Petition for Writ of Certiorari — Boyle v. Commissioner

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MAY 24

CHARLES ELMORE

In THE 3 al”

Supreme Court of the United States

Ocroser TERM, 1950 30 y

James F. Boyze, Petitioner,

COMMISSIONER OF INTERNAL ReveNvE, Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE THIRD CIRCUIT AND BRIEF IN SUPPORT

THEREOF.

LieweE.Ltyn A. Luce,

937 Munsey Building,

Washington 4, D. C.,

Counsel for Petitioner.

WILSON - EPES PRINTING Co. - RE 6003 - WASHINGTON 1, D. C.

INDEX

Petition for writ of certiorari.

Opinion below

Jurisdiction

Questions presented

Statute and Regulations involved (See appendix)

Statement of facts...

Specification of errors

Reasons relied upon for allowance of a writ of

certiorari . ES

Brief in support of petition

I. The stock sold by the petitioner to Air

Cruisers, Inc. was neither ‘‘eancelled’’ nor

‘‘redeemed’”’ within the meaning of See-

tion 115(g) of the Internal Revenue Code.

The Court of Appeals erred in holding

that the stock was “redeemed” and that

Section 115(g) of the Code was applicable

in this case ee

II. The legislative history of Section 115(g)

supports the position of the petitioner in

this case and the decisions of the Seventh

and Second Circuits respectively in Com-

missioner of Internal Revenue v. Fred B.

Snite, supra and Alpers v. Commissioner,

supra é

Ill. In this case there was no distribution to the

stockholders of Air Cruisers, Inc. ‘‘at

such time’’ or ‘‘in such manner’’ as to be

‘cessentially’’ equivalent to a taxable divi-

dend within the meaning of Section

INDEX (Continued)

Table of Cases Cited

PAGE

Alpers v. Commissioner (CCA 2), 126 F. (2d) 58.... 7, 8, 15

Borg et al. v. International Silver Co. (CCA 2), 155

F. (2d) 147, 150

Amelia H. Cohen Trust et al. v. Commissioner (CCA

3), 121 F. (2d) 689 18

Kirschenbaum v. Commissioner (CCA 2), 155 F. ns 7

W. C. Robinson, 42 BTA 7 SESSA ss

Commissioner of Internal

(CCA 7), 177 F. (2d) 819

In THe

Supreme Court of the Anited States

Ocroser Term, 1950

a i cdaseetenel

James F. Bovze, Petitioner,

ComarissioNkR OF INTERNAL Revenve, Respondent.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR

THE THIRD CIRCUIT AND BRIEF IN SUPPORT

THEREOF.

To the Honorable, the Chief Justice, and the Associate

Justices of the Supreme Court of the United States:

The petitioner, James F. Boyle, by his attorney, prays

that a writ of certiorari issue to review the judgment of

the United States Court of Appeals for the Third Cir-

cuit (R. 42-43), entered in the above entitled cause, on

the 27th day of February, 1951. The opinion of the Cir-

cuit Court of Appeals is unreported but may be found

at Paragraph 72,281, Volume 4, 1951 Edition of Prentice-

Hall Federal Tax Service, affirming the decision of the

Tax Court of the United States, reported in 14 T. C. 1382.

JURISDICTION

The opinion and judgment of the United States Court

of Appeals for the Third Circuit was entered on Feb-

ruary 27, 1951 (R. 35-43). The jurisdiction of this Court

is invoked under Section 240(a) of the Judicial Code as

amended by the Act of February 13, 1925.

QUESTIONS PRESENTED

On December 13, 1943 the petitioner sold to Air Cruis-

ers, Inc. 3,302 shares of that corporation for $206,936.34.

The cost of said stock to petitioner was $10,140. In filing

his Federal income tax return for 1943 the petitioner

reported the correct profit from the sale, $196,799.34, as

capital gain from the sale of a capital asset (common

stock in a corporation) and paid the tax thereon at

capital gain rates.

“The respondent concluded that the transaction involved

was not a purchase and sale but rather the distribution

of a taxable dividend under Section 115(g) of the Inter-

nal Revenue Code and taxed the petitioner on the entire

sum of $206,936.34 as ordinary dividend income for 1943,

determining a deficiency in tax of $137,561.21.

The Tax Court of the United States held that the 3,302

shares of stock had heen ‘‘redeemed”’ by Air Cruisers,

Ine. ‘‘at such time” and ‘‘in such manner’’ as to make

the consideration of $206,936.34 paid for the stock by the

corporation essentially equivalent to the distribution of a

taxable dividend and affirmed the respondent in deter-

mining a deficiency of $137,561.21 in Federal income tax

against the petitioner for the year 1943 (R. 14A-27A).

The Court of Appeals affirmed the decision of the Tax

Court (R. 35-43).

Accordingly this petition presents the following ques-

tions: :

1. Whether the transaction involved constituted a sale

by petitioner of 3,302 shares of stock in Air Cruisers, Inc.

or the distribution of a taxable dividend by Air Cruisers,

Inc. to petitioner in the amount of $206,936.34.

9. Whether the 3,302 shares of stock were ‘‘redeemed’’

by Air Cruisers, Inc. within the meaning of Section 115(g)

of the Internal Revenue Code.

3. Whether there was a redemption of the stock by

the corporation ‘‘at such time’’ and ‘in such manner”’

as to constitute the distribution of a taxable dividend

under Section 115(g) of the Internal Revenue Code.

STATUTE AND REGULATIONS INVOLVED

The pertinent statute and regulations involved in this

case are presented in the Appendix, infra, pp. 22-24.

STATEMENT OF FACTS

The United States Court of Appeals for the Third Cir-

cuit summarized the facts as follows (R. 36-39) :

‘‘Petitioner, an engineer, is the inventor of a num-

ber of inflatable rubber articles including rubber boats

and life jackets. In 1929 he organized Air Cruisers,

Inc., a Delaware corporation to manufacture and sell

such products. That same year the Company’s au-

thorized capital stock was increased from 10,000 to

15,000 shares of no par value. Of these no more

than 10,705 shares were ever issued and outstanding.

in stock ownership on dates here material was as

ollows:

ae 11, Dee. 18, Dec. 18, May 16, 18,

Prior to 1943 to 1943to 1943to 1944to 1 to After

May 11, Dec. 13, Dec. 18, May 16, May 18, May 29, wg ty

Stockholder 1948 1948 1948 1944 1945 1945 1

Petitioner............ 8,095 3,602 300 300 300 300 300

Glover. ...............- 2,995 3,501 3,501 3,501 3,501 — —

Tiff: nempenee 2006. 3508 300 300 — — —

fH: P. Morris...... 100 100 100 — — — —

Pelham Bissell. 710 _ — — — co nen

Adrian

Van Muffling.. 810 _ a _ oo —

Treasury Stock. — — 6,504 6,504 6,604 10,005 9,805

Vaughan .......... a _ os 50 200

Harry A.

Gerrish .......... — — — 50 200 200 300

Wotels:.:..-.ci.... 10,705 10,705 10,705 10,705 10,705 10,705 10,705

Taxpayer, Glover and Tiffany as the chart shows,

were the three chief stockholders. Taxpayer was the

production head. Glover was the business manager

and was president and treasurer. Tiffany was vice-

resident. He was active principally in signing notes

or the company. On May 11, 1943, the three ac-

quired Bissell and Muffling’s 1,520 shares. Taxpayer

and 'Piffany received 507 each of these and Glover

506. Glover died July, 1943, and taxpayer became

president. In December, 1943, Vaughan, who had

sueceeded Glover as treasurer, and Gerrish, attorney

for and later executor of the Glover Estate, acquired

the Morris 100 shares each receiving 50 shares. As |

of May 16, 1944, 150 of the 300 Tiffany shares op-

tioned by Gerrish were acquired by Vaughan.

Tiffany had carly quarreled with Glover on man-

agement and had been trying to sell his stock since

1941. He had disagreed with Vaughan after the lat-

ter succeeded Glover and had continued his efforts to

sell. Some purchasers were interested only in taking

over the company itself so his efforts to sell included

negotiations which embraced disposal of the entire

outstanding stock. Failing to sell, either individually

or on a company basis, Tiffany and the taxpayer pro-

posed a transfer of some of their stock to the com-

pany. Gerrish approved this. At a special meeting

of the stockholders on December 13, 1943, presided

over by Tiffany and attended only by him and peti-

tioner, it was agreed that the company purchase 6,504

shares of their stock at its book value of $62.67 a

share. On that same date petitioner and Tiffany

endorsed to the company 3,302 and 3,202 shares for

which they received $206,936.34. and $200,669.34 re-

spectively. The 6,504 shares were held by the com-

pany as treasury stock until its dissolution. Tax-

payer retained 300 shares and continued as president

beeause Gerrish, who expected to function as executor

of Glover’s Estate, believed his technical knowledge

was required for the company to complete work

under its contracts. Tiffany gave Gerrish a ten year

option to purchase 300 shares at ten cents each with

a proxy and power of attorney to vote the stock dur-

ing the option period. The option was exercised in

1944, Tiffany considered the 300 shares compensa-

tion to Gerrish for services in disposing of his stock

to the company. (errish said he thought they were

a gratuity from Tiffany.

After Gerrish was confirmed as executor on March

30, 1944, he was unsuccessful in attempting to work

out a plan of distributing the Glover stock to the

legatees. On May 17, 1945, the stockholders’ annual

meeting authorized the purchase by the company of

the 3,501 Glover shares at $62.67 per share. The

legatees were given an option extending to June 1,

1945 to purchase from the company any ortion of

the stock so acquired up to the extent 0 their re-

spective legacies for the sum of $62.67 per share.

The Glover shares were transferred to the company

as of May 18, 1945. Vaughan and Gerrish exercised

their options as legatees and as of May 29, 1945, each

acquired 100 shares from the company. The remain-

ing 3,301 Glover shares were held by the company as

treasury stock until its dissolution.

The company’s products were important in the war

effort. It dealt almost exclusively with the United

States Government. Its gross sales rose from prac-

tically nothing in 1939 to $10,000,000 in 1942. As

of December 31, 1943, after the transfer of the stock

of taxpayer and Tiffany, the company’s cash on

hand and surplus were $476,294.05 and $222,711.56

respectively. The company never declared a cash or

stock dividend. It was dissolved on November 7,

1949.

Petitioner reported the $206,936.34 received for his

stock as a long term capital gain on his 1943 return

which was filed in New Jersey. He used a basis of

$10,140 being the amount paid for the 507 shares

purechaséd from Bissell and Moffling, resulting in a

gain of $196,796.34 and a ‘gain * * * to be taken

into account’ of $98,398.17. The Commissioner de-

termined that the $206,936.34 was to be taxed as a

dividend i.e. as ordinary income instead of as a long

term capital gain on the sale of assets. The Tax

Court upheld this view.”’

