Opinion
Docket No. 40926.
1956-07-31
IRWIN G. LUKENS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Charles S. Jacobs, Esq., and Early L. Gilbert, C.P.A., for the petitioner. William G. Handfield, Esq., for the respondent.
Charles S. Jacobs, Esq., and Early L. Gilbert, C.P.A., for the petitioner. William G. Handfield, Esq., for the respondent.
Held, on the facts, that the redemption of 446 shares of the stock of Florex Gardens was at such time and in such manner as to make the distribution therefor essentially equivalent to a taxable dividend, under section 115(g) of the Internal Revenue Code of 1939.
Respondent determined a deficiency in income tax against petitioner for the taxable year 1948 in the amount of $14,041.66. The only issue is whether the redemption of 446 shares of petitioner's stock in a closely held corporation, in consideration for the cancellation in substantial part of the indebtedness of petitioner, was essentially equivalent to the distribution of a taxable dividend, under section 115(g) of the Internal Revenue Code of 1939.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found as stipulated.
Petitioner is a resident of North Wales, Pennsylvania. He filed his income tax return for 1948 with the collector of internal revenue for the first district of Pennsylvania.
The Florex Gardens, sometimes referred to hereafter as Florex, is a Pennsylvania corporation, and was organized in 1907, for the purpose of raising and marketing cut flowers in North Wales. Its authorized capital stock of $100,000 consisted of 2,000 shares, with a par value of $50 per share, all of which was issued and outstanding on May 2, 1921. The 2,000 shares originally were issued between 1907 and 1913 to eight different individuals for $102,000, of which $97,000 was in cash and $5,000 was for services rendered.
Petitioner purchased 1,500 shares of the stock, at $50 per share, for cash, and had stock certificates issued to him, as follows:
+-----------------------------------------------------------------+ ¦ ¦Stock certificate ¦No. of ¦ +---------------------------+-------------------+-----------------¦ ¦Date of stock certificate ¦number ¦shares of stock ¦ +---------------------------+-------------------+-----------------¦ ¦ ¦ ¦ ¦ +---------------------------+-------------------+-----------------¦ ¦May 2, 1921 ¦113 ¦325 ¦ +---------------------------+-------------------+-----------------¦ ¦May 2, 1921 ¦114 ¦15 ¦ +---------------------------+-------------------+-----------------¦ ¦June 1, 1921 ¦115 ¦153 ¦ +---------------------------+-------------------+-----------------¦ ¦June 4, 1921 ¦116 ¦90 ¦ +---------------------------+-------------------+-----------------¦ ¦June 6, 1921 ¦117 ¦25 ¦ +---------------------------+-------------------+-----------------¦ ¦June 13, 1921 ¦118 ¦147 ¦ +---------------------------+-------------------+-----------------¦ ¦Mar. 15, 1922 ¦121 ¦400 ¦ +---------------------------+-------------------+-----------------¦ ¦Mar. 15, 1922 ¦122 ¦110 ¦ +---------------------------+-------------------+-----------------¦ ¦Mar. 15, 1922 ¦123 ¦235 ¦ +---------------------------+-------------------+-----------------¦ ¦Total ¦ ¦1,500 ¦ +-----------------------------------------------------------------+
Shortly after his graduation in 1922 from the University of Pennsylvania, and at petitioner's request, George E. Lukens, petitioner's son, returned to North Wales and took charge of the business operations of Florex. He started to work on July 5, 1922, at a salary of $30 per week.
On October 8, 1922, and on June 18, 1923, petitioner transferred to George, as gifts, 15 shares and 225 shares of Florex stock. On the latter date he sold 100 additional shares to George, at $50 per share, which left petitioner owning 1,160 shares. George paid $5,000 in cash for the 100 shares of stock.
The 500 shares of Florex stock owned by others than petitioner and George were acquired by Florex on February 25, 1933, from the estate of William A. Geiger and retired by the company. This left issued and outstanding in the possession of petitioner and his son the 1,500 shares originally purchased by petitioner.
‘After having made the aforesaid gifts, and beginning in 1946, petitioner, with the intent to make gifts to his son, George E. Lukens, and his daughter, Clara L. Brooks, of his entire interest in The Florex Gardens, made the following transfers of stock:
+-----------------------------------------------------------------------------+ ¦ ¦ ¦Number ¦ +---------------------------+-------------------------------------+-----------¦ ¦Date of stock certificate ¦Transferred to ¦of shares ¦ +---------------------------+-------------------------------------+-----------¦ ¦June 23, 1946 ¦Clara L. Brooks ¦240 ¦ +---------------------------+-------------------------------------+-----------¦ ¦June 21, 1947 ¦Clara L. Brooks ¦187 ¦ +---------------------------+-------------------------------------+-----------¦ ¦June 21, 1947 ¦George E. Lukens ¦186 ¦ +---------------------------+-------------------------------------+-----------¦ ¦December 28, 1948 ¦The Florex Gardens redeemed at $50.00¦446 ¦ ¦ ¦per share ¦ ¦ +---------------------------+-------------------------------------+-----------¦ ¦December 9, 1950 ¦Clara L. Brooks ¦51 ¦ +---------------------------+-------------------------------------+-----------¦ ¦December 9, 1950 ¦George E. Lukens ¦50 ¦ +-----------------------------------------------------------------+-----------¦ ¦Total shares of stock of the Florex Gardens transferred by the ¦1,160” ¦ ¦petitioner and being all of the said stock owned by him * * * ¦ ¦ +-----------------------------------------------------------------------------+
After the surrender of the above 446 shares of Florex stock and petitioner had divested himself of all remaining shares, Florex had 1,054 shares outstanding, all of which were owned by petitioner's son, George, and his daughter, Clara L. Brooks, and aside from the 100 shares which George had purchased from petitioner on June 18, 1923, for cash, the stock was owned 476 shares by George and 478 shares by Clara, all of which they had received by gift from petitioner.
