The opinion
Dawson, J., dissenting: I respectfully dissent. In attempting to reaffirm this Court’s position adopted in William L. Mitchell, 52 T.C. 170 (1969), revd. 428 F. 2d 259 (C.A. 6, 1970), the majority concludes that the petitioner herein sold his stock in his capacity as a Zenith shareholder while his obligation to restore his gain to Zenith arose out of his status as an employee. This distinction fails to persuade me that petitioner’s repayment to Zenith was not directly and integrally related to the sales transaction of Zenith stock which gave rise to his capital gain.
As noted in Booth v. Varian Associates, 334 F. 2d 1 (C.A. 1, 1964), certiorari denied 379 U.S. 961 , section 16 (b) of the Securities Exchange Act of 1934 is remedial rather than penal and includes all profits realized by those assumed by the statute to have access to inside information whether or not an intention to profit from the unfair use of such information can be shown. Included in this group of persons are officers, directors, or beneficial owners of more than 10 percent of any class of stock in the company involved. As I view the payment made by petitioner to Zenith, stripping him of the capital gain he realized on the sale of his Zenith stock, it was in essence the satisfaction of any “obligation” he may have had under section 16(b). Negardless of why he agreed to make, or may have been required to make, this payment, it was inextricably intertwined with petitioner’s stock transactions of April 1966. Petitioner’s payment was neither a fine nor a settlement of a claim for punitive damages arising out of his conduct. He was merely called upon to restore to Zenith any gain which he realized as a result of his “insider” position. Accordingly, I think that the rationale of Arrowsmith v. Commissioner, 344 U.S. 6 (1952), and United States v. Shelly Oil Co., 394 U.S. 678 (1969), is applicable to this case. No matter how artfully the majority has tried, I doubt whether they have successfully blunted the thrust of these cases.
To bestow upon this petitioner and others similarly situated the “windfall” benefit of deducting in full the amount of a repayment pursuant to section 16(b), while taxing any capital gain previously realized only in part, serves no logical end. As the Supreme Court pointed out in Skelly Oil, the Code should not be interpreted to permit the equivalent of a double deduction absent a clear declaration by Congress of such intent. Similarly, Chief Judge Phillips, under almost identical facts, stated in the Mitchell case ( 428 F. 2d at 263 ):
The taxpayer here, as in Shelly Oil, received income which was taxed at reduced rates, thereby receiving a tax benefit. In the present case, as in Shelly Oil, the taxpayer was required to give up a part of that income. Under Arrowsmith and Shelly Oil, when income is given up, which in its inception was taxed at reduced rate.s, the taxpayer is not permitted to enjoy preferred treatment twice by deducting in full the extra amount given up as an ordinary deduction.
Certainly we would not want to make it possible for a person to intentionally avail himself of this benefit.
Finally, unresolved by the majority opinion is whether different treatment should be accorded directors and shareholders affected by section 16(b). Is a shareholder who, either voluntarily or under some form of compulsion, makes a repayment of his “insider” profit to a corporation entitled only to a capital loss deduction while an officer of the same company is entitled to an ordinary-loss deduction? Is a corporate director who receives minimal directors fees from the corporation entitled to an ordinary-loss deduction under similar circumstances? I think not. It is my view that officers, directors and “10 percent” shareholders should all be treated as investors with respect to trading in the capital stock of their companies (excluding dealers in securities). Any gains or losses from the sale of their stock, as well as profits they might be required to restore to their companies under section 16(b), should be consistently treated. No sound reason for bifurcating these transactions has been advanced in the majority opinion.
Under these circumstances I would sustain the respondent’s determination in denying the deduction as an ordinary and necessary business expense under section 162(a) of the amount paid by petitioner to Zenith during 1966.
Qtjealy, J., agrees with this dissent.