The opinion
JONES, Chief Judge,
dissenting, with whom REED, Justice (Retired), sitting by designation, joins.
The result reached by the court stems primarily from a belief that Treasury Regulation 111, § 29.22(a)-15, is not in accord with the economic facts of life or with the Internal Revenue Code of 1939, and consequently that a corporation does not make a gain or profit “in a real sense,” or even “in a tax sense,” when dealing with its own shares in the manner disclosed by the record in this case. Although the court has not direct *368 ly invalidated the regulations, it would appear that it has accomplished the same result in its approach to the question of the plaintiff’s tax liability. We would uphold the validity of the regulations. Clayton, Anderson & Co. v. United States, 1955, 350 U.S. 55 , 76 S.Ct. 25 , 100 L.Ed. 43 .
The Government is not seeking to convert a strictly capital transaction into an income-producing transaction. If, as the plaintiff contends, the sale of treasury stock involves merely a “contribution to the capital of the corporation,” it is difficult to understand why the Congress allowed the plaintiff corporation to deduct as a business expense the value of the treasury stock given to the employees in exchange for the alleged contribution to capital.
The majority, apparently, takes the position that a disposition of the corporation’s shares for the purpose of implementing an employee profit sharing plan can never amount to a dealing in its own shares as it would in those of another corporation even when these shares were purchased in the open market. And it has decided the case on the basis of this single circumstance instead of determining the real nature of the transaction from all of its facts and circumstances, as the regulations require.
As we view the record in this case, the employee bonus plan was not essentially or primarily a plan for employee-stockholder participation. Rather it was based on the idea that the corporation should each year pay a part of its yearly profits to those employees who contributed most to the earning of those profits. The plan provided that the bonus could be paid in stock or partially in stock. There were no restrictions on the sale of the stock which the employees received. Therefore, we would hold that in accomplishing this primary purpose of the bonus plan—the payment of an immediate reward—the plaintiff dealt with its shares as it might in the shares of another corporation.
It is true, as the court has said, that “There would have been no point whatever in buying stock of another corporation to distribute as bonuses to the plaintiff’s key employees.” This factor, however, seems irrelevant since the plaintiff could and did accomplish its purpose of rewarding its employees by making cash payments and by giving the employees stock which the corporation had purchased.
This particular stock had already been issued and 23,000 of the shares purchased were in the hands of individuals wholly outside the organization. It was purchased like any other asset. On its books it carried this stock like any other valuable asset, and in its income report for the years in question it properly treated this profit as capital gain. We cannot agree that this was an accounting error. If an individual employee or outsider had purchased this stock at the time the plaintiff purchased and had disposed of it in any fashion he would have been subject to a capital gains treatment.
Does anyone doubt that if the stock had gone down as much as it increased in value and plaintiff had used it as part payment of a bonus at the then current market value, it would have claimed a capital loss?
If the plaintiff had sold the stock in the open market and delivered the proceeds in order to pay all the declared bonus in cash, does anyone doubt that it would have been taxable?
The court in its opinion shows that the plaintiff used some of its stock to buy other companies. It sold 1,331 shares on the open market. When there was a split-up, the stock the company had bought participated. As we see it, this is exactly what would have happened if the Hercules Powder Company had been dealing in the stock of other corporations. Earnings, by dividends paid or by increased assets, on the treasury stock went to the company. The distribution at market value paid the company’s obligation to its employees.
To permit the plaintiff to realize gains by purchasing stock at a low price and disposing of it in lieu of cash bonuses *369 at a higher figure, but escape all tax on the transaction, and at the same time take a deduction for salary paid to employees does not make sense. It will stand neither the light of reason nor the logic of analysis. The plaintiff’s petitions should therefore be dismissed.
WHITAKER, Judge, took no part in the consideration and decision of these cases.