The Scope and Effect of Treasury Regulations under the Income, Estate, and Gift Taxes

Abstract

In the recent decision of Helvering v. R. J. Reynolds Tobacco Co.g the Supreme Court sharply focused attention on an important problem of income tax administration which had been quietly developing in recent years. This decision involved the question of the relationship of Treasury Regulations to the interpretation and application of the revenue acts. While the circumstances of the case suggested the dream-like details of a law school examination problem, the situation presented is nevertheless merely one of many possible intricate patterns. The taxpayer corporation, Reynolds Tobacco Company, had in I929 sold at a profit some of its own stock which it had previously purchased. The only statutory provision pertinent to the question of whether such profit should be included in taxable income was the broad definition of gross income in Section 22(a) of the Revenue Act of I928.2 Regulations 74, Article 66 under that Act contained the statement that A corporation realizes no gain or loss from the purchase or sale of its own stock, and this had been the uniform rule of the regulations since I920. In May, 1934, partly as a result of a circuit court of appeals decision 3 indicating that taxable income might arise where a corporation dealt in its own shares as if they were the stock of another corporation, T. D. 4430 4 was issued by the Treasury Department providing that whether such transactions gave rise to taxable gain depended upon their real nature, and further that if a corporation did so deal in its shares as if they were the shares of another corporation, gain or loss should be computed as though the corporation were actually dealing in such shares. This Treasury Decision retroactively amended Regulations 74, Article 66. The Reynolds case was then pending in the Board of Tax Appeals on other issues. Relying upon the Regula-