Petitioner filed gift tax returns for 1946 and 1947 with the collector of internal revenue for the first district of Pennsylvania, reporting among other gifts, the gifts he had made of Florex stock to his children. In each return, he reported the value of the Florex stock at $50 per share and each return was accepted as filed.
At the time petitioner transferred the 446 shares to Florex, he was indebted to Florex in the amount of $30,000, represented by his demand notes, as follows:
+---------------------------------+ ¦Date of note ¦Amount of note ¦ +----------------+----------------¦ ¦ ¦ ¦ +----------------+----------------¦ ¦July 20, 1944 ¦$2,000 ¦ +----------------+----------------¦ ¦March 12, 1946 ¦5,000 ¦ +----------------+----------------¦ ¦June 7, 1946 ¦5,000 ¦ +----------------+----------------¦ ¦March 2, 1948 ¦6,000 ¦ +----------------+----------------¦ ¦April 29, 1948 ¦5,000 ¦ +----------------+----------------¦ ¦October 29, 1948¦7,000 ¦ +----------------+----------------¦ ¦Total ¦$30,000 ¦ +---------------------------------+
This outstanding indebtedness was satisfied as follows:
+-----------------------------------------------------------------------------+ ¦Date ¦Amount ¦Method ¦ +----------------+--------+---------------------------------------------------¦ ¦ ¦ ¦ ¦ +----------------+--------+---------------------------------------------------¦ ¦December 30, ¦$22,300 ¦446 shares of stock with a par value of $50 per ¦ ¦1948 ¦ ¦share. ¦ +----------------+--------+---------------------------------------------------¦ ¦March 11, 1949 ¦700 ¦Cash. ¦ +----------------+--------+---------------------------------------------------¦ ¦September 6, ¦3,500 ¦Cash. ¦ ¦1949 ¦ ¦ ¦ +----------------+--------+---------------------------------------------------¦ ¦January 16, 1950¦3,500 ¦Cash. ¦ +----------------+--------+---------------------------------------------------¦ ¦Total ¦$30,000 ¦ ¦ +-----------------------------------------------------------------------------+
The surrender of the 446 shares of Florex stock by petitioner at its par value of $50 per share was considered and approved by the board of directors at a special meeting, with all members present, on December 28, 1948. The directors of Florex were petitioner, his son, George, and his daughter, Clara L. Brooks, who were respectively president, vice president and secretary and treasurer, and assistant secretary of the company. The following is from the minutes of the December 28 meeting:
Irwin G. Lukens, the holder of 547 shares of stock of the Company, offered to sell 446 shares to the Company at the par value of $50.00 per share. After the subject was discussed among the Directors, the following Resolution was duly offered, seconded and unanimously passed with Irwin G. Lukens refraining from voting:—
RESOLVED, That the Treasurer of the Company be and is hereby empowered to purchase 446 shares of stock of this Company from Irwin G. Lukens at par value of $50.00 per share, and that the said stock be placed in the treasury of the Company.
After surrender and as provided in the resolution, the 446 shares were carried on the Florex books as treasury stock.
Petitioner was president of Florex until December 9, 1950, and received a salary in several years prior to 1948. However, he devoted very little time to the Florex business, as his principal occupation was with the First National Bank of Lansdale, of which he was president. He was a principal officer of the North Wales Building & Loan Association, and of the Keller-Whilldin Pottery Company. During the early years of Florex's operations petitioner would go by the company's office after banking hours for an hour or so, 3 or 4 days a week, but during the later 10 or 15 years the number of his visits had dropped until they were not more than 5 a year. The salary paid to petitioner by Florex for the years 1946 and 1947 was disallowed by respondent as deductions on the income tax returns of Florex, and thereafter, during 1948, 1949, and 1950, petitioner received no salary from Florex. George was the only officer to receive compensation in 1948. His salary was $15,000 a year.
