Verkouteren v. District of Columbia

*463ON REHEARING EN BANC

Before FAHY, Senior Circuit Judge, and WRIGHT, McGOWAN, TAMM, LEVENTHAL, ROBINSON, MacKINNON and ROBB, Circuit Judges, sitting en banc. PER CURIAM:

The court, by a divided vote, reinstates the decision of the panel issued February 6, 1969. The issue is one of local law, and the rule for the future has in any event been specified by the amendments effected by the District of Columbia Revenue Act of 1969, 83 Stat. 176 (1969). While the various issues discussed by counsel in their briefs and argument en bane have been carefully considered, we think the case is an appropriate one for invoking Local Rule 13(c), and for announcing the judgment en bane without detailed exposition en bane of the legal points beyond that already provided in the majority and minority opinions of the panel.

Before Fahy, Senior Circuit Judge, and Leventhal and Robinson, Circuit Judges. SPOTTSWOOD W. ROBINSON, III, Circuit Judge.

Capitol Hotel Enterprises, Inc. (Capitol) was organized in 1948 and, until its dissolution in 1960, owned and managed investment'properties situated in the District of Columbia. At its inception, petitioners, by investment of $720 of Capitol’s $1,200 total capitalization, became holders of three-fifths of its common stock,1 2and this stock they retained until its liquidation. During 1948, Capitol purchased stock in Chastleton Hotel, Inc. (Chastleton) for $20,480,8 and until dissolution carried it on its books at that figure.

When Capitol dissolved in 1960, the book value of its assets was $101,021.30, consisting of notes receivable, accrued interest, and the Chastleton stock.3 With no liabilities, Capitol’s net worth appeared on its books at $1,200 in paid-in capital and $99,821.30 in earned surplus. Book values of the notes and interest were equal to their fair market values,4 but over the twelve years since its purchase the Chastleton stock had appreciated from $20,480 to a fair market value of $390,000.

Petitioners acquired on Capitol’s liquidation three-fifths of its assets actually worth $282,324.78, including three-fifths of the Chastleton stock having a market value of $234,000.5 Three days thereafter, they joined with Capitol’s other former stockholders in a sale, at the price of $390,000, of all of the Chastleton stock Capitol had previously owned. From the sale petitioners received $234,0006 as their pro rata portion of its proceeds.

Petitioners, all individual residents of the District during 1960, filed cash-basis District income tax returns for that year, but omitted Capitol’s liquidating shares. Upon a subsequent examination of their returns, the assessing authority revised each petitioner’s tax liability by adding to the taxable income reported, in the ratio of his ownership of Capitol’s stock, a portion of Capitol’s earned surplus and a portion of the profit on the Chastleton stock sale. The aggregate gain on that sale was computed at $369,520, being the sale price of $390,000 minus the $20,480 *464originally paid for it. Tax deficiencies were assessed accordingly and were paid.

Petitioners then filed suit in the District of Columbia Tax Court challenging so much of the additional assessments as was based on the gain from sale of the Chastleton stock.7 The Tax Court upheld the assessments upon a finding that for tax purposes the stock had been constructively sold by Capitol and not by the stockholders. That finding contravened a stipulation by the parties that the stockholders had effected the sale. For that reason, upon earlier appeals here, we reversed and remanded the cases to the Tax Court for its decision on petitioners’ additional taxability on the premise stipulated.8 On remand, the Tax Court again affirmed the assessments, and the cases are back for further review.

Thus once again we are brought face-to-face with the need to construe and

apply the District of Columbia income tax laws in the resolution of difficult questions of far-reaching significance. In the performance of this duty, we take the statutory provisions as we find them, utilize our past interpretive decisions as we understand them and, “albeit with Congressional illumination of a very faint order indeed,” 9 arrive at the conclusions that' seem to achieve the underlying legislative objectives. That process leads us to affirmance of the decisions from which the appeals before us were taken.

