Court Opinion

ID: 9666201
Source: CourtListenerOpinion
Date Created: 2023-08-24 01:07:45.987545+00
Date Added: 2024-06-11T13:27:24.483187
License: Public Domain

MADDEN, Judge
(dissenting).
The stockholders, through their interest in the predecessor corporation, owned, in addition to a profitable going business, a valuable asset. That asset was a coal lease at five cents a ton royalty. The coal property was apparently such that an operator could have afforded to pay a much higher royalty and still have a made a profit. If the owners of the predecessor corporation had decided to liquidate it, and take individual ownership of the lease, and sublease it to another operator, that operator’s royalty payments would, of course, have been deductible as rents. Here the owners elected to do that, but they themselves formed the new corporation. However, they changed substantially the legal relations which they had had with the *580former corporation. Their right to the rents, or over-riding royalties, they retained as individuals. To be sure, their interest in these royalties was in proportion to their ownership of the stock of the respective corporations, but that would have been true if the sublease had been to a stranger operator. That was the proportion in which they owned the old corporation and its assets, including the lease.
Their rights as individuals to the over-riding royalties were not tied to their stockholdings in the new corporation. There was no covenant that they must be transferred together. Within a comparatively short time after the arrangement was made, 50 percent of the stock of the new corporation passed, by normal devolution, to persons other than the owners of the over-riding royalties.
I think that royalty payments not in fact made to stockholders, or made to stockholders not as such but only because they happen to continue to own the right to the royalty payments, are not the substantial equivalent of dividends. If the separation, which was 50 percent complete in the tax years in question, later became 100 percent complete, and the only payments which the corporation could afford to make were the royalty payments to non-stockholders, it would be hard indeed to regard the payments as dividends.
Parties may put a transaction through two steps instead of one for the sole purpose of making it non-taxable, or less taxable, although, apart from the tax question, the form which they give the transaction would be a waste of time and paper and ink. United States v. Cumberland Public Service Co., 338 U.S. 451, 70 S.Ct. 280, 94 L.Ed. 251, affirming 83 F.Supp. 843, 113 Ct.Cl. 460.
In the instant case, the arrangement adopted had, as is said in the opinion of the court the purpose of assuring a more definite income to some of the then principal stockholders, in addition to the purpose of reducing taxes. The arrangement also made permanent and important changes in the relations to the corporation of the persons who were, as individuals, to receive the royalty payments. The company became unconditionally liable to make these payments, whether it made money on its mining operations or not, and whether the persons owning the royalty rights were stockholders or not.
The transaction was, I think, much more than the sham which it is called in the opinion of the court. I would allow the plaintiff to recover.
WHITAKER, J., concurs in the foregoing dissent.