For treatment of the exchange if any property is received which is not permitted to be received under this subsection (including an excess principal amount of securities received over securities surrendered), see section 356. Under the most recent decision of this Court on the subject, William H. Bateman, 40 T.C. 408 (1963), appeal dismissed (C.A. 4, Jan. 28, 1964), the GW warrants were not stock within the meaning of section 354(a)(1). Section 354(a) applies only where stock is surrendered solely for stock, securities are surrendered solely for securities in an equal or lesser principal amount, or securities are surrendered for stock and securities in an equal or lesser principal amount.
— For treatment of the exchange if any property is received which is not permitted to be received under this subsection (including an excess principal amount of securities received over securities surrendered), see section 356. Under the most recent decision of this Court on the subject, William H. Bateman, 40 T.C. 408 (1963), appeal dismissed (C.A. 4, Jan. 28, 1964), the G&W warrants were not stock within the meaning of section 354(a)(1). Section 354(a) applies only where stock is surrendered solely for stock, securities are surrendered solely for securities in an equal or lesser principal amount, or securities are surrendered for stock and securities in an equal or lesser principal amount.
This construction of the statute stemmed from the Supreme Court's opinion in Commissioner v. Estate of Bedford, 325 U.S. 283, 292 (1945). In subsequent cases, however, the courts have retreated from this so-called automatic dividend rule; instead, the focus has shifted to the nature of the distribution ( Bateman v. Commissioner, 40 T.C. 408, 419 (1963)) and the effect of the reorganization on the distributee's interest in the corporation. Shimberg v. United States, 577 F.2d 283, 286-290 (5th Cir. 1978), cert. denied 439 U.S. 1115 (1979); Wright v. United States, 482 F.2d 600, 604 (8th Cir. 1973); Hawkinson v. Commissioner, 235 F.2d 747, 751 (2d Cir. 1956).
382 F. 2d at 492. Cf. William H. Bateman, 40 T.C. 408; Helvering v. Southwest Corp., 315 U.S. 194. To be sure, rights have been held in certain circumstances to be the equivalent of stock, cf. Carlberg v. United States, 281 F. 2d 507 (C.A. 8); James C. Hamrick, 43 T.C. 21; but the particular instruments involved in those cases represented direct contingent interests in the respective corporations and were not options to purchase stock.
Whether the distributions to Wilson had the effect of dividends depends upon all the facts and circumstances surrounding the distributions. Ross v. United States, 147 Ct. Cl. 661, 173 F. Supp. 793, certiorari denied 361 U.S. 875 (1959); Idaho Power Co. v. United States, 142 Ct. Cl. 534, 161 F. Supp. 807, certiorari denied 358 U.S. 832 (1958); cf. William H. Bateman, 40 T.C. 408 (1963). Of course, petitioners have the burden of proving the distributions did not have the effect of dividends. Rule 32, Tax Court Rules of Practice.
Whether the distributions to Wilson had the effect of dividends depends upon all the facts and circumstances surrounding the distributions. Ross v. United States, 147 Ct.Cl. 661, 173 F.Supp. 793, certiorari denied 361 U.S. 875 (1959); Idaho Power Co. v. United States, 142 Ct.Cl. 534, 161 F.Supp. 807, certiorari denied 358 U.S. 832 (1958); cf. William H. Bateman, 40 T.C. 408 (1963). Of course, petitioners have the burden of proving the distributions did not have the effect of dividends. Rule 32, Tax Court Rules of Practice.
There is no indication in the 1954 Code that Congress intended to disapprove any part of that decision, and it has been applied by the courts in cases arising thereunder. See William H. Batemen, 40 T.C. 408. The employee stock option cases, Commissioner v. LoBue, 351 U.S. 243, and Commissioner v. Smith, 324 U.S. 177, relied on by the Commissioner as authority overruling Palmer, do not discuss this aspect of that case at all, but rather cite Palmer with approval in other respects.