The opinion
Tietjens, J. dissenting: The majority apparently is willing to accept the labels attached by the parties to the payments in question as determinative of the tax consequences — i.e., the parties to a business transaction can determine.between themselves which party the Government shall tax. This is nonsense. Even though every “i” is dotted and every “t” is crossed, this “opens questions as to the proper application of a taxing statute; it does not close them.” Bazley v. Commissioner, 331 U.S. 737, 741 ; 2554-58 Creston Corp., 40 T.C. 932 .
Here the Commissioner determined that the so-called preferred dividends were not dividends but interest. Unquestionably the burden is on petitioner to prove otherwise.
Despite the careful terminology used by Malone & Hyde and Rag-land in the basic contract and the instruments issued (“preferred stock”), was it really “preferred stock” ? Certainly the Commissioner is not bound by labels. Even Malone & Hyde had doubt about what they had done taxwise. They first treated the questioned payments as dividends, then reversed the field and claimed them as interest. Of course Ragland stuck to its guns — we set the deal up this way deliberately (no question about it) and the Commissioner is stuck with it (anyone is privileged to minimize taxes). But how can parties to a contract bind the Commissioner, who is not a party, especially when one party to the contract is not itself sure as to the tax nature of the creature spawned by the contract?
Ragland wanted to sell its assets. Malone & Hyde wanted to buy. A price of $5 million was determined. How was payment to be made? All cash probably could have been raised. Or part cash and a note ? No, Ragland’s tax advisers said, part caáh and preferred stock, more advantageous from a tax standpoint. Well, I want my money shortly, says Ragland. O.K., the controlling stockholders of Malone & Hyde say, we will do that, and agree to use our best efforts to have the preferred stock redeemed within four years. (The stock was in fact redeemed in 18 months.) Malone & Hyde’s tax advice apparently was equivocal as to the effect of the transaction. At any rate, Malone & Hyde claimed no deduction as interest for payments made to Ragland with reference to the stock until after Ragland’s preferred stock was redeemed and the majority stockholders of Malone & Hyde had satisfied their obligation to Ragland. A very short time indeed in which to record a mind change, if the suspicion that a change was not in mind from the beginning.
I would conclude the securities in question were merely a short-term means of financing the purchase of assets and that the characteristics of debt outweigh the characteristics of an investment in the stock of Malone & Hyde. The questioned payments were interest on deferred purchase price and not true dividends.
Raum, Dawson, and Hoyt, JJ., agree with this dissent.