Court Opinion

ID: 9425569
Source: CourtListenerOpinion
Date Created: 2023-08-02 23:15:03.980236+00
Date Added: 2024-06-11T17:22:56.238640
License: Public Domain

Mr. Justice Douglas,
dissenting in Davis with the concurrence of The Chief Justice and Mr. Justice Brennan, viewed the majority opinion as reading § 302 (b)(1) out of the Code:
“When the Court holds it [the redemption under consideration in Davis] was a dividend, it effectively cancels § 302 (b)(1) from the Code. This result is not a matter of conjecture, for the Court says that in the case of closely held or one-man corporations a redemption of stock is 'always’ equivalent to a dividend.” 397 U. S., at 314.
The Tax Court’s decision in this case abundantly bears out Mr. Justice Douglas’ view. In light of the deliberate retention of the “essentially equivalent to a dividend” language in the 1954 revision of the Code, most courts prior to Davis had assumed that § 302 (b)(1) required a factual determination as to the business purpose of the stock redemption.5 Had such a factual inquiry been made in this case, it is evident that the result would have been different.
In addition to the presence of a legitimate business purpose and the absence of any evidence of tax evasion, the preferred stock in question here was nondividend paying — a highly unusual provision for a preferred *987stock. Thus petitioners, having been induced by the Commission to advance additional private capital to A & S, found themselves either locked in without income on their investment or compelled, as the price of recouping it, to pay taxes at ordinary income rates on a nonexistent gain. It is difficult to think of a more unjust result, and yet this is the inevitable consequence of the sweeping Davis requirement that a redemption “always” be deemed “ 'essentially equivalent to a dividend’ ” in the absence of “a change in the relative economic interests or rights of the stockholders.” 397 U. S., at 307, 313.6
*988One may recognize the tax-avoidance concern underlying the Court’s opinion in Davis 7 without concluding that the only remedy with respect to closely held corporations is “always” to tax stock redemptions as dividends without regard to facts and circumstances. It may indeed have been reasonable to create a rebuttable presumption in favor of the Government, but it is difficult to see a justification for a result as harsh and inequitable as that often produced by the Davis rule. Moreover, if Congress’ purpose was to enact the Davis per se rule, it could have been expressed in the simplest language.8 As the Court notes in Davis, the Senate Finance Committee deliberately chose not to take that option. Id., at 310-311.
In my view the Davis rule, often a trap for unwary investors in small businesses and facially contrary to the relevant Code provision, should be reconsidered.

 See cases cited in United States v. Davis, 397 U. S. 301, 303 n. 2 (1972).

 This one qualification (namely, a change in the relative economic interests or rights of stockholders) may immunize from Davis consequences the larger corporations, where a congruitv of interest between common and preferred stockholders is found far less frequently than in the family type of small corporations. But even where it can fairly be said (and often the facts as to this are ambiguous) that there has been no such change, this does not mean that minority stockholders are not severely penalized by the Davis rule. In this case, the Tax Court noted that the redemption was made at the insistence of petitioners, who were in the unhappy position of holding nondividend preferred stock. But nothing in Davis protects a minority stockholder in a close corporation (and their number is legion) who may have little or no influence as to whether or .when preferred stock is redeemed. If the majority shareholders. in such a corporation effect a pro rata redemption, a minority shareholder has no means to avoid Davis consequences In this connection, the language of the Senate Finance Committee in restoring the “essentially equivalent” language to § 302 of the Code is relevant. The Senate Committee stated that the House bill, which had deleted this language, “appeared unnecessarily restrictive, particularly, in the case of redemptions of preferred stock which might be called by the corporation without the shareholder having any control over when the redemption may take place.” S. Rep. No. 1622, 83d Cong., 2d Sess., 44 (1954). See United States v. Davis, supra, at 310. The truth is that minority shareholders, even in close corporations, frequently have no such control.

 See B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders 9-2 (3d ed. 1971).

 It has been suggested that since Davis was decided March 23, 1970, Congress has had more than three years to repudiate or ameliorate the Davis per se rule. With all respect, this suggestion seems unrealistic. Congress has had under consideration during this period a general revision of the Code as well as a broad re-examination of many of the fundamental assumptions underlying the present Code. It is unlikely that piecemeal adjustments would have been made during this period of study and re-examination. Furthermore, the Davis rule falls most heavily on small family corporations unlikely to have specialized tax counsel capable of warning that Davis has converted § 302. (b) (1) into “a treacherous route to be employed only as a last resort.” B. Bittker & J. Eustice, supra n. 7, at 9-9. It is these very corporations that are least likely to make their voices heard in Congress, since they have limited “lobbying” capabilities.