*1140 Petitioner's sole indirect stockholder being an insolvent bank the real estate holdings of which were carried in petitioner's name, and liquidation of petitioner's assets under supervision of the state superintendent of banks being for the benefit of the bank's depositors, held, petitioner is exempt from tax to the same extent as the bank. Act of Congress of March 1, 1879, sec. 22 (20 Stat. 351); Revenue Act of 1938, sec. 818.
*811 This proceeding was brought for a redetermination of deficiencies in petitioner's income tax in the sums of $892.90 and $1,644.17 for the years 1934 and 1935, respectively.
By amended answer to the amended petition, respondent alleges that petitioner is subject to excess profits tax and asserts deficiencies in excess profits tax in the sums of $262.19 and $494.79 for the years 1934 and 1935, respectively.
The only question involved is whether petitioner, whose sole stockholder is the principal solely owned subsidiary of an insolvent bank exempt from tax under section 22 of*1141 the Act of Congress of March 1, 1879 (20 Stat. 351), should also be included in the exemption.
FINDINGS OF FACT.
Those facts contained in the agreed statement of facts filed by the parties are hereby found accordingly. Facts which are not part of the stipulation, appearing in the following statement, are found from the record made at the hearing:
Petitioner was incorporated under Ohio law on October 5, 1929, its original capital of $500 being paid in by The New England Co., hereinafter referred to as "New England." In January 1930 New England paid into petitioner an additional sum of $49,500, giving petitioner a capital of $500 and a paid-in surplus of $49,500. No additional capital or surplus has ever been paid to petitioner. From the date of its incorporation until April 23, 1934, all of petitioner's capital stock was owned by New England.
New England was incorporated under the laws of Ohio on March 19, 1900. All of its capital at that time was paid in by The Guardian Trust Co., a banking corporation organized and existing under the laws of Ohio, hereinafter referred to as "Guardian" or "the bank." @ All of the capital subsequently flowing into New England was paid*1142 in *812 by Guardian, and all of its capital stock has at all times been owned by Guardian. At all times here material New England was the principal subsidiary of Guardian, owning the majority of Guardian's other subsidiaries.
Petitioner was incorporated in order to handle the large volume of foreclosures on real estate held by the bank as security which became necessary in 1929. Prior to then the bank had handled but little real estate. It was contemplated that petitioner's activities in this real estate would yield a possible profit. Petitioner's incorporation was also to cover up any brokerage activities in order that the realtors would not feel that the bank was competing with them. Petitioner was to take and hold title to parcels or real estate which had belonged to Guardian in order to maintain Guardian's well-being and sound financial structure; to operate, manage, and sell all of such properties at the request of Guardian; to operate, manage, and sell real estate of Guardian carried by Guardian in its "Real estate owned" account and real estate to which Guardian held title as trustee; to act as a real estate broker and dealer in handling real estate of Guardian*1143 or real estate taken over from Guardian, a function which Guardian could not perform under the law. Since its inception, petitioner has been the exclusive agent for the management and sale of all real estate owned by Guardian.
Petitioner's purpose clause reads as follows:
To acquire by purchase, lease of otherwise and to hold, control, manage, operate, sell, lease, mortgage, hypothecate, lend upon as security and otherwise deal with real and personal property and interests therein, either for itself or on behalf of others.
Guardian carried on a banking and trust business until June 15, 1933, at which time it was taken over for liquidation by the Superintendent of Banks for the State of Ohio by reason of its insolvency and its inability to pay its depositors in full.
On April 23, 1934, the Superintendent of Banks of Ohio, in charge of the liquidation of Guardian, acquired the entire capital stock of petitioner by purchasing it at public auction, it having been pledged by New England to Guardian as collateral to secure the payment of indebtedness of New England to Guardian.