The Court of Appeals affirmed the decision of the Tax

Court of the United States.

SPECIFICATION OF ERRORS

The Honorable Circuit Court of Appeals erred:

1. In refusing to recognize that the transaction in-

volved constituted a sale by petitioner of 3,302 shares of

stock in Air Cruisers, Ins.

2. In holding and deciding that the 3,302 shares of

stock were ‘‘redeemed’’ by Air Cruisers, Ine, within the

meaning of Section 115(g) of the Internal Revenue Code.

3. In holding and deciding that there was a redemption

of the stock by the corporation ‘‘at such time’’ and ‘‘in

such manner’’ as to constitute the distribution of a tax-

able dividend under Section 115(g) of the Internal Rev-

enue Code.

REASONS RELIED UPON FOR ALLOWANCE

OF A WRIT OF CERTIORARI

We believe that:

1. The decision of the Court below is in conflict with

the decision of the United States Court of Appeals for

the Seventh Circuit in Commissioner of Internal Revenue

v. Fred B. Snite, 177 F. (2d) 819 and the decision of

the United States Court of Appeals for the Second Cir-

cuit in Alpers v. Commissioner, 126 F. (2d) 58.

Both the Tax Court and Circuit Court of Appeals found

as a fact that the stock sold to Air Cruisers by petitioner

was never “cancelled” or ‘‘retired’’? by the corporation

but was held by the corporation in its treasury as ‘‘treas-

ury’’ stock until its dissolution (R. 19A, 21A and 38.)

Nevertheless, the Court below held that the stock had

been ‘‘redeemed’’ within the meaning of Section 115(g)

of the Internal Revenue Code.

In deciding a similar case involving Section 115(g) of

the Code, the Court of Appeals for the Seventh Circuit

in Commissioner of Internal Revenue v. Smite supra de-

clared in an opinion rendered on November 15, 1949 (177

F. (2d) at page 823):

“The Tax Court did not discuss the question of

ether in fact redemption had been made. We

jously doubt whether redemption ever occurred.

re was an express sale of the assets to the cor-

poration. The stock was not cancelled and we think

it was not redeemed. Redemption in this section, we

believe, connotes something other than repurchase ;

it includes the idea of a surrender of shares by &

stockholder and a retirement of that which he sur-

renders. Alpers v. Commissioner, 2 Cir. 126 F. 2d

58. These taxpayers did not surrender their stock

but sold it. They did not contemplate retirement of

their shares and the corporation did not retire them.

Rather it placed them in its treasury, as live assets

to be disposed of as it should thereafter determine.

A true redemption of stock, preferred or common,

occurs when it is called and retired. The stockholder,

in such instance, receives the redemption money in

discharge of his shares which are thereby thereafter

without legal existence. On the other hand, when the

corporation purchases its own capital stock it deals

in the shares as it might have done in the stock of

another corporation. Commissioner v. Rollins Bur-

dick Hunter Co., 74 F. 2d 698, 7th Cir.’’

In Alpers v. Commissioner, supra, relied on by the

Court in Commissioner of Internal Revenue v. Snite,

supra, the Court of Appeals for the Second Circuit said

in the coneluding paragraph of its opinion (126 F. (2d)

at page 61) :

««* * * We do not think that a subsequently formed

intention to retire stock purchased by a corporation

can convert its payment of the purchase price into

‘a distribution by the corporation in complete can-

cellation or redemption of a part of its stock’ so as

to affect the tax liability of the shareholder who sold,

even on the assumption that formal compliance with

the state law as to retirement is unnecessary.”’

We think, therefore, that there is a clear conflict be-

tween the decision of the Court below in the case at bar

and the decisions of the Seventh and Second Circuits in

Commissioner of Internal Revenue v. Snite, swpra, and

Alpers v. Commissioner, supra.

2. By the sale of petitioner’s 3,302 shares of stock

and Tiffany’s 3,202 shares of stock to the corporation the

control of the corporation was completely changed. By

these sales the holding of each of the two selling stock-

holders was lessened in amount and the proportionate

holding of the other stockholders increased.

As shown above, on December 1, 1943, the stockhold-

ings of Air Cruisers, Inc. were as follows:

Estate of Earl F. Glover

James F. Boyle (Petitioner)

Carter Tiffany

H. P. Morris

Immediately after the sales by Boyle and Tiffany on

December 13, 1943, the stockholdings of Air Cruisers,

Inc. were as follows (R. 16A):

Estate of Earl F. Glover

James F. Boyle (Petitioner)

Carter Tiffany (holding of record)..

H. Preston Morris 100 shares

Boyle’s stockholdings had lessened by 3,302 shares and

Tiffany’s by 3,202 shares, whereas the proportionate hold-

ings of the other stockholders were greatly increased. In

fact, Tiffany lost all semblance of control because the 300

shares which he held as of record had been optioned to

Gerrish and Gerrish had been granted a complete power

of attorney to vote these 300 shares of stock. After De-

cember 13, 1943, Tiffany had nothing further to do with

the corporation and passed completely out of the picture.

However, the Court below held that there was a suffi-

cient pro rata distribution among the stockholders of the

corporation “at such time’’ and ‘‘in such manner’’ as to

constitute the distribution of a taxable dividend under

Section 115(g) of the Internal Revenue Code rather than

a sale.

On this point we think there is again a clear conflict

between the decision of the Court below and the decision

of the Seventh Cireuit Court of Appeals in Commissioner

of Internal Revenue v. Smite. In the Swiite case the

Court of Appeals said:

‘‘Obviously, the sale of stock to the company was

the same as the sale of a piece of real estate to it

and the same as the purchase from stockholders of

stock. in another corporation. It was, in its essence,

a sale of an asset for a stated valuable considera-

10°

tion, resulting in a pratt, for which the taxpayers

duly accounted. (177 F (2d) page 822) i 9%

‘There was no pro rata distribution to stockhold-

ers but the payment of purchase price to two out of

four stockholders, all whom held substantial in--

terests in the corporation. By virtue of the trans-

action, the holding of each of the two selling stock-

holders was lessened in amount and the proportionate

holding of the other stockholders increased.’’ (177

F. (2d) page 822)

3. The questions at issue involve important principles

of tax law as follows:

a. The meaning of the term ‘‘redemption’”’ under Sec-

tion 115(g) of the Internal Revenue Code.

b. Whether a substantial pro rata distribution among

stockholders within a given year is necessary in deter-

mining that a sale of corporate stock to a corporation is

made ‘‘at such time” and ‘‘in such manner’’ as to be

essentially equivalent to a taxable dividend under Section

115(g) of the Internal Revenue Code.

It is respectfully submitted that the decision of the

Court below is incorrect and that the conflict between the

decisions of the United States Courts of Appeal on the

questions involved should be set at rest and the points

finally decided by this Honorable Court. tii

Counsel for. petitioner. certifies that in his opinion this

petition is well founded and is not interposed for delay.

. Wherefore, it is respectfully prayed that this petition

he granted, a

Respectfully submitted,

Luewettyn A. Lucsz,

937 Munsey Building,

Washington 4, D. C.,

Counsel for Petitioner.

In THe

Supreme Court of the United States

Ocroszsn Term, 1950

James F. Bortz, Petitioner,

| 3 v.

CoMMISSIONER OF INTERNAL REVENUE, Respondent.

BRIEF IN SUPPORT OF PETITION

Opinions Below

The opinion of the Tax Court of the United States (R.

14A-27A) is reported in 14 T. C. 1382, The opinion of

the United States Court of Appeals for the Third Circuit

is as yet unreported but may be found at Paragraph

72,281, Volume 4, 1951 Edition of Prentice-Hall Federal

Tax Service.

Questions Presented, Statutes Involved, Etc. —

A statement of the questions presented, statutes in-

volved, jurisdiction, specification of errors to be urged

and a statement of the facts of the case will be found in

the foregoing petition.

ARGUMENT

The Stock Sold by the Petitioner to Air Cruisers, Inc.

Was Neither ‘‘Cancelled’’ Nor ‘‘Redeemed’’ Within the

Meaning of Section 115(g) of the Internal Revenue Code.

The Court of Appeals Erred in Holding That the Stock

Was ‘‘Redeemed’’ and That Section 115(g) of the Code

Was Applicable in This Case.

In order for Section 115(g), relied upon by the Court

below, to become applicable in any given case the cor-

porate stock involved must be ‘‘cancelled’’ or “redeemed’”’

for the statute says: ‘‘* * * If a corporation cancels or

redeems its stock * * °.’’

The findings of the Tax Court confirm the proposition

that as a matter of fact the stock here involved was

never ‘‘‘cancelled’’ or ‘‘redeemed’’ by the corporation

but was held by the corporation in its treasury as ‘‘treas-

ury’’ stock.

The Tax Court found (RB. p. 19A):

“On December 13, 1943, petitioner and Tiffany en-

- dorsed to the company and 3,202 shares, for

which they received $206,936.34 and $200,669.34, re-

spectively. The 6,504 shares were held by the com-

on fags treasury stock until its dissolution.”’ (Italics

ours.

The ‘Tax Court further found (R. p. 21A):

“As of May 18, 1945, the Glover Estate transferred

_ its 3,501. shares to the company in exchange for

$62.67 per share which it reported in its Federal in-

come tax return as capital gain.

‘‘Vaughan and Gerrish exercised their options as

legateees, and as of May 29, 1945, each acquired 100

shares from the company. The remaining 3,301

Glover shares were held by the company as treasury

stock until its dissolution. None of the shares

formerly owned by petitioner, Tiffany, or Glover

were ever formally canceled.

‘*Revenue stamps, provided for under the Stamp

Tax Act, were _ to each of the shares trans-

ferred to the company by petitioner and Tiffany on

gree 13, 1943, and by Glover’s Estate on May

. ;

Nevertheless the Court below held in its opinion that

as a matter of law the stock was ‘‘redeemed’’ within the

meaning of Section 115(g) of the statute.

We think that the Court’s conclusion is in conflict with

the most recent legal authority and the interpretation

which has been placed upon Section 115(g) by the Circuit

Courts of Appeal. In Commissioner of Internal Revenue

v. Fred B. Snite, 177 F. (2d) 819, 38 AFTR 841, the

United States Court of Appeals for the Seventh Circuit

in its opinion entered on November 15, 1949 said (177

F. (2d) at page 823):

‘“‘The Tax Court did not discuss the question of

whether in fact redemption had been made. We se-

riously doubt whether redemption ever occurred.

There was an express sale of the assets to the cor-

oration. The stock was not cancelled and we think

it was not redeemed. Redemption in this section, we

believe, connotes something other than repurchase; it

includes the idea of a surrender of shares by a stock-

holder and a retirement of that which he surrenders.

