Robert H. Jackson

“ But 'earnings and profits' in the tax sense, although it does not correspond exactly to taxable income, does not necessarily follow corporate accounting concepts, either. [8] Congress has determined that in certain types of transaction the economic changes are not definitive enough to be given tax consequences, and has clearly provided that gains and losses on such transactions shall not be recognized for income-tax liability but shall be taken account of later. §§ 112, 113. It is sensible to carry through the theory in determining the tax effect of such transactions on earnings and profits. ”

“ But to recognize the increment in value as affecting earnings and profits would no more harmonize with the taxless character of the transaction than to treat a realized gain as doing so. The same policy which carries over the transferor's basis for purposes of the corporation's income tax, § 113 (a) (8) , requires carrying it over for determining the taxability of its distributions as the Commissioner's regulation directs: gains and losses are to be brought into earnings and profits at the time and 'to the extent' that they are recognized under § 112. ”

“ The Act in 1938, the induce corporate liquidations, permitted a qualified stockholder to elect postponement of a portion of the gain realized on a December 1938 liquidation and to be taxed, as for a dividend, on 'so much of the gain as is not in excess of his ratable share of the earnings and profits of the corporation * * *.' If the market-value basis is used for the securities acquired from the Wheelers and later sold, the operations of the Company showed a deficit on November 30, 1938, when the books were closed. ”