Source: https://law.justia.com/cases/federal/appellate-courts/F2/218/719/61281/
Timestamp: 2020-01-26 14:59:23
Document Index: 209933107

Matched Legal Cases: ['§ 115', '§ 8623', '§ 1701', '§ 115', '§ 115', '§ 115']

Anna I. Woodworth et al., Petitioners, v. Commissioner of Internal Revenue, Respondent, 218 F.2d 719 (6th Cir. 1955) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Sixth Circuit › 1955 › Anna I. Woodworth et al., Petitioners, v. Commissioner of Internal Revenue, Respondent
Anna I. Woodworth et al., Petitioners, v. Commissioner of Internal Revenue, Respondent, 218 F.2d 719 (6th Cir. 1955)
U.S. Court of Appeals for the Sixth Circuit - 218 F.2d 719 (6th Cir. 1955) January 27, 1955
L. F. Loux, Cleveland, Ohio (Orgill, Klein, Loux & Wickham, Cleveland, Ohio, on the brief), for petitioners.
S. Dee Hanson, Washington, D. C. (H. Brian Holland, Ellis N. Slack, Lee A. Jackson and L. W. Post, Washington, D. C., on the brief), for respondent.
The controversy grows out of the acquisition of control of The Buckeye Stamping Company, hereinafter called "Buckeye," by a purchasing syndicate in 1943. The petitioners were members or are successors in interest to members of the syndicate.
Early in 1943 Earle C. Derby died, leaving his widow, personally and as executrix, in control of ninety per cent of Buckeye's outstanding shares. At that time Buckeye had substantial accumulated earnings, represented largely by government bonds and other marketable securities. Mrs. Derby, of advanced age and with no experience or training to conduct the affairs of the corporation she thus controlled, embarked upon negotiations for the disposition of her interest in Buckeye almost immediately upon her appointment as executrix.
On this review petitioners vigorously urge that the Tax Court's factual findings are clearly erroneous. They say that the written agreement of September 4 was superseded by "other and different agreements," and that in the actual transaction as carried out Mrs. Derby caused Buckeye's accumulated earnings represented by its liquid assets to be paid over to her, leaving Buckeye only its operating assets before the syndicate members acquired control of the company.
Petitioners say that their subsequent execution of notes payable to Buckeye for stock certificates issued in their names was an independent transaction amounting to nothing more than an agreement to purchase stock from the company, which was rescinded by mutual consent in 1945. They say that some shares were purchased under this agreement as payments were made on the notes from 1943 to 1945. They emphasize that it was only because counsel advised the company in 1945 that the purported issuance of stock in return for notes was illegal under Ohio law, that the company in that year cancelled all stock for which payment in full had not been received, and returned all unpaid notes to the syndicate members. They insist that in view of these circumstances there was no "distribution," no "redemption," and indeed no earnings or profits to distribute since these had been paid to Mrs. Derby in 1943, and that § 115(g) of the Internal Revenue Code can therefore have no application.
The petitioners further contend that, since under the Ohio law a corporation may not accept promissory notes in payment for shares, the purported stock certificates and notes were a nullity, and therefore no valid shares were cancelled and no valid notes releaseD. Ohio General Code § 8623-22; cf. Ohio Revised Code § 1701.26; see State ex rel. Cullitan v. Stookey, Cuyahoga County 1953, 95 Ohio App. 97, 113 N.E.2d 254. This contention would, of course, have bearing only if we should reject the Tax Court's finding that the syndicate members purchased their shares from Mrs. Derby.
The petitioners' arguments are not without force. We are unable, however, to hold clearly erroneous the Tax Court's finding that the terms under which Mrs. Derby parted with her stock in 1943 were those contained in the written agreement of September 4, providing for the sale of her stock to petitioners, not to Buckeye. Despite the inconsistencies emphasized by petitioners, most of the facts of record sustain the view that what was done was done pursuant to the September 4 agreement. That agreement provided that Mrs. Derby was to transfer her shares to the syndicate members or their nominees, and her subsequent transfer of them to Buckeye is, therefore, not necessarily so inconsistent as at first blush would appear. Moreover, Buckeye's books and records are consistent with the Tax Court's finding and inconsistent with the theory advanced by petitioners. Buckeye's books continued during the remainder of 1943 and throughout 1944 to show its outstanding stock as two thousand shares of a par value of $100 each. Buckeye never recorded or carried on its books as treasury stock the eighteen hundred shares in question. The balance sheet showed a surplus at the end of 1943 comparable to that of the prior year. Book entries are, of course, not conclusive, but they are evidential. Doyle v. Mitchell Brothers Co., 1918, 247 U.S. 179, 187, 38 S. Ct. 467, 62 L. Ed. 1054. Other corroborating evidence is reviewed in the Tax Court's opinion and need not be repeated here.
