Court Opinion

ID: 9444075
Source: CourtListenerOpinion
Date Created: 2023-08-03 19:40:33.216134+00
Date Added: 2024-06-11T17:29:42.346352
License: Public Domain

RIVES, Circuit Judge
(dissenting).
Congress has consistently and wisely, I think, been as. definite and objective as possible in defining what corporate distributions constitute taxable dividends. It has left as small field as is required by necessity for the operation of such uncertainties and variables as the motives, plans, or business purposes of the corporation or its stockholders. The general rule is that any distribution of either money or property by a corporation to its stockholders constitutes a taxable dividend to the extént of the corporation’s earnings and profits. Internal Revenue Code Sec. 115 (a) and (b). There is an exception when the distribution is in complete or partial liquidation of the corporation. Sec. 115(c). Even then, however, to the extent that it represents a distribution of earnings or profits, it is treated as a' taxable dividend if made “at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend”. Sec. 115(g).
What is meant by the quoted expression? Considerable help is afforded by Section 29.115-9 of Treasury Regulations 111:
“Sec. 29.115-9. Distribution in Redemption or Cancellation of Stock Taxable as a Dividend.—
“The question whether a distribution in connection with a can-' cellation or redemption of stock is essentially equivalent to the distri- • bution of a taxable dividend de- • pends upon the circumstances -of each case. A cancellation or re*611demption by a corporation of a portion of its stock pro rata among all the shareholders will generally be considered as effecting a distribution essentially equivalent to a dividend distribution to the extent of the earnings and profits accumulated after February 28, 1913. On the other hand, a cancellation or redemption by a corporation of all of the stock of a particular shareholder, so that the shareholder ceases to be interested in the affairs of the corporation, does not effect a distribution of a taxable dividend. * * * »
The various Regulations have contained this identical language ever since 1929.1 Since then, the identical language of the present Section 115(g) of the Code has been repeatedly reenacted. The Regulations, being clearly a reasonable interpretation of subsection (g), must be deemed to have received the implied approval of Congress and, therefore, to have the force and effect of law. Helvering v. Win-mill, 305 U.S. 79, 59 S.Ct. 45, 83 L.Ed. 52.
The Regulations make it clear that the fact that the cancellation or redemption of stock is pro rata is the most important single fact tending to show essential equivalence to the distribution of a taxable dividend. A pro rata redemption of stock does not change the
stockholders’ proportionate interests in and control over the corporation and is usually a mere formality. It seems to me utterly immaterial whether each of the two stockholders owned 1500 shares, as before the distribution, or 2500 shares, as after the distribution. They each owned fifty percent of the stock both before and after the distribution. Their interests in and control over the corporation were not affected in any way.
It seems to me that the fact most frequently mentioned and given greatest weight in the decisions is that the cancellation or redemption of stock was pro rata, or substantially so, and that, therefore, the same proportionate ownership of and control over the corporation existed after the distribution as before.2
An essential, of course, is that the corporation had a surplus which could have been distributed by the declaration of a true dividend, and the fact of a large surplus is often mentioned in the decisions.3 This corporation had accumulated earnings and profits in the amount of either $905,217.95 or $359,-878.24. Another fact mentioned in the decisions is the corporation’s history as to payment of dividends.4 The stock redeemed in 1943 was originally issued in 1937, and the corporation had never declared any regular dividends. Another fact mentioned is that the amount paid for the redeemed stock was not based upon value, book or otherwise,5 *612and that holds true in this case. Other factors discussed in the cases go to the presence or absence of a business contraction or liquidation purpose 6 or of a tax avoidance motive.7 On the other hand, that a business purpose prompted the distribution has been regarded as immaterial,8 and it has been recognized that the absence of a motive of tax avoidance is not determinative of the issue.9
The last two subjective purposes or motive factors are the only ones tending to support the majority decision. There were business needs and purposes of the corporation as explained in the majority opinion for a distribution of the properties except as to two of those properties, the gas payment and notes receivable having a total fair market value of $774,036.27. Those two were included in the distribution for the stockholders’ benefit rather than by reason of any business purpose of the corporation. As to the distribution of the other properties, the corporation’s business purposes and needs furnished no reason for the redemption of stock accompanying the distribution. Such distribution, or any disposition, of these properties could have been made just as well without as with the redemption of stock.
The only real reasons suggested for the redemption of stock were to reduce capital stock taxes, usually a very small factor, and to accord with good business and accounting practices. If those reasons were really substantial, they did not call for any liquidation, even partial, of the corporation, but merely for a simple amendment of the corporate charter. A mere change in capital structure is not, in and of itself, a legitimate business reason for the redemption of stock. Bazley v. Commissioner, 331 U.S. 737, 67 S.Ct. 1489, 91 L.Ed. 1782.
It seems to me that the law is clearly to the effect that the actual conduct of the parties and the objective results of the distribution and redemption of stock, rather than any business motives, needs or purposes, furnish the controlling factors for the application vel non of Section 115(g).10 Whatever may have been the mental ratiocinations of the two stockholders and the assumed business purposes and needs of the corporation, their conduct and the results thereof were “essentially equivalent to the distribution of a taxable dividend.” Their acts seem to me more important taxwise than their intentions.
I, therefore, respectfully dissent.

