# Petition for a Writ of Certiorari — Rose Ann Coates Trust v. Commissioner > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385607_1008%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for a Writ of Certiorari - **Published:** January 1, 1973 - **Citation:** 414 U.S. 1045 ## Text BR AE gi aA TAR SEITE SE i SUBJECT INDEX Page I. Opinions Below 1 II. Jurisdiction 1 2 2 2 3 7 III. Questions Presented ..... IV. Statutes Involved V. Statement of the Case VI. Reasons for Granting Writ VII. Conclusion TABLES OF AUTHORITY Table of Cases Commissioner v. Stickney, 399 F.2d 828 (1968), affg sub nom., Henry McK. Haserot, 46 T.C. 864 eet tana er 3, 4,5,6 H McK. Haserot, 41 T.C. 562 (1964), remanded, 355 F.2d 200 (6th Cir. 1965) 22. ceeeeeceeeeee 4,5,6 Henry McK. Haserot, 46 T.C. 864 (1966) ................ 3, 4, 5,6 Statutes i emnanoionasnans 1 Other Authority Internal Revenue Code of 1954: inal 2,5 Sec. 301(c)(1) 4,7 Sec. 302 2 Sec. 302(b) (1) 5 Sec. 302(d) 4,5, 6,7 Sec. 304 2, 4, 5, 6,7 Sec. 304(a) (1) 3,4 Sec. 351 2, 4,5, 6,7 SI ee he 4 Sec. 368 IN THE Supreme Court of the United States October Term, 1973 Rose ANN Coates Trust, RosBert N. Coates, Trustee; Trust Under Will of SypNey N. Coates, Rosert N. Coates, Trustee; PETER M. Coates; CHARLES N. CoATEs; PAMELA L. Coates; Catuy A. CoATEs, Petitioners, Vv. ComMISSIONER OF INTERNAL REVENUE, Respondent. PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT Petitioners pray that a writ of certiorari issue to review the judgment of the United States Court of Appeals for the Ninth Circuit entered on June 5, 1973. OPINIONS BELOW The opinion of the court of appeals (App. A, infra, pp. A-1 to A-8) is not yet reported. The opinion of the United States Tax Court (App. B, infra, pp. A-9 to A-27) is re- ported at 55 T.C. 501. JURISDICTION The jurisdiction of this Court is invoked under 28 U.S.C. §1254(1). sa a ec 2 QUESTIONS PRESENTED Whether Section 304 or Section 351 of the Internal Reve- nue Code of 1954 prevails in a transaction where both sections are applicable. STATUTES INVOLVED The pertinent provisions of Sections 301, 302, 304, and 351 of the Internal Revenue Code of 1954 are set forth in Appendix C, infra, pp. A-28 to A-31. STATEMENT OF THE CASE In 1948, Sydney Coates incorporated his sole proprietor- ship as Coates Electric Manufacturing Company; the name of this corporation was subsequently changed to CAM In- dustries, Inc. CAM manufactured a line of commercial and industrial electrical equipment. Sydney Coates, together with his son, Robert Coates, and Sydney Coates’ two sons-in-law, Arthur Heinen and Morgan Boyd, incorporated Washington Industrial Prod- ucts, Inc. (hereinafter called “WIP”) to take over the as- sets and contracts of a corporation in the related business of manufacturing ovens for the food industry. The incor- porators of WIP each received one-fourth of the corpora- tion’s capital stock. CAM and WIP operated as separate corporate entities until 1965. Robert N. Coates managed CAM and succeeded his father as president in 1963. Although Robert Coates was generally familiar with the operations of WIP, the company was managed by Arthur Heinen from 1955 until 1965. In 1965, the management of WIP and CAM, having determined that substantial economies could be realized by combining the personnel, inventories, purchasing and OTHE oe laid The AGT agi eemeennemeteiinen, vite PAROS STIL alee RO ee CLADE IRAE PARRA 3 machinery of both corporations, decided to combine WIP and CAM. Before his death in 1963, Sydney Coates gave most of the CAM stock he owned to members of his family. Robert Coates received control of over two-thirds of the voting stock and 51% of the total stock of CAM. In combining CAM and WIP, Robert Coates required that he have the & same ownership interest in the resulting entity as he had in & CAM. Since a reorganization under Section 368 was not feasible, the shareholders of WIP, on May 20, 1965, ex- } changed their shares in WIP for agreements from CAM to — pay $1,000 per share of stock over a ten-year period with & interest thereon. (App. A, pp. A-2 to A-3). In his deficiency notices, the Commissioner of Internal Revenue treated the transactions as a redemption by a § related corporation under Section 304(a)(1) taxable as a & dividend at the face value of the agreements. The United States Tax Court sustained the Commissioner's position with the exception that the fair market value of the agree- | ments was determined to be 60% of their face value and the court of appeals affirmed. REASONS FOR GRANTING THE WRIT I. The court below erroneously decided an important ' question involving the application of two sections of the = Internai Revenue Code providing for radically different tax treatment of the same transaction. The decision of the court below is directly in conflict with the decision of the | Court of Appeals for the Sixth Circuit in Commissioner v. Stickney, 399 F.2d 828 (1968), aff'g sub nom., Henry McK. Haserot, 46 T.C. 864 (1966). The existence of this direct , conflict was noted by the Ninth Circuit in its opinion in | RDN RA atiie a Appendix A, infra, p. A-6. The Ninth Circuit based its deci- sion on the separate opinion of Judge Tannenwald of the United States Tax Court in Henry McK. Haserot, 46 T.C. 864, a decision of the full Tax Court. The question is one of statutory interpretation and has previously been decided in only one reported case, i.e., Commisioner v. Stickney, supra. Since the decision in Stickney is the result of years of litigation requiring four separate opinions before final resolution, it may be helpful to clarify the history of the case. The taxpayer, Henry McK. Haserot, controlled three corporations, Northport Cherry Factory, Inc., Gypsum Can- ning Co. and Haserot Co. Haserot Co. purchased the en- tire production of Northport and Gypsum and furnished the management and financing for those corporations. In February 1958, the taxpayer, having decided to place Northport and Gypsum under the direct control of Haserot Co., transferred to Haserot Co. his shareholdings in these corporations in exchange for $64,850 in cash and 2,432 shares of Haserot Co. A deficiency was determined by the * Commissioner after the taxpayer failed to report income ’ from this transaction. The only issue before the Tax Court + was whether the cash received by the taxpayer was taxable at capital gains rates as Section 351(b) “boot” or as divi- - dend income under Section 301(c)(1) by virtue of Sec- 5 tions 304(a)(1) and 302(d). Since Section 304 is not : _ self-executing, dividend treatment results only if both Sec- 1 tion 302(d) and Section 301(c)(1) are also applicable. Ia Henry McK. Haserot, 41 T.C. 562 (1964), remanded, 355 F.2d 200 (6th Cir. 1965), the Tax Court held that Sec- tion 351 prevailed over Section 304. on the ground that the x 5 : “Except as otherwise provided” limitations of Sections 301(a) and 302(d) indicated that Section 301 dividend treatment can result only if no other provision in chapter 1 and subchapter C, respectively, requires other treatment. The Sixth Circuit remanded the first Haserot decision for findings on the issue of dividend equivalency without deciding whether Section 304 or Section 351 took prece- dence in the transaction. In the second Haserot decision the majority of the Tax Court limited its decision to a finding that the distribution of cash to the taxpayer by Haserot Co. was essentially equivalent to a dividend with- in Section 302(b)(1). Judge Tannenwald, however, in