Court Opinion

ID: 4486707
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:38.556463+00
Date Added: 2024-06-11T14:54:07.862776
License: Public Domain

Chabot, J., concurring in the result: To the extent that the majority forbid petitioners to argue substance over form, I disagree. I would hold that petitioners are bound by the facts they helped to create (i.e., the course of action they pursued), but I would permit petitioners to contend that the substance of the transactions is different from the forms they used, and thus to dispute the tax characterization of what occurred.1 However, I would then hold that petitioners have failed to show that their income is properly taxable as a capital gain rather than a dividend. This is the same result that the majority reach, and so I concur in their result but do not join in their opinion. Three different ways have been suggested to characterize the facts of the instant case: (1) A constructive dividend to petitioners of the excess value of the culm banks, (2) a constructive dividend to Green of the excess value of the culm banks, Green then using the excess value as part of the purchase price for petitioners’ GACC stock, and (3) a redemption by gacc of petitioners’ stock, using the excess value of the culm banks as the consideration. The question before us is whether petitioners have proven that the first alternative is not the proper characterization of the facts. It is suggested that because petitioners terminated their interest in gacc before GACC transferred the culm banks to petitioners, the distribution of the excess value could not have been a constructive dividend to petitioners because the distribution was not “to a shareholder with respect to its stock”, sec. 301(a). However, legal ownership of stock at the time of the distribution is not necessarily a requirement for dividend income. See sec. 1.61-9(c), Income Tax Regs. (“When a stock is sold after the declaration of a dividend and after the date as of which the seller becomes entitled to the dividend, the dividend ordinarily is income to the seller”); 10 Mertens, Law of Federal Income Taxation, sec. 38B.18, at 75 (1991) (“If the stock is sold after both the date the dividend was declared and the record date (when the owner becomes entitled to the dividend), the dividend will be includable in income of the seller”); id. sec. 38B.19, at 76 (“When a stock is trading exdividend, the seller is entitled to a dividend that has already been declared but not yet paid”). Thus, the timing of the contractual termination of petitioners’ interest in GACC and the distribution of the excess value does not preclude a finding of a constructive dividend to petitioners. As the majority point out, majority op. p. 570, petitioners concede that in fact there was no redemption of their GACC stock. As to the substance, in contrast to Estate of Schneider v. Commissioner, 88 T.C. 906, 939-941 (1987), affd. 855 F.2d 435 (7th Cir. 1988), (1) it does not appear in the instant case that the stock that Green received was different from the stock that petitioners disposed of, and (2) petitioners and Green did negotiate a transfer of GACC stock from petitioners to Green. Thus, the elements that caused us to conclude that the Estate of Schneider situation provided a better fit for a redemption, in the instant case cause me to conclude that the situation here provides a poor fit for a redemption, but a proper fit for a sale and a constructive dividend to petitioners. As to the theory of a constructive dividend of the culm banks to Green followed by a transfer from Green to petitioners, we note that there is no evidence that Green ever had even momentary legal or equitable ownership of the culm banks. The dividend-to-Green theory requires the creation of events which never in fact occurred. The step transaction doctrine suggested by petitioners involves the determination that a series of transactions be treated as an integrated transaction, not that steps which never occurred be treated as though they occurred. This analysis of the step transaction doctrine is explained in Glacier State Electric Supply Co. v. Commissioner, 80 T.C. 1047, 1057-1058 (1983), as follows: Although we agree with petitioner that where appropriate, under the step transaction doctrine, separate steps must be taken together in attaching tax consequences, this is not a correct case in which to apply that doctrine. Petitioner is not asking us to skip, collapse, or rearrange the steps he employed. See Harris v. Commissioner, 61 T.C. 770, 783 (1974). He is instead asking that we accept an entirely new series of steps or events that did not take place. The step transaction doctrine cannot be stretched so far. Despite petitioner’s present objections, in essence it is merely arguing