could properly be regarded as the actual regular rate of pay. We hold for the reasons stated above that the District Court and the Circuit Court of Appeals properly determined that the wage agreement in question failed to satisfy the statutory requirements. Walling v. Helmerich & Payne, Inc., supra; Walling v. Youngerman-Reynolds Hardwood Co., supra; Walling v. Harnischfeger Corp., 325 U.S. 427 (1945). Affirmed. [Note: By an order of the Court announced on June 16, 1947, post, p. 795, the judgment in this case was modified so as to provide that the judgment of the Circuit Court of Appeals is affirmed and the cause is remanded to the District Court with authority in that Court to consider any matters presented to it under the Portal-to-Portal Act of 1947, approved May 14, 1947.] COMMISSIONER OF INTERNAL REVENUE v. MUNTER. NO. 674. CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE THIRD CIRCUIT.* Argued April 10, 1947-Decided May 5, 1947. 1. Under Internal Revenue Code §§ 22 (a), 115 (a), (b), upon a reorganization of two corporations into a new corporation, accumulated earnings and profits of the predecessor corporations which are undistributed in the reorganization are deemed to be acquired by the successor corporation and upon distribution by it are taxable as income, notwithstanding the participation of new investors in the successor corporation. Pp. 215-216. *Together with No. 675, Commissioner of Internal Revenue v. Munter, also on certiorari to the same Court. 210 Opinion of the Court. 2. To what extent the accumulated earnings and profits of the predecessor corporations have been retained by the successor in this case is for the Tax Court to determine upon a factual analysis. Pp. 216-217. 157 F.2d 132, reversed. The Tax Court sustained the Commissioner's determination of deficiencies in respondents' income taxes. 5 T. C. 108. The Circuit Court of Appeals reversed. 157 F.2d 132. This Court granted certiorari. 329 U. S. 709. Reversed and remanded, p. 217. Lee A. Jackson argued the cause for petitioner. With him on the brief were Acting Solicitor General Washington, Sewall Key, Helen R. Carloss, Stanley M. Silverberg and I. Henry Kutz. Samuel Kaufman argued the cause for respondents. With him on the brief was David Glick. MR. JUSTICE BLACK delivered the opinion of the Court. The Commissioner assessed deficiencies against respondents for failure to report as 1940 income dividends paid to them on stock of Crandall-McKenzie & Henderson, Inc., which respondents had bought earlier in that year.' These dividends are taxable as income to the respondents if the corporation paid them out of its earnings and profits. Int. Rev. Code §§ 22 (a), 115 (a), (b). Since its organization in 1928, the corporation had not accumulated earnings and profits sufficient to pay the 1940 dividend in full. But the Commissioner found that the 1 The Tax Court incorporated by reference a fact stipulation of the parties as its finding of fact. Each of the respondents had bought 10,000 shares of the 38,922 shares of the corporation then outstanding. The dividends declared in 1940 amounted to $35,166.25, of which each of the taxpayers received $12,500. 2 At one point in the stipulation it was indicated that the new corporation had "no earnings or profits accumulated from December 4, Opinion of the Court. 331 U.S. two old corporations which were merged in 1928 to form this new corporation had at that time, and turned over to the new corporation, accumulated earnings and profits sufficient to cover these dividends. One of these old corporations, L. Henderson & Sons, Inc., had about $75,000 in earnings and profits accumulated since 1913; the other, Crandall-McKenzie Company, had about $330,000. Liability of respondents for these deficiencies depends upon whether the new corporation acquired and retained a sufficient amount of these earnings and profits of its predecessors to cover the 1940 dividends. The 1928 merger took place under the following circumstances. Stockholders of Henderson and certain stockholders of Crandall-McKenzie agreed together with a firm of underwriters to effect a merger of the two corporations into a new one. The underwriters agreed to buy for cash 52% of the stock of the new corporation for public sale. In execution of this agreement the new corporation was formed and acquired all the assets of Henderson and Crandall-McKenzie. The six stockholders of Henderson accepted stock in the new corporation as full payment for surrendering their old company stock. Holders of nearly one-half of the stock of old Crandall-McKenzie did not accept new corporation stock but were paid some $355,000 in cash for their old stock. The other old Crandall-McKenzie stockholders 1928 to December 31, 1939," and no earnings or profits in the taxable year 1940. But elsewhere in the stipulation it appears there may have been some $32,000 earnings and profits accumulated between 1928 and 1940. The Tax Court apparently did not resolve these contradictory statements. 