Court Opinion

ID: 4480808
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:32.140786+00
Date Added: 2024-06-11T14:53:59.751683
License: Public Domain

Mtodock, <7., dissenting: The petitioner in this case was responsible for the organization in 1925 of a realty company. He gave the corporation property in exchange for its shares at the time of incorporation. The finding is that the fair market value of the property turned in for the shares was equal to the par value of the shares. Among the shares received by the petitioner were some preferred shares. It was the desire of the petitioner at the beginning that his investment in the corporation should not exceed $1,000,000, and that the corporation would retire the preferred shares in excess- of that amount as soon as it could do so. There were restrictions upon the payment of dividends until this was done. Some of these preferred shares were retired prior to the taxable years and some more were retired during the taxable years. The stock was retired at par, the same amount which the petitioner had originally paid for that stock in property when the corporation was organized. Thus, he paid $100 per share in to the corporation for the stock and now the corporation has paid the same amount back to him in retirement of the stock. The majority holds that the distributions in retirement of these shares in the taxable years were substantially equivalent to the distribution of taxable dividends within the meaning of section 115 (g), but it fails to explain satisfactorily why this is so or cite any direct authority for it. An illustration from the committee reports indicating that the retirement of the shares originally paid for in cash could come within (g) is given, but the opinion does not demonstrate to my satisfaction how or why the retirement in the present case comes within that provision. The case of George O. Rockwood, 31 B. T. A. 927; affd., 82 Fed. (2d) 359, would seem to be in point. There, stock which had been issued for cash or property was later retired because the capital was no longer needed in the business. There were earnings and profits in excess of the amount paid in redemption of the stock and yet the holding was that section 115 (g) did not apply. Here, the petitioner did not want to invest more than a million dollars of his funds in this corporation. Reluctantly, however, he did invest about $850,-000 more than his million, with the expressed desire and understanding that the corporation would pay it back by retiring the stock just as soon as it could spare the necessary funds. The retirements would indicate that the corporation had sufficient working capital represented by the million dollars which the petitioner paid in, plus subsequent earnings, and no longer needed the capital which it was returning to the petitioner. The mere fact that it was using accumulated earnings in its business and was able to return the petitioner’s capital is no justification for holding that the retirement of this stock was substantially equivalent to the distribution of a taxable dividend under the circumstances of this case. The purpose which the petitioner always had in mind is clear and it doesn’t seem to me that it was a purpose to avoid the payment of dividends to him. It simply was that he didn’t want to have so much of his capital invested in the corporation. If, perchance, the corporation has accumulated earnings beyond its needs for the purpose of preventing the imposition of surtax on the petitioner, section 102 will apply, but that is not the question here. The situation, after this stock is retired, will be no different from what it would have been if the petitioner had loaned the money in excess of a million dollars and the loan had been repaid without interest, which is what he wanted to do in the first place.