Rickey v. U.S., 77-1459
| Decision Date | 10 April 1979 |
| Docket Number | No. 77-1459,77-1459 |
| Citation | 592 F.2d 1251 |
| Parties | 79-1 USTC P 9323 Horace B. RICKEY, Jr. and Jewel S. Rickey, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant. Elizabeth Ann RICKEY, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant. Robert Harper RICKEY, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Edward L. Shaheen, U. S. Atty., Shreveport, La., Myron C. Baum, Acting Asst. Atty. Gen., John F. Murray, Tax Div., U. S. Dept. of Justice, Gilbert E. Andrews, Acting Chief, Appellate Section, Michael L. Paup, Gilbert S. Rothenberg, M. Carr Ferguson, Asst. Attys. Gen., U. S. Dept. Of Justice, Washington, D. C., for the U. S.
John G. Torian, II, Lawrence L. Lewis, III, Joseph Onebane, Lafayette, La., for plaintiffs-appellees.
Appeals from the United States District Court for the Western District of Louisiana.
Before GEWIN, HILL and FAY, Circuit Judges.
These consolidated cases are for the recovery of income taxes assessed and collected from plaintiffs (taxpayers) for the year 1968. The question presented is simply whether an estate can waive the entity attribution rules of Internal Revenue Code Section 318(a)(3), 1 so that a sale to a corporation by an estate of all shares in that corporation Actually owned by the estate will qualify as a complete redemption of all the stock of the corporation owned by the shareholder, I.R.C. § 302(b)(3), thus entitling the estate to capital gains treatment under Internal Revenue Code Section 302(a).
Horace B. Rickey, Sr. (the decedent), the President and principal stockholder of Horace B. Rickey, Inc. (the Company) died in May of 1967. At the time of his death, the decedent owned 1,292 of the 2,255 shares of common stock of the company. 2 The decedent was survived by his second wife, Flora Womack, and three children: Horace B. Rickey, Jr., the child of his first marriage, and Robert H. Rickey and Elizabeth Ann Rickey, minor children of his second marriage to Flora Womack. At the time of the decedent's death, Horace Rickey, Jr. was 42 years of age, Robert Rickey was 14 years of age and Elizabeth was 12 years of age. The three children are the plaintiffs in these consolidated actions. Horace Rickey, Jr. at the time of the decedent's death was an officer, director and an active employee of the Company and had founded the business with his father in the late 1940's. Elizabeth and Robert were quite a bit younger than their half brother and had no active participation in the business. Robert and Elizabeth had acquired their relatively insignificant interest in the Company through a gift from their father.
Shortly after its inception, the Company embarked upon a policy of acquiring and maintaining life insurance policies on the lives of its officers and key shareholder-employees. These insurance policies were purchased by the Company for the purpose of having cash funds on hand with which to purchase the stock of a deceased shareholder. Article VI of the Company's Articles of Incorporation required that upon the death of a deceased shareholder, the Company be offered the option to purchase the shares owned by the deceased stockholder at the book value. Although Article VI only provided an option to the Company, all of the shareholders of the Company viewed the provision as requiring the Company to purchase a deceased shareholder's stock and the life insurance was maintained for that purpose. The policy of purchasing a deceased shareholder's interest in the Company through the redemption provision in Article VI was designed to insure that control of the Company was maintained in the hands of those who were active in the business.
Immediately prior to the decedent's death, the stock ownership in the Company was as follows:
Number
Stockholders of Shares Percentage
------------------------ --------- ----------
Horace B. Rickey, Sr. 1,292 57.295%
Horace B. Rickey, Jr. 708 31.396%
Robert H. Rickey 40 1.774%
Elizabeth Ann Rickey 40 1.774%
--------- ----------
2,080 92.239%
Other shareholders not
related to Rickey family 175 7.761%
--------- ----------
2,255 100%
The will of the decedent named as residuary universal legatees his three surviving children and his second wife was named as executrix of his estate. The will directed that the executrix was to tender the stock owned by the decedent in the Company to the Company for the purposes of redemption pursuant to Article VI of the Company's Articles of Incorporation.
