Casner v. CIR
| Decision Date | 09 November 1971 |
| Docket Number | No. 29290.,29290. |
| Citation | 450 F.2d 379 |
| Parties | J. E. CASNER and Una Casner et al., Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Fifth Circuit |
COPYRIGHT MATERIAL OMITTED
Towner Leeper, El Paso, Tex., for petitioners-appellants.
Johnnie M. Walters, Asst. Atty. Gen., Ann E. Belanger, Atty., Tax Div., U. S. Dept. of Justice, K. Martin Worthy, Chief Counsel, Daniel J. Boyer, Atty., Internal Revenue Service, Lee A. Jackson, Atty., Tax Div., William A. Friedlander, Robert I. Waxman, Attys., U. S. Dept. of Justice, Washington, D. C., for respondent-appellee.
Before COLEMAN, INGRAHAM, and WILKEY,* Circuit Judges.
In this case we must decide the tax consequences of a set of involved transactions which took place among the shareholders of two incorporated automobile dealerships in Texas.
Relative to the cash distributions from the paid-in capital surplus accounts of "Alpine" and "Marfa" made to the selling stockholders, J. E. Casner and B. R. Slight, we hold that such cash distributions to the selling stockholders constituted in fact a part of the purchase price paid to them for their stock and therefore were properly subject to taxation under the capital gain provisions of the Internal Revenue Code of 1954. Such cash distributions to the selling stockholders did not constitute taxable dividends to the selling stockholders under the mandates of §§ 61(a) (7) and 316(a) of the Internal Revenue Code of 1954. As to the appellants, J. E. Casner and B. R. Slight, the decision of the Tax Court is reversed.
Having found that the cash distributions to the selling stockholders did not constitute taxable dividends, we hold that the cash distributions to the selling stockholders constituted taxable dividends to the buying stockholders under the statutory mandates of §§ 61(a) (7) and 316(a) of the Internal Revenue Code of 1954 in proportion to their stock purchases.
Relative to the cash distributions from the paid-in capital surplus accounts of "Alpine" and "Marfa" made directly to the buying shareholders and thereafter paid by the buying shareholders to the selling shareholders, such cash distributions did result in taxable dividends under the mandates of §§ 61(a) (7) and 316(a) of the Internal Revenue Code of 1954. As to the appellants, Forrest Walker and J. D. Holman, the decision of the Tax Court is affirmed.
Despite the difficulty of it, we first undertake a clear exposition of the facts. There is no dispute about what was done. The controversy is over the consequences.
Taxpayers, J. E. Casner and Una J. Casner; B. R. Slight and Winifred Slight; Forrest Walker and Geraldine Walker; and J. D. Holman and Una Holman are married couples who, at the time their petitions in these cases were filed, resided in Alpine, Texas. Each couple filed a joint federal income tax return for the calendar year 1964 with the District Director of Internal Revenue at Austin.
Casner Motor Company of Alpine, Texas, Inc., is a Texas corporation with its principal place of business in Alpine, Texas. This corporation will hereinafter be referred to only as "Alpine". Casner Motor Company of Marfa, Texas, Inc., is a Texas corporation with its principal place of business in Marfa, Texas. This corporation will hereinafter be referred to only as "Marfa".
In January, 1957, J. E. Casner, B. R. Slight, Forrest Walker, and J. D. Holman formed "Alpine". They transferred to "Alpine" assets from their previously existing partnership having a book value of $168,580.99 and liabilities of $11,910.57. "Alpine" issued $100,000 of $10 par value common stock and credited a paid-in surplus of $56,670.42. The stock was issued as follows:
Stockholder No. of Shares
Casner 4,177
Holman 2,500
Slight 823
Walker 2,500
________
Total 10,000
In January, 1957, J. E. Casner, Jack Edwards, H. F. Darr, and L. E. Howard formed "Marfa". They transferred to "Marfa" assets having a book value of $139,516.20, and liabilities of $36,082.73. "Marfa" issued $100,000 of $10 par value common stock and credited a paid-in surplus of $3,433.47. The stock was issued as follows:
Stockholder No. of Shares
Casner 6,750
Edwards 2,500
Darr 750
Howard None
________
Total 10,000
On February 5 and 6, 1960, the stockholders of "Marfa" and "Alpine" executed mutual consent agreements in regard to their stock. The agreements provided that upon the death of a stockholder the issuing corporation would be presented the decedent's stock and would pay therefor the value of the stock in a sum not less than book value. It was further provided that no living shareholder would sell or otherwise dispose of his stock to anyone other than another shareholder and that if a living shareholder should desire to sell his stock, the corporation would have the right to purchase at not less than corporate book value.
