Court Opinion

ID: 9459704
Source: CourtListenerOpinion
Date Created: 2023-08-04 21:29:13.809799+00
Date Added: 2024-06-11T17:36:17.674842
License: Public Domain

BRIGHT, Circuit Judge
(dissenting).
I respectfully dissent. My difference with the majority lies not in its statement of the applicable law but in its application of that law to the total factual situation. This record discloses that the taxpayer, William F. Wright, owned all of F & G Construction Company (99.2 percent), except for one share held by his wife and one share held by his attorney, and that immediately prior to consolidation, this corporation’s earned surplus amounted to $101,802. The amount of the earned surplus was only $200 less than the amount of the note that the taxpayer received upon consolidation. As noted by the majority, the taxpayer owned 56 percent of the shares of a sec*611ond corporation, World Wide, which was consolidated into Omni. Dunn, taxpayer’s business associate, owned 30 percent, and taxpayer’s mother and his attorney owned the remaining shares, constituting approximately 14 percent of the total shares.
The taxpayer has stipulated. that in consolidating F & G and World Wide into Omni, he, as well as Dunn, desired to attain equity ownership in Omni of the same proportionate percentage as their ownership in Danco Construction Company, a third corporation owned 71.-5 percent by taxpayer, 27.9 percent by Dunn, and .6 percent by taxpayer’s attorney.
Interestingly enough, following the consolidation of World Wide and F & G into Omni and after the payment of “boot” to taxpayer and the contribution of new capital by Dunn, the shareholdings show Dunn possessed of the almost identical percentage interest in Omni (27.8 percent) as his percentage of stock in Danco (27.9 percent). Taxpayer, however, was left with only 61.7 percent of Omni. Thus, in order for taxpayer to attain the same approximate percentage equity ownership in Omni as he had in Danco, the stipulation1 of the parties would require counting shares owned by Mrs. W. F. Wright, Sr. (taxpayer’s mother), Mrs. W. F. Wright, Jr. (taxpayer’s wife), and John Thurman, Sr. (taxpayer’s lawyer) as equitably owned and controlled by taxpayer.
Moreover, as the majority aptly observes in n. 14 of the opinion, the constructive ownership rules of 26 U.S.C. § 318 apply to § 302(b)(1). Thus, under the attribution rules the stock of the taxpayer’s wife and mother must be deemed owned by the taxpayer in determining whether the stock redemption was essentially equivalent to a dividend. United States v. Davis, 397 U.S. 301, 90 S.Ct. 1041, 25 L.Ed.2d 323 (1969).
The majority enunciates the following test for determining whether a stock redemption was “not essentially equivalent to a dividend:”
We think that if a distribution is not to have the “net effect” of a dividend, there must have occurred a meaningful reduction of the redeeming shareholder’s proportionate interest or in other words a meaningful change in the relative economic interests or rights of the shareholder after the redemption. [Majority opinion at 609 (citations omitted).]
In finding such a “meaningful change,” the majority emphasizes the reduction of the taxpayer’s voting power in Omni whereby he no longer directly retained the two-thirds interest necessary to amend the articles of incorporation or to force a merger, consolidation, or liquidation of Omni under Arkansas law.
I find this analysis flawed because the taxpayer by stipulation asserted that his intended “equity ownership” in Omni was to be the same as that in Danco, i. e., approximately 72 percent. Practical considerations, as well as the rules of attribution, indicate that the taxpayer has retained an interest in Omni which closely approximates the intended percentage of equity ownership. Of course this percentage is well over the two-thirds figure necessary for the taxpayer to exercise every power he possessed in the merging corporation, F & G.2
*612The majority’s reliance upon Estate of Arthur H. Squier, 35 T.C. 950 (1961), is misplaced since that case is clearly distinguishable on its facts. Initially, I note that if one uses the same method to compute the taxpayer’s interest in Squier as that used by the majority here, i. e., without applying the attribution rules of § 318, the taxpayer’s percentage interest in Squier was 50.09 percent before the redemption and 41.27 percent after the redemption. As a result of the redemption, the principal, nonre-lated, minority shareholder actually became the majority shareholder with 43.-18 percent of the shares.
