after concluding that a loan was, in substance, a personal obligation of a corporation's controlling shareholder, recharacterizing the corporation's loan repayment as a constructive distribution to the shareholder and disallowing corporation's claimed interest deductions
How later courts described this case
- after concluding that a loan was, in substance, a personal obligation of a corporation's controlling shareholder, recharacterizing the corporation's loan repayment as a constructive distribution to the shareholder and disallowing corporation's claimed interest deductions
- distributions deemed to have passed from the distributing corporation to the recipient shareholder and then to the third-party actual recipient
- "The ultimate responsibility for a correct return lies with the taxpayer, who must at least furnish the necessary information to his agent who prepared the return."
Written by the judges who cited it.
The opinion
Rattm, /., dissenting: I cannot agree with the Court’s decision regarding the extent to which the corporation’s earnings and profits of R.R.R. were reduced by the redemption of Simons’ 19 shares of stock. The majority rejects Rev. Rul. 70-531, 1970- 2 C.B. 76 , which calls for a contrary result, and it relies instead upon Helvering v. Jarvis, 123 F. 2d 742 (C.A. 4). In my judgment, Jarvis does not require the result reached by the majority.
In holding that a 1934 distribution was to be charged against earnings and profits, thereby reducing the amount of earnings and profits out of which a 1935 distribution could have been made, the court in Jarvis stated ( 123 F. 2d at 745 ) :
The distribution of earnings and profits was undoubtedly taxed in 1934 to the recipients. It is not to be presumed that Congress intended to treat the 1935 distribution as from the same source and therefore taxable again. * * *
Plainly, what the court was attempting to do in that case was to prevent the same earnings and profits from being taxed twice in the hands of the recipients. No such situation is involved in the present., whgrebv earnings and profits properly allocable to stockholders are * To tlie'cdittrary;~tho majority opinion opens a wide lo'dphole^ permanently*relieved of any tax when finally distributed to the stockholders. 1 The statute requires no such bizarre result and to the extent that Rev. Rui. 70-531 forbids it, that ruling is consistent with the statute and should be followed.
Quealy, agrees with this dissent. Quealy, /., dissenting: The decision that the redemption by R.R.R. of 19 shares of its stock was not a constructive dividend to Enoch is, in my opinion, wholly irreconcilable in principle with the decision of the U.S. Court of Appeals for the Fifth Circuit in Casner v. Commissioner, 450 F. 2d 379 (C.A. 5, 1971), reversing in part a Memorandum Opinion of this Court. It must be assumed, therefore, that the majority is refusing to follow the decision of the appellate court in the Casner case.
In my opinion, the same rules should apply regardless whether the funds to complete the purchase are derived from a prorata distribution to the existing stockholders or a redemption of a part of the stock. In either instance, the source of the funds is the same, and the amount required of the buyer is correspondingly reduced.
Cf. Foster v. United States, 303 U.S. 118 . To be sure, Foster involved pre-1913 earnings, and the Court did indeed make specific reference to that fact, but the basic principle involved is substantially the same, and the holding of the majority herein, just as the position unsuccessfully maintained by the taxpayer in Foster, would permanently insulate post-1913 corporate earnings and profits from tax in the hands of stockholders when distributed to them.