Alpers v. Commissioner, 2 Cir. 126 F. 2d 58. These

taxpayers did not surrender their stock but sold it.

They did not contemplate retirement of their shares

and the corporation did not retire them. Rather it

placed them in its treasury, as live assets to be dis-

posed of as it should thereafter determine. A true

redemption of stock, preferred or common, occurs

when it is called and retired. The stockholder, in

such instance, receives the redemption money in dis-

charge of his shares which are thereby thereafter

without legal existence. On the other hand, when

the corporation purchases its own capital stock it

deals in the shares as it might have done in the

stock of another corporation. Commissioner v. Rol-

lins Burdick Hunter Co., 74 F. 2d 698, 7th Cir.

As authority for its decision in the Snite case, the

Court of Appeals for the Seventh Cireuit cited Alpers

v. Commissioner, 126 F. (2d) 58 (CCA-2). In that case

the United States Court of Appeals stated, in the con-

cluding paragraph of its opinion, as follows (126 F. (2d)

at page 61):

intention to retire stock purchased by a corporation

can convert its payment of the purchase price into

‘a distribution by the corporation in complete can-

cellation or redemption of a part of its stock”’ so as

to affect the tax liability of the shareholder who sold,

even on the assumption that formal compliance with

the state law as to retirement is unnecessary.

Order reversed.

In support of its decision that the stock involved in

this case was redeemed within the meaning of Section 115

(g), although held as treasury stock and never canceled

or retired, the Court below cited Kirschenbawm v. Com-

missioner (CCA-2) 155 F. (2d) 23. The Kirschenbawm

case first came before the Tax Court as the Appeal of

Harry Banner, Tax Court Memorandum Decision, March

27, 1945, Docket Nos, 3655, 3656, 4 T. C. M. 342.

The case of Harry Banner, supra, was appealed by the

taxpayer to the United States Court of Appeals for the

Second Circuit and affirmed by that Court in Kirschen-

baum v. Commissioner, 155 F. (2d) 23. (The name of

the case on appeal was changed from Banner to Kirs-

chenbaum.) The Court of Appeals for the Second Circuit

affirmed the Tax Court in Kirschenbawm v. Commissioner,

supra, on the basis of the rule established by Dobson v.

Commissioner, 320 U. S. 489. The Court stated in its

opinion, however, that in a case on appeal from a District

Court, it would hold that stock purchased and placed in

the corporate treasury, subject to resale, is never ‘‘can-

celled or redeemed”. (155 F. (2d) at page 25), citing

Alpers v. Commissioner, 126 F. (2d) 58, CCA-2, February

21, 1942,

Stace the Dobson rule has been repealed by legislative

ensctment, we think that the Kirschenbaum case is a

clear precedent for the petitioner herein and is authority

for the petitioner’s position in addition to the Alpers

and Snite cases.

Counsel for petitioner understands that the respondent

herein has acquiesced in the decision of the Court of

Appeals for the Seventh Circuit in the Smite case and

that no petition for certiorari was filed by the Commis-

sioner.

We respectfully submit that the decision of the United

States Court of Appeals in the case at bar is in direct

conflict with the decision of the United States Court of

Appeals for the Seventh Cireuit in Commissioner of In-

ternal Revenue v. Fred B. Snite, supra, and the decision

of the United States Court of Appeals for the Second

Cirenit in Alpers v. Commissioner, supra.

II.

The Legislative History of Section 115(g) Supports the

Position of the Petitioner in This Case and the Decisions

of the Seventh and Second Circuits Respectively in Com-

missioner of Internal Revenue v. Fred B. Snite, Supra

and Alpers v. Commissioner, Supra.

The origin of section 115(g) as it now appears in the

Internal Revenue Code was in section 201(d) of the Rev-

enue Act of 1921. In that Act the provision that a can-

cellation or redemption equivalent to a taxable dividend

should be taxed as a dividend was coupled with the pro-

vision that a stock dividend is not subject to tax and the

dividend tax applied only if the cancellation or redemp-

tion of stock was preceded by the distribution of a stock

dividend. The provision appeared in the Revenue Act of

1924 as section 201(f) amended to provide for its appli-

cation where the cancellation or redemption occurred

either before or after the distribution of a stock dividend.

In the Revenue Act of 1926, the section was further

amended to apply “whether or not such stock was issued

as a stock dividend.’? Aside from provisions as to the

date of application of the amendment made by the 1926

Act, the section there appearing as section 201(g) was

then in substantially its present form.

In commenting on the provision as it appeared in the

1921 Revenue Bill, Senator McCumber, the Floor Manager

for the Bill in the Senate stated as follows:

«“* * * Mr. President, nothing has developed at

the present time to necessitate this hg erege amend-

ment, but conditions are ripening, I think, among a

number of corporations for them to declare stock

dividends which, under the late decision of the Su-

preme Court, would not be taxable, and then, we will

say in a month or a short time thereafter, to redeem

the stock, in other words, cancel the stock, In that

way, under the law as it now stands, and under the

Supreme Court decisions, a stockholder would not

be compelled to pay a tax upon the income so de-

rived. * * *’? (Emphasis added.) (Cong. Ree. Vol.

61, p. 7507.)

It is noted that Senator McCumber used the words

‘‘eancel’’ and ‘‘redeem’’ as synonymous.

The Conference Report on the Revenue Act of 1926

(H. Rept. 356, 69th Cong. Ist Sess.), explaining the

amendment removing the necessity for the issuance of a

stock dividend as a condition precedent to application of

section 201(g) of the Revenue Act of 1926 contained the

following example:

«<* * * assnme that two men hold River ge all

the stock of a corporation for which each paid $50,000

im cash, aad the corporation had accumulated a sur-

plus of $50,000 above its cash capital. It is elaimed

that under existing law the corporation could buy

from the stockholders for cash one-half of the stock

held by therm end cancel tt without making the stock-

helders. subject te amy tax, yet this action in all

essentials would be the equivalent of a distribution

from cash dividends of the earned surplus.” (Em-

phasis added.) Repert Conference Committee, 69th

Cong. lat. Sess., H. Bept. 356 (p. 30).

The same example in the same language appeared in

the reports of the Ways and Means Committee and the

Senate Finance Committee on the Revenue Act of 1926

(H. Rept. 1, 69th Cong., Ist Sess., page 5. S. Rept. 52,

69th Cong. Ist Sess., page 15). It is to be noted that in

this example the stock was reacquired from the stock-

holders on a pro rata basis and the corporation then

proceeded to ‘‘cancel it.’’

At the same time that Congress was considering sec-

tion 205(f) of the Revenue Act of 1924 which corre-

sponds to seetion 115(g) of the Internal Revenue Code,

it was considering sections 201(c) and 201(g) of the 1924

Act which provided for the treatment of distributions in

partial liquidation and defined the term ‘‘amounts dis-

tributed in partial liquidation.’’ The definition of “par-

tial liquidation” in section 201(g) is a ‘‘distribution by a

corporation in complete cancellation or redemption of a

part of its stock, or one of a series of distributions in

eomplete cancellation or redemption of all or a portion of

its stoek.”” The same words ‘‘ecancellation’’ and ‘‘re-

demption’’ are used in section 201(g) of the 1924 Act as

appear in section: 201(f) of that Act, which is the prede-

cessor of the sections of the Code in question in this case.

In explaining these provisions, the Committee reports

used the word ‘‘retirement’’ in speaking of what is called

a ‘cancellation or redemption’’ in the Act. (H. Rept.

No. 179, 68th Cong. Ist Sess. pp. 11-12). See W. C.

Robinson, 42 B. T. A. 725 (Sept. 20, 1940), acq. 1941-1

C. B. 9. Sie vf

It is respectfully submitted that the legislative history

of Section 115(g) demonstrates that the word “re-

deemed’’ as used in this section of the statute means to

**retire’’.

«* * © Treasury stock is an asset in the company’s

treasury and may be resold at any time as suits the

corporate owner’s purpose, while retired stock ceases

to exist as an evidence of interest or ownership in

_ corporate property.”

Amelia H. Cohen Trust et al. v. Commissioner, 121 F.

(2d) 689; Borg et al. v. International Silver Co. (CCA

2) 11 F. (2d) 147, 150.

Itt.

“In This Case There Was No Distribution to the Stock-

holders of Air Cruisers, Inc. ‘‘At Such Time’’ or ‘‘In

Such Manner’ As to Be ‘‘Essentially”’ Equivalent to a

Taxable Dividend Within the Meaning of Section 115(g).

We think that the decision of the Court below and the

position of respondent reads out of Section 115(g) the

important phrases necessary for that section of the stat-

ute to be applicable, to wit: a ‘distribution’? at ‘‘such

time’’ and ‘‘in such manner’’ as to be ‘‘essentially equiv-

alent to a taxable dividend.

We believe that there must be present to meet the

qualifications of “distribution’”’ ‘‘at such time’’ and ‘‘in

such manner’ the following:

(a) A substantially pro rata distribution among the

stockholders within a given year.

(b) A distribution within a given time which does not

substantially. change the control among the corporate

stockholders.

19-

We respectfully urge that this view is sustained by the

latest decision upon the very issue by the United States

Court of Appeals for the Seventh Circuit in Commis-

stoner v. Snite, supra. There the Court said (177 F. (2d).

at page 822):

‘‘Obviously, the sale of stock to the company was

the same as the sale of a piece of real estate to it

and the same as the purchase from stockholders of

stock in another corporation. It was, in its essence,

a sale of an asset for a stated valuable considera-

tion, resulting in a profit, for which the —e

duly accounted.’’

* * e

‘‘There was no pro rata distribution to stockholders

but the payment of purchase price to two out of four

stockholders rs, all of whom held substantial interests

in the corporation. By virtue of the transaction, the

holding of each of the two selling stockholders was

lessened in amount and the proportionate holding of

the other stockholders increased.’’

Here there was no. ‘‘distribution’’ but a sale of stock

by only two stockholders. The sale of the asset (stock),

resulting in a profit was accounted for in the petitioner’s

return. However, the Court of Appeals refused to rec-

ognize the sale. °

As of December 1, 1943, the stockholders in Air Cruis-

ers, Inc. were as follows (Appendix p. 16A):

Estate of Earl F. Glover... 3,501 shares

James F. Boyle (Petitioner).............. 3,602 shares

Carter Tiffany .... 3002 shares

H. P. Morris. .- 100 shares”

Total 10,705 shares

On December 18, 1943, Harry Gerrish and Thomas P.

Vaughan acquired the stock owned by H. P. Morris (50

shares each). ;

During the year 1943, Air Cruisers, Inc. paid no monies

in connection with their stockholdings to the Estate of

Glover, owning 3,501 shares, or to the minority steck-

holders owning 100 shares, Morris, Gerrish and Vanghan.

