# Gunther v. Commissioner

> United States Tax Court · January 19, 1989 · 92 T.C. 39

URL: https://www.frixlaw.com/law-library/cases/4486269

## Case

- **Full name:** H. Dale Gunther and Marie M. Gunther, Gene W. Gunther and Lois H. Gunther, James L. Bjorkman and Penelope A. Bjorkman, Peter C. Gunther and Mary Lou Gunther, Donald S. Robinson and Pamela G. Robinson, Prudence G. Hillier, and Gary B. Gunther v. Commissioner of Internal Revenue
- **Court:** United States Tax Court
- **Decided:** January 19, 1989
- **Citations:** 92 T.C. 39; 92 T.C. No. 5; 1989 U.S. Tax Ct. LEXIS 5
- **Precedential status:** Published
- **Opinion:** Dissent by Wright
- **Judges:** Chabot,Nims,Whitaker,Korner,Shields,Hamblen,Cohen,Swift,Williams,Wells,Whalen,Colvin,Parr,Gerber,Williams,Wright,Clapp,Jacobs,Ruwe
- **Cited by:** 13 later opinions in the Frix Law Library

## Citator (automated)

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## Opinion text

Wright, J., dissenting: The majority upholds our decision in Haserot v. Commissioner, 41 T.C. 562 (1964) (Haserot I), and maintains that congressional intent is best served by holding that when both section 351 and section 304 apply, section 351 should control. I respectfully dissent. I agree with the separate opinion of Judge Tannenwald in Haserot II, and I believe that Haserot I was wrongly decided when written and that we should not uphold it now.
The majority compares the role of a “traffic cop” at an intersection to our task as a court because we both must direct the paths of two conflicting forces. While the majority quite correctly notes that occasionally the Court must decide between apparently conflicting statutory directives, the majority is mistaken in thinking that our “traffic-cop” role permits only one solution. The majority states that here we have been given a “clear, unambiguous rule to govern our traffic-cop activities” (majority opinion at 59) as if we patrolled an intersection where only one light was green at a time. Unfortunately, if I may extend the majority’s analogy, our “traffic-cop” is faced with green lights in both directions and the choice of which lane should take priority is far from clear.
The majority stresses that the legislative history of H.R. 8300, ultimately the Internal Revenue Act of 1954, contained directions for interpreting the overlap between section 351 and sections 301 and 302. The majority notes that the Senate Finance Committee amended the House bill but failed to discuss the relationship between sections 351 and 304. From this omission the majority draws the inference that Congress meant for section 351 to control when in conflict with section 304. However, the converse inference can just as easily be drawn. We conclude that Congress considered only the relationship between section 351 and sections 301 and 302 when enacting the amended legislation. Congress’ silence on the interaction between sections 351 and 304 certainly should be read as an oversight and not as an expression of intent.
The majority’s decision rests largely on its conclusion that the “literal language” of sections 304 and 351 allows no other result. However, an interpretation of “literal language” which leads to an absurd and irrational result should not be strictly followed. Rather than literally reading the statute to produce an absurd result, we should consider several possible interpretations of the statute, examine their effect, look to the legislative history, and adjudicate what interpretation carries out the legislative purpose. See United States v. Gilmore, 372 U.S. 39, 44-45 (1963); Ziegler v. Commissioner, 70 T.C. 139, 143 (1978); Doing v. Commissioner, 58 T.C. 115, 129 (1972). See also J.C. Penney Co. v. Commissioner, 37 T.C. 1013, 1017 (1962), affd. 312 F.2 655 (2d Cir. 1962) (in interpreting statutes, it is the Court’s function to construe the language so as to give effect to the intent of Congress).
The legislative history of sections 351 and 304 demonstrates that section 304 of the 1954 Code was Congress’ response to the tax-avoidance possibilities inherent in sales of stock of one controlled corporation to another corporation controlled by the selling shareholders. S. Rept. 1622, 83d Cong., 2d Sess. 238-240 (1954). The genesis of section 304 can be found in section 208 of the Revenue Act of 1950, which added section 115(g) to the Internal Revenue Act of 1939, for the purpose of controlling redemptions by a subsidiary from a parent. In enacting this section, Congress intended to prevent the sale or exchange treatment in cases in which assets of a subsidiary are withdrawn from corporate solution in exchange for stock of its parent. See. H. Rept. 2319, 81st Cong., 2d Sess. (1950), 1950- 2 C.B. 380 , 420; S. Rept. 2375, 81st Cong., 2d Sess. (1950), 1950- 2 C.B. 483 .
