The opinion
Scott, J., dissenting: I respectfully dissent from the holding of the majority on the capital loss issue in this case. I agree that our cases cited by the majority for the proposition that “non-pro-rata surrenders of stock to the issuing corporation do not represent capital contributions, but give rise to deductible losses” so hold. However, I do not agree that any other court has so held. The Court of Appeals for the Fifth Circuit in Schleppy v. Commissioner, 601 F.2d 196 (5th Cir. 1979), in reversing Smith v. Commissioner, 66 T.C. 622 (1976), held to the contrary. After referring to the holdings of this Court allowing a loss for the non-pro-rata surrender of stock by a stockholder to the issuing corporation, the Circuit Court stated: “We find no Court of Appeals decision that determines the correctness of these decisions. We therefore write on a clean sheet.”
In my view, we have been incorrect in our holding that an individual who transfers stock either to the corporation or to a third party for the benefit of the corporation sustains a loss. The Supreme Court and numerous lower courts, including this Court, have uniformly held that a payment by a stockholder for the benefit of his corporation constitutes a contribution to capital and not an expense of carrying on the business of the individual. Interstate Transit Lines v. Commissioner, 319 U.S. 590 (1943).
If the transfer for the benefit of the corporation made by a stockholder was of some property other than cash or stock of the corporation for whose benefit the transfer was made, we would undoubtedly hold that such transfer was a contribution to the capital of the corporation. I can see no reason why a different result should be reached because the property used by a stockholder for the benefit of the corporation is the stock of the corporation for whose benefit the transfer was made. I therefore agree with the conclusion of the Circuit Court in Schleppy v. Commissioner, supra, although I respectfully disagree with the interpretation placed by that court on our opinion in Foster v. Commissioner, 9 T.C. 930 (1947).
Since, clearly, the transfer of the stock by petitioner in this case was for the benefit of the corporation, I would hold for respondent. Even though I consider our holdings in the cases relied on by the majority to be incorrect, I would be hesitant to depart from holdings extending over a period of 50 years, except for the fact that respondent’s regulation, which the majority has declared invalid, fairly puts taxpayers on notice that transfers of stock for the benefit of the issuing corporation might now be considered contributions to capital.
I would accept respondent’s regulation, not because of any specific statement in section 83 of the Code which supports it, but because it is now and has been, despite our decisions to the contrary, a proper interpretation of the result of a transaction such as is here involved.
I have no problem with the situation of a stockholder transferring stock to a third party for the benefit of the issuing corporation where the transfer is for a sum that results in a gain to the transferor. To the extent the transferring stockholder receives consideration other than a benefit to the corporation from his transfer of stock, he has received a gain in the amount of the difference in the monetary consideration received and his basis in the stock transferred. This is true even though the transfer may be at less than the fair market value of the stock. This situation can be equated with a bargain sale of stock to a relative. We have held that a taxpayer in such a situation has made a gift of the value of the stock in excess of the bargain price at which it is transferred even though that bargain price was greater than his basis in the stock. In such a situation, we have held that there is both a taxable gain and a gift. If stock is transferred at less than its value but more than its basis for the benefit of the issuing corporation, instead of a gift, a taxpayer would have made a contribution to the capital of the corporation of the excess of the value of the stock over the price received for it. He would have a taxable gain and also would have made a contribution to the capital of the corporation. This is not to be interpreted as determining whether a contribution to capital under these circumstances would increase the taxpayer’s basis in his remaining stock. This is a separate issue that is not involved in the instant case.
Dawson and Chabot, JJ., agree with this dissenting opinion. Simpson, </., dissenting: Usually, when we have a vexing question of statutory interpretation, we are faced with a problem not anticipated during the development of the legislation, and we are unable to ascertain the treatment which Congress would have intended if it had considered the matter. Not so in this case. Here, the legislative purpose is indisputable, and the regulations undertake to carry out that purpose. The majority quibbles with the way Congress undertook to express its purpose, and because it did not set forth all the intended rules in the statute itself, the majority proposes to disregard the clearly manifested legislative purpose.
When Congress decided to legislate with respect to the tax treatment of bargain sales of property to persons rendering services, it recognized that in addition to sales by an employer to an employee, it needed to provide rules broad enough to cover other compensatory sales of property. Thus, section 83(a), which governs the taxability of the recipient of the property, applies “If, in connection with the performance of services, property is transferred to any person other than the person for whom such services are performed.” Thus, the rule applies to any compensatory transfer, not merely to a transfer to an employee. It includes a sale made by a parent or shareholder of the employer corporation to an employee of such corporation. For example, in the case of a group of affiliated corporations, the parent corporation may wish to retain all of the stock of the subsidiaries so that the employees of the subsidiaries are offered an opportunity to purchase, at a bargain, the stock of the parent.
