IRWIN, Judge:
Respondent determined deficiencies in petitioners' income and estate taxes for the following years: Docket Taxable year Name of petitioner Deficiency No. 6819-65 D/D 6/15/61 ... Estate of Henry P. $5,145.12 Lammerts, deceased, Henry P. Lammerts, Jr., and Hildred K. Lammerts, executors. 732-66 6/16/61-5/31/62 .. Estate of Henry P. 82,016.09 Lammerts, deceased, Henry P. Lammerts, Jr., and Hildred K. Lammerts, executors. 733-66 1962 ............. Lammerts, Inc ............... 1,207.22 734-66 1962 ............. Hildred K. Lammerts ......... 4,049.41 Certain concessions having been made by the parties, the issues remaining for decision are:
Issue 1:
(A) Whether the purported liquidation of Lammerts Associates, Inc., was in substance a section 368(a)(1)(F)fn2 reorganization.
(B) Whether the distribution of assets by Lammerts Associates, Inc., was pursuant to a complete liquidation within the intendment of section 331 or merely constituted a section 301 dividend paid by a continuing corporation.
Issue 2: Whether the redemption of 180 shares of preferred stock by Lammerts, Inc., amounted to a distribution not essentially equivalent to a dividend within the meaning of section 302(b)(1).
Issue 3: Whether the late filing of the fiduciary income tax return was due to reasonable cause so as to prevent the imposition of a penalty under section 6651(a).
FINDINGS OF FACT
Some of the facts have been stipulated by the parties and are incorporated herein, along with the exhibits attached thereto, by this reference.
Hildred K. Lammerts, one of the petitioners herein, resided in Lewiston, N.Y., at the time the petition herein was filed. Her Federal income tax return for the taxable year 1962 was filed with the district director of internal revenue at Buffalo, N Y
Lammerts, Inc., one of the petitioners herein (hereinafter Lammerts (New)) was incorporated under the laws of the State of New York on December 27, 1961. Its principal office at the time it petition was filed was in Niagara Falls, N.Y. It filed its U.S. corporation income tax return for the taxable year 1962 with the district director of internal revenue at Buffalo, N Y
Henry P. Lammerts, Sr. (hereinafter either Henry or decedent), a resident of Lewiston, N.Y., died testate on June 15, 1961, at the age of 73. His son, Henry P. Lammerts, Jr. (hereinafter Parkinson), and his wife, Hildred K. Lammerts (hereinafter Hildred), qualified as executors of his estate. It is in this capacity that Parkinson appears as a petitioner herein. Hildred and Parkinson, as executors, timely filed an estate tax return with the district director of internal revenue at Buffalo, N.Y. On April 15, 1963, they also filed on behalf of the estate a fiduciary income tax return for the period from June 16, 1961, to May 31, 1962, with the district director of internal revenue at Buffalo, N Y
Lammerts, Inc. (hereinafter Lammerts (Old)), was incorporated under the laws of the State of New York on May 27, 1929.fn3 The original shareholders and their ownership interest in said corporation were as follows:
Number of shares Name of shareholder of common stock
Peter Lammerts ......................... 351 Henry P. Lammerts ...................... 349 ----- Total ............................. 700
Peter Lammerts and Henry P. Lammerts were father and son, respectively. Their stock ownership in Lammerts (Old) represented all of its issued and outstanding stock. Peter Lammerts died on October 24, 1941. As part of his share of his father's estate, Henry P. Lammerts received his father's 351 shares of common stock of Lammerts (Old), thereby making him owner of all the stock.
During his lifetime Henry P. Lammerts made the following gifts of Lammerts (Old) stock to his son, Parkinson:
Date of gift Number of shares
November 1956 ....................... 12 November 1957 ....................... 12 November 1958 ....................... 14 November 1959 ....................... 14 November 1960 ....................... 14 ----- Total ........................... 66
From its inception in 1929 until about January 2, 1962, Lammerts (Old) was engaged in the operation of retail automobile sales and service agencies. During this period it was a dealer for the Buick Division of the General Motors Corp. Its Buick operations, originally located at 5043 6th Street, Niagara Falls, N.Y., were later relocated to the corner of First Street and Elk Street, Niagara Falls, N.Y. (which address will hereinafter be referred to as the Ramp Garage). The land and building constituting the Ramp Garage property was owned by Lammerts (Old). In January 1961, Lammerts (Old) again moved its Buick operations; this time to 838 66th Street, Niagara Falls, N Y The new premises were leased from Pine Land Realty Co., Inc., a corporation owned entirely by Parkinson.
