Federal Income Tax-Definition of Collapsible Corporation

In 1948 petitioner and several other taxpayers, who had previously been active in constructing homes, formed two corporations to build apartment houses. As a result of decreases in the price of building materials and savings on labor and architectural costs, each corporation was left, after completion of construction, with borrowed funds which exceeded costs of construction. In the year following completion of construction the taxpayers distributed the excess borrowed funds of the two corporations and then sold their stock in each at a substantial profit. Petitioner reported, his receipts from the distribution of the loan funds and the profit on the sale of his stock as long term capital gain. The Tax Court, one judge dissenting, upheld the Commissioner’s assertion that these were collapsible corporations under section 117(m) of the Internal Revenue Code of 1939 and that taxpayer’s gains were therefore ordinary income. On appeal, the Court of Appeals for the Second Circuit affirmed the Tax Court’s opinion, holding that section 117(m) applies to the collapse of a corporation regardless of whether a shareholder might have received capital gains treatment on his receipts if he were doing business as an individual proprietorship. On certiorari, held, affirmed, one Justice dissenting. Congress, in enacting section 117(m), intended to define what it believed to be a tax avoidance device rather than leave the question of the presence of tax avoidance to the courts to be determined on the facts of each case; thus the provision applies to all corporations falling within its definition, regardless of what tax consequences might have resulted had another form of enterprise been used. Braunstein v. Commissioner, 374 U.S. 65 (1963).