I

To the extent that Capitol’s liquidating shares represented its earned surplus, they were properly considered to be “dividends” constituting gross income to the recipient stockholders. By statute it .is so provided,10 our decisions so hold,11 *465and petitioners concede the validity of so much of the assessments.12

But the Chastleton stock which Capitol distributed in kind falls into a different category. The increase in the stock’s value while in Capitol’s portfolio was unrealized, and never became a part of its “earnings, profits, or surplus.”13 The Chastleton stock, then, did not become a dividend upon its receipt by Capitol’s stockholders, even to the extent of its appreciation in value after Capitol’s acquisition.14 For the treatment it was properly to be given, we must consult other relevant provisions of the tax laws.

The District’s income tax is imposed generally upon the entire net income of a resident individual in excess of his personal exemptions and credits for dependents.15 Net income is defined as gross income less allowable deductions.16 Gross income includes “income derived from * * * sales or dealings in property, whether real or personal, other than capital assets * * *, growing out of the * * * sale of * * * such property * * 17 The single exclusion from gross income at all pertinent to this case is of “[g]ains from the sale or exchange of any capital assets.”18 A capital asset, with exceptions immaterial here, is “any property * * * held by the taxpayer for more than two years * * 19 Thus the gain from petitioners’ sale of the Chastleton stock was gross income unless they held stock as a capital asset.

Had petitioners sold or exchanged their Capitol stock at a profit, the gain would not have been includible as gross income. Had Capitol itself made a profitable sale or exchange of the Chastleton stock, the profit would have been nontaxable to it. The result in each instance would flow from the fact that the subject of the disposition, while in the ownership of the disposer, was a capital asset, gains from the sale or exchange of which are excluded from gross income.

But our case is different. It involves neither a sale or exchange by Capitol of the Chastleton stock nor a sale or exchange by petitioners of their Capitol stock. It is concerned with petitioners’ sale of the Chastleton stock after its untaxed distribution to them. We *466conclude that the Chastleton stock, having been held by petitioners for only three days before the sale, was not a capital asset in their hands.

Capitol was not the alter ego of its shareholding community, but a tax entity distinct from its stockholders.20 Assets demand independent tax treatment — perhaps differing treatment — according to whether they belong to the corporation, ongoing or dissolved, or to its stockholders. We find nothing in the District’s tax statute purporting to classify, from the stockholder’s standpoint, distributed property as a capital asset simply by reason of its prior tax status as such while in corporate ownership. Nor did the fact that the Capitol stock was retained by the stockholders for more than two years, and thus became a capital asset, mean that the Chastleton stock, which they kept for only three days, also was a capital asset to them.

The words “capital assets” are defined in terms of property “held by the taxpayer.” 21 That description characterizes aptly Capitol’s proprietorship of the Chastleton stock before Capitol’s dissolution. But Capitol’s stockholders, merely because they held the aggregate beneficial interest in the corporate enterprise, did not bear that degree of relationship to the corporate assets prior to the liquidation. As we see it, Capitol’s stockholders acquired the Chastleton stock in the type of ownership prerequisite to a capital asset holding only upon its distribution to them, three days before they sold it.

Unlike our dissenting colleague,22 we do not find support for a contrary position in our Goldman decision.23 There the majority of the court held that distributions from corporate depreciation reserves, irrespective of whether they exceeded investments in the corporation’s stock, were capital payments and not gross income to the distributees under Section 47-1557a.24 That determination is inapposite, for it treats an issue not before us in this case. The question here is not the taxability of the Chastleton stock upon its receipt by petitioners, but the taxability of the profit upon its subsequent sale by petitioners three days after its untaxed distribution to them.25

As we understand Goldman, it decided that the involved distributions were nontaxable, not because the stockholders held their corporate stock as capital assets, but on the ground that the distributions did not constitute gross income at all.26 The capital asset exclusion was referred to in the majority opinion merely as one of several illustrations to support the conclusion that the expression “income from any source whatever” in Section 47-1557a27 did not sweep all profits into gross income. In other words, there are exceptions, and a distribution from a depreciation reserve was held to be one such exception.