Prior to 1949 Lammerts (Old) operated what was known in the automobile industry as a dual dealership. In addition to the Buick agency it also was a dealer for the Cadillac Division of General Motors. The operations of the Cadillac agency were conducted at 5043 6th Street, Niagara Falls, N Y
Around 1949 the Cadillac and Buick dealerships were separated. On August 19, 1946, a corporation by the name of Lammerts Motor Ramp Corp. was formed under the laws of the State of New York for the purpose of selling and servicing Cadillac automobiles. The original shareholders and their stockholdings in said corporation were as follows:
Number of shares Name of shareholder of common stock
Henry ............................... 30 Hildred K. Lammerts ................. 30 Parkinson ........................... 40 ---- Total ......................... 100
On or about October 29, 1948, the name of Lammerts Motor Ramp Corp. was changed to Lammerts Cadillac Corp. (hereinafter Cadillac). Cadillac operated as a Cadillac automotive sales and service agency in the city of Nigara Falls until January 1961.
During the year 1948, the above shareholders of Cadillac acquired additional shares of common stock as reflected below:
Additional Name of shareholder shares acquired
Henry ......................... 120 Hildred ....................... 120 Parkinson ..................... 160 ------ Total ..................... 400
These shares, when coupled with the 100 shares originally issued, represented all the issued and outstanding common stock of Cadillac.
Sometime in 1958 the General Motors Corp. (Cadillac division) came to Cadillac and requested that a new facility be built to house the Cadillac agency since the building located at 5043 6th Street was built before the turn of the century. Cadillac informed General Motors that it could not afford to build a new facility by itself. After much negotiation, General Motors finally agreed to the unification of the Cadillac and Buick agencies operated by Cadillac and Lammerts (Old). As a result, Cadillac sold all of its assets which were connected with the automotive agency business (except the real property) to Lammerts (Old). The sale took place during January 1961. Thereafter, Cadillac's operations were limited to the management of several parcels of real estate located in the city of Niagara Falls.
As a result of its acquisition of the automobile business formerly conducted by Cadillac, Lammerts (Old) entered into a new direct dealer selling agreement with the General Motors Corp. which was to be effective from January 16, 1961, to October 31, 1965. This agreement contemplated that Henry and Parkinson would substantially and actively participate in either the ownership and/or operation of the dealership and that General Motors could terminate the agreement in the event of the death or incapacity (for reasons of health) of either Henry or Parkinson. Like the Buick dealership agreement which had been in effect from March 1, 1956, through October 31, 1960, this agreement also provided that if either party died or became incapacitated, General Motors would offer the dual dealership to the surviving party if he qualified as an agency operator and if he owned or acquired within a reasonable time a 25-percent financial interest in the successor dealership.
The applicable portions of this agreement were as follows:
IN CONSIDERATION * * * of the promises hereinafter made by the parties to each other, it is agreed as follows:
* * * * * * *
THIRD: This is a personal contract, being entered into in reliance upon and in consideration of the personal qualifications of and representations with respect thereto of the following named persons, who actively and substantially participate in the ownership or in the operations, or both in the ownership and in the operations of the Dealer:
* * * * * * *
H. P. LAMMERTS
H. P. LAMMERTS, JR.
* * * * * * *
TERMINATION OF AGREEMENT
* * * * * * *
B. Termination for Cause
* * * * * * *
(3) In the event of the death or incapacity of Dealer or any person named in Paragraph Third hereof Buick may terminate this Agreement. * * *
* * * * * * *
D. Rights of Surviving Persons Named in Paragraph Third
If this Agreement should be terminated by Buick under the provisions of subsection 23B(3) or 23B(4) a and at the time of such termination another person is named in Paragraph Third on the basis of being qualified as an operator as distinguished from being qualified solely on the basis of a financial interest, and if such other person owns a financial interest of at least twenty-five per cent (25%) or acquires such an interest within a reasonable time (considering then existing circumstances) after the date of such termination * * * Buick shall offer such other person a new Selling Agreement for the unexpired balance of the term of the Selling Agreement being terminated. * * *
On June 15, 1961, Henry died testate at the age of 73. Paragraph fourth of Henry's will (dated November 13, 1958) provided as follows:
I presently own all the common stock of LAMMERTS, INC., a New York corporation, other than a few shares held by my son, HENRY PARKINSON LAMMERTS, JR. Included in the assets of that corporation are real property located at First Street and Elk Place, in the City of Niagara Falls, New York; certain stocks, bonds or securities of other corporations; and the remainder consisting of the operating assets of a Buick automobile sales and service agency, including new and used automobiles, automotive parts, tools, fixtures and operating capital, all of which are hereinafter referred to as the "operating business assets". I hereby direct my executors to effect the liquidation of that corporation and, upon such liquidation, to cause the distribution of the assets in kind. Since it is the desire of my son, HENRY PARKINSON LAMMERTS, JR., to continue in the active operation of the Buick automobile agency, I direct my executors to vote for the distribution to my said son, on account of the shares which he may hold in said corporation, an undivided interest in the "operating business assets", and to further vote for the distribution of the remainder of the assets, including such remaining portion of the "operating business assets", to my estate for the shares held by me at the time of my death.
