Court Opinion

ID: 9448443
Source: CourtListenerOpinion
Date Created: 2023-08-03 23:36:22.973275+00
Date Added: 2024-06-11T17:31:26.289462
License: Public Domain

DURFEE, Judge
(concurring in part and dissenting in part).
I agree with the majority decision as to the corporate distribution for the nine redeemed shares that were never resold by the corporation being essentially equivalent to a dividend. I disagree with the majority in that I believe the corporate distribution for the remaining thirty-eight redeemed shares was also essentially equivalent to a dividend.
As I view the transaction presently before the court the redemption bears no relation whatever to the subsequent change in Neff’s proportionate interest in the company. The majority seems to place great emphasis on the assumption that the redemption served a valid business purpose — the acquisition of additional capital. I believe first, that the redemption was unrelated to this purpose, and second, that business purpose is irrelevant inasmuch as under § 302(b) (1) the net effect of the transaction must be deemed controlling. The net effect of this redemption was the pro rata distribution of $19,035 of the corporation’s accumulated earnings and profits.
Once having decided upon the desirability of acquiring additional capital, the *334most obvious course for the corporation would have been to issue additional corporate shares and have the company sell them. Had thirty-eight additional shares been issued and sold in precisely the same manner as undertaken here, the assets of the company would have remained intact prior to the sale, the total assets would have been enlarged by an identical amount of new capital from the sale, and Neff’s proportionate ownership in the corporation would have been altered to a degree substantially equivalent to the change that resulted from the transaction as it actually occurred. Instead the more complex and circuitous redemption procedure was chosen which brought an identical amount of new capital to the company and changed Neff’s proportionate interest in the company to essentially the same degree. The only difference between the newly-issued-stock route and the chosen redemption route was that the latter resulted in a $19,035 pro rata distribution out of the company’s accumulated earnings and profits to Neff, who at the time held 99 of 100 corporate shares. In this context the distribution of $19,035 is entirely divested of real relation to the ultimate change in proportionate ownership, and bears every attribute of a dividend.
It appears to me that in reaching a contrary result the majority has overlooked entirely the realities of the closely held — or in this case, single-owner corporation. Presumably had the corporation retired the shares acquired from Neff and then issued new shares for subsequent sale, the majority would have concluded that the distribution was equivalent to a dividend inasmuch as there would have been no formal connection between redemption and ultimate change in proportionate ownership. I find no greater connection between redemption and ultimate change in proportionate interest in the facts as they actually transpired. It is difficult for me to perceive how, in the context of a company in effect owned, controlled, and directed by one individual, the mere change in wording of the fiat decreed by that single owner should change the tax consequences of the transaction. Moreover, it would seem that the majority decision raises a red flag for alert tax counsel to be on notice that on any occasion that a closely held corporation wishes to acquire additional capital by sale of corporate shares, it may simultaneously return a dividend distribution for its shareholders that will be subject only to capital gains tax treatment, merely by first effecting a pro rata redemption of some of their shares. I do not believe this to be the import of the applicable statutory provisions.
For the reasons stated I must respectfully dissent from the decision of the court.