Stewart, Moremen and Milliken, JJ., dissenting.
COMBS, Justice. The judgment sustains an income tax assessment made by the Kentucky Tax Commission against the taxpayer, Mrs. Christine H. Collins, individually and as executrix of the estate of her deceased husband, George C. Collins, Jr.
The facts are stipulated. The partnership of Collins & Newman, composed of Christine H. Collins, her husband, George C. Collins, Jr., and Mr. and Mrs. L. J. Newman, held 42,094 shares of common stock of the par value of $1 per share in the Cummins Distilleries Corporation at the time of its dissolution. Some of the stock had been held by the partnership longer and some less than two years. The corporation was liquidated on December 31, 1942. On that date the assets of the corporation consisted of whiskey in storage valued on the books of the corporation at $1,145,658.65. Distribution in kind was made to the stockholders in the form of warehouse receipts representing the whiskey. Some four or five days later, a committee for the stockholders sold the whiskey for $4,127,000 and, after deducting the cost of sale, made distribution to the respective stockholders according to their interest. The partnership of Collins & Newman realized a net gain of $391,673.33 from the stock hold by it. Neither of the Collinses reported the gain on their 1942 tax returns. The Commission made additional assessments against them in 1946, and corrected assessments in 1948. Taxability of the proceeds from the stock held less than two years is not in issue.
The question is whether the gains realized by Mr. and Mrs. Collins from the stock held by them in the Cummins Distilleries Corporation for more than two years are taxable as income under Chapter 141, Kentucky Revised Statutes, in force in 1942.
The Commission takes the position the gain realized by the taxpayer is taxable as a dividend under KRS 141.010(3), which reads in part:
'Dividend' means any distribution made by a corporation out of its current earnings or profits, or out of its accumulated earnings or profits, to its shareholders or members, whether the distribution is made in cash or other property. It includes such portion of the assets of a corporation distributed at the time of dissolution as is in effect a distribution of earnings or profits, provided the distribution constitutes income to its recipient. * * * In a distribution at the time of dissolution all money or other property received that is not in effect a distribution of earnings of the corporation shall be treated under subsection (1) of KRS 141.100. * * *'
The taxpayer relies on KRS 141.100, the applicable part of which reads:
'(2) Income realized or loss sustained from the sale of property held two years or more shall be ignored in computing income for the purposes of this chapter * * *.'
Other sections of Chapter 141 which have important, although not decisive, bearing on the question, are 141.020 which requires payment of tax on the taxpayer's entire net income; 141.010(9) which defines net income as gross income less deductions, not here involved, and 141.010(5) which defines gross income as including dividends.
The question in the case, stripped of nonessentials and restated in the terms of the statute, is whether the gain or profit realized by the taxpayer, by whatever name it might be called, is 'income realized * * * from the sale of property held two years or more', within the meaning of section 141.100 or is 'in effect a distribution of earnings or profits' of the corporation within the meaning of KRS 141.010(3). If it falls under 141.100, it is not taxable; if it comes within 141.010(3), it is taxable. We find no inconsistency between the two sections and know of no reason why greater emphasis should be placed on one than the other, although, as pointed out by the Commission, the exemption under which the taxpayer seeks to avoid the tax has its existence only by reason of the saving clause contained in 141.010(3).
The taxpayer relies on the line of authorities, of which Sears v. Commissioner of Corporations & Taxation, 322 Mass. 446, 451, 78 N.E.2d 89, is typical, which hold that the mere increase in value of capital assets is not earning or profits. The significance of this rule becomes apparent in view of the admission, or at least the concession, that the increase in value of the whiskey distributed to the stockholders resulted solely from the foresight and acumen of the management of the Cummins Distilleries in withholding the whiskey from a climbing market during World War II. Using this as a premise, the taxpayer insists, with persuasive argument, that the distribution to the stockholders of the warehouse receipts -- which is admitted to be in legal effect a distribution of the whiskey -- was merely a return of capital and was not, in any sense, a liquidating dividend or distribution of earnings or profits. Considerable emphasis is placed on the fact that under bookkeeping methods, admittedly correct, no earnings or profits were reflected by the corporation's books.
The Commission's argument is based on the wording of the statute and on general authority to the effect that income includes profit gained through sale or conversion of capital assets. Eisner v. Macomber, 252 U.S. 189, 207, 40 S.Ct. 189, 64 L.Ed. 521, 529. Although admitting that mere increase in value of capital assets is not income, the Commission contends that realization of the increase is income; and that looking to realities rather than to the fiction of bookkeeping entries, the realization of the increase by the stockholders, rather than by the corporation, as such, doesn't bring the taxpayer within the exemption clause of 141.100.
As is true in most cases involving construction of a statute, text book authority and cases from other jurisdictions, although informational and persuasive, are not decisive. For instance, the Sears case, cited above, 322 Mass. 446, 451, 78 N.E.2d 89, which at first glance appears to be on all fours with this case, is based on a statute somewhat different from ours. As already noted, our statute subjects to a tax accumulated gain which 'is in effect a distribution of earnings or profits'. There is no equivalent phrase in the Massachusetts statute.
In the final analysis decision in the case must turn on the wording of the statute. The key phrase, to our minds, is: 'It [dividend] includes such portion of the assets of corporation distributed at the time of dissolution as is in effect a distribution of earnings or profits'. It must be assumed this phrase was included in the statute for a purpose and we are not at liberty to ignore it. Furthermore, we think the words should be given their plain, ordinary, and commonly understood meaning. When this is done we are forced to the conclusion these words were included in the statute with calculated forethought to include just such a contingency as now confronts us. If the transaction in question was not 'in effect a distribution of earnings or profits,' we can hardly conceive of a case where this phrase would be applicable. It seems to us the weakness in the taxpayer's reasoning lies in the failure to account satisfactorily for the source of the profit admittedly realized. This profit did not result from legerdemain or sleight of hand. It has a definite economic source. As we see it, that source has to be either the earnings or profits of the corporation, or the increase in value of the whiskey warehouse receipts during the few days they were held by the stockholders. If either of these alternatives is correct, the gain to the taxpayer is taxable income. It cannot be said with any degree of logic that the holding of the whiskey by the corporation for more than two years was in legal effect a holding by the individual stockholders. The stockholders did not hold the whiskey as such. They held stock certificates which entitled them, among other things, to a certain percentage of the earnings and profits of the corporation. But the holding of the stock was not legally equivalent to a holding of the whiskey. It may be conceded that so long as the whiskey was held by the ...