Moreover, the capital gain exclusion is limited in operation to transactions involving a “sale or exchange” of a capital asset.28 While stock held for more than two years is clearly a capital asset, we have consistently held that distributions to stockholders from the corporation’s capital, although accompanied by extinction of all outstanding stock in the corporation, are neither sales nor exchanges.29 We feel compelled *467to avoid a reading of Goldman that would impinge upon the statutory language and our prior decisions.

Nonreeognition either of gain or loss should not be expanded by implication beyond the fair intendment of statutory authority. The general policy of the law is to tax gains and exclusions are not broadly construed.30 The District’s capital gain exclusion is generous to taxpayers and the public interest argues against enlarging it.31 In our view, neither the period a corporation holds distributed property nor the period a stockholder holds his stock in the distributing corporation is the criterion in the District for measuring the duration of his ownership to ascertain whether for him it is a capital asset.

II

From plain statutory specifications, we derive the formula for computation of the amount includible as gross income in consequence of the sale of the Chastleton stock. Section 47-1583a of the District’s income tax laws provides:

The gain or loss, as the case may be, from the sale or other disposition of property shall be the difference between (a) the amount realized from such sale or other disposition of the property and (b) the basis as defined in section 47-1583.

And Section 47-1583, with exceptions inapplicable to this case, provides:

The basis for determining the gain or loss from the sale, exchange, or other disposition of property shall be the cost of such property * * *.

Read together, these provisions mean that petitioners’ gain was their share of the sale price of the stock less the cost to them of the stock they sold.

We cannot accept the proposition that the market value of the Capitol stock which petitioners relinquished upon Capitol’s dissolution represented their cost of the Chastleton stock which they then obtained and later sold.32 The distributed Chastleton stock was not a dividend to petitioners, and so could not on that account take on market value as its basis for purposes of subsequent sale.33 Nor was the distribution of the *468Chastleton stock and simultaneous surrender of the Capitol stock a sale or exchange,34 for which the value of the acquired stock might be its quid pro quo.

It was the unrealized pre-liquidation market value of the Chastleton stock that produced predominantly the market value of the Capitol stock. So much of the market value of the Capitol stock as arose from the market value of the Chastleton stock could not be petitioners’ cost of the latter stock, for they incurred no cost in yielding up the Capitol stock for the very thing that increased its value. And neither Capitol during its ownership, nor petitioners upon their acquisition, paid any income taxes on the great price advance of the Chastleton stock.

The cost of the Chastleton stock to Capitol concededly was $20,480. Upon its transfer to petitioners on Capitol’s dissolution, that was also its book value, reflected wholly in Capitol’s earned surplus.35 Accordingly, on distribution of Capitol’s assets, including the Chastleton stock, petitioners’ pro rata share of the $20,480 was determined by the District’s assessing authority to be part of petitioners’ taxable dividend. Petitioners accepted the assessor’s ruling on that score, and the Tax Court approved it.

But this $20,480 — the value of .the Chastleton stock the Capitol stockholders realized through the dividend 36 — was not received in cash or other tangible form; the stock itself was received. At the same time, petitioners were charged with a ratable portion of the $20,480 dividend equaling the earned surplus of the Chastleton stock. When they sold the stock for $390,000, the assessor treated the amount of this dividend as petitioner’s cost in determining their gain, and the Tax Court approved.

