Court Opinion

ID: 4493093
Source: CourtListenerOpinion
Date Created: 2020-01-17 22:03:46.009922+00
Date Added: 2024-06-11T15:03:59.593130
License: Public Domain

Sterniiagen,
dissenting: As to the deduction allowed as compensa-
tion for services of the value of a corporation taxpayer’s shares, I have already expressed my disagreement in Haskell & Barker Car Co., 9 B.T.A. 1087. The confusion disclosed by the issue raised in the present proceeding as to the time and amount of the accrual, as suggested by my brother Murdock, has its genesis in the fallacy of regarding the disposition by a corporation of its own shares as an expense. The corporation has spent or incurred nothing. The transaction was a sale or issuance of shares to a restricted class for a price. The earnings and profits remain, throughout these stock transactions, entirely in the corporation’s possession, subject to its use and disposition, and distributable, in its discretion, by way of dividends. What then serves to reduce its income ? Nothing, unless the redistribution of share interests can be said to do so. If a partnership were to give an employee an interest in the business, there would probably be no suggestion of deduction. The concept of capital stock in Eisner v. Macomber, 252 U.S. 189, leads to the same result. Since, as the prevailing opinion holds, the payment of cash dividends to the employees fails to reduce income, it is difficult to see why the issuance of the stock upon which the dividends are paid should do so. It may be added, lest there be doubt as to the importance of this question, that the facts in Rogers v. Guaranty Trust Co., 288 U.S. 123, give some idea of the possible extent of its effect. A close corporation could by this method earn profits year after year, and by distributing shares of an increasing value for services *152avoid all tax while distributing its earnings, which to the distributee are free from normal tax. And it certainly adds nothing to the argument for deductibility that instead of an outright issuance for service, there is a sale for less than value.
Mttedock agrees with this dissent.