*1 WISDOM, Before RIVES and Circuit Judges, DAWKINS, Jr., District Judge. Judge. WISDOM, Circuit February 25, Geophysical 1954 General Company, taxpayer, cer- transferred depreciable
tain
assets
a tax basis
$169,290
$746,-
and a market
major
525 to two of its
stockholders in
of their
Later
stock.
day
reacquired
same assets from the former stockholders
exchange
notes in the
$746,525.
amount of
In its 1954 income
depre-
tax return the
claimed
using
ciation deductions
cost basis
market value of the
quesr;
time of the
transaction.1
sole
litigation presents
tion this
is whether
corporation’s reacquisition of the
tbe
stepped up
the basis. We hold that
did not and
reverse the decision below.
Earl W. Johnson founded General Geo-
Company
engage
physical
exploration,
managed
opera-
oil
tions until his sudden
death
1953. At
estate,
wife, mother,
his death his
his
a friend
L.
Paul Davis owned dispute
deprecia
gain
according
1. In addition
able
to tbe tax-
appeal
payer, $11,049 according
tion deductions
also affects
to tbe Govern-
por
the taxation of the sale of a small
ment.
assets,
produced
tion
a tax-
*2
taxpayer
insisted
and
Witnesses
corporation’s
stock
of the
total
agreement
the
major portion that
no
between
voting
The
of its
shares.
by corporation
re-
and the
remaining
stockholders
owned
of the
shares was
exchange
corporate properties
Hall,
Al-
the
and
Sappington, T. O.
Chester
redemp-
ferred to
Gruff,
the stockholders in the
officers
also
bert B.
who were
judge
tion of their
so
shares.
trial
corporation.
was
The
the
Johnson
The
stock
found,
belonged
and
was
(cid:127)community
it seems clear that there
property: half
legally binding agreement
ef-
that
held
was
other half
the widow and the
attorney
fect. The
for the stockholders
of Houston
Bank
the Second National
testify, however,
had dis-
that he
Johnson’s
and
for
executor
trustee
possibility
and
testimony
cussed the
such resale
of
a
that
estate.
shows
The
February 25,
prepared
before
1954 had
that
bank and
Johnson
realized
Mrs.
soon
any-
that
documents for
resale in case
a
neither of them
contribute
could
upon
thing
running
corporate
after the initial trans-
of value to
fer.
they
business,
at-
and
that
should
tempt
They
that if
it.
realized also
Under Section 1012 of
Internal
corporation
prop-
liquidated
its
and
Revenue Code of
26 U.S.C.A. §
they
sold,
erties
less than
would receive
property
“the
of
basis
be the
shall
going
a
con-
value of their stock in
property.”
of
requires
cost
such
This
Hall,
Sappington,
cern.
Grubb be-
and
taxpayer
determination
when
ac-
corporation
lieved
successfully
run
that
quired
price
property
paid
he
so,
re-
and
should
if
depends
for it. Our decision
on whether
profits. Accordingly,
ceive
its future
or not the
creat-
agreed
to retire
stock
ed an
Johnsons,
bank,
Mrs.
held
the two
property, producing
basis on
new
long negotiations the
and Davis. After
reacquisition.
its
The
Government
parties settled on a valuation of the stock
disregard
serts that we
the form
share, payable partly
cash’
recognize
of the
and
transfer
attorney
partly
and
for
in notes. The
awas
re-
of the transactions
substance
retiring
against
the'
stockholders advised
corporate
demption
for cash
stock
proposal
this
for
that would leave
fear
leaving
notes,
ownership and
pro-
the stockholders without sufficient
depreciable assets undis-
tection in case the
should be
there
answers that
turbed.
bankruptcy.
forced into
this
He based
subterfuge in these
no fraud or
was
transactions,
legitimate
fear
Robinson
on
ac-
the stockholders
Wangemann, Cir., 1935,
75 F.2d
quired complete and unfettered owner-
that when a former
which holds
properties,
ship
the trial
bankrupt
owns notes
shareholder
finding
separate
judge’s
of two
in-
poration, received in the
dependent
over-
transactions cannot be
permitted
stock, he “cannot
be
appeal.
