United States v. Anderson, Clayton & Company

PETITIONER:United States
RESPONDENT:Anderson, Clayton & Company
LOCATION:

DOCKET NO.: 26
DECIDED BY: Warren Court (1955-1956)
LOWER COURT:

ARGUED: Oct 20, 1955
DECIDED: Nov 07, 1955

Facts of the case

Question

Audio Transcription for Oral Argument – October 20, 1955 in United States v. Anderson, Clayton & Company

Earl Warren:

Number 26, United States versus Anderson, Clayton and Company.

Mr. Holland.

H. Brian Holland:

If the Court please.

This — this case comes here on a writ of certiorari to the Court of Claims like the Glenshaw Glass and the Goldman Theatres cases decided at the last term.

This case involves the scope or a particular application of the question of the scope of the concept of taxable income under in the Internal Revenue Code.

In those cases, the question was whether punitive damages were taxable income.

In the instant case, the question is whether the respondent corporation having purchased certain shares of its own stock realized taxable income when a few years later, it resold some of those shares at a prize in excess of the prize that they’ve had paid for them.

The facts are these.

The respondent corporation was incorporated under the laws of the State of Delaware in the year 1929.

Had his principal place of business in Houston, Texas.

It was engaged in the cotton merchandising business which according to the findings of fact of the court below is primarily a management business, dependent for it’s success upon the skill and experience of it’s principal executives who are called upon to make difficult day-to-day decisions as to purchases and sales of spot cotton and dealings in cotton futures both domestic and foreign.

The corporation was capitalized at the outset with $26,000,000 of preferred stock representing the value of the assets of a prior business which it took over in 1929 and 100,000 shares of common stock which was issued to and held exclusively by its executives.

The common stock was no per stock with a stated value of $1 a share and was designed according to the findings below to provide a vehicle for the distribution of future earnings among those who were responsible for the success of the corporation business.

It was understood from the outset that the common stock should be held exclusively by the management that no outsider should be permitted to own any and that the holdings of common stock should be adjusted from time to time in accordance with the varying capacity and responsibilities of the several members of the management group.

— corporate requirements?

H. Brian Holland:

I beg your pardon sir?

— corporation?

H. Brian Holland:

No.

That was a — that was at first a general understanding and then in 1931, that understanding was incorporated in a written agreement to which the corporation and the then common stockholders were parties.

At the time their agreement was executed, the holders of the common stock deposited their stock with a trustee, retaining the right to the dividends and the right to vote and executed this formal agreement which contained a number of previsions, all of which were designed to keep the stock closely held.

For example, the agreement provided that no common stock should be sold that is by any of the holders without the approval of holders of 75% of the common stock.

The agreement provided that on the death of any common stockholder, the corporation should purchase his shares.

It provided that a common stockholder could withdraw at anytime, withdraw from the stock holding group involving his resignation as an officer of the corporation and that the corporation would purchase his shares from him.

It also provided that the holders of 75% of the common stock could at anytime require a holder of that stock to sell any product of his holdings.

There were provisions in this agreement for the fixing of the price at which purchases and sales where to be made.

In the case of the death of a stockholder, the price was based — the price to be paid his estate by the corporation under the agreement, was to be based on the balance sheet of the corporation as of the end of the preceding fiscal year adjusted to reflect unrealized appreciation and depreciation in it’s assets, all as determined by the executive committee of the corporation.

And after that basic prize had been determined based on the balance sheet then there was to be added interest of 4% from evaluation date to the date of the stockholders death.

Similarly, there were provisions made with which were not immediately concern now for the termination of the price in the case of purchases and sales arising on the other circumstances then for the death of the stockholder.

The agreement also provided expressly, that any stock purchased by the corporation in accordance with the terms of the agreement might be resold at anytime on — on such terms as should be determined by the holders of not less than 75% of the common stock.

Now, in 1939, one of the principal stockholders of the corporation died and in accordance with the terms of the agreement, the corporation purchased his shares which at that time numbered 18,574.

H. Brian Holland:

Paying for those shares, a price determined in accordance with the provisions of the contract of $50.79 per share.

Those shares were not retired.

In fact, shortly after they have been purchased some of them were resold — some of them were resold during the year 1939, some more, I think, during the year 1940, in both instances at prices lower than the prices paid by the corporation to the estate of a deceased stockholder.