Prior to the liquidation of Guardian its officers or their nominees constituted all the officers*1144 of petitioner. The officers of the bank had and exercised complete control over all of petitioner's activities, including its personnel who were given the same rights as employees of the bank to participate in the bank's pension fund and group insurance. When title was taken to any property or when any property was sold it was pursuant to instructions or approval by the bank. Thereafter these officers were succeeded by legally appointed deputy *813 superintendents of banks, agents or nominees of the superintendent of banks of Ohio. The operation and activities of petitioner have been directed and controlled during liquidation by the liquidators of Guardian.
In 1933 petitioner took title to approximately $1,500,000 worth of real estate on a transfer to it from Guardian, and executed a mortgage and note to the bank for the full purchase price. Prior thereto it took title to but few properties. Practically all of this real estate was deeded in 1934 to the superintendent of banks, and the note and mortgage were canceled.
For the taxable years in question petitioner filed separate income tax returns, claiming exemption under the Act of Congress of March 1, 1879. In its*1145 return for 1934 it charged as expense a portion of officers' salaries, the other portion and employees' salaries being paid by New England.
On August 23, 1934, a suit by the United States against Guardian, asserting income tax deficiencies for the year 1919, was dismissed without prejudice, in accordance with the Act of Congress of March 1, 1879 (20 Stat. 351).
By letter dated February 20, 1934, respondent stated that income tax deficiencies for 1929 asserted against Guardian and its subsidiaries, including The New England Co., were closed. The letter concluded:
Since it is evident that collection of this tax would affect the claims of the depositors of the Guardian Trust Company, no assessment of the deficiency in question will be made and the case will be considered closed in this office.
By letter dated November 2, 1937, petitioner was advised that the proposed deficiencies would not be assessed. Thereafter, by letter dated October 20, 1938, the deficiencies in question were asserted.
OPINION.
OPPER: As this controversy is presented the difference between the parties narrows to the single question whether for purposes of section 22 of the Act of March 1, 1879, 1*1146 petitioner's separate corporate identity should be disregarded in favor of the view that it and its remote sole stockholder, an insolvent bank, are to be treated as a unit. To state petitioner's position in its own words, it is that "since the assertion of an income tax against The Valuation Service Company would diminish *814 the assets necessary for the full payment of all depositors of The Guardian Trust Company, the Board should disregard the corporate entity and consider The Guardian Trust Company and The Valuation Service Company as one and the same enterprize, and, therefore, immune from taxation under the Act of Congress of 1879, 2 * * *."
*1147 Despite such anomalous adjudications as , (C.C.A., 3d Cir.), and (C.C.A., 2d Cir.), it must be recognized that corporations are ordinarily organized for the purpose of being treated as distinct from their shareholders, and that they should be so treated. . This result is the more necessary where the application to overlook distinctive corporate existence is submitted in behalf of those responsible for the situation to which we are asked to close our eyes. . See . It is "when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime". 3 that the usual and normal view of corporate individuality may be set aside. Needless to say it is ordinarily difficult, if not impossible, for the corporation*1148 itself or its sponsors to bring its situation within that description.
The rule to be applied in such circumstances as these has recently been formulated by the Supreme Court in the following language:
* * * In the Commonwealth Improvement Company case, the taxpayer, for reasons satisfactory to itself voluntarily had chosen to employ the corporation in its operations. A taxpayer is free to adopt such organization for its affairs as he may choose and having elected to do some business as a corporation, he must accept the tax disadvantages.
On the other hand, the Government may not be required to acquiesce in the taxpayer's election of that form for doing business which is most advantageous to him. The Government may look at actualities and upon determination that the form employed for doing business or carrying out the challenged tax event is unreal or a sham may sustain or disregard the effect of the fiction as best serves the purposes of the tax statute. * * * [*1149
If the true party in interest here were this petitioner or even its ultimate sole stockholder, the bank, the matter could readily be disposed of by applying to this dispute the principle announced in the early portion of that quotation. But it is apparently accepted as a fact by respondent that the actual loss, if this proceeding is determined *815 adversely to the petitioner, will fall upon the depositors of the bank. His position is that if this petitioner were the bank itself he would have no question as to the applicability of the 1879 Act. It is thus inadmissible to conclude that the present petition to treat corporation and stockholder as an essential unit is advanced for the benefit of either. Hence we think it incumbent upon us to look further in order to apply here that view on the disputed issue which "best serves the purposes of the tax statute."
