Court Opinion

ID: 9474534
Source: CourtListenerOpinion
Date Created: 2023-08-05 05:00:58.139419+00
Date Added: 2024-06-11T17:44:10.053109
License: Public Domain

WINTER, Circuit Judge,
concurring in the result:
My disagreement with Judge Mansfield’s thoughtful opinion lies in my preference for a clear cut rule affording a degree of future certainty rather than a narrow ruling restricted to these particular facts.
The issue in this case poses a dilemma with no apparent solution that meets fully both logical and legal criteria. Judge Mansfield’s opinion neatly describes this dilemma and the solutions offered by the parties. However, it declines to adopt either the position of the taxpayer — a non-pro rata surrender of stock leads to an ordinary loss — or the position of the Tax Court — such a surrender, when intended to increase the value of a taxpayer’s remaining shares, is recognized (as a capital loss) only when the remaining shares are disposed of. Rather, the majority holds that there is no ordinary loss when a non-pro rata surrender of stock does not have an impact of some undefined magnitude on the taxpayer’s interest in the corporation.
The holding thus suggests that the particular facts of this case are the key to the decision. It is, however, ambiguous as to *127which facts are dispositive and as to whether the effect of a surrender of stock on the taxpayer’s interest in a corporation must be quantitative in the sense of dollar value surrendered or qualitative in the sense of diminution or loss of control. This ambiguity is aggravated because the Tax Court failed to make findings that were at the time irrelevant in view of existing precedent but are essential to the majority’s disposition.
There are thus no findings as to the dollar value of the taxpayer’s surrender or the corporation’s resulting gain. Whether the dollar value is small or large, however, the taxpayer bore 100% of the loss and got at best 65% of the gain. I say “at best” because the 65/35 division almost certainly overstates the potential benefits to the taxpayer. If the corporation were to experience a modest turnaround, dividends on the remaining preferred would have first priority. The taxpayer’s surrender of his preferred shares in fact ensures that he would not have shared in any gain absent the corporation’s encountering outright prosperity. Moreover, the preferred stock in this case was convertible, and those conversion rights further decreased the potential for gain on the taxpayer’s part. Finally, we do not know what other rights the preferred stock had which might impinge on the taxpayer’s control. It is noteworthy, I believe, that others declined to surrender their preferred shares as a means of resuscitating the corporation. The majority does not seem to me to spell out why this loss is legally of no consequence or what kind of loss would lead to a different result.
However, the majority is quite right in noting that the position urged by the taxpayer enables shareholders to utilize non-pro rata surrenders of stock to gain tax advantages not available through a sale of shares. I would respectfully add the observation that the actual dollar value of such surrenders will almost always be disproportionate to the proposed ordinary loss. If so, however, we would do everyone a favor simply by affirming on the rationale adopted by the Tax Court and thus avoid much future litigation over the magnitude of impact of particular surrenders of stock. I therefore concur in the result.