However, even if the rules of attribution are applied to the factual situation in Squier to reach the ownership percentages cited by the majority,3 the present factual situation is not analogous. Contrary to the majority’s assertion that the “dissident minority” interest was the 43.18 percent shareholder, the “dissident” shareholders in Squier were actually family members whose stock the Tax Court attributed to the taxpayer4 under the rules of 318, i. e., taxpayer’s wife and grandchild.5 These family members had had a severe disagreement with the taxpayer (the executor of the estate) over the selection of a new president upon the death of Mr. Squier.6 The Tax Court found that as a result of the executor’s failure to appoint decedent’s son-in-law as the new president, there was “considerable friction and strained relations” between the taxpayer-executor and the decedent’s family. Thus the Tax Court concluded:
[T]he record herein reveals a sharp cleavage between the executor and members of the Squier family, and in spite of the attribution rules as to stock “ownership,” the redemptions herein in fact resulted in a crucial reduction of the estate’s control over the corporation. [Emphasis on “control” in original.] Accordingly, notwithstanding the attribution rules, the re-demptions in this case did result in a substantial dislocation of relative stockholdings in the corporation and also in'fact brought about a significant change in control. [Id. at 956 (emphasis added).]
If the record in the present case revealed the exceptional situation where the interest of family-member shareholders (whose shares were attributable to the taxpayer) were in fact adverse to the taxpayer, I would be inclined to agree that the Squier case would be applicable here, and under its holding the taxpayer would have made a meaningful change in his interest through the redemption. However, the record before us provides no basis for assuming that shares attributable to the taxpayer are held by shareholders with interests adverse to the taxpayer.
Therefore, I conclude that the majority has ignored the taxpayer’s own argument that “the type of treatment to be accorded distributions in connection with reorganizations is to be determined from all the facts pertaining to a given case.” Appellee’s Br. at 3. Instead, the majority has focused only on an artificial change in the taxpayer’s interest, which, when closely scrutinized, reveals that the taxpayer has recovered all of the earned surplus of F & G corporation without surrendering any meaningful control in the new corporate entity (Omni). Whether or not we apply the *613attribution rules of § 318, practical considerations, i. e., family ownership of stock and the stipulation indicating taxpayer’s intended ownership, amply demonstrate that there has been no significant change in taxpayer’s ownership interest in Omni by reason of the distribution of boot. Thus the “boot” received by the taxpayer must be treated as a dividend for tax purposes. 26 U.S.C. § 356(a) (2).

. The stipulation stated:
[T]hey [taxpayer and Dunn] wished to pool the assets of World Wide Motors, Inc. and F & G Construction Company into a single corporate operation with the equity ownership of said new corporation as between Wright and Dunn to be approximately the same as that of Danco Construction Company.

. Tangentially, I also note my disagreement with the views of the majority that the taxpayer reduced his ownership in Omni by 23.3 percent. This computation fails to take into consideration ownership by attribution and the new capital contributed by Dunn. Thus, I compute taxpayer’s diminution in ownership at approximately 10 percent (82 percent before redemption; 72 percent after redemption), a relatively insignificant change.

. The percentages' provided by the majority in regard to the taxpayer’s interest (63.03 percent before the reilemption and 56.82 percent after the redemption) were not discussed by' the Tax Court because its holding was not based on the change in percentage ownership but on the actual change in control.

. I do not here consider whether the Tax Court was correct in applying attribution rules of § 318.

. The grandchild’s aliares were held in trust by the decedent’s daughter.

. Instead of being a “dissident” interest, the nonfainily shareholder actually cooperated with the executor on most corporate decisions. Estate of Arthur H. Squier, 35 T.C. 950, 951 (1961).