I give and bequeath to my said son, HENRY PARKINSON LAMMERTS, JR., such portion of the "operating business assets" as, when added to the portion which he shall receive upon such corporate liquidation, will make a total of twenty-five percent (25%) interest in said operating business. The remaining seventy-five percent (75%) of the undivided interest in such "operating business assets" I give and bequeath to my wife, HILDRED K. LAMMERTS, to be hers absolutely. In the event my wife, HILDRED K. LAMMERTS, should predecease me, I give and bequeath the entire share of the "operating business assets" to my son, HENRY PARKINSON LAMMERTS, JR. I further direct my executors to make the distributions herein provided immediately upon the liquidation of the said corporation, provided there are sufficient remaining assets in my said estate to insure the payment of estate obligations and estate taxes.
The effect of the above provision, when coupled with paragraphs Fifth and Sixth of the will, was threefold: First, it assured Parkinson the 25-percent ownership interest in Lammerts (Old) which would be required for renewal of the agency contracts with General Motors. Second, it preserved the rest of Henry's estate for his wife Hildred who, under paragraphs Fifth and Sixth of the will, was entitled to (a) an outright share of the residuary estate equal to the maximum marital deduction allowable in determining the Federal estate taxes payable by reason of Henry's death and (b) a life income interest in the remainder. Third, it effectively isolated and removed the Ramp Garage property from the other assets of the business.
Since Parkinson controlled the corporation which, at the time of Henry's death, owned the real property facilities in which Lammerts (Old) was housed, a bequest of a percentage of the operating assets of the business was all that was required to satisfy the ownership requirements of the General Motors agency contract. See fn. 4 supra.
At a special meeting held on December 14, 1961, the stockholders of Lammerts (Old) adopted a plan of dissolution and approved a change in the name of the corporation from "Lammerts, Inc." to "Lammerts Associates, Inc."
On December 27, 1961, Lammerts (Old) filed a certificate of change of name with the Department of State for the State of New York and changed its name to Lammerts Associates, Inc. (also referred to hereinafter as Lammerts (Old)).
On January 2, 1962, a special meeting of the board of directors of Lammerts (Old) was held to effectuate the dissolution of the corporation. In the minutes of this meeting, the "net worth" of the corporation was reported to be as follows:
Net value of real property (Ramp Garage) ........ $78,591.65 Operating business assets ....................... 214,085.58 ---------- Total net worth ............................... 292,677.23
The directors resolved that the assets of the corporation would be distributed in liquidation as follows: Distribution to — Kind of property Estate Parkinson Undivided interest in operating assets of business .......... $186,490.30 $27,595.28 Real property (Ramp Garage) .... 78,591.65 ------------ ----------- Total ..................... 265,081.95 27,595.28 Upon receiving the distribution in liquidation in accordance with the resolution adopted by the board of directors of Lammerts (Old) on January 2, 1962, the executors of the estate made a distribution of all of the undivided interest held by it in the operating assets of the automotive sales-service agency (valued at $179,810.15) to the legatees in Henry's will:
Though the book value of the undivided interest in the operating assets of the agency distributed to the estate was determined to be $186,490.30, the actual worth of these assets was stipulated at a value of $179,810.15. No explanation was offered by the parties as to the reason for this discrepancy.
It was also stipulated that the distribution to Parkinson was made by the executors of the estate (as opposed to the directors of the corporation).
(a) To Hildred — an undivided part of the said business held by the estate, said portion having a value of $154,812.70.
(b) To Parkinson — the remainder of the undivided part of the said business held by the estate, said portion having a value of $24,997.45.
On December 27, 1961, a certificate of incorporation, dated December 18, 1961, was filed by Lammerts, Inc. (hereinafter Lammerts (New)), with the Department of State for the State of New York. The authorized capital stock of Lammerts (New) consisted of 1,000 shares of $100 par value common stock, and 3,000 shares of $100 par value, noncumulative, nonvoting preferred stock.
Also, on January 2, 1962, Hildred transferred most of the undivided interest in the operating assets of the agency which she had received from the estate to Lammerts (New).
The amount transferred was valued at $149,812.70. In return she received 1,498 shares of $100 par value preferred stock of Lammerts (New) and cash of $12.70. Parkinson also transferred to Lammerts (New) most of his undivided interest ($46,104.24) in the automotive business (part of which he had received from Lammerts (Old) and part of which he had received from the estate), and received in return 461 shares of $100 par value common stock of Lammerts (New) plus cash of $4.24.
A comparison of the opening balance sheet of Lammerts (New) as of January 2, 1962, with the closing balance sheet of Lammerts (Old) as of December 30, 1961, reveals that Lammerts (New) acquired all of the assets and liabilities of Lammerts (Old) except for regular accounts receivable in the amount of $2,688.83, a loan to the shareholders in the amount of $9,979.81, and the Ramp Garage property with a book value of $78,591.65.