a separate opinion in which Judge Simpson concurred, ex- pressed the opinion that Section 304 should take prece- dence over Section 351 where a transaction comes within the literal language of both sections. On appeal, the Sixth Circuit affirmed the first Tax Court decision in Haserot that Section 351 takes precedence over Section 304 thus reject- ing Judge Tannenwald’s reasoning. As for the merits, little can be added to the above refer- enced opinions which delineate the difficult question of statutory interpretation presented herein. Ultimate resolu- tion of this issue will depend primarily on the interpreta- tion accorded the “Except as otherwise provided” limita- tions in Sections 301(a) and 302(d). The Sixth Circuit found the only reasonable explanation of the limiting clause in Section 301(a) was that, when another section of the chapter has application, the Section 301 treatment is to be excluded. Petitioners submit the Stickney decision, which gives effect to the limiting clauses of Sections 301(a) and 6 302(d), is correct. This question of statutory interpreta- tion, having created a clear conflict in the circuit courts, can only be resolved by this Court. II. Resolution of the question presented is necessary to provide for certainty in transactions by shareholders of related corporations. The present conflict of decisions mag- nifies the problems and uncertainties faced by shareholders of related corporations who seek to restructure their own- ership interests in such corporations. As stated in the find- ings of fact set forth in the decision of the United States Tax Court in the instant case, the purpose of the transac- tion in question was to combine two family owned corpora- tions which, because of the requirements of the majority shareholder of CAM Industries, Inc., could not be accom- plished by a reorganization under Section 368. The transaction adopted to effect this combination, as- suming the legal consequences were determined in accord- ance with the Stickney decision, would have resulted in no adverse tax consequences to the petitioners. This trans- action, essentially a transfer of WIP shares for long-term installment obligations of CAM which the Ninth Circuit assumed for purposes of argument to be “securities”, would have been governed by the provisions of Section 351. Since no “boot” i.e., cash or other property, was received in this transaction, the owners of shares in WIP would have carried over their basis in such shares to the installment obligations without immediate tax consequences. Notwithstanding the decisions of the Tax Court in both Haserot cases and the affirming opinion of the Sixth Cir- cuit, holding that Section 351 takes precedence over Sec- tion 304, the court below reached a contrary conclusion. ye, SO 7 Rather than considering the transaction to be within the non-recognition provision of Section 351, the Ninth Cir- cuit requires that the transaction be considered a redemp- tion under Section 304 with dividend treatment resulting by application of Sections 302(d) and 301(c) (1). The con- flict created by the Ninth Circuit decision leaves the Com- missioner and all taxpayers uncertain of the statute to be applied in ‘similar transactions. . Until this Court provides a definitive solution, private counsel will, as a practical matter, be unable to advise their clients to resolve problems such as those raised here, short of litigation. Unless the Court resolves the present conflict in the circuits, taxpayers in control of related corporations in different parts of the nation will be taxed differently even though they consummate virtually identical trans- actions concerning their shareholdings in related corpora- tions. CONCLUSION The petition for a writ of certiorari should be granted. Respectfully submitted, Josern H. TRETHEWEY GERALD R. HERGERT of TRETHEWEY & BRINK Attorneys for Petitioners August 1973 EEE PEF IRAE I TE EIS EMER LIS ON a RA POE DON Se ena PA es i LRT PEO HENNY ah ee gets 2 A-1 APPENDIX A UNITED STATES COURT OF FOR THE NINTH CIRCUIT Rose Ann. Coates Trust, Rosert N. Coates, Trustee; Trust UNpER WiLL OF Sypney N. Coates, Ropert N. Coates, Trustee; PETER M. CoaTEs; Cuarves N. Coates; PAMELA L. Coates; Catuy A. Coates, APPEALS Nos. 71-1968 71-1969 > 71-1970 71-1971 71-1972 71-1973 Appellants-Petitioners, v. CoMMISSIONER OF INTERNAL REVENUE, Appellee-Respondent. [June 5, 1973] Appeal from the Tax Court of the United States Before: CHAMBERS, WRIGHT, and KILKENNY ; Circuit Judges. WRIGHT, Circuit Judge: Sydney and Rose Ann Coates, together with their chil- dren, children’s spouses, and grandchildren, owned all of the shares of two corporations, CAM Industries, Inc. (here- inafter called CAM) and Washington Industrial Products, Inc. (hereinafter called WIP). After the death of Sydney Coates, the family group agreed to combine the two cor- porations by having CAM “purchase” the shares of WIP. When the transaction was complete, CAM and WIP shares were held by members of the family as follows: A-2 Estate of Sydney Coates 75 664 Robert N. Coates 51 ~——- 11,640 2,250 Peter Coates 6 205 Cathy Coates 6 205 Pamela Coates 6 205 Charles N. Coates 6 205 Marjorie Coates (Mrs. Robt. ) 290 R. Morgan Boyd 63 10 422 Robert M. Boyd, Jr. 6 391 James Boyd 6 391 Ruby Boyd (Mrs. R. M.) 390 372 A. C. Heinen 57 10 375 Barbara Heinen 6 340 * Gary Heinen 6 340 = Richard Heinen 6 340 -~ Molly Heinen (Mrs. A. C.) 390 325 Totals 300 2,440 7,320 | The “purchase” was effected on May 20, 1965 when CAM and the shareholders of WIP entered into agreements in this form: AGREEMENT FOR SALE OF STOCK Agreement made this 20th day of May, 1965, by and between the undersigned “Seller” and CAM INDUS- TRIES, INC., a corporation, hereinafter called the “Buyer.” ; Seller hereby sells to Buyer, and Buyer hereby pur- 3 chases from Seller. Ce eee shares of the common stock of Washington Industrial Products, Inc., a Washington corporation, at the price and on the terms and condi- tions herein set forth. 1. Purchase Price. The price to be paid by Buyer to Seller for said shares of common stock shall be $1,000.00 per share or an aggregate purchase price of ................... 2. Delivery of Stock and Payment of Purchase Price. (a) The certificate or certificates for the shares of com- mon stock sold hereunder by Seller are herewith delivered to Buyer, duly endorsed for transfer to Buyer, Pit ht ttn ble Diba sonds CesMN IE Fe 2 Ti, She eet we wey ey duh! Hera ks lp ene? Anon awd dale ee Ty NE ES EE a et peer Me NRE A-3 and Buyer hereby wledges receipt of said certif- icate or certificates. May of each year thereafter until the 31st day of May, 1975, at which time the entire unpaid ea | the purchase price shall be due payable, Buyer pay interest on the diminishing balance of said purchase 3 5 = § S. § 3 : 8 s 3 a ment shall inure to the b ; of and bind the successors and assigns of Buyer and t. executors, administrators, heirs, successors and assigns of Seller. Subsequently, by order of the Superior Court of Wash- ington for King County on September 23, 1965, Robert N. Coates as Trustee of the Trust Under Will of Sydney Coates received an undivided one-third interest in the May 20 contract for the sale of 75 shares of WIP held by the Sydney Coates Estate. By the same order Robert N. Coates as Trustee for the Rose Ann Coates Trust! received an undivided two-thirds interest in the May 20 contract for the sale of the 75 shares held by the Estate? 