U.S. Supreme Court
MANHATTAN GENERAL EQUIPMENT CO. v.
COMMISSIONER OF INTERNAL, 297 U.S. 129 (1936)
297 U.S. 129
MANHATTAN GENERAL EQUIPMENT CO.
v.
COMMISSIONER OF INTERNAL REVENUE. *
COLLIER SERVICE CORPORATION
v.
SAME.
Nos. 226, 227.
Argued Jan. 8, 1936.
Decided Feb. 3, 1936.
* Rehearing denied 297
U.S. 728 , 56 S.Ct. 587.
[297 U.S. 129, 130] Mr. Laurence Graves, of Washington, D.C., for petitioners.
The
Attorney General and Mr. Golden W. Bell, Asst. Sol. Gen., of Washington, D.C.,
for respondent.
Mr. Justice SUTHERLAND delivered the
opinion of the Court.
These cases involve identical facts
and questions of law, and were disposed of by the court below in one opinion.
76 F.(2d) 892. The facts, so far as they concern the
question here, are taken from the statement of that court:
'The
petitioners are affiliates of United Brokerage Company. That corporation filed
income tax returns for itself and its affiliates for
1925 and 1926, and the petitioners seek to review tax deficiencies attributed
to them by the Commissioner, which the Board of Tax Appeals has affirmed. ...
'On
June 30, 1925, the United Brokerage Company purchased for $3,41 , 345.63 in
cash all the capital stock of Artemas Ward, Inc. (a
New York corporation), that was [297 U.S. 129, 131] issued and outstanding consisting of
4,964 shares of no par value. ...
'On
December 31, 1925, pursuant to a plan of reorganization, Artemas
Ward, Inc. (N.Y.) transferred to Artemas Ward, Inc.
(a Delaware corporation), in exchange for 100 shares of stock of the latter
company of no par value, all its assets, then of a net book value of
$1,246,920.07, with the exception of cash and accounts receivable aggregating
$284,967.21- that is to say, the New York corporation transferred to the
Delaware corporation assets of the value of $961,952.86. Immediately after the
transfer, and on December 31, 1925, Artemas Ward,
Inc. (N.Y.) distributed to United Brokerage Company the 100 shares of stock of Artemas Ward, Inc. ( Del.) and
accounts receivable amounting to $234,967.21. In December, 1926, United
Brokerage sold the entire 4,964 shares of Artemas
Ward, Inc. (N.Y.) for $49,640. That stock had cost the United Brokerage
$3,414,345.63 and the total must be apportioned between the 100 shares of the
Delaware corporation (which it still owns) and the
4,964 shares of Artemas Ward, Inc. (N.Y.) in order to
determine the loss suffered by the United Brokerage Company through its sale of
the 4,964 shares at $49,640. ...
'Upon
the reorganization, the New York corporation had left among its assets, valued
at $1,246,920.07, accounts receivable and cash aggregating $ 284,967.21, or
approximately 22.85% thereof, after $961,952.86 had been transferred to the
Delaware Company. Under Art. 1599(2) (as amended,
infra) the portion of $3,414,345.63 paid by the United Brokerage Company for
the stock of Artemas Ward, Inc. (N.Y.) represented by
that stock after the reorganization was $780,303.97. If from this be deducted
$234,967.21 accounts receivable and the $49,640 realized from the sale in
December, 1926, there [297 U.S. 129, 132] would be a loss of $495,696.76. This
loss the Commissioner allowed in assessing the income tax for 1925. The second
point raised on this appeal is whether the loss, for the year 1926, to which
the United Brokerage Company and its affiliates were entitled was only the sum
of $495,696.76 or was the sum of $2,167,785.56 which would arise through
deducting from $ 3,414,345.63 (the cost of the stock of the New York company)
the value at the time of the reorganization of the Delaware stock which was
$961,952.86 and $234,967.21 realized from accounts receivable and $49,640
realized from sale of the 4,964 shares.'
It thus appears, the New York
company having parted with all its assets except $50,000 in cash, that the
assets behind the 4,964 shares when the 100-share distribution was made consisted
of only that sum, while the 100 shares of the Delaware company stock were
represented by the transferred assets of the New York company of the value of
$961,952.86. The sale of the 4,964 shares brought $49,640; and the simple
question to be determined is, What method for the purposes of taxation should
be employed to determine the loss in respect of the 4,964 shares under the
Revenue Act of 1926, 204(a)(9), c. 27, 44 Stat. 9, 14, 15 (26 U.S.C.A. 113
note)? That section provides that the basis for determining the gain or loss
from such sale shall be the cost of the property, except that,
'(9)
If the property consists of stock or securities distributed after December 31,
1923, to a taxpayer in connection with a transaction described in subdivision
(c) of section 203,1 the basis in the case of the
stock in [297 U.S. 129, 133] respect
of which the distribution was made shall be apportioned, under rules and
regulations prescribed by the Commissioner with the approval of the Secretary,
between such stock and the stock or securities distributed.'
