MR. JUSTICE BLACKMUN, with whom MR. JUSTICE MARSHALL and MR. JUSTICE POWELL join, dissenting.
The issue in this federal income tax case is whether a cash distribution that petitioner husband (hereafter petitioner) received in 1965 with respect to his shares in Capital Southwest Corporation (CSW) was taxable to him as a dividend, as the United States Court of Appeals for the Fifth Circuit held, or whether that distribution was a return of capital and therefore not taxable, as the Tax Court held. I regard the issue as of sufficient importance in the administration of the income tax laws to justify review here, and I dissent from the Court's failure to grant certiorari.
CSW was the parent of a group of affiliated corporations. Consolidated returns were filed for CSW and the group for the fiscal years ended March 31, 1964 and 1965. This was advantageous taxwise, for it enabled income of Capital Wire & Cable Corporation (CW), one of the subsidiaries, to be offset against losses sustained by CSW. CW's board formally recognized a saving in tax of about $863,000 through the filing of consolidated returns for the two fiscal years. That board then distributed $1 million in March 1965, not solely to CSW, its principal shareholder, but ratably to all its shareholders. As primary shareholder, CSW received $803,750 of that distribution.
The Internal Revenue Service subsequently determined that the consolidated returns for fiscal 1964 and 1965 did not accurately reflect the earnings of the group. Asserted deficiencies were settled in 1972 for approximately $900,000. Of this amount, about $755,000 was allocated to CW.
Petitioner takes the position that CW's allocable share of the 1965 tax must be accrued to that fiscal year; that CW's 1965 payment to CSW was thus not a dividend entering into the determination of CSW's earnings and profits at all, but was a constructive payment of CW's share of the tax bill; that this left CSW with no earnings and profits for 1965; and that, as a consequence, CSW's 1965 distribution to petitioner could only be a nontaxable return of capital and could not be a taxable dividend. The Tax Court, in a reviewed decision, with six judges dissenting, accepted this view. 64 T. C. 320 (1975). The Fifth Circuit reversed. 569 F.2d 863 (1978).
As is not infrequently the situation in tax cases, the parties initially wage a battle of maxims. Petitioner speaks of "substance and realities" and cites, among other cases, Helvering v. Lazarus & Co., 308 U.S. 252, 255 (1939), and Frank Lyon Co. v. United States, 435 U.S. 561, 573 (1978). The Commissioner asserts that a taxpayer must accept the tax consequences of his structural choice and cites Commissioner v. National Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149 (1974). In addition, however, it is clear that CW's distribution was definitely intended to compensate CSW for the tax saving effected by the beneficial use of CSW's loss in the consolidated return. On the other hand, that compensatory action was accomplished by a pro rata distribution not only to CSW but to minority shareholders as well.
For me, the answer to this tax question is by no means immediately apparent. Each side advances a forceful argument. The deep division among the judges of the Tax Court is indicative and significant. I cannot regard the issue as one that is too fact-specific or incapable of precedential effect. On the contrary, it features important aspects of tax accounting and tax law. CSW and CW, after all, were accrual-basis taxpayers. Normally, when a deficiency in tax of an accrual-basis taxpayer is ultimately determined, it is to be accrued as of the tax year of the deficiency and it affects earnings and
profits accordingly. A consideration opposing this accepted proposition is the fact that the portion of CW's 1965 distribution paid to minority shareholders obviously qualified and apparently was reported as taxable dividends; it would be at least somewhat anomalous to have the portion paid to CSW constitute, in contrast, a return of capital.
I hope that the Court's decision to pass this case by is not due to a natural reluctance to take on another complicated tax case that is devoid of glamour and emotion and that would be remindful of the recent struggles, upon argument and reargument, in United States v. Foster Lumber ...