Court Opinion

ID: 9451852
Source: CourtListenerOpinion
Date Created: 2023-08-04 17:25:09.026383+00
Date Added: 2024-06-11T17:32:55.565609
License: Public Domain

SETH, Circuit Judge
(dissenting).
I respectfully dissent from the opinion of the majority of the court.
The record shows that the eighty-four shares of the corporation stock in question were originally issued in the name of Ben F. Kelly, Jr., and when the entire transaction is examined, that is about all that can be said about his interest in the company. The certificates on issuance were endorsed by Kelly to Trotz and were delivered to the possession of Trotz where they remained at all material times thereafter, and Trotz had the right to receive the dividends on the shares. Trotz provided all of the cash to the corporation for the issuance of the shares, including the $8,400.00 for the eighty-four shares in question. As between Trotz and Kelly this amount was treated as a loan to Kelly, who gave back a promissory note. There was however no personal liability on this note (the stock could be surrendered as payment), and the record does not indicate that any payments were made on it.
However the most significant feature of the arrangement was the fact that upon its completion, Kelly had no right to regain possession of the shares of stock as against the wishes of Trotz. The corporate bylaws made express provision for the removal of an officer or director by a majority vote (which Trotz had), and in the event Kelly was so removed Trotz had the right to have the shares reissued in his name. This could be done by giving credit on the note or by payment of the book value of the stock, not including intangibles, as determined by the board of directors. Thus as far as Trotz was concerned, he was in a position to always retain possession of the shares of stock as against the wishes of Kelly. It would seem that the concep*931tion of ownership would include the enforceability, practically and legally, of rights as to the property in question. If the transaction is so examined, it is clear that all of the effective rights were retained by Trotz.
Thus when the arrangement is examined on the before and after basis, it is apparent that Trotz gave up nothing by way of ownership in his contracting business through the incorporation and the arrangement with Kelly.
The purpose of the Act under consideration is to prevent the transfer of assets of the nature of those in question from an individual to a corporation controlled by such individual and vice versa, and thus to prevent the transfer of depreciated assets from one pocket to the other to secure tax advantages under the capital gains rates and the new base for depreciation. “Control” for the purpose of this section of the Code would appear to have been defined by Congress as the ownership of more than eighty per cent in value of the shares of the corporation, and is not corporate control in the usual sense. Congress has presumed that the taxpayer has control of shares which may be wholly owned by his spouse, by his minor children, or by his minor grandchildren. Congress has not expressed any other presumed control, and thus we are left with the question as to whether or not Congress intended by the use of the word “owned” to include control by the taxpayer over shares which are issued in the names of other persons. It would appear that the matter must be so examined in the light of “control” over the corporation or over the shares. This guide for construction should be utilized although it has been pointed out by the parties that the House version of the legislation which referred to direct or indirect ownership was eliminated from the Bill as it was finally adopted.
Reference is made to two cases relating to trusts. These are, of course, Mitchell v. Com’r of Internal Revenue, 300 F.2d 533 (4th Cir.), and our case of United States v. Rothenberg, 350 F.2d 319 (10th Cir.). The Mitchell decision is based entirely on the fact that the legislative history of Section 1239 of the 1954 Internal Revenue Code demonstrates the intention of Congress that the interest of beneficiaries of trusts not be included. The decision also mentions control over other stock and notes, the specific limitations contained in the present Act, as compared to the more general language of indirect ownership contained in the House version of the Bill. Thus the Mitchell case and our Rothenberg case, which was based upon the Mitchell case, did not decide that beneficial interests were not included by reason of the nature of such interests. Instead the decision was based entirely upon the legislative history that such interests be not included regardless of their legal character. Thus the two cited cases, in my opinion, do not help us in reaching our decision in the present case. We are thus left with the language and the purpose of the Act.
As indicated above reliance cannot be placed upon any particular document, but instead the entire series of events must be considered. If a particular event or document is examined separately, certain assumptions as to the legal relationship of the parties or assumptions as to the property must be made which may not be warranted. For example, if the rights of the parties are considered to depend upon the option agreement, a part or all of the result is thereby assumed, although to give an option Kelly must be considered to be the “owner” of the shares.
Likewise the substance of the arrangement must be considered rather than placing reliance upon its form. We do not have a question of attributing ownership as the term is ordinarily used nor do we have the case where the bare contract rights of the parties will determine the transaction.
In my opinion when the substance of the transaction is examined, the case falls within the intention of Congress that the transfer of depreciated assets be not permitted from one pocket to the other. For the purpose of the statute, Trotz “owned” the shares in question and Kelly had no “ownership” in them. This *932ownership is just as effective or more effective than the presumed control which Congress has found to exist, for example,in circumstances where the stock is owned by the grandchildren of the taxpayer, and comes within the meaning of the statute.
I would affirm the decision of the Tax Court.