Legal Document

25 United States Supreme Court Reports Lawyer’s Edition 2d Series KF101.8 U54 323 90 Reporter 1041 397 U.S. 301 UNITED STATES, Petitioner,v.Maclin Pacific KF135 P2 DAVIS et ux. Number 282. Argued Jan. 12, 1970. Decided March 23, Rehearing Denied April 27, See 1071, 1495. Sol. Gen. Erwin N. Griswold, for petitioner. William Waller, Nashville, Tenn., respondents. Mr. Justice MARSHALL delivered the opinion of Court. 1 In 1945, taxpayer1 and E. baron Bradley organized a corporation. exchange property transferred to new company, received 500 shares common stock, taxpayer his wife similarly each 250 such shares. Shortly thereafter, made an additional contribution corporation, purchasing 1,000 preferred stock at par value $25 per share. 2 The purpose this latter transaction was increase company's working capital thereby qualify loan previously negotiated through Reconstruction Finance Corporation. It understood that corporation would redeem when RFC had been repaid. Although in interim bought Bradley's divided them between son daughter, total capitalization company remained same until 1963. That year, after fully repaid accordance with original understanding, redeemed taxpayer's stock. 3 1963 personal income tax return did not report $25,000 by him upon redemption as income. Rather, considered sale company—a gains under § 302 Internal Revenue Code 1954 resulting no since basis equaled amount he it. Commissioner Revenue, however, approve treatment. According Commissioner, essentially equivalent dividend thus taxable ordinary §§ 316 Code. Taxpayer paid deficiency brought suit refund. District ruled favor, 274 F.Supp. 466 (D.C.M.D. Tenn. 1967), on appeal Appeals affirmed. 408 Federal Reporter, 2nd 1139 (C.A.6th Cir. 1969). 4 held 'not dividend' within meaning phrase 302(b)(1) because final step course action legitimate business (as opposed avoidance) purpose. holding represents only one variety treatments accorded similar transactions circuit courts appeals.2 We granted certiorari, 396 815, 88, 24 66 (1969), order resolve recurring question involving redemptions closely corporations. reverse. 5 * provides generally treatment distributions its shareholders; those provisions, distribution is includable gross out earnings profits extent exist.3 There are exceptions application these general among found certain basic case whether falls section—more specifically, motivation qualifies Preliminarily, we must consider relationship rules regarding attribution ownership 318(a) 6 Under subsection (a) 302, treated 'payment stock,' qualifying rather than treatment, if conditions contained any four paragraphs (b) met. addition paragraph (1)'s test, available where (2) voting strength substantially diminished, (3) interest completely terminated, or (4) railroad redeemed. Paragraph involved here, admits do apply. Moreover, agrees purposes 302(b)(2) apply own 750 outstanding children name.4 7 Taxpayer, argues considering 302(b)(1). taxpayer, should be percent corporation's then it pro rata proportionate interest, fundamental test equivalency. Treas.Reg. 1.302—2(b). However, plain language statute compels rejection argument. (c) specifically applicable 'in determining section.' Applying language, both below applies all including 302(b)(1)—a view accord decisions other appeals,5 longstanding treasury regulation,6 leading commentators.7 8 Against weight authority, result (1) different there explicit reference (3). Neither fact, nor history support rules—designed provide clear answer what otherwise difficult question—formed part bill subsequently enacted As discussed further, infra, passed House Representatives provision comparable When added Senate, evidenced restrict applicability 318(a). continued entire section, believe Congress intended they taken into account wherever relevant. 9 Indeed, necessary unless were effectively eliminated from consideration regard also. For failed sections solely rules, according argument nonetheless cannot agree so nullify directive. conclude, therefore, apply; and, deciding 302(b)(1), deemed owner II 10 After viewed most simply involves sole stockholder who causes conclude always 'essentially 302(b)(1)8 therefore reach Government's alternative event facts treatment.9 11 predecessor came law 201(d) Act 1921, 42 Statutes-at-Large 228: 12 'A shall subject but proceeds cancel time manner make cancellation dividend, *.' 13 Enacted response Court's decision dividends constitute income, Eisner versus Macomber, 252 189, 40 64 L.Ed. 521 (1920), obvious preventing avoiding distributing shareholders two transactions—a followed redemption—that have economic consequences simple dividend. Congress, soon recognized even without prior could effected whereby 'especially which has few stockholders, might able stockholders effect dividend.' H.R.Rep. 1, 69th Cong., 1st Sess., 5. cover situation, amended '(whether issued dividend)' whenever 'at manner' 1926, 201(g), 44 11. 