It is self-evident that the objective of the enactment in question, both in its original form and as amended, was to assist and benefit depositors of insolvent banks. As the Court of Claims says in *1150 , the provision "was passed for the undoubted purpose of relieving depositors in national banks from the payment of certain taxes, not assessed upon them, but upon the banks of which they are only customers; taxes which, under the preexisting law, they would indirectly be obliged to pay when a bank is so insolvent that all its capital is gone and it has nothing left with which to pay taxes, except the money of its depositors." It is clear that the depositors are no more responsible for the present situation than they were for the tax deficiencies of the bank itself. They were not the organizers of petitioner, they had no voice in its management and no direct interest in its affairs. They are in danger, however, of being the innocent victims of circumstance. For, if respondent is successful in this proceeding, the entirely collateral element of the form of petitioner's organization as a separate corporation, instead of as the bank's real estate department, will result in denial to the depositors of that relief which it seems evident it was the purpose of Congress to afford; relief which they would have obtained without*1151 question in the absence of petitioner's intervening presence.
In that view we can not avoid the conclusion that it will most nearly effectuate the evident legislative purpose to treat these taxes as being due only "on account of such bank"; to treat petitioner and the bank as parts of a single organization, all of whose assets are subject to the claims of the bank's depositors, and whose unforgiven liabilities will inevitably diminish those assets; and so to apply the statute as to find that there is no deficiency in tax due from this petitioner under its terms.
As respondent points out, it is not the purpose of the relevant legislation to relieve those having a proprietary interest in the bank from their appropriate tax liability. . But even if there were a possibility under the facts here that such a result might eventuate, the danger is eliminated by the provisions *816 of the 1938 Amendment, 4 leaving open the ultimate liability of those governed by the statute until the outcome of liquidation is apparent.
*1152 Neither party seeks to question the Board's jurisdiction by reason of the unusual language of the section under consideration; and in any event that point has already been passed upon in favor of our power in the premises. ; .
Decision will be entered for the petitioner.
Footnotes
1. SEC. 22. That whenever and after any bank has ceased to do business by reason of insolvency or bankruptcy, no tax shall be assessed or collected, or paid into the Treasury of the United States, on account of such bank, which shall diminish the assets thereof necessary for the full payment of all its depositors; and such tax shall be abated from such national banks as are found by the Comptroller of the Currency to be insolvent; and the Commissioner of Internal Revenue, when the facts shall so appear to him, is authorized to remit so much of said tax against insolvent State and savings banks as shall be found to affect the claims of their depositors. [20 Stat. 351.] ↩
2. This statute was amended by section 818, Revenue Act of 1938, but petitioner places no reliance on the amended language, saying in its reply brief: "For the purpose of this brief we * * * rest our case solely on section 22 of the Act of 1879, 20 Stat. 327 [sic↩ 351], or its counterpart, section 22A, as amended by the Revenue Act of 1938."
3. . ↩
4. SEC. 818. TAXES OF INSOLVENT BANKS.
* * *
(c) Any such tax so collected shall be deemed to be erroneously collected, and shall be refunded subject to all provisions and limitations of law, so far as applicable, relating to the refunding of taxes, but tax so abated or refunded after the date of the enactment of the Revenue Act of 1938 shall be reassessed whenever it shall appear that payment of the tax will not diminish the assets as aforesaid. The running of the statute of limitations on the making of assessment and collection shall be suspended during, and for ninety days beyond, the period for which, pursuant to this section, assessment or collection may not be made, and a tax which has been abated may be reassessed and collected during the time within which, had there been no abatement, collection might have been made. ↩