Opinion ID: 334653
Heading Depth: 1
Heading Rank: 2

Heading: the exchange of stock

Text: 13 As a general rule, the incident of taxation depends on the substance rather than form of the transaction. Commissioner of Internal Revenue v. Court Holding Co., 324 U.S. 331, 65 S.Ct. 707, 89 L.Ed. 981 (1945); Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788 (1940); Higgins v. Smith, 308 U.S. 473, 60 S.Ct. 355, 84 L.Ed. 406 (1939); Griffiths v. Helvering, 308 U.S. 355, 60 S.Ct. 277, 84 L.Ed. 319 (1939); Minnesota Tea Co. v. Helvering, 302 U.S. 609, 58 S.Ct. 393, 82 L.Ed. 474 (1938); Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935); Crenshaw v. United States, 5 Cir. 1971, 450 F.2d 472; Redwing Carriers, Inc. v. Tomlinson, 5 Cir. 1968, 399 F.2d 652. As Judge Rives stated in Kanawha Gas & Util. Co. v. Commissioner of Internal Revenue, 5 Cir. 1954, 214 F.2d 685: 14 This basic concept of tax law is particularly pertinent to cases involving a series of transactions designed and executed as parts of a unitary plan to achieve an intended result. Such plans will be viewed as a whole regardless of whether the effect of so doing is imposition of or relief from taxation. The series of closely related steps in such a plan are merely the means by which to carry out the plan and will not be separated. Id. at 691. 15 Moreover, courts have repeatedly observed that a given result at the end of a straight path is not made a different result because reached by following a devious path. Minnesota Tea Co. v. Helvering, 302 U.S. 609, 613, 58 S.Ct. 393, 395, 82 L.Ed. 474, 477. 16 Relying on these principles, the trial judge concluded, and we agree, that taxpayers' acts were 17 merely component parts of a single transaction. (citations omitted). The contribution of Enterprises' stock to Kuper Volkswagen and the later redemption by Kuper Volkswagen of George's Kuper Volkswagen stock were simply steps in a circuitous route deliberately taken in the futile hope of disguising the fundamental nature of the underlying stock-for-stock exchange transaction at the shareholder level. 61 T.C. at 630. 18 Petitioners criticize this refusal to recognize the integrity of each of the individual steps of the transaction. They argue that taxpayers are permitted to arrange their tax affairs so as to minimize the amount owed to the Federal Government. Unquestionably the taxpayer has a legal right to plan his business activities in the light of the tax laws. Gregory v. Helvering, 292 U.S. 465, 469, 55 S.Ct. 266, 267, 79 L.Ed. 596, 599 (1935). The Commissioner, however, must accept the form and accompanying legal characterization of taxpayer's business transactions only insofar as they are comprehended within the intention of the pertinent revenue statutes. Id. We do not believe that Congress intended that under the circumstances of the present case taxpayers could utilize this series of steps to artificially avoid the tax incidents of a simple stock exchange. As Chief Judge Brown said in Crenshaw v. United States, 5 Cir. 1971, 450 F.2d 472, where the Court refused to examine the discrete parts of a transaction except insofar they constituted a substantive whole: 19 (Taxpayers) cannot compel a court to characterize the transaction solely upon the basis of a concentration on one facet of it when the totality of circumstances determines its tax status. The most obvious answer to Taxpayer's argument that the parties' characterization is conclusive is that such a result would completely thwart the Congressional policy to tax transactional realities rather than verbal labels . . . Otherwise, form, rather than substance, would invariably prevail. Id. at 477-78. 20 This approach is especially proper where, as here, it is unlikely that any one step would have been undertaken except in contemplation of the other integrating acts, all of which when seen together substantively form a taxpayer level stock swap. 21 Taxpayers assert that we confront here an ordinary Congressionally approved total redemption of George's Kuper Volkswagen stock pursuant to I.R.C. § 302(b) (3) under which the selling stockholder (George) receives capital gains and the remaining shareholders experience no tax effect. See note 4 supra. Specifically, petitioners argue that the corporation did not undertake any primary and personal obligation of the buying shareholders to buy out the selling shareholder and thus did not come within the scope of the Fourth Circuit's holding in Wall v. United States, 1947, 164 F.2d 462 (finding a dividend where the corporation paid a share holder's debt which the latter had incurred in conjunction with the purchase of stock from another shareholder.) Clearly, Wall has been utilized