Before SWAN, WATERMAN and FRIENDLY, Circuit Judges.
This petition for review presents the rare case in which it is as clear as anything ever can be that Congress did not mean what in strict letter it said.The contretemps arose through a crossreference in a section inserted in the Internal Revenue Code of 1954 during a late stage of its passage. Relying on the letter, petitioner asserts that its wholly owned subsidiary, which sold real estate in 1954, prior to enactment of the Code, for a gain of $1,808,632.05 that would have been taxable to the subsidiary as the law stood at the time, and which thereafter liquidated on the tax-free basis for the parent provided in prior Revenue Acts and continued by the Code, was also freed from tax on the gain from the sale. A unanimous Tax Court disagreed. So do we.
J.C. Penney Building and Realty Corporation, a wholly owned subsidiary of petitioner, owned an office building and warehouse in New York City and two warehouses elsewhere. On February 2, 1954, it entered into a contract to sell the New York warehouse at a substantial gain; it delivered the deed on August 3, 1954. On November 24, 1954, the directors of the parent and the subsidiary adopted a plan of complete liquidation whereby all the subsidiary's assets were to be distributed to the parent in exchange for the cancellation of its stock and in satisfaction of its indebtedness to the parent. On November 30, the assets were distributed; nine days later the subsidiary was dissolved. In its final tax return the subsidiary elected to have § 392(b) of the 1954 Code apply to the sale - with the result, as claimed, that the gain of $1,808,632.05 would not be taxable to it although, by virtue of § 332, the parent would pay no tax on the gain from the liquidation. The Commissioner, holding § 392(b) to be inapplicable in a situation where § 332 gave tax immunity to gain on the liquidation, determined a deficiency of $471,029.11 (along with an over-assessment of $171.17 for the preceding taxable year) in the subsidiary's tax return, and asserted this liability against petitioner as transferee. The Tax Court, in an able opinion by Judge Train reviewed by the full court, sustained the Commissioner without dissent, disagreeing with the contrary ruling in Diversified Services, Inc. v. United States, 192 F. Supp. 571 (S.D. Fla. 1961), now on appeal to the Fifth Circuit.
Petitioner's argument is this. Section 392(b)(1) of the 1954 Code provides:
"(1) Nonrecognition of gain or loss. - If -
"(A) all of the assets of a corporation (less assets retained to meet claims) are distributed before January 1, 1955, in complete liquidation of such corporation; and
"(B) the corporation elects (at such time and in such manner as the Secretary or his delegate may by regulations prescribe) to have this subsection apply, then no gain or loss shall be recognized to such corporation from the sale or exchange by it of property during the calendar year 1954."
It is not disputed that what J.C. Penney Building and Realty Corporation did fits (A) and (B) of subdivision (1). The fly in petitioner's ointment is a provision in the next subdivision:
"(2) Certain provisions of section 337 made applicable. - For purposes of paragraph (1) -
"(B) the limitations of section 337(c) shall apply."
Section 337, new in the 1954 Code, was designed to provide a method for escaping the two-fold taxation that had previously occurred when a corporation sold property at a gain to itself and then liquidated at a gain to its stockholders. Subdivision (a) provided:
"(a) General rule. - If -
"(1) a corporation adopts a plan of complete liquidation on or after ...