Flanagan v. Helvering
Decision Date | 14 October 1940 |
Docket Number | No. 7448.,7448. |
Citation | 116 F.2d 937 |
Parties | FLANAGAN v. HELVERING, Com'r of Internal Revenue. |
Court | U.S. Court of Appeals — District of Columbia Circuit |
John F. Greaney and Frank J. Albus, both of Washington, D. C., for petitioner.
Sewall Key, Sp. Asst. to Atty. Gen., Norman D. Keller and S. Dee Hanson, Department of Justice, and J. P. Wenchel, Chief Counsel, and Irving M. Tullar, Sp. Atty., of the Bureau of Internal Revenue, all of Washington, D. C., for respondent.
Before GRONER, Chief Justice, and EDGERTON and VINSON, Associate Justices.
The question presented by this appeal is whether the Board of Tax Appeals erred in its ultimate determination that moneys received by the McCaffrey estate, in redemption of a part of its stock in F. Archibald, Inc., was "essentially equivalent to the distribution of a taxable dividend".
From a stipulation of facts and the testimony of Michael A. Flanagan, the Board made its findings in narrative form. An excerpt of the relevant facts follows:
* * * * * *"
The Commissioner contends that the $18,400 stock redemption payment to the McCaffrey estate is sufficiently similar to a taxable dividend to fall within § 115(g) of the Revenue Act of 1932.1 The tax was assessed on this basis, plus a 25% penalty for failing to file a return. The estate, through Flanagan its co-executor, argues that the payment does not come under § 115(g), but rather, that the redemption is a partial liquidation which should be treated on a capital gain or loss basis as provided by § 115(c). If so treated, it is argued further, a loss was sustained and, therefore, no tax due. The Board decided in favor of the Commissioner.
In 1933, Mr. Flanagan, as co-executor of the McCaffrey estate, found that he needed $18,400 to take care of debts and administration expenses. The stock redemption plan to raise this money was conceived because of a fear that the heirs would be entitled to a dividend issued in the usual fashion, and hence the estate would be in no better position to pay its debts. The corporation proceeded to redeem 368 shares of stock, paying $18,400 to the McCaffrey estate and a like amount to the Archibald heirs. Thus, the proportionate ownership of the corporation was not altered.
The corporation operated profitably before (as well as since) the redemption. In 1920, $15,310 of earnings were capitalized. In 1926, a stock dividend with a par value of $60,000 was declared. Of the 1300 shares outstanding before the redemption, 753.1 signified corporate profit. Meanwhile, the only cash dividends paid were $13,000 in 1932, and $6,500 in 1933. In the year of the redemption there was an earned surplus of $70,451.49, with current net income of $10,017.20.
Under these circumstances, was the redemption and cancellation of the stock "at such time and in such manner as to make the distribution essentially equivalent to the distribution of a taxable dividend"? To say that the present redemption should be treated as a dividend is in accord with, if not demanded by, the ratio decidendi in Hyman v. Helvering.2 The illustration given in the House, Senate, and Conference Reports,3 set out in that case, shows the applicability of § 115(g) to the instant controversy: Suppose . 4
In determining whether a transaction is equivalent to a taxable dividend under § 115(g), or whether it is a partial liquidation within § 115(c), neither the Board of Tax Appeals nor the courts have laid down a sole decisive test. The phrases "in such manner" and "essentially equivalent" negative any idea that a weighted formula can resolve the one crucial issue — shall the distribution be treated as a taxable dividend.
Most of the judicial criteria that have been determinative in placing a transaction within § 115(g) are presented in the instant case. The major part of the capitalization represented former earnings; only two relatively small cash dividends were paid; the proportional ownership of the shareholders was not changed; the corporation did not manifest any policy of contraction; the initiative for the corporate distribution came from a stockholder who needed cash; it has continued to operate at a profit.5 Absent here is the maintenance of the same capital liability, and there is no finding of a scheme of tax evasion (bad faith), factors sometimes significant.6 But the net effect of the distribution rather than the motives and plans of the taxpayer or his corporation, is the fundamental question in administering § 115(g).
The cases, moreover, for the most part, involve instances where the present surplus was not in excess of the distribution, although previously profits had been capitalized.7 Here, there was an earned surplus of $70,451.49, with current net income of $10,017.20, the distribution amounted to $36,800. For a case like this, the statutory declaration of § 115(b) leaves little, if any, doubt. "For the purposes of this Act chapter every distribution is made out of earnings or profits to the extent...
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