During the period 1923 through 1951, loans were made to Florex by petitioner, his son, George, his daughter, Clara, and his grandson, Irwin L. Brooks. The following shows the dates of loans (all notes payable on demand), the amounts, and the dates on which Florex made repayments:
+-----------------------------------------------------------------------+ ¦Date of note ¦Amount¦Date of payment¦Amount of¦ +--------------------------------------+------+---------------+---------¦ ¦ ¦loan ¦ ¦payment ¦ +--------------------------------------+------+---------------+---------¦ ¦Loans by George E. Lukens --Continued¦ ¦ ¦ ¦ +--------------------------------------+------+---------------+---------¦ ¦Sept. 30, 1938 ¦$1,500¦May 15, 1939 ¦$1,500 ¦ +--------------------------------------+------+---------------+---------¦ ¦ ¦ ¦(Apr. 6, 1939 ¦1,000 ¦ +--------------------------------------+------+---------------+---------¦ ¦ ¦ ¦(June 16, 1939 ¦1,000 ¦ +--------------------------------------+------+---------------+---------¦ ¦ ¦ ¦(June 27, 1939 ¦1,000 ¦ +--------------------------------------+------+---------------+---------¦ ¦Oct. 26, 1938 ¦7,000 ¦(July 7, 1939 ¦1,000 ¦ +--------------------------------------+------+---------------+---------¦ ¦ ¦ ¦(July 14, 1939 ¦1,000 ¦ +--------------------------------------+------+---------------+---------¦ ¦ ¦ ¦(Dec. 15, 1939 ¦1,000 ¦ +--------------------------------------+------+---------------+---------¦ ¦ ¦ ¦(Jan. 5, 1940 ¦1,000 ¦ +--------------------------------------+------+---------------+---------¦ ¦Sept. 29, 1939 ¦1,000 ¦Jan. 8, 1940 ¦ ¦ +--------------------------------------+------+---------------+---------¦ ¦ ¦ ¦(Jan. 26, 1940 ¦3,000 ¦ +--------------------------------------+------+---------------+---------¦ ¦ ¦ ¦(Feb. 27, 1940 ¦1,000 ¦ +--------------------------------------+------+---------------+---------¦ ¦ ¦ ¦(Apr. 18, 1940 ¦1,000 ¦ +--------------------------------------+------+---------------+---------¦ ¦Oct. 31, 1939 ¦11,000¦(Apr. 29, 1940 ¦2,000 ¦ +--------------------------------------+------+---------------+---------¦ ¦ ¦ ¦(May 21, 1940 ¦2,000 ¦ +--------------------------------------+------+---------------+---------¦ ¦ ¦ ¦(May 29, 1940 ¦2,000 ¦ +--------------------------------------+------+---------------+---------¦ ¦Jan. 26, 1951 ¦3,500 ¦Feb. 2, 1951 ¦3,500 ¦ +--------------------------------------+------+---------------+---------¦ ¦ ¦ ¦(June 20, 1951 ¦1,500 ¦ +--------------------------------------+------+---------------+---------¦ ¦ ¦ ¦(June 28, 1951 ¦1,000 ¦ +--------------------------------------+------+---------------+---------¦ ¦Apr. 4, 1951 ¦5,000 ¦(Aug. 31, 1951 ¦1,500 ¦ +--------------------------------------+------+---------------+---------¦ ¦ ¦ ¦(July 8, 1952 ¦1,000 ¦ +--------------------------------------+------+---------------+---------¦ ¦Dec. 29, 1951 ¦4,500 ¦July 8, 1952 ¦4,500 ¦ +-----------------------------------------------------------------------+
Total loans by George E. Lukens to the Florex Gardens. $60,500 $60,500
Loans by Clara L. Brooks: (Feb. 28, 1938 5,000 (June 8, 1938 2,000 Jan. 3, 1938 $15,000 (June 18, 1938 2,000 (Apr. 20, 1939 2,500 (May 15, 1939 3,500 (June 8, 1938 2,000 (June 18, 1938 2,000 Feb. 28, 1938 10,000 (Apr. 20, 1939 4,000 (May 15, 1939 2,000 (May 15, 1939 3,000 (June 6, 1939 1,000 (June 16, 1939 1,000 Nov. 7, 1938 10,000 June 27, 1939 1,000 (July 7, 1939 1,000 (July 14, 1939 1,000 (Jan. 5, 1940 2,000 (Jan. 8, 1940 1,000 (Jan. 26, 1940 3,000 (Feb. 27, 1940 1,000 Oct. 31, 1939 12,000 (Apr. 18, 1940 1,000 (Apr. 29, 1940 2,000 (May 21, 1940 2,000 (May 29, 1940 2,000 (Apr. 30, 1943 18,000 Apr. 9, 1941 20,000 (May 7, 1943 2,000 (Apr. 17, 1942 3,000 Nov. 8, 1941 5,500 (May 29, 1942 2,000 (July 7, 1942 500 Dec. 9, 1941 1,000 Apr. 10, 1942 1,000 Dec. 1, 1942 2,000 May 7, 1943 2,000 Jan. 2, 1943 7,500 May 14, 1943 7,500 (Dec. 31, 1943 10,000 Nov. 10, 1943 12,000 (Jan. 14, 1944 2,000
Total loans by Clara L. Brooks to the Florex Gardens. $95,000 $95,000
Loans by Irwin L. Brooks: (May 28, 1943 3,500 Jan. 2, 1943 $7,500 (Jan. 14, 1944 2,000 (Jan. 21, 1944 2,000 Sept. 27, 1943 4,500 Jan. 21, 1944 4,500
Total loans by Irwin L. Brooks to the Florex Gardens. $12,000 $12,000
Summary of Loans to the Florex Gardens
