Friendly and Smith, Circuit Judges, and Blumenfeld, District Judge.*fn*
BLUMENFELD, District Judge
This is an appeal from a summary judgment adverse to the appellant in a suit for refund of income taxes paid to satisfy deficiency assessments for the years 1954, 1955 and 1956. The taxpayer, Mrs. Lora McCarthy,*fn1 owned 1000 shares of the stock of The Andrew Radel Oyster Company, a family corporation, which she had acquired through inheritance. In December 1954, she sold her shares to the corporation which paid for them with liquid assets it had accumulated out of earnings and profits over a long period. It was the taxpayer's use of a claimed loss on this transaction to offset income for the years in question that the District Director disallowed.
The court below found that there was no genuine issue of fact which would rebut the District Director's determination that the payment made by the corporation for the purchase of her stock was not a distribution in partial liquidation and ruled that the loss deduction was properly disallowed under § 267 of the 1954 Code. We agree.
The issues before us have been narrowed somewhat. The government has conceded that the payment received by the taxpayer from the corporation escapes dividend tax treatment as a distribution under § 302(b)(3) of the 1954 Code.*fn2 The taxpayer has conceded that since her two sisters and her two brothers owned the remaining 4000 outstanding shares of stock, the transaction out of which the claimed loss arose was between related taxpayers as defined in § 267(b) and that the recognition of any loss is governed by § 267 of the Internal Revenue Code of 1954.
The foundation of the taxpayer's dispute with the District Director lies in that portion of § 267 which provides:
"(a) Deductions disallowed.
"No deduction shall be allowed -
"In respect of losses from sales or exchanges of property (other than losses in cases of distributions in corporate liquidations), directly or indirectly, between persons specified within any one of the paragraphs of subsection (b)." (Emphasis added.) It is taxpayer's contention here, as it was below, that the payment to her by the company constituted a "distribution[s] in corporate liquidation[s]" within the parenthetical exception in § 267(a)(1) and, therefore, that the loss was deductible.*fn3
Briefly stated, her first and principal argument for this expansive view of the exception is that partial liquidations as embodied in the phrase "distributions in corporate liquidations" in § 267(a)(1) includes all distributions in redemption of stock which are not essentially equivalent to a dividend. On the premise that the history of what the law has been is necessary to the knowledge of what the law is, she turns to the statutes and regulations to find the meaning of the term "partial liquidation," and necessarily so, for when the concept of "partial liquidation" was first brought to light in the Revenue Act of 1924, "it was not a phrase drawn from the common corporate parlance of the day."*fn4 The concept of "partial liquidation" which she urges upon us is drawn from the context of certain provisions in the 1939 Code.
She begins by pointing out that § 115(i)*fn5 of the 1939 Code said a "partial liquidation" includes "a distribution * * * in complete cancellation or redemption of a part of its stock" by a corporation. Section 115(c)*fn6 provided that distributions in partial liquidations were to be treated as payment in exchange for the stock. In the same section, § 115(g)(1)*fn7 said that if a distribution was made "in such manner" as to make the redemption "essentially equivalent to the distribution of a taxable dividend" it should be treated as such to the extent that it represented a distribution of earnings and profits. This is an abbreviated recital of the prior law from which the appellant's interesting three-step thesis emerges. That is, that the redemption of stock in question would have been considered a partial liquidation under § 115 of the 1939 Code. Taxpayer then assumes that it is the definition of partial and complete liquidation under § 115 which would have been used to determine whether a distribution to the taxpayer in exchange for her stock was a "distribution in liquidation" within the exception of § 24(b)(1)(B) of the 1939 Code, predecessor to § 267(a)(1) in the 1954 Code. The final link in the argument is that Congress did not intend to change this theorized result when it passed the 1954 Code. While the appellant's assumption may appear to be plausible,*fn8 since nowhere else in the 1939 Code could one find any other definition of liquidation, there is considerable doubt whether § 115(i) was carried over to § 24, enacted ten years later and without any clear indication in legislative history that a cross-reference was intended. In Commissioner v. Estate of Bedford, 325 U.S. 283, at 291-292, 65 S. Ct. 1157, at 1161, 89 L. Ed. 1611 (1945), the Supreme Court rejected a similar contention, stating:
"Respondent, however, claims that this distribution more nearly has the effect of a 'partial liquidation' as defined in § 115(i). But the classifications of § 115, which governs 'Distributions of Corporations' apart from reorganizations, were adopted for another purpose. They do not apply to a situation arising within § 112. The definition of a 'partial liquidation' in § 115(i) is specifically limited to use in § 115" (n. 5 omitted).
Also, if § 115(i) were to be lifted into § 24 without qualification, that would produce the weird result that a distribution in liquidation essentially equivalent to a dividend, which, by virtue of § 115(g)(1), would not qualify as a sale or exchange ...