We’re not now concerned with those sales but we are concerned with sales which occurred in the year 1943, December 18th, 1943 of 6500 of these shares which had been acquired by the corporation in 1939.

These sales in 1943 being made to five of the executives, I think, junior executives of the corporation at the price determined in accordance with the contract formula which I have mentioned which as of that time was $112.68 a share or $51.89 more than the corporation had paid for those shares in 1939.

Now, on the books of the corporation, when the shares were purchased from the decedents estate that cost $50.79 a share was charged to a treasury stock account and for balance sheet purposes, the common stock capital was reduce by the stated value of $1 per share and the remainder of the cost of $49.79 per share was charged to surplus.

When the 6500 shares were resold in 1943, the treasury stock account was credited with the original cost of those shares and the excess of the selling price over the cost was credited to surplus.

At that time the corporation apparently, although the record isn’t too clear on this, had setup a separate capital surplus account and it appears that the excess of the proceeds over the cost was credited to that capital surplus account.

And that result of these transactions, the purchase of 1939 and the sale in 1943 of these 6500 shares was that the corporation ended up with an increase of approximately $400,000 in its net worth.

That or rather the tax on that amount is the subject matter of this litigation.

It means it did not go to capital account (Inaudible)

H. Brian Holland:

It went to capital surplus.

Capital surplus.

H. Brian Holland:

As I understand it.

(Inaudible)

H. Brian Holland:

Well, there is an indication in the record that — that sometime between 1939 and 1943, the corporation, which as far as I can make out, had only surplus account prior to that time, readjusted it’s surplus in some way and apparently divided it between an earned surplus account and a capital surplus account.

The corporation did not treat this $400,000 as taxable income but the Commissioner of Internal Revenue held that it was taxable as a long-term capital gain.

The respondent contended and the Court of Claims held that under the applicable statute and the regulations, this $400,000 was not income at all and therefore of course not subject to tax.

Among the findings made by the Court of Claims were several findings which I think amount to conclusions of fact.

One being that the purchased of these shares by the corporation, amounted to a withdrawal by the selling stockholder of his share of the earnings accumulated during the period of his ownership of the stock.

And that the resale of the shares in 1943 by the corporation amounted to a contribution of capital by the purchaser of the shares equal to accumulated earnings so as to equalize the common equity of all of the stockholders.

The Court of Claims also made a finding that the shares were not purchased by the corporation for investment or for the purpose of dealing in its own shares as it might in the stock of another corporation.

Now, that latter finding has reference to a provision of the regulations which I will come to in a moment.

Now, what relation (Inaudible)

H. Brian Holland:

The record doesn’t indicate sir — actually there wasn’t any market.

I think this was a very closely held stock and I think there was no market.

The applicable statute of cost is Section 22 (a) of the Internal Revenue Code of 1939, the definition of gross income which defines gross income as including gains or profits and income derived from any source whatever.

That’s the catch-all provision which the Court end up, head into consideration last term in the two cases that I mentioned.

This Court has said with respect to that catch-all provision that evidences — the intention of Congress to exert its taxing power to the fullest.

The Court has also pointed out that the language of that provision is so general that an interpretative regulation is appropriate and almost since the beginning of the income tax law, the regulations have dealt with this question of the tax effect of the transactions by a corporation in its own share.

H. Brian Holland:

At the beginning or almost at the beginning under the Revenue Act of 1917, the regulations flatly provided that gain was realized by a corporation when it’s sold shares which it had held in its treasury.

However in — or under the 1918 Act, the Treasury Department apparently change his mind because it promulgated a new regulation which said in effect that the proceeds of sale of the treasury shares should be regarded as capital and not income and therefore, of course not subject to income tax.The rule remained that way, so far as the regulations were concerned from about 1918 until 1934.

In 1934, as a result of some court decisions which had thrown some doubt on the correctness of the regulations at least in other respects.

The Treasury Department promulgated a so-called treasury decision 4430 which later became a part of the regulations and which is the regulation applicable in this case.

That is reproduced on page 3 of the Governments brief and in view of its importance to a case, I think perhaps I should read it.

It says, “Whether the acquisition or disposition by a corporation of shares of its capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction which is to be ascertain from all its facts and circumstances.”

