Court Opinion

ID: 9652837
Source: CourtListenerOpinion
Date Created: 2023-08-23 17:33:15.557106+00
Date Added: 2024-06-11T18:12:54.488547
License: Public Domain

MARIS and GOODRICH, Circuit Judges
(dissenting).
The critical question in this case is, we think, one of law and one upon which this Court has an obligation to exercise its own judgment when the decision of the Tax Court is brought here for review. That question is whether a corporate reorganization, in order to be tax free, must be one conducted for a “corporate business purpose” of the corporation as distinguished from serving a proper business interest of the shareholders.
That this question is squarely presented there can be no doubt. The Tax Court’s findings of fact with regard to the reasons for the transaction here in question are as follows: “Reasons for adopting the transaction hereinafter described, involving the issuance of additional common stock and of debenture bonds, were that the original shareholders, by obtaining debenture bonds for their stockholdings, would receive a security which was much less fluctuating and more readily marketable, particularly in case it was necessary for a deceased shareholder’s estate to liquidate his investment in the corporation in order to meet inheritance taxes or for other purposes, and that if it became necessary to sell some portion of their investment in the .corporation the debenture bonds could be sold without reducing the Bazley family stock control of the corporation; that the contemplated entry into the hazardous road building business made it desirable to put the original stockholders in possession of bonds which would place them in a position of sharing alike with creditors to the extent of the debentures instead of ranking after creditors if the business did not succeed; that as of February, 1939 the corporation had plant and equipment of a value ($719,782.41 as of April 30, 1939) which was large in relation to the $100,000 par value of the capital stock outstanding, and, since the equipment had been purchased by the use of funds acquired through the accumulation of $855,783.07 of earnings and profits after the organization of the business in 1930, it was thought advisable to reflect a more permanent dedication to corporate use of these earnings by reducing the surplus available for dividends and transferring a portion thereof to the capital stock account and another portion to the long term debt represented by 20-year debenture bonds.”
An additional finding of fact is made as to the relation of the -purpose and the corporate business. It reads as follows: “There was no legitimate purpose of the corporate business of J. Robert Bazley, Inc., in the issuance and distribution to the stockholders of $400,000 in debenture bonds.”
The significance of these findings of fact is pointed up by the discussion of the Tax Court when it says: “Such objectives as to create a security more desirable for the stockholders as being less fluctuating in valúe, more regular and certain in its income, easier to market for inheritance tax payments, and furnishing greater safety against claims of corporate creditors are easily understandable from the standpoint of the stockholders. They furnish persuasive reasons why the stockholders wanted to change the form of their investment. But, as we have said, a desire to encompass such an exchange without occasioning the tax consequences usually attendant upon those transactions would not supply the *245necessary purpose as a business or corporate object.”
We accept the Tax Court’s findings of fact. We also, now that we understand we are so to do, accept its conclusion when it applies its facts to a correct rule of law regardless of whether we, in a particular instance, would have reached the same conclusion or not. But if we believe the legal criterion used by the Tax Court is incorrect it is our duty so fo say and to send the case back for appropriate proceedings under the application of what we deem the correct criterion.
We think that the criterion here making a distinction between “corporate” and “shareholder” purpose is incorrect. The foundation for it is supposed to be Gregory v. Helvering, 1935, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596, 97 A.L.R. 1355. That case involved the formation of a dummy corporation which did no business otherwise than to participate in a transfer which the taxpayer was seeking to effect without tax liability. What we had was a sale masquerading as a reorganization. The court struck through the sham.
To expand that decision into a rule of law such as is now contended for is to push it beyond anything which we think the court could have had in mind. Nor do we think the expansion is one which a reasonable growth beyond Gregory v. Hel-vering would call for. We have long since passed the place in our thinking where we view the corporation as “an artificial being, invisible, intangible and existing only in contemplation of law.” We think of it as a device that shareholders use to carry on their business as a group. A corporation does not have purposes apart from its shareholders. Shareholders, of course* may have conflicting interests among themselves with regard to the conduct of their common enterprise. They may fight with each other, perhaps, in order to elect A instead of B to the directorship of their company. And, of course, aside from their interest in the common enterprise, called their corporation, they have interests as varied as the hopes and desires of human beings. But when we talk about the interest of shareholders in connection with the 'business enterprise and have a finding of fact that such and such a thing was done and that it was to the .shareholders’ business advantage, speaking of them as a group, we do not find substance in a distinction between the business advantages of the shareholders with respect to the corporation or the business advantages of the corporation itself.
Furthermore, this very thing concerned with here, reorganization, is a matter in which shareholders directly participate. The day to day business of the corporation is done by its officers, directors, employees. But a realignment of the interests in the enterprise through reorganization must come, under every corporation law we know of, through vote of the shareholders. In such circumstances it is as a practical matter impossible to separate as to the very transaction involved, a “shareholder’s” from a “corporate” interest.
We think the distinction attempted coming, as it does, quite a number of years after Gregory v. Helvering, is one not established by that decision, the statute, nor the regulations. If reorganization provisions contain too many avenues of escape for taxes which ought to be collected the Congress can close those avenues by appropriate legislation which can be so framed and defined as to leave the way clear to what it deems are business transactions in which no gain or loss should be recognized. We do not think it should be by judicial decision which establishes the exceedingly vague criterion as to whether a given transaction was to the interest of the shareholder as distinguished from the interest of the corporation in which he holds shares of stock.
The gloss here sought to be placed upon those provisions of Section 112 of the Internal Revenue Code which render non-taxable the exchange of certain securities in connection with corporate reorganizations, can only be justified upon the assumption that all reorganizations which are put through by stockholders solely to promote their own business purposes must necessarily involve the motive of tax avoidance. Only upon this assumption can the principle of Gregory v. Helvering be applicable. But this assumption is quite unsound as the facts of the case before us demonstrate. *246And even clearer cases can readily be brought to mind. Suppose a case in which the common shareholders arrange for the reclassification of a part of their holdings as non-voting stock in order that they may sell it or give it away without endangering their voting control. This would be a perfectly proper business purpose of the stockholders involving not a trace of tax avoidance but it would not benefit the business of the corporation as such. We do not think that there is any authority for the proposition that such a recapitalization would not be within both the letter and the spirit of Section 112.