One of the vital characteristics of a ‘¢distribution’’ at

such time and in such manner as to be essentially equiva-

lent to a dividend is a payment pro rata to all stock-

holders owning stock of the same class. It cannot be

said that there is in any true sense a distribution of a

dividend when no payment is made to a stockholder own-

ing approximately one-third of a eorporation’s outstand-

ing stock as was the case here with respect to the Glover

Estate owning 3,501 shares of common stock out of

10,705. ere there was no pro rata cancellation or re-

demption of a portion of the eorporation’s stock “‘pro

rata’ among all the shareholders as referred to in re-

spondent’s Regulations 111, Section 29.11509.

- By the sale of petitioner’s 3,302 shares of stock and

Tiffany’s 3,202 shares of stock to the corporation, the

control of the corporation was completely changed. By

these sales the holding of each of the two selling stock-

holders was lessened in amount and the proportionate

holding of the other stockholders increased.

As shown above, on December 1, 1943, the steckheldings

of Air Cruisers, Inc, were as follows:

Estate of Earl F. Glover........----------- 3,501 shares

James F. Boyle (Petitioner)..........---- 3,602 shares

Carter Tiffany..........-------------- ... 3,502 shares

H. P. Morris _..... 100 shares

Immediately after the sales by Boyle and Tiffany on

December 13, 1943, the stockholdings of Air Cruisers,

Inc. were :as follows (R. p. 16A):

Estate of Earl F. Glover.._.........------ 3,501 shares

James F. Boyle (Petitioner)........ 300 shares

Carter Tiffany (holding of record) 300 shares

H. Preston Morris...... 100 shares

_ Boyle’s stockholdings had lessened by 3,302 shares and

Tiffany’s by 3,202 shares, whereas the proportionate

holdings of the other stockholders were greatly increased.

In fact, Tiffany lost all semblance of control because the

300 shares which he held as of record had been optioned

to Gerrish and Gerrish had been granted a complete

power of attorney to vote these 300 shares of stock.

After December 13, 1943, Tiffany had nothing further to

do with the corporation and passed completely out of

the picture.

We believe the decision of the United States Court of

Appeals for the Third Circuit in the case at bar is again

in conflict with the decision of the United States Court

of Appeals for the Seventh Circuit in Commissioner of

Internal Revenue v. Snite, supra, as to the issues of pro

rata distribution and control.

CONCLUSION

It is respectfully submitted that the decision of the

Circuit Court of Appeals is incorrect and that for the

reasons stated herein the petition for a writ of certiorari

should be granted.

Respectfully submitted,

LLEwELLyn A. Luce,

937 Munsey Building,

Washington 4, D. C.,

Counsel for Petitioner.

APPENDIX #1

STATUTES AND REGULATIONS INVOLVED

The statute and regulations of the Commissioner of

Internal Revenue involved are as follows:

Internal Revenue Code

SEC. 115. DISTRIBUTIONS BY CORPORATIONS.

(g) REDEMPTION OF STOCK :—If a corporation

eancels or redeems its stock (whether or not such

stock was issued as a stock dividend) at such time

and in such manner as to make the distribution and

cancellation or redemption in whole or in part essen-

tially equivalent to the distribution of a taxable

dividend, the amount so distributed in redemption

or cancellation of the stock, to the extent that it rep-

resents a distribution of earnings or profits accumu-

lated after February 28, 1913, shall be treated as a

taxable dividend.

Regulations 111

Reg. 111, See. 29.22(a)-15. Acquisition or disposi-

tion by a corporation of its own capital stock.—

Whether the acquisition or disposition by a corpora-

tion of shares of its own capital stock gives rise to

taxable gain or deductible loss depends upon the real

nature of the transaction, which is to be ascertained

from all its facts and circumstances. The receipt by

a corporation of the subscription price of shares of its

capital stock upon their original issuance gives rise

to neither taxable gain, nor deductible loss, whether

the subscription or issue price be in excess of, or less

than, the par or stated value of such stock.

But if a corporation deals in its own shares as it

might in the shares of another corporation, the re-

sulting gain or loss is to be computed in the same

manner as though the corporation were dealing in

the shares of another. So also if the corporation re-

ceives its own stock as consideration upon the sale

of property by it, or in satisfaction of indebtedness

to it, the gain or loss resulting is to be computed in

the same manner as though the payment had been

made in any other property. Any gain derived from

such transactions is subject to tax, and any loss sus-

tained is allowable as a deduction where permitted

by the provisions of the Internal Revenue Code.

Reg. 111, See. 29.115-9. Distribution in redemption

or cancellation of stock taxable as a dividend.—If a

corporation cancels or redeems its stock (whether or

not such stock was issued as a stock dividend) at

such time and in such manner as to make the distribu-

tion and cancellation or redemption in whole or in

part essentially equivalent to the distribution of a

taxable dividend, the amount so distributed in re-

demption or cancellation of the stock, to the extent

that it represents a distribution of earnings or profits

accumulated after February 28, 1913, shall be treated

as a taxable dividend.

The question whether a distribution in connection

with a cancellation or redemption of stock is essen-

tially equivalent to the distribution of a taxable divi-

dend depends upon the circumstances of each case.

A cancellation or redemption by a corporation of a

portion of its stock pro rata among all the share-

holders will generally be considered as effecting a

distribution essentially equivalent to a dividend dis-

tribution to the extent of the earnings and profits

accumulated after February 28, 1913. On the other

hand a cancellation or redemption by a corporation of

all of the stock of a particular shareholder, so that

the shareholder ceases to be interested in the affairs

of the corporation, does not effect a distribution of a

taxable dividend. A bona fide distribution in com-

plete cancellation or redemption of all of the stock

of a corporation, or one of a series of bona fide dis-

tributions in complete cancellation or redemption of

all of the stock of a corporation, is not essentially

equivalent to the distribution of a taxable dividend.

Tf a distribution is made pursuant to a corporate res-

olution reciting that the distribution is e in liqui-

dation of the corporation, and the corporation is com-

pletely liquidated and dissolved within one year after

the distribution. the distribution will not be considered

essentially equivalent to the distribution of a taxable

dividend; in all other cases the facts and circum-

stances should be reported to the Commissioner for

his determination whether the distribution, or any

part thereof, is essentially equivalent to the distribu-

tion of a taxable dividend.

INDEX

Page

I WU hos Riso dbadinackDiddvendassbaccaasecauass 1

RA Sh baussabdedanadeserbdneesd casudc; sibesstads 1

ND UOMO: Scbccdavddvcdcuabieddecisaavs reer Ty 2

Btatute and regulations involved bik Whenikd bs sda vcdsandaase 2

a i evShbSck beck bedueudboubaedasd 4

DGG ipKLsphasheadades Odus ds dacababbabiods danse 7

NS vis GahudSabhewdsachusesdbdvndchslanddadnsadic 14

CITATIONS

Cases:

Alpers v. Commissioner, 126 F. 2d 68... 12,13

Batley v. Commissioner, 165 F. 2d 287_... 8,9

Batley v. Commissioner, 381 U. 8. 787_....-.. 8,9

Baumgartner v. United States, 822 U. 8. 605......______- 10

Brown v. Commissioner, 79 F. 2d 78... .- 9

Commissioner v. Estate of Bedford, 326 U. 8. 283_..______- 8,9

Commissioner v. Snite, 177 F. 2d 819......- 8,9, 10, 12

: Commissioner v. Straub, 76 F.2d 888... 9

Dr. Pepper Bottling Co. of Mise. v. Commiasioner, 1 ‘T. C. 80. 13

3 Flanagan v. Helvering, 116 F. 24 987... 8,9, 10

: Goodyear Co. v. Ray-O-Vae Co., 821 U. 8. 2756......_____. 10

Hirsch v. Commissioner, 124 F. 2d 24......-... 9

: Hyman v. Helvering, 71 F. 2d 342, certiorari denied, 293

de, CUMibiks ach ackdnadesbackhhsenedas deeedeccese 10

Kirechenbaum v. Commissioner, decided March a7, 1945

(1945 P-H T. C. Memorandum Decisions, par. 45, 106),

affirmed, 155 F. 2d 23, certiorari denied, 329 U. 8. 726.. 9, 18

McGuire v. Commiasioner, 84 F. 2d 481__._..._.__._____. 8,9

Meyer v. Commissioner, 164 F. 2d 65..._._....._______. 8

F Natwick v. Commissioner, 36 B. T. A. 866..........____. 13

Randolph v. Commissioner, 76 F. 2d 472_........_______- 8

Rheinstrom v. Conner, 1256 F. 24 790_..__._..__.________. 8,9

3 Robinson v. Commissioner, 69 F. 24 972... ______. 13

Smith v. United States, 121 F. 2d 692............____._- 9

Virginian Ry. v. Federation, 300 U. 8. 615........_.____- 10

Wall v. United States, 164 F. 2d 462_........._..______- 13

Wood v. Commissioner, decided November 23, 1943 (1943

P-H T. C. Memorandum Decisions, par. 43, 488)... __- 13

Statute:

Internal Revenue Code, Sec. 115 (26 U. 8. C. 1946 ed.,

Beas caadas UCASE sa dabace ce apace eae 2,7, 12,13

053074—-51

pat

iscellaneous:

H. Rep. No. 1, 69th Cong., Ist sess., p- 5 (1939—1 Cum.

Bull. (Part 2) 315)---------------------------"-""5

H. Conference Rep. No. 356, 69th Cong., Ist sess., Pp- 30

(1939—1 Cum. Bull. (Part 2) 361)....----------------

8. Rep. No. 52, 69th Cong., 1st sess., p. 15 (1939—1 Cum.

Bull. (Part 2) 882). ----------------------------"-""

Treasury Regulations 111, Sec. 29.115-9- ---------------

Page

Yuthe Supreme Court of the Vinited States

OctoBER TERM, 1951

No. 70

JAMES F’. BoYLE, PETITIONER

Vv.

CoMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW

The opinion of the Court of Appeals (R. 35-

42) is reported at 187 F. 2d 557. The findings

of fact and opinion of the Tax Court of the

United States (R. 14A-27A) are reported at

14 T. C. 1382.

JURISDICTION

The judgment of the Court of Appeals was

entered on February 27, 1951. (R. 42-43.) The

petition for a writ of certiorari was filed on May

24, 1951. The jurisdiction of this Court is in-

voked under 28 U. S. C. Section 1254.

(1)

QUESTIONS PRESENTED

1. Whether the court below properly sustained

the Tax Court’s conclusion that the payment of

$206,936 to taxpayer by Air Cruisers, Inc., for 3,302

shares of his stock in that company occurred at such

time and in such manner as to be essentially

equivalent to the distribution of a taxable divi-

dend within the meaning of Section 115 (g) of

the Internal Revenue Code.