1. Sydney and Rose Ann Coates had executed mutual wills. His will gave the house, auto, bank accounts and personal effects to Rose Ann Coates, with the residue of his estate going to the Trust Under Will of Sydney Coates. Her will provided that, in the event Sydney Coates predeceased her, she would convey by separate instrument her interest in any community property “to the Trustee or Trustees as named under the terms of the Trust created by the Will of Sydney N. Coates.” Pur- suant to this agreement, the Rose Ann Coates Trust was created by instrument dated August 21, 1965, executed by Rose Ann Coates, trustor, and Robert N. Coates, trustee. 2. The court below determined that the WIP stock was held by Sydney and Rose Ann Coates as community property. 37% shares be- longing to each spouse. The odd apportionment is explained by the Order Approving Final Account, Report and Decree of Distribution of the Superior Court, which provided that in dividing the community property “any disproportionate allocation necessary shall be made in the respective ownership of the contract receivable for the sale of the Wash- ington Industrial Products stock.” Te eA Tee Re dienes ore) aN NA RN aca ie Laban eb Rhea & PBRverttencs: ee tateri oo: A-4 In their 1965 income tax returns, all parties reported the 1965 transaction as a sale of their WIP stock entitling them to capital gain treatment. In his notice of deficiences the Commissioner treated the “sale” as a redemption by a re- lated corporation under §304(a)(1) of the Internal Reve- nue Code of 1954,’ taxable as a dividend at the face value ($1,000) of the agreements. The Tax Court upheld the Commissioner's §304(a)(1) and dividend treatment,‘ but found the fair market value of the agreements to be 60% of their face value rather than 100% as determined by the Commissioner. It is from this decision that the taxpayers appeal.® I. Initially, petitioners contend that since the two trusts were not in existence at the time of the transfer of the WIP shares to CAM they are not taxpayers within the meaning of §7701(a) (14), and that, accordingly, the Com- missioner determined deficiencies against the wrong par- ties. They would have us hold that since the WIP shares were community property, the proper parties for taxation are the Estate of Sydney Coates and Rose Ann Coates. We decline to do so and affirm the Tax Court. The Trust Under Will of Sydney Coates, under §§661 and 662, was a proper party to the proceedings below. While the question raised as to the Rose Ann Coates Trust is more difficult. we have concluded it also was a proper party below. Upon the death of her husband, Mrs. Coates held her community property interest in the WIP shares subject to a restriction on their use, by virtue of the mutual 3. All section references hereafter are to the Internal Revenue Code of 1954, as amended. 4. On October 24, 1969, the Tax Court entered decisions of no de- ficiency in the following listed cases on the basis that the redemption of their stock in WIP by CAM was substantially disproportionate pursuant to §302(b)(2): Arthur C. Heinen and Molly M. Heinen; Estate of Ruby M. Boyd, deceased, R. Morgan Boyd, executor; R. Morgan Boyd; Robert W. Boyd and Judith K. Boyd; Gary A. Heinen; Richard CG. Heinen; Barbara Gaye Heinen; James E. Boyd. Robert and Marjorie are not parties in this case because of other matters with respect to their 1965 return which had not been resolved by the Service at the time this suit was instituted. 5. The decision of the Tax Court is reported at 55 T.C. 501 (1970). a 2 + Da RA WAN ORR RS A-5 wills (see footnote 1 supra). Under Washington law her ~greement to transfer her half of the community property into trust was specifically enforceable by the beneficiaries roar In " Young's Estate, 40 Wash.2d 582, 244 P.Qd 1165 (1952). Thus on May 20, 1965 when the WIP shares held by the Estate were “sold,” Mrs. Coates held her half of the com- munity property in constructive trust for the beneficiaries of her agreement.® Cf. Healy v. Commissioner, 345 US. 278 (1953). We conclude, therefore, that the beneficial the Rose Ann Coates Trust, and as such it was subject to the tax on the transfer thereof. 2 Mertens, Law of Federal Income Taxation, §17.08 (1967 Revision ). Il. Petitioners next contend that the agreements entered into n May 20 between CAM and the WIP shareholders are “securities” as that term is used in §351’ and that, since after the May 20 transaction the WIP shareholders con- trolled over 80% of the stock of CAM, §351 operates to grant them either no tax liability or capital gain treatment.® The Tax Court concluded that the agreements were not securities, citing Warren H. Brown, 27 T.C. 27 (1956). Petitioners argue that the Brown decision creates an invalid distinction between an installment sales contract and other long term corporate obligations. See Bittker & 6. It is noteworthy that at no time after the death of her husband did Mrs. Coates obtain control over the WIP shares or the purchase agree- ments. Also, the agreements did not pass through Mrs. Coates, but rather were transferred directly from the Estate of Sydney Coates to the Rose Ann Coates Trust. 7. Section 351(a) provides that: No gain or loss shall be recognized if property is transferred to a corporation . . . by one or more persons in exchange for stock or securities in such corporation and immediately after the exchange such person or persons are in control . . . of the corporation. 8. The taxpayers argue two alternative positions: (1) that all of the agreements are securities, that §351 in [sic] applicable and, no “other property” having been received, that the taxpayers did not incur any tax liability on the transfer; or (2) that certain of these agreements are “securities” but that some of them could be treated as “other property” under §351, thus making the transaction taxable at capital gains rates to the extent of the value of this other property. TE TN Oe Oe ee eT ey ee oe figs « : a WEE RTE AN A-6 Eustice, Federal Income Taxation of Corporations and Shareholders 3-55 (3rd Ed. 1971); Comment, Section 351 Transfers to Controlled Corporations: The Forgotten Term—“Securities,” 114 U.Pa. L. Rev. 314 (1965). We do not reach that issue, however, for even assuming ar- guendo that these ae are “securities” under §351, we are convinced that the provisions of §351 are over- ridden by those of §304 and that, accordingly, §304 and not §351 applies to this transaction. See Henry McK. Haserot, 46 T.C. 864, 872 (1966) (Tannenwald, J.) (sep- arate opinion ). In Commissioner v. Stickney, 399 F.2d 828 (6th Cir. 1968), affg Henry McK. Haserot, supra, the Sixth Circuit reached a contrary result. While the statutory language and legislative history reveal that Congress did not pro- vide for or contemplate the possible conflict between the tmissive policy of §351 and the preventive policy of $304, we are convinced that our decision “best achieves the underlying legislative intent and policy and . . . more nearly reflects the manner in which Congress would have ‘straightened this ruck out if they had come across it.’” Haserot, supra at 878 (Tannenwald, J.). Accordingly, we decline to follow the Sixth Curcuit for the reasons so co- gently set forth by Judge Tannenwald.