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COMMISSIONER V. PHIPPS, 336 U. S. 410 (1949)

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U.S. Supreme Court

Commissioner v. Phipps, 336 U.S. 410 (1949)

Commissioner v. Phipps

No. 83

Argued December 10, 1948

Decided March 14, 1949

336 U.S. 410


In 1936, a parent corporation made a tax free liquidation of five of its wholly owned subsidiaries by distributing to itself all of their assets, subject to their liabilities, and redeeming and cancelling all of their stock. At that time, one subsidiary had earnings and profits of $90,362 accumulated since February 28, 1913, and the other four had deficits aggregating $3,147,803. Not counting the earnings or deficits of its subsidiaries, the parent had at the end of that year earnings and profits of $2,129,957 accumulated after February 28, 1913. In 1937, it had earnings of $390,387. During 1937, the parent made a pro rata cash distribution of $802,284 to its preferred stockholders.

Held: this distribution in its entirety was a dividend under § 115 of the Revenue Act of 1936, and constituted ordinary income. Pp. 336 U. S. 411-421.

1. The rule of Commissioner v. Sansome, 60 F.2d 931, is grounded not on a theory of continuity of the corporate enterprise, but on the necessity to prevent escape of earnings and profits from taxation. Pp. 336 U. S. 414-417.

2. Harter v. Helvering, 79 F.2d 12, distinguished. Pp. 336 U. S. 417-418.

3. Under the Sansome rule, explicitly ratified by Congress, tax-free reorganizations do not disturb the status of earnings and profits otherwise available for distribution. Pp. 336 U. S. 418-421.

4. In this case, to allow deduction of the subsidiaries' deficits from the parent's earnings would, in effect, recognize losses the tax effects of which Congress has explicitly provided should be deferred. P. 336 U. S. 421.

167 F.2d 117, reversed.

The Tax Court held that part of a cash distribution to stockholders by a parent corporation which had absorbed five subsidiaries in a tax free liquidation was not a dividend taxable as income under § 115 of the Revenue Act of 1936, because the accumulated earnings and profits of the parent corporation, plus those of one of the subsidiaries, chanroblesvirtualawlibrary

Page 336 U. S. 411

were erased by the aggregate deficits of the other four subsidiaries. 8 T.C.190. The Court of Appeals affirmed. 167 F.2d 117. This Court granted certiorari. 335 U.S. 807. Reversed, p. 336 U. S. 421.

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