+-------------------------------------------------+ ¦By: ¦ ¦ ¦ +--------------------------------+-------+--------¦ ¦Irwin G. Lukens ¦$53,000¦ ¦ +--------------------------------+-------+--------¦ ¦George E. Lukens ¦60,500 ¦ ¦ +--------------------------------+-------+--------¦ ¦Clara L. Brooks ¦95,000 ¦ ¦ +--------------------------------+-------+--------¦ ¦Irwin L. Brooks ¦12,000 ¦ ¦ +--------------------------------+-------+--------¦ ¦Total loan to the Florex Gardens¦ ¦$220,500¦ +-------------------------------------------------+
The following shows the amounts of loans Florex made to petitioner, the dates of the demand notes, and the dates on which petitioner paid the loans:
+-------------------------------------------------+ ¦Date of note ¦Amount ¦Date of payment¦Amount of¦ +--------------+--------+---------------+---------¦ ¦ ¦of loan ¦ ¦payment ¦ +--------------+--------+---------------+---------¦ ¦Jan. 1, 1929 ¦$40,000 ¦Dec. 31, 1929 ¦$40,000 ¦ +--------------+--------+---------------+---------¦ ¦Dec. 31, 1929 ¦1,600 ¦June 23, 1930 ¦1,600 ¦ +--------------+--------+---------------+---------¦ ¦Jan. 3, 1930 ¦40,000 ¦Dec. 29, 1930 ¦40,000 ¦ +--------------+--------+---------------+---------¦ ¦Dec. 31, 1930 ¦1,600 ¦Feb. 4, 1931 ¦1,600 ¦ +--------------+--------+---------------+---------¦ ¦ ¦ ¦(Jan. 21, 1932 ¦10,000 ¦ +--------------+--------+---------------+---------¦ ¦ ¦ ¦(Mar. 5, 1934 ¦5,000 ¦ +--------------+--------+---------------+---------¦ ¦ ¦ ¦(May 3, 1933 ¦4,000 ¦ +--------------+--------+---------------+---------¦ ¦ ¦ ¦(Mar. 2, 1932 ¦1,000 ¦ +--------------+--------+---------------+---------¦ ¦Jan. 1, 1931 ¦40,000 ¦(Aug. 30, 1934 ¦3,000 ¦ +--------------+--------+---------------+---------¦ ¦ ¦ ¦(Jan. 22, 1931 ¦10,000 ¦ +--------------+--------+---------------+---------¦ ¦ ¦ ¦(Sept. 18, 1934¦2,500 ¦ +--------------+--------+---------------+---------¦ ¦ ¦ ¦(June 8, 1935 ¦2,500 ¦ +--------------+--------+---------------+---------¦ ¦ ¦ ¦(June 30, 1935 ¦2,000 ¦ +--------------+--------+---------------+---------¦ ¦Oct. 20, 1937 ¦2,000 ¦Jan. 4, 1938 ¦2,000 ¦ +--------------+--------+---------------+---------¦ ¦June 27, 1938 ¦2,000 ¦July 13, 1939 ¦2,000 ¦ +--------------+--------+---------------+---------¦ ¦Jan. 27, 1939 ¦3,000 ¦July 1, 1939 ¦3,000 ¦ +--------------+--------+---------------+---------¦ ¦ ¦ ¦(July 1, 1939 ¦2,000 ¦ +--------------+--------+---------------+---------¦ ¦May 23, 1939 ¦3,000 ¦(Dec. 30, 1939 ¦1,000 ¦ +--------------+--------+---------------+---------¦ ¦June 3, 1939 ¦1,000 ¦Dec. 30, 1939 ¦1,000 ¦ +--------------+--------+---------------+---------¦ ¦July 13, 1939 ¦3,000 ¦Dec. 30, 1939 ¦3,000 ¦ +--------------+--------+---------------+---------¦ ¦June 25, 1941 ¦2,000 ¦Nov. 4, 1941 ¦2,000 ¦ +--------------+--------+---------------+---------¦ ¦Sept. 5, 1941 ¦5,000 ¦Nov. 4, 1941 ¦5,000 ¦ +--------------+--------+---------------+---------¦ ¦Sept. 14, 1942¦2,000 ¦Nov. 10, 1942 ¦2,000 ¦ +--------------+--------+---------------+---------¦ ¦Mar. 3, 1944 ¦6,000 ¦Dec. 20, 1947 ¦6,000 ¦ +--------------+--------+---------------+---------¦ ¦July 1, 1944 ¦8,000 ¦Dec. 20, 1947 ¦8,000 ¦ +--------------+--------+---------------+---------¦ ¦ ¦ ¦(Dec. 30, 1948 ¦1,300 ¦ +--------------+--------+---------------+---------¦ ¦July 20, 1944 ¦2,000 ¦(Mar. 11, 1949 ¦700 ¦ +--------------+--------+---------------+---------¦ ¦Mar. 12, 1946 ¦5,000 ¦Dec. 30, 1948 ¦5,000 ¦ +--------------+--------+---------------+---------¦ ¦June 7, 1946 ¦5,000 ¦Dec. 30, 1948 ¦5,000 ¦ +--------------+--------+---------------+---------¦ ¦Sept. 11, 1946¦5,000 ¦June 9, 1947 ¦5,000 ¦ +--------------+--------+---------------+---------¦ ¦Sept. 25, 1946¦5,000 ¦June 9, 1947 ¦5,000 ¦ +--------------+--------+---------------+---------¦ ¦Mar. 2, 1948 ¦6,000 ¦Dec. 30, 1948 ¦6,000 ¦ +--------------+--------+---------------+---------¦ ¦Apr. 29, 1948 ¦5,000 ¦Dec. 30, 1948 ¦5,000 ¦ +--------------+--------+---------------+---------¦ ¦Sept. 9, 1948 ¦2,000 ¦Sept. 24, 1948 ¦2,000 ¦ +--------------+--------+---------------+---------¦ ¦ ¦ ¦(Sept. 6, 1949 ¦3,500 ¦ +--------------+--------+---------------+---------¦ ¦Oct. 29, 1948 ¦7,000 ¦(Jan. 16, 1950 ¦3,500 ¦ +--------------+--------+---------------+---------¦ ¦Total ¦$202,200¦ ¦$202,200 ¦ +-------------------------------------------------+
Petitioner borrowed money from the company as he wished, without question, and made repayments at his own convenience.