At the time of the reorganization,
article 1599 of Treasury Regulations 69, which had been promulgated on August
28, 1926, was in force. Petitioners invoke subdivision 2 of that regulation
which provided:
'Where
the stock distributed in reorganization is in whole or in part of a character
or preference materially different from the stock in respect of which the
distribution is made, the cost or other basis of the old shares of stock shall
be divided between such old stock and the new stock in proportion, as nearly as
may be, to the respective values of each class of stock, old and new, at the
time the new shares of stock are distributed, and the basis of each share of
stock will be the quotient of the cost or other basis of the class with which
such share belongs, divided by the number of shares in the class. The portion
of the cost or other basis of the old shares of stock to be attributed to the
shares of new stock shall in no case exceed the fair market value of such
shares as of the time of their distribution.' (Italics added.)
April 3, 1928, this regulation was
amended by striking from it the italicized portion. The taxpayer contended that
its loss should be computed in accordance with the original regulation. This
would have resulted in an allocation to the 4,964 shares of the New York corporation of $2,452,392.77, and, after making certain
deductions, the allowable loss, as already appears, would have been something
over $2,000,000. The Commissioner, however, proceeding in strict accordance
with the amended regulation, determined the amount of loss to be $495,696.76.
Without pursuing the matter in further detail, it is enough to say that the
case turns entirely upon the ques- [297 U.S. 129, 134] tion whether
the loss was to be determined in accordance with the original or the amended
regulation. If in accordance with the former, the taxpayer is right; if in
accordance with the latter, the Commissioner is right. The court below held
that the amended and not the original regulation furnished the applicable rule,
and affirmed the determination of the Board of Tax Appeals, which in turn had
sustained the Commissioner. We agree with that view.
In determining a loss, the statute
requires that the basis shall be 'apportioned' between the old and the new
stock. To apportion is to 'divide and assign in just proportion,' 'to
distribute among two or more a just part or share to each,' Fisher v. Charter
Oak Life Ins. Co., 14 Abb.N. C.(N.Y.)
32, 36, albeit, a division may be just without necessarily being also an
exactly equal division. The result of applying the original regulation here is
to bring about an inequitable apportionment, contrary to the intent of the
statute, and to credit the taxpayer with a loss essentially and greatly
disproportionate. On the other hand, application of the amended regulation
effectuates the legislative intent that the basis of apportionment between the
old and the new stock shall result in a fair and jut division.
The power of an administrative
officer or board to administer a federal statute and to prescribe rules and
regulations to that end is not the power to make law, for no such power can be
delegated by Congress, but the power to adopt regulations to carry into effect
the will of Congress as expressed by the statute. A regulation which does not
do this, but operates to create a rule out of harmony with the statute, is a
mere nullity. Lynch v. Tilden Produce Co., 265
U.S. 315 , 320-322, 44 S.Ct. 488; Miller v.
United States, 294
U.S. 435, 439 , 440 S., 55 S.Ct. 440, and cases
cited. And not only must a regulation, in order to be valid, be consistent with
the statute, but it must be reasonable. [297 U.S. 129, 135] International
R. Co. v. Davidson, 257
U.S. 506, 514 , 42 S.Ct.
179, 66 L.Ed . 41. The original regulation as applied
to a situation like that under review is both inconsistent with the statute and
unreasonable.
The contention that the new
regulation is retroactive is without merit. Since the original regulation could
not be applied, the amended regulation in effect became the primary and
controlling rule in respect of the situation presented. It pointed the way, for
the first time, for correctly applying the antecedent statute to a situation which
arose under the statute. See Titsworth v.
Commissioner of Int. Rev. (C.C.A.) 73 F.(2d) 385, 386.
The statute defines the rights of the taxpayer and fixes a standard by which
such rights are to be measured. The regulation constitutes only a step in the administrative
process. It does not, and could not, alter the statute. It is no more
retroactive in its operation than is a judicial determination construing and
applying a statute to a case in hand.
Judgment affirmed.
Footnotes
[ Footnote 1 ] Sec. 203(c), 44 Stat. 13 (26 U.S.C.A. 112 note) provides:
'If there is distributed, in pursuance of a plan of reorganization, to a shareholder
in a corporation a party to the reorganization, stock or securities in such
corporation or n another corporation a party to the reorganization, without the
surrender by such shareholder of stock or securities in such a corporation, no
gain to the distributee from the receipt of such
stock or securities shall be recognized.'