Rushing v. CIR, 30151.

• Citation: 441 F.2d 593
• Decision Date: 19 April 1971
• Docket Number: No. 30151.,30151.
• Parties: W. B. RUSHING et al., Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

441 F.2d 593 (1971)

W. B. RUSHING et al., Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

No. 30151.

United States Court of Appeals, Fifth Circuit.

April 19, 1971.

Johnnie M. Walters, Asst. Atty. Gen., Tax Div., U. S. Dept. of Justice, Meyer Rothwacks, Harry Baum, Attys., K. Martin Worthy, Chief Counsel, I. R. S., Leonard J. Henzke, Jr., Atty., Dept. of Justice, Tax Div., Washington, D. C., for respondent-appellant.

Edward R. Smith, Smith & Baker, Lubbock, Tex., for petitioners-appellees.

Before GOLDBERG and DYER, Circuit Judges, and GROOMS, District Judge.

GOLDBERG, Circuit Judge.

Here we exhume a transaction which in the government's post mortem analysis imposes a different tax consequence than that asserted by the taxpayers.

The taxpayers, W. B. Rushing and Max Tidmore,¹ each owned 50 percent of the stock in two corporations. In 1962 the taxpayers as directors voted to adopt a plan of liquidation for both corporations in accordance with the provisions of Internal Revenue Code § 337.² Shortly after the decision to liquidate, substantially all of the assets of both corporations were sold. Immediately before the end of the statutory twelve month period allowed for liquidation under § 337 both taxpayers created irrevocable trusts for each of their children and sold their stock in the two corporations to these trusts. The trustee, Lubbock Citizens National Bank, purchased the stock by paying part cash and executing notes for the remainder, payable to the taxpayers over a period of years. These notes were to be secured by the general assets of the trusts.³ In each case the total purchase price payable by the trusts was an amount equal to the anticipated liquidation dividend to be paid on the stock purchased. Shortly thereafter, and still within the twelve month statutory period, the trustee, as sole shareholder of the two corporations, liquidated the corporations and collected the distribution proceeds.

In their tax returns for 1963, the year of liquidation, the taxpayers did not report their gain from the liquidation of the two corporations, but claimed instead that they had sold their stock to the trusts which were to make payments on the installment basis. Accordingly, the taxpayers contended that the gain need be reported only as the payments were received from the trusts in succeeding years under Int.Rev.Code § 453.⁴ The

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Commissioner, refusing to allow taxpayers the benefit of the installment sales section, determined that each taxpayer was taxable in 1963 on his gain of $301,310, representing the difference between the proceeds received in liquidation and his basis in the stock. The Commissioner determined their income tax deficiencies accordingly.

The Tax Court, relying in part on Jacobs v. United States, S.D.Ohio, 1966, 280 F.Supp. 437, aff'd, 6 Cir., 390 F.2d 877, disallowed the Commissioner's deficiency determination, finding that the taxpayers should be allowed to report their gain on the stock on the installment basis.⁵ Agreeing with the determination of the Tax Court, we affirm.

At the outset we feel compelled to state what this case is not about. In the first place, there is no attempt here to change the character of the gain involved and convert what would be ordinary income into capital gain. The gain realized by the taxpayers on the liquidation of the corporations, whether derived through sale on the installment basis to the trust or directly from the liquidation proceeds, would be entitled to capital gains treatment. Secondly, this is not a case where one taxpayer has attempted to shift the gain to a second taxable entity in order to reap the benefits of the second entity's lower tax rate. The price the trusts paid the taxpayers for the stock was the full value of the stock, including the appreciation in value which would be realized upon liquidation. We therefore find the Commissioner's reliance upon the anticipatory assignment of income theory entirely misplaced simply because no income was assigned. The taxpayers, in effect, kept all of the gain realized as a result of the appreciation in value of the stock. The only question is whether they must pay taxes on the entire amount of the gain in the year the corporations were liquidated or whether they may pay taxes on the entire amount over a period of years as the installment payments are received from the trusts. In essence, the determinative question is whether for tax purposes Rushing and Tidmore should be treated as if they constructively received the entire liquidation dividend in the year of liquidation or whether the sale and consequent distribution to the trusts insulates the taxpayers so that for tax purposes they are deemed to receive the payments representing their gain only as they receive the installment payments from the trusts.