Petitioner was 81 years of age when he surrendered the 446 shares of Florex in any way, nor did it impair its capital.
On December 9, 1950, the date petitioner made gifts of his remaining 101 shares of Florex stock to George and Clara, he resigned as president and as director of Florex.
From the time petitioner acquired his 1,500 shares of stock of Florex, dividends were declared and paid in cash, as follows:
+-----------------------+ ¦May 20, 1924 ¦$10,000 ¦ +--------------+--------¦ ¦July 1, 1925 ¦20,000 ¦ +--------------+--------¦ ¦April 9, 1926 ¦30,000 ¦ +--------------+--------¦ ¦June 24, 1927 ¦35,000 ¦ +--------------+--------¦ ¦June 30, 1928 ¦20,000 ¦ +--------------+--------¦ ¦May 31, 1929 ¦25,000 ¦ +--------------+--------¦ ¦Total ¦$140,000¦ +-----------------------+
At December 31 of the years indicated, current assets, fixed assets after depreciation, goodwill, deferred charges, and total assets of Florex were as follows:
+-----------------------------------------------------------------------------+ ¦Year ending ¦Current ¦Fixed assets after ¦Goodwill¦Deferred ¦Total ¦ ¦December 31 ¦assets ¦depreciation ¦ ¦charges ¦assets ¦ +--------------+----------+-------------------+--------+----------+-----------¦ ¦1934 ¦$81,478.65¦$73,800.65 ¦$1,000 ¦$2,036.95 ¦$158,316.35¦ +--------------+----------+-------------------+--------+----------+-----------¦ ¦1935 ¦94,761.30 ¦70,721.97 ¦1,000 ¦2,099.54 ¦168,582.81 ¦ +--------------+----------+-------------------+--------+----------+-----------¦ ¦1936 ¦109,300.62¦107,376.02 ¦1,000 ¦1,909.29 ¦219,585.93 ¦ +--------------+----------+-------------------+--------+----------+-----------¦ ¦1937 ¦113,899.65¦101,923.96 ¦1,000 ¦2,137.98 ¦218,961.59 ¦ +--------------+----------+-------------------+--------+----------+-----------¦ ¦1938 ¦101,717.00¦113,153.00 ¦1,000 ¦2,158.79 ¦218,028.79 ¦ +--------------+----------+-------------------+--------+----------+-----------¦ ¦1939 ¦101,607.84¦108,864.83 ¦1,000 ¦1,683.57 ¦213,156.24 ¦ +--------------+----------+-------------------+--------+----------+-----------¦ ¦1940 ¦93,898.60 ¦118,290.76 ¦1,000 ¦3,354.98 ¦216,544.34 ¦ +--------------+----------+-------------------+--------+----------+-----------¦ ¦1941 ¦64,658.72 ¦120,197.70 ¦1,000 ¦2,952.56 ¦188,809.18 ¦ +--------------+----------+-------------------+--------+----------+-----------¦ ¦1942 ¦69,251.69 ¦116,070.03 ¦1,000 ¦2,259.75 ¦188,581.47 ¦ +--------------+----------+-------------------+--------+----------+-----------¦ ¦1943 ¦76,221.43 ¦108,364.08 ¦1,000 ¦2,090.46 ¦187,675.97 ¦ +--------------+----------+-------------------+--------+----------+-----------¦ ¦1944 ¦114,266.33¦104,710.83 ¦1,000 ¦2,024.73 ¦222,001.89 ¦ +--------------+----------+-------------------+--------+----------+-----------¦ ¦1945 ¦139,019.96¦100,137.51 ¦1,000 ¦2,298.38 ¦242,455.85 ¦ +--------------+----------+-------------------+--------+----------+-----------¦ ¦1946 ¦148,356.28¦98,245.42 ¦1,000 ¦2,854.21 ¦250,455.91 ¦ +--------------+----------+-------------------+--------+----------+-----------¦ ¦1947 ¦125,993.22¦114,439.63 ¦1,000 ¦5,750.75 ¦247,183.60 ¦ +--------------+----------+-------------------+--------+----------+-----------¦ ¦1948 ¦82,063.24 ¦110,921.52 ¦1,000 ¦4,829.21 ¦1 ¦ ¦ ¦ ¦ ¦ ¦ ¦229,477.76 ¦ +--------------+----------+-------------------+--------+----------+-----------¦ ¦1949 ¦68,915.42 ¦104,968.83 ¦1,000 ¦3,624.80 ¦1 ¦ ¦ ¦ ¦ ¦ ¦ ¦209,172.84 ¦ +--------------+----------+-------------------+--------+----------+-----------¦ ¦1950 ¦100,364.16¦106,092.93 ¦1,000 ¦3,652.46 ¦1 ¦ ¦ ¦ ¦ ¦ ¦ ¦241,773.34 ¦ +--------------+----------+-------------------+--------+----------+-----------¦ ¦1951 ¦97,613.55 ¦102,427.38 ¦1,000 ¦3,774.35 ¦2 ¦ ¦ ¦ ¦ ¦ ¦ ¦227,115.28 ¦ +--------------+----------+-------------------+--------+----------+-----------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+