The here pertinent language of § 115 (g) has been in the revenue statutes since 1926, and over the years the courts have searched for some sure touchstone that would tell when it is that a distribution in partial redemption is "essentially equivalent" to the payment of a dividend. The search has been in vain.
It was once widely supposed that in order to invoke the statute an intent to avoid taxes had to be shown. Patty v. Helvering, 2 Cir., 1938, 98 F.2d 717; Commissioner of Internal Revenue v. Cordingley, 1 Cir., 1935, 78 F.2d 118. It was thought that a legitimate business purpose for the partial redemption was enough to avoid the inpact of the statute's provisions. Bona Allen, Jr., 1940, 41 B.T.A. 206; Commissioner of Internal Revenue v. Champion, 6 Cir., 1935, 78 F.2d 513.
Then, in the light of the Supreme Court's opinion in Commissioner of Internal Revenue v. Bedford's Estate, 1945, 325 U.S. 283, 65 S. Ct. 1157, 89 L. Ed. 1611, the pendulum swung the other way, and it was even suggested that the only test might be the mere existence of earnings and profits. Kirschenbaum v. Commissioner, 2 Cir., 1946, 155 F.2d 23, 170 A.L.R. 1389. As soon perceived, however, the question could not be so simply resolved. For if Section 115(c) prescribing capital gain treatment for redemption of stock in partial liquidation is to have any application, not all stock redemption cases can be disposed of by simple reference to the availability of earnings and profits. Commissioner of Internal Revenue v. Snite, 7 Cir., 1949, 177 F.2d 819.
In Flanagan v. Helvering, 1940, 73 App.D.C. 46, 116 F.2d 937, 939, 940, Judge (later Chief Justice) Vinson wrote that it is the "net effect of the distribution rather than the motives and plans of the taxpayer or his corporation," that is "the fundamental question in administering § 115(g)." Yet it has been said that "the net-effect test is not a test but an attractive abbreviation of the statute * * *. `Net effect' is a paraphrase for `essentially equivalent.'" Commissioner of Internal Revenue v. Sullivan, 5 Cir., 1954, 210 F.2d 607, 609.
So the decided cases in the end only lead back to the door at which we entered, the statute itself, which imposes an ordinary income tax upon a partial liquidation only when made "at such time" and "in such manner" as to make the distribution and cancellation essentially equivalent to the distribution of a dividend.2
That being so, it can be argued that to permit the decision of the Tax Court to stand is to permit form to triumph over substance. Yet, to the extent here implied, it is form which often must prevail, when the delicate question involved is whether the extraction of a corporation's earned surplus has been accomplished at less than the rates taxed upon ordinary income. Cf. Chamberlin v. Commissioner, 6 Cir., 1953, 207 F.2d 462. "If a taxpayer has two legal methods by which he may attain a desired result, the method pursued is determinative for tax purposes without regard to the fact that different tax results would have attached if the alternative procedure had been followed." Woodruff v. Commissioner, 5 Cir., 1942, 131 F.2d 429, 430. Indeed the statute directs that the "manner" of the transaction be a controlling factor.
The Tax Court's finding of substantial equivalence to a dividend, although decisive of the sole ultimate issue, remains a finding of fact. Commissioner of Internal Revenue v. Champion, supra; Lowenthal v. Commissioner, supra; McGuire v. Commissioner, supra; Kirschenbaum v. Commissioner, supra. In view of the court's finding as to the "manner" of the transaction, and of the retention by petitioners of undiminished fractional interests in Buckeye after all was over, we cannot conclude that the Tax Court's disposition of the ultimate issue was clearly erroneous.
"If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend." 26 U.S.C.A. § 115(g)
"No rule of construction applicable alike in all cases can be accepted, but each case presents questions of fact to be determined in the light of all the surrounding circumstances, and whether a given case falls within or without * * * section 115(g) is often a difficult question and one inviting the closest scrutiny of the trier of the facts." McGuire v. Commissioner, 7 Cir., 1936, 84 F.2d 431, 432. Cf. Treasury Regulations 111, Sec. 29.115-9 "The question * * * depends upon the circumstances of each case."