The receipt by a corporation of the subscription price of shares of its capital stock upon their original issuance gives rise to neither taxable gain nor deductible loss whether the subscription or issue price be in excess of or less than the prior or stated value of such stock.

But, if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as well as the corporation were dealing in the shares of another.

So, also if the corporation receives its own stock as consideration upon the sale of property by it or in satisfaction of indebtedness to it, the gain or loss resulting is to be computed in the same manner as though the payment had been made in any other property.

Any gain derived from such transaction is subject to tax and any loss sustained is allowable as a deduction that were permitted by the provisions of the Internal Revenue Code.

Now, this Court had the section of the regulations or a predecessor which was substantially identical with it.

Before it, in the Reynolds Tobacco Company case which was decided, I think, in the year 1939.

However, the question involved in that case had to do only with the retroactive application of this change in the regulations which as I have said took place in 1934.

The Treasury decision purported to make the new regulation retroactive as far back, I think, as 1924 or 1926, the transaction involved in the Reynolds Tobacco case have taken place in 1929 and the question was whether the new regulation or the old regulation applied to that transaction.

The Court held that the old rule the pre-1934 rule under which a corporation was held to realize either gained or loss on the sale of treasury stock had acquired the force of law through repeated reenactment of the underlying statute without any substantial change, and that therefore the new regulation could not govern the tax consequences of a transaction which took place in 1929, five years before it was adopted.

The Court expressly reframes from passing on the question whether the rule of the old regulation could be altered for the future by administrative action or whether legislative action was necessary.

However, in later cases such as the Wilshire Oil case in — in volume 308 and the Reynolds case, not the Reynolds Tobacco case, the Reynolds case in volume 313, the Court did deal with that question of a prospective change in regulations and held that administrative regulations, even though buttress by repeated reenactment of the underlying statute did not become so completely frozen into the law as to preclude the possibility of a change for the future through an appropriate exercise of the administrative rule making power.

The Court of Claims in the instant case didn’t expressly pass on this question of the validity of the regulation because it found it possible to decide the case in the taxpayer’s favor on other grounds.

However, in an earlier decision in the (Inaudible) case, which is cited in the Governments brief, cited in 1945 which involved this regulation.

The Court of Claims expressly approved the regulation, sustained its validity and all of the Courts of Appeals, there have been six of them which have considered this question of the validity of the new regulation have sustained it.

And I submit that in the light of the Wilshire Oil and the Reynolds cases, there can’t be any doubt about the power of the Treasury Department to change the rule for the future, notwithstanding the implied Congressional approval of the earlier rule.

The Court of Claims — what the Court of Claims held was that under what it considered to be the correct interpretation of the regulations, this $400,000 excess of the proceeds of sale of these treasury shares, over their cost to the corporation was not income because as the Court of Claims construed the regulation, the respondent corporation engaging in these transactions and it’s own stock was not dealing in it’s own shares as it might in the shares of another corporation.

And the reason that the Court of Claims gave for that conclusion, the principal reasons were these.

It said first that the corporation did not purchased these shares at opportune times that is it wasn’t purchasing — purchasing them with a view to striking a bargain or for what the hope of getting them cheap and making a profit on them at latter date.

Second reason it gave was, that in — in purchasing the shares the corporation was fulfilling a contractual obligation that is the obligation under this 1931 agreement to purchase the shares held by the estate of the deceased stockholder.

The third reason that it gave was, that the time of the resale of the shares was not dictated by the potentiality of profit.

In other words, the shares were not resold by the corporation because it could get a good price for them, but they were resold in accordance with its policy of the distributing shares among the management group.

The Court also stressed the fact that the overall purposed of the purchases and the resales was not to make a profit but to restrict the ownership of the stock and to provide an incentive to the management.

In brief, the Court of Claims took the view of the regulations which has been rejected by — as I have said all of the Courts of Appeals which have considered the question, namely that a corporation is to be deemed as dealing in its own stock as it might in the stock of another corporation only if it is engaging in transactions in its own shares with a profit motive typically, when it buys and sells it shares on the open market.

Now, strangely enough in its earlier decision in the (Inaudible) case, which the Court said here without any explanation was distinguishable on its facts.

H. Brian Holland:

In its earlier decision in that case, the Court had relied on some of the Court of Appeals decisions, the reasoning of which it now repudiates.