At December 31 of the years indicated, accounts payable, notes payable, capital stock, surplus, and total liabilities of Florex were as follows:
+-----------------------------------------------------------------------------+ ¦Year ending ¦Accounts ¦Notes ¦Capital ¦Surplus ¦Total ¦ ¦December 31 ¦payable ¦payable ¦stock ¦1 ¦liabilities ¦ +-----------------+------------+----------+----------+----------+-------------¦ ¦1934 ¦$3,142.06 ¦ ¦$75,000 ¦$80,174.19¦$158,316.25 ¦ +-----------------+------------+----------+----------+----------+-------------¦ ¦1935 ¦5,688.49 ¦ ¦75,000 ¦87,894.32 ¦168,582.81 ¦ +-----------------+------------+----------+----------+----------+-------------¦ ¦1936 ¦12,158.19 ¦$36,000 ¦75,000 ¦96,427.74 ¦219,585.93 ¦ +-----------------+------------+----------+----------+----------+-------------¦ ¦1937 ¦5,758.10 ¦35,000 ¦75,000 ¦103,203.49¦218,961.59 ¦ +-----------------+------------+----------+----------+----------+-------------¦ ¦1938 ¦8,860.65 ¦30,500 ¦75,000 ¦103,668.14¦218,028.79 ¦ +-----------------+------------+----------+----------+----------+-------------¦ ¦1939 ¦4,351.75 ¦27,000 ¦75,000 ¦106,804.49¦213,156.24 ¦ +-----------------+------------+----------+----------+----------+-------------¦ ¦1940 ¦7,236.73 ¦42,000 ¦75,000 ¦92,307.61 ¦216,544.34 ¦ +-----------------+------------+----------+----------+----------+-------------¦ ¦1941 ¦5,025.37 ¦36,500 ¦75,000 ¦72,283.81 ¦188,809.18 ¦ +-----------------+------------+----------+----------+----------+-------------¦ ¦1942 ¦14,244.44 ¦43,000 ¦75,000 ¦56,337.03 ¦188,581.47 ¦ +-----------------+------------+----------+----------+----------+-------------¦ ¦1943 ¦9,346.43 ¦16,500 ¦75,000 ¦86,829.54 ¦187,675.97 ¦ +-----------------+------------+----------+----------+----------+-------------¦ ¦1944 ¦17,469.25 ¦20,000 ¦75,000 ¦109,532.64¦222,001.89 ¦ +-----------------+------------+----------+----------+----------+-------------¦ ¦1945 ¦33,874.07 ¦ ¦75,000 ¦133,581.78¦242,455.85 ¦ +-----------------+------------+----------+----------+----------+-------------¦ ¦1946 ¦21,526.54 ¦ ¦75,000 ¦153,929.37¦250,455.91 ¦ +-----------------+------------+----------+----------+----------+-------------¦ ¦1947 ¦10,749.94 ¦ ¦75,000 ¦161,433.66¦247,183.60 ¦ +-----------------+------------+----------+----------+----------+-------------¦ ¦1948 ¦4,694.73 ¦17,000 ¦2 75,000¦132,783.03¦229,477.76 ¦ +-----------------+------------+----------+----------+----------+-------------¦ ¦1949 ¦8,212.65 ¦35,000 ¦2 75,000¦90,960.19 ¦209,172.84 ¦ +-----------------+------------+----------+----------+----------+-------------¦ ¦1950 ¦16,273.30 ¦100,000 ¦2 75,000¦50,500.04 ¦241,773.34 ¦ +-----------------+------------+----------+----------+----------+-------------¦ ¦1951 ¦59,926.62 ¦90,000 ¦2 75,000¦2,188.66 ¦227,115.28 ¦ +-----------------+------------+----------+----------+----------+-------------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+ Prior to 1934, an item entitled “Reserves” appeared as a liability on the Florex balance sheets. At December 31, 1933, the amount shown as “Reserves” was $37,180.32. In 1934 this amount was included in the amount shown as the surplus and was at all times thereafter so included.Of the $75,000 shown, $22,300 represented the 446 shares surrendered by petitioner on December 28, 1948 which shares were thereafter carried as treasury stock.
are applicable, and the amount so applied in satisfaction of petitioner's indebtedness is to be treated as a taxable dividend.
Both parties suggest various factors which they argue are significant, if not controlling, in determining that the distribution in redemption of the 446 shares was or was not, as the case might be, essentially equivalent to the distribution of a taxable dividend.