. See Section 19.115-9 of Treasury Regulations 103 (1940 ed.); Article 115-9 of Treasury Regulations 101 (1939 ed.), 94 (1936 ed.), and 86 (1935 ed.) ; Article 629 of Treasury Regulations 77 (1933 ed.) and 74 (1929 ed.).

. Flanagan v. Helvering, 73 App.D.C. 46, 116 F.2d 937; Boyle v. Commissioner, 3 Cir., 187 F.2d 557; Smith v. United States, 3 Cir., 121 F.2d 692; Commissioner v. Roberts, 4 Cir., 203 F.2d 304; Vesper Co. v. Commissioner, 8 Cir., 131 F.2d 200; Hirsch v. Commissioner, 9 Cir., 124 F.2d 24; Stein v. United States, Ct.Cl., 62 F.Supp. 568, 104 Ct.Cl. 446, see also, Levit v. Commissioner, 43 B.T.A. 1077, 1086; W. & K. Holding Corp. v. Commissioner, 38 B.T.A. 830, 841.

. Flanagan v. Helvering, supra n. 2; Boyle v. Commissioner, supra n. 2; Hill v. Commissioner, 4 Cir., 66 F.2d 45; Commissioner v. Roberts, supra n. 2; Rheinstrom v. Conner, 6 Cir., 125 F.2d 790; McGuire v. Commissioner, 7 Cir., 84 F.2d 431; Hirsch v. Commissioner, supra n. 2; see also, W. & K. Holding Corp. v. Commissioner, supra n. 2; cf. Bazley v. Commissioner, 331 U.S. 737, 67 S.Ct. 1489, 91 L.Ed. 1782.

. Flanagan v. Helvering, supra n. 2; Boyle v. Commissioner, supra n. 2; Hirsch v. Commissioner, supra n. 2; see also, Natwick v. Commissioner, 36 B.T.A. 866, 875.

. Vesper Co. v. Commissioner, supra n. 2.

. Flanagan v. Helvering, supra n. 2; Boyle v. Commissioner, supra n. 2; Smith, v. United States, supra n. 2; Commissioner v. Roberts, supra n. 2; Vesper Co. v. Commissioner, supra n. 2.

. Commissioner v. Roberts, supra n. 2; Boyle v. Commissioner, supra n. 2; Flanagan v. Helvering, supra n. 2; Smith v. United States, supra n. 2; Natwick v. Commissioner, 36 B.T.A. 866; Adler v. Commissioner, 30 B.T.A. 897.

. See Lewis v. Commissioner, 1 Cir., 176 F.2d 646; Estate of Hill v. Commissioner, 10 T.C. 1090.

. Cf. Flanagan v. Helvering, supra n. 2; Hill v. Commissioner, supra n. 3.

. Flanagan, v. Helvering, supra n. 2; Hyman v. Helvering, 63 App.D.C. 221, 71 F.2d 342; Kirschenbaum v. Commissioner, 2 Cir., 155 F.2d 23, 170 A.L.R. 1389; Boyle v. Commissioner, supra n. 2; Smith v. United States, supra n. 2; Brown v. Commissioner, 3 Cir., 79 F.2d 73; Commissioner v. Roberts, supra n. 2; McGuire v. Commissioner, supra n. 3; Commissioner v. Snite, 7 Cir., 177 F.2d 819; Vesper Co. v. Commissioner, supra n. 2; Hirsch v. Commissioner, supra n. 2; Stein v. United States, supra n. 2; cf. Hill v. Commissioner, supra n. 3; Wall v. United States, 4 Cir., 164 F.2d 462.