LOCATION: U.S. District Court for the District of New Mexico
DOCKET NO.: 282
DECIDED BY: Burger Court (1969-1970)
LOWER COURT: United States Court of Appeals for the Sixth Circuit
CITATION: 397 US 301 (1970)
ARGUED: Jan 12, 1970
DECIDED: Mar 23, 1970
Facts of the case
Media for United States v. Davis
Audio Transcription for Oral Argument - January 12, 1970 in United States v. Davis
Warren E. Burger:
Number 282, United States against Davis.
You may proceed whenever you're ready Mr. Solicitor General?
Erwin N. Griswold:
May it please the Court, this is a tax case what we might call a regular tax case, not a criminal case nor a land case as the last two were which comes here on a writ of certiorari to the Court of Appeals for the Sixth Circuit.
The basic factual situation is simple, the statutory provisions are somewhat complex but I think reduced to a relatively simple problem.
The case arises with respect to a family corporation which was set up in 1945 by Mr. Davis, the taxpayer here and his partner, Mr. Bradley.
At that time, Bradley had 50% of the stock and Davis had 25% and Davis' wife had 25%.
They sought to barrow $95,000.00 from the Reconstruction Finance Corporation or a subsidiary of it but found that they could do so only if the company had more capital.
Bradley was unwilling to increase his investment and so it was worked out by Davis acquiring $25,000.00 in preferred stock from the company for which he paid cash.
Some years later, Davis purchased Bradley's stock and transferred it in equal shares to his son and to his daughter.
As a result of this transaction, the stock was held four ways and Davis owned 25%, his wife 25%, his son 25%, and his daughter 25%.
And Davis himself owned all of the preferred stock.
In June 1963, the RFC loan was finally paid off and thereafter on October 1, 1963 pursuant to a corporate resolution, Mr. Davis turned in his preferred stock and received $25,000 from the corporation, and this is the transaction which is at issue here.
Is there any question as to whether or not the time of the redemption of the preferred stock, there were earnings and profits?
Erwin N. Griswold:
No, there's no question about that Mr. Justice, there were adequate earnings and profits to cover this.
The question is whether under the applicable provisions of the statute, the $25,000.00 is taxable as a dividend or whether it was received in exchange for the preferred stock resulting in no tax, since the amount received, $25,000.00 was the same as Mr. Davis' basis for the preferred stock.
Before going further, I would like to make it plain that this is simply a matter of construing a rather specific and somewhat intricate statute.
There is no suggestion of tax avoidance or that Mr. Davis set up any sort of scheme for artificially reducing his taxes.
The fact is that he received $25,000.00 from the corporation and that he turned in his preferred stock.
The question is what the tax consequences of this were and the circumstances of this case and under the applicable statutory provisions.
It's clear I think that this is a situation where Congress had power under the Sixteenth Amendment to impose a tax.
For that purpose, the basic fact is that $25,000.00 was separated from the corporation and was received by Mr. Davis to which I may add as indicated in my response to Mr. Justice Stewart that the corporation had earnings and profits and at least that amount.
This is not a case like Eisner and Macomber, the stock dividend case where the taxpayer received only pieces of paper and ended with more pieces of paper representing exactly the same interest that he had before.
Here, the shareholder received cash and had fewer pieces of paper than he had before that receipt, and the question is how the receipt of the cash is to be treated for tax purposes.
Basic to the consideration of that question is the provision of Section 318 of the Internal Revenue Code which is set out at pages 43 and 44 of the Government's recovered brief insofar as it is relevant to this question.
This is one of the two key provisions in the statute and I think that I should read it.
Section 318 at the bottom of page 43 of the Government's brief.
For purposes of those provisions of this subchapter to which the rules contained in this section are expressly made applicable 1 (a), an individual shall be considered as owning the stock owned directly or indirectly by or for his spouse other than a spouse who is divorced or under a decree of separate maintenance which is not applicable here, and two, his children, grandchildren and parents.
Now, under this statute, Mr. Davis “shall be considered” not maybe or improper circumstances but “shall be considered” as owning all the stock of the corporation, every share, all the common and all the preferred.
What is it, that statute really, this attribution provision really means what it says if by –-
Erwin N. Griswold:
Mr. Justice Stewart, --