Factors stressed by the respondent as being important to, if not controlling of, the determination of the question at issue are (a) whether there was a justifiable business reason for the redemption of the stock; (b) whether the accumulation of surplus warranted payment of a dividend; (c) whether net earnings were substantial, good, or poor during the years surrounding the transaction; (d) whether dividends had been paid regularly, and if not, why not; (e) whether there was a shrinkage or reduction of business comparable to the reduction of capital stock; (f) whether the transaction resulted in an impairment of the capital; (g) whether there was an intent on the part of the stockholders to liquidate the corporation; (h) whether there was a close relationship between and among the stockholders; and (i) whether the stockholder whose stock was redeemed was in substantially the same position after the transaction as before.
Petitioner takes the position that the payment made by Florex to him in the redemption of the 446 shares could not have been ‘essentially equivalent to the distribution of a taxable dividend’ where (a) the redemption reduced the percentage of his ownership of the company from 36 1/2 per cent to less than 10 per cent; (b) no payment of any kind was made to the holders of the other 63 1/2 per cent of the stock; (c) the stock was redeemed at its par value, which was also its fair market value at the time of the redemption and its cost to him; (d) treatment of the redemption price as a distribution of a taxable dividend would increase the cost basis of his remaining 101 shares of stock to a fantastically high figure; (e) the stock redeemed was not dividend stock, but stock which had been originally issued at par for cash or its equivalent; and (f) management of the corporation knew that the corporation's needs for working capital would be less in future years.
Most, if not all, of the factors mentioned have been present one or more times in the decided cases, and have been regarded as significant in varying degrees for the purpose of determining whether the distribution or distributions in redemption of stock were, or were not, within the provisions of section 115(g). In our study of the cases, however, we have been unable to discover any certain or reasonably definite test or criterion for determining when such distribution is to be treated as a taxable dividend, under that section. And, as aptly stated in Woodworth v. Commissioner, 218 F.2d 719, affirming a Memorandum Opinion of this Court, ‘the decided cases in the end only lead back to the door at which we entered, the statute itself, which imposes an ordinary income tax upon a partial liquidation only when made ‘at such time’ and ‘in such manner’ as to make the distribution and cancellation essentially equivalent to the distribution of a dividend.' In short, the applicability of the statute must be determined on the basis of the combination of the facts and circumstances in each particular case.
We do know, from the specific wording of the statute, that whether or not the stock redeemed was issued as a stock dividend is not decisive of the applicability of section 115(g). We also know that under the pertinent regulations
there are specified situation in which distributions made in the redemption of stock are not to be regarded as being within the purview of the said section. Section 115(g), for instance, does not apply to a distribution in complete cancellation or redemption, or to one of a series of distributions in complete cancellation or redemption, of all of the stock of a corporation, the tax effect resulting from such distributions being governed by section 115(c) of the Code. The regulation also excludes from the scope of section 115(g) amounts distributed in ‘cancellation or redemption by a corporation of all of the stock of a particular shareholder, so that the shareholder ceases to be interested in the affairs of the corporation.’
At first blush, it might appear that this is a case falling under that part of the regulation last referred to above, which categorically states that if, by reason of the cancellation or redemption of all of the stock of a particular shareholder, so that the shareholder ceases to be interested in the affairs of the corporation, the distribution is not within section 115(g), since the petitioner in surrendering the 446 shares was merely taking one step in an over-all plan whereby he intended to divest himself of all of his Florex stock and thereby cease ‘to be interested’ in its affairs. Upon examination, however, it is clear that the redemption of the 446 shares in the instant case was not a redemption such as the regulation contemplates. The facts show that petitioner had no intention of surrendering all of his Florex stock for redemption, but that, to the contrary, he intended not only that the corporate business should continue as it had, but that, except for the 100 shares of stock which he had sold to his son, George, in 1923, the ownership of the corporation should continue to be represented by the shares which, though no longer his, would be owned equally by his son and daughter, the natural objects of his bounty, and by reason of the gifts which he had made and did make to them. In short, he intended to effect no substantial change in the corporation or its relationship to its stockholders, but rather, intended that such changes as did result would come from the gifts of stock which, by design, would be held in equal proportions by George and Clara. Accordingly, the over-all result was not substantially different from the result which would have been occasioned by an admitted distribution of a dividend on his stock from the profits of the corporation and the use thereof in the satisfaction of his indebtedness.
Other facts, in our opinion, also indicate that the end result was, for all practical purposes, a de facto distribution to petitioner from the profits of the corporation. Florex had had some bad years, but the facts indicate that such years were decidedly the exception. There is every indication that it was very prosperous from 1924 through 1929, since during that time it paid very attractive dividends. It's balance sheets for the years 1932 through 1949 indicate that it had a bad year in 1933, but after 1933, and for every year through 1939, it steadily increased its accumulated earnings. It would appear that it sustained fairly substantial losses for the years 1940, 1941, and 1942, but for the years thereafter up to 1948 its business was quite profitable, and between December 31, 1942, and December 31, 1947, its accumulated earnings increased by $105,096.63. In the face of those earnings, however, it paid no dividends whatever after May 31, 1929. It apparently sustained fairly substantial losses in both 1948 and 1949, but even after those losses it still disclosed on its balance sheets a comparatively substantial amount of accumulated earnings, and was in a position, in 1948, to permit petitioner's debts to it to the extent of $22,300 to be satisfied, not by cash, but by the turning in of stock, which stock it did not write out of capital but carried as treasury stock, continuing to show its capital stock after the surrender in the same amount as it had before, namely, $75,000.