® III. Petitioners next argue that the Tax Court erred in holding that the transaction was a redemption through the use of a related corporation under §304(a)(1). They would have us hold that the “one or more persons” of §304(a)(1)(A) refers to one person plus those persons 9. Our case reveals the ultimate inconsistency that would result if we followed Stickney and held that the “except as otherwise provided” pro- visos of §§302(d) and 301(a) precluded §304 applicability to these taxpayers. Other parties to this transaction were taxed at the capital gains rate by virtue of §§304(a) and 302(b) (2). See footnote 4, supra). That result would not be altered were we to follow Stickney’s interpreta- tion of the provisos. Thus Stickney’s rationale would lead us to hold that those specifically excluded by Congress from dividend treatment ( by virtue of §302(b)(2)) would be taxed at the capital gains rate, while ___ those Congress intended to be taxed at ordinary income rates (by virtue * of §§304(a), 302(d), and 301(a)) would escape taxation altogether by » §351. Such a result does not comport with our reading of the legislative intent behind §§304 and 351. a x 4 g 8 4 » s 4 4 BAe MARAT Nc 2 BSI Emme pe POEL EERIE ETAT ELEN BT EE PENS SS SI, — AAD AE SARS SORT ARUN A-7 whose shares are attributed to him under §318, and that the concept of a ate control as prescribed by Reg. §1.304-2(b *° and applied by the Tax Court departs from the specific language and intent of the statute. Petitioners misconceive the operation and effect of §304. That section was not } these to be so narrowly con- fined as to relate only to “family” transactions. To the contrary, it was designed to apply to any closely held corporations whether or not the parties were related by blood. The phrase “or more persons” is not i agra. as petitioners ultimately must contend, but er indi- cates an attempt to expand the scope of §304(a)(1) beyond the family relationship to include unrelated per- sons who act in concert. See Radnitz v. Commissioner, 187 F. Supp. 952 (S.D.N.Y. 1960), aff'd per curiam, 294 F.2d 577 (2d Cir. 1961). Since in the instant case the same group of persons controlled both WIP and CAM, §304(a) (1) applies to this transaction, and the property received by the WIP shareholders must be treated as a distribution in redemp- tion of the stock of CAM.” IV. To determine the tax consequences of a §304(a)(1) redemption, it is necessary to refer to §302. Unless the redemption qualifies as an exchange under one of the categories of §302(b), it is to be treated under §301.” sales and immediately subsequent to the last of such sales) shall be dis- regarded, provided the other facts and circumstances indicate related transactions. 11. Section 304(a)(1)(B). 12. It is undisputed that §301 treatment results in the distribution being taxed to each of the taxpayers as a dividend under §§316 and 301(c) (1). a aa SR Ra CE NT Se i; Pe SERRE NG a VR GAS ot alm i PLE LETS OPE Se A-8 The only portion of §302(b) relevant here is §302(b)(1), ore at 6 arr a age lt adh tee The instant transaction resulted in no reduction in any of the taxpayers’ proportionate interests in WIP. That rg Sow case, the Tax Court correctly concluded that the distribution did not qualify for the preferred treat- ment under §302(b)(1). Taxpayers attempt to distinguish Davis on the grounds that that opinion applies only to 100% shareholders. The rationale of Davis a not support such a distinction, and we reject it without further » scorn V. Petitioners finally contend that the Tax Court erred in determining .the fair market value“ of the agreements te be $600 per $1,000 face value. We have carefully examined the record and conclude that there was ample support for the court's finding. It certainly was not clearly erroneous. The decision of the Tax Court is affirmed. 13. The relevant inquiry concerns the taxpayers’ respective interests in WIP. Section 304(b) (1). 14. The amount of the distribution is the fair market value of the property received. Section 301(b) (1). A-9 APPENDIX B UNITED STATES TAX COURT a. RosE ANN Coates Trust, Roperr N. Coates, TRUSTEE, ET AL.,’ PETITIONERS v. CoMMISSIONER OF INTERNAL REvVE- NUE, RESPONDENT Docket Nos. 5810-68, 5813-68, 5834-68, 5870-68, 5872-68, Filed December 15, 1970, The Coates family owned all of the shares of CAM corporation and WIP corporation, CAM “purchased” the shares of WIP. Held: 1. The Rose Ann Coates Trust, not Rose Ann Coates, was the proper taxpayer where Rose Ann Coates had agreed by mutual will to place her community shares in trust, and the transaction occurred after the death of her husband. cuted by the Estate of Sydney Coates was passed through to the trust-beneficiary. 3. The transaction was a redemption by a related corporation under sec. 304. Sec. 351 not applicable. 4. The redemption was essentially equivalent to a dividend. Business purpose is irrelevant. United States v. Davis, 397 U.S. 301 (1970). Joseph H. Trethewey, for the petitioners, Millard D. Lesch, for the respondent. 1. Proceedings of the following petitioners are consolidated here- with: Trust Under Will of Sydney N. Coates, Robert N. Coates, Trustee, docket No. 5813-68; Peter M. Coates, docket No. 5834-68; Charles N. Coates, docket No. 5870-68; Pamela L. Coates, docket No. 5871-68; and Cathy A. Coates, docket No. 5872-68. LE ; : a eS RNB A PLE REEL EPL DOR GLEE PLE | PP MATE AGATA EAST i A-10 Dawson, Judge: In these consolidated cases respondent determined the following deficiencies in petitioners’ Fed- eral income taxes for the year 1965: Petitioner Docket No. Deficiency Rose Ann Coates Trust, Robert N. Coates, CC Lehi cds Wend Gu Anes tc ié.00004.66 00.0 5810-68 $12,936.62 Trust Under Will of Sydney N. Coates, Robert N. Coates, Trustee ............. 5813-68 5,313.41 oaks nach p undue seas eas 5834-68 654.42 GEN Oe: MINED coc ccnccccvsvvstveres 5870-68 427.00 PT III oda vances civics vevsvces 5871-68 427.00 I 65nd dnc vecddcensocenas 5872-68 602.87 By amendment to his answer, respondent has claimed the following additional deficiencies: Petitioner Docket No. Deficiency Rose Ann Coates Trust, Robert N. Coates, MEE DSSS eAUN er aah ener heb Raieoee 5810-68 $11,495.89 Trust Under Will of Sydney N. Coates, Robert N. Coates, Trustee ............. 5813-68 4,966.42 NE I ee hac Gansvckcsccavecete 5834-68 511.06 SR MD occ ats oiwe cess wees 5870-68 419.20 it Oh so oho kv han dae dea aeens 5871-68 419.20 FE ner Rae 5872-68 470.03 The key issues presented for decision are: (1) Whether the sale by petitioners of all of their stock in Washington Industrial Products, Inc., to CAM Industries, Inc., on May 20, 1965, was a redemption through the use of a related corporation under section 304(a)(1), IR.C. 1954;? (2) whether the redemption of all of the stock in Washington Industrial Products, Inc., by CAM Industries, Inc., was essentially equivalent to a dividend to petitioners under section 302(b)(1) so that the amounts received by them are taxable as ordinary income; and (3) the fair market value of the contracts received by petitioners from CAM Industries, Inc., on May 20, 1965. There is a preliminary oo as to whether the Rose Ann Coates Trust and e Trust Under Will of Sidney N. Coates are proper parties in these proceedings. 