This is not the first time that a taxpayer, in order to receive installment sale benefits, has created a third entity between himself and the ultimate source of his profit. See e. g., Griffiths v. Helvering, 1939, 308 U.S. 355, 60 S.Ct. 277, 84 L.Ed. 319; Hindes v. United States, 5 Cir. 1967, 371 F.2d 650; Hindes v. United States, 5 Cir. 1964, 326 F.2d 150; Williams v. United States, 5 Cir. 1955, 219 F.2d 523; Pozzi v. Commissioner of Internal Revenue, 1967, 49 T.C. 119. We think it clear from a reading of these cases that a taxpayer may, if he chooses, reap the tax advantages of the installment sales provision if he actually carries through an installment sale, even though this method was used at his insistence and was designed for the purpose of minimizing his tax. Williams v. United States, supra, 219 F.2d at 527; Pozzi v. Commissioner of Internal Revenue, supra, 49 T.C. at 128. On the other hand, a taxpayer certainly may not receive the benefits of the installment sales provisions if, through his machinations, he achieves in reality the same result as if he had immediately collected the full sales price, or, in our case, the full liquidation proceeds. As we understand the test, in order to receive the installment sale benefits the seller may not directly or indirectly have control over the proceeds or possess the economic benefit therefrom. In Griffiths v. Helvering, supra, the Supreme Court denied installment sale benefits to a seller who arranged for an intermediate corporation which he wholly controlled to collect the full sales price from the buyer and pay it over to him in installments. In Griffiths the Court said:

"We cannot too often reiterate that `taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed — the actual benefit for which the tax is paid.\' Corliss v. Bowers, 281 U.S. 376, 378, 50 S.Ct. 336, 74 L. Ed. 916, 917. And it makes no difference that such `command\' may be exercised through specific retention of legal title or the creation of a new equitable but controlled interest, or the maintenance of effective benefit through the interposition of a subservient agency. Cf. Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596, 97 A.L.R. 1355." 308 U.S. at 357, 60 S.Ct. at 278.

Applying these principles to the instant case, we find that the taxpayers here are entitled to the benefits of the installment sale provision. The sale to the trusts deprived the taxpayers of the immediate right to realization of the liquidation dividends. An autonomous entity controlled the proceeds, and no right of recapture inured to the benefit of the taxpayers. The Tax Court found, and we think the evidence supports the finding, that the trustee was independent of the taxpayers' control.⁶ Thus the intervening third party, the trustee, was neither a puppet nor an economic serf. The taxpayers retained no effective benefit or control over the liquidation dividend. Absent the possibility of control or recapture, the alienation of the stock cannot be hyphenated for tax purposes by merely labeling the transaction an assignment of income or constructive receipt. Here there was no possibility of recapture or control. The trustee was no alter ego of the taxpayers; it had independent duties and responsibilities to persons other than the taxpayers. The taxpayers' only effective means of obtaining the benefit of the liquidation proceeds was under the contract of sale with the trust a contract which provided for payments to be made on the installment basis. The taxpayers therefore are entitled to report their gain as it is received by them.

For the foregoing reasons the decision of the Tax Court is affirmed.

1 The wives of the taxpayers are parties to this suit only because joint returns were filed for the year in question.

2 Int.Rev.Code § 337 provides:

§ 337. Gain or loss on sales or exchanges in connection with certain liquidations

(a) General rule. — If —

(1) a corporation adopts a plan of complete liquidation on or after June 22, 1954, and

(2) within the 12-month period beginning on the date of the adoption of such plan, all of the assets of the corporation are distributed in complete liquidation, less assets retained to meet claims,

then no gain or loss shall be recognized to such corporation from the sale or exchange by it of property within such 12-month period.

(b) Property defined. —

(1) In general. — For purposes of subsection (a), the term "property" does not include —

(A) stock in trade of the corporation, or other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year, and property held by the corporation primarily for sale to customers in the ordinary course of its trade or business,

(B) installment obligations acquired in respect of the sale or exchange (without regard to whether such sale or exchange occurred before, on, or after the date of the adoption of the plan referred to in subsection (a)) of stock in trade or other property described in subparagraph (A) of this...