It is true that the stockholders, particularly petitioner and his son, had at numerous times loaned money to the corporation, presumably to meet temporary cash needs, since in the main most of the amounts so borrowed by Florex were paid off within relatively short periods of time. According to the record, however, petitioner made only one loan to Florex after December 31, 1937, which was a loan of $3,000 on November 10, 1942, all of which was repaid on December 31, 1942. After 1942, and from March 3, 1944, to October 29, 1948, during which time Florex was prospering and adding to its accumulated earnings, petitioner, by 11 loans ranging from $2,000 to $8,000 and amounting in the aggregate to $56,000, had the use according to his needs of the Florex surplus, one loan of $7,000 being made on October 29, 1948, just 2 months before the surrender of the 446 shares of stock and for which he received the $22,300 credit against his indebtedness.
It would thus appear that Florex, particularly during the 1940's and up to and including the taxable year, had accumulated earnings which it did not need in the operation of its business, but instead of distributing dividends, it made loans to the petitioner, who, except for 100 shares, either owned or by gift had divided all of the outstanding stock between his son and daughter. In that position, petitioner was content to carry his withdrawals from Florex as loans, and according to the testimony of George, if Florex should need the cash for operations, petitioner was in a position to satisfy that need by prompt repayment of the loans. It would appear, however, that when the time was approaching when petitioner would have completed the division of his stock between George and Clara, it was decided, as to $22,300 of the amounts which Florex, by reason of its surplus earnings over the years, had been able to loan to petitioner without hampering its business, that repayment was not necessary and would not be required. Such being the picture, as we see it, we cannot escape the conclusion that the redemption of the 446 shares of stock was ‘at such time and in such manner’ as to make the $22,300 credited to petitioner against his indebtedness ‘essentially equivalent to the distribution of a taxable dividend,‘ under section 115(g).
Against that conclusion, petitioner argues that the occasion of the redemption was a reduction for business purposes in Florex's capital, and not a distribution of profits, the basis for the argument being that it was the intention of George, when he obtained control of Florex, to raze the burdensome and gigantic greenhouse, thereby lessening the needs of the company for capital, and that in 1950, when petitioner no longer owned any of the stock, the greenhouse was razed. Not only is there no demonstration that such was the occasion for the surrender by petitioner of the 446 shares, but the facts show that during the years particularly from 1944 up to the surrender of the said shares Florex was able to conduct its business, which included the maintenance of the huge greenhouse, and still have accumulated earnings sufficient to enable it to make the loans to petitioner and to redeem the stock at the end of 1948, a year which according to its balance sheet was a loss year.
Decision will be entered for the respondent. 1. SEC. 115. DISTRIBUTIONS BY CORPORATIONS.(g) REDEMPTION OF STOCK.— If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) 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, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. 2.Regulations 111.SEC. 29.115-9. DISTRIBUTION IN REDEMPTION OR CANCELLATION OF STOCK TAXABLE AS A DIVIDEND.— If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) 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, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend.The question 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 circumstances of eac- case. A cancellation or redemption by a corporation of a portion of its stock pro rata among all the shareholders will generally be considered as effecting a distribution essentially equivalent to a dividend distribution to the extent of the earnings and profits accumulated after February 28, 1913. On the other hand, a cancellation or redemption by a corporation of all of the stock of a particular shareholder, so that the shareholder ceases to be interested in the affairs of the corporation, does not effect a distribution of a taxable dividend. A bona fide distribution in complete cancellation or redemptions of all of the stock of a corporation, or one of a series of bona fide distributions in complete cancellation or redemption of all of the stock of a corporation, or one of a series of bona fide distributions in complete cancellation or redemption of all of the stock of a corporation, is not essentially equivalent to the distribution of a taxable dividend. * * * -------- Notes:
1Includes “Claim for Refund--Income Tax, $8,363.79,” and “Treasury Stock, $22,300.”
2Includes “Treasury Stock, $22,300.”
On its return for 1948, Florex reported a net loss of $37,014.42.
For years, Florex was known throughout the trade, and even internationally, as having the largest greenhouse in the world. This was the company's greenhouse No. 1, and petitioner was quite proud of it. However, because of the high cost of maintaining the greenhouse and the fact that the productivity of the flower beds in it was much less than that of beds in Florex's other greenhouses, George had insisted for some time that the greenhouse should be demolished. He felt that with the elimination of the greenhouse, Florex would need less working capital. He also differed with petitioner on other matters of policy, but because they were close together otherwise, George usually deferred to his father's wishes. Petitioner used his influence both as principal stockholder and as father of the other two stockholders to maintain his policies. In 1950, the year in which petitioner completely severed his relations with Florex, George had the greenhouse demolished.
The 446 shares transferred by petitioner to Florex on December 28, 1948, were redeemed by the company at such time and in such manner as to make the distribution of $22,300, as credited on petitioner's loan account, essentially equivalent to the distribution of a taxable dividend.
OPINION.
TURNER, Judge:
The only question submitted is whether the redemption in 1948 of a part of petitioner's stock in Florex Gardens, in consideration for the cancellation of $22,300 of his indebtedness to Florex, was ‘essentially equivalent to the distribution of a taxable dividend.’ If so, the provisions of section 115(g) of the Internal Revenue Code of 1939