9. Whether the purchase by the company of

taxpayer’s stock was a “redemption” within the

meaning of Code Section 115 (g) where the com-

pany held the stock as treasury shares until

dissolution.

STATUTE AND REGULATIONS INVOLVED

Internal Revenue Code:

Src. 115. D1sTRIBUTIONS BY CORPORATIONS.

+ *

(g) Redemption of Stock.—If a corpora-

tion cancels or redeems its stock (whether

or not such stock was issued as a 8

dividend) at such time and in such manner

as to make the distribution and cancella-

tion or redemption in whole or in part

essentially equivalent to the distribution of

a taxable dividend, the amount so dis-

tributed in redemption or cancellation of

the stock, to the extent that it represents

a distribution of earnings OF profits ac-

cumulated after February 98, 1913, shall

be treated as @ taxable dividend.

* * *

* *

(26 U.S. C. 1946 ed., Sec. 115.)

Treasury Regulations 111, promulgated under

the Internal Revenue Code:

Src. 29.115-9. Distribution in Redemp-

tion or Cancellation of Stock Taxable as

a Dividend.—

* * * * *

The question whether a distribution in

connection with a cancellation or redemp-

tion of stock is essentially equivalent to

the distribution of a taxable dividend de-

pends upon the circumstances of each case.

A cancellation or redemption by a corpora-

tion of a portion of its stock pro rata ~

among all the shareholders will generally

be considered as effecting a distribution

essentially equivalent to a dividend distri-

bution to the extent of the earnings and

profits accumulated after February 28,

1913. On the other hand, a cancellation

or redemption by a corporation of all of

the stock of a particular shareholder, so

that the shareholder ceases to be interested

in the affairs of the corporation, does not

effect a distribution of a taxable dividend.

A bona fide distribution in complete can-

cellation or redemption of all of the stock

of a corporation, or one of a series of bona

fide distributions in complete cancellation

or zedemption of all of the stock of a cor-

poration, is not essentially equivalent to

the distribution of a taxable dividend. If

a distribution is made pursuant to a cor-

porate resolution reciting that the distribu-

tion is made in liquidation of the corpora-

tion, and the corporation is completely

liquidated and dissolved within one year

after the distribution, the distribution will

not be considered essentially equivalent to

the distribution of a taxable dividend; in

all other cases the facts and circumstances

should be reported to the Commissioner for

his determination whether the distribution,

or any part thereof, is essentially equivalent

to the distribution of a taxable dividend.

STATEMENT

The facts found by the Tax Court (R. 15A-

22A) may be summarized as follows:

Taxpayer, an engineer, invented a number of

inflatable rubber products. In 1929 he organ-

ized Air Cruisers, Inc., to manufacture and sell

such products. (R. 15A-16A.)

Taxpayer, Earl F. Glover, and Carter Tiffany

were the three principal stockholders until

Glover’s death in July 1943. In December of

that year, Thomas P. Vaughan, who had suc-

ceeded Glover as treasurer, and Harry A. Gerrish,

attorney for, and later executor of, the Glover

estate, acquired 100 shares held by H. P. Morris,

each receiving 50. (R. 16A-17A, 20A.)

Early in the history of the company, Tiffany

had disagreed with Glover on management and

had been trying to sell his stock since 1941. He

disagreed with Vaughan after the latter succeeded

Glover and had continued his efforts to sell.

Having failed to sell either his individual stock

or complete ownership of the company through

agreement with other stockholders, Tiffany and

the taxpayer proposed a transfer of some of

their stock to the company, which was approved

by Gerrish. On December 13, 1943, at a stock-

holders’ meeting attended only by taxpayer and

Tiffany, it was agreed that the company purchase

6,504 shares of their stock at $62.67 a share, the

book value. Also on that date taxpayer and

Tiffany endorsed to the company 3,302 and 3,202

shares for which they received the book value

of $206,936.34 and $200,669.34, respectively. The

6,504 shares were held by the company as treasury

stock until its dissolution. (R. 16A-19A.)

Taxpayer retained his remaining 300 shares

and continued as president because Gerrish, who

expected to function as executor of Glover’s es-

tate, believed taxpayer’s technical knowledge was

required for the company to complete work under

its contracts. Tiffany gave Gerrish a ten-year

option to purchase his remaining 300 shares at

ten cents each, with a power of attorney to vote

the stock during the option period. The option

was exercised in 1944. (R. 19A.)

After Gerrish was confirmed as executor on

March 30, 1944, he was unsuccessful in attempt-

ing to work out a plan of distributing the Glover

stock to the legatees. At their annual meeting

held on May 17, 1945, the stockholders of Air

Cruisers, Inc., authorized the purchase by the

: =

company of the 3,501 Glover shares at $62.67

a share. The legatees were given options to pur-

chase from the company any of the stock so ac-

quired at the company’s purchase price of $62.67.

All of the Glover shares were transferred to

the company as of May 18, 1945, and on May 29

of that year Vaughan and Gerrish, two of the

legatees, exercised their options, each acquiring

100 shares from the company. The remaining

3,301 shares were held by the company as treasury

stock until its dissolution. (R. 20A-21A.)

As a result of the various stock transfers re-

ferred to above, the approximately one-third

ownership of stock by taxpayer on May 11, 1943,

represented by 3,602 shares, was on May 29, 1945,

still a one-third interest, although represented by

only 300 shares. The identity of the other two

stockholders with one-third interests had changed

and there were by that date 9,805 shares in the

treasury which were never reissued. (R. 16A.)’

1 The ownership of stock at all times relevant to this con-

troversy was as follows (R. 16A) :

.| May 18,

1945 to |, After

The company’s gross sales rose from prac-

tically nothing in 1989 to ten million dollars in

1942 (R. 16A). On December 31, 1943, after

the transfer of the stock of taxpayer and Tiffany,

the company’s cash on hand was $476,294.05 and

its surplus was $221,711.56 (R. 21A). The com-

pany never declared a cash or stock dividend

(R. 16A). It was dissolved on November 7,

1949 (R. 22A).

Taxpayer reported the amount received for his

stock as a long-term capital gain on his 1943

return. The Commissioner determined that the

entire amount received was to be taxed as a divi-

dend and, therefore, as ordinary income. The

Tax Court, in approving the deficiency, found

as an ultimate fact that the shares in question

‘‘were redeemed by the company at such time

and in such manner as to make the distribution

of the $206,936.34 essentially equivalent to the

distribution of a taxable dividend.’’ (R. 22A.)

The Court of Appeals affirmed. (R. 42.)

ARGUMENT

1. It has been uniformly held that the standard

prescribed by Section 115 (g) of the Internal

Revenue Code, supra, p. 2, for determining

whether the purchase by a corporation of its

stock is to be treated as a dividend—i. e., whether

the purchase occurred ‘‘at such time and in such

manner as to make the distribution * * * es-

sentially equivalent to the distribution of a tax-

able dividend,’’ requires a factual determination

which turns on all the circumstances of the par-

ticular case involved. Flanagan v. Helvering, 116

F. 24 987 (C. A. D. C.); Commissioner v. Snite,

177 F. 2d 819 (C. A. 7); Meyer v. Commissioner,

154 F. 2d 55 (C. A. 3); Rhetnstrom v. Conner,

125 F. 2d 790 (C. A. 6); McGuire v. Commis-

sioner, 84 F. 2d 431, 433 (C. A. 7); Randolph v.

Commissioner, 15 F. 2d 472 (C. A. 8). Cf. Com-

missioner v. Estate of Bedford, 325 U. 8. 283;

Bazley v. Commissioner, 331 U. 8. 737. See also

Treasury Regulations 111, Section 29.115-9,

supra, pp. 3-4.

The Tax Court’s ultimate finding of fact (R.

22A) was that the redemption occurred ‘‘at such

time and in such manner as to make the distri-

bution of the $206,936.34 essentially equivalent

to the distribution of a taxable dividend.”’ This

conclusion, expressly approved by the Court of

Appeals (R. 39, 40-41), is unquestionably sup-

ported by the record in this case because most,

if not all, of the factors which in other cases

have been held relevant in determining whether

the stock purchase was a dividend, are present.

Thus the stock of the company was closely held

(R. 16A-22A) ;* there were large earnings and

2H. Rep. No. 1, 69th Cong., Ist sess., p. 5 (1939-1 Cum.

Bull. (Part 2) 315) ; S. Rep. No. 52, 69th Cong., 1st sess., p. 15

(1939-1 Cum. Bull. (Part 2) 332); H. Conference Rep.

No. 356, 69th Cong., 1st sess., p. 30 (1939-1 Cum. Bull. (Part

2) 361) ; Flanagan v. Helvering, 116 F. 2d 987 (C. A. D.C.) ;

Bazley v. Commissioner, 155 F. 2d 237,239 (C. A. 3), affirmed,

331 U. S. 787.

unnecessary accumulation of cash (R. 23A) ;°

no cash dividends had ever been declared (R.

16A) ;* the company did not then intend to liqui-

date or to contract its business (R. 24A);° the

purchase of taxpayer’s stock served no business

purpose of the company nor was one even sug-

gested (R. 23A); it was motivated by considera-

tions personal to individual stockholders (R.

24A);° and finally, the net effect of the purchase

of taxpayer’s stock was to distribute earnings of

the company just as if a cash dividend had been

declared (R. 22A, 26A).’ The decision below,

3 See fn. 2 above; see also Hirsch v. Commissioner, 124 F.

2d 24, 29 (C. A. 9).

‘In this respect, the facts of this case more clearly indicate

a.slividend than those in most of the cases to come before the

courts since even an intermittent dividend policy or relatively

low cash dividend rate has given rise to the inference that the

redemption of stock was a substitute for cash dividends.

Flanagan v. Helvering, supra, p. 939, and cases cited in fn. 5

of that opinion. Brown v. Commissioner, 79 F. 2d 73

(C. A. 8).

5 Smith v. United States, 121 F. 2d 692 (C. A. 3); Rhein-

strom v. Conmer, 125 F. 2d 790, 793 (C. A. 6); Flanagan v.

Helvering, supra, p. 939; McGuire v. Commissioner, 84 F. 2d

431, 482 (C. A. 7); Commissioner v. Straub, 76 F. 2d 388

(C. A. 3).

*“The personal requirements and desires of its sole stock-

holder, and not the liquidation of the company, were the mo-

tivating cause of the stock redemption.” Smith v. United

States, supra, p.695. Bazley v. Commissioner, supra, pp. 2A1,

244; cf. Commissioner v. Snite, 177 F. 2d 819 (C. A. 7).

* Bazley v. Commissioner, 331 U.S. 737; Kirschenbaum v.

