Court Opinion

ID: 9460181
Source: CourtListenerOpinion
Date Created: 2023-08-04 21:44:05.586426+00
Date Added: 2024-06-11T17:36:31.106248
License: Public Domain

OAKES, Circuit Judge
(dissenting):
Review of the tax consequences of a business transaction requires consideration of the economic realities of the entire transaction. See Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935); South Bay Corp. v. Commissioner of Internal Revenue, 345 F.2d 698, 703, 705 (2d Cir. 1965). Whether a transaction should be viewed as two or more steps or as one integrated transaction may result in entirely different tax consequences. See generally B. Bittker & J. Eustice, Federal Taxation of Corporations and Shareholders ¶ 1.05 at 1-19 through 1-21 (3rd ed. 1971); Mintz & Plumb, Step Transactions in Corporate Reorganizations, N.Y.U. 12th Inst, on Fed.Tax. 247 (1954); cf. Treas.Reg. § 1.351-1 (c)(2) & (5) (1967) (“existing plan” and subsequent steps “however delayed”).
Here, as I see it, the form of the transaction was two-step: a gift of stock followed by a redemption of the stock by the donor controlled corporation. The substance of the transaction, however, was a payment out of corporate earnings and profits to a charity designated by the donor who retained a life interest in the gift.1
The factors which distinguish the RPI-Grove transactions from other charitable donations of securities and which persuade me to treat this as an integrated transaction are two: first, the gifts made by the Groves were of stock in a closed corporation that was inevitably redeemed annually; second, by virtue of retaining a life income from the reinvested proceeds and by retaining a measure of control over how those proceeds should be reinvested (by designating the investment adviser who was also the Groves’ personal adviser), the Groves were able to achieve a bail-out from their non-dividend-paying closed corporation.
Viewing the economic realities of the situation, the pattern of redemption always following upon the gifts makes it clear that by the tax years here in issue Grove could confidently expect that RPI would quickly redeem and reinvest the Grove stock in safe income bearing securities. From the time Grove first began giving RPI shares in 1955, until 1964 when Grove was assessed with the taxes here in dispute, RPI consistently and without exception offered for redemption the Grove shares approximately one year after they were received. Not only was the practice consistent, thus indicating that at least as of 1963 the Groves could count on annual redemption offers, but it was the only practice which a university treasurer could correctly take and still meet his own statutory obligations as a fiduciary to RPI. See N.Y. Estates, Powers and Trust Law § 11-2.1 & .2 (McKinney 1967 & Supp. 1972). As pointed out in the majority opinion, construction company stock may be quite risky. Given the relatively conservative nature of university investments, it *249would have been obvious to Grove from the beginning that RPI’s treasurer (pursuant to direction from the finance committee of the RPI board of trustees) would redeem the Grove shares quite soon after their receipt. RPI was required as a condition to the gifts to offer any Grove shares to the Grove corporation for redemption prior to resale elsewhere. Grove as majority shareholder had control over whether the shares would be redeemed by the corporation. Thus it is entirely unimportant that there was no written agreement requiring that RPI offer its Grove stock for redemption. Judge Learned Hand observed in Commissioner of Internal Revenue v. Transport Trading & Terminal Corp., 176 F.2d 570, 572 (2d Cir. 1949) (dictum), cert, denied, 338 U.S. 955, 70 S.Ct. 493, 94 L.Ed. 589 (1950), that the “sure expectation” of a later transaction might be sufficient to bring a transaction within the principle enunciated in Gregory v. Helvering, swpra.2 There surely was a “sure expectation” of redemption here. It did not become any the less sure when Grove became a term trustee of RPI in 1957, and subsequently a life, and then an honorary trustee.
Moreover, the reinvestment which took place gave the Groves a life interest in an entirely different sort of security than they had had as owners of the shares of Grove Shepherd Wilson & Kruge, Inc. — thus accomplishing a financially desirable diversification and creating a dependable interest and dividend flow. Their closed corporation paid no dividends during the period here in question, although it could have done so. See Edgar v. Commissioner of Internal Revenue, 56 T.C. 717, 758-759 (1971); Security First National Bank v. Commissioner of Internal Revenue, 28 B. T.A. 289, 310-11 (1933); Rev.Rul. 68-658, 1968-2 Cum.Bull. 119. The fact that Grove could depend on RPI’s investment of the Grove shares in stocks and bonds paying substantial dividends and interest is clear. Indeed, he selected the investment firm advising RPI on such reinvestment. This firm also personally advised him, and RPI acknowledged in writing as early as 1955 that it was pleased to conform to Grove’s wishes, to have the investment of the redemption proceeds coordinated with Grove’s personal investment program. The investment firm could be expected to act, and did in fact act as far as the record indicates, to make investments which provided good yearly income to Grove as well as a safe capital base for RPI.3