14 This 1926 carried forward subsequent revenue act finally became 115(g)(1) 1939. Unfortunately, policies encompassed predecessors clear, resulted much confusion law. At first, assumed aimed avoidance schemes sought determine scheme existed. See, e.g., Quackenbos, 78 156 (C.A.2d Cir., 1935). later emphasis changed focus more distribution, many find like equivalent' if, example, motivated sufficiently strong nontax cases cited n. 2, supra. disagreement, about purpose, case-by-case determination decided 'on particular question.' Bains States, 289 644, 646, 153 Ct.Cl. 599, 603 (1961). 15 By revision 1954, draftsmen faced aptly described 'the morass created decisions.' Balenger 192, 196 (C.A.4th 1962). effort eliminate considerable exists area' facilitate planning, 1337, 83d 35, Cong. & Admin. News Page 4025, authors objective tests govern redemptions. Thus, language. provided 'safe harbors' corporate met now 16 Senate Committee's added, 'if continue 'existing law,' legislative reverted part' general' 1939 Government, old improper rely 'a redemption' 'an absence proscribed bail favorable rates.' Northup 240 304, 307 1957); Smith 121 692, 695 (C.A.3d 1941); cf. Estate Bedford, 325 283, 65 1157, 89 1611 (1945). need decide question, revisions merely re-enact 17 explaining reason adding Committee stated provisions 'appeared unnecessarily restrictive, particularly, called shareholder having control over may take place.' S.Rep. 1622, 44; 4675. explanation gives indication behind affect result.10 detailed technical evaluation 302(b) (1), reported follows: 18 'The incorporated interpretation currently employed section Your committee further intends applying future inquiry will devoted nature properly characterized redeeming presence material. Example: X, half does notwithstanding profits.' supra, 234, 4870. 19 scope revealed certainly free doubt. Government making relevant narrow sale, apparently rejecting past court also factors indicating tax-avoidance motive.11 least implication example given. clearly mandated laid down nothing suggests 'business purpose' redemption. just opposite inference drawn likely situation profits. wrong looking Second Circuit irrelevant equivalence' Hasbrook 343 811, 814 (1965). 20 strongly treat here elevate form substance. argues, subordinated instead buying gotten back difference substance largely problematical, complaints little proper prevent 21 enacting If distributes transfer change relative interests rights stockholders. Where effect, said satisfied requirement meaningful reduction shareholder's Clearly, (after rules) before redemption, test. reversed remanded dismissal complaint. 22 ordered. 23 Reversed remanded. DOUGLAS, whom BRENNAN concurs, dissenting. N Dec. Immigration Nationality Decisions Court, 466, Appeals, 1139, respondent's obtain reasons lower courts, dividend,' bona fide belies payment Appeals: 26 'Although closely-held corporations call close scrutiny law, circumstances case, allow mechanical transform scheme.' F.2d, 1143—1144. 27 holds cancels matter conjecture, says one-man 'always' leave Congress. References 'taxpayer' Maclin Davis. His party joint returns filed year question. Only unequivocally adopted Commissioner's Levin 385 (1967); 811 First Circuit, seems almost come conclusion, too. Compare Wiseman 371 816 (1967), Bradbury 298 111 (1962). appeals willing give some Berenbaum, 369 337 (C.A.10th 1966); Kerr 326 225 (C.A.9th 1964); Ballenger 192 1962); Heman 283 227 (C.A.8th 1960); Fewell, 255 496 (C.A.5th 1958). Neff 305 455, 157 322 Even required related, issuance supra; Gordon, 391 83, 88—89, 88 1517, 448 (1968). makes contention accumulated Section 'General rule.—For subchapter expressly applicable— '(1) Members family.— '(A) general.—An individual owning owned, directly indirectly, for— '(i) spouse (other legally separated decree divorce separate maintenance), '(ii) children, grandchildren, parents.' 318(b) 'section (relating stock).' 521, 526—527 Cir.1967); 337, 342 199 111, 116—117 (C.A.1st Bittker Judge Eustice, Income Taxation Corporations Shareholders 292 32 (2d ed. 1966). Of course, means 301, taxed present related investment necessity cited, either view, lose Treas. Reg. 1.302—2(c) applied 7, 291: 'It easy expansive construction major function immunizing minority holdings stock.' confirmed acceptance contractions—a factor earlier describing action, 'Your committee, bill, separates their significant elements kind incoherently aggregated definition partial liquidation. Those capital-gain characteristics various subjected, level, (§ 318). On hand, happens level assets distributed included concept liquidation.' S.Rep.No.1622, 49, Admin.News 4680. (Emphasis added.)

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