Estate of Byrd v. CIR

• Decision Date: 26 March 1968
• Docket Number: No. 24135.,24135.
• Citation: 388 F.2d 223
• Parties: ESTATE of Otis E. BYRD, Jimmie Lou Byrd, Administratrix, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

388 F.2d 223 (1967) ESTATE of Otis E. BYRD, Jimmie Lou Byrd, Administratrix, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 24135.

United States Court of Appeals Fifth Circuit.

December 28, 1967.

Rehearing Denied March 26, 1968.

Macbeth Wagnon, Jr., Lee C. Bradley, Jr., Birmingham, Ala., for petitioner.

Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, Harry Marselli, David O. Walter, Robert M. Willan, Grant W. Wiprud, Stuart A. Smith, Attys., Dept. of Justice, Lester R. Uretz, Chief Counsel, I.R.S., Christopher J. Ray, Atty., I.R.S., Washington, D. C., for respondent.

Before BROWN, Chief Judge, AINSWORTH, Circuit Judge, and SUTTLE, District Judge.

Rehearing En Banc Denied March 26, 1968.

JOHN R. BROWN, Chief Judge:

This appeal presents a novel question in the field of income taxation. The question is whether, for purposes of a stock redemption that will qualify for exchange treatment under § 303,¹ 26 U. S.C.A. § 303, Taxpayer² can include not only stock owned directly by him in the redeeming corporations but also the value of stock owned indirectly by him through another corporation which owns shares in the redeeming corporations. Belatedly asserted in the Tax Court is the further contention that the redemption qualifies for exchange treatment under § 302³ as "not essentially equivalent to a dividend." The Tax Court, upholding the Commissioner, determined that the redemptions were taxable as dividends. We affirm. Proving again the sometimes weird tax world results, Tandy Leather Co. v. United States, 5 Cir., 1965, 347 F.2d 693, 695 (concurring opinion), in the first the taxpayer is denied the benefit of attribution, cf. Phinney v. Tuboscope Co., 5 Cir., 1959, 268 F.2d 233, while in the second the Government gets it.

The facts, fully stipulated, can be quickly presented with the aid of a schedule⁴ in which bracketed numbers 1 2, etc. have been inserted for ease of reference. Otis Byrd died in 1957 owning substantial and controlling interests, directly (4, 5, 6,) and indirectly (7, 8), in four corporations. The assets of one corporation, Peoples Savings, consisted primarily (but not exclusively) of stock in the other three corporations — Alabama Banking, Hub City, and Rock Finance (see 7, 8). The decedent owned 88.9% of the stock in Peoples Savings. In valuing the decedent's gross estate,⁵ there was included not only the value of the stock owned directly by the decedent in the redeeming corporations, but also the value of decedent's stock ownership of 88.9% of Peoples Savings.

In 1959, a part of the stock owned directly by the decedent in three of the corporations — Alabama Banking, Hub City, and Rock Finance — was redeemed for $88,900 12, the same amount for which it was valued for estate purposes. The redemption was for the purpose of providing funds with which to discharge certain estate expenses⁶ in excess of $100,000.

In the estate's income tax return for the taxable year ending December 31, 1959, Taxpayer treated the proceeds of the redemptions as distributions in full payment in exchange for the stock redeemed under § 303, "Redemptions to Pay Death Taxes." The Commissioner disagreed, and assessed a deficiency on the ground that the redemptions failed to qualify for exchange treatment under either § 302 or § 303⁷ and that therefore the proceeds were to be treated as dividends under § 301. Confining its consideration to taxpayer's § 303 contentions in the petition⁸ the Tax Court agreed. Byrd v. Commissioner, 46 T.C. 25 (1966). By motion for reconsideration and motions to amend the petition and reopen the record, Taxpayer sought to raise the § 302 contention that the distributions were "not essentially equivalent to a dividend," but after a hearing, these motions were denied.

I.

The only issue initially presented to and determined by the Tax Court (see note 7 supra) was whether the distributions received by the estate on the redemption of stock qualified under § 303 for treatment as distributions in exchange for the stock, or failing that, under § 301 as dividends. This in turn, depends upon whether for purposes of satisfying the 75% requirement of § 303 (b) (2) (B), and therefore the 35% or 50% requirements of § 303(b) (2) (A) (see note 1 supra) Taxpayer can include not only the value of the stock directly owned by the decedent in the redeeming corporation (which concededly he can) but also the value of the stock indirectly owned by the decedent in the redeeming corporations through his ownership of Peoples Savings. The Government agrees that if Taxpayer can include the value of the stock indirectly owned in the redeeming corporations, then the percentage requirements of § 303 will be met and the distributions would qualify for exchange treatment.