turned
the other unsecured credi-
share with
in the distribution
requires
tors
solution of hard tax
cases
bankrupt
something
easy generaliza-
estate.” To avoid ex-
than the
more
risk,
pro-
than the
posure
this
tion that the substance rather
the stockholders
of a transaction is determinative
form
posed
the Johnson stock
effect,
exchange
since in
corporate
tax
numerous situa-
of its
cash and
tired
which transaction is
equal
the form
tions
property
market
influence or control
does
effected
of the stock. The
generalization does,
This
consequences.
pro-
out in accordance with carried
however,
will,
later,
the truth that courts
reflect
posal.
hours
A few
beyond
occasion,
superficial
look
property
repurchased
of a transaction to
notes, giving
former
determine
stockholders a
formalities
proper
treatment.
mortgage
properties.
on certain of
Gregory
statutory pur-
action
would defeat
the landmark case
pose.
Helvering,
Supreme
Court
79 L.Ed.
presents
The ease at bar
an unusual
*3
give
corporate
to
to
trans-
refused
effect
question
by
conjunction
created
the
complied precisely
the
with
actions which
frequent
parts
of two
tax code
requirements
formal
for nontaxable
brought
ly
together by
single
transac
ground
porate reorganizations,
governing
provisions
tion : the
and
basis
func-
no
transactions had served
capital gains,
gain is
and the rule that no
to
tion other than that of
contrivance
recognized by
corporation
dis
when it
earnings
to
sole
bail out
property
respect
tributes
to its
with
gains
capital
shareholder
tax rates.
at
property
stock. The basis of
is deter
Holding
1945,
Co.,
v.
Commissioner Court
by
cost;
property
mined
is
when the
981,
331,
707,
324
L.Ed.
U.S.
65 S.Ct.
89
gain
sold the owner realizes a taxable
corporation
Supreme
Court taxed a
equal to the difference
the basis
between
gain
apartment
on the
from the
of an
sale
proceeds
received in
sale.
notwithstanding
house
a transfer
danger
There
that a
corporation’s
house to the
two share-
repurchase
effect an artificial sale and
to
sale,
it found
holders before the
since
appreciated property,
raise the basis of
solely
set
the transfer
was made
subject
since such a transaction would
in a more
form a sale
favorable tax
him
step-up
to a tax on the
in the basis.
reality
by
corporation.
in
made
are,
provisions
pre
There
therefore, no
Similarly,
Helvering
Clifford, 1940,
in
by
device,
vent tax
such a
avoidance
788,
331,
554,
309 U.S.
60
84
S.Ct.
L.Ed.
whether a transfer
re
Supreme
grantor
Court taxed
trust
acquisition
recognized
should be
as in
property
on the income of the trust
since
dependent
creating
transactions
tax con
by
property
the formal
transfer of the
sequences
generally
only
would
affect
grantor
lacking
substance.
timing
imposition
of a tax rather
the dilution
his
The Court found that
than its amount. The twist here comes
insignificant
control seemed
imma-
corporation
from the fact
terial and that “since the
husband
not incur a tax on the difference between
investment,
tains
has
control over the
he
basis and current market value when it
complete
rather
assurance that the trust
transferred the assets to its sharehold
any
change
will
effect
substantial
ers in
of their stock. Section
position.”
economic
309
at
U.S.
311(a)
Code,
311(a),
26 U.S.C.A. §
pages 335-336,
page
60
See
557.
provides
gain
that “no
or loss shall be
Weinert,
also Estate
v. Commis-
etc.
recognized
corporation
to a
on the dis
Revenue, Cir.,
of Internal
sioner
5
tribution,
stock,
respect
with
to its
750;
294 F.2d
Liston
Co.
Zander Credit
*
**
property.”
provision
This
S., Cir., 1960,
417; Camp-
U.v.
276 F.2d
expressly
applicable to
made
stock re
Fasken,
792;
Cir.,
267 F.2d
bell v.
Treasury
demption
by
distributions
Rupe
Corp.
