Commissioner of Internal Revenue v. Bollinger

PETITIONER: Commissioner of Internal Revenue
RESPONDENT: Bollinger
LOCATION: Chelsea, Michigan

DOCKET NO.: 86-1672
DECIDED BY: Rehnquist Court (1988-1990)
LOWER COURT: United States Court of Appeals for the Sixth Circuit

CITATION: 485 US 340 (1988)
ARGUED: Jan 13, 1988
DECIDED: Mar 22, 1988

ADVOCATES:
Alan I. Horowitz - on behalf of the Petitioner
Charles R. Hembree - on behalf of the Respondents

Facts of the case

Question

Media for Commissioner of Internal Revenue v. Bollinger

Audio Transcription for Oral Argument - January 13, 1988 in Commissioner of Internal Revenue v. Bollinger

William H. Rehnquist:

The opinion of the Court in Westfall against Irwin in No. 86-1672, Commissioner of Internal Revenue v. Jesse C. Bollinger.

Mr. Horowitz, you may proceed whenever you're ready.

Alan I. Horowitz:

Mr. Chief Justice, and may it please the Court:

The issue in this case concerns the two-tiered structure established by Congress to govern the tax treatment of a corporation and its shareholders.

To briefly summarize that structure, it treats a corporation as a separate taxable entity that must recognize on its own return the tax consequences of its business activities.

The shareholders' individual taxes are affected by this business activity only indirectly, that is, in connection with their own dealings with the corporate entity.

Corporate income is recognized by the corporation.

The shareholders pay tax on corporate income only when they receive a distribution of corporate earnings, either as dividends or liquidating distributions.

Similarly, when a corporation suffers net operating losses in a given year, that loss is deductible by the corporation on its own return and may be carried back to earlier years or carried forward for up to 15 years to be offset against corporate income in future years.

Such a loss would be reflected on the shareholders' return, only if they dispose of their interest in the corporation or liquidate it.

Back in the 1940s, this Court in the Moline case, considered the question whether this two-tiered tax structure applied in full to so-called dummy corporations.

That is, situations where a closely-held corporation's interest are essentially congruent with those of its shareholders or perhaps in many cases a sole shareholder, and where the business activity of the corporation is quite limited.

The facts of the Moline case are in many respects quite similar to those of the instant case.

In Moline, the Court held that the separate entity doctrine was fully applicable to the facts there.

In that case, the mortgagee had required an individual borrower to set up a corporation to hold title to mortgaged property.

The corporation engaged in little other business activity, and its expenses were paid directly by the individual shareholder.

Despite this limited activity and the undisputed fact that the individual was the beneficial owner of the property, the Court held that the corporation had to pay tax on the gain when the property was sold.

The Court summarized its holding, as follows, and I quote:

"Whether the purpose be to gain an advantage under the law of the state of incorporation or to avoid or to comply with the demands of creditors or to serve the creator's personal or undisclosed convenience, so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation, the corporation remains a separate taxable entity. "

The Court went on to say that once the taxpayer had chosen the corporate form for his own business purposes, he was bound by the tax consequences of this choice.

William H. Rehnquist:

There the corporation held the title to the property in its own name, the dummy corporation, didn't it?

Alan I. Horowitz:

That's right.

William H. Rehnquist:

So what this Court said was that the Code simply required the taxpayer to recognize the record state of affairs.

Alan I. Horowitz:

That's right.

The corporation was the owner of the property and the fact that it really didn't do anything other than operate for the individual shareholder didn't mean that that could just be transferred to the individual shareholder.

When the property was sold, the gain had to be recognized by the corporation and a corporate tax paid on the gain.

Now, this principle of Moline was reaffirmed several years later by the Court in the National Carbide case, and it's now a well-settled proposition, and indeed, a proposition that respondents do not directly challenge, although, as I'll explain later, we think the thrust of their argument here would seriously undermine the Moline principle.

We believe that this case is governed by the rule of Moline.

Respondents in this case chose the corporate form for their own business purposes, and now they seek to avoid the tax consequences of that choice.

In short, they want to have their cake and eat it too.