Also on February 5, 1960, Casner transferred to Forrest Walker 833 shares of "Alpine" stock.
On April 1, 1961, Casner, Holman, Walker, and Slight, the stockholders of "Alpine", transferred to "Alpine" additional assets having a book value of $15,032.81. "Alpine" issued $9,680 of $10 par value common stock and credited a paid-in surplus of $5,352.81. The stock was issued as follows:
Stockholder No. of Shares
Casner 387
Holman 242
Walker 242
Slight 97
_____
Total 968
Between 1957 and 1963 Casner sold 600 shares of "Marfa" stock to L. E. Howard and gratuitously transferred two shares to J. D. Holman, his son-in-law.
Since their corporate formation, "Alpine" and "Marfa" have been operating as retail dealers of automobiles and trucks. They operate under "Dealer Selling Agreements" with the Chevrolet Division of General Motors and their product line includes all of General Motors' automotive and trucking line.
In 1963, Mr. Casner was 75 years old. During that year R. P. Paulk, zone manager of Chevrolet, asked Casner whether he had any plans to retire. Paulk had been instructed by General Motors to contact all dealers in his area over 65 and urge them to sell their shares of stock and retire.
By early 1964, Casner was becoming inactive in his automobile dealerships. Forrest Walker and Jack Edwards had assumed over-all responsibility for the operations of "Alpine" and "Marfa", respectively.
When Jack Edwards died on March 2, 1964, Casner wrote Chevrolet to request an extension of time to buy Jack Edwards' stock in "Marfa". Casner's request was granted. Thereafter, Casner purchased Edwards' "Marfa" stock at book value as of January 1, 1964, which included surplus, for $32,586.28.
However, the death of Edwards gave Chevrolet, acting through their new zone manager, O. E. Alexander, Jr., another opportunity to encourage Casner to dispose of his stockholdings in both "Alpine" and "Marfa". During March, 1964, Walker and Casner met twice with Alexander in El Paso, Texas. At the second meeting, Casner agreed to dispose of his stock. At the same meeting. Casner requested that his son-in-law, Holman, be designated as the dealer at "Marfa". Chevrolet refused to appoint anyone other than Herb Harlow, who had been sales manager of "Alpine". However, Walker's request to bring Kenneth Stucke into the "Alpine" dealership was granted. Since Slight had also become inactive in the management of "Alpine," he also agreed to sell his stock in that corporation.
The dealership agreements of General Motors require individuals in whose name dealership agreements are executed to own a substantial percentage of the corporate stock. For that reason, and because Forrest Walker had already assumed responsibility for "Alpine", Chevrolet was agreeable to Walker acquiring a greater percentage of stock in "Alpine".
When Casner agreed to sell his stock, he stated that he wanted to receive as much cash as possible from the sale. It was anticipated, however, that the purchasers would not have sufficient cash to purchase Casner's shares of "Marfa" and "Alpine" at their current book values. Thereupon, Alexander, the Chevrolet zone manager, recommended to Casner that "Marfa" and "Alpine" distribute some of their cash. This would reduce the book values of the shares which Casner and Slight were preparing to sell and would also get cash into the hands of the other shareholders for the purchase of the Slight and Casner stock.
Following the two meetings between Alexander, Walker, and Casner, it was decided that a certified public accountant (CPA) should compute the book values of "Alpine" and "Marfa" stock, as of March 31, 1964. The CPA was told that Slight would sell all of his shares and Casner would sell some of his to new shareholders, Herb Harlow and Kenneth Stucke. Casner would then sell his remaining shares to existing shareholders, Holman and Walker.
The shareholders of "Marfa" held a special meeting on March 26, 1964. The minutes of the meeting stated in part:
Mr. J. E. Casner, President and Acting Chairman of the meeting, stated that he was desirous of retiring from active management in the corporation and that in order to do so, he wanted to sell his stock and that in the name of Mrs. Casner to the other stockholders in accordance with the Mutual Consent Agreement dated February 5, 1960, and in order to reduce the value of the stock he suggested that the paid-in capital surplus account of the corporation, in the amount of $3,433.47 be distributed to the present stockholders.
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