Opinion
Docket No. 3711.
1945-02-9
STANLEY D. BEARD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Floyd F. Toomey, Esq., and John P. Lipscomb, Jr., Esq., for the petitioner. William F. Evans, Esq., for the respondent.
Where an individual owner of preferred shares of a corporation, L, all the common shares of which are owned by another corporation, C, being advised that his shares will soon be redeemed by L and that C offers to buy his shares before the forthcoming redemption, of his own volition sells his shares to C and later the shares, when owned by C, are redeemed by L, held, the gain of the individual is taxable to him as a long term capital gain from sale and not as an ordinary gain, as it would have been if he had held the shares until the redemption by L. Floyd F. Toomey, Esq., and John P. Lipscomb, Jr., Esq., for the petitioner. William F. Evans, Esq., for the respondent.
A deficiency of $2,731.85 in the taxpayer's 1939 income tax is grounded upon the Commissioner's determination that a transaction in shares of Lederle Laboratories, Inc., was a partial liquidation, the gain in which was taxable in its entirety, and not a sale, the gain in which was taxable only to the extent of 50 percent.
FINDINGS OF FACT.
The taxpayer, a resident of Pearl River, New York, filed his 1939 income tax return on the cash receipts basis in Albany. In 1939 he was in the employ of Lederle Laboratories, Inc., as a scientist, and owned 1,379 preferred shares of the corporation, the basis of which was $4,122. The American Cyanamid Co. owned all the common shares of Laboratories and 15,500 of the 75,000 preferred shares. The taxpayer was not a shareholder or an employee of Cyanamid. The preferred shares were subject to the right of Laboratories to redeem them upon notice at $18 2/3 plus accrued dividends. On September 5, 1939, Cyanamid resolved to lend Laboratories up to $1,400,000, as Laboratories might require in connection with the redemption of its preferred shares. It also resolved in the event of such call for redemption on November 15, 1939, to make an offer to such preferred shareholders to buy their shares before October 31, 1939, at $18 2/3 plus accrued dividend. On September 6, 1939, Laboratories resolved to redeem its preferred shares on November 15, 1939, at $18 2/3 plus accrued and unpaid dividends on that date, the redemption to be out of capital to the extent of $1,400,000 and out of surplus or net profits to the extent of $21,000; to send notice to the shareholders to that effect, and also to enclose with the notice a form of written offer of Cyanamid to purchase the shares at $18 2/3; to borrow from Cyanamid on open account any amount required for such redemption up to $1,400,000; and to perfect the cancellation of such redeemed shares. Cyanamid's offer to the shareholders to buy their shares was actuated by a desire to avoid their displeasure at the redemption of an attractive high-yielding investment by suggesting to them a transaction with a more favorable income tax effect, although this was not stated to them. The taxpayer was not informed by anyone of this motive and inquired of no one as to the tax effect. He made no agreement with Cyanamid. He though of this tax effect himself, and without suggestion or assistance he selected the method of sale instead of holding for redemption. On October 25, 1939, he sent his certificate of 1,379 shares of Laboratories preferred to the agent for Cyanamid for its purchase in accordance with its offer at $18 2/3 plus dividend accrued to date of delivery. On October 26, 1939, he received from the agent in payment of said shares $25,949.41, which was the sale price of $26,045.94 less stamp tax of $96.53. He included in his income tax return $25,643.88 as proceeds of a long term sale and $304.61 as dividends. On November 15, 1939, Cyanamid delivered all its then owned Laboratories preferred shares to Laboratories and received the redemption price, whereupon the shares were redeemed.
OPINION.
STERNHAGEN, Judge:
The taxpayer on October 25, 1939, sold his 1,379 shares of Laboratories stock to Cyanamid for $25,949.41. Because of the circumstances preceding the sale, from which it is clear that Cyanamid knew that its purchase of the Laboratories shares of any shareholder would have the effect of a lower tax upon the shareholder than if the shares were redeemed by Laboratories while owned by him, the Commissioner argues that the amount received by the shareholder should be treated not as sale price, but as if it were the redemption price which Laboratories would have paid him if he had waited for the redemption and thus received substantially the same amount from Laboratories. The taxpayer's motive of selecting the sale to Cyanamid instead of the redemption transfer to Laboratories was to avoid the higher tax, but this is not a vicious motive which vitiates the transaction adopted or one requiring that to him must be imputed the more onerous tax effect of the alternative transaction which he avoided.
There is in the evidence no indication of sham on the taxpayer's part. He did not go through an empty form, like the setting up of a pseudo corporation (Gregory v. Helvering, 293 U.S. 465; Higgins v. Smith, 308 U.S. 473), which the Commissioner is permitted to disregard, or a pseudo sale which was promptly rescinded, or which the revenue act warned might not be recognized. Cf. Hamilton Allport, 4 T.C. 401. He had an election as between two transactions, and bona fide he elected the one with less onerous tax consequences. He was not bound to retain his shares and await the redemption by the Laboratories corporation with its inevitably higher tax. He was permitted to sell them to Cyanamid or any other purchaser he could find (W. P. Hobby, 2 T.C. 980); and when he sold, he could not escape the tax imposed by the statute upon the gain from the sale that actually occurred. If it were to his tax advantage to do so, he would not be heard to say that not the actual transaction, but a fictitious transaction which might have been must be recognized as the occasion for his tax.
The Commissioner is no less required to tax him in accordance with what occurred, and he is not permitted to distort the transaction by giving it an artificial character upon which a larger tax could be imposed if it were true. When the Laboratories redemption occurred, this taxpayer was not the owner of the shares; he had already sold them and realized his gain. The only question as to his tax was what was the proper statutory provision to be applied to the gain so realized, and this he correctly found to be section 117, defining the gain from the sale of property held more than 24 months as a long term capital gain and requiring recognition of such gain to the extent of 50 percent thereof. This, we think, the Commissioner is required to recognize. The determination that the gain from the sale to Cyanamid was received in partial liquidation of Laboratories and as such was 100 percent taxable under section 115(c) is reversed.
Decision will be entered for the petitioner.