Jones v. Griffin, 4681.

• Decision Date: 15 November 1954
• Docket Number: No. 4681.,4681.
• Citation: 216 F.2d 885
• Parties: H. C. JONES, individually and as a former Collector of Internal Revenue, Appellant, v. John Toole GRIFFIN, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

216 F.2d 885 (1954)

H. C. JONES, individually and as a former Collector of Internal Revenue, Appellant, v. John Toole GRIFFIN, Appellee.

No. 4681.

United States Court of Appeals Tenth Circuit.

November 15, 1954.

Walter Akerman, Jr., Sp. Asst. to the Atty. Gen. (H. Brian Holland, Asst. Atty. Gen., Ellis N. Slack, Robert N. Anderson, Sp. Assts. to the Atty. Gen., and Robert E. Shelton, U. S. Atty., Oklahoma City, Okl., were with him on the brief), for appellant.

Graham Loving, Jr., and James D. Fellers, Oklahoma City, Okl. (Mosteller, Fellers, Andrews & Loving, Oklahoma City, Okl., were with them on the brief), for appellee.

Before PHILLIPS, Chief Judge, and BRATTON and PICKETT, Circuit Judges.

BRATTON, Circuit Judge.

The question of major importance presented on this appeal is whether the sum of $2,000 received from a corporation in redemption of certain shares of preferred stock was taxable to the recipient thereof on the basis of being essentially the equivalent of a taxable dividend by the corporation.

Koma, Inc., hereinafter referred to as the corporation, had issued an outstanding common stock and preferred stock. In 1946, the board of directors of the corporation adopted a resolution that all of the outstanding preferred stock should be redeemed. John Toole Griffin, hereinafter referred to as the taxpayer, owned 20 shares of such stock. In 1947, the taxpayer, along with other owners of preferred stock, surrendered his shares and received therefor the sum of $2,000. That was the amount which had been paid to the corporation for the shares at the time of their issuance. The Commissioner of Internal Revenue determined that the entire amount thus received by the taxpayer was subject to tax in his hands as a dividend received from the corporation. That determination resulted in the imposition of a deficiency in tax. The deficiency together with accrued interest was paid. A claim for refund was seasonably filed. No action was taken on the claim within six months after the date on which it was filed, and the taxpayer instituted this action to recover the amount paid. The case was tried to a jury. At the conclusion of the evidence, each party moved for a directed verdict in his favor. Rulings on the motions were reserved; the cause was submitted to the jury; and the jury returned a verdict in favor of the taxpayer. The former collector filed a motion for judgment in accordance with his motion for a directed verdict, or for a new trial. An order was entered denying both motions of the former collector; judgment was entered in favor of the taxpayer; and the former collector appealed.

Section 115(a) of the Internal Revenue Code, 26 U.S.C.A. § 115(a), defines the term dividend to mean any distribution made by a corporation to its shareholders, whether in money or in property, out of earnings or profits accumulated after February 28, 1913, or out of earnings or profits of the taxable year, without regard to the amount of the earnings and profits at the time the distribution was made. Section 115 (c) provides that amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation shall be treated as in part or full payment in exchange for the stock; and that in the case of amounts distributed in partial liquidation the part thereof which is properly chargeable to capital account shall not be considered a distribution of earnings or profits. Section 115(g) provides that if a corporation cancels or redeems its stock at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed, to the extent that it represents a distribution of earnings or profits shall be treated as a taxable dividend. And section 115(i) provides that as used in the section, the term "amounts distributed in partial liquidation" means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock. No inflexible and unyielding rule of thumb has been devised for ready use in determining in every instance whether a transaction constituted a partial liquidation within the scope and meaning of section 115(c), or was the equivalent of a taxable dividend within the purview of section 115(g). A critical examination of the statute as a whole negates the suggestion that a weighted formula can resolve the crucial question in every case. But certain criteria are recognized for determining the question. These include the past record of the corporation in respect to the distribution of dividends, whether at the time of the distribution the corporation had large earnings and profits in excess of the distribution, whether any substantial change in the proportionate ownership and control of the corporation resulted from the distribution, whether the corporation manifested a policy of contraction in its operations, whether the corporation continued to operate at a profit, and whether the transaction was initiated or motivated by the stockholders. Flanagan v. Helvering, 73 App.D.C. 46, 116 F.2d 937; Smith v. United States, 3 Cir., 121 F.2d 692; Hirsch v. Commissioner, 9 Cir., 124 F.2d 24; Rheinstrom v. Conner, 6 Cir., 125 F.2d 790, certiorari denied 317 U.S. 654, 63 S.Ct. 49, 87 L.Ed. 526; Commissioner of Internal Revenue v. Snite, 7 Cir., 177 F.2d 819; Boyle v. Commissioner, 3 Cir., 187 F.2d 557, certiorari denied 342 U.S. 817, 72 S.Ct. 31, 96 L.Ed. 618; Commissioner of Internal Revenue v. Roberts, 4 Cir., 203 F.2d 304. By appropriate instructions, the court charged the jury that these elements were component factors in the established judicial criteria for determining the question whether the distribution made to the taxpayer was a partial liquidation of the corporation or was the equivalent of a taxable dividend.