In this we think the assessor and the Tax Court were entirely correct. Capitol purchased the Chastleton stock for only $20,480, and neither Capitol nor its stockholders paid any income tax on its appreciated market value because during Capitol’s ownership the gain was unrealized. And the stockholders’ true and only cost of that stock was the $20,-480 portion of the taxable liquidating dividend that was attributable to the Chastleton stock.37 By the same token, *469unless the $20,480 was deemed to be the stockholders’ cost of the Chastleton stock, they would have been twice subjected to income taxes on it. Double taxation in any form is an interpretive conclusion that is to be avoided unless manifestly required.38 We believe that a construction of Section 47-1583 equating “cost” to the $20,480 taxed as a dividend in this case is fully consistent with legislative goals.39

Had Capitol, prior to dissolution, sold the Chastleton stock at the $390,000 price and then distributed liquidating dividends to its stockholders, the latter would have become liable for District income taxes thereon to the extent that the liquidating shares represented Capitol’s profit on such sale.40 Petitioners realized in 1960 — three days after the distribution— more than $280,000 on the $720 investment they made in 1948. Only on the $20,480, reflecting Capitol’s cost of the Chastleton stock, which was included in the liquidating dividend, have either Capitol or petitioners paid any income taxes on the Chastleton stock transaction. A holding that their enormous financial advance is otherwise completely nontaxable would open a loophole of considerable magnitude in the District’s income tax laws. This, in our judgment, Congress hardly intended.41

Affirmed.

. Petitioners then acquired 300 shares of Capitol’s common stock. On Capitol’s dissolution, 500 shares of its common stock, the only class of capital stock authorized, were issued and outstanding.

. Capitol paid $20,000 for 200 shares of Chastleton’s preferred stock, and $480 for 480 shares of its common stock.

. The individual book values were $76,-603.80 for the notes, $3,937.50 in interest, and. $20,480 for the Chastleton stock.

. See note 3, supra.

. Petitioners received 120 of the 200 preferred shares, and 288 of the 480 common shares.

. The price was paid partly in cash and partly by the purchaser’s one-year promissory note.

. Petitioners do not contest the assessments insofar as they are predicated upon the distributions from Capitol’s earned surplus. See also notes 10-11, infra, and accompanying text.

. Verkouteren v. District of Columbia, 120 U.S.App.D.C. 361, 346 F.2d 842 (1965). See also Alper v. District of Columbia, 120 U.S.App.D.C. 364, 346 F.2d 845 (1965).

. Oppenheimer v. District of Columbia (Oppenheimer II), 124 U.S.App.D.C. 221, 222, 363 F.2d 708, 709 (1966). In that case we also said: “There are a number of anomalies inherent in residence in the District of Columbia, but none is more striking than that of being simultaneously subjected to differing schemes of income taxation devised by the same legislature. The resulting confusion plagues taxpayer, tax collector, and court alike. This review of a decision of the District of Columbia Tax Court does not lessen the problem, nor is anything likely to do so short of a Congressional determination that one income tax structure at a time is enough for any legislative body to erect for those under its jurisdiction.” Id. at 222, 363 F.2d at 709.

. “The word ‘dividend’ means any distribution made by a corporation (domestic or foreign) to its stockholders or members, out of its earnings, profits, or surplus (other than paid-in surplus), whenever earned by the corporation and whether made in cash or any other property (other than stock of the same class in the corporation if the recipient of such stock dividend has neither received nor exercised an option to receive such dividend in cash or in property other than stock instead of stock) and whether distributed prior to, during, upon, or after liquidation or dissolution of the corporation: Provided, however, That in the case of any dividend which is distributed other than in cash or stock in the same class in the corporation and not exempted from tax under this subchapter, the basis of tax to the recipient thereof shall be the market value of such property at the time of such distribution: And provided, however, That the word ‘dividend’ shall not include any dividend paid by a mutual life insurance company to its shareholders.” D.C.Code § 47-1551e(m) (1967 ed.).

. Berliner v. District of Columbia, 103 U.S.App.D.C. 351, 258 F.2d 651, cert. denied 357 U.S. 937, 78 S.Ct. 1384, 2 L.Ed.2d 1551 (1958). See also Oppenheimer II, supra, note 9, 124 U.S.App.D.C. at 223, 363 F.2d at 710; Doyle v. District of Columbia, 124 U.S.App.D.C. 207, 363 F.2d 694 (1966) ; Snow v. District of Columbia, 124 U.S.App.D.C. 69, 71-72, 361 F.2d 523, 525-526 (1966) ; Estate of Uline v. District of Columbia, 124 U.S.App.D.C. 5, 360 F.2d 820 (1966) ; Bord v. District of Columbia, 120 U.S.App.D.C. 175, 177, 344 F.2d 560, 562 (1965).

