Stinnett v. Commissioner

FeatherstoN, J., concurring:

I agree with the conclusion of the majority but add these thoughts.

The regulation we held invalid in W. C. Gammam, 46 T.C. 1 (1966), provided that “If an instrument purporting to be a debt obligation is actually stock, it will constitute a second class of stock.” (Emphasis added.) Following our decision in Gamman, this language was amended to provide that “Obligations which purport to represent debt but which actually represent equity capital will generally constitute a second class of stock.” (Emphasis added.) It is immediately observable that this new language is even less consistent with the statute than the invalidated regulation it replaced, for section 1371(a)(4) refers to “stock” but not to “equity capital.”

The effect of the present regulation is to subject a corporation’s subchapter S status to all the uncertainties, inconsistencies, and confusion derived from the unceasing stream of cases involving the debt-equity dichotomy, which, after all, is merely a tool for reasoning. See, e.g., J. S. Biritz Construction Co. v. Commissioner, 387 F. 2d 451 (C.A. 8, 1967), reversing a Memorandum Opinion of this Court; Murphy Logging Co. v. United States, 378 F. 2d 222 (C.A. 9, 1967), reversing 239 F. Supp. 794 (D. Oreg. 1965); Nassau Lens Co. v. Commissioner, 308 F. 2d 39 (C.A. 2, 1962), reversing 35 T.C. 268 (1960); Byerlite Corp. v. Williams, 286 F. 2d 285 (C.A. 6, 1960), reversing 170 F. Supp. 48 (N.D. Ohio 1958); Gilbert v. Commissioner, 248 F. 2d 399 (C.A. 2, 1957), remanding a Memorandum Opinion of this Court, opinion on remand affirmed 262 F. 2d 512 (C.A. 2, 1959), certiorari denied 359 U.S. 1002 (1959); Miller's Estate v. Commissioner, 239 F. 2d 729 (C.A. 9, 1956), reversing 24 T.C. 923 (1955); Kraft Foods Co. v. Commissioner, 232 F. 2d 118 (C.A. 2, 1956), reversing 21 T.C. 513 (1954). Since small corporations customarily depend on stockholder loans and guarantees for financing, I do not think Congress intended to make the harsh consequences of a “retroactive” termination of the election under section 1372 (e) (3) subject to such inexactitude.

One of the purposes of the requirement in section 1371 (a) (4) was—

to avoid the complexities involved in passing the earnings of a corporation through to its stockholders where the stock of the corporation is held by a widely diversified group of stockholders with different rights. See S. Rept. No. 830, 88th Cong., 2d Sess., p. 146, 1964-1 C.B. (Part 2) 650.

W. C. Gamman, supra at 7-8 . The other pass-through provisions of subchapter S (i.e., those dealing with capital gains and net operating losses) likewise are workable only if there is a simple corporate structure with one class of stock. However, even the regulation implicitly recognizes that the computation of these pass-throughs is not complicated by the existence of notes held in proportion to stockholdings. And such computations are no more complex where the notes are held disproportionately. 1

For these additional reasons, I agree that the regulation under consideration is so clearly at odds with the language and purposes of the statute that it cannot be sustained. See generally Kurzner v. United States, 413 F. 2d 97 (C.A. 5, 1969); O’Neill v. United States, 410 F. 2d 888 (C.A. 6, 1969); United States v. Empey, 406 F. 2d 157 (C.A. 10, 1969); Edward A. Moradian, 53 T.C. 207, 210-211 (1969); Vincent B. Rodgers, 51 T.C. 927, 930 (1969).

DeeNNEN, Fat, Hott, and TaistneNWALd, JJagree with this concurring opinion. While the character in the hands of the shareholders of distributions in retirement of disproportionately, or even proportionately, held notes, and the effect of the distributions on the corporation's earnings and profits, may depend upon whether the notes constitute “debt” or “equity,” such distributions do not affect computation of the pass-throughs.