Lewis v. Commissioner
This text of 35 T.C. 71 (Lewis v. Commissioner) is published on Counsel Stack Legal Research, covering United States Tax Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
OPINION.
Over a period of years, beginning prior to 1943 and continuing until her death in 1954, Eva L. Beyer owned 156 shares out of a total of 283 shares of stock of Beyer & Fortner, Inc. The remaining shares were owned by her three daughters or their husbands in unequal amounts. She was president of the corporation, but ceased taking salary in 1943 by reason of a temporary decline in the corporate business due to the war. Her poor health prevented her from playing any active part in the enterprise after 1947, and she never did receive any salary from 1943 until her death. Her needs for living expenses during this period were met by loans from the corporation. The amounts were modest, aggregating $20,435.54 over the entire period of some 11 or 12 years. No dividends were paid at any time, although the corporation did have accumulated earnings and profits. At her death the liquidation of her indebtedness to the corporation presented a serious problem, since the value of her estate, apart from the 156 shares, was considerably less than the amount of the indebtedness. The problem was solved by having the corporation redeem 51 of her shares valued at a price that was sufficient to repay the loans; the remaining 105 shares were then promptly distributed in equal amounts of 35 shares to each of the three daughters. No other shares were redeemed and the total holdings of the families of the three daughters, being unequal prior to the redemption and distribution, remained unequal thereafter, but in different proportions. The Commissioner determined that on these facts there was a redemption essentially equivalent to a dividend under sections 301 and 302 of the 1954 Code.
Had this case arisen under the predecessor provisions of the 1939 Code,1 it might hare been possible to find that the redemption was not essentially equivalent to the distribution of a taxable dividend, in view of the fact that shares of only one stockholder were redeemed, resulting in a disturbance of the proportionate holdings of the various stockholders. Although such a dislocation of the relative holdings would not necessarily be fatal to the Government’s position, it would nonetheless be a factor, which when considered against the factual background of this case, could tip the scales in petitioners’ favor.
However, the problem before us must be considered in terms of the 1954 Code. Pertinent excerpts from sections 301 and 302 are set forth in the margin.2 The general statutory framework, with the many confusing cross references, makes the study and application of these provisions a most exasperating task. Nevertheless, after threading our way through these provisions we finally come to rest, at least temporarily, in section 302(b)(1), which, in general, was intended to incorporate the preexisting law embodied in section 115(g)(1) of the 1939 Code.3 The words “in general” must be stressed, for the new provisions were not made fully coextensive with the old. Not only did paragraphs (2), (3), and (4) of the new section 302(b) single out and remove three specific types of redemp-tions from the more general test contained in section 302(b) (1) and the old section 115(g) (l),4 but section 302(c) of the 1954 Code made the constructive ownership rules of section 318(a) applicable (with certain exceptions not pertinent here) to the redemption tests. Thus, a new dimension has been added to the 1939 Code approach, and it is that new dimension, based upon section 318(a), that moves us to sustain the Commissioner herein. The pertinent provisions of that section are set forth below.5
Applying the constructive ownership rules of section 318(a), we must conclude that the stock owned by the husbands of the three daughters is to be attributed to the daughters themselves under paragraph (1) (A) (i); that the stock thus attributed to them must be treated under paragraph (4) as “actually owned by” them; and that therefore their own stock plus the stock thus attributed to them must in turn be attributed to the estate under the second sentence of paragraph (2) (A). As a consequence of the foregoing, the estate must be treated as owning all the shares that were really owned by the daughters and their husbands, with the net result that the estate is to be regarded as owning 100 per cent of the stock.
Accordingly, we are required by the 1954 Code to appraise the facts of this case in the light of an assumption that the estate owned all of the stock. And, with that assumption in mind, we conclude that the redemption herein was essentially equivalent to a distribution of a dividend. For, the picture thus presented is one of corporate withdrawals from time to time by a dominant stockholder for her needs, where the corporation has never declared a dividend although having sufficient accumulated earnings and profits to do so, followed finally by a cancellation of the indebtedness in exchange for stock upon the death of that stockholder when only her estate had an interest in the enterprise, when such cancellation and redemption could not possibly have any economic effect upon any stockholder-corporation relationship, and when there was no plan either to contract the corporate enterprise or to use the redeemed shares in any manner for a corporate purpose. In these circumstances, and taking into account all other evidence before us, we conclude and find that the redemption herein was essentially equivalent to a dividend. Cf. Ferro v. Commissioner, 242 F. 2d 838 (C.A. 3), affirming T.C. Memo. 1956-94; Genevra Heman, 32 T.C. 479; Samuel H. Kessner, 26 T.C. 1046, affirmed per curiam 248 F. 2d 943 (C.A. 3); James F. Boyle, 14 T.C. 1382, affirmed 187 F. 2d 557 (C.A. 3), certiorari denied 342 U.S. 817.
Decisions will be entered under Rude 50.
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35 T.C. 71, 1960 U.S. Tax Ct. LEXIS 48, Counsel Stack Legal Research, https://law.counselstack.com/opinion/lewis-v-commissioner-tax-1960.