Court Opinion

ID: 4482106
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:18.991051+00
Date Added: 2024-06-11T14:53:27.324669
License: Public Domain

Ratjm, /., dissenting: This case is not fairly distinguishable from Samuel Pollack, 47 T.C. 92, which was affirmed by the Fifth Circuit, 392 F. 2d 409. This case, too, arises in the Fifth Circuit. There, as here, there was involved the application of Income Tax Regs, section 1.1371-1 (g), which implements and construes the statutory provision that a subchapter S corporation may not have more than one class of stock, and which provides that “a difference as to voting rights * * * will disqualify a corporation.” In Pollack, the only difference in voting rights related to the weight to be given the shares in the election of directors; in all other respects, both as to voting generally and in every other manner, the various shares were identical. Indeed, even the limited restriction with respect to the election of directors did not appear on the certificates, nor were such certificates otherwise identified as being of different “classes,” although the shares were described as being of different classes in the amended articles of association. In the present case, the restriction relating to the voting of the 5 shares in question was of a more drastic character than in Pollack. Here, the owner of these shares was irrevocably deprived of the right to vote his shares in any manner, a legend setting forth that disability appeared on the certificate of stock itself, and any purchaser or transferee of those shares could acquire them only subject to that restriction. The situation is entirely different from an ordinary proxy; here, the shares themselves were burdened with a permanent disability that persisted throughout their existence, regardless of who any subsequent owner might be. These 5 shares were certainly different in respect of voting rights from the remaining shares of the corporation. While it is true they were not described as being of a different class, the label should be a matter of no consequence. Cf. Portage Plastics Co. v. United States, 370 F. 2d 308 (C.A. 7), reversing 301 F. Supp. 684, where an equity interest in a corporation was held to represent a different class of stock, notwithstanding that it wasn’t even formally labeled as stock at all. Even if the matter were in doubt, the applicable provisions of the regulations quoted above require that the shares in question be treated as being of a different class. The prevailing opinion cavalierly brushes these regulations aside by treating them as invalid, contrary to the well-established principle that “Treasury regulations must be sustained unless unreasonable and plainly inconsistent with the revenue statutes and that they constitute contemporaneous constructions by those charged with the administration of these statutes which should not be overruled except for weighty reasons.” Commissioner v. South Texas Co. 333 U.S. 496, 501. See also Bingler v. Johnson, 394 U.S. 741, 749-750; Fawcus Machine Co. v. United States, 282 U.S. 375, 378; Boske v. Comingore, 177 U.S. 459, 470; Brewster v. Gage, 280 U.S. 327, 336; Textile Mills Corp. v. Commissioner, 314 U.S. 326, 336-339; Colgate Co. v. United States, 320 U.S. 422, 426. This rule is fully recognized and followed in the Fifth Circuit. See, e.g., Grouf Life & Health Insurance Co. v. United States, 434 F. 2d 115, 120; Miami Beach First National Bank v. United States, 443 F. 2d 116, 120. Moreover, the very regulations here in question were applied both by this Court and the Fifth Circuit in Pollack. I can find no warrant in the language of the statute or its legislative history1 for dealing a lethal blow to these regulations. I would sustain the Commissioner’s determination. Simpson and SteeRett, JJ., agree with this dissent.   Indeed, the legislative history Is at best murky. In S. Rept. No. 1622, 83d Cong., 2d Sess. (1954), the Senate Elnance Committee commented upon similar statutory provisions for the 1954 Code which were not then adopted, saying (p. 453) : No class of stock may be preferred over another as to either dividends, distributions, or voting rights. If this requirement were not made, undistributed current earnings could not be taxed to the shareholders without great complications. * * * [Emphasis supplied.] While the second sentence may be a non sequitur from that portion of the first sentence relating to voting rights, it nevertheless appears that the Committee did regard a difference in voting rights as a basis for classifying stock differently. From petitioner’s point of view, the most that can be said of the legislative history is that it is inconclusive, but it is in precisely such circumstances that an applicable regulation should be sustained.