Commissioner, 155 F. 2d 23 (C. A. 2), certiorari denied, 329

U. S. 726; cf. Commissioner v. Estate of Bedford, 325 U.S.

283. See also Smith v. United States, supra; Hirsch v. Com-

then, is manifestly correct, but even if there

might be some doubt as to this, no occasion would

be presented for the issuance of the writ because

the factual determination on which the case turns

and on which both courts below have agreed, will

not, on familiar principles, be reviewed by this

Court. See Goodyear Co. v. Ray-O-Vae Co., 321

U. S. 275, 278; Virginian Ry. v. Federation, 300

U. 8. 515, 542; Baumgartner v. United States,

322 U. S. 665.

9. Petitioner contends (Pet. 8-10, 20-21) that

by the sale of his 3,302 shares of stock and Tif-

fany’s 3,202 shares “‘the control of the corpora-

tion was completely changed.’’ He asserts that

these sales lessened his and Tiffany’s holdings

and thereby increased proportionately the hold-

ings of the other stockholders. He thus en-

deavors to show a conflict between the decision

in the instant case and that of the Seventh Cir-

cuit in Commissioner v. Snite, 177 F. 2d 819.

Apart from the fact that change of control of the

corporation was only one of the numerous fae-

tors which entered into the ultimate determina-

tion of the question presented in this case, the

short answer to petitioner’s contention is that

there is no factual foundation in the record to

support his assertion that there was a substantial

change of control.

missioner, supra; Flanagan v. Helvering, supra; Hyman v.

Helvering, 71 F. 2d 342 (C. A. D. C.), certiorari denied, 293

U. S. 570.

Obviously, petitioner’s contention that there was

a complete change of corporation control im-

mediately after the sale of his and Tiffany’s

shares rests entirely on the fact that the corpora-

tion did not purchase the Glover estate’s shares

until a later date (Pet. 9,20). But, as the Court

of Appeals observed, immediately after the sales

of their shares petitioner and Tiffany were prac-

tically the only stockholders of the corporation

with power to act, since the Glover estate was

in litigation and its shares were ‘‘tied up.’’ (R.

40.) Thus the sale of the Glover estate shares

was delayed for technical reasons only (R. 26A).

And, as both courts below concluded, the later

sale to the corporation of the Glover estate shares

was made pursuant to a prearranged plan or

agreement. (R.26A,40.) The Court of Appeals

accurately pointed out (R. 40) that ‘“‘Even-

tually * * * petitioner actually possessed one-

third of the company’s outstanding stock as he

had originally,’’ and then quoted with approval

the conclusion of the Tax Court that (see R. 26A

and 40):

Although it took something over a year

to accomplish, the upshot was, as our find-

ings show, that a corporation, with three

principal stockholders holding their shares

in virtually equal proportions, distributed

to them the bulk of its accumulated earn-

ings and that ultimately there remained

three shareholders again with identical

holdings.

It is plain, therefore, that there is no factual

basis in the record for petitioner’s assertion that

there was a complete change in the control of

the corporation immediately after the sales of

his and Tiffany’s shares of stock. Consequently,

the Court of Appeals did not, in the instant case,

reach the question whether an effective change

in the control of the corporation would have

required a contrary conclusion. Hence, its de-

cision did not and could not create a conflict with

the decision in the Snite case on the change-of-

control question.

3. The only other reason advanced by peti-

tioner for the issuance of a writ of certiorari

(Pet. 7-8) is that because the shares sold to the

corporation were placed in its treasury there was

no ‘‘redemption” of the stock as required by

Section 115 (g), supra, p. 2. He contends that

the contrary conclusion reached by the Court of

Appeals in the instant case is in conflict with

the Seventh Circuit’s decision in Commissioner

vy. Snite, supra, and the Second Circuit’s decision

in Alpers v. Commissioner, 126 F. 2d 58.

There is no merit either in the interpretation

of the statute contended for by petitioner or

in his claim of conflict. It has long been held

that under Setiony 115 (g), supra, p. 2, the

purchase of stock which is placed in the treasury

of a company where there are no plans to reissue

is a “‘redemption.’’* The basis of the established

rule was succinctly stated by the Court of Appeals

in the instant case in its approved quotation from

the Fourth Circuit’s opinion in Wall v. United

States, 164 F. 2d 462, 465, as follows (R. 41):

If it should be held that taxpayers can

avoid the terms of the statute by the simple

device of selling their stock to the corpora-

tion and having it held as treasury stock,

the purpose of the statute to prevent the

evasion of taxes upon corporate dividends

would be completely frustrated.

The decision in the Alpers case in no way

conflicts with the decision below because a dif-

ferent statute (Section 115 (c), Internal Revenue

Code; 26 U. S. C. 115 (c)) with different lan-

guage and purposes was there involved. The

language in the Snite case on which petitioner

relies is an obiter dictum as the court below ob-

served (R. 42), and in any event, that case is

plainly distinguishable because the very purpose

of the stock purchase in that case was to make

those shares available for resale to key employees,

® Wall v. United States, 164 F. 2d 462, 465 (C. A. 4);

Kirschenbaum v. Commissioner, decided March 27, 1945 (1945

P-H T. C. Memorandum Decisions, par. 45,106), affirmed,

155 F. 2d 23 (C. A. 2), certiorari denied, 329 U. S. 726;

Robinson v. Commissioner, 69 F. 2d 972 (C. A. 5) ; Natwick

v. Commissioner, 36 B. T. A. 866; Wood v. Commissioner,

decided November 23, 1943 (1943 P-H T. C. Memorandum

Decisions, par. 43,488). Cf. Dr. Pepper Bottling Co. of Miss.

v. Commissioner, 1 T. C. 80, 84.

whereas, in the instant case there was no pur-

pose: to reissue the shares, nor were they ever

reissued.

CONCLUSION

The decision of the court below is clearly cor-

rect, and there is no conflict of decisions. The

petition for a writ of certiorari should, therefore,

be denied.

Respectfully submitted.

Pur B. PERLMAN,

Solicitor General.

THERON LAMAR CAUDLE,

Assistant Attorney General.

Euuis N. SLack,

A. F. PREscott,

Irvine I. AXELRAD,

Special Assistants to the Attorney General.

JuNE 1951.

B. 5. GOVERNMENT PRINTING OFFICE: 1958

In THE

Supreme Court of the United States

October Term, 1951

No. 70

James F. Boyz, Petitioner,

CoMMISSIONER oF INTERNAL Revenve, Respondent

SUPPLEMENTAL MEMORANDUM IN SUPPORT OF

PETITION FOR A WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS FOR

THE THIRD CIRCUIT.

To the Honorable, the Chief Justice, and the Associate

Justices of the Supreme Court of the United States:

The petitioner, on the 24th day of May, 1951, filed

with this Honorable Court a petition for a writ of cer-

tiorari to the United States Court of Appeals for the

Third Circuit and brief in support thereof.

The principal purpose of this supplemental memoran-

dum is to call to the attention of this Honorable Court

the decision of the Tax Court of the United States in

Carter Tiffamy v. Commissioner of Internal Revenue,

Docket No. 27780, 16 T.C. No. 176, promulgated on June

29, 1951.

Question Presented

On December 13, 1943 the petitioner in the case at bar

sold to Air Cruisers, Inc. 3,302 shares of stock in that

corporation for $206,936.34. The cost of said stock to

petitioner was $10,140. In filing his Federal income tax

return for 1943 the petitioner reported the correct profit

from the sale, $196,799.34, as capital gain from the sale

of a capital asset (common stock in a corporation) and

paid the tax thereon at capital gain rates.

The respondent concluded that the transaction involved

was not a purchase and sale but rather the distribution

of a taxable dividend under Section 115(g) of the In-

ternal Revenue Code and taxed the petitioner on the en-

tire sum of $206,936.34 as ordinary dividend income for

1943, determining a deficiency in tax of $137,561.21.

The Tax Court of the United States held that the 3,302

shares of stock had been ‘‘redeemed’’ by Air Cruisers,

Ine. ‘‘at such time’’ and ‘‘in such manner’’ as to make

the consideration of $206,936.34 paid for the stock by

the corporation essentially equivalent to the distribution

of a taxable dividend and affirmed the respondent in

determining a deficiency of $137,561.21 in Federal income

tax against the petitioner for the year 1943 (R. 14A-

27A). The Court of Appeals affirmed the decision of

the Tax Court (R. 35-43).

The petition accordingly presented the question

whether the transaction involved constituted a sale by

petitioner of 3,302 shares of stock in Air Cruisers, Inc.

or the distribution of a taxable dividend by Air Cruisers,

Inc. to petitioner in the amount of the consideration paid

for the stock, $206,936.34.

Since the filing of the petition for a writ of certiorari

herein, the Tax Court of the United States decided on

June 29, 1951 the case of Carter Tiffany v. Commissioner

of Internal Revenue, supra, Docket No. 27780, 16 T.C.

No. 176.

Carter Tiffany and the petitioner herein were the two

stockholders in Air Cruisers, Inc. who on the same date,

December 13, 1943, sold stock to Air Cruisers, Inc. In

the case at bar (Boyle v. Commissioner) the Court of

Appeals summarized the following facts found by the

Tax Court (R. 37-38):

On that same date petitioner and Tiffany endorsed

to the company 3,302 and 3,202 shares for which

they received $206,936.34 and $200,669.34 respectively.

The 6,504 shares were held by the company as treas-

ury stock until its dissolution. Taxpayer retained

300 shares and continued as president because Ger-

rish, who expected to function as executor of Glover’s

Estate, believed his technical knowledge was required

for the company to complete work under its con-

tracts. Tiffany gave Gerrish a ten year option to

purchase 300 shares at ten cents each with a proxy

and power of attorney to vote the stock during the

option period. The option was exercised in 1944.

Tiffany considered the 300 shares compensation to

Gerrish for services in disposing of his stock to the

company. Gerrish said he thought they were a gra-

tuity from Tiffany.

* * * *

In its decision in Carter Tiffany v. Commissioner,

supra, the Tax Court recognized the sale by Tiffany of

3,202 shares of stock to Air Cruisers, Inc. and held that

Tiffany was entitled to report the profit as capital gain

and that the sale price, $200,669.34, was mot taxable to

Tiffany as a dividend under Section 115(g) of the In-

ternal Revenue Code.

Therefore it is respectfully submitted that in the

matter of two stockholders who sold an almost identical

amount of stock on the same day, the Tax Court has

reached conclusions which are not only inconsistent but

are diametrically opposed, contrary and repugnant. The

Tax Court has refused to recognize the sale by Mr.

Boyle and has approved a deficiency in tax of $137,561.21

on the theory that he received a dividend whereas the

Court has recognized the sale by Mr. Tiffany and has

refused to approve the deficiency in tax proposed against

him by the Commissioner of Internal Revenue.

We think that this presents a very novel situation and

a curious, conflicting and inconsistent interpretation of

Section 115(g) of the Internal Revenue Code which

should be cured and set at rest by a decision of this

Honorable Court.