It is an established rule of general acceptation that usually the question whether a distribution made by a corporation in connection with the redemption or cancellation of its stock is essentially the equivalent of a taxable dividend or a partial liquidation within the intent and meaning of these statutory provisions is a question of fact dependent upon the particular circumstances of each case. Commissioner of Internal Revenue v. Babson, 7 Cir., 70 F.2d 304, certiorari denied Helvering v. Commissioner, 293 U.S. 571, 55 S.Ct. 107, 79 L.Ed. 669; Randolph v. Commissioner, 8 Cir., 76 F. 2d 472, certiorari denied Randolph v. Helvering, 296 U.S. 599, 56 S.Ct. 116, 80 L.Ed. 425; Commissioner of Internal Revenue v. Champion, 6 Cir., 78 F.2d 513; Brown v. Commissioner, 3 Cir., 79 F.2d 73; Hirsch v. Commissioner, supra; Rheinstrom v. Conner, supra; Jones v. Dawson, 10 Cir., 148 F.2d 87; Commissioner of Internal Revenue v. Roberts, supra; Commissioner of Internal Revenue v. Sullivan, 5 Cir., 210 F.2d 607; Keefe v. Cote, 213 F.2d 651. The trial court submitted that issue to the jury, and the jury resolved it in favor of the taxpayer.

The former collector does not challenge the general rules of law to which reference has been made. He recognizes them. He contends that the stipulation into which the parties entered and the evidence adduced upon the trial did not present any issue of fact for the jury. It is his position that under all of the facts and circumstances presented, the $2,000 which the corporation paid to the taxpayer in connection with the redemption and retirement of his shares of preferred stock was as a matter of law taxable in his hands as a dividend under section 115(g). By stipulation or evidence, these facts were adduced upon the trial. The corporation was engaged in the operation of a radio station in Oklahoma City, Oklahoma. In 1939, it began operations with an initial paid-in capital of $300,000 and a paid-in surplus of $30,000. It was authorized to issue and did issue 300 shares of common stock, each of the par value of $100, and 2,700 shares of preferred stock, each of the par value of $100. The articles of incorporation provided among other things that the preferred stock should bear interest at the rate of six per cent per annum and should be guaranteed and secured by a first lien upon all of the assets of the corporation; that the owners and holders of the stock, both common and preferred, should have voting privileges; that the holder of any preferred stock should be entitled to receive and the corporation should be bound to pay him dividends at such rates as would be sufficient to pay the interest on the stock held and owned by him; and that the directors should, from time to time, provide for the payment and retirement of such preferred stock as in their judgment would be to the best interest of the corporation. The common stock was originally subscribed by and issued to the following named individuals in the respective amounts stated, J. T. Griffin, 50 shares, Marjory Griffin, now Marjory...