Dahlgren v. U.S.

• Decision Date: 03 June 1977
• Docket Number: No. 75-3263,75-3263
• Citation: Dahlgren v. U.S., 553 F.2d 434 (5th Cir. 1977)
• Parties: 77-1 USTC P 9457 Harold P. DAHLGREN et al., Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 434

553 F.2d 434

77-1 USTC P 9457

Harold P. DAHLGREN et al., Plaintiffs-Appellees, v.UNITED STATES of America, Defendant-Appellant.

No. 75-3263.

United States Court of Appeals Fifth Circuit.

June 3, 1977.

Rehearing Denied Aug. 12, 1977.

See 557 F.2d 456.

Frank D. McCown, U. S. Atty., Ft. Worth, Tex., Scott P. Crampton, Asst. Atty. Gen., Wm. A. Friedlander, Murray S. Horwitz, Attys., Gilbert E. Andrews, Chief, Appellate Sec. Tax Div., U. S. Dept. of Justice, Washington, D. C., Martha Joe Stroud, Asst. U. S. Atty., Dallas, Tex., for defendant-appellant.

John L. Hauer, Robert Goodfriend, Clarice M. Davis, Dallas, Tex., for plaintiffs-appellees.

Appeal from the United States District Court for the Northern District of Texas.

Before TUTTLE, WISDOM and COLEMAN, Circuit Judges.

TUTTLE, Circuit Judge:

The issue before the jury in this income tax refund suit was whether ownership by taxpayer of 79.975% of the capital stock of the company to which he made a sale of depreciable property was ownership of "more than 80 percent in value of the outstanding stock . . . ."(emphasis added) within contemplation of § 1239(a)(1) of the Internal Revenue Code of 1954.¹

The jury answered special interrogatories stating that they found from a preponderance of the evidence that "(Dahlgren) did not own more than 80% in value 'of the stock of Dahlgren Manufacturing Company.' "The Commissioner, on appeal, did not contend that this was not a fact issue but places his appeal from the verdict and ensuing judgment on three separate grounds, hereinafter outlined.

I.BACKGROUND FACTS

After engaging extensively in the art of commercial offset lithographic printing, Dahlgren obtained a patent on the "Dahlgren Continuous Duty Dampening System"(CDDS) in 1965.On February 1, 1966, he transferred his 85% interest in that patent to Dahlgren Manufacturing Company, which he had formed in 1959 and which already owned the remaining 15% of the patent.On this date, Dahlgren was the record owner of 79.975% of the stock in this company.The remaining 20.025% of the stock was held in two blocks of approximately 10% each.Prior to this transfer, according to testimony at the trial, a long-time associate, Broun, had an oral agreement with Dahlgren that if he would stay on and work with Dahlgren for an unspecified period he would "own a percentage of that company" and would have a job as long as the company continued to produce.²The trial court also admitted in evidence a state trial court judgment entered in 1970, in which Broun was adjudged to be entitled to 10% of Dahlgren's stock as of February 1, 1964.

The Government's grounds of appeal are: (1)the trial court erred in not charging the jury as requested in several numbered charges to the effect that there is an inherent value attribute in a majority or controlling block of corporate stock which gives it a per share value greater than stock not in such majority block. ³(2) that evidence of the Broun agreement and of the state court judgment was inadmissible because the claim for refund filed by Dahlgren did not contain facts adequately to apprise the Commissioner of Internal Revenue of the "exact basis" . . . "of the ground upon which the. . . refund (was) claimed."(3) finally, the Commissioner attacks the admissibility in evidence of the state court judgment on the ground of relevancy and materiality and, especially, without a limiting instruction that it was not "controlling as to the facts in this case."

II.THE PARKER PRINCIPLE

The Government's first effort to put the trial court in error arose from the refusal of the trial court to give in charge to the jury what we may call the "Parker principle."The substance of the principle is that where it becomes necessary to ascertain whether a stockholding in a closely-held corporation under § 1239(a)(1) amounts to an ownership of "more than 80 percent in value of the outstanding stock", the fact finder must be made aware of a rule of law to the effect that among the ingredients or attributes of value in the making of such a determination is the fact, if it be true, that the stock to be valued represents a majority or controlling stock of the corporation.It is clear that this states a correct rule of law as was announced in United States v. Parker, 376 F.2d 402(5 Cir.1967).