If Grove had given RPI listed “safe” securities equivalent to those invested in by Scudder, Stevens & Clark to RPI rather than the risky construction company stock he would have received no benefit from these transactions (other than the gift tax deduction). But in this case his gifts acted as a sort of low risk pension fund for himself and his wife in case of failure of the construction business, without his having to pay a tax on any dividends that might be declared by his corporation. The Groves were in the very same financial position after the gift-redemption-reinvestment transaction as if the corporation had paid them a cash dividend in the amount of the gift, a dividend which they had then given to RPI to be reinvested safely. The Groves maintained their position as controlling shareholders. Cf. United States v. Davis, 397 U.S. 301, 313, 90 S.Ct. 1041, 25 L.Ed.2d 323 (1970). Finally, the corporation was also in the same financial position as if it had declared and paid a cash dividend *250since it redeemed the shares of stock for cash (except that on redemption it was better off in that it rather than the Groves owned its shares redeemed). But a tax on the amount of the dividend, had one been declared, had' — hopefully for corporation and shareholder alike— been avoided and under the majority decision was in fact avoided.
The majority opinion relies heavily on two cases which I believe are readily distinguishable from the situation here. One is Carrington v. Commissioner of Internal Revenue, 476 F.2d 704 (5th Cir. 1973), relied on for the proposition that “(a] gift of appreciated property does not result in income to the donor so long as he gives the property away absolutely and parts with title before the property gives rise to income by way of sale.” Here the Groves did not part with all interest in the construction company stock. The reservation of a life interest in the stock (or its reinvested proceeds), when coupled with taxpayer’s right, however indirect, to direct the manner in which proceeds would be invested, gave the Groves a very great continuing interest and control, a fact of not inconsiderable tax significance. Cf. Corliss v. Bowers, 281 U.S. 376, 378, 50 S.Ct. 336, 74 L.Ed. 916 (1930) (Holmes, J.) (“taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed. . ”). More importantly, Carring-ton involved only one contribution of stock and one redemption; there was no pattern of redemption of stock as was clearly established here at least by the time of the tax years in question.
In Behrend v. United States, CCH 1973 Stand.Fed.Tax Rep. ¶ 9123 (4th Cir. 1972), also relied upon by the majority, the proceeds of the redemption were used wholly for the benefit of the charitable foundation which was the recipient of the stock; there was no life estate reserved for the personal benefit of the donors. See 1973 Stand.Fed.Tax Rep. ¶ 9123 at 80,067 (“[P]redominant force” in Behrend decision is “indisputable fact” that the taxpayers therein “did not participate whatsoever in the beneficence of the foundation”).
Thus, I believe that when, as here, the nature and conditions of the charitable gift and the pattern of donor-charity behavior are such as to make it for all practical purposes inevitable that the stock given will be offered for redemption and accepted by the closely held corporation, resulting in providing the equivalent of a safe pension fund for the donor stockholders, then the transaction must be treated as a distribution of dividends under §§ 301(a), 301(c) and 316(a) of the Internal Revenue Code of 1954. The majority opinion refers to an “absence of any supporting facts in the record” for the Commissioner’s position, but omits to rely upon the one most important fact on which the case should turn: the pattern of redemption over years of giving. I accordingly dissent.

. Courts have frequently dealt with the substance-form dilemma in a charitable gift context and found against the taxpayer, though not in situations specifically like this one. Cf. Parmer v. Commissioner of Internal Revenue, 468 F.2d 705 (10th Cir. 1972) ; Tatum v. Commissioner of Internal Revenue, 400 F.2d 242 (5th Cir. 1968) (donor-taxpayer held to have realized income upon the later collection by the donee charity of income due on assigned rights to shares of crops produced by the donor’s tenants). See also Friedman v. Commissioner of Internal Revenue, 346 F.2d 506 (6th Cir. 1965) (donor-taxpayer held to have realized income upon the collection by a charity of endowment policy interest payable shortly after the policy was transferred to the charity).

. Clearly, the step transaction doctrine would be a dead letter if restricted to situations where the parties were hound to take certain steps.
The doctrine derives vitality, rather, from its application where the form of a transaction does not reqxñre a particular further step be taken; but, once taken, the substance of the transaction reveals that the ultimate result was intended from the outset. King Enterprises, Inc. v. United States, 418 F.2d 511, 518, 189 Ct.Cl. 466 (1969).

. The investment income was $9,636.86 of interest and dividends in 1964 and $7,475.01 in 1963.