The — the position taken by the Court of Appeals on the other hand with respect to the meaning of this regulation is that the motive with which shares of stock of a corporation are bought or sold by the corporation is immaterial.

That it’s immaterial that purchases on sales are made in the fulfillment of some contractual obligation that the corporation may have assumed that what is important and the only thing that’s important is what the corporation does, and not why it doesn’t.

The distinction that the Court of Appeals at least the more articulate opinions in the Court of Appeals draw — the distinction that is drawn between taxable and non-taxable transactions by a court in — in dealings by a corporation in its own stock, is the distinction between transactions which involved an adjustment of the corporations capital structure and those which don’t involve an adjustment of the corporation’s capital structure.

That this is the distinction that the regulations seek to draw, I think, is indicated by the origin of the regulation.

The change in 1934, followed upon decisions of several of the courts, particularly, the decision of the Court of Appeals for the First Circuit in the S. A. Woods Machine Company case in 1932 and as a matter of fact this language that this case revolves around that if a corporation deals in it’s own shares, as it might in the shares of another corporation was lifted almost verbatim from the opinion of the Court of Appeals for the First Circuit in that Woods Machine Company case.

That case involved a somewhat different question, the question in that case the corporation had accepted shares of its own stock held by one of its shareholders.

In settlement of a claim which it had against the stockholder for a patent infringement and the question was, whether in receiving those shares in that manner and for that purpose, the corporation realized income.

The Court of Appeals reversing the Court of Tax Appeals said that it did and it’s opinion it drew this distinction, which I have mentioned between capital transactions which it defined as being transactions in connection with readjustment of the corporation’s capital structure on the one hand and on the other hand, transactions not connected with the readjustment of the corporation’s capital structure which it defined as transactions in which the corporation deals in its own shares as it might in the shares of another.

That is transactions in which the stock of the corporation is treated essentially no matter what — what the correct theory maybe, but it’s treated as practical matter essentially as though it were any other kind of an asset.

What do you — what do you understand in that provision the regulation to mean, where it says it may deal as it may deal with the shares of another corporation?

What’s that mean?

H. Brian Holland:

Well, I —

Just simply mean the power to buy?

H. Brian Holland:

I think it means buying and selling its own shares as it might —

Well, just to —

H. Brian Holland:

— say as to another corporation.

— if it just have the power to buy the shares of your corporation and — and the — and have the power to buy shares of another corporation, is that enough?

H. Brian Holland:

Well, I think it’s — I think it’s a question of what — what you do.

Of course if —

That’s all that was done here, wasn’t it?

They just bought their own stock.

H. Brian Holland:

The — the authority is part of it and this corporation have the authority both under the Delaware law and under its own charter.

They were speculating in —

H. Brian Holland:

No.

They weren’t — they weren’t —

— they were buying it for an investment?

H. Brian Holland:

No.

They weren’t.

They bought it for the three specific purposes that the Court of Claims said they bought it.

H. Brian Holland:

I think that’s correct, Mr. Justice.

But what —

I don’t — I — I’m wondering what the — what that — what that means, is what you have to — have to — to show as to dealing with other shares.

H. Brian Holland:

Well —

How much dealing must there be?

H. Brian Holland:

What — what I was trying to suggest was, that the — the meaning of that phrase can be determined by seeing the context in which it was used in its — in the place it originally came from which is in this decision of the — the opinion of the Court of Appeals for the First Circuit, where the Court attempted to draw this distinction between the transactions and stock, which are connected with the readjustment of capital structure.

That would be typically an original issue of stock or reduction of capital on the one hand and transactions of all other kinds which the Court described in this language, which we now find in the regulations, that is dealing in its own shares as it might in — in any kind of an asset.

How much dealing must there be?

Mr. Holland, what — what would be the difference between purchasing if — if they had reduced their capital and that have been sold — increase the capital again at a higher price of shares.

Would that been just like this transaction?

H. Brian Holland:

Well, I think as the regulation says it would depend on all the facts and circumstances.

Well, take the circumstances in this case.

Instead of carrying this stock in — in their treasury as I understand it then, they have to use the amount of capital understanding of shares outstanding of the amount they bought.

And later reinstated the original amount and had sold at the price that they received for these shares that they sold.

