Court Opinion

ID: 4476375
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:11:59.391882+00
Date Added: 2024-06-11T14:51:49.568396
License: Public Domain

ARNOLD, J., dissenting: I am not persuaded by the reasoning of the foregoing report and I am unable to agree with the conclusion reached therein. The manner in which it exalts the form of transactions over their substance is contrary to a long line of established cases stemming from Gregory v. Helvering, 293 U. S. 465 (1935). The facts disclose that Hobby had a block of stock which was about to be redeemed in a partial liquidation. For the sole purpose of removing the redemption gains from the operation of section 115 (c) of the Internal Revenue Code, under which they would have been taxed as short term capital gains, and to bring them under the provisions of section 117 of the Code, to be taxed as long term capital gains, Hobby resorted to the simple device of going through formal sales with four of his friends and business associates, who were familiar with his purpose and willing to cooperate therein for a consideration. It was petitioner’s plan that his transferees hold the stock until the date of redemption and then surrender it for redemption. The evidence is clear that the transferees understood that this was what they were to do and they acted subsequently in accordance with petitioner’s plan. In view of this fact the transferees received the stock subject to restrictions and commitments, and by virtue of the understanding petitioner retained control of the disposition of the stock. The only question in the case is whether Hobby successfully avoided the statute by these transfers. The foregoing opinion concludes, in effect, that because the' transfers from Hobby to his friends, separately considered, were apparently complete and valid under state law, their bona -fides can not be subject to question for Federal revenue purposes. This is not so. Numerous transactions otherwise complete and binding have, been disregarded for revenue purposes. Good faith as between transferor and transferee is immaterial if good faith toward the Government is lacking.' The law does not permit taxpayers to resort to schemes or devices or enter into transactions lacking in good faith to reduce or avoid tax liability. Gregory v. Helvering, supra; Higgins v. Smith, 308 U. S. 473 (1940); Griffiths v. Commissioner, 308 U. S. 355 (1939); Pierre S. DuPont, 37 B. T. A. 1198; affd., DuPont v. Commissioner (C. C..A., 3d Cir., 1941), 118 Fed. (2d) 544; certiorari denied, 314 U. S. 623; Commissioner v. Dyer (C. C. A., 2d Cir., 1935), 74 Fed. (2d) 685; Court Holding Co., 2 T. C. 531; William C. Hay, 2 T. C. 460; Belle G. Loewenberg, 39 B. T. A. 844; Chicago Title & Trust Co., Executor, 32 B. T. A. 249. If this were not so, schemes and devices for the purpose of avoiding tax liability would go completely unchecked. It is well settled that in the application of the revenue laws to particular transactions substance rather than form prevails, and transactions iñ form only may be disregarded. We have here a series of transactions, all parts of a coordinated plan devised by the taxpayer solely to technically avoid the effect of section 115 (c), supra, by casting what was shortly about to become a redemption of stock into the form of sales. The taxpayer admitted that tax avoidance was his only motive and he neither alleged nor proved any other purpose. Tax avoidance alone is not a legitimate business purpose sufficient to lend these transactions any reality. Higgins v. Smith, supra; Electrical Securities Corporation v. Commissioner (C. C. A., 2d Cir., 1937), 92 Fed. (2d) 593; William C. Hay, supra. Cf. Moline Properties, Inc. v. Commissioner, 319 U. S. 436. Petitioner’s gains were realized from what were, in substance, distributions in partial liquidation, although sales in form. John D. McKee et al., Trustees, 35 B. T. A. 239; and Clara M. Tully Trust, 1 T. C. 611, relied upon in the foregoing report, are distinguishable in fact and in principle from the instant case. The transaction in the McKee case was not motivated by a desire to avoid the effect of a specific statutory provision, as here, but rather to fix the taxable character of the gain involved, by reason of a doubt as to the effect of the then prevailing administrative interpretations and Board of Tax Appeals decisions. Cf. I. T. 1637, C. B. II-1, p. 36; I. T. 2488, C. B. VIII-2, p. 127; I. T. 2678, C. B. XII-1, p. 117; Henry P. Werner, 15 B. T. A. 482; John H. Watson, Jr., 27 B. T. A. 463. When the transaction in controversy in the McKee case occurred on January 31, 1931, I. T. 2488, supra, and Henry P. Werner, supra, were in force and both held that the proceeds of redemption were capital gains, but the petitioners there, apparently out of an abundance of caution, took the course they did to definitely establish the proceeds as capital gains. In doing so, they were not attempting to avoid any statute or any existing administrative or judicial interpretation of a statutory provision. As we said at page 242, “The petitioners were acting in abundant good faith in taking the steps which they took on January 31,1931.” In Clara M. Tully Trust, supra, the stock had not been called for redemption, as here, and there the sale was bona fide to an outside third party, without restrictions or commitments of any kind and without understanding for a subsequent resale by the purchaser to the issuing corporation. See Court Holding Co., supra, p. 540. The issuing corporation sought to buy in some of its outstanding stock, which was held by others as well as petitioners. Petitioners could hold their stock as an investment or sell it. For petitioners there to then realize on their investment it was necessary to sell. If they desired to sell they had the choice to sell either to the corporation or upon the open market. The choice was made to sell to a purchaser which would result in the least amount of tax liability, which the courts recognize a taxpayer has the right to do. Petitioner here, however, knowing his stock would soon be redeemed at par, had no choice to hold his stock as an investment, and routed it through some of his friends in the form of sales for the sole and only, purpose of getting it out of his hands before it was redeemed and thereby escaping the tax consequences of section 115 (c). The business purpose there involved was a realization on taxpayer’s investments. Here such purpose was not present, as the realization of petitioner’s investment was imminent through redemption of his stock. There was no evidence to indicate a desire to realize sooner on his investment. Tax avoidance was his only purpose. Section 115 (c), supra, was enacted in its original form as section 115 (c) of the Revenue Act of 1934. The primary purpose of that act, and the specific purpose of section 115 (c), was to prevent tax avoidance. H. Rept. No. 704, 73d Cong., 2d sess.; S. Rept. No. 558, 73d Cong., 2d sess. Congress could not have intended that a section designed to prevent tax avoidance should be avoided by a device such as the one here, and by so holding we “permit the schemes of taxpayers to supersede legislation in the determination of the time and manner of taxation.” Riggins v. Smith, supra, p. 477. It is my opinion that for Federal tax purposes each of the four transactions was lacking in good faith and that they should be disregarded and section 115 (c) applied in determining Hobby’s tax liability for 1939.