In support of its contention that the indirectly owned stock may be taken into account, Taxpayer asserts two basic arguments. First, Taxpayer urges that under the constructive ownership rules of § 318, the stock owned by Peoples Savings in the redeeming corporations was attributed to decedent to the extent of his proportionate ownership in Peoples Savings. Such ownership, if attributable is more than sufficient (see schedule 11 and note 5 supra) to satisfy the percentage requirements of § 303. Second, relying on the wording of § 303 (b) (2) (B), Taxpayer urges that even though owned by Peoples Savings, the stock of the redeeming corporations literally was "included in determining the value of the decedent's gross estate * * *." This is so because decedents' 88.9% ownership of Peoples Savings was determined solely by reference to the value of the underlying assets — the stock owned by it in the redeeming corporations.

a. Constructive Ownership Under § 318

On this appeal, Taxpayer relies primarily on the applicability to § 303 of the constructive ownership rules of § 318, 26 U.S.C.A. § 318.⁹ Although § 318 is not expressly or by cross-reference¹⁰ made applicable to § 303, Taxpayer strenuously argues that this was neither legislative oversight nor an expression of Congressional intent that the attribution rules should not apply. Quite the contrary, it urges that such provision was deemed unnecessary by Congress, indeed its inclusion would have been superfluous. This is so from an analysis of the statutory scheme. Thus, the argument runs, the statutory provision that levies the tax, § 302(d), has certain exceptions, some of them found in § 302 (b), but also including § 303. The attribution rules of § 318 are expressly and by cross-reference made applicable to § 302 through § 302(c). Consequently, the same rules — i. e., the attribution rules — which are applied in fixing the scope of the levy must also be applied in ascertaining the scope of all exceptions to the levy, which includes § 303.

A careful examination, not only of the wording of the provisions in question but more important of their legislative history, convinces us that Taxpayer's argument that § 318 attribution should apply under § 303(b) (2) (B) cannot prevail. The legislative revisions of the 1954 Code sections relating to "corporate distributions and adjustments" represented a "complete structural overhaul" of existing law.¹¹ In these revisions, Congress sought not only to clarify existing law, but also to liberalize provisions for tax relief where warranted while at the same time precluding some then-existing methods of tax avoidance. These objectives find expression in the provisions here in question. As a tax relief provision, § 303 was first added to the Code by the Revenue Act of 1950. For estates which consisted primarily of stock in a closely held business, its purpose was to enable the estate to discharge certain obligations without having to dispose of the family interest in the business. But Congress was explicit that "the circumstances under which such relief is available are narrowly defined and will restrict relief to situations in which true hardship exists."¹² In considering the revisions of the 1954 Code, Congress held the view that the existing provision was inadequate and that further liberalization was needed.¹³ One of the changes¹⁴ made, therefore, was to add a provision, now § 303(b) (2) (B), which would allow stock of two or more corporations to be redeemed if more than 75 percent¹⁵ in value of the outstanding stock of each corporation was included in the decedent's gross estate. Taxpayer argues that this expressed legislative purpose and these liberalizing changes require the conclusion that Congress did intend the constructive ownership rules of § 318 to apply in the present factual situation in order to provide relief.

In the enactment of § 318, however, Congress had in mind an objective different from that of § 303. Section 318, making its first appearance in the 1954 Code insofar as corporate redemptions and distributions were concerned,¹⁶ was enacted primarily as a device to prevent tax avoidance. In 318, Congress sought to articulate, with precision (see note 16 supra), the circumstances in which ownership of stock by one person, trust, corporation, etc., would for the purpose of the provisions to which § 318 was "expressly made applicable" be attributed to another person. This selective applicability was accomplished in subsection (b) where the sections to which the rules of constructive ownership would apply were specifically set out. While there are cross-references in § 318 to §§ 302 and 304, there is none to § 303. Moreover, in those sections to which it is made applicable,¹⁷ there is specific provision that the terms of § 318 shall apply. Again, there is none in § 303.

Taxpayer goes too far in characterizing the relief afforded by § 303 as an "exception" to the levy provision of § 302 (d). This fails to recognize that § 303 is a self-contained, independent provision of the Code contemplating relief in a specified, narrow situation which if satisfied, removes the transaction from the dividend consequences of § 301. The...