Court Opinion

ID: 4480344
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:13.762413+00
Date Added: 2024-06-11T15:03:38.457524
License: Public Domain

Withet, J., concurring: I concur in the result reached on the issue whether there is more than one class of stock here within the meaning of section 1371 of the 1954 Code and Income Tax Regs., sec. 1.1371-1 (g). I do not believe it is necessary to question the validity of the regulation for it seems to me the regulation itself requires the conclusion reached. With respect to the holding herein that the promissory notes involved were not a second class of stock within the meaning of the statute or “actually stock” within the meaning of the regulation because their holders had no intention to enforce their rights thereunder, I arrive at the conclusion reached in the opinion upon the theory that these notes, in the hands of these petitioners and in the taxable years before us, were not “actually stock” under any theory. In that connection I believe the Commissioner’s use of the quoted phrase “actually stock” has more force than do the phrases so often used in thin capitalization cases “similar to stock” or “of the character of stock.” It seems to me the Commissioner means what he says, i.e., that the elements of character of the so-called debt obligation must be the same as the elements characterizing a share of stock. It does not seem that the promissory notes involved in this case have sufficient of such character to he designated “actually stock.” In the first place, they may be called on demand of the holder; secondly, the interest (which under the thin capitalization cases would be likened to dividends) is payable from the very assets of the corporation if necessary, unlimited by its earnings; and thirdly, the amount of earnings to be derived from the capital invested (interest) is an amount fixed by a percentage of the principal (or investment) which is required to be paid at fixed intervals. I know of no State which permits the issuance of any class of stock with these characteristics. I do not agree however that the intention of the holders of the notes here involved has any bearing upon the question whether or not they constitute stock or a second class of stock. Scott and Tannenwald, JJ., agree with this concurring opinion. Dawson, /., concurring: I concur in the result reached in the majority opinion and I agree with most of what Judge Drennen says. However, I want to add that in view of the decisions in Catalina Homes, Ine., T.C. Memo. 1964-225, and Henderson v. United States, 245 F. Supp. 782, as well as the position taken by the respondent in Rev. Rul. 63-226,1963-2 O.B. 341, it seems to me that any type of loan from stockholders will throw a cloud over a small business corporation. I believe this is not in accord with the legislative history of subehapter S, which indicates that the single class of stock requirement was imposed primarily to avoid the necessity for complex rules of allocation. In addition, section 1376(a) specifically establishes rules on adjusting the basis of indebtedness which a subchapter S corporation may owe to a stockholder. Consequently, I think the second class of stock doctrine, as stated in the regulations, is inconsistent with the intent of Congress and may produce grave inequities that were never originally contemplated. Hoyt, /., agrees with this concurring opinion.