. See note 7, supra.

. D.C.Code § 47-1551c(m) (1967 ed.), quoted supra note 10.

. District of Columbia v. Oppenheimer (Oppenheimer I), 112 U.S.App.D.C. 239, 301 F.2d 563 (1962). See also Oppenheimer II, supra note 9, 124 U.S.App.D.C. at 223, 363 F.2d at 710; Estate of Uline v. District of Columbia, supra note 11, 124 U.S.App.D.C. at 7, 360 F.2d at 822; Bord v. District of Columbia, supra note 11, 120 U.S.App.D.C. at 177, 178 n. 6, 344 F.2d at 562, 563 n. 6.

. D.C.Code §§ 47-1567, 47-1567b (1967 ed.).

. D.C.Code § 47-1557 (1967 ed.).

. “The words ‘gross income’ include gains, profits, and income derived from salaries, wages, or compensation for personal services of whatever kind and in whatever form paid, including salaries, wages, and compensation paid by the United States to its officers and employees to the extent the same is not exempt under this sub-chapter, or income derived from any trade or business or sales or dealings in property, whether real or personal, other than capital assets as defined in this subehapter, growing out of the ownership, or sale of, or interest in, such property; also from rent, royalties, interest, dividends, securities, or transactions of any trade or business carried on for gain or profit, or gains or profits, and income derived from any source whatever.” D.C.Code § 47-1557a(a) (1967 ed.).

. D.C.Code § 1557a(b) (11) (1967 ed.). And losses from the sale or exchange of a capital asset are not allowed in computing net income. D.C.Code § 1557b (b) (6) (1967 ed.).

. “The words ‘capital assets’ mean any property, whether real or personal, tangible or intangible, held by the taxpayer for more than two years (whether or not connected with his trade or business), but do not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the end of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.” D.C.Code § 47-1551c (l) (1967 ed.).

. See D.C.Code §§ 47-1571, 47-1571a (1967 ed.).

. D.C.Code § 47-1551c(Z) (1967 ed.), quoted supra note 19.

. Infra pp. 468-478.

. District of Columbia v. Goldman, 117 U.S.App.D.C. 219, 328 F.2d 520 (1963).

. Quoted supra note 17.

. Compare Snow v. District of Columbia, supra note 11.

. We note, too, that petitioners, although urging the theory espoused in dissent, do not rely upon Goldman or even cite it in their briefs.

. Quoted supra note 17.

. D.C.Code § 1557a(b) (11) (1967 ed.), quoted in the text supra at note 18.

. Oppenheimer II, supra note 9, 124 U.S.App.D.C. at 224, 363 F.2d at 711; Doyle v. District of Columbia, supra note 11; *467Estate of Uline v. District of Columbia, supra note 11, 124 U.S.App.D.C. at 7, 360 F.2d at 822; Berliner v. District of Columbia, supra note 11, 103 U.S.App.D.C. at 353-356, 258 F.2d at 653-656. This differs radically, of course, from the statutory assimilation of the transaction to an exchange in federal income tax law. Int.Rev.Code of 1954, § 31(a), 26 U.S.C. § 331(a) (1964). The differences, doctrinal as well as substantive, between federal and District law in this regard and with respect to capital assets mean that analogies may not provide a firm decisional foundation. Compare Berliner v. District of Columbia, supra note 11, 103 U.S. App.D.C. at 354-355, 258 F.2d at 654-655; Eastman Kodak Co. v. District of Columbia, 76 U.S.App.D.C. 339, 341, 131 F.2d 347, 349 (1942).

