Crown Iron Works Co. v. Commissioner of Internal Rev., 15709.

• Decision Date: 24 June 1957
• Docket Number: No. 15709.,15709.
• Citation: 245 F.2d 357
• Parties: CROWN IRON WORKS COMPANY, a corporation, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Eighth Circuit

245 F.2d 357 (1957)

CROWN IRON WORKS COMPANY, a corporation, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 15709.

United States Court of Appeals Eighth Circuit.

June 24, 1957.

O. A. Brecke, St. Paul, Minn., for petitioner.

Harry Marselli, Attorney, Department of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., and Robert N. Anderson and Charles B. E. Freeman, Attorneys, Department of Justice, Washington, D. C., on the brief), for respondent.

Before SANBORN, WOODROUGH and JOHNSEN, Circuit Judges.

SANBORN, Circuit Judge.

The Tax Court on August 29, 1956, in a decision not officially reported, sustained a determination of the Commissioner of Internal Revenue that there were deficiencies in the income tax of the petitioner, Crown Iron Works Company, for the years 1949 and 1950, of $927.56 and $5,025.31 respectively. The petitioner asks this Court to review and reverse the Tax Court's decision.

The nature of the controversy and the question for review are stated with clarity and brevity in the petition as follows:

"On December 30, 1944, Crown Iron Works Company entered into an agreement with Barney G. Johnson and members of his immediate family, whereby the Company agreed to purchase all of the outstanding common stock then owned by the Johnson family. This stock was paid for partly in cash and partly by the issuance of a class of so-called preferred stock, created for that purpose and redeemable in installments over a period of fifteen (15) years. The Petitioner deducted in its income tax returns the so-called dividends paid on this stock, as interest. The Respondent claims such payments were purely dividends and not deductible. The Tax Court of the United States has held that these payments were, in fact, dividends and not interest, and the sole question arising on this appeal involves the character of such payments, whether in the nature of interest or dividends."

Actually the question for this Court to decide is not whether the payments involved were interest on indebtedness within the meaning of § 23(b), Internal Revenue Code of 1939, 26 U.S. C.A. § 23(b), and deductible, or were dividends on preferred stock and nondeductible, but whether the determination of the tax Court that the payments were dividends, and not interest, was clearly wrong.

The petitioner, in effect, asserts that the preferred stock issued to the Johnsons in connection with the purchase by petitioner of the common stock owned by them was, under the facts stipulated and the evidence adduced before the Tax Court, conclusively shown to have been issued "merely as security for the payment of the balance of the purchase price for the common stock sold by the Johnson family" to petitioner.

The contract for the purchase of the Johnson common stock was entered into January 2, 1945. It provided that $123,500 should be paid for it by petitioner as follows:

"The sum of $38,500.00 in cash to be paid on or before February 15, 1945, at your election, and the balance of $85,000.00 by the issuance to you of 850 shares of the new Class A Preferred Stock of the Crown Iron Works Company provided for in the amendment to its Articles of Incorporation approved by the Directors at their meeting of December 30, 1944, a copy of such amendment being hereto attached and made a part of this agreement. The Company further agrees that it will pay you interest at the rate of five per cent per annum on the sum of $85,000.00 from January 2, 1945, to the date of issue of said preferred shares."

Pursuant to this agreement, the petitioner amended its Charter to provide for the preferred stock. The amendment was approved by its stockholders on January 16, 1945. The purchase of the Johnson common stock was finally consummated on February 8, 1945. The Johnsons were paid $38,500 in cash, and 850 shares of preferred stock were issued to them.

The minutes of the meeting of the petitioner's stockholders held January 16, 1945, contain the following:

"The Chairman then explained to the stockholders that it was the intention of the Board of Directors to issue $85,000.00 par value of the new preferred stock to B. G. Johnson and family in exchange for Class B stock held by him and the members of his family on the basis of $11.75 per share for such Class B stock and to pay in cash for any additional stock owned by Mr. Johnson and his immediate family over and above the amount acquired in exchange for preferred stock, all Class B stock so acquired to be retired and cancelled. After a further discussion of this action, Mr. Smith moved the adoption of the following resolution:

"Resolved that the shareholders of Crown Iron Works Company approve the action of the Board of Directors in acquiring the Class B stock owned by Barney G. Johnson and the members of his immediate family on the basis of $11.75 per share and the payment therefor by the issuance of $85,000.00 in par value of the new preferred stock and the payment of the additional purchase price in cash, said Class B stock so acquired to be retired and cancelled.

"This motion was duly seconded by Mr. Austin and adopted by the unanimous vote of all of the shareholders present."

Nothing appears in the minutes to indicate that the petitioner was intending to pledge this stock as security for the payment of a debt.

In its brief...