H. Brian Holland:

Well —

As I understand it, they did put it into a surplus account.

H. Brian Holland:

They — they held it in a — in a so-called treasury stock account so that —

If they — if they’ve done what I suggest, there would not have been (Inaudible)

H. Brian Holland:

Well, Mr. Justice, I think that’s an arguable question.

Ordinarily, I agree that if a corporation retires shares in the formal sense and reduces its capital and then sometime later for some reason decides to — to issue some more shares that — that would not be considered a — a transaction in which taxable gain would be involved.

On the one hand, if there is such a relationship between the purchase on the one hand and then there — the issue of the new shares, I mean if they all seems to be a part of — of one plan then I think perhaps a different result might be justified.

Earl Warren:

Mr. White.

John C. White:

May it please the Court.

In the fall of 1943, in Anderson, Clayton after reviewing its operations, concluded that certain men had — had and were contributing considerably more to the management operations of the business.

And that they were entitled to a greater participation in earnings.

Mr. Holland has pointed out that this is a management business and whether it makes a profit or not, depends on the experience and the ability of the management and therefore, that subject has required constant attention from the corporation.

To accomplish this purpose of giving these men a greater participation in earning, the directors approved the sale to them of the 6500 shares of treasury stock, at a price of a $112.68 a share.

Now, that price was determined by an analysis of the surplus of the corporation, which was prescribed by the charter itself.

That charter is a very unusual charter, it’s very difficult to work out and it’s worked only in connection with a stockholders agreement also.

But the price of a $112.68 was just the representative of what had been accumulated by the corporation in the way of earnings prior to the transfer to these shareholders.

John C. White:

Now, they had held some stock previously, but these were additional amounts to most of them.

They gave for these shares their demand notes under which they had the right to attorney stock in settlement of a note or to pay the amount which was $112.68 per share.

The treasury stock had been acquired at the death of Mr. Anderson and at that time its share — his share in the distributed or undistributed earnings was $50.79 or that amount less $1.

This stock was originally issued to him at $1 a share and he received $943,373.46 for it or his estate received that because that was the earnings which had been accumulated while he owned it and under the — the contract while he was entitled to share in those earnings.

Taxpayers approach to this problem has been a simple one.We raised no question as to the validity of the treasury regulations.

We simply said to the Court of Claims, “Apply the treasury regulations to the facts of this case.”

Now, there was little controversy as to the facts either.

As a matter of fact, there was a joint request for findings of fact and the Court followed that request almost verbatim including this finding that in substance, these transactions involved in the case of purchases by the corporation, a withdrawal of the earnings and the — for the fact that in the case of sales by the corporation, it amounted to contribution of capital and the deposited earnings by deposit of the same amount which other common stockholders had at risk from that day forward.

When we turn to the regulations, we say that the real nature of the transaction must be ascertained from all its facts and circumstances and that among those, is did the taxpayer deal in its own stock as it might those of another corporation.

This regulation under the Helvering versus R.J. Reynolds Tobacco case is certainly, it seems to me, an order.

True they left — you left open there the question of whether a rule which should become incorporated in the statute could be changed by regulation rather than by Congress.

But in the Wilshire case, you seem to say that for the future a regulation can be changed.

But we said to the Court and we say to this Court that the regulation was not changed insofar as it applies to this particular case and to the facts which the Court of Claims found here.

Now, just about the time this case we decided, Congress had this subject onto consideration and it enacted the rule which the Court of Claims put into effect here.

It said that no gain or loss shall be recognized to a corporation on the receipt of money or other property in exchange for stock including treasury stock of such corporation.

That is in the 1954 Act and, of course, it was not applicable to the particular transaction.

The Committee reports pointed out that on the present law whether the disposition by a corporation of shares of its own capital stock gives rise to taxable gain or deductable loss depends under certain decisions.

Those were the decisions of the Court of Appeals, which were four which had reversed Tax Court decisions upon whether the transaction constitutes a dealing by a corporation in its own share, which is to be ascertained from all the facts and circumstances.

That seemed to us to say, that so far as Congress is concerned the rule was it, the question depends on whether the corporation dealt in its own stock as it might dealt with another corporation.

The purpose of this section is to remove the uncertainties of the present law.Now, turning to the facts, we’ve said that for three reasons here the corporation did not deal any stock as it would to have another corporation because of the very nature of the stock, because of the used made of it and because of the effect.

