Haserot v. Comm'r of Internal Revenue
| Citation | 46 T.C. 864 |
| Decision Date | 30 September 1966 |
| Docket Number | Docket No. 93774. |
| Parties | HENRY MCK. HASEROT AND BONNIE C. HASEROT, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
John Lansdale, Jr., and Edward J. Hawkins, Jr., for the petitioners.
Gordon B. Cutler, for the respondent.
Petitioner controlled corporations H, N, and G. Petitioner transferred to H all of his N and G stock and received a cash credit of $64,850 plus stock of H worth $48,640. Held on remand, the distribution of $64,850 was essentially equivalent to a dividend.
Respondent determined a deficiency in petitioners'1 1958 Federal income tax of $82,224.86. The principal ground for the deficiency was respondent's claim that cash credited to petitioner, in a transaction involving the transfer of stock for stock and a cash credit, constituted dividend income.
On January 27, 1964, this Court filed its findings of fact and opinion in Henry McK. Haserot, 41 T.C. 562 (1964), holding that the cash credit was capital gain and entered its decision therein under Rule 50 on April 8, 1964.
Respondent appealed the decision to the U.S. Court of Appeals for the Sixth Circuit, which, on November 3, 1965, remanded the case to this Court for a determination as to whether the transaction involved herein was ‘essentially equivalent to a dividend‘ within the meaning of sections 302(b)(1) and 301(a). 2 In its order, Commissioner v. Haserot, 355 F.2d 200 (C.A. 6, 1965), the Court of Appeals stated:
The Tax Court did not determine if the redemption was here equivalent to a dividend * * *
It appears to this Court, upon review, that a determination of the issue of equivalency might indeed be dispositive of the thrust of petitioner's argument on the Section 304 application to the transaction herein and that such a determination should be made. * * * As such, it should be decided initially by the Tax Court.
This matter is hereby remanded to the Tax Court for further proceedings in accordance with the views expressed in this order. (335 F.2d at 201.)
On December 7, 1965, this Court vacated the decision in Henry McK. Haserot, supra. Thereafter, on January 4, 1966, petitioner filed a motion to revive that decision.3
The Findings of Fact in Henry McK. Haserot, supra, are incorporated by reference and are made findings of fact herein.
The $64,850 cash credit received by petitioner in 1958 constituted a distribution essentially equivalent to a dividend.
OPINIONThe critical issue for our present consideration is whether the cash credited to petitioner was essentially equivalent to a dividend within the meaning of sections 302(b)(1) and 301(a). The parties agree that a finding of no dividend equivalency would be dispositive of the case.
The colors of the cloth of dividend equivalency are not completely fast. Indeed, the fabric ‘bleeds,‘ madras-like, to such an extent that the decided cases have been described as a ‘morass' (see Ballenger v. United States, 301 F.2d 192, 196 (C.A. 4, 1962)) and the underlying statutory provisions referred to as ‘exasperatingly complex‘ (see Charles Swan, 42 T.C. 291, 297 (1964), affd. 355 F.2d 795 (C.A. 6, 1966)). Under such circumstances, we believe it would be a sterile exercise to indulge in an analysis of all the factors involved and the weight to be given to each factor.
The legislative history of section 302(b)(1) indicates that it is to be interpreted ‘in general‘ in the same manner as section 115(g) of the Internal Revenue Code of 1939 and that the inquiry is to be ‘factual.‘ S. Rept. No. 1622, 83d Cong., 2d Sess., pp. 233-234 (1954).
There are two main prongs to petitioner's argument that the transaction was not essentially equivalent to a dividend within the meaning of section 302(b) (1).4 He asserts (a) it produced a substantial change of control at the shareholder level and (b) it was motivated by and achieved a corporate business purpose.5
Respondent answers that there was no meaningful shift of stock ownership as a result of the transaction, that there was no valid corporate business purpose for the transaction, and that therefore its net effect was a dividend.
Before the transactions, the ownership of the corporations was as follows:
Northport (4,562 shares): Petitioner, 1,999; Gypsum, 1,312; Company, 1,250; others, 1.
Gypsum (6,582 shares): Petitioner, 4,486; Company, 2,022; others, 74.
Company6 (33,014 shares): Petitioner, 18,895; petitioner's son, 1,023; estate of petitioner's father, 10,293; others, 2,803.
After the transactions, the ownership was as follows:
Northport (4,562 shares): Company, 3,249; Gypsum, 1,312; others, 1.
Gypsum (6,582 shares): Company, 6,508; others, 74.
Company (35,446 shares): Petitioner, 29,188; petitioner's son, 3,455; others, 2,803.