Investment
v. Commissioner
Regulations.2
may
easily
The rule
be
Revenue,
Cir.,
of Internal
justified by
corpora
the fact that when a
Georgia-Pacific
624;
Corp.
S.,
v. U.
F.2d
appreciated property
tion transfers
to its
Cir., 1959, 264
161.
Each case
shareholders, as a
ex
dividend
by
be
own
ex-
must
merits
change
shares,
gain
for their
created
amining the form and substance of the
appreciation has
not accrued to
purpose
transactions and the
of the rele-
provisions
and should not
taxed to
vant
determine wheth-
recognition of the form of the
er
trans-
it.3
Treas.Reg.
holders,,
(a)
(1955).
gain probably
1.311-1
would be at
corporation.
tributed to the
See United
Lynch,
If
in effect does realize
States
192 F.
gain by handling
prop-
the sale of the
2d
certiorari
denied
erty
1342;
after
its distribution to the share-
72 S.Ct.
96 L.Ed.
Com-
n
transferring
op-
stepped up
by'
basis
avoidance
of tax
horizon
newA
allowing
reac-
then
opened
sets
its shareholders and
portunities would be
them,
quiring
we
scrutinize the
from the
must
to result
stepped-up basis
al-
Corporations
make
sure that
here effected.
transaction
leged
difficulty
did occur. The trans-
divestiture
without
be enabled
recognized as cre-
should be
actions
whenever
by
of their assets
the basis
raise
ating
the market
it fell below
ferring
produce
a new
the assets sufficient to
to shareholders
only
has
when the
made
and then
or stock
dividend
buying
a clear
its own-
and distinct severance of
the same
back
*4
ership prior
reacquisition.
they
to
have dis-
cash that
otherwise would
directly.
market values
Since
tributed
will
these transactions
The facts
by
pushed up
inflation and the
are often
holding
corpora-
support a
that
not
frequently reduced under the
basis is
ownership its
terminated
tion had
depreciation
far faster than
liberál
rules
legal
parted
bare
purposes.
with
It
these
actually
pos-
depreciate,
property for
few short
a
to
title
sibility
practical
enormous
would have
delivery
physical
made
It
hours.
any
significance.
impli-
tax avoidance
These
and use
Its control
assets.
not
a
cations do
constitute
license to
interrupted.
never
property were
to
courts
distort the laws or to write
legal
of its
title
the surrender
Even
they
provisions;
new
do mean that we
creating a
under circumstances
made
guard against giving
a
force to
strong,
expectation that it would be
gives
purported transfer
off
an
shortly. True, the stockholders
turned
may
unmistakably
is
hollow sound when it
legal
complete
freedom to
had
have
tapped.
pur-
It is hollow
sound for
corpora-
to
resell
refuse to
poses; here, we are
concerned with
not
tion,
almost no likelihood
but
legal
purposes or
effective-
foregone
they
so. It was a
would do
that
ness of
under the law of
the transaction
they
would resell the
conclusion
law, it
Texas. Under the tax
is of course
very
someone,
reason for
to
since the
sets
making
open
to a
dividend
redemption
original
was that
or a stock
distribution
not
wish to continue
stockholders
appreciated assets rather than
distribute
manage-
ownership of the assets and
purchase
its cash to
and to use
cash
And
of the business.
since
ment
replacement
step-
aat
similar assets for
integrated
already
were
into
ped-up
Such
are how-
basis.
taxpayer
repre-
operations of the
Moreover, in
ever limited
their costs.
assets,4
taxpay-
sented 47%
such a
it would be
that the cor-
case
clear
logical,
practical
and as a
was the
er
poration
disposed
had
of its former as-
purchaser.
matter,
only possible
That
acquired
When,
already
sets and
new ones.
how-
up
had
drawn
stockholders
resale,
ever,
papers
contends
it
in case
decided
Transport Trading
Aspects,
missioner
& Ter
Tax
Kind: Their
Harv.L.
Corp.,
1949,
(1950).
minal
Rev. 593
denied
338 U.S.
certiorari
The tax treatment
were
before enactment of Section
confused with
taxation of
to be
largely
bursting
but
is
shareholders,
since
section
a field
with dif-
See,
Bittker,
of the rule laid down
Gen
problems.
g.,
codification
e.
