Source: https://supreme.justia.com/cases/federal/us/414/982/
Timestamp: 2019-04-21 06:11:55+00:00

Document:
Norman E. ALBERS et al., Executors, Estate of Joseph Miele, et al.
Rehearing Denied Dec. 10, 1973.
Mr. Justice POWELL, with whom Mr. Justice DOUGLAS and Mr. Justice BLACKMUN, join dissenting.
a proposed first mortgage loan from a bank. Before the Commission would extend its guarantee, it required to A & at least $150,000 of additional private capital. The Commission presented A & B with two options. A & could resort either to subordinated debt or to the issuance of nonvoting, nondividend paying, noncumulative preferred stock unredeemable until full payment of the desired loan.
A & chose the latter course. In proportion to their holdings of A & common, petitioners in 1959 purchased $150,000 of preferred stock possessing all the attributes required by the Commission. The loan was then consummated with the Commission's guarantee, and A & purchased a replacement vessel. By 1964 the loan was paid off in full. Having no further need for the $150,000, and in accord with the wishes of petitioners,1 A & redeemed the preferred stock in 1965 and 1966 in two equal installments. No premium was paid and petitioners received precisely the amount each had previously invested. The Commissioner of Internal Revenue treated the redemptions as the receipt of ordinary income, taking the view that they were 'essentially equivalent to a dividend' within the meaning of 302(b)(1) of the Internal Revenue Code of 1954, 29 U.S.C. 302(b)(1). Citing United States v. Davis, 397 U.S. 301 (1970), the Tax Court agreed. Joseph Miele et al., 56 T.C. 556 ( 1971); La Fera Contracting Co., T.C. Memo 1971-161. The Court of Appeals for the Third Circuit affirmed without published opinions. Miele v. Commissioner of Internal Revenue, 474 F.2d 1338 (1973); La Fera Contracting Co. v. Commissioner of Internal Revenue, 475 F.2d 1395 (1973); Spiniello v. Commissioner of Internal Revenue, 475 F.2d 1396 (1973).
is 'always 'essentially equivalent to a dividend" where there is no 'change in the relative economic interests or rights of the stockholders.' 397 U.S., at 307, 313 (emphasis added). Undoubtedly the Court sought to promote ease of administration through adoption of a simplistic, per se rule. Yet the Court explicitly recognized that the weight of authority in the lower federal courts was contrary to its mechanical approach. Id., at 303, n. 2. Furthermore, the Court conceded that the 'legislative history is certainly not free from doubt.' Id., at 311.
In my view, the result produced by Davis in this case is justified neither by the language of the Code nor by the legislative history, and certainly not by precedent prior to Davis. In these circumstances, ease of administration is too high a price to pay for the presumably unforeseen and undeniably harsh consequences visited on these and similarly situated taxpayers.
'We consider [petitioners'] argument as having been foreclosed and the issue determined by the case of United States v. Davis, 397 U.S. 301 (1970).
'When the Court holds it [the redemption under consideration in Davis] was a dividend, it effectively cancels 302(b)(1) from the Code. This result is not a matter of conjecture, for the Court says that in the case of closely held or one-man corporations a redemption of stock is 'always' equivalent to a dividend.' 397 U.S., at 314, 90 S. Ct. 1041.
The Tax Court's decision in this case abundantly bears out Mr. Justice DOUGLAS' view. In light of the deliberate retention of the 'essentially equivalent to a dividend' language in the 1954 revision of the Code, most courts prior to Davis had assumed that 302(b)(1) required a factual determination as to the business purpose of the stock redemption. 5 Had such a factual inquiry been made in this case, it is evident that the result would have been different.
One may recognize the tax avoidance concern underlying the Court's opinion in Davis7 without concluding that the only remedy with respect to closely-held corporations is 'always' to tax stock redemptions as dividends without regard to facts and circumstances. It may indeed have been reasonable to create a rebuttable presumption in favor of the Government, but it is difficult to see a justification for a result as harsh and inequitable as that often produced by the Davis rule. Moreover, if Congress' purpose was to enact the Davis per se rule, it could have been expressed in the simplest language. [Footnote 8] As the Court notes in Davis, the Senate Finance Committee deliberately chose not to take that option. 397 U.S., at 310-311.
In my view the Davis rule, often a trap for unwary investors in small businesses and facially contrary to the relevant Code provision, should be reconsidered.
Footnote 1 One may understand the desire of petitioners to have their capital contributions returned, as the preferred stock was nondividend paying.
Footnote 2 I am not unaware of the importance of stare decisis, especially with respect to the tax code. Yet, even in the tax area, the Court has recognized that the policies underlying stare decisis do not require 'adherence to the latest decision, however recent and questionable, when such adherence involves collision with a prior doctrine more embracing in its scope, intrinstically sounder, and verified by experience.' Commissioner of Internal Revenue v. Hallock et al., 309 U.S. 106, 119 (1940).
'Distributions in Redemption of Stock.
'(a) General Rule.-If a corporation redeems its stock . . ., and if paragraph (1) . . . of subsection (b) applies, such redemption shall be treated as a distribution in part or full payment in exchange for the stock.
Footnote 4 No finding was made by the Tax Court, for example, that an earned surplus was available from which ordinary dividends could have been paid.
Footnote 5 See cases cited in United States v. Davis, supra, 397 U.S., at 303 n. 2.
Footnote 6 This one qualification (namely, a change in the relative economic interests or rights of stockholders) may immunize from Davis consequences the larger corporations, where a congruity of interest between common and preferred stockholders is found far less frequently than in the family type of small corporations. But even where it can fairly be said (and often the facts as to this are ambiguous) that there has been no such change, this does not mean that minority stockholders are not severely penalized by the Davis rule. In this case, the Tax Court noted that the redemption was made at the insistence of petitioners, who were in the unhappy position of the holding nondividend preferred stock. But nothing in Davis protects a minority stockholder in a close corporation (and their number is legion) who may have little or no influence as to whether or when preferred stock is redeemed. If the majority shareholders in such a corporation effect a pro rata redemption, a minority shareholder has no means to avoid Davis consequences. In this connection, the language of the Senate Finance Committee in restoring the 'essentially equivalent' language to 302 of the Code is relevant. The Senate Committee stated that the House bill, which had deleted this language, 'appeared unnecessarily restrictive, particularly, in the case of redemptions of preferred stock which might be called by the corporation without the shareholder having any control over when the redemption may take place.' S. Rep.No.1622, 83d Cong., 2d Sess., 1954 U.S.Code Cong. & Admin. News, p. 4675. See United States v. Davis, supra, 397 U.S., AT 310. The truth is that minority shareholders, even in close corporations, frequently have no such control.
Footnote 7 See B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders 9-2 (3d ed. 1971).
Footnote 8 It has been suggested that since Davis was decided March 23, 1970, Congress has had more than three years to repudiate or ameliorate the Davis per se rule. With all respect, this suggestion seems unrealistic. Congress has had under consideration during this period a general revision of the Code as well as a broad reexamination of many of the fundamental assumptions underlying the present Code. It is unlikely that piecemeal adjustments would have been made during this period of study and reexamination. Furthermore, the Davis rule falls most heavily on small, family corporations unlikely to have specialized tax counsel capable of warning that Davis has converted 302(b)(1) into 'a treacherous route to be employed only as a last resort.' B. Bittker & J. Eustice, supra, at 9-9. It is these very corporations that are least likely to make their voices heard in Congress, since they have limited 'lobbying' capabilities.

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