Burghart v. Commissioner

*340 Respondent determined a deficiency of $1,777.79 in petitioners' income tax for the year 1938. A portion of the deficiency, $145.45, is not in dispute. Petitioners contend with respect to the balance of the deficiency that respondent erred in including income received by them in complete liquidation of the Bates & Rogers Construction Co. at the 50 percent basis set by section 117 of the*1132 Revenue Act of 1938 rather than at the 30 percent basis fixed by section 117(a) of the Revenue Act of 1936.

FINDINGS OF FACT.

The facts were stipulated and we hereby adopt the stipulation as our findings of fact. In so far as they are pertinent they may be summarized as follows:

Petitioners are husband and wife. They resided together during 1938 and filed a joint income tax return for the calendar year 1938 with the collector of internal revenue for the first district of Illinois at Chicago, Illinois.

In various years prior to June 29, 1927, petitioners acquired, at a cost of $89,951.23, 765 1/2 shares of capital stock of the Bates & Rogers Construction Co., a corporation. In 1937 the company formulated a plan of complete liquidation, to be completed by final distribution on or before two years from December 31, 1937. Pursuant to that plan the following amounts were distributed on the dates shown to each shareholder in complete liquidation of each share of stock of the corporation:

*1133 Petitioners received in complete liquidation of their 765 1/2 shares a total of $126,283.17 of which $87,450.72 was received in 1937 and $38,832.45 was received in 1938.

In their joint return for 1938 petitioners reported, as net long term gain from sale or exchange of capital assets, income of $10,899.58, representing 30 percent of the total gain received.

In the notice of deficiency respondent increased petitioners' income by an additional net long term gain of $7,266.39 in respect of gain realized upon liquidation of the 765 1/2 shares. The additional assessment was based upon inclusion of 50 percent of the total gain pursuant to section 117(b) of the Revenue Act of 1938.

*341 OPINION.

VAN FOSSAN: The sole question for decision is whether the gains received during 1938 by petitioners on liquidation of the Bates & Rogers Construction Co. are to be taxed under the 1936 Act or under the 1938 Act. Petitioners contend that the 1936 Act governs and that under section 117(a) of that act ¹ 30 percent of the liquidation gain of $36,331.94 should be included in computing petitioners' net income. Respondent determined that the 1938 Act should govern and in accordance*1134 with section 117(b) of that act ² included 50 percent of the gain.

*1135 Petitioners first argue that the legislative history of section 115(c) of the Revenue Act of 1936, ³ which deals with distributions made in complete liquidation of a corporation, shows an intent that the 1936 Act should govern all distributions under a plan of complete liquidation if the first distribution was made under the 1936 Act. We have searched the legislative history and are unable to find any such intent manifested. The report of the House Ways and Means Committee states that the change from recognition under the 1934 Act of the entire gain on liquidation to recognition on a percentage basis was *342 made to encourage liquidations. There is nothing to indicate an intention on the part of the legislators that the 1936 Act should apply to all liquidations begun under it. Nor do we believe that such an interpretation would be reasonable.

*1136 Petitioners argue further that a reasonable interpretation of section 115(c) of the Revenue Act of 1938 ⁴ makes the 1936 Act govern distributions made pursuant to a plan of liquidation promulgated prior to the effective date of the 1938 Act. That argument must be rejected. The portion of section 115(c) of the 1938 Act which draws a distinction between liquidations begun before January 1, 1938, and those begun after December 31, 1937, as regards the length of time within which distribution and liquidation must be completed, was added by amendment on the floor of the Senate. The explanation given does not indicate an intent that the 1936 Act should apply throughout the liguidations commenced under it.

*1137 Not only did Congress fail to indicate an intent that the provisions of the 1936 Act should apply, but it was within the power of Congress to apply the increased percentage of gain on distributions made during 1938. It is well established that a taxpayer has no vested right in existing rates of taxation. As we pointed out in :

* * * That case [ and , indicate that taxpayers must be deemed to be forewarned of the possibility of changes in rates, classifications, deductions, and credits in the income tax laws. * * *

See also .

The gains received by petitioners by reason of distributions made during 1938 were taxable under the 1938 Act and respondent properly included 50 percent of such gains in determining petitioners' net income.

Decision will be entered for the respondent.