After enactment of section 115(g), however, the same tax-avoidance possibilities, previously problematic in the parent-subsidiary situation, continued to arise in the brother-sister relationship, where both the issuing corporation and the acquiring corporation were controlled by the same interests. Recognizing this, one of the objectives of the draftsmen of the Internal Revenue Code of 1954 in creating section 304 was to prevent tax avoidance by “sales of stock between corporations owned by the same interests.” S. Rept. 1622, supra at 45. Accordingly, the enactment in 1954 of section 304, which was designed to apply to brother-sister transactions as well as those between a parent and a subsidiary, precludes such abuses by characterizing the transaction for tax purposes so that the cash or other property received by the shareholders is not treated as the proceeds of a sale or exchange which would permit capital gains treatment. Specifically, section 304 fragments the transaction into two parts: (1) The stock which is transferred to the acquiring corporation is treated as a contribution to capital, and (2) the cash or other property received brings the transaction under the scrutiny of section 302. See generally Kerr v. Commissioner, 326 F.2d 225, 228-229 (9th Cir. 1964); Wiseman v. United States, 259 F. Supp. 90, 93-94 (D. Me. 1966), affd. per curiam 371 F.2d 816 (1st Cir. 1967); Radnitz v. United States, 187 F. Supp. 952 (S.D.N.Y. 1960), affd. per curiam 294 F.2d 577 (2d Cir. 1961); B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders, sec. 9.30-9.32 (5th ed. 1979).
The majority’s interpretation of the interplay between sections 304 and 351 renders section 304 meaningless. Even though securities can normally be received without tax under section 351, the transfer to a controlled corporation of a related corporation’s stock presents clear “bailout” opportunities because the corporation can later repay the securities without triggering dividend consequences to the holder. Secondly, the securities may be immediately marketable, raising problems analogous to the preferred stock bailouts which prompted the enactment of section 306. Further, if section 351 controlled the exchange for securities, a corporation could later retire the securities and, under section 1232, no dividend consequences would be triggered. Perhaps the most curious result of the majority’s view is the special treatment unreasonably accorded to a particular group of shareholders. Under the majority’s view, when both sections 351 and 304 apply, shareholders who own between 50 and 79 percent of a closely held corporation are prevented from bailing out corporate earnings by section 304, while shareholders with 80 percent or more would be protected from the anti-bailout sanction of section 304. Because the anti-bailout provision was clearly intended to reach all shareholders holding 50 percent or more of the outstanding stock, there is no sensible explanation for this absurd result.
While it appears that Congress did not provide for or contemplate the possible conflict between sections 351 and 304, one of the principal rules of statutory construction is that if an unreasonable result is produced by one of several interpretations of a statute, that is a reason for rejecting that interpretation in favor of another which would produce a reasonable result. Rosado v. Wyman, 397 U.S. 397 (1970); Commissioner v. Brown, 380 U.S. 563 (1965); Worthy v. United States, 328 F.2d 386 (5th Cir. 1964). The law favors a rational and sensible construction. American Tobacco Co. v. Patterson, 456 U.S. 63, 71 (1982). Thus, while the intention of the legislature must be ascertained from the words used to express it, the manifest reason and obvious purpose of the law should not be sacrificed to a literal interpretation of such words. Harrison v. Northern Trust Co., 317 U.S. 476 (1943). To weave sections 304 and 351 together to produce a uniform and rational result, section 351 must give way in a situation which encapsulates the very problem which Congress sought to control by enacting section 304. As Judge Tannenwald noted in Haserot II, “Such reasoning allows the permissiveness of section 351 to yield to the preventive policy of section 304. * * * It best achieves the underlying legislative intent and policy and, in my opinion, more nearly reflects the manner in which Congress would have ‘straightened this ruck out if they had come across it’.” 47 T.C. at 877-878.
The majority’s final point is that any decision other than theirs exceeds the bounds of our proper judicial activity. The finding that section 304 should control when sections 351 and 304 conflict, is apparently outside the bounds of statutory construction and “We should not revise the statute, when the statute does provide the answer, merely because we believe we could have done a better job.” (Majority opinion at 64.) I submit to the majority that interpreting and clarifying unanticipated statutory conflict is the very business of a court and not an example of unjustifiable “judicial repairs.”
Of perhaps greater significance, I would today overrule Haserot v. Commissioner, an old and established case. Haserot v. Commisisoner does not, however, represent a venerable and inviolate principle upon which tax planners have relied. Soon after Haserot I was issued, respondent issued a nonacquiesence in Rev. Rul. 73-2, 1973- 1 C.B. 171 . To extend the majority’s analogy, our “traffic-cop” is placed at an intersection where there is not, and indeed has never been, any traffic. Moreover, the Ninth Circuit went out of its way to decline to follow Haserot v. Commissioner, and instead agreed with Judge Tannenwald’s separate opinion. Rose Ann Coates Trust v. Commissioner, 480 F.2d 468 (9th Cir. 1973). To quote Justice Frankfurter “Wisdom often never comes, and so one ought not to reject it merely because it comes too late. Since I now realize that I should have joined the dissenters * * * , I shall not compound the error by pushing that decision still farther.” Henslee v. Union Planters National Bank, 335 U.S. 595, 600 (1949). For the foregoing concerns, I respectfully dissent.
CLAPP, Jacobs, and RUWE, JJ., agree with this dissent.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4486269. Public record. Not legal advice.