The opinion
J. BLAINE ANDERSON, District Judge
(concurring and dissenting):
I have no hesitancy in concurring with the disposition as to the section 453 issue.
The peculiar and special facts in this case, and the timing of the statute and the implementing regulations, all dealt with in more detail hereinafter, compel this dissent on the section 1244 issue. Warner v. Commissioner, (9th Cir. 1968) 401 F.2d 162 , does not, in my opinion, require the result reached by Judge Hufstedler nor by Judge Koelsch in his reliance on Godart v. Commissioner, (2nd Cir. 1970) 425 F.2d 633 . Some elaboration seems necessary to an understanding of the point of this dissent.
On June 17, 1960, petitioners incorporated “The Shack” under the laws of the State of California. An organizational meeting was held on June 27, 1960, and J. H. Rickey was elected president. The Shack was authorized to issue a total of 2,000 shares of stock at a par value of $100.00. A resolution was adopted authorizing the corporation to issue not more than 200 shares to J. H. Rickey. Is is apparent from reading the resolution that it was mandatory in its language and direction, requiring the officers to immediately comply with the terms of the permit. The resolution stated, in part:
“that upon issuance of a Permit by the Commissioner of Corporations of the State of California, pursuant to such Application, the President and/or the Vice-President and the Secretary be, and they are hereby authorized — and directed to sell and issue shares of stock of this corporation to any or all of the above-named individuals in the amounts and for the consideration stated in and in compliance with all the terms and conditions of such Permit and these resolutions.” (emphasis supplied)
In July, 1960, an application for a permit to issue shares in accordance with the above resolution was filed with the Commissioner of Corporations. On July 19, 1960, the Commissioner issued his permit to The Shack, authorizing it to sell 200 shares of its stock to petitioners for $100.00 per share. The permit stated:
“That unless revoked or suspended, or renewed upon application filed on or before the date of expiration specified in this condition, all authority to sell securities under paragraph I of this permit shall terminate and expire on January 30, 1961 . . . ”
On July 22, 1960, The Shack issued 200 shares to J. H. Rickey in return for $20,000.00 in cash. In December, 1963, The Shack, since renamed “Rick’s Swiss Chalet”, was liquidated at a loss. Of the total amount lost, $17,673.86 was attributable to the capital stock contribution. The Commissioner disallowed this loss as an ordinary loss pursuant to 26 U.S.C.A. Section 1244 , 1 26 C.F.R. 1.1244, *757 for two reasons: First, the plan did not blatantly limit the stock offering to two years, and second, that the plan did not specifically say it was a “Section 1244” plan.
Congress enacted Section 1244 of the Internal Revenue Code (effective Sept. 2, 1958) to encourage the flow of capital into small business, corporations, an area of commerce where there are substantial chances of failure. 2 During the hiatus between congressional action, Sept. 2, 1958, and the promulgation of the regulation, October 8, 1960, one would need psychic qualities to comply with nonexistent regulations. It is felt that any interpretation of this section should have as its goal a realistic application of congressional wording without reference to the words of the then non-existing implementing regulation.
It is, I believe, sufficient evidence of intent that he formed a small corporation, and the transactions that occurred during its formation conform to the standards set out in the statute. Given only the statute, without benefit of case law or regulations, I feel that Rickey did an adequate job of conforming to its requirements. In cases such as this, we must look to the substance of the transaction, not the form. It is basic tax law that when there is an ambiguity in the statute, doubts should be resolved in favor of the taxpayer, Gould v. Gould, 245 U.S. 151 , 38 S.Ct. 53 , 62 L.Ed. 211 (1917). This has long been the rule as to other sections of the Internal Revenue Code, Sami v. United States, 277 F.2d 153 (9th Cir. 1960), and I cannot see why it should be different with Section 1244 standing alone without the guiding regulation. I feel that this policy is especially true in this case as the appellant was without the benefit of case law or applicable regulations to guide him at the time of the formation of the corporation. 3 It was sometime later that anyone in the legal or accounting professions learned of the strict interpretation and application the IRS was to make of this statute.
In 33 St. John’s Law Review 172 (1958) there was a short discussion of new legislation. Section 1244 stock was one of the subjects mentioned and the following comment should be noted:
“Section 1244 stock must be issued pursuant to a corporate plan. While the statute is silent as to the form of such plan, the report of the House Ways and Means Committee specifies that such plan must be in writing. At present, why any plan is required as a condition precedent to issuing 1244 stock, and what the form and content of such a plan will be, are not apparent.” P. 173
It is apparent that the statute, without aid of regulations, engendered uncertainties. The statute does not even, for instance, require a written plan, only a plan.
