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A United States Court of Appeals is without power on review of proceedings of the Board of Tax Appeals to make any findings of fact. The function of the court is to decide whether the correct rule of law was applied to the facts found; and whether there was substantial evidence before the Board to support the findings made. If the Board has failed to make an essential finding and the record on review is insufficient to provide the basis for a final determination, the proper procedure is to remand the case for further proceedings before the Board. And the same procedure is appropriate even when the findings omitted by the Board might be supplied from examination of the records.
General Utilities, a Delaware corporation, acquired 20,000 shares (one-half of total outstanding) common stock Islands Edison Company, for which it paid $2,000. Gillet & Company owned the remainder. Whetstone, President of Southern Cities Utilities Company, contemplated acquisition by his company of all Islands Edison common stock. He discussed the matter with Lucas, petitioner's president, also with Gillet & Company. Lucas pointed out that the shares which his company held could only be purchased after distribution of them among stockholders, since a sale by it would subject the realized profit to taxation, and when the proceeds passed to the stockholders there would be further exaction. General Utilities’ directors considered the disposition of the Islands Edison shares. Officers reported they were worth $1,122,500, and recommended an appreciation on the books to that figure. Accordingly, 19,090 shares were distributed amongst General Utilities’ thirty-three stockholders and proper transfers to them were made upon the issuing corporation's books. It retained 910 shares. After this transfer, all holders of Islands Edison stock, sold to Southern Cities Utilities Company at $ 56.12 1/2 per share. General Utilities realized $46,346.30 net profit on 910 shares and this was duly returned for taxation. There was no report of gain upon the 19,090 shares distributed to stockholders. The Commissioner of Internal Revenue declared a taxable gain upon distribution of the stock in payment of the dividend declared. General Utilities sought certiorari of a judgment from the United States Court of Appeals for the Fourth Circuit, which reversed a decision of the Board of Tax Appeals that had overruled an income tax assessment by respondent Commissioner of Internal Revenue on the gain realized on the sale of stock to a third party. General Utilities contended that, because the stock had been sold by its shareholders, petitioner realized no taxable gain.
In reviewing a decision of the Board of Tax Appeals, may the Circuit Court of Appeals sustain an assessment over the Board's decision upon a ground which was not presented to the Board nor in the petition for review?
The United States Supreme Court concluded that the lower court erred in considering the contention that the sale was, in reality, a sale by General Utilities because that objection had not been presented to or ruled upon by the Board of Tax Appeals. The lower court was without power on review to make any finding of fact, but it inferred a fact directly in conflict with the stipulation of the parties and the findings, for which the record afforded no support whatsoever. The lower court rightly concluded that General Utilities derived no taxable gain from the distribution to its stockholders of the stock as a dividend. Based upon that conclusion, the judgment was reversed.