3 Some of the Crandall-McKenzie stockholders were paid $356.00 plus per share; others were paid $315.53 per share for identical stock. A part of the old Crandall-McKenzie stock for which cash was paid was bought for $300,000 cash by one old Crandall-McKenzie stockholder from another while the reorganization was being transacted. The stockholder who made this purchase thereupon surrendered his 210 Opinion of the Court. were satisfied to accept only new corporation stock. When the reorganization was complete the new corporation stock had been distributed as follows: 14,607 shares to old Crandall-McKenzie stockholders, 9,524 shares to old Henderson stockholders, and 25,869 shares to the general public through the participating underwriters. The Tax Court found that there was a failure of proof that the earnings and profits of the old corporations had been distributed in 1928. Relying upon the rule of Commissioner v. Sansome, 60 F. 2d 931, which, for tax purposes, treats a reorganized corporation as but a continuation of its predecessors, the Tax Court determined that the new corporation acquired all the earnings and profits of its predecessors in 1928. Then, without analyzing the earnings and distribution history of the new corporation after its inception in 1928 and prior to the 1940 distribution, the Tax Court concluded that the new corporation's accumulated earnings and profits were sufficient in 1940 to make the questioned dividends taxable to respondents as income. 5 T. C. 108. The Circuit Court of Appeals for the Third Circuit reversed, 157 F. 2d 132, following its earlier decision in Campbell v. United States, 144 F.2d 177, which had narrowly limited the Sansome rule. The theory of the Campbell decision, so far as relevant to the only question directly presented here, was that change in ownership brought about by the participation of new investors in the reorganization made the new corporation such an entirely different entity that it could not properly be called, even for tax purposes, a continuation of its original Crandall-McKenzie holdings, together with his recently purchased shares, to the new corporation in exchange for shares in the new corporation and $300,000 cash. We do not decide whether the sale from one old stockholder to another represents a transaction separate from the reorganization. Whatever may be the ultimate significance of this point, it does not affect the result we reach here. Opinion of the Court. 331 U.S. predecessors. Thus, it was concluded, earnings and profits of the predecessors were not acquired by the new corporation. We granted certiorari because of an alleged conflict with the Sansome rule. 329 U. S. 709. In the state of the record presented we find it necessary to decide no more than whether the distinction of the Sansome rule made by the Campbell case is correct. A basic principle of the income tax laws has long been that corporate earnings and profits should be taxed when they are distributed to the stockholders who own the distributing corporation. See Int. Rev. Code §§ 22, 115 (a), (b). The controlling revenue acts in question, however, exempt from taxation distributions of stock and money distributions, at least in part, made pursuant to a reorganization such as transpired here in 1928. See Revenue Act of 1928, § 112 (b), (c), (i) (1) (A); § 115 (c), (h), 45 Stat. 791, 816-818, 822-823. Thus unless those earnings and profits accumulated by the predecessor corporations and undistributed in this reorganization are deemed to have been acquired by the successor corporation and taxable upon distribution by it, they would escape the taxation which Congress intended. See § 112 (h), Revenue Act of 1928; Murchison's Estate v. Commissioner, 76 F. 2d 641; United States v. Kauffmann, 62 F. 2d 1045. In Commissioner v. Sansome, supra, it was held that implicit in the tax exemption of reorganization distributions was the understanding that the earnings and profits * There were two independent grounds for the decision in the Campbell case. One ground was that the earnings and profits of the predecessor corporation there had actually been distributed in the course of the reorganization. The Circuit Court of Appeals stated expressly that it did not rest its decision in the instant case on this theory. |