In Godart v. C. I. R., 425 F.2d 633 (2nd Cir. 1970), a seemingly contrary result was stated. But even at the outset, Judge Friendly conceded that it was a “close question”. The facts further reveal that the taxpayer did not make a Section 1244 claim on his original return, but on an amended return after the Commissioner assessed him with a deficiency. In Godart the corporation was formed after the regulations were adopted. In Childs v. C. I. R., 408 F.2d 531 (3rd Cir. 1969), the court noted that there was no mention of Section 1244 in the taxpayer’s plan, a plan adopted after *758 publication of the regulations, but went on to observe that:
“ . . . [Tjhere is nothing in the resolution of the board of directors . , nor in the minutes of the stockholders’ meeting, which would differentiate these resolutions and minutes from the ordinary purchase of stock by a buyer and seller. Here, if any offer was made, it was made on behalf of the appellant, . . . , and the acceptance was by the corporation and the respective resolutions and minutes merely set the same forth.” P. 533.
In Spillers v. C.I.R., 407 F.2d 530 (5th Cir. 1969), there, seems to be little question that even if the appellant had used the term “Section 1244 stock”, he would not have qualified for a Section 1244 deduction due to the numerous flaws in the formation of the corporation. In Anderson v. United States, 436 F.2d 356 (10th Cir. 1971), the appellant stipulated that at the time of formation he had no intent to satisfy the statute. The court, applying the rule in Godart, supra, 425 F.2d p. 638, said: “There must be some substantially contemporary objective evidence that the plan was adopted with § 1244 in view.” and concluded that with the facts as stipulated, the judgment had to be affirmed. In the present case Rickey is claiming that the substance of the transactions objectively demonstrate that he had § 1244 in view, even though he did not specifically mention the statute.
The holding in Warner v. C.I.R., 401 F.2d 162 (9th Cir. 1968), is distinguishable from the one at hand. There the stock offering was not limited to two years or less by a written plan or operation of local law and regulations and the Revenue Code regulations had been published at the time this stock was offered.
The Shack was incorporated in accordance with a plan. That plan was a written plan and consisted of the minutes of the organizational meeting of the board of directors augmented by the application to the California Commissioner of Corporations for a permit to sell stock and the issued permit. Corporate minutes are sufficient writings to meet the requirements of the statute, Eger v. C.I.R., 393 F.2d 243 (2nd Cir. 1968), and those writings may be augmented by applicable state laws. I would hold thát the minutes as augmented by the permit, are sufficient writings to satisfy the statute where, as here, no regulations had been adopted by the Commissioner.
The Commissioner urges that the plan must still fail for another reason, that the two-year limitation was not specifically stated in the writings. 26 C.F.R. 1.1244(c)-l(c) states, in part, that:
“The two-year requirement will be met if the period specified in the plan is based upon a date when, under the rules or regulations of a government agency relating to the issuance of the stock, the stock may lawfully be sold, and it is clear that such period will end, and in fact it does end, within two years after the plan is adopted.”
These regulations were adopted after the formation of The Shack. Nevertheless, in this case there is no dispute that the stock was in fact sold in less than six months and that the permit to sell the stock was only good for six months. The Commissioner argues that the permit said on its face that it could be renewed ; thus, the two-year limitation was not met. This is a highly speculative argument and during oral argument it was conceded that the permit could not, as a practical matter, be renewed more than twice. Since the permit is only good for six months, with two renewals, the stock could only be offered for a maximum of 18 months. As stated earlier, the stock was in fact sold within the original period of the permit. Therefore, I would hold that the two-year requirement was met. I would emphasize that this holding is confined to the peculiar facts of this case, as they relate to Section 1244 and the absence of guiding regulations during the crucial period.
. See footnotes, 13 and 14, supra.
. For an interesting and informative discussion on the practicalities and policies which led Congress to pass this statute see L. Ward Wright’s Utilization of Subchapter S and Section 1244 Stock, 12 Western Reserve Law Review 225.
. The regulations pertaining to Section 1244 were not adopted until October 8, 1960 (T. D. 6495, F.R. 9675), some two and one-half months after the corporation was formed. The first appellate court decision would not appear for eight years, Eger v. C. I. R., 393 F.2d 243 (2nd Cir. 1968).