2. All statutory references are to the Internal Revenwe Code of 1954, as amended, unless otherwise indicated. . =— - weet a MA Meld TOR OAR Laces A-11 FINDINGS OF FACT Some of the facts have been stipulated. The stipulation of facts, supplemental stipulation of facts, together with the ne attached thereto, are incorporated herein by reference, Petitioners Peter M. Coates, Charles N. Coates, Pamela L. Coates, and Cathy A. Coates are brothers and sisters who filed their individual income tax returns for 1965 with the district director at Tacoma, Wash. They were residents = Bellevue, Wash., at the time they filed their petitions erein. Petitioner Rose Ann Coates Trust, Robert N. Coates, trus- tee, is a trust created under the laws of the State of Wash- ington. Robert N. Coates, trustee, caused the trust to file its Federal fiduciary income tax return for 1965 with the dis- trict director at Tacoma. Wash. Robert N. Coates, trustee, resided in Bellevue, Wash., at the time the trust filed its petition herein. Petitioner Trust Under Will of Sydney N. Coates, Robert N. Coates, trustee, is a trust existing under the laws of the State of Washington. Robert N. ates, trustee, caused the trust filed its petition herein. Sydney N. Coates and Rose Ann Coates were husband and wife. Sydney N. Coates died on January 31, 1963. Rose Ann Coates is stil] living. Robert N. Coates, Ruby Boyd, and Molly Heinen are the children of Sydney N. Coates and Rose Ann Coates, Ruby Boyd is the wife of Morgan Boyd. Robert M. Boyd, Jr., and James Boyd are their children. Molly Heinen is the wife of A. C. Heinen. Barbara — Gary Heinen, and Richard Heinen are their chil- en, 3 3 3 é 2 Oo et er Ge ee SIE GIO LT EOS RCE TN PRE PER 5 eA oT « A-12 CAM Industries, Inc. (hereinafter sometimes call CAM), began its existence as the sole proprietorship. of Sydney Coates, doing business as the Coates Electric Man Co. Coates Electric manufactured a line of com- mercial and industrial electric equipment including ovens and water-heating equipment for government and private customers. The company was incorporated on June 1, 1948, and on May 18, 1965, changed its name to CAM Industries, Inc. At the time of Coates Electric’s incorporation in 1948 Sydney Coates received 696 shares of stock and Robert N. Coates, R. Morgan Boyd, Arthur C. Heinen, and Zena M. Gilbert received 1 share each. Subsequently the number of shares issued to Sydney Coates was reduced from 696 to 426 since the original allotment should have been 426 shares. On May 31, 1960, Coates Electric amended its articles of incorporation as follows: The capital stock of the corporation shall be 2,500 shares of Class A voting common stock at a par value of $30.00 per share and 7,500 shares of Class B non-voting common stock at a par value of $30.00 per share. Class A and Class B shareholders shall have identical and equal rights to divi- dends or to any other incidents arising from the ownership of said stock except that only Class A voting common stock shareholders shall be entitled to vote. Shareholders were required to surrender their old shares: For each ten shares delivered to the corporation each shareholder shall receive twenty-five shares of non-voting stocks together with 844 shares of voting common stock. On October 13, 1960, the shares of Coates Electric were held as follows: Class A Class B Class A Class B Sydney N. Coates. 1,610 4,830/ ArthurC. Heinen. 10 30 Robert N. Coates. 710 2,130 | Molly Heinen... 50 150 R. Morgan Boyd... 10 30/| Treasury shares.. 10 30 Ruby Boyd ...... 50 150 Total...... 2450 7,350 2 , sen Foy A-13 tari nnd dz ch rt p on August . shares held by the children of and spouses were received by them as gi from Sydney and Rose Ann Coates. Sydney and Rose Ann Coates made additional gifts of stock on October 13, 1960, January 2, 1961, and January 10, 1962, so that by May 20, 1965, prior the acquisition by CAM of all the stock of ee Industrial Products, Inc. (herei r sometimes WIP), the stock of CAM was held as follows: Class A Class B Class A Class B Estate of Sydney ames Boyd ........... 391 | aS, 664 Rube Boyd ..... 372 Robert N. Coates. 1,640 2,250|4.C Heinen..... 10 «375 Peter Coates .......... 205 | Barbara Heinen ....... 340 Cathy Coates ......... 205 RRS RRR ARS 340 Pamela Coates ........ 205 | Molly Heinen 390 325 Charles N. Coates..... 205 | Richard Heinen ....... Marjorie Coates ....... 290 | Treasury shares 10 30 R. M Boyd. 10 422 Total 2 450 7,350 Robert M. Boyd, Jr. 391; —- Total... 4 WIP was incorporated on August 2, 1951, for the purpose chase a large piece of machinery from the Campbell Co. Finding the Campbell Co. in financial difficulty and near default on its government contracts, the officers of Coates Electric organized WIP to take over the assets and con- tracts of Campbell. At that time Campbell manufactured ovens for the food industry (dissimilar to Coates Electric ovens ) and an industrial oven. WIP, from which each deducted amounts sufficient to pay off the bank note covering the purchase of the Campbell assets. On May 20, 1965 prior to the acquisition by CAM of all the stock of WIP all the stock of WIP and all the stock — RL PCR SES taeda fe B. Gy TOO... .. ce cccces 57 10 Barbara Heinen ........... De iccosckeses Gary Heinen ............. _ 2) ORR Richard Heinen ........... _ | SE Molly Heinen (Mrs. A +) Es eee 390 ae 300 2,440 7,320 In 1951 the premises of WIP and Coates Electric were located a half mile apart. Soon WIP was moved to the Coates Electric plant, but operations remained physically distinct except for the sharing of some heavy equipment. In 1955 Coates Electric required more room, so WIP was relocated 6 miles away. Under the management of Arthur Heinen, WIP began to compete with Coates Electric, particularly in the indus- trial oven area. The two corporations also began subcon- tracting work to one another. Coates Electric sold some products to WIP for resale. i ae LE LE ES DEO ee SSG A eR A RO a . 3 i Bertone ce canreaes anne a ee a A-15 During this period Robert N. Coates enerally famil- iar with the operations of WIP, and made himself nd the resources of Coates Electric available to WIP. He did not preside over day-to-day operations of WIP. combining their businesses. They determined that by com- bining office personnel, salesmen, inventories, purchasi and machinery, they would realize substantial economies. Before his death, Sydney Coates had transferred most of the stock of CAM from his estate, and, in the process, left his only son, Robert N. Coates, in complete control of CAM. It was the wish of Sydney Coates to give Robert N. Coates control of two-thirds of the voting stock and 51 percent of the total stock of CAM. At his death Sydney Coates had accomplished his purpose. only manner in which this could be accomplished was by having CAM purcase WIP. A merger would have reduced Robert N. Coates’ interests below the amounts he insisted upon. On May 20, 1965, CAM and the shareholders of WIP entered into agreements of the following form: AGREEMENT For SALE OF Stock Agreement made this 20th day of May, 1965, by and be- tween the undersigned “Seller” and CAM INDUSTRIES, INC., a corporation, hereinafter called the “Buyer.” Seller hereby sells to Buyer, and Buyer hereby purchases from Seller, shares of the common stock of Wash- ington Industrial Products, Inc., a Washington corporation. at ~ price and on the terms and conditions herein set forth. 1. Purchase Price. The price to be paid by Buyer to Seller for said shares of common stock shall be $1,000.00 per share or an aggregate purchase eR 2. Delivery of Stock and Payment of Purchase Price. bh hie Nime es eek tT al a miata a cep da hainsenic bai ok a eg Atte 8 AEA a a OT Ales Liv pte Po haertin ys oak lle ta De CR ee ae A-16 a) The certificate or certificates for the shares of com- mon stock sold hereunder by Seller are herewith delivered to Buyer, duly endorsed for transfer ye ne and Buyer hereby acknowledges receipt of said ificate or certif- icates. (b) The purchase price shall be paid ................ , Or more at Buyer's option, on or before May 31, 1966, and a like sum, or more at Buyer's option, on the 3lst day of May of each year thereafter until the 3lst day of May, 1975, at which time the entire unpaid balance of the purchase price shall be due and payable. Buyer shall pay interest on the diminishing balance of said purchase price at the rate of four percent per annum from the Ist day of June, 1965, which interest shall be deducted from each install- ment payment and the balance of each payment applied in reduction of principal. 3. Successors and Assigns. The provisions of this agree- ment shall inure to the benefit of and bind the successors and assigns of Buyer and the executors, administrators, heirs, successors and assigns of Seller. In Witness WHEREOF, the parties hereto have executed this agreement the day and year first above written. CAM liquidated WIP on May 31, 1965. On May 30, 1965, the accumulated earnings and profits of CAM were $183,000. The fair market value of the contracts between CAM and the shareholders of WIP as of May 20, 1965, were $600 per $1,000 face value. Sydney N. Coates and Rose Ann Coates executed mu- tual wills. Sydney Coates’ will gave the house, automobile, bank accounts, and personal effects to Rose Ann Coates, and the residue of his estate went to the Trust Under Will of Sydney N. Coates. Rose Ann Coates’ will provided that, in the event Sydney N. Coates predeceased her, she agreed to convey by separate instrument her interest in any com- munity property “to the Trustee or Trustees as named under the terms of the Trust created by the Will of Sydney N. Coates.” A-17 The Trust Under Will of Sydney Coates provided, in part, that: The Trustee or successor Trustee or Trustees shall pay a sum of not less than $500.00 a month to the said ROSE ited thereto, said monthly income to come out of the in- come of the property in Trust, or from the principal there- of, provided that the said ROSE ANN COATES may, by an instrument in writing, waive said monthly payments or take a lesser sum during business depressions or emer- gencies. It further provided: NINTH: In the event of the death of the said ROSE ANN COATES, then the Trustee or successor Trustee or Trustees is directed to distribute the remaining corpus of the estate as follows: A. To ROBERT N. COATES, a percentage of the estate interest of the partnership assets of COATES & COATES, equivalent to the percentage needed to give the said ROB- ERT N. COATES fifty per cent (50% ) of said partnership assets. B. The remainder of the corpus shall be distributed to the children of SYDNEY N. COATES and ROSE ANN COATES, to-wit: ROBERT N. COATES, RUBY N. BOYD and MOLLY M. HEINEN, share and share alike. By order of the Superior Court of the State of Washing- ton for King County dated September 23, 1965, Robert N. Coates as trustee of the Trust Under Will of Sydney N. Coates received: 4. 332 shares common stock in CAM Industries, Inc. 8. An undivided one-third interest in the contract dated May 20, 1965, for the sale of 75 shares of Washington In- dustrial Products common stock. The Rose Ann Coates Trust, established by an agree- ment dated August 21, 1965, provided: A-18 ARTICLE II DisTRIBUTION FROM THE TRUsT EsTATE In that certain trust established under the Will of Syd- ney N. Coates, it is provided that: “The Trustee or successor Trustee or Trustees shall pay a sum of not less than $500.00 a month to the said ROSE ANN COATES to keep her and maintain her in the man- ner to which she is accustomed, and to raise said amount as the Trustee in his discretion may see fit, for any reason whatsoever, such as for sickness or for travel, but not lim- ited thereto, said monthly income to come out of the in- come of the property in Trust, or from the principal there- of, provided that said ROSE ANN COATES may, by an instrument in writing, waive said monthly payments or take a lesser sum during business depressions or emergencies;” To the extent that the payments provided for Rose Ann Coates in the trust established under the Will of Sydney N. Coates are not made as provided therein, payment shall be made from the trust herein established, provided, however, that said payments hereunder shall in no event exceed $250.00 per month. ARTICLE V ULTIMATE DISTRIBUTION Upon the death of Trustor, the Trustee or successor Trustee or Trustees are directed to distribute the remain- ing ‘corpus of the trust to the children of SYDNEY N. COATES and ROSE ANN COATES, to-wit: ROBERT N. COATES, RUBY N. BOYD and MOLLY M. HEINEN, share and share alike. On March 25, 1966, Robert N. Coates, as trustee of the Rose Ann Coates Trust, received by order of the Superior Court of the State of Washington for King County: 4. 332 shares common stock in CAM Industries, Inc. 8. An undivided two-thirds interest in the contract dated May 20, 1965, for the sale of 75 shares of Washington Industrial Products common stock. ee eee A-19 7 In his notice of deficiencies the respondent treated the “sale” of the WIP shares as a redemption by a related cor- poration within the scope of section 304. On October 24, 1969, the Tax Court of the United States entered decisions of no deficiency in the following listed cases. With res to the following listed ders of Washington Industrial Products, Inc., the respondent de- termined that the redemption of their stock in Washington Industrial Products, Inc., by Cam Industries, Inc., was sub- stantially disproportionate pursuant to section 302(b) (2), LR.C. 1954: Name Docket No. Arthur C. Heinen & Molly M. Heinen.............. 5873-68 Estate of Ruby M. Boyd, deceased, R. Morgan Boyd, executor Boyd LieRaN ine heaniirsnie eke cekiewties —- EE EEE Ae 12-68 Robert M. Boyd & Judith K. Boyd................. 5842-68 ll RIES aig Rael 5861-68 EE EE er ey 5867-68 MEIN. |. os. caw concvneceecucceos 5868-68 RS IP Oe 5869-68 OPINION This case arises out of a transaction between the members of a family group and two corporations controlled by them. Sydney and Rose Ann Coates, together with their children, children’s spouses, and grandchildren, owned all the shares of two corporations conducting related businesses. After the death of Sydney Coates, the family group agreed to combine the two corporations by having CAM “purchase” the shares of WIP. Respondent's position is that the transaction was a re- demption Seeceh the use of a related corporation, within the scope of section 304(a)(1).2 Under sections 302(d) and 301 (a) and (c),° respondent would treat the amount 3. SEC. 304. REDEMPTION THROUGH USE OF RELATED CORPORATIONS. (a) TREATMENT oF CERTAIN Stock PURCHASES.— (1) AcQuIsITION BY RELATED CORPORATION (OTHER THAN sUBSID- 1aRY).—For purposes of sections 302 and 303, if— (A) one or more persons are in control of each of two cor- porations, and (B) in return for property, one of the corporations acquires | - en ce alan cna A-20 of the distribution to the petitioners herein as dividends. Some members of the adie have escaped dividend treatment under section 302(b)(2). The case of Robert N. Coates and Marjorie Coates was not joined herein with these petitioners. The trial of these related cases took place before the decision of the Supreme Court in United States v. Davis, 397 U.S. 301 (1970). Much of the proof, therefore, was directed at the issue of whether the transaction between the stockholders and their two corporations had a “busi- ness ” which might bring it within the scope of section 302(b) (1). Respondent’s opening brief is devoted largely to this issue. However, because of several exten- sions of time for filing their brief, petitioners’ opening brief was filed after the Davis case was decided. Conse- uently, the petitioners have shifted their primary position om the “business purpose” issue to another | ee namely, the question of proper parties. Respondent, in turn, was caught off balance in framing his reply. As a result, we are faced with briefs reflecting the turmoil of events. Moreover, both the parties and the Court are handicapped by the vagaries of a record created primarily for an issue which is now of uncertain status. 