A copy of the Findings of Fact and Opinion of the

Tax Court in Carter Tiffany v. Commissioner of Internal

Revenue, supra, is attached hereto as an appendix to

this memorandum.

Furthermore it is respectfully submitted that the de-

cision of the Tax Court strengthens and confirms Point

III, page 18, of petitioner’s brief in support of petition

for certiorari, to wit:

‘On December 1, 1943, the stockholdings of Air Cruis-

ers, Inc. were as follows: (R. p. 16A)

Estate of Earl F. Glover............-------- 3,501 shares

James F. Boyle (Petitioner)...........- 3,602 shares

Carter Tiffany 3,502 shares

H. P. Morris 100 shares

‘Immediately after the sales by Boyle and Tiffany on

December 13, 1943, the stockholdings of Air Cruisers,

Inc. were as follows (R. p. 16A):

Estate of Earl F. Glover.................... 3,501 shares

James F. Boyle (Petitioner)............ 300 shares

Carter Tiffany (holding of record) 300 shares

H. Preston Morris 100 shares”’

The Estate of Glover did not sell its 3,501 shares of

stock and received no payment of any kind. H. P.

Morris received no payment.

Under the decision of the Tax Court in Tiffany v.

Commissioner, supra, Mr. Tiffany made a sale but did

not receive a dividend.

Under the decisions of the Tax Court, only Boyle, of

all the stockhoders, received a dividend. Since the other

stockholders did not receive a dividend under the facts

as found by the Tax Court the payment to Boyle loses

all resemblance to a distribution made ‘‘at such time’’

or ‘‘in such manner” as to be ‘‘essentially’’ equivalent

to a taxable dividend under Section 115(g) of the Code.

There was clearly under the Tax Court’s decisions no

pro rata payment to all stockholders owning stock of

the same class or any payment that even bore a remote

resemblance to a dividend in 1943.

The Tax Court attempts to distinguish its decision in

Tiffany v. Commissioner, supra, from its decision in

Boyle v. Commissioner, supra (this case) on the ground

that in 1945 Boyle regained the same proportional in-

terest in the corporation that he had in 1943. The fact

remains, however, that at the close of the year 1943

and during 1944, Boyle’s holdings had lessened by 3,302

shares and he had lost control.

The tax here involved was assessed for the year 1943,

on conditions as they existed in 1943, and we respect-

fully submit that this case should be decided on the

basis of the facts as they were at the close of 1943 and

not on the basis of what happened in 1945 by reason of

the sale of the 3,501 shares of stock by the Glover

Estate in 1945.

Conclusion

It is respectfully submitted that the decision of the

Cireuit Court of Appeals in this case is incorrect in

affirming the Tax Court and that the petition for a

writ of certiorari should be granted.

Respectfully submitted,

LieweE.tyn A. Luce,

937 Munsey Building,

Washington 4, D. C.

Counsel for Petitioner

APPENDIX

THE TAX COURT OF THE UNITED STATES

Carter Tiffany, Petitioner, v. Commissioner of Internal

Revenue, Respondent.

Docket No. 27780. Promulgated June 29, 1951.

Payment received by petitioner from corporation in

exchange for stock therein in circumstances whereby he

no longer retained any beneficial stock interest in the cor-

poration, held not a taxable dividend under section

115 (g), Internal Revenue Code. James F. Boyle, 14

T. C. 1382, distinguished.

Randolph Paul, Esq., Meyer Kurz, Esq., and Howard

Rea, Esq., for the petitioner.

John J. Madden, Esq., for the respondent.

The respondent determined a deficiency in income and

victory taxes in the amount of $126,223.63 for the calen-

dar year 1943. The only issue now in dispute is whether

$200,669.34 received by petitioner for 3,202 shares of

stock of Air Cruisers, Inc., is taxable as a dividend

under section 115 (g) of the Internal Revenue Code.

Findings of Fact.

A stipulation of facts filed by the parties is adopted

as part of our findings.

Petitioner, an individual residing in Englewood, New

Jersey, filed his income and victory tax return for 1943

with the collector of internal revenue for the third dis-

trict of New York.

In 1929 petitione rbecame associated with Anthony H.

Fokker, an airplane designer, inventor, and manufac-

turer, and remained with Fokker until Fokker’s death in

1939, when he became sole executor under Fokker’s will.

Air Cruisers, Inc. referred to sometimes hereinafter

as the company, was a corporation engaged in manufac-

turing and selling airplane safety equipment. It was

organized under the laws of Delaware in 1929 with an

authorized capital stock of 10,000 shares, which was

increased during the same year to 15,000 shares, but no

more than 10,705 shares were ever issued and outstand-

ing. In 1931 and for some years thereafter the financial

condition of the company was exceedingly precarious.

Petitioner, at the suggestion of Fokker, purchased 5,600

shares of Air Cruisers stock for one dollar in 1931. He

became a vice president and director in 1932.

Prior to his death in July 1943, Earl F. Glover was

the business manager and financial head of the company,

serving as president and treasurer. James F. Boyle

was secretary and chief engineer; he became president

after Glover’s death. Thomas P. Vaughan succeeded

Glover as treasurer.

During the early days, Glover and Boyle received

small salaries. Petitioner received no salary until 1941;

he had various other interests both before and after

1941, and his services to the company were not on a full-

time basis. In August 1939, petitioner transferred as a

gift 2,150 shares of Air Cruisers stock to Glover and

448 shares to Boyle. These gifts made the stockhold-

ings of petitioner, Boyle and Glover approximately equal.

Beginning with the period immediately prior to May

11, 1943, the stockholders of record of Air Cruisers

were, on the dates and for the periods indicated, as fol-

lows:

; 5/11/48 12/18/48 12/18/48 5/16/44 5/18/45

ockholder oo to to oy oq — -

/11/43 49/13/48 12/18/48 5/16/44 5/18/45 5/29/46

F. Boyle..........- 8,095 3,602 3 300 800 800

I aimieeaesiabrcesins 2,995 3,501 3,501 3,501 1 ess

es 2,995 3,502 300 Rees ee

Yorris .........-.-. 100 1 MOA Slee | ee

m Bissell ..........- Re ea nl A eae nee

aVen Muffling, 810000 = 0 mene eR 9,006

ery Stock... wee 0 ee 6,504 ae 6,504 10,005

ae a 50 200 200

Te eccincsene 10,705 10,705 10,705 10,705 10,705 10,705

The foregoing table is based upon the records of the

company, and is not necessarily accurate as to beneficial

ownership of the stock for the periods involved.

The 2,995 shares owned by petitioner immediately

prior to May 11, 1943, were part of the shares originally

acquired by him in 1931. On May 11, 1943, petitioner

purchased 507 shares, Glover 506 shares, and Boyle 507

shares of the total of 1,520 shares owned by Pelham St.

George Bissell and Adrian Van Mouffling. Petitioner paid

$20 a share, or a total of $10,140 for his 507 shares.

The company’s gross sales rose from practically zero

in 1939 to about $10,000,000 in 1942 and 1943, and were

about $7,000,000 in 1944. During these latter years over

95 per cent of its sales were to the United States Gov-

ernment. The company was indebted to the Fokker

estate on a note in the amount of $107,316.56. The

parties appear to be of the impression that no dividends

could be paid while the note was outstanding. How-

ever, no such prohibition appears on the face of the

note. By the end of 1942, the company was in a strong

financial position, and the note could easily have been

paid at that time. Moreover, by its terms, the note could

have been discharged by the issuance of preferred stock,

but petitioner opposed the issuance of preferred stock

as adverse to the interests of the estate, and Glover and

Boyle had told petitioner that they would not cause the

note to be paid off in preferred stock over his objec-

tions.

6 a ORS ens

WRITING CLOSE TO EDGE

Petitioner’s relationships with the other officers and

directors of the company were generally cordial from

1931 to 1940, but beginning in 1940 friction developed,

particularly between Glover and petitioner. A disagree-

ment also arose in 1943 between Boyle and petitioner,

after Glover’s death, that resulted in strained relations.

Notwithstanding the company’s prosperity during the

war, it had never declared or paid any dividends, nor

had it taken any steps to discharge the Fokker note,

which may have been regarded as an obstacle to the

payment of dividends. During 1943, a salary of $62,500

was paid to Glover or to his estate, $62,500 to Boyle,

$20,000 to petitioner, and $15,083.31 to Vaughan.

In the spring of 1943 the company’s war contracts

were renegotiated, and during 1943 it paid a renegotia-

tion liability of $1,700,000 for 1942. Subsequent thereto,

the prices charged by the company were scaled down-

ward, and the possibility of renegotiation for subsequent

periods was considerably diminished. The company’s

December 31, 1943, balance sheet made no provision for

any renegotiation liability for 1943, and renegotiation

proceedings for the year 1943 in fact resulted in a de-

termination of no liability. The company’s cash on hand

as of December 31, 1943, after the purchases of stock

from petitioner and Boyle on December 13, 1943, here-

inafter described, was $476,294.05. The surplus shown

on the company’s books as of December 31, 1943, was

$629,317.24.

Glover’s will appointed Harry A. Gerrish, the com-

pany’s attorney, as executor. Caveats protesting probate

of the will were filed by Glover’s divorced wife and son

on August 6, 1943, and September 7, 1943, respectively.

On March 30, 1944, the Passaic County Surrogate’s

Court, New Jersey, dismissed the caveats and authorized

Gerrish to administer the estate. No temporary admin-

istrator was appointed prior to March 30, 1944.

Petitioner was dissatisfied with the company’s failure

to pay dividends. In addition, as a result of strained

personal relations, and possibly for other reasons as well,

petitioner was anxious to dispose of his stock in the

company.

At a meeting with Glover and Boyle some time prior

to the fall of 1942 at which there was violent disagree-

ment between Glover, Boyle and petitioner, petitioner of-

fered to sell all his stock to Glover and Boyle for $75,000.

They did not accept his offer. Late in 1942 or early in 1943,

petitioner offered his stock to Gerrish and Clyde D.

Yeomans, the company auditor, but the offer was not

accepted.

In 1942 and 1943, petitioner participated in various

negotiations looking towards the sale of all of his stock

as well as Glover’s and Boyle’s stock to outside inter-

ests. After Glover’s death in July 1943, petitioner held

conferences with a Colonel Davis regarding a possible

sale of petitioner’s and of Boyle’s stock to the Pharis

Tire and Rubber Company. Gerrish had not yet quali-

fied as executor of Glover’s will as a result of the litiga-

tion which delayed probate of the will. Boyle agreed

orally to the Pharis sale, but withdrew at the last mo-

ment when the contract was to be signed. Since Pharis

was interested in acquiring at least a majority of the

outstanding stock, the entire deal collapsed. Petitioner

was incensed at Boyle because of Boyle’s refusal to

adhere to his oral commitment. Petitioner was so angry

that he refused to see Boyle again, stayed away from

the factory, and threatened Boyle with lawsuits.