If we look only to the shares registered in petitioner's name, his percentage of control is as follows:
+--------------------------------------+
¦ ¦Northport ¦Gypsum ¦Company ¦
+------+-----------+---------+---------¦
¦ ¦percent ¦percent ¦percent ¦
+------+-----------+---------+---------¦
¦Before¦43.8 ¦68.2 ¦57.2 ¦
+------+-----------+---------+---------¦
¦After ¦0 ¦0 ¦82.3 ¦
+--------------------------------------+
However, the Company owned shares in both Gypsum and Northport. A majority of the issued and outstanding shares of the Company were registered in petitionerS name and he therefore could dictate actions to be taken by Company with respect to its Northport and Gypsum shares. As a result, petitioner had effective control of a majority of the shares of all three corporations, as revealed by the following table:
+--------------------------------------+
¦ ¦Northport ¦Gypsum ¦Company ¦
+------+-----------+---------+---------¦
¦ ¦percent ¦percent ¦percent ¦
+------+-----------+---------+---------¦
¦Before¦99.9 ¦98.9 ¦57.2 ¦
+------+-----------+---------+---------¦
¦After ¦99.9 ¦98.9 ¦82.3 ¦
+--------------------------------------+
Finally, if we apply the attribution rules of section 318,7 the following pattern of petitioner's control appears:
+--------------------------------------+
¦ ¦Company ¦Gypsum ¦Northport ¦
+------+---------+---------+-----------¦
¦ ¦percent ¦percent ¦percent ¦
+------+---------+---------+-----------¦
¦Before¦91.5 ¦96.3 ¦96.6 ¦
+------+---------+---------+-----------¦
¦After ¦92.1 ¦91.1 ¦91.8 ¦
+--------------------------------------+
Parenthetically, we note that petitioner disputes the attribution to him of the shares acquired from his father's estate and the shares issued to his son. He supports his position by the general assertion that ‘This has the anomalous result of using stock acquired with cash to make the cash itself look more like a dividend.’ Additionally, petitioner argues that attributing ownership of Northport and Gypsum to him through his ownership of Company shares after the transaction is ‘unreal.’ In support of his contentions he relies upon Estate of Arthur H. Squier, 35 T.C. 950 (1961), acq. 1961-2 C.B. 5. The opinion in that case did contain some indication that the attribution rules would not be applied inflexibly in determining whether a redemption is essentially equivalent to a dividend. But the Court made clear that it reached the same result even after applying the attribution rules of section 318. See 35 T.C.at 955. Moreover, the Court emphasized that the redemption therein ‘in fact resulted in a crucial reduction of the estate's control over the corporation.’ 8 See 35 T.C.at 955-956. If we look at the reality of control herein, it is obvious that, with or without the application of the attribution rules, petitioner was at all times in a position to dominate all three corporations.
Petitioner further seeks to avoid the impact of his continuing dominant position by asserting that the transaction herein was merely a step in a plan to transfer control of the corporate complex to his son. Whatever may be the merits of this assertion in another context, it has no relevance to the instant case. The only actual change in the formal management occurred in 1960 when petitioner's son became president of the three corporations. Petitioner, in his testimony, adverted to a plan for transferring the shares he owned at his death in such a manner that his son would have majority control. Needless to say, any such plan was at all times subject to change until petitioner died and therefore may properly be disregarded. Friend v. United States, 345 F.2d 761 (C.A. 1, 1965); see Neff v. United States, 305 F.2d 455, 458 (Ct.Cl. 1962).
To confine ourselves to petitioner's limited view of the situation would be to exalt illusion over reality. We hold that under all the circumstances of this case there has not been that ‘meaningful change‘ in petitioner's shareholder position which is the ‘indispensable first step‘ to a finding of lack of dividend equivalence. Bradbury v. Commissioner, 298 F.2d 111 (C.A. 1, 1962), affirming a Memorandum Opinion of this Court; Leon R. Meyer, 46 T.C. 65 (1966), on appeal (C.A. 8, June 15, 1966); Ralph L. Humphrey, 39 T.C. 199 (1962).9
We turn to the second main prong of petitioner's position, namely, that the transaction herein was clothed with a corporate business purpose.10 We recognize that such a purpose may, under certain circumstances, constitute a ‘conspicuous countervailing consideration’ sufficient ‘to dispel the aura of dividend equivalence.’ See Bradbury v. Commissioner, supra at 117. But it is equally true that such a purpose does not per se establish nonequivalence. See Neff v. United States, supra at 457; Charles Swan, supra at 299.
Petitioner contends that the transaction herein had as its objectives assurance of Company control over Northport and Gypsum and preservation of Company stock ownership in active Company management. Petitioner's witnesses testified that, when petitioner'...
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