1. Proper Parties—Petitioners’ initial argument is that “the Rose Ann Coates Trust and the Trust Under Will of | | stock in the other corporation from the person (or persons) so in control. then (unless paragraph (2) applies) such property shall be treated as-a distribution in redemption of the stock of the corporation acquir- ing such stock. In any such case, the stock so acquired shall be treated as having been transferred by the person from whom acquired, and as having been received by the corporation acquiring it, as a contribution to the capital of such corporation. 4. SEC. 302. DISTRIBUTIONS IN REDEMPTION OF STOCK. : (d) ReDEMPTIONS TREATED AS DISTRIBUTIONS OF Property.—Except : as otherwise provided in this subchapter, if a corporation redeems its stock (within the meaning of section 317(b), and if subsection (a) j of this section does not apply, such redemption shall be treated as a distribution of property to which section 301 applies. 5. SEC. 301. DISTRIBUTIONS OF PROPERTY. (a) In GeneraL.—Except as otherwise provided in this chapter, a distribution of property (as defined in section 317(a)) made by a EIEN SS IIS BH HE 2. x 3 MBs tesco rman soon apo Ams RON a en La SAN NO eh ARR OE A-21 Sydney Coates did not transfer shares in W. Industrial Products, Inc., to CAM Industries, Inc., and consequently are not chargeable with a dividend.” Peti- tioners point out that the Rose Ann Coates Trust was created after the agreement to transfer the WIP shares. They argue that the agreement was made by the Estate of Sydney Coates, administering community property, and that the proper taxpayers are Rose Ann Coates and the Estate of Sydney Coates. In its reply brief, respondent “agrees with petitioners that, if the [75 shares of WIP] stock of Sydney Coates was the community property of S$ dney and Rose Ann Coates, then the transaction would c taxable one-half to Rose Ann Coates and one-half to the Estate of Sydney Coates. Rose Ann Coates is not a party to this action.” Respond- ent's position with respect to the Estate of Sydney Coates is that the contract distributed to the testamen trust would be deductible by the estate, and reported by the trust. However, respondent contends that “The argument that the stock of Sydney Coates was community property was never raised in the pleadings or in petitioners’ opening statement.” corporation to a shareholder with respect to its stock shall be treated in the manner provided in subsection (c). (c) AmMounT TaxaBLe.—In the case of a distribution to which sub- section (a) applies— (1) AMOUNT CONSTITUTING DIVIDEND.—That portion of the dis- tribution which is a dividend (as defined in section 316) shall be included in gross income. (2) AMOUNT APPLIED AGAINST BASIS.—That Portion of the distri- bution which is not a dividend shall be applied against and reduce the adjusted basis of the stock. (3) Amount In Excess or Basis.— (A) In GeneraL.—Except as provided in subparagraph (B), that portion of the distribution which is not a dividend, to the extent that it exceeds the adjusted basis of the stock, shall be treated as gain from the sale or exchange of property. (B) DisTRipuTIONS OUT OF INCREASE IN VALUE ACCRUED BEFORE MarcH 1, 1913.—That portion of the distribution which is not a dividend, to the extent that it exceeds the adjusted basis of the stock and to the extent that it is out of increase in value before March 1, 1913, shall be exempt from tax. REREAD EEN det A-22 Paragraph 5(f) of the petition alleges: Washington Industrial Products, Inc., is a Washing- ton n incorporated on August 2, 1951. As of M 19, 1953, its shares were held by the follow- ing families—75 shares each: Mr. and Mrs. Robert N. Coates Mr. and Mrs. Sydney N. Coates Mr. and Mrs. R. Morgan Boyd Mr. and Mrs. Arthur C. Heinen The assets for which said shares were issued were transferred from a pre-existing company, J. A. Camp- bell Co., which was not related to anyone in either company here. These assets were paid for by funds earned by each of the four males above. , In his answer respondent admitted only that WIP was a Washington corporation incorporated August 2, 1951, and denied the remaining allegations of paragraph 5(f). We think the statement that the shares were held by husband and wife (“Mr. and Mrs.”) in a community property State, the statement that the assets which bought the shares were paid for with the husband's earnings, to- gether with respondent’s denial, clearly place in issue the status of the shares as community property. The evidence presented indicates that the 75 shares of WIP were held by Sydney and Rose Ann Coates as com- munity property. The correspondence concerning their estate planning shows that virtually all of their property was held as community property. In particular, the WIP : shares were paid for from Sydney's earnings. Usually, property “acquired after marriage by either husband or wife or both, is community property” in Washington. Wash. : Rev. Code sec. 26.16.030. We note that by their mutual : wills it was agreed that Rose Ann Coates would place her so! tha a Leet ee ee aye share of the community property into the Rose Ann Coates ‘ Trust. The contract for sale of the 75 shares of WIP was eventually distributed two-thirds to the Rose Ann Coates Trust and one-third to the Trust Under Will of Sydney N. Coates. The odd apportionment is explained by the Order Approving Final Account, Report and Decree of Distribu- tion of the Superior Court, which provided that in dividing ferences eee ens ennoneneraeenteneteneenenmneeneen ee A-23 the community property “any disproportionate allocation necessary s Of made in the respective ownership of the contract receivable for the sale of the Washington Indus- trial Products stock, as hereinafter set forth.” Having determined that the 75 shares of WIP were held as community property, we must examine respondent's position that the transaction is therefore taxable one-half to Rose Ann Coates, who is not a party. This concession in respondent's reply brief would compel us to the conclusion that Rose Ann.Coates, and not the Rose Ann Coates Trust is the proper party as to half of the shares.