Court Opinion

ID: 9448667
Source: CourtListenerOpinion
Date Created: 2023-08-03 23:42:30.54748+00
Date Added: 2024-06-11T17:31:31.410667
License: Public Domain

LARAMORE, Judge
(dissenting).
I am of the opinion that the transaction in this case was not equivalent to a dividend. The reason I think this is not equivalent to a dividend is based on the following: Plaintiff J. W. Neff was the sole stockholder of the J. W. Neff Laboratories, Inc. This corporation needed additional operating capital. It could not borrow money from the banks; no purchaser would buy stock directly from Mr. Neff since the proceeds of the sale would inure to Neff rather than to the corporation. Hence, Mr. Neff decided to sell to the company 47 of the 99 shares he owned at about half of the book value of the shares. This was for the purpose of permitting the corporation to resell these, which it thought it could do at a profit, and thereby secure the capital necessary to the continuation of the corporation. The corporation did resell 38 shares over a period of between 9 to 12 months, and realized a profit greatly in excess of what the corporation had paid Mr. Neff. The fact that the resale was accomplished over a period of some 9 to 12 months, in my opinion, would not change the complexion of the transaction. Obviously the stock could not be immediately sold at the profit eventually realized. The 9- to 12-month period necessary to complete the transaction should not, and could not, as later demonstrated, alter the situation to the extent of making the sale equivalent to a dividend.
Thus, when the transaction is viewed as a whole, the entire purpose had been accomplished; i. e., the gathering of additional money to sustain the future operations of the corporation. I realize that the presence of a valid business purpose alone is not controlling. Holsey v. Commissioner, 3 Cir., 258 F.2d 865, 869; Northup v. United States, 2 Cir., 240 F.2d 304, 307. However, in this situation, Mr. Neff, after the sale, had a quite different interest than before. This being true, the money and property given him by the corportion in exchange for his stock could not be considered the equivalent of a dividend. When a person receives a dividend, his interest in the company remains exactly the same. This is not the case here. After the entire transaction, Mr. Neff’s interest in the company was 56 percent as opposed *460to his 99 percent stock ownership before.
It is true that section 302(b) (2) (C) (i) contains the language “immediately after the redemption.” However, the fact that the stock was sold by the corporation over a period of months would not, in my opinion, have the effect of bringing into play section 302(b) (2) of the 1954 Code. Section 302(b) (1) of the 1954 Code was a re-enactment of section 115(g) of the 1939 Code and reiterated the essential equivalent to- a dividend test. The prior law on the subject was preserved, as is disclosed by the legislative history of section 301(b) (1).
Senate Report No. 1622, 83rd Congress, 2nd session, in discussing subsection (b) of section 302, states:
“ * * * In lieu of the approach in the House bill, your committee intends to revert in part to existing law by making the determination of whether a redemption is taxable as a sale at capital gains rates or as a dividend at ordinary income rates dependent, except where it is specifically provided otherwise, upon a factual inquiry.
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“Subsection (b) of section 302 states three conditions in paragraphs (1), (2), (3) and (4), the satisfaction of any one of which ■will result in the treatment of the 'Redemption as a distribution in full or part payment in exchange for the stock. [Italic supplied]
* * * * * *
“Paragraph (1) of subsection (b) provides that subsection (a) will apply if the redemption is not essentially equivalent to a dividend.
“The test intended to be incorporated in the interpretation of paragraph (1) is in general that currently employed under section 115(g) (1) of the 1939 Code. Your committee further intends that in applying this test for the future that the inquiry will be devoted solely to the question' of whether or not the transaction by its nature may properly be characterized as a sale of stock by the redeeming shareholder to the corporation. * * * ”
From the above language, it seems clear that the tests under the 1939 Code are still pertinent to cases arising under section 302(b) (1) of the 1954 Code and that the remaining subsections (2), (3), and (4) of said section serve not as restrictions on the scope of subsection (1), but as additional areas in which capital gains treatment will be permitted. This was likewise held in the case of Radnitz v. United States, D.C., 187 F.Supp. 952, 956.
Having met the test of section 302(b) (1), i. e., that the redemption was not equivalent to a dividend, the intent of Congress as shown by Senate Report No. 1622, supra, was that the amount realized on the stock redemption should receive capital gains treatment.
For the above reasons, I believe plaintiffs are entitled to recover in this action.