that since the transaction would have been nontaxable if cast in another form, we should grant similar treatment to the form it utilized. This we cannot do. The cornerstone of tax planning is that the same economic or business result may be validly achieved through a variety of routes, each with differing tax consequences. The step transaction doctrine may be argued by taxpayers in cases where the form chosen does not reflect that transaction’s true substance (which is reflected in the combining of the individual steps). This is to be distinguished, however, from situations where, as in the instant case, the substance of the transaction coincides with the form employed. In such situations, it is well-settled that: while a taxpayer is free to organize his affairs as he chooses, nevertheless, once having done so, he must accept the tax consequences of his choice, whether contemplated or not, * * * and may not enjoy the benefit of some other route he might have chosen to follow but did not. [Commissioner v. National Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149 (1974); citations omitted.] This Court also views with disfavor attempts by taxpayers to restructure transactions after they are challenged. Hoover Co. v. Commissioner, 72 T.C. 206, 248 (1979); Legg v. Commissioner, 57 T.C. 164, 169 (1971), affd. per curiam 496 F.2d 1179 (9th Cir. 1974); Aero Manufacturing Co. v. Commissioner, 39 T.C. 377, 385 (1962), affd. 334 F.2d 40 (6th Cir. 1964), cert, denied 379 U.S. 887 (1964). Accordingly, we conclude that in both form and substance, the two redemptions occurred here as they were originally cast, and that the step transaction doctrine is of no aid to petitioner. Thus, the step transaction doctrine does not permit us to create a step in which Green had a legal or equitable right to the culm banks. Accordingly, I conclude that the instant case provides a poor fit for a constructive dividend to Green. In the instant case, the conclusion that petitioners received a constructive dividend matches the facts as we have found them at least as well as either of the two above-described alternatives and, on balance, is a better “fit” to the facts. The substance of petitioners’ transaction, and our characterization of it, is in accord with petitioners’ course of action, and the form of a constructive dividend. At the very least, I would conclude that petitioners failed to carry their burden of proving that either of the other two alternatives better characterize the facts. Thus, I concur in the majority’s result. However, the majority reach their result by refusing to consider the merits of petitioners’ central claims.2 That is, the majority conclude that “these petitioners should not be allowed to disavow the form they chose.” (Majority op. p. 574.) In the past we have not feared to listen to taxpayers’ claims. We have allowed taxpayers to argue that the substance of what they did should control over the form they used, and in many instances then concluded that the substance indeed matched the form. In Glacier State Electric Supply Co. v. Commissioner, 80 T.C. at 1053-1054, we described our approach as follows: We agree with petitioner that it is the substance of a transaction rather than mere form which should determine the resultant tax consequences when the form does not coincide with economic reality. Commissioner v. Court Holding Co., 324 U.S. 331 (1945); Higgins v. Smith, 308 U.S. 473 (1940); Foster v. Commissioner, 80 T.C. 34, 201 (1983); Gray v. Commissioner, 56 T.C. 1032 (1971). The taxpayer, as well as the Commissioner, is entitled to assert the substance-over-form argument although in such situations taxpayers may face a higher than usual burden of proof. Landa v. Commissioner, 206 F.2d 431, 432 (D.C. Cir. 1953); Ciaio v. Commissioner, 47 T.C. 447, 457 (1967). The majority refer to Glacier State at several points in justifying their determination to forbid petitioners to invoke the doctrine of substance over form. With respect, I suggest the majority miss the point of Glacier State. As the above quotation from Glacier State plainly states, taxpayers are allowed to invoke the doctrine of substance over form. When the taxpayer in Glacier State invoked the step transaction doctrine, we pointed out that it was misusing the doctrine. We there said: “Petitioner is not asking us to skip, collapse, or rearrange the steps * * * [it] is instead asking that we accept an entirely new series of steps or events that did not take place.” 80 T.C. at 1057-1058. Thus, the lesson of Glacier State is that we bind taxpayers to the facts they helped to create, even though we permit them to invoke the substance-over-form doctrine. In Glacier State, we analyzed the substance and facts, and closed as follows: “Accordingly, we con-elude that in both form and substance, the two redemptions occurred here as they were originally cast”. 