. “The intent to exclude must be definitely expressed, where, as here, the general language of the act laying the tax is broad enough to include the subject-matter.” Choteau v. Burnet, 283 U.S. 691, 696, 51 S.Ct. 598, 601, 75 L.Ed. 1353 (1931). See also Heiner v. Colonial Trust Co., 275 U.S. 232, 234-235, 48 S.Ct. 65, 72 L.Ed. 256 (1927).

. We respect the underlying policy of the capital gain exclusion to encourage long-term investment. District of Columbia v. Goldman, supra note 23, 117 U.S.App.D.C. at 221-222, 328 F.2d at 522-523; Garrett v. District of Columbia, 81 U.S.App.D.C. 374, 159 F.2d 457 (1946), cert. denied 330 U.S. 835, 67 S.Ct. 971, 91 L.Ed. 1282 (1947). Congress has not, however, manifested a judgment that its recognition in asset-conversion situations like that here is essential to attainment of its objective.

. Petitioners argue, and Judge Leventhal concludes, that the basis of the Chastleton stock in petitioners’ ownership was its market value, with the result that no gain was realized when it was sold. He considers petitioners’ receipt of that stock a taxable event imparting its market value basis, and invokes the capital gain exclusion as a bar to income taxation of the stock at the point of petitioner’s acquisition.

. D.C.Code § 1583c (1967 ed.), provides that “[wjhere any property other than money is paid by a corporation as a dividend, the basis to the recipient thereof *468shall be the market value of sueb property at the time of its distribution by such corporation.” See also, to the same effect, D.O.Code § 47-1551c(m) (1967 ed.), quoted supra note 10. It is clear from the statutory scheme that Section 1583c makes an exception to the general cost basis specified in Section 47-1583 for determining gain or loss on property dispositions. But, as we have pointed out, see note 14, supra, and accompanying text, an appreciation in the value of corporate assets which is not realized before dissolution does not become a dividend when those assets are distributed on liquidation. And even if the Chastleton stock received by petitioners on Capitol’s dissolution were a dividend, its value should have been included as income in their tax returns, which was not done. Thus, had it. been given that treatment, their income taxes would have to be readjusted upward.

. See note 29, supra, and accompanying text.

. Together with the other assets, consisting of $80,541.30 in the form of notes receivable and accrued interest. See note 3, supra, and accompanying text.

. Petitioners’ three-fifths share of the $20,480 came to $12,288, computed without regard to the $1,200 capital investment included in the book value of the Chastleton stock, which we, like the parties, treat as de minimis.

. Compare Oppenheimer II, supra note 9. In that case, corporate assets, the actual value of which reflected unrealized appreciation over their cost to the corporation, were distributed to a stockholder who sought unsuccessfully to sustain a depreciation basis established at fair market value. We affirmed the Tax Court’s dis-allowance of a “stepped-up depreciation base largely comprised of an untaxed, because unrealized, rise in market value” — ■ “a depreciation base,” we described, “consisting of a book write-up of a value on which, very properly, no tax need be paid upon its receipt by the stockholder.” 124 U.S.App.D.C. at 223, 224, 363 F.2d at 710, 711. Compare Estate of Uline v. District of Columbia, supra note 11, where we concluded that only the cost, and not the fair market value, of stock held in a corporation may be used to reduce the amount taxable as a corporate liquidating dividend.

. Maass v. Higgins, 312 U.S. 443, 449, 61 S.Ct. 631, 85 L.Ed. 940 (1941). See also General Motors Corp. v. District of Columbia, 380 U.S. 553, 559-560, 85 S.Ct. 1156, 14 L.Ed.2d 68 (1965).

. Compare Oppenheimer II, supra note 9, 124 U.S.App.D.C. at 224, 363 F.2d at 711.

. Estate of Uline v. District of Columbia, supra note 11.

. See Oppenheimer II, discussed supra note 37. Our conclusion is in keeping with the principle that “[g]ain is in the end to be completely taxed once, but only once.” 3A J. Mertens, Federal Income Taxation § 21.01 (1958).