Before ALBERT LEE STEPHENS, GOODRICH and MCLAUGHLIN, Circuit Judges.
MCLAUGHLIN, Circuit Judge.
From the facts stipulated before the Tax Court, it appears that the petitioner is a Delaware corporation organized in 1923. In a nontaxable reorganization it acquired the net assets of three corporations in exchange for its own stock. Those assets were taken over under the internal revenue laws without recognition of gain or loss. The bases of such assets to the petitioner were the same as to the three corporations.Under Commissioner v. Sansome, 2 Cir., 60 F.2d 931, certiorari denied 287 U.S. 667, 53 S. Ct. 291, 77 L. Ed. 575, the earnings and profits of the original corporations, amounting to $923,180.51, became the earnings and profits of the petitioner at the time of the reorganization.*fn1 From January 1, 1924, when the petitioner started business, to and including December 31, 1939, its losses exceeded $923,180.51. As of the beginning of the taxable years involved (1940 and 1941) the petitioner had no accumulated earnings either from its own efforts or transferred to it by a predecessor company under the Sansome rule. In computing its equity invested capital for the 1940 and 1941 excess profit tax the petitioner made no deduction for the amount of earnings and profits it had acquired from the old companies. The Tax Court held that there should have been such deduction under Section 718(b) (3) of the Internal Revenue Code, 26 U.S.C.A. Int. Rev. Code, § 718(b) (3).*fn2
Petitioner asserts that section 718(b) (3) was enacted to eliminate duplications in the computation of invested capital. The duplication ordinarily existing arises because the accumulated earnings and profits of the antecedent corporations are included in the property of the latter taken over by the successor and become part of its own invested capital. In addition, under Sansome, the accumulated earnings and profits of the original companies are considered part of the accumulated earnings and profits of the functioning company. Therefore unless the latter accumulated earnings and profits of the prior corporations were deducted they would be in reality counted twice. Petitioner maintains that in this case there is no such duplication because the earnings and profits received under Sansome have been lost. As calculated, petitioner's equity invested capital reflects only its paid-in capital and does not include any amount of accumulated earnings and profits of the functioning company. It is argued that the provisions of section 718 contemplated that a corporation which is the result of a consolidation has an invested capital of its own without regard to the invested capital of its predecessors and therefore that its paidin capital is not reduced by subsequent losses.
The legislative history of section 718(b) (3) is stressed as supporting the view that there was no intention of requiring a deficit corporation to reduce its equity invested capital by the earnings and profits acquired from its predecessors and that the section was included in the Code in order to eliminate duplications in the computation of invested capital. The Second Revenue Bill of 1940, H.R. 10413, contained the forerunner of 718(b) (3) which was 718(c) (4) and read:
"(c) Rules for application of subsections (a) and (b) For the purposes of subsections (a) and (b) * * *
"(4) Earnings and Profits of Transferor Corporations - For the purposes of subsection (a) (4) the accumulated earnings and profits of the corporation shall be determined without the inclusion of any of the earnings and profits of a transferor corporation which would otherwise be included by reason of property of such transferor having been paid in for shares of, or as a contribution to the capital of, or as paid-in surplus of, the transferee corporation."
In explanation of this the House Ways and Means Committee stated: "Under various provisions of the Internal Revenue Code dealing with exchanges and liquidations, the transfer of the property by a corporation to another corporation results in the non-recognition, in whole or in part, of the gain or loss realized by the transferor upon such transfer. In such cases well established principles of income tax law require that the earnings and profits of the transferor shall go over to the transferee and shall be considered to be earnings and profits of the transferee for tax purposes. Subsection (c) (4) of Section 718 provides that such transferred earnings and profits shall not be taken into account in computing the earnings and profits as of the beginning of the taxable year for the purpose of determining the equity invested capital. Inasmuch as the property received by the transferee upon such a transfer is included in such cases in the equity invested capital at its adjusted basis in the hands of the transferor, it is necessary to exclude the earnings and profits acquired by the transferee by reason of such transfer in order to avoid duplication." H. Report 2894 Cum. Bull. 1940-2 p. 514.
Section 718(c) (4) was then deleted by the Senate Committee and replaced with section 718(b) (3). The Senate Finance Committee commenting on this change said (Senate Report No. 2114, Cumulative Bulletin 1940-2), pages 528, 532: "Your committee has made no change in the determination of equity invested capital except to clarify the provisions which were designed to avoid any overstatement of invested capital as the result of duplicating amounts in the items of earnings and profits and property paid in. Such a duplication might otherwise arise in the computation of invested capital in cases of reorganization and other tax-free exchanges."
Further in the same report the Committee stated on page 539:
"Section 718. Invested Capital. This section is substantially as it was in the House bill except for certain clerical and technical changes. The most important of these are as follows:
"(1) Section 718(c) (4) of the House bill provided that, in making the computations required by subsections (a) and (b), the earnings and profits of a transferee corporation were not to include the earnings and profits of another corporation which would otherwise be included by reason of property of such other corporation having been paid in for stock, or as a contribution to capital, or as paid-in surplus, of the transferee corporation.This subsection has been inserted as Section 718(b) (3) and made an actual step in the computation."
The Conference Committee accepting the Senate changes said regarding them (H. Conference Rep. No. 3002, 76th Cong., 3rd Sess. (1940-2 Cum. Bull. 548) at page 49): "The conference agreement also makes further technical changes in order to eliminate duplications in the computation of equity invested capital. Provisions have been inserted governing the extent to which the equity invested capital of a parent corporation is to be increased or decreased following a liquidation under section 112 (b) (6). This provision enables the provisions of section 718(b) (3) to be expanded so as to cover all situations in which, under the doctrine of Commissioner v. Sansome, 2 Cir. 60 F.2d 931, the earnings and profits of one corporation become the earnings and profits of another."
As seen, unquestionably Congress in considering this branch of the excess profits tax problem had in mind possible duplication of equity invested capital. If the House proposal of 718(c) (4) calling for a reduction of accumulated earnings and profits alone and not providing for a reduction of equity invested capital had been adopted, the present question might well not have arisen. But 718(c) (4) was deliberately eliminated and in its place 718(b) (3) was substituted with the Conference Committee reporting as to the latter that it was "expanded so as to cover all situations in which, under the doctrine of Commissioner v. Sansome, 2 Cir., 60 F.2d 931, the earnings and profits of one corporation become the earnings and profits of another." It is fair to assume that if Congress had intended the section which it finally adopted not to apply to such facts as here presented it would have so stated. That is just what it did with section 718(a) (4) which is specifically limited to corporations having accumulated earnings and profits. The House Committee, though it was dealing with the proposed section 718(c) (4) at the time, nevertheless understood that the legislation would affect a deficit corporation. See House Report No. ...