Fed-
ficult
Operating
Corporations
&
Utilities
Co.
Hel
eral
Taxation
Income
eral
vering, 1935,
(1959).
Shareholders,
56 S.Ct.
208-245
precede
L.Ed. 154 which did
these cases
validity
probably
valued
is
transferred were
their
by
undercut
4. The assets
$746,525.
parties
Plumb,
At
the statute. Mintz and
Divi
the rate of
repre-
share,
per
would
Kind —The
total
dends
Thunderbolts
and the
slightly
Look,
shares,
New
10 Tax L.Rev.
45-4
sent 3047
47%
outstanding.
generally Baum,
(1954).
then
shares
See
Dividends
the 6461
strengthened
produce
one, undoubtedly
cient to
The basis
new basis.
make
taxpayer
original purchase
be.found
must
from the
confidence with which
reacquisition
price
adjustments
and the
it.
look forward to the
made
n The
findings may
properties.
never
district court’s
There
rect;
suggestion
whisper
com-
of a
conclusions
in error.
are
operations,
pany was to cut down on its
judgment
The
permanently
if
be inevitable
Reversed.
including
assets,
parted with
of its
rigs.
said
can be
most that
three
The
Rehearing
Petition for
On
gave
the bank
that the
power
it of
divest
Johnson
Mrs.
PER CURIAM.
properties;
of certain
rehearing
case
in this
petition for
power
and then
hours
held that
for a few
strongly
con-
petitioner’s
expresses
transactions, from the
returned it.
corporation’s standpoint,
recog-
that this Court failed
viction
more like
transaction.
bona fides of the
nize the
option
option
sale,
than
*5
again,
wish,
petition
denying
we
expired quickly
been
without
ex-
base
clear that we
not
to make
ercised.
good
faith
on a lack of
decision
the transac
asserts that
parties
transaction.
It is true
to the
prompted
a valid
tions
against giv-
guard
said,
we
“we
purpose
mo
and were
without a
effected
ing
purported
which
transfer
force to
accept
of tax
tive
avoidance.
these
We
unmistakably
gives
sound
an
hollow
off
assertions,
supported
which are
tapped”.
But this statement
it
when
judge’s
They
findings,
trial
true.
lend
against
(in
sentence)
the same
was set off
support
taxpayer’s case,
but
avoid-
“These tax
the other extreme:
disposition
not
do
control
implications
a li-
do not constitute
ance
ques
Intent
in
case.
often is relevant
courts to distort
laws or
cense
taxation, particularly
tions
where the
Throughout
provisions.”
in new
write
fides of a
bona
transaction is called into
say
opinion we were careful
question,
in
but most
tax
cases
treatment
any
was not
lack
our decision
based on
done,
why
depends on what was
not
it
good
parties
faith
trans-
to the
was done. And our
decision
this case
action,
pass
and that we did not
on the
not on
rests
motivation
the trans
legal
effect
transaction outside
question
actions in
but rather on our
tax frame
do not
reference. We
conclusion that the admitted facts of the
integrity
question
parties
preclude finding
two transfers
of a suffi
suggest
any
flim-flam.
corporate ownership
cient hiatus in the
purposes
do not
We
doubt the business
justify
of the assets to
bestowal of a new
transaction.
The decision does not
reacquisition.5
them after the
purport to
effectiveness
To
protecting
determine the basis of the assets
we
the transaction
the stock-
against
holding
look backward to ascertain when
the holders
in Robinson
corporation acquired
Cir.,
Wangeman,
them. We note
5
the v.
valid under income purposes the trust to remove Hel- income. taxable from the settlor’s vering Clifford, 1940, U.S. ORDERED It is L.Ed. 788. rehearing filed in petition for be, styled cause and numbered the above hereby same Denied. RELATIONS
NATIONAL LABOR BOARD, Petitioner, *6 INC., SUPERCENTER, BARNEY’S Respondent. No. 13596. Appeals United States Court of Third Circuit. Argued Oct. Decided Nov.