Its nature I have already pointed out it was unique, it was issued at $1 a share, back of some $25 million of 6.5% preferred originally.

At this time, it stood back of 16 million long-term debentures and 32 million preferred stocks which were — both of which were irredeemable.

There were no preemptive rights, none of the charters the directors have had and were given full discretion as to the persons to whom it could be issued and the price that which it could be issued.

If it were retired, as Justice Reed suggested, it could be immediately reissued at any price, the directors might think it was appropriate.

Well, if this stock had not had these special provisions, would then would you come out the other way?

John C. White:

As to the — we think that again that is one of the facts and circumstances which the Court of Claims was required by this regulation to consider and I don’t’ know that the change in that one fact would change the total picture.

But because this is, in its nature, so very unique and obviously can be used only for a purpose of this sort, it has no marketable value.

That it was not permitted to be marketed that we think that that is an important fact.

As I say, I don’t know that we’ve come out the other way, but that is a strongly supporting fact.

Another feature of this stock was that after 1938, when a company was reorganized that it had in a sense, a preference of its own.

John C. White:

After 4% accumulated was earned on preferred, then $5 a share on its share of this common was turned over to a common stock surplus which was setup by the charter itself on the books of the corporation.

And that $5 plus 4% on the amount in the common stock surplus was a preference to common.

Then after that had been set aside, preferred got one-half of the remainder of the earnings and these 100,000 shares of common got the other half of the earnings.

Now, as I say we — we think that the nature of the stock is important, then its holding was limited to the actual participating management.

Upon the death, it was retired immediately and automatically under the contract at a price which was designed to approximate the earnings of the corporation during the period the man had held the stock.

It was subject to reallocation if the management concluded that Mr. (Inaudible) and Mr. (Inaudible) wasn’t earning and wasn’t performing functions which entitled him to the amount he was receiving, he could be directed to sell it to transfer to someone else.

If Mr. (Inaudible) decided that he was tired of the business and wished to retire, he could turn it back into the corporation and the corporation was legally obligated to distribute to him in payment the amount which has been earned while he held that stock.

In short, there’s a Tax Court found in an earlier case involving same stock and at 8 T.C.706, and by the way these findings of the Tax Court, a part of the record here by stipulation, this stock was not marketable but for use to distribute profits in proportion to active participation in business.

It was not only designed for that purpose, it was used for it while before Anderson’s death, 23,000 shares had been transferred by Mr. W.A. Clayton and Mr. M.D. Anderson to junior members of the management because those junior members of the management were assuming greater responsibility and performing more important duty.

The payments made out for the stock was solely made in case of death and in the case of M.D. Anderson as I say, he received $900,000 more than he originally paid for.

Sales made by the corporation which were of this stock which has been acquired in the case of death or acquired of that stock were made only to management.

Now, as the affected of the transaction that’s been indicated in part but this stock was issued for $18,574.

Corporation paid $943,000 for it.

It immediately sold or shortly thereafter sold 3000 shares of it at less than it paid for it because of a change in the common stock surplus.

If the loss was not deducted, the loss — there’d be a loss because it was regarded as a capital transaction.

Then the — this 6500 shares was sold for the $732,000 derived in a way I have pointed out.

It was treated on the books of the capital transaction.

The $732,000 was entered into the common — charged to the common stock surplus of the corporation.

I have mentioned the findings of — Mr. Holland also did, that in substance, this was in the case of purchases by the corporation, a withdrawal of earnings and in the case sales a contribution of capital.

And the fact, that these findings were jointly requested by the taxpayer and the Government.

So, we have said that the fact as they are and as the court — as the Government agreed they were and as the Court of Claims found them, brought that Court to deflect questions whether the fact that shares acquired back from M.D. Anderson were not legally retired, legally compelled the decision for the Government regardless of all other facts and circumstances and regardless of the substance of the transaction which it had placed before it.

That was frankly an open position of the Government and the court below.

Despite Government active thoughts, the taxpayer believed that, that must be the Government position here.

The — this Court has recognized that findings of fact to the Court of Claims are either binding on it or at least entitled to the greatest respect.

And of course so far as any tax or trial tribunal is concerned, it has recognized that the facts found by them are to be respected in such cases, (Inaudible).

