Kuper v. C. I. R.

• Decision Date: 09 June 1976
• Docket Number: No. 74-3138,74-3138
• Citation: 533 F.2d 152
• Parties: 76-1 USTC P 9467 James and Martha KUPER and Charles and Kathleen Kuper, Petitioners-Appellants Cross-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee Cross-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 152

533 F.2d 152

76-1 USTC P 9467

James and Martha KUPER and Charles and Kathleen Kuper Petitioners-Appellants Cross-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee Cross-Appellant.

No. 74-3138.

United States Court of Appeals Fifth Circuit.

June 9, 1976.

Towner Leeper, El Paso, Tex., for petitioners-appellants.

Scott P. Crampton, Asst. Atty. Gen., Bennet N. Hollander, Atty., Tax Div., Dept of Justice, Gilbert E. Andrews, Acting Chief, Appellate Section, Dept. of Justice, Meade Whitaker, Chief Counsel, Bobby Burns, Atty., I.R.S., Myron C. Baum, Deputy Asst. Atty. Gen., Tax Div., Dept. of Justice, Washington, D. C., for Commissioner of Internal Revenue.

Appeals from the Decisions of the Tax Court of the United States (Texas case).

Before GOLDBERG, DYER and RONEY, Circuit Judges.

GOLDBERG, Circuit Judge:

Once again we confront taxpayers who have taken a circuitous route to reach an end more easily accessible by a straightforward path. Looking to substance rather than form, we decide that the instant transactions must be taxed for what realistically they are an exchange of stock and a dividend. The Tax Court heard the present controversy, 61 T.C. 624 (1974), and found a taxable exchange of stock a determination which we affirm. That same court, however, failed to denominate the cash transfer of corporate funds a dividend, and it is this latter decision which, for the reasons discussed below, we reverse.

I. THE FACTS

Prior to March 1, 1966, three brothers, Charles, James, and George Kuper, owned in equal shares the outstanding stock of Kuper Volkswagen, an automobile dealership located in El Paso, Texas. ¹ Similarly, these siblings held, pro rata, the entire stock of Kuper Enterprises (hereinafter "Enterprise"), a realty company which leased land and buildings to Kuper Volkswagen.

The Tax Court found that before 1966, James and George had had serious disagreements over "managerial philosophy" which had "adversely affected" the effective operation of Kuper Volkswagen. 61 T.C. at 629. In the fall of 1965, the Las Cruces, New Mexico, Volkswagen dealership became available. James, concluding "that he wanted to obtain a small dealership in another city," id. at 627, made inquiries with respect to the New Mexico franchise. However, the area Volkswagen distributor decided that George, not James, should take over the new operation. George, hoping to resolve the internal conflicts at the El Paso franchise, accepted the distributor's offer. Id. at 629. Because the parent company, Volkswagen of America, did not permit the same person to invest in or manage two distinct Volkswagen dealerships, it became necessary for George to relinquish his Kuper Volkswagen stock. Id. at 627, 629. The brothers accomplished this task by a series of transactions on February 28, 1966 and March 1, 1966.

First, on February 28, James, Charles, and George each contributed their one-third stock interest in Enterprise to Kuper Volkswagen's capital causing Enterprise momentarily to become a wholly owned subsidiary of Kuper Volkswagen.

Second, on the same day, Kuper Volkswagen's Board of Directors made a cash capital contribution to Enterprise of $42,513.54. ²

Finally, on March 1, 1966, Kuper Volkswagen exchanged its 100% ownership of Enterprise for George's one-third ownership of Kuper Volkswagen. Id. at 627-28.

As a result of these transactions, the value of Enterprise stock, now held entirely by George, was enhanced by $42,513.54, the amount of the cash contribution from Kuper Volkswagen. Kuper Volkswagen's outstanding stock was reduced by one-third, the stock received from George, and James and Charles now owned 100% of Kuper Volkswagen.

Characterizing these acts as (1) a nontaxable contribution of Enterprise stock to Kuper Volkswagen, (2) a nontaxable cash contribution by Kuper Volkswagen to Enterprise, and (3) a total redemption of George's Kuper Volkswagen stock taxable at the corporate level ³ and to George Kuper individually, ⁴ petitioners James and Charles Kuper ⁵ reported no personal income from the aforementioned transactions. The Commissioner of Internal Revenue disagreed and in October, 1971, determined deficiencies for James and Charles Kuper of $15,079.02 and $14,034.95 respectively. Id. at 625. The Commissioner based the deficiency notices on his characterization of the February 28-March 1 events as 1) a taxable exchange of James's and Charles's Enterprise stock for George Kuper's Volkswagen stock ⁶ and 2) a dividend of $14,171.18 ⁷ each constructively paid by Kuper Volkswagen to James and Charles Kuper. ⁸ Id. at 628.

