Hall v. Commissioner
| Decision Date | 16 March 1983 |
| Docket Number | Docket No. 10769-80,14642-80. |
| Parties | John A. Hall and Barbara P. Hall v. Commissioner. Estate of Robert T. Smith, Deceased, Colonial American National Bank, Executor, and Marion W. Smith, Surviving Spouse v. Commissioner. |
| Court | U.S. Tax Court |
Johnson Kanady III, Gerald A. Dechow, and Joseph L. Anthony, P.O. Box 13606, Roanoke, Va., for the petitioners in docket No. 10769-80. Robert C. Elliot, Jr. (Trust Officer of Colonial American National Bank, Executor) and Marion W. Smith, pro se, for the petitioners in docket No. 14642-80. Richard F. Stein, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in Federal income taxes of petitioners for the taxable year 1977 in the following amounts:
Docket No. Petitioner Deficiency
10769-80 John A. Hall and $7,615
Barbara P. Hall
14642-80 Estate of Robert T. 980
Smith, Deceased
Colonial American
National Bank
Executor, and
Marion W. Smith
Surviving Spouse
These cases were consolidated for trial, briefing, and opinion.
The principal issue we must decide is whether a series of transactions on May 4, 1977, by which petitioner John A. Hall sold 30 shares of common stock of John A. Hall & Company, Inc., to Robert T. Smith or Marion W. Smith and by which John A. Hall & Company, Inc., redeemed 30 shares of Marion W. Smith's common stock was in substance a redemption of John A. Hall's stock taxable to him as a dividend. A related question, which the parties apparently agree will be resolved by our decision on the primary issue, is whether petitioner Marion W. Smith realized a long-term capital gain when John A. Hall & Company, Inc., redeemed the 30 shares of her stock.1
Some of the facts in these cases were stipulated. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.
Petitioners John A. Hall (hereinafter Hall) and Barbara P. Hall, husband and wife, filed a joint Federal income tax return for the taxable year 1977 with the Internal Revenue Service Center at Memphis, Tennessee. At the time the petition in docket No. 10769-80 was filed, they resided in Roanoke, Virginia.
Petitioner Colonial American National Bank is the executor of the Estate of Robert T. Smith, deceased. Petitioner Marion W. Smith is the surviving spouse of Robert T. Smith. At the time the petition in docket No. 14642-80 was filed, she resided in Roanoke, Virginia. Robert T. Smith (hereinafter Smith) and Marion W. Smith (hereinafter Marion) filed a joint income tax return for the year 1977 with the District Director of Internal Revenue, Richmond, Virginia.
John A. Hall & Company, Inc. (hereinafter the corporation), a Virginia corporation, is engaged in the paving, grading and drainage construction business.
Immediately prior to May 4, 1977, 1,000 shares of common stock of the corporation were outstanding. Of the 1,000 shares, Hall owned 545 shares, Aggregate Haulers, Inc., owned 175 shares, Marion owned 90 shares, Richard L. Smith owned 40 shares, and Thomas R. McDonald owned 100 shares.2 Hall owns all the outstanding stock of Aggregate Haulers, Inc. Richard L. Smith is the son of Mr. and Mrs. Robert T. Smith.
On May 4, 1977, Hall and Smith were the corporation's president and secretary-treasurer, respectively.
Prior to the death of Wiley N. Jackson (hereinafter Jackson) in October 1973, Hall and Jackson each owned 48½ percent of the corporation's stock. After Jackson's death, Hall purchased Jackson's interest in the corporation from his estate pursuant to a buy-sell agreement. The purchase price of approximately $190,000 plus interest was to be paid in four equal installments. The first installment was due within 90 days after Jackson's death. Thereafter, annual payments of 25 percent of the purchase price were required. In 1976, Hall borrowed approximately $145,000 from the First National Exchange Bank (FNEB) in Roanoke, so as to discharge his indebtedness to Jackson's estate and an income tax liability he owed. The terms of the loan from FNEB required Hall to make monthly principal payments of $1,500, plus interest at the rate of 1 percent above the prime interest rate on the unpaid principal.
In the winter of 1977, Hall decided it would be prudent to reduce the principal amount of his indebtedness to FNEB, so as to decrease the amount of interest payable to FNEB monthly. In March or April of 1977, Hall explained his financial situation to Smith and McDonald and discussed with Smith and McDonald the possibility of each purchasing an equal amount of stock in the corporation from him. Smith and McDonald each agreed to purchase 30 shares of stock from Hall.