Thomas P. Vaughan had been an employee of the

company since 1931. He became assistant treasurer and

assistant secretary in 1941. He first became a stock-

holder in the company on December 18, 1943, when he

and Gerrish each purchased 50 shares of the 100 shares

owned by H. P. Morris.

Late in November 1943, Gerrish visited petitioner in

his New York office and proposed a sale of petitioner’s

stock to the company itself at book value. Petitioner

assented. On December 1, 1943, at a subsequent meet-

ing between Gerrish and petitioner, Gerrish requested

petitioner to turn over to him 300 shares in connection

with the transaction. Petitioner agreed to do so. How-

ever, at Gerrish’s request, the transfer of the 300 shares

was not made to Gerrish outright. Instead, petitioner,

on December 1, 1943, signed an option agreement, con-

ferring on Gerrish the right to purchase 300 shares of

the company’s stock at 10 cents a share at any time

prior to 1954. The option agreement recited that peti-

tioner would deposit the 300 shares with one Otto Cooper

[an associate of Gerrish], as trustee, and petitioner in

fact endorsed a certificate for 300 shares in blank on

December 1, 1943, and simultaneously delivered it to Ger-

rish. Petitioner also conferred on Gerrish the irrevocable

right to vote the stock, and simultaneously executed a

document, appointing Gerrish as his proxy from Decem-

ber 1, 1943, until January 1, 1954. Gerrish took the

documents to his office and put them in the safe of Otto

Cooper, whom petitioner had never met. Petitioner never

saw the documents again.

The book value of the stock on December 1, 1943, was

$62.67 per share. It was understood between petitioner

and Gerrish that the consideration of 10 cents a share

mentioned in the option agreement would not be paid,

and in fact it was never paid, nor was any other con-

sideration paid in connection with the option agreement.

Beginning with December 1, 1943, Gerrish considered

himself as having supplanted petitioner as the owner of

the 300 shares.

At some time on or before December 1, 1943, petitioner

learned that the company’s purchase of his shares at

book value was to be accompanied by a similar purchase

at the same price of stock owned by Boyle.

On December 13, 1943, the directors and shareholders

of the company, at special meetings held for the pur-

pose, agreed to accept the offers of petitioner and Boyle

to surrender to the company 3,202 shares and 3,302

shares, respectively, of the stock of the company for the

respective amounts of $200,669.34 and $206,936.34. On

the same day, petitioner and Boyle each delivered to the

company certificates representing the number of shares

ascribed to him above.

The shares acquired by the company from petitioner

and Boyle were not cancelled but were held by the com-

pany as treasury stock and were carried on its books as

assets in an investment account with no reduction of or

charge to surplus therefor. The balance sheets set forth

on the income tax return filed by the company for 1943,

1944, and 1945 indicate that a charge to surplus was

made in connection with the transfer of the shares of

petitioner and Boyle to the company.

After his transfer of 3,302 shares to the company on

December 13, 1943, Boyle continued to hold 300 shares

of stock of the company. He also continued to play an

active role in the management of the company as presi-

dent and director. For the year 1944 Boyle received

$45,000 as salary or compensation for services rendered.

After December 1, 1943, petitioner had no beneficial in-

terest in the 300 shares delivered to Gerrish. After his

transfer of 3,202 shares to the company on December 13,

1943, he had no further beneficial stock interest in the

company.

The directors’ meeting of December 13, 1943, was at-

tended by Boyle, Vaughan, Gerrish and petitioner. Boyle

was elected president and secretary of the company to

succeed Glover. Vaughan was elected vice president and

treasurer. Petitioner was elected a vice president to

serve until the next annual meeting and accepted the

office. Petitioner had stated that he would like to be

elected vice president and director so that he would be

in a position to discharge his duties to the Fokker estate.

However, he was reminded that his salary would stop

at the end of 1943, and petitioner acquiesced. Petitioner

did not in fact serve after December 13, 1943, and was

not thereafter reelected at the directors’ and stockhold-

ers’ meetings in March 1944.

Gerrish assumed and performed the duties of vice

president and director formerly performed by petitioner

shortly after December 1943. He was formally elected

vice president on March 30, 1944, receiving compensation

retroactively to January 1, 1944, at $20,000 a year. Peti-

tioner’s annual salary of $20,000 terminated in December

1943, and he received no salary for 1944 from the com-

pany.

On December 29, 1943, petitioner received payment in

the amount of $200,669.34 for the stock which he sold

to the company. In 1944 he received a check represent-

ing a small balance of his 1943 salary. After December

13, 1943, he never received any payments, other than

the foregoing, from the company.

After December 13, 1943, petitioner did no further

work for the company. He had no further association

or contact with the stockholders and officers of the

company, except for communications with Gerrish re-

garding payments of principal and interest on the Fokker

note, and was never consulted by the stockholders or

officers in any capacity. Petitioner never saw the office rs

or stockholders again until he was called as a witness

in the case involving Boyle’s tax liability for 1943, exeept

for a brief chance encounter in 1947. Petitioner never

visited the company’s plant again except for a five-min-

ute visit on December 29, 1943, to collect the check for

the purchase of his stock. Petitioner regularly attended

all meetings of the directors and shareholders of the

company until December 13, 1943. After December 13,

1943, he never received notice of or attended any direc-

tors’ or shareholders’ meeting of the company.

Gerrish was in a position at any time after Decem-

ber 13, 1943, to record or to have recorded on the stock

book of the company the transfer of the certificate for

300 shares to himself or anyone else. On May 16, 1944,

Gerrish did fill in the blank on the back of the certificate

with his name and the name of Vaughan, recorded the

transfer on the stock book of the company, and caused

two certificates for 150 shares each to be issued in lieu

thereof to himself and Vaughan. Vaughan paid nothing

to Gerrish for these 150 shares. Petitioner never re-

ceived any notice that the option of December 1, 1943,

had been exercised and that Gerrish had transferred the

200 shares to himself and Vaughan; he never expected

to receive any such notice.

On May 17, 1945, at meetings of the company’s board

of directors and stockholders, it was determined to offer

to purchase the 3,501 shares held by the Glover estate

for 962.67 per share. The book value of the stock was

considerably higher at that time. The residuary legatees

were granted an option to repurchase any portion of the

stock so acquired by the company, to the extent of their

respective legacies for $62.67 per share, provided that

the option were exercised on or before June 1, 1945.

Vaughan and Gerrish were among the residuary legatees,

and shared to the extent of one-sixth each. They were

the only residuary legatees to exercise the option, and

although each could have repurchased over 500 shares,

each in fact repurchased 100 shares. As a result, Boyle,

Vaughan, and Gerrish thereafter owned 300 shares each,

and no other shares were outstanding, apart from the re-

purchased shares being held as treasury stock.

Petitioner did not learn until 1947 that there had been

a sale of the stock of the Glover estate. Whatever may

have been the plans of Boyle, Gerrish, and Vaughan,

petitioner’s sole purpose in selling his stock to the com-

pany was to part with all his interest in the company.

During 1943 and prior years petitioner had activities

outside of the company and other sources of income.

He handled various matters for Fokker until Fokker’s

death in 1939. He was a partner in the brokerage house

of Gamwell & Company from 1941 to 1945, although he

was relatively inactive in that concern in 1943. He re-

ceived substantial receivership fees in 1943. Air Cruis-

ers, Inc., furnished practically the sole activity for Boyle

and Glover.

None of the sales of stock to the company was based

upon any purpose to decrease any of the company’s ac-

tivities. The company remained in business and was

later dissolved in 1949.

The transfer of shares owned by petitioner and trans-

ferred to Air Cruisers, Inc., constituted an outright pur-

chase by the company and a sale by petitioner. The pay-

ment of $200,669.34 to petitioner in December 1943 was

not made at such time and in such manner as to be a

dividend or essentially equivalent to a taxable dividend.

Opinion

Raum, Judge: In James F. Boyle, 14 T. C. 1382, affd.

(C. A. 3), 187 F. 2d 557, we held that Boyle’s proceeds

from the December 13, 1943, sale of stock to the company

constituted a taxable dividend to him under section 115

(g) of the Internal Revenue Code.1 We gave weight to

the fact that at the inception of the transaction there

were three principal stockholders, and that upon comple-

tion of the various steps (including the disposition of the

stock of the Glover estate), three principal stockholders

remained holding their shares in virtually equal propor-

tions.

Thus, when all the smoke cleared away, Boyle emerged

with a substantially identical fractional’ interest in the

corporation. We noted that the transaction had ‘‘too

many appearances of being interrelated parts of a single

operation to discard the suggested test of the Flanagan

ease [Helvering v. Flanagan (C. A. D. C.), 116 F. 2d

937, 939] as to the ‘net effects of the distribution.’ ’’ As

to Boyle, the December 1943, payment constituted in

practical effect nothing more than a distribution of cor-

porate profits to one whose ultimate fractional stock in-

terest in a going concern was not substantially altered.

Respondent contends that the same result is required

here, placing great stress upon the fact that petitioner

similarly retained 300 shares (the same number of shares

retained by Boyle), and that it was not until some months

later, in May 1944, that petitioner ceased being a stock-

holder of record. We think there is a crucial difference

between this case and the Boyle case.

1SEC. 115. DISTRIBUTIONS BY CORPORATIONS.

* * * *

(g) REDEMPTION OF Srock.—If a corporation cancels or redeems

its stock (whether or not such stock was issued as a stock dividend)

at such time and in such manner as to make the distribution and

cancellation or redemption in whole or in part essentially equivalent

to the distribution of a taxable dividend, the amount so distributed

in redemption or cancellation of the stock, to the extent that it rep-

resents a distribution of earnings or profits accumulated after Feb-

ruary 28, 1913, shall be treated as a taxable dividend.

We are satisfied that petitioner did not retain any

beneficial interest whatever in any stock of the company

after December 13, 1943. Although it is true that he re-

mained a stockholder of record, to the extent of 300

shares, until May 16, 1944, the fact is that he delivered

those shares, endorsed in blank, to Gerrish on December

1, 1943, accompanied by an irrevocable proxy entitling

Gerrish to vote the stock. There was never any intention

that the formalities described in the option agreement

would ever be carried out; it was the understanding of

both petitioner and Gerrish that by the transfer of De-

cember 1, 19438, petitioner parted permanently with all

interest in the 300 shares at that time. Thus, after the

sale of December 13, 1943, petitioner no longer retained

any beneficial stock interest whatever. His situation was

wholly different from Boyle’s. He sold all of his stock.

The transaction was not the equivalent of the distribution

of a taxable dividend as to him. We conclude that, on

the facts of this case, section 115 (g) has no application

to petitioner.

Decision will be otored under Rule 50.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.