942-2 Cum. Bull. 372, 412, 442-443)

and S. Rep. No. 1631, 77th Cong., 2d Sess., p. 116

(1942-2 Cum. Bull. 504, 591), which explain the

non-retroactive repeal of Section 115 (c) by Sec-

tion 147 of the Revenue Act of 1942, ce. 619, 56

Stat. 798, as designed to correct inequities, point-

ing out that under ‘‘existing law’’ gains on dis-

tributions in partial liquidation were taxed as

short-term capital gains, irrespective of the period

the stock was actually held.*

Finally, equitable considerations (see Pet. 10-

11, 16) would not have justified a construction

of the statutory provisions controlling the taxa-

tion of the distribution which was directly op-

posed to, or inconsistent with, the plain meaning

of the language used. Deputy v. du Pont, 308

® The effect of the 1942 change is that gains on distribu-

tions in partial liquidation made in 1942 and subsequent years

are treated as are other capital gains. The amount of the gain

which is taxable is determined by the period the surrendered

stock has been held. Thus, a gain is included in income in

its entirety only if the cancelled or redeemed stock has

actually been held for the period to qualify it as a short-term

capital asset as defined in the Internal Revenue Code.

14

U. 8. 488, 498; United States v. Emory, 314 U.S.

423, 430-431." This is particularly true where, as

here, Congress itself has declined to change the

method of taxing distributions in partial liquida-

tion, except for 1942 and subsequent years, despite

the recognized inequities in existing law.

CONCLUSION

The petition for a writ of certiorari should be

denied.

Respectfully submitted.

GerorGcE T. WASHINGTON,

Acting Solicitor General.

SEWALL Key,

Acting Assistant Attorney General.

HELEN R. Carvoss,

HELEN GOooDNER,

Special Assistants to the Attorney General.

Marcu, 1947.

t Stone v. White, 301 U. S. 532, cited by the taxpayer (Pet.

10), was concerned with the equitable right of set-off in a

suit to recover an erroneously paid tax, a wholly different

question from that here.

a OL I = Se oe | ee a a:

APPENDIX

Internal Revenue Code:

Sec. 115. DistrrBuTIONS BY CORPORATIONS.

% * * * *

(ec) Distributions in Liquidation.—

Amounts distributed in complete liquida-

tion of a corporation shall be treated as in

full payment in exchange for the stock, and

amounts distributed in partial liquidation

of a corporation shall be treated as in part

‘or full payment in exchange for the stock.

The gain or loss to the distributee result-

ing from such exchange shall be determined

under section 111, but shall be recognized

only to the extent provided in section 112.

Despite the provisions of section 117, the

gain so recognized shall be considered as a

short-term capital gain, except in the case

of amounts distributed in complete liquida-

tion. For the purpose of the preceding

sentence, ‘‘complete liquidation’’ includes

any one of a series of distributions made by

a corporation in complete cancellation or

redemption of all of its stock in accordance

with a bona fide plan of liquidation and

under which the transfer of the property

under the liquidation is to be completed

within a time specified in the plan, not ex-

ceeding, from the close of the taxable year

during which is made the first of the series

of distributions under the plan, (1) three

years, if the first of such series of distribu-

tions is made in a taxable year beginning

after December 31, 1937, or (2) two years,

(15)

16

if the first of such series of distributions

was made in a taxable year beginning be-

fore January ‘1, 1938. In the case of

amounts distributed (whether before Janu-

uary 1, 1939, or on or after such date) in

partial liquidation (other than a distribu-

tion to which the provisions of subsection

(h) of this section are applicable) the part

of such distribution which is properly

chargeable to capital account shall not be

considered a distribution of earnings or

pom,” * *

* * * * *

(i) Definition of Partial Liquidation —

As used in this section the term ‘“‘amounts

distributed in partial liquidation’’ means a

distribution by a corporation in complete

cancellation or redemption of a part of its

stock, or one of a series of distributions in

compiete cancellation or redemption of all

or a portion of its stock.

= * * * ~~

(26 U. S. C. 115.)

Src. 117. CAPITAL GAINS AND LOSSES.

(a) Definitions—As used in _ this

chapter—

* * * * *

(2) Short-term Capital Gain.—The term

‘‘short-term capital gain’’ means gain from

the sale or exchange of a capital asset held

for not more than 18 months, if and to the

extent such gain is taken into account in

computing net income;

* * * * *

(b) Percentage Taken into Account.—In

the case of a taxpayer, other than a cor-

poration, only the following percentages of

the gain or loss recognized upon the sale or

SE iid

gp Nm rage —

é

}

,

"i er a

ea ly,

ETB Rn,

dian * antec ain -teeakoe _aeenee

17

exchange of a capital asset shall be taken

into account in computing net income:

100 per centum if the capital asset has

been held for not more than 18 months;

6674 per centum if the capital asset has

been held for more than 18 months but

not for more than 24 months;

50 per centum if the capital assets has

been held for more than 24 months.

* * * * *

(26 U. 8. C. 117.)

Treasury Regulations 103, promulgated under

the Internal Revenue Code:

Sec. 19.115-5. Distributions in liquida-

tion.—

(a) General—Amounts distributed in

complete liquidation of a corporation are to

be treated as in full payment in exchange

for the stock, and amounts distributed in

partial liquidation are to be treated as in

part or full payment in exchange for the

stock so cancelled or redeemed. The gain

or loss to a shareholder from a distribution

in liquidation is to be determined, as pro-

vided in section 111 and section 19.111-1,

by comparing the amount of the distribu-

tion with the cost or other basis of the stock

provided in section 113; but the gain or loss

will be recognized only to the extent pro-

vided in section 112.

~ * * * *

(c) Partial liquidation—In the case of

amounts distributed in partial liquidation

of a corporation, the amount of the loss

recognized is subject to the limitations con-

tained in section 117 but the entire amount

of the gain recognized shal] be considered as

a short-term capital gain despite the provi-

18

sions of section 117.* The term ‘‘amounts

distributed in partial liquidation” means a

distribution by a corporation in complete

cancellation or redemption of a part of its

stock, or one of a series of distributions in

complete cancellation or redemption of all

or a portion of its stock. A complete can-

cellation or redemption of a part of the cor-

porate stock may be accomplished, for ex-

ample, by the complete retirement of all the

shares of a particular preference or series,

or by taking up all the old shares of a par-

ticular preference or series and issuing new

shares to replace a portion thereof, or by

the complete retirement of any part of the

stock, whether or not pro rata among the

shareholders.

* * * * *

*This sentence was amended by T. D. 5230, 1943 Cum.

Bull. 299, 308, to conform it to the provisions of the Revenue

Act of 1942, but the amendment does not affect the year

involved in this case.

U. S. GOVERNMENT PRINTING OFFICE: 1947