in this Circuit to find dividend equivalency. See Griswold v. Commissioner of Internal Revenue, 5 Cir. 1968, 400 F.2d 427. Our decision, however, is not premised on a determination that Kuper Volkswagen assumed a buying stockholder's personal and pre-existing obligation but instead on our view of the substance of petitioners' actions as a stock exchange. Therefore, taxpayers' contention that they have not violated the Wall holding, although perhaps true, cannot alter the result in this case. 22 Moreover, so called bootstrap cases including Zenz v. Quinlivan, 6 Cir. 1954, 213 F.2d 914; Holsey v. Commissioner of Internal Revenue, 3 Cir. 1958, 258 F.2d 865; Ray Edenfield, 19 T.C. 13 (1952) 9 ; see generally Rev.Rul. 69-608, 1969-2, C.B. 43; B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders P 9.25 (1971), where an increase in a continuing shareholder's ownership interest is facilitated by corporation redemption of a part or all of the stock of another shareholder whose interest in the corporation is being reduced or terminated, are not determinative of this controversy. The present case is similar to the redemption cases just cited in that in vacuo the exchange between Kuper Volkswagen and George can be said to have had the effect of using corporate assets to relieve the cost burden to the buying shareholders (James and Charles). However, except for the $42,513.54 transfer, see section III infra, the assets used in the exchange (the Enterprise stock) had only the day before the exchange been contributed to Kuper Volkswagen by the Kuper Volkswagen shareholders. To this extent, corporate assets did not really assist in the termination of George's interest in Kuper Volkswagen. Rather, the corporation merely served as a conduit for the shuffling of certificates between the Kuper brothers in a manner which we find does not fall within the intent of the Revenue Statutes. Stated another way, any reliance on the above noted cases is undercut by our refusal to accept taxpayers' fundamental premise that one aspect of these transactions can be analyzed as a redemption separate and apart from the real overall substance of taxpayers' coordinated actions. See Redwing Carriers v. Tomlinson, supra. 23 A recent Ninth Circuit case, Portland Manufacturing Co. v. Commissioner of Internal Revenue, 9 Cir. 1975, 75-1 U.S.T.C. § 9449, lends support for our view of the transaction as a taxpayer level exchange of stock. On the basis of the Tax Court's opinion, 56 T.C. 58 (1971), the Court of Appeals affirmed decision in a case analogous to the one presently before this Court. Two companies, Portland Manufacturing Company (Portland) and Simpson Redwood Company (Simpson) were each 50% owners of Springfield Lumber Mills, Inc. (Springfield) and of an unincorporated business, Albany-Plylock (Plylock). Differences of opinion regarding the operations and conduct of the businesses of Plylock and Springfield, id. at 67, arose between Portland and Simpson. Because of these differences, the co-owners decided to separate their interests completely. They contemplated an end result in which Simpson would acquire Portland's 50% holding in Plylock and Portland would receive Simpson's 50% interest in Springfield. However, instead of undertaking a simple exchange of stock for assets, the parties engaged in a complicated series of transactions in which Portland asserted that it its only corporate act was a capital contribution of its Plylock holdings to Springfield. 10 The Commissioner, collapsing the steps, charged Portland with liability for a taxable exchange. Plaintiff sued in the Tax Court where a verdict was rendered for the Government. The Tax Court's opinion said: 24 It is clear that because of disagreements petitioner (Portland) and Simpson wanted to separate their interests . . . . Simply put, there was an exchange of interests, and the various steps taken to arrive at the final settlement were but component parts of a single transaction. Redwing Carriers, Inc. v. Tomlinson, 399 F.2d 652, 654 (C.A. 5, 1968), affirming an unreported decision of the District Court (M.D.Fla. 19 A.F.T.R.2d 1253, 67-1 U.S.T.C. par. 9392); S. Nicholas Jacobs, 21 T.C. 165, 169 (1953), affd. 224 F.2d 412 (C.A. 9, 1955); Kimbell-Diamond Milling Co., 14 T.C. 74, 80 (1950), affirmed per curiam 187 F.2d 718 (C.A.5, 1951); John Simmons Co., 14 T.C. 29, 32 (1950). . . . 25 To be sure, a taxpayer has the right to arrange his affairs so as to reduce the amount of tax incident to a transaction. Gregory v. Helvering, 293 U.S. 465, 469, 55 S.Ct. 266, 267, 79 L.Ed. 596, 599 (1935). However, this means a taxpayer may resort to tax planning, and not alchemy whereby mixing a brew of incorporation, conveyance, and liquidation, and incanting the language of deeds, bills of sale, and corporate minutes, a taxable exchange is changed into a tax-free reorganization. 