Case Name: W. P. Hobby, Petitioner, v. Commissioner of Internal Revenue, Respondent
Court: United States Tax Court
Jurisdiction: United States
Decision Date: 1943-11-15
Citations: 2 T.C. 980
Docket Number: Docket No. 109663
Parties: W. P. Hobby, Petitioner, v. Commissioner of Internal Revenue, Respondent.
Judges: HaRRON, J., agrees with this dissent.
Reporter: Reports of the Tax Court of the United States
Volume: 2
Pages: 980–990

Head Matter:
W. P. Hobby, Petitioner, v. Commissioner of Internal Revenue, Respondent.
Docket No. 109663.
Promulgated November 15, 1943.
James H. Teatman, Esq., H. I. Wilhelm, G. P. A., and J. A. Phillips, C. P. A., for the petitioner.
Homer J. Fisher, Esq., and James L. Bachstrom, Esq., for the respondent.

Opinion:
OPINION.
Sternhagen, Judge:
The Commissioner's ground for the deficiency is his determination that the gain realized by the petitioner in his disposition of the Enterprise shares in the four transactions was a short term liquidation gain in the redemption of the shares, taxable under section 115 (c) and (i). The petitioner contends that as a matter of fact he sold each of the four blocks of Enterprise shares after* he had held them for more than twenty-four months, and that the gain which he realized was therefore a long term capital gain, taxable under section 117 (a) (4) and (b).
In our opinion, the evidence completely supports the petitioner's position. In each instance he in fact sold the shares to another indi vidual for an agreed price, and they were delivered and title to them passed. The sales were completed before the corporation redeemed or retired the shares and at the time of such redemption petitioner was not the owner or in any other way related to them. To him, the gain realized was in the sale price and he received nothing from the corporation as a redemption. The redemption occurred after petitioner had sold the shares, and we can see no ground upon which the redemption can be attributed to him.
The Commissioner argues that petitioner did not in fact sell, or may not be regarded as having sold, the shares. He says that this is because the alleged sale "had no business purpose." What kind of '"business purpose" must be shown as necessary to the recognition of a sale is not made clear, and there is no statutory requirement to that effect. The question is not one of purpose, but whether the transactions were in fact what they appear to be in form. Chisholm v. Commissioner, 79 Fed. (2d) 14. It is true that the sales were made at times when their effect would be to avoid the impact of the forthcoming redemption and the resulting tax. Petitioner, a shareholder, had an unrealized increment in his shares which he wanted to realize. Collaterally he wanted to use a legitimate transaction which would impose upon him the least tax. This is not an interdicted purpose. The primary purpose to realize the gain was a legitimate business purpose, even though it also had a collateral favorable tax effect.
The Commissioner argues that the sales were not bona fide, since petitioner's purpose was to avoid the short term gain tax which would have resulted if he had held the shares until the redemption. There was, however, no lack of good faith between the petitioner and the respective purchasers. Both intended that complete title and control should pass for a fixed price, — that for all purposes petitioner's ownership should end and the purchaser's begin with the transfer. This was fulfilled, and so far as this record discloses no one could upset the sale for lack of tona -fi'des or refuse to recognize the purchaser as the owner. The petitioner's tax saving purpose did not invalidate the sale. Clearly the corporation could not have refused to recognize the purchaser as entitled to the redemption amount.
It is suggested that the sale to Borden can not be regarded as bona fide because Borden in effect gave Hobby the dividend of $1,050, thus recognizing Hobby's right and ownership. But Borden testified,— and we have no reason to doubt the testimony, — that he intended this as a gjft to Hobby. Hobby did not claim the dividend as his own. The gift was-one which Borden intended to and was entitled to make (see Helvering v. American Dental Co., 318 U. S. 322), and it did not indicate that the Borden sale was any less a sale than the other three.
The Commissioner cites Gregory v. Helvering, 293 U. S. 465; Griffiths v. Helvering, 308 U. S. 355, and Higgins v. Smith, 308 U. S. 473, but these decisions are not analogous. On the other hand, John D. McKee et al., Trustees, 35 B. T. A. 239, and Clara M. Tully Trust, 1 T. C. 611, fully support the petitioner's contention.
The determination of the Commissioner can not be sustained, and
Decision will be entered for the petitioner.
Reviewed by the Court.