80 T.C. at 1058. That is the analysis I would use in the instant case. We have used this analysis in Court-reviewed opinions, without challenge. In Yamamoto v. Commissioner, 73 T.C. 946, 954 (1980), affd. without published opinion 672 F.2d 924 (9th Cir. 1982), a Court-reviewed opinion, we explained as follows: Apart from any question of presumption of correctness of respondent’s determination, we will assume that the acts of the parties and documentation surrounding the transactions reflect the intent of the parties unless we are given some evidence to the contrary. We will not relieve a party from the tax consequences of the form in which he or she appears to have molded a transaction, in the absence of proof that that form does not properly reflect the transaction. [Emphasis added.] We then examined the taxpayers’ contentions and concluded that “petitioners have wholly failed to persuade us that Yamamoto’s books and records, as well as those of the corporations, were in complete conflict with the true intentions of the parties to the transactions”. 73 T.C. at 958. In Hope v. Commissioner, 55 T.C. 1020, 1031 (1971), affd. 471 F.2d 738 (3d Cir. 1973), also a Court-reviewed opinion, we stated as follows: While we agree with the petitioner’s observation that the substance of a transaction must prevail over its form (Commissioner v. Court Holding Co., 324 U.S. 331 (1945)), and that the rule may work for the benefit of the taxpayer as well as the Government (Frank Ciaio, 47 T.C. 447 (1967)); Maynard Hospital, Inc., 52 T.C. 1006 (1969), we do not find that the realities of the transactions that are the subject of the instant case differ from the form in which they were cast. Abrams v. United States, 797 F.2d 100 (2d Cir. 1986), involved a dispute as to whether a payment by a decedent was a gift in contemplation of death. Decedent and her husband had filed joint income tax returns. The Internal Revenue Service determined that decedent and her husband owed additional income taxes. Decedent’s husband borrowed from a bank and paid the income taxes. During the next year, decedent’s husband paid off part of the loan. Decedent then paid off another part of her husband’s loan. Decedent’s executrix contended that decedent’s payment of a part of decedent’s husband’s loan should be considered as, in substance, a payment of a portion of decedent’s joint and several income tax liability. The Court of Appeals did not prohibit decedent’s executrix from challenging the form of decedent’s payment. Rather, the Court of Appeals set forth the text that we have quoted from Yamamoto v. Commissioner, supra, and then concluded that the evidence in the case was insufficient to create a genuine issue as to whether the substance was different from the form. In sum, I would permit petitioners to make their contentions and I conclude that respondent’s analysis better fits the facts (or, at least, that petitioners have failed to carry their burden of proving that respondent’s analysis is wrong). I disagree with the majority’s denial of petitioners’ right to make their contentions. Because my ultimate conclusion in the instant case is the same as the majority’s, I concur in the result even though I do not join in the majority’s opinion. Gerber, J., agrees with this concurring opinion.   The distinction was recently described as follows by Judge Raum in n.3 of his opinion in Kanetzke v. Commissioner, T.C. Memo. 1991-152: The Government has attempted to associate with Commissioner v. Danielson, 378 F.2d 771 (3d Cir. 1967), the Supreme Court’s statement in Commissioner v. National Alfalfa Dehydrating & Milling Co., 417 U.S. 134, 149 (1974), to the effect that “while a taxpayer is free to organize his affairs as he chooses, nevertheless, once having done so, he must accept the tax consequences of his choice, whether contemplated or not [citations omitted], and may not enjoy the benefit of some other route he might have chosen to follow but did not.” Although this statement might teasingly appear to be related to Danielson, it was in fact directed to an entirely different matter. The issue in Nat. Alfalfa was whether the taxpayer there would be treated as having pursued a course of action different from the one it had in fact followed. By contrast, the issue here involves the proper characterization of the course of action actually followed by petitioner. We in no way intend to depart from Nat. Alfalfa, but we find it inapplicable here.    It is not clear whether the majority’s analysis is a version of, or analogous to, the various forms of the doctrine of judicial estoppel discussed in Bokum v. Commissioner, 94 T.C. 126, 135-137 (1990), on appeal (11th Cir., July 31, 1990).