Consequently, on May 4, 1977, Hall transferred 30 of his shares of stock in the corporation to Smith or Marion for $18,000.3
Also on May 4, 1977, the corporation redeemed 30 shares of its stock from Marion for $18,000. The proceeds from the redemption were deposited to a joint checking account that Mr. and Mrs. Smith maintained at Colonial American National Bank (hereinafter Colonial American). The payment for $18,000 to Hall for his 30 shares in the corporation was made by a check, numbered 1892, drawn on the same account.
During May 1977 Marion maintained her own savings account at Colonial American. Smith and Marion maintained no bank account other than the joint checking account and Marion's saving account at Colonial American. Aside from the redemption proceeds of $18,000 deposited to Smith and Marion's joint checking account, from April 28, 1977, to May 23, 1977, the balance of the account ranged from a low of $573.57 to a high of $1,123.90. The balance in Marion's saving account in May 1977 was $11,425. Thus, without the redemption proceeds, Smith and Marion had insufficient cash available to purchase 30 shares of stock from Hall for $18,000.
In addition to the accounts described above, during 1977 Smith and/or Marion had funds invested in a certificate of deposit with Colonial American. Mr. and Mrs. Smith received dividends in 1977 from stock of Ashland Oil and Refinery, which was held by a trust created by the Smiths.4 Such dividends were deposited to the Smiths' joint checking account and, perhaps, also to Marion's savings account.
Smith first discussed the redemption of Marion's shares with Marion on May 4, 1977, the day of the redemption. The Smiths agreed to the redemption of Marion's shares and subsequent purchase of Hall's shares by Smith or Marion solely to help Hall financially.
Following the redemption of Marion's stock and the sale of Hall's stock to Smith or Marion, 970 shares of common stock of the corporation were outstanding. Of the 970 shares, Hall owned 515 shares, Aggregate Haulers, Inc., owned 175 shares, Marion owned 60 shares, Richard L. Smith owned 40 shares, and Smith or Marion owned 30 shares.
In the notice of deficiency issued to the Halls on June 11, 1980, respondent determined that the series of stock transactions between Hall and Mr. and Mrs. Smith involving the corporation's stock "constitute a constructive redemption of 30 shares of stock from Hall by his controlled corporation, Further, this constructive redemption is essentially equivalent to a dividend * * *."
In the notice of deficiency mailed to the the other petitioners, respondent determined that they had "realized a long-term capital gain of $6,739.00 from the sale of 30 shares of common stock of the corporation."
OpinionThe disposition of this case depends upon the tax consequences of two transactions that took place on May 4, 1977: the corporation's redemption of 30 shares of Marion for $18,000 and Hall's sale of 30 of his shares in the corporation to Marion or Smith for $18,000.
Having taken inconsistent positions in the determined deficiencies in these consolidated cases, respondent is essentially a stakeholder and is primarily concerned that the transactions in question be uniformly treated for tax purposes by both parties. On brief, however, he urges that the redemption and sale were integral parts of a single transaction, which constituted a "constructive" redemption of 30 shares of Hall's stock by the corporation. He further argues that such constructive redemption is essentially equivalent to a dividend under section 302(b)(1).5 Hall, on the other hand, contends that his sale of stock to Smith or Marion was independent from the redemption and that, accordingly, the profit from the sale of his 30 shares is long-term capital gain from the sale or exchange of a capital asset. Hall alternatively contends that assuming, for the sake of argument, the transactions in question constitute a constructive redemption of his stock, such constructive redemption was not essentially equivalent to a dividend and therefore, is not taxable to him as a dividend.
In the alternative respondent argues that we should find that the redemption of Marion's 30 shares of stock resulted in long-term capital gain taxable to the petitioners in docket No. 14642-80, if we find that the stock transactions of May 4, 1977, do not constitute a constructive redemption of 30 shares of stock from Hall.
It is well settled that the "incidence of taxation depends upon the substance of a transaction" rather than its mere form. Commissioner v. Court Holding Co. 45-1 USTC ¶ 9215, 324 U.S. 331, 334 (1945); Minnesota Tea Co.v. Helvering 38-1 USTC ¶ 9050, 302 U.S. 609 (1938); Yamamoto v. Commissioner Dec. 36,797, 73 T.C. 946 (1980), affd. in unpub. opinion 672 F. 2d 924 (9th Cir. 1982). Courts have frequently treated separate steps as part of a single transaction so as to elevate substance over form. See e.g., Helvering v. Alabama Asphaltic Limestone Co. 42-1 USTC ¶ 9245, 315 U.S. 179 (1942); Kuper v. Commissioner 76-1 USTC ¶ 9467, 533 F. 2d...
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