I think the care with which the Court of Claims examined the facts here as shown by the fact that this decision was written by Judge Littleton who wrote the decision of the Court in the (Inaudible) case which the Government counsel mentioned.

The both decisions by the way were unanimous.

Judge Littleton brought the facts in that case, justified — making it taxable and the facts in this case showed that the transaction was — did not amount to dealing in its stock as it would those of another corporation.

So far as that question of whether it’s traded share or an issue to shares that are sold.

It seemed to us and the Court points out that that’s the question of mechanics of form rather than substance under these particular facts where $1 a share was the total capital involved on — in connection with the stock whether the corporation actually retired that stock was meaningless from every economic point of view.

John C. White:

This treasury stock too had none of the important qualities of — of stock while it was in the hands of the corporation.

It couldn’t — it didn’t vote, it couldn’t be counted for forum, it didn’t receive any dividends and as a matter of fact, no investor would pay a cent more for it than for the property of the corporation because it held the stock in its treasury.

We’ve also pointed out that in other tax fields, the Government has treated this question of whether treasury stock is unimportant.

And the question of stock dividends for instance, originally attempted to say that treasury stock is property and therefore when it’s distributed it is taxable, even though the stock dividends paid from an issued stock are not taxable.

That was decided against it by the Tax Court in the Bruckheimer case and then the Treasury in P.D. 5290, went along with the decision of the Tax Court.

In the question of whether a — a particular purchase or redemption is equivalent to a dividend, the courts have held that the question of whether the stock is retained, the retired is unimportant.

And then the case of invested capital again it has indicated that it regards that question is unimportant.

I might also say, that so far as the S. E. C. is concerned it — it is required that treasury stock be treated as a not being property and it’s also required that any income made from it be placed in a capital account rather than placed in earned surplus.

We have thus concluded that in substance of this transaction, insofar as the corporation is concerned was its receipt of this $112.68 under — under a binding agreement to return it to the payor upon his demand or if he wish to, he could turn it back to the corporation in payment of his notes.

It’s difficult to see how the corporation made any profit from this contract.

From the point of view of the other stockholders, if you look at the corporation as being an irrigation of stockholders, it’s equally difficult to see how they profited when all the contribution affected was an equalization of the position of the two — of — of these new shareholders with those of the stock, then outstanding.

A problem — between the time that the corporation acquired the stock when it sold it while the — the stock that was in the treasury went for and decided this the same as the other stock.

It didn’t belong to the other people.

It didn’t belong to the present stockholders.

They get an addition when they sold?

John C. White:

No.

So far — so far as the other stockholders were concerned they were left in the exactly the same position because as the — under the charter and as this value was calculated it was $112.68 a share, the value that each one of their share is representing.

Now, assume that this was sold, each share still represented $112.68 per share so that, it meant nothing to the other stockholders.

The Government in this brief and Mr. Holland both indicated that they have a question as to whether the view or purpose for which the transaction is entered is of any importance.

I’d like to point out that in the question of gifts.

This Court said its important.

The question of whether a man is a traitor or a dealer, it’s regarded as very important.

The question of hedging is regarded as rather important whether or not he has a motive of balancing his risks or not.

In the questions of whether a certain payment to a corporation is a contribution to capital, the motive is also of considerable importance.

And now, as to the Court of Appeals decisions, actually no Court of Appeals decision involved this question so closely until long after the transaction here involved took place.

The Tax Court’s decision for uniformity and along the lines of the Court of Claims decision and it was not until later that any Circuit Court of Appeals reversed those cases.

We have felt that these Courts of Appeals did not really analyze the regulations in a way that the Court of Claims did.

Now, the — through it, the regulation originated with the Woods decision that Wood’s decision can be supported only the ground that the corporation sold a property or right of another sort and received its stock in exchange.

It kept that stock — stock by the way and did not retire and the new regulation —

The Tax Court has now joined the Court of Appeals has it not?

John C. White:

The Tax Court, the same day about that this Court of Claims handed down its decision, threw up its hands and said, cited four decisions of the Court of Appeals and — and went along with them.

But it did not admit that it was wrong, I would say [Laughter] in its analysis of even those facts.

And I might say this again that I believe that there are no other facts comparable to those that are involved in this case in any of the Tax Court decision.

Hugo L. Black:

May I ask you this question?