At trial, the parties stipulated to the essential facts. In addition, the taxpayers testified briefly. Judge Fay, writing for the Tax Court, found:

Petitioners' contribution of their stock in Enterprises to Kuper Volkswagen and Kuper Volkswagen's subsequent purported redemption of George's entire interest in Kuper Volkswagen in substance constituted a taxable exchange of stock between petitioners and George.

Kuper Volkswagen's transfer of $42,513.54 to Enterprises was motivated by a valid corporate business purpose and, accordingly, was a justifiable nonshareholder contribution to capital. 61 T.C. at 628.

The Commissioner appealed from the latter finding and taxpayers cross-appealed, challenging the former determination. Agreeing for the most part with the Commissioner's arguments, we affirm the Tax Court's decision on the first issue and reverse its decision on the second issue.

II. THE EXCHANGE OF STOCK

As a general rule, the incident of taxation depends on the substance rather than form of the transaction. Commissioner of Internal Revenue v. Court Holding Co., 324 U.S. 331, 65 S.Ct. 707, 89 L.Ed. 981 (1945); Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788 (1940); Higgins v. Smith, 308 U.S. 473, 60 S.Ct. 355, 84 L.Ed. 406 (1939); Griffiths v. Helvering, 308 U.S. 355, 60 S.Ct. 277, 84 L.Ed. 319 (1939); Minnesota Tea Co. v. Helvering, 302 U.S. 609, 58 S.Ct. 393, 82 L.Ed. 474 (1938); Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935); Crenshaw v. United States, 5 Cir. 1971, 450 F.2d 472; Redwing Carriers, Inc. v. Tomlinson, 5 Cir. 1968, 399 F.2d 652. As Judge Rives stated in Kanawha Gas & Util. Co. v. Commissioner of Internal Revenue, 5 Cir. 1954, 214 F.2d 685:

This basic concept of tax law is particularly pertinent to cases involving a series of transactions designed and executed as parts of a unitary plan to achieve an intended result. Such plans will be viewed as a whole regardless of whether the effect of so doing is imposition of or relief from taxation. The series of closely related steps in such a plan are merely the means by which to carry out the plan and will not be separated. Id. at 691.

Moreover, courts have repeatedly observed that "a given result at the end of a straight path is not made a different result because reached by following a devious path." Minnesota Tea Co. v. Helvering, 302 U.S. 609, 613, 58 S.Ct. 393, 395, 82 L.Ed. 474, 477.

Relying on these principles, the trial judge concluded, and we agree, that taxpayers' acts were

merely component parts of a single transaction. (citations omitted). The contribution of Enterprises' stock to Kuper Volkswagen and the later redemption by Kuper Volkswagen of George's Kuper Volkswagen stock were simply steps in a circuitous route deliberately taken in the futile hope of disguising the fundamental nature of the underlying stock-for-stock exchange transaction at the shareholder level. 61 T.C. at 630.

Petitioners criticize this refusal to recognize the integrity of each of the individual steps of the transaction. They argue that taxpayers are permitted to arrange their tax affairs so as to minimize the amount owed to the Federal Government. Unquestionably the taxpayer has a legal right to plan his business activities in the light of the tax laws. Gregory v. Helvering, 292 U.S. 465, 469, 55 S.Ct. 266, 267, 79 L.Ed. 596, 599 (1935). The Commissioner, however, must accept the form and accompanying legal characterization of taxpayer's business transactions only insofar as they are comprehended within the intention of the pertinent revenue statutes. Id. We do not believe that Congress intended that under the circumstances of the present case taxpayers could utilize this series of steps to artificially avoid the tax incidents of a simple stock exchange. As Chief Judge Brown said in Crenshaw v. United States, 5 Cir. 1971, 450 F.2d 472, where the Court refused to examine the discrete parts of a transaction except insofar they constituted a substantive whole:

(Taxpayers) cannot compel a court to characterize the transaction solely upon the basis of a concentration on one facet of it when the totality of circumstances determines its tax status. The most obvious answer to Taxpayer's argument that the parties' characterization is conclusive is that such a result would completely thwart the Congressional policy to tax transactional realities rather than verbal labels . . . Otherwise, form, rather than substance, would invariably prevail. Id. at 477-78.

This approach is especially proper where, as here, it is unlikely that any one step would have been undertaken except in contemplation of the other integrating acts, all of which when seen together substantively form a taxpayer level stock swap.

Taxpayers assert that we confront here an ordinary Congressionally approved total redemption of George's Kuper Volkswagen stock pursuant to I.R.C. § 302(b) (3) under which the selling stockholder (George) receives capital gains and the remaining shareholders experience no tax effect. See note 4 supra. Specifically, petitioners argue that the corporation did not undertake any "primary and personal obligation" of the buying shareholders "to buy out the selling shareholder" and thus did not come within the scope of the Fourth Circuit's holding in Wall v. United States, 1947, 164 F.2d 462 (finding a...