Though the primary purpose of section 83 was to provide rules for determining when the recipient of the bargain realized compensation and was taxable thereon, Congress recognized that questions would arise as to whether and when a deduction for compensation is to be allowed. See Deputy v. du Pont, 308 U.S. 488 (1940); Hewett v. Commissioner, 47 T.C. 483 (1967); Rand v. Commissioner, 35 T.C. 956 (1961). As a result, it enacted section 83(h), which accomplishes two objectives: it allows a deduction under section 162 to the person for whom the services are performed, and it allows such a deduction when the compensation is includable in income. By describing the recipient of the deduction as “the person for whom were performed the services,” it is clear that Congress had in mind situations where the transferor would be a person other than the employer; there would have been no need to use such convoluted language if Congress had meant merely to cover a bargain sale by an employer to an employee. The committee report reinforces that view. S. Rept. 91-552 (1969), 1969- 3 C.B. 423 , 500-502.
In deciding whether a deduction is to be allowable in such situation, and to whom, the draftsmen no doubt had in mind the various views of the transaction that could be taken: when a shareholder sells his stock to an employee of the corporation, it could be viewed as a simple sale (Downer v. Commissioner, 48 T.C. 86 (1967)); under that view, there would be a capital transaction giving rise to gain or loss, but there would be no transfer of compensation taxable to the employee and deductible by either the transferor or the employer. Deputy v. du Pont, supra. In the alternative, the transaction could be viewed as a transfer of stock to the corporation and a transfer of such stock by the corporation to the employee. Since the statute allows a deduction for compensation, the statute makes clear that Congress rejected the view that the transaction was merely a sale by a shareholder to an employee.
Having decided to tax the employee on the receipt of compensation and to allow the corporation a deduction for the payment thereof, the draftsmen went on to explain in the committee report the theory on which such treatment was based; that is, the parent or shareholder is considered to have made a contribution to the capital of the corporation. The draftsmen could have expanded the provisions of section 83(h) and included in the statute rules reflecting the treatment of the transaction described in the committee report. 1 Surely, we cannot have any doubt that Congress would have passed the legislation had the statutory provisions been expanded in that manner, and surely, we can have no doubt that the statements of the committee report accurately reflect the legislative purpose. See, for example, United States v. Davis, 397 U.S. 301, 308-312 (1970), in which the Supreme Court relied on legislative history to decide the scope of the “not essentially equivalent to a dividend” provision of section 302(b)(1), and Walt Disney Productions v. United States, 480 F.2d 66, 68-69 (9th Cir. 1973), cert. denied 415 U.S. 934 (1974), in which the court relied on legislative history to decide what was “tangible personal property” for purposes of the investment credit.
In Downer v. Commissioner, supra, we adopted a different view of the transaction, but since the decision in that case, Congress has reviewed the subject and adopted section 83(h) reflecting its view of the transaction. In taxing the employee on the compensation and in allowing the corporation a deduction for compensation, Congress rejected the view that there was simply a sale by the shareholder to the employee. Under such circumstances, we are no longer bound by our decision in Downer, and we should accept and apply the clearly expressed legislative purpose. 2
Fay, Wilbur, and Chabot, JJ., agree with this dissenting opinion. Sec. 83 was enacted as a part of the Tax Reform Act of 1969, Pub. L. 91-172, 83 Stat. 588. Although such legislation was a major tax bill, it was considered and enacted by the Congress in a single calendar year — hearings on tax reform were announced by the Ways and Means Committee on Jan. 29,1969, and the legislation was finally approved by the Congress on Dec. 22,1969. In hindsight, it is easy for us to say that the draftsmen should have expanded the statutory provisions, but their failure to do so may be understandable in the light of the time pressures upon them.
I would sustain the regulations disallowing a loss deduction in this case, for it is clear to me that such provision of the regulations is consistent with sec. 83(h) and its legislative history. However, I am not expressing approval of all the provisions of the regulations, and in fact, there is a serious question as to whether some of those provisions are consistent with the committee report and the concept that the shareholder is considered to have contributed the stock to the corporation. See, e.g., secs. 1.83-l(a)(l)(ii), 1.83-6(b), (c), and (dX2), Income Tax Regs.