In accordance with the directions of the decedent, the executrix offered the 1,292 shares owned by Horace B. Rickey, Sr. at the time of his death to the Company. The offer was made and transmitted on May 25, 1967. The Company accepted the offer at a Board meeting on June 5, 1967. The price was determined in September of 1967 and on October 23, 1967, $383,194 was paid to the estate.
After the redemption, the percentage ownership interest of the Company shareholders was as follows:
Number
Stockholders of Shares Percentage
------------------ --------- ----------
Horace Rickey, Jr. 708 73.520%
Robert Rickey 40 4.154%
Elizabeth Rickey 40 4.154%
--------- ----------
788 81.828%
Others not related
to Rickey family 175 18.172%
--------- ----------
963 100%
The estate of the decedent was closed by Judgment of Possession on June 3, 1968 and all assets of the estate including the cash remaining from the proceeds of the redemption were distributed to the residuary legatees, the plaintiffs, in the amount of one-third to each.
For federal income tax purposes, the taxpayers treated the redemption of the decedent's 1,292 shares as a distribution in full payment in exchange for the stock and since their basis in the shares had been stepped-up to fair market value at the time of the decedent's death pursuant to Section 1014 of the Code, they reported no income from the redemption. Upon audit of the estate and the individuals' returns for 1968, the Commissioner determined that the redemption was essentially equivalent to a dividend and the 1967 redemption proceeds (to the extent they exceeded the amounts used to pay death taxes under Code Section 303) were dividends to the estate, taxable as ordinary income to the taxpayers as distributees of the estate. Accordingly, each of the taxpayers was treated as having received approximately $51,400 additional income in 1968.
In April of 1973, the taxpayers waived their right to receive statutory notices of deficiencies, and consented to immediate assessment of the tax as determined by the Commissioner. In June of 1973 all of the assessed amounts were paid. In June of 1973 the succession of the decedent was reopened in the appropriate Louisiana State Court so that the executrix could file with the Commissioner a ten-year agreement under Section 302(c)(2)(A). That agreement was received by the Commissioner on October 1, 1973. It is the validity and effect of that agreement which forms the basis of the government's appeal herein.
The taxpayers subsequently filed timely claims for refunds which were denied by the Commissioner and the instant suit was instituted in District Court. The District Court found in favor of the taxpayers holding that the redemption from the estate was a complete termination of the estate's interest under Section 302(b)(3) and that the waiver agreement filed in 1973 was effective to waive the entity-beneficiary attribution rules. The government has appealed with the taxpayers filing cross appeals for the purpose of preserving their right to argue various alternative theories presented to the District Court. 3
An examination of the statutory scheme surrounding tax treatment of corporate redemptions reveals the following. Section 302(d) provides that unless a redemption meets one of several exceptions spelled out in the Code, a redemption shall be treated as a distribution of property to which Code Section 301 applies. Thus, unless one of the exceptions is applicable, property distributed by a corporation in redemption of its shares will constitute a dividend, to the extent of current and post-1913 earnings and profits. I.R.C. § 301(c)(1). To the extent that the distribution exceeds accumulated and current earnings and profits, the portion of the distribution shall reduce the redeemed party's adjusted basis in his stock. I.R.C. § 301(c)(2). To the extent that the distribution exceeds accumulated and current earnings and profits, and the adjusted basis of the redeemed party, the distribution shall constitute capital gain. I.R.C. § 301(c)(3).
Section 302 of the Code provides a set of exceptions to the general rule outlined above. This section examines corporate redemptions from the shareholder perspective. Compare Section 346 which examines redemptions from the corporate perspective. Section 302(a) provides that if the redemption affects the shareholder in any one of four possible ways, the redemption shall be treated as a distribution in exchange for the stock, thus qualifying any gain for the preferential capital gains treatment.
One of these exceptions to the general rule of 302(d) is set forth in Section 302(b)(3) which applies "if the redemption is in complete redemption of all of the stock of the corporation owned by the shareholder." At first blush, Section 302(b)(3) would appear to mandate capital gains treatment in the case at bar. Here the estate, which owns 57.295% Of Rickey, Inc., sells all of the stock which it owns to Rickey, Inc. But life, particularly...
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