Richmond, Fredericksburg and Potomac R. Co. v. C.I.R.

Decision Date04 December 1975
Docket NumberNo. 74--2146,74--2146
Citation528 F.2d 917
CourtU.S. Court of Appeals — Fourth Circuit

Frank W. Hardy, Richmond, Va. (Williams, Mullen & Christian, Richmond, Va., on brief), for appellant.

John G. Manning, Atty., Tax Div., U.S. Dept. of Justice (Scott P. Crampton, Asst. Atty. Gen., Tax Div., U.S. Dept. of Justice, Gilbert E. Andrews, Elmer J. Kelsey, Attys., Tax Div., U.S. Dept. of Justice, on brief), for appellee.

Before HAYNSWORTH, Chief Judge, ALDRICH *, Senior Circuit Judge, and MERHIGE, ** District Judge.

HAYNSWORTH, Chief Judge:

The Railroad, issuer of old hybrid securities, sought certain income tax advantages bottomed upon the claim that the securities are bonds. While they have some of the attributes of bonds, they also have attributes of common stock. The Tax Court held that with respect to the transactions involved, the securities should be treated as equity capital. Since the transactions themselves were oriented to those features attributable to common stock, we affirm.

In the last half of the last century, Richmond, Fredericksburg & Potomac Railroad issued several series of hybrid securities which were called 'Guaranteed Stock.' They have no fixed maturity date, but the face value would become due and payable six months after a 'guaranteed dividend' payment had been in default. Semi-annual payments of dividends at the rate of seven 1 percent per annum were guaranteed. The 'guaranteed dividends' were payable regardless of earnings, and the payment of the face value and accrued 'guaranteed dividends' was secured by deeds of trust which are now first liens upon the Railroad's property.

The securities also have important attributes of stock. They carry voting rights just as the common stock does, and, if the dividends on the common stock exceed the 'guaranteed dividend' on the 'Guaranteed Stock,' the holders of the 'Guaranteed Stock' participate in the earnings by receiving the same amount of dividends as the common stockholders. In dissolution, after the common stockholders had received the par value of their stock, the guaranteed stockholders shared ratably in the distribution of all remaining assets.

In 1962, 1963 and 1964 the Railroad repurchased some of its guaranteed stock at prices far in excess of the face value. On its income tax return, it took a deduction of the excess of the purchase price over par value as a bond repurchase premium. When the Commissioner disallowed this deduction and the Railroad filed its petition in the Tax Court, it also claimed a deduction for the excess dividends paid over the guaranteed dividend. In the first of those years, the 'excess dividend' was almost twice as much as the guaranteed portion of the dividends; in the other two years it was more than twice as much.

The Tax Court, with four judges dissenting, held against the Railroad on both of its claims.

In Helvering v. Richmond, F. & P. Co., 4th Cir., 90 F.2d 971, we held that the guaranteed portion of these dividends was deductible as interest payments on debt. We recognized that the securities had many of the attributes of common stock, but the guaranteed dividend was a characteristic of fixed obligations and not of equity capital. The taxpayer now contends that after having held that the securities were debt for the purpose of deciding the deductibility of the payment of the guaranteed dividends, they must be treated as debt for all purposes. With that, however, we cannot agree. The securities are hybrids, and whether in a given instance they must be treated as debt or equity depends upon the circumstances, particularly a discriminating look at the provisions of the securities most relevant to the immediate transaction.

After a four-for-one stock split in 1949, reducing the par value of each guaranteed share from $100 to $25, the dividend payments substantially exceeded the $1.50 guaranteed on the six percent stock and the $1.75 guaranteed on the seven percent stock. The dividends paid on each increased from $3 per share in 1950 to $6 per share in 1964. The dividend in 1962 and in 1963 on each was $5.50.

The average price per share which the Railroad paid for the guaranteed stock acquired in 1962, 1963 and 1964 was, respectively, approximately $112, $118, and $164. There was a market for the shares, but to get the quantity it wished, the...

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4 cases
  • Frederick Weisman Co. v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • November 20, 1991 at stake. Markham & Brown, Inc. v. United States, 648 F.2d 1043, 1045 (5th Cir. 1981); Richmond, Fredericksburg & Potomac Railroad v. Commissioner, 528 F.2d 917, 920 (4th Cir. 1975), affg. 62 T.C. 174 (1974) (need to show “dire necessity”); Jim Walter Corp. v. United States, 498 F.2d 631......
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    • U.S. Tax Court
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    ...¶ 9518], 648 F.2d 1043, 1045 (5th Cir. 1981); Richmond, Fredericksburg & Potomac R.R. Co. v. Commissioner [76-1 USTC ¶ 9101], 528 F.2d 917, 920 (4th Cir. 1975) (need to show "dire necessity"), affg. [Dec. 32,588] 62 T.C. 174 (1974); Jim Walter Corp. v. United States [74-2 USTC ¶ 9629], 498 ......
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  • Dietzsch v. Comm'r of Internal Revenue , Docket No. 693-70.
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    • U.S. Tax Court
    • March 31, 1976
    ...the issue previously decided by the Court of Claims. Richmond, Fredericksburg & Potomac Railroad Co., 62 T.C. 174 (1974), affd. 528 F.2d 917 (4th Cir. 1975), followed. Samuel B. Nimberger and Martin D. Cohen, for the petitioners.Theodore J. Kletnick, for the respondent.QUEALY, Judge: The re......

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