Court Opinion

ID: 4493287
Source: CourtListenerOpinion
Date Created: 2020-01-17 22:03:52.385901+00
Date Added: 2024-06-11T15:03:59.934398
License: Public Domain

Van Fossan,
dissenting: I agree with the holding of the majority that the contract in this case was indivisible and that the entire transaction was one on which gain or loss may be predicated. I *1197must dissent however from the conclusion that under the facts in this case the petitioner realized a gain from the surrender for cancellation of a block of its own stock.
The whole theory of income taxation is based on the concept that, where the taxpayer has acquired an increment, a gain, a profit, he should pay a tax thereon. Whereas he formerly had 100 units of value, now he has 100 units plus 10. The 10 units are taxable.
In this case we are looking at the situation solely as to the tax liability, i.e., the gain in money or property, of the corporation. We are not here concerned with the tax problems of the stockholders. So viewing the picture, wherein under the facts is petitioner richer than before the sale? How does the number of units of value possessed by petitioner after the sale compare with the number possessed before the sale? The answer to these questions seems simple when we resort to the figures in the case. Whereas petitioner had $466,997.24 in property available for distribution to stockholders, it now has $410,066.67 in property so available. The fact that the $410,066.67 is all cash while the $466,997.24 was part cash and partly other propery is beside the question. It was agreed that $466,997.24 represented the net cost and value of all assets, cash or otherwise. Therefore, for the purposes of this case it must be treated as equal to cash. Similarly, it would seem to be wholly immaterial to the question of gain to the corporation that whereas before the sale it would, on distribution, have divided the $466,997.24 among 12,533 shares, after the sale it would divide the $410,066.67 among 6,892 %s shares. The number of stockholders is immaterial so far as the corporation in liquidation is concerned.
When we ask the question: How is petitioner corporation better off financially by the cancellation?, we find the picture to be as follows : Before the sale there were 12,533 shares of stock entitled to share in net assets of an agreed value of $466,997.24. After the sale and cancellation there are 6,892 ¾8 shares of stock entitled to share in net cash assets of $410,066.67. Undoubtedly each remaining shareholder is in a better position than before the sale, — his stock is worth more because there are fewer shareholders entitled to share in the distribution. But wherein is the corporation in a better financial position? If it be said that it is pro tanto released from the liability created by the right of the shareholders to share in the distribution of the assets, it should be rejoined that as the liability of each share of stock was wiped out a new and proportionately equal additional right or liability was-created as to the remaining stockholders. The cancellation of part of the stock merely transferred the rights formerly held by some of the stockholders to those remaining.
*1198It is of no moment that the stock surrendered for cancellation was valuable. True, it was valuable in the bands of the stockholders before surrender, but on surrender and cancellation its value passed, not to the corporation, but to the other stockholders, whose shares were made proportionately more valuable. The assets of the corporation were not affected by the transmutation.
Respondent held that the receipt of the shares represented a gain of $210,961.89 to petitioner, or that the total receipts from the sale were $621,028.56. Obviously if petitioner received this sum, it was then available for the distribution which shortly followed. The simple fact is however that the corporation received only $410,066.67 and this amount and no more was available for distribution.
Taxation is a practical matter, it has 'been said, and, looked at practically, I am unable to see any basis for holding that the surrender and cancellation of part of petitioner’s stock added one cent to the income, the assets, or the net worth of the petitioner corporation. There was nothing additional available for distribution to shareholders on the liquidation of the corporation.
This case differs in its vital facts from any heretofore considered by the Board. In S. A. Woods Machine Co., 21 B.T.A. 818, the stock was the sole consideration received in satisfaction of an obligation arising from a compromise settlement of litigation. The effect of our decision was to hold the transaction nontaxable. The Circuit Court of Appeals, in Commissioner v. S. A. Woods Machine Co., 57 Fed. (2d) 635, reversed our decision, but in their opinion observed: “ Whether the acquisition or sale by a corporation of its own capital stock gives rise to taxable gain or deductible loss depends on the real nature of the transaction involved.” Here we hold the transaction to be one on which gain or loss may be recognized, but I am unable to perceive that the stock phase of the transaction made for either gain or loss. The learned court observed further: “ If it was in fact a capital transaction, i.e., if the shares were acquired or parted with in connection with a readjustment of the capital structure of the corporation the Board rule (neither gain nor loss) applies.” In the instant case the “ surrender * * * for cancellation ” of the block of stock would seem to be within this observation. Continuing further the court stated: “ But where the transaction is not of that character, and a corporation has legally dealt in its own stock as it might in the shares of another corporation and in so doing has made a gain or suffered a loss, we perceive no sufficient reason why the gain or loss should not be taken into account in computing the taxable income.” (Italics supplied.) In the case before us we have seen that the stock was surrendered for cancellation. It was not “ dealt in ” in any way “ as it might in the shares of another corporation.” Whether it made a gain or suffered a loss *1199(tlie whole transaction being held to be taxable) is the very question for decision.
The majority also relies on Houghton & Dutton Co., 26 B.T.A. 52, in which the Board followed the Circuit Court of Appeals in S. A. Woods Machine Co., the instant case arising in the same circuit, and Commissioner v. Boca Ceiga Development Co., 66 Fed. (2d) 1004, in which the Third Circuit Court of Appeals followed the S. A. Wood Machine Co. case. Neither of these cases is, in my judgment, adequate contrary authority to the position I would take here.
Petitioner contends that not only was the Commissioner in error in finding a gain from the transaction (the gain being based on the value of the stock), but he erred further in not allowing petitioner as a loss the difference between the agreed cost of the assets sold and the cash realized.
Having concluded, as the Board has (in which I agree) that the transaction was indivisible and might give rise to gain or loss, and having reached the further personal conclusion that no gain arose from the surrender for cancellation of the block of petitioner’s stock, it follows that the petitioner should be sustained in its contention as to loss suffered.
As above pointed out, the agreed cost and value of the assets was $466,997.24. The total amount received by the corporation in payment was $410,066.67. In my judgment the difference represents a deductible loss of the corporation.
McMahon and GoodRich concur in this dissent.
Sternhagen agrees with the conclusion of this dissenting opinion.