Zenz v. Quinlivan, 12066.
| Decision Date | 11 June 1954 |
| Docket Number | No. 12066.,12066. |
| Citation | 213 F.2d 914 |
| Parties | ZENZ v. QUINLIVAN. |
| Court | U.S. Court of Appeals — Sixth Circuit |
M. R. Schlesinger, Cleveland, Ohio, Bert P. Hebenstreit, Toledo, Ohio, Spengler, Nathanson, Hebenstreit & Heyman, Toledo, Ohio, Grossman, Schlesinger & Carter, Cleveland, Ohio, for appellant.
Walter Akerman, Jr., Washington, D. C., H. Brian Holland, Ellis N. Slack, Washington, D. C., John J. Kane, Jr., U. S. Atty., Cleveland, Ohio, for appellee.
Before MILLER, Circuit Judge, and GOURLEY and STARR, District Judges.
The appeal relates to the interpretation of Section 115(g) of the Internal Revenue Code and poses the question —
Is a distribution of substantially all of the accumulated earnings and surplus of a corporation, which are not necessary to the conduct of the business of the corporation, in redemption of all outstanding shares of stock of said corporation owned by one person essentially equivalent to the distribution of a taxable dividend under the Internal Revenue Code?
The District Court answered in the affirmative and sustained a deficiency assessment by the Commissioner of Internal Revenue.
After consideration of the records, briefs and arguments of counsel for the parties, we believe the judgment should be reversed.
Under the applicable statutes and Treasury Regulations a corporation's distribution of its earned surplus out of its accumulated earnings or profits or out of the earnings or profits for the taxable year is subject to tax as an ordinary dividend, but an amount distributed by a corporation in partial liquidation shall be treated as in complete cancellation or redemption of a part of its stock and as in full payment in exchange for the stock. However, 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,1 the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of accumulated earnings or profits, shall be treated as a taxable dividend. Whether a distribution in connection with a cancellation or redemption of stock is essentially equivalent to the distribution of a taxable dividend depends upon the facts and circumstances of each case.
The question stems from the following circumstances:
Appellant is the widow of the person who was the motivating spirit behind the closed corporation which engaged in the business of excavating and laying of sewers. Through death of her husband she became the owner of all shares of stock issued by the corporation. She operated the business until remarriage, when her second husband assumed the management. As a result of a marital rift, separation, and final divorce, taxpayer sought to dispose of her company to a competitor who was anxious to eliminate competition.
Prospective buyer did not want to assume the tax liabilities which it was believed were inherent in the accumulated earnings and profits of the corporation. To avoid said profits and earnings as a source of future taxable dividends, buyer purchased part of taxpayer's stock for cash. Three weeks later, after corporate reorganization and corporate action, the corporation redeemed the balance of taxpayer's stock, purchasing the same as treasury stock which absorbed substantially all of the accumulated earnings and surplus of the corporation.
Taxpayer, in her tax return, invoked Section 115(c) of the Internal Revenue Code and Treasury Regulation 111, Section 29.115-9 (26 CFR 29.115-9, page 424) as constituting a cancellation or redemption by a corporation of all the stock of a particular shareholder, and therefore was not subject to being treated as a distribution of a taxable dividend.
The District Court sustained the deficiency assessment of the Commissioner that the amount received from accumulated earnings and profits was ordinary income since the stock redeemed by the corporation was "at such time and in such manner as to make the redemption thereof essentially equivalent to the distribution of a taxable dividend" under Section 115(g) of the Code.
The District Court's findings were premised upon the view that taxpayer employed a circuitous approach in an attempt to avoid the tax consequences which would have attended the outright distribution of the surplus to the taxpayer by the declaration of a taxable dividend.
The rationale of the District Court is dedicated to piercing the external manifestations of the taxpayer's transactions in order to establish a subterfuge or sham.
Nevertheless, the general principle is well settled that a taxpayer has the legal right to decrease the amount of what otherwise would be his taxes or altogether avoid them, by means which the law permits. Gregory v. Helvering, 293 U.S. 465, 469, 55 S.Ct. 266, 79 L.Ed. 596; Commissioner v. Tower, 327 U.S. 280, 288, 66 S.Ct. 532, 90 L.Ed. 670. The taxpayer's motive to avoid taxation will not establish liability if the transaction does not do so without it. Chamberlain v. Commissioner of Internal Revenue, 6 Cir., 207 F.2d 462; United States v. Cummins Distilleries Corp., 6 Cir., 166 F.2d 17, 20; Helvering v. Chisholm, 296 U.S. 641, 56 S.Ct. 174, 80 L.Ed. 456; United States v. Cumberland Public Service Co., 338 U.S. 451, 455, 70 S.Ct. 280, 94 L.Ed. 251.
The question accordingly presented is not whether the overall transaction, admittedly carried out for the purpose of avoiding taxes, actually avoided taxes which would have been incurred if the transaction had taken a different form, but whether the sale constituted a taxable dividend or the sale of a capital asset. Chamberlain v. Commissioner of Internal Revenue, supra.
It is a salutary fact that Section 115 (c) is an exception to Section 115(a) that all distributions of earning and profits are taxable as a dividend.
The basic precept underlying the capital gains theory of taxation as distinguished from ordinary income tax is the concept that a person who has developed an enterprise in which earnings have been accumulated over a period of years should not be required to expend the ordinary income tax rate in the one year when he withdraws from his enterprise and realizes his gain.
Common logic dictates that a fair basis of measuring income is not determined upon the profits on hand in the year of liquidation but is properly attributable to each...
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Durkin v. Comm'r of Internal Revenue (In re Estate of Durkin), 47036–86.
...26, 1975, culm bank purchase and stock sale to Green should be taxed as if it had been structured as a redemption, citing Zenz v. Quinlivan, 213 F.2d 914 (6th Cir.1954). Respondent argues that in Zenz the taxpayer consistently sought to have the transaction taxed based on its form, unlike......
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...79 L.Ed. 596; Commissioner v. Tower, 327 U.S. 280, 66 S.Ct. 532; Chamberlin v. Commissioner, 6 Cir., 207 F.2d 462, 468; Zenz v. Quinlivan, 6 Cir., 213 F.2d 914, 916; Coca-Cola Co. v. United States, 47 F.Supp. 109, 97 Ct.Cl. 241, 261. The fact that the plaintiff's predecessor corporation was......
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