¢ However, it appears to us that this concession is based upon an errone- ous interpretation of law. The stipulation of a conclusion of law is not controlling. Davis v. Commissioner, 241 F.2d 701 (C.A. 7, 1957); Ohio Clover Leaf Dairy Co., 8 B.T.A. 1249 (1927), aff'd. 34 F.2d 1022 (C.A. 6, 1929); ef. Forbes v. Commissioner, 82 F.2d 204 (C.A. 1, 1936). A fortiori, we may disregard respondent’s concession on this point of law. In offering his concession, respondent has assumed that if the shares were community property, then Rose Ann Coates owned one half of them at the time of the trans- action. But respondent has overlooked the existence of the mutual wills. Rose Ann Coates had agreed that upon Sydney’s death she would transfer her half of the communi- ty property into trust. In the State of Washington this agree- ment was specifically enforceable by the beneficiaries of the agreement (who were Rose Ann and her children). In re Young's Estate, 40 Wash.2d 582, 244 P.2d 1165 (1952); Cummings v. Sherman, 16 Wash.2d 88, 132 P.2d 998 (1943); Allen v. Dillard, 15 Wash.2d 35, 129 P.2d 813 (1942). Therefore, upon Sydney's death and at the time of the transaction, the equitable owner of the 37% shares was the Rose Ann Coates Trust. Since the Rose Ann Coates Trust was the owner of 374% shares at the time of the transaction, it is a proper party to this proceeding. In addition, the Rose Ann Coates Trust reported the income as capital gain on the installment basis on its tax return for 1965. 6. Nevertheless, the trust might be liable as a transferee. A-24 We also conclude that the Trust Under Will of Sydne N. Coates is a proper party to this proceeding. Al won the Estate of Sydney N. Coates sold the shares to produce the income, such income, when distributed, was deductible by the estate and taxable to the beneficiary. See secs. 661 and 662. The Trust Under Will of Sydney N. Coates rec- ognized the pass-through character of the income distribu- tion from the Estate of Sydney Coates and reported such income as capital gain on the installment basis on its tax return for 1965. 2. Section 351.—Petitioners contend that the sale of their WIP shares to CAM falls within the scope of section 351 as well as within section 304. Relying on Commissioner v. Stickney, 399 F.2d 828 (C.A. 6, 1968), affirming sub nom. Henry McK. Haserot, 46 T.C. 864 (1966), they argue that section 351 takes precedent over section 304, and that any recognized gain is taxable at capital gains rates, We agree with respondent that section 351 is inapplica- ; ble to this trarsaction. Section 351 applies where “property ‘a is transferred to a corporation ° ° * by one or more per- 4 sons solely in exchange for stock or securities in such cor- poration.” Petitioners transferred their shares to a corpora- __ tion for an agreement to pay an amount of cash plus in- ; terest in installments over a 10-year period. Petitioners do not contend that the agreement is a “security,” and we think it is not. See Warren H. Brown, 27 T.C. 27 (1956). For the same reason, we think that petitioners did not do “exactly what Mr. Haserot did” in Stickney. In combining his businesses, Haserot received for his shares a cash credit plus stock. Thus, without considering whether section 351] or section 304 takes precedence when both apply, it is plain here that section 351 does not apply. 3. Section 304.—Petitioners next contend that section 304 does not apply to this situation. They refer to the language of section 304(a)(1)(A), which requires that “one or more persons are in control of each of two corpora- tions.” They argue that “one or more persons” refers to control by one person plus the attribution persons de- scribed in section 318. This construction by the petitioners is contrary to section 4 Reo mn ‘ ’ LMS SORE HORSE RNGCO MSIE SAINTE RESIN IHS CUNT neneeneeeansrorcemest 2 eG Se aN Ry, A-25 1.304—2(b) and (c), Income Tax Regs., which refers to ‘two or more Persons, in the aggregate” and gives ex- amples of control by unrelated persons. Petitioners cite no authority for their inte retation. We are persuaded that e regulations present the Proper construction of the sta- tute. Section 304(c) (2) makes the attribution rules of section 318 expressly applicable for purposes of determin- ing control. That being the case, the reference to “or more persons” in section 304(a)(1)(A) would, by petitioners’ interpretation, become entirely superfluous. Even if petitioners’ interpretation of section 304(a)(1) E (A) were correct, Rose Ann Coates, or Rose Ann Coates E together with persons whose shares are attributable to her, : ad “control” of s ares in excess of the 50 percent of the ; voting shares of each corporation. The shares of the estate and the shares of her children and grandchildr attributable to her. Sec. 318(a)(1) <) and (a)(2). It is of no consequence that the shares of children can- not be attributed to one another. Section 304 requires con- trol by “one or more persons,” not control by each and every person. Accordingly, we hold that the sale of their stock by all the sharehokie rs of WIP to CAM on May 20, 1965, was a redemption through the use of a related corporation under section 304(a) (1), ments of section 302(b)(1). To the contrary, respondent argues that the redemption of all the stock in WIP by CAM was essentially equivalent to a dividend to petitioners. We might agree with the petitioners that there was a business purpose for combining WIP and CAM. Their tion for the particular manner by which they achieved this combination. We know that Sydney N. Coates and Robert N. Coates wanted Robert N. Coates to maintain a two- irds voting interest and a 50-percent ownership in the ‘ciate a SND SPER OY Se Ric ei LAINE EYRE LES POOLEY TIE IY RINE NEMS! BNN A TEP NERSENS. SOIT RE RRREN y NA eestoe sons POE LESAN MLA ST SEIS ANNE ET ’ re 4 SEAT earn EPRI: A-26 tax consequences. It is not necessary in this case for us “to dissect the dif- ferences between corporate and shareholder business pur- which have so often troubled the courts.” Perry S. Lewis, 47 T.C. 129, 135 (1966); Estate of Moses L. Parsh- elsky, 34 T.C. 946 (1960), revd. 303 F.2d 14 (CA. 2, 1962). We are relieved of that burden by the recent de- cision of the Supreme Court of the United States that “ ‘the business of a transaction is irrelevant in determin- ing dividend equivalence’ under § 302(b)(1).” United States v. Davis, 397 U.S. 301, 312 (1970). We do not un- derstand petitioners to contend that a nonprorata redemp- tion would by itself preclude dividend equivalence. Clear- ly section 302 reaches nonprorata redemptions. See sec. 1.302-2(b), Income Tax Regs.; cf. United States v. Davis, supra at 312. Accordingly, we conclude that the distribution in re- demption of petitioners’ stock was essentially equivalent to a dividend. 5. Fair Market Value of Contracts—In return for their stock in WIP, each shareholder received a contract from CAM obligating CAM to pay $1,000 per share of stock. This amount, plus interest of 4 percent on the unpaid balance, was payable in annual installments over 10 years. It is necessary to determine the fair market value a these con- tracts because under section 301(b)(1)(A) the amount of a distribution other than money is the “fair market value = the other property received.” This question of value is At trial the parties called expert witnesses who offered their various opinions as to the value of the contracts. Their conclusions were: Per $1,000 face value Mr. Morforde (1,000x.875x.65x.50)........-.---- $284.38 Mr. O'Farrell Teed cenbakasenaeed a . e contract—15 percent....... . Mr. Kleinberg small contract—18 percent....... 554.10 pe EES OAR, nee eee a Oe Nant! NT bin aE ident of a discount corporation, impressed us as who was most familiar with this type of contract, ha i dealt with “similar” unsecured contracts, both —_ su con- Taking into account the testimony of the witnesses, and the financial information made available to us concerning CAM's ability to pay, we conclude that the fair market value of the contracts was $600 per $1,000 face value. To reflect the conclusions reached herein, Decisions will be entered under Rule 50. ee sosialsbabehiiadediiaaatiaiteeatomsbentts