26 The artificiality of the transaction is apparent when it is realized that the Plylock assets moved through the corporate hands of Springfield and APC in a matter of days, never pausing long enough to serve any business purpose, until they reached their ultimate destination, Simpson, where, for all we know, they have remained ever since. We fail to see how any legal significance can be attached to the two momentary stopovers. Cf. Ragland Investment Co., 52 T.C. 867 (1969), affd. 435 F.2d 118 (C.A. 6, 1970). 27 We find the Portland reasoning convincing in the present case where also we encounter a roundabout path, complete with a momentary stopover unnecessary to the achievement of the desired exchange of interests. 28 Seeking to avoid the substance over form contentions discussed above, taxpayers argue that since the Enterprise-Kuper Volkswagen separation of interest was motivated by a valid business purpose, the elimination of managerial friction between George and James, the Government should recognize the integrity of the individual steps. The simple answer to this claim is that a straightforward, taxable stock swap also would have accomplished this business objective. A legitimate business goal does not grant taxpayer carte blanche to subvert Congressionally mandated tax patterns. See United States v. Ingalls, 5 Cir. 1968, 399 F.2d 143, 146. Moreover, we note that the same business purpose asserted here the need to free the business of management conflict did not sanctify taxpayer's actions in Portland. 29 The Kupers further contend that not only the end result but also the exact structuring of the three-step arrangement was dictated by a valid business purpose. Specifically, petitioners assert that Kuper Volkswagen could not redeem George's Enterprise stock because such a redemption would have left the Volkswagen company with less working capital than that required by its franchisor. After examining all of the evidence including various tax returns, Kuper Volkswagen's financial statements, and the parties' testimony, the Tax Court rejected this contention. 11 In so acting, the Tax Court emphasized the availability of alternative methods of financing which would not have damaged Kuper Volkswagen's working capital ratio and its own conclusion that in reality the only conceivable purpose of the transactions involving the contribution of Enterprises stock to Kuper Volkswagen and Kuper Volkswagen's purported redemption of George's interest was to avoid any tax consequences at petitioners' level. 61 T.C. at 630. In other words, taxpayers did not wish merely to exclude George from Kuper Volkswagen ownership, their asserted business purpose, but also had larger tax objectives which ultimately controlled specific form of the transactions. Applying the clearly erroneous standard to the Tax Court's finding of primary purpose and rejection of petitioners' business purpose claim, see Sammons v. Commissioner of Internal Revenue, 5 Cir. 1972, 472 F.2d 449, 452; Chared Corp. v. United States, 5 Cir. 1971, 446 F.2d 745, 746, and closely scrutinizing the record, we cannot say that that Court erred. 12 Moreover we concur in that Court's conclusion that the discrete steps undertaken here must be seen as an exchange of stock. 30 As a general matter, it is important to emphasize that we are not saying that the exigencies of business finance can never legitimize the taxpayers' choice of a route different from that favored by the Internal Revenue Service, or that in arranging business dealings taxpayers have no flexibility in structuring their transactions as their judgment deems best. In certain circumstances, the Congress has approved the use of alternative tax and business paths to a given end. See, e.g., I.R.C. §§ 337, 351, 368. However, for this Court to permit taxpayers randomly to piece together the various provisions of the Code unhampered by any limits on the artificiality of their constructions would leave the Congressional taxing scheme in shambles. Because all of the combinations conceivable by a resourceful tax bar cannot be perceived in advance and because the background circumstances vary so greatly from case to case, we are unable to draw a single bright line separating in all instances unacceptable artifice from valid tax planning. Whatever the exact location of this boundary, it is clear that the present taxpayers have crossed over to an area where their transaction must be collapsed, characterized, and taxed on the basis of its substance a taxable exchange of stock.