John C. White:

Yes.

Hugo L. Black:

Suppose this has been just regular stock and it didn’t have these conditions that you speak of, that you possibly point out.

They have both the — the exact amount of stocks all together (Inaudible).

They’ve held that this is a waste of time, then had sold as to this same officials for the price they did or (Inaudible).

I think it was sold or whatever it was.

Would you say that it was taxable under the regulation involved, for the corporation?

John C. White:

I think it — it would certainly be a — a different fact situation, but the question to my mind is — is open.

You have said that whether or not a transaction is capital or income that in the gain derived from labor or — or from capital or that including from a sale or conversion of capital assets.

Well, now there’s a question where their treasury shares in the hands of the corporation are capital assets or assets of any nature.

There are decisions in Justice — Judge Learned Hand has insisted in great many cases that it’s a — meaningless to say that the corporation holding its own stock has anything because it hasn’t any dividends, it hasn’t any right to vote, it had — has only the chance of disposing of it for renewing a contract to some other shareholders.

In the stock dividend cases, it’s where the Government first said here as an asset, they abandoned that position.

So, I — I would say that — that there is a question as a Court of Claims have, as to whether any dealing in treasury stock is not a capital transaction.

Hugo L. Black:

So that if it’s just a regular corporate — say the Texas Company buys 6000 shares of its stocks (Inaudible).

What would you say about that?

John C. White:

I think first that, the Dow Chemical case might be taken into the decision of the Court of Appeals on some facts about like that.

And the Court said, that it could not imagine facts more like those of dealing in another corporation stock that were involved in that case.

The corporation simply went into the market and bought some shares and then later time sold them.

It had — it treated as if it were an asset on its books.

Its purpose was to realize the profit because they thought the shares were low at that time.

It sold them their profit.

There to my mind is the type of case which this regulation is designed to cover and which it may properly cover.

Although as I say, the Court of Claims indicates that it had a sincere doubt as to whether any transaction in treasury shares could be regarded as taxable rather than capital in nature.

Hugo L. Black:

If you’re right in that, all the stockholders preceding the company would have to pay any increase of value and all those stockholders who could preceded the ownership of the company would have to pay but there would be no tax collected for the increase value during the time the company (Inaudible).

John C. White:

The question of what increase in value is of a — of a nonexistent —

Hugo L. Black:

That’s your (Voice Overlap) —

John C. White:

— chosen action (Voice Overlap) —

Hugo L. Black:

That’s your point.

John C. White:

Yes, it is my point.

I cannot understand why — why there wasn’t a profit made during this time of — that they held a stock with the sale because the corporation, I’m going to say, earned a million dollars the — before this, they divide it among all the shareholders including Mr. Anderson.

Now, when that stock went into treasury, it no longer have to pay dividends (Inaudible).

Is that much more to the other people.

John C. White:

There was that much greater share in —

Much greater income to —

John C. White:

In the future earnings.

In the future earnings.

John C. White:

That’s correct.

It affected — his death meant that the members (Inaudible) who were previously getting say 5% might being — now getting 6% (Voice Overlap) —

— they’re just doubled.

John C. White:

For — for instance, this sale of 6500 share was only 84,000 outstanding meant that common stockholder are that — that there was 50,000 additional preference to this — this common stockholder and it meant that each of the —

It’s — it’s only when you consider it does — as the Court of Claims did, as I understand it, as a retirement and a further issuance of shares to escape the earnings —

John C. White:

Well, you mean escape of redistribution of — of future earnings.

Yes.

John C. White:

Anytime you retire shares or anytime you reissue them, you effect that same redistribution.

Nothing in the world except none recognition of its importance —

— simply a retirement and a reissue.

John C. White:

If in — Except from the strict legal point of view it was because under the terms of the contract, the stock became meaningless and serve no purpose.

It could have been — we could have retired it and reissue — resold this — reissued this without any difficulty whatsoever other than (Inaudible) mechanics.

Hugo L. Black:

You claim that there had been no — consequences at all.

John C. White:

None whatever.

Hugo L. Black:

To anybody.

John C. White:

Yes.

We had absolute control of both the stock in the treasury and the stock in the unissued stock if — if this has been retired.

No preemptive rights and with the director’s being given full responsibility for its reissuance.

Thank you, sir.