After stating what appeared to this Court to be the purpose for which Congress enacted § 1239, dealing with the sale or exchange to a "controlled corporation or a spouse,"this Court said:

"The issue here, of course, is whether Parker's corporation is sufficiently Parker's slave to justify invocation of § 1239.We have concluded that Parker owned, for purposes of § 1239, exactly 80 per cent of the corporation's outstanding stock.The decisive question now is whether this 80 per cent is, under § 1239, 'more than 80 per cent in value of the outstanding stock.'(Emphasis in original).

. . . § 1239 says 'more than 80 per cent in value.'The words 'in value' in § 1239 must have some meaning.Trotz v. Commissioner of Internal Revenue, 10 Cir.1966, 361 F.2d 927, 930.We cannot indulge in statutory interpretation by excision.Statutory explication may be an art, but it must not be artful.Further, we cannot say that by using 'in value'Congress intended us to consider only the factors of voting power or number of shares.'If the 80% determination is to be (merely) on the basis of the number of shares outstanding, no reason exists for the use of the words 'in value'.'Trotz v. Commissioner of Internal Revenue, supra, 361 F.2d at 930.Or, if number of shares and voting power were the sole indicia, Congress could have limited § 1239 by using terms similar to those which § 351 draws from § 368(c), in an analogous situation within the Code's framework.'In value' is a broader phrase, and we think that it calls for the familiar, though difficult, process of fair market valuation.(footnote omitted).

'The value of property is an underlying factor in a great number of income tax cases, particularly in such areas of the law as those involving the receipt of income, the computation of gain or loss, depreciation and depletion.'10 Mertens, Law of Federal Income Taxation§ 59.01(1964 revision).Value is not a strange or alien concept in tax law, and we have held that 'There is no distinction, for most purposes * * *, in the meaning of fair market value as used in an estate tax case and one involving income tax.'Champion v. Commissioner, 5 Cir.1962, 303 F.2d 887, 892-893.

We next note that in the present case Eaves owned exactly 20 per cent of the outstanding stock, and Parker owned exactly 80 per cent.Therefore, if any fact can be found which shows that the value per share of Parker's stock exceeded by any amount, no matter how small, the value per share of Eaves's, then Parker owned more than 80 per cent in value of the outstanding stock.While it is true that Parker and Eaves owned the same class of stock, Eaves's stock was burdened with impedimenta from which Parker's stock was free.We hold that as a matter of law these impedimenta must have decreased the value per share of Eaves's stock, and as we need only show that this value per share was lower by any indeterminate amount, no matter how miniscule, than the value per share of Parker's stock, we are able to render judgment here without remand.⁸76 F.2d 407-408.

As will be noted, the fact situation in Parker might be considered to be the obverse of the issue of valuation present in this case.In Parker, the taxpayer owned exactly 80% in number of the shares of the corporation, whereas the other stockholder owned his stock subject to an obligation, limiting his power of sale.We held that this automatically reduced the value of the minority holding per share as a matter of law, thus resulting in our holding that the 80% block was worth more than 80% in value.

This Court, further, in the Parker case based its decision equally on the fact that Parker had absolute control of the corporation.We said: "We reiterate that in the present case it is sufficient for the rendering of judgment to note that the restriction on Eaves's stock and its minority qualities combine to have some depressing effect, no matter how small, on its value per share."376 F.2d at 410.(Emphasis added.)

In Trotz v. Commissioner of Internal Revenue, 10th Cir.1966, 361 F.2d 927, the Court of Appeals for the Tenth Circuit, in a case in which the taxpayer owned 79% of the stock, stated that:

"The phrase 'in value' as used in § 1239 must have an intended meaning.If the 80% determination is to be on the basis of the number of shares outstanding, no reason exists for the use of the words 'in value.'

We make no comment on the claim that the taxpayer in fact owned more than 80% in value of the outstanding stock.This presents a factual issue for determination in the first instance by the Tax Court.All we hold is that a numerical count of outstanding shares, in and of itself, does not determine the percentage of value. . . ."361 F.2d 930.

This Court, in its Parker decision, quoted with approval the following commentary dealing with the inherent attribute of control in giving extra value to the shares of a majority block of stock:

" 'Even absent any contemplated change in management, control increases the value of an investment by protecting it.The power to change the management, even while unexercised, protects the investor with control against an abrupt change by someone else and against a gradual deterioration of the incumbent management.Therefore, in a sense, controlling shares are inherently worth more than noncontrolling shares for reasons relating solely to investment value.When control is diffused, the same reasoning establishes, to a lesser degree, that shares enabling their holder to particpate in control are worth more than those that do not.This is the strongest part of any argument against a broad reading of (Perlman v. Feldmann...