No interruption of the automobile agency business occurred as a result of the foregoing transactions. Business was resumed, as usual, following the January 1 holiday weekend. The employees of Lammerts (New) were the same persons who had been employed by Lammerts (Old). The agency business telephone number was left unchanged. Bank accounts, stationery, and the Lammerts (Old) employees' identification numbers were left intact. No notice was given to the public that the dual automobile agency was operating under a new corporate structure. Only the office manager and office bookkeeper were aware of the fact that a transition had occurred.
An information return setting forth the terms of liquidation set forth in the resolution adopted by the shareholders of Lammerts (Old) on January 2, 1962, was never filed with the district director's office of the Internal Revenue Service as required.
Under sec. 6043(1), the filing of an information return within 30 days after the adoption of a plan of liquidation is required of every liquidating corporation. Sec. 6043(1) contains the following directive:
SEC. 6043. RETURN REGARDING CORPORATE DISSOLUTION OR LIQUIDATION.
Every corporation shall —
(1) Within 30 days after the adoption by the corporation of a resolution or plan for the dissolution of the corporation or for the liquidation of the whole or any part of its capital stock, make a return setting forth the terms of such resolution or plan and such other information as the Secretary or his delegate shall by forms or regulations prescribe; * * *
In 1967 Lammerts Associates, Inc. (Lammerts (Old)), was dissolved pursuant to the provisions of section 203-A of the New York Tax Law as amended. Lammerts (Old), under the then name "Lammerts Associates, Inc.," did not, subsequent to the fiscal year 1961, file a corporate tax return.
As of December 31, 1960, the board of directors of Lammerts (Old) consisted of Henry, Parkinson, Robert W. Seigner, and E. Russell Sandham. As a result of Seigner's resignation in April 1961 and Henry's death in June 1961, Hildred and Elizabeth K. Lammerts (the wife of Parkinson) were elected to the board of directors on June 26, 1961. There were no further changes in the membership of the board of directors during the remainder of 1961 or during the entire year 1962. During the year 1962 the board of directors of Lammerts (New) consisted of Hildred, Parkinson, E. Russell Sandham, and Elizabeth K. Lammerts.
On or about May 2, 1962, new dealer selling agreements were entered into by Lammerts (New) with General Motors, which were to be effective from May 2, 1962, to October 31, 1965. Each of these agreements recited that the agreement was a personal service contract and that it was being entered into in reliance on the personal qualifications of Parkinson and on the expectation that he would substantially participate in the ownership and operation of the dealership. Except for the deletion of Henry's name, the terms of each of these dealership agreements were identical with those described earlier.
At a special stockholders meeting held on December 15, 1962, the stockholders of Lammerts (New) authorized the purchase by the corporation of 180 shares of its preferred stock from Hildred for the sum of $18,000 (which amount represented the par value of said shares).
Paul H. Reid, Jr. (hereinafter Reid), who represents petitioners in the instant proceedings, prepared the estate tax return for the Estate of Henry Lammerts. Reid, however, was not retained to prepare Federal income tax returns for either the corporation or the individual members of the Lammerts family. An accountant named DeLyden had always been used by the family for the preparation of both corporation and personal income tax returns. DeLyden had in the past been given free access to all the books and records of the corporation. No specific instructions were given to DeLyden by either Henry or Parkinson. DeLyden or one of his representatives would merely prepare whatever returns were necessary (corporate or individual), using the books and records which were always available to them. However, DeLyden never had access to the records which pertained to the income of the estate for the period from June 15, 1961, to May 31, 1962, since these records were maintained in the office of Reid.
Neither Parkinson nor Hildred, the two executors of Henry's estate, ever discussed the matter of preparing a fiduciary income tax return with DeLyden. Parkinson, who apparently assumed responsibility for such family matters as tax returns, had never acted as executor of any estate prior to the time he was appointed as one of the executors of his father's estate. As a result of his inexperience, he was under the impression that the only return that had to be filed was the estate tax return. Sometime in 1963, DeLyden discovered that the fiduciary income tax return had not been filed and immediately apprised Parkinson of the necessity of filing such a return, whereupon he (DeLyden) was instructed by Parkinson to prepare it. The return was prepared by DeLyden and filed by the estate on April 15, 1963, some 7 months after the statutory filing deadline.
OPINION Issue 1. Distribution of Assets to Petitioner; Ordinary Income or Capital Gain.
The primary question in this case is whether the distribution by Lammerts (Old) of certain property, not transferred to Lammerts (New), resulted in ordinary income to the estate (pursuant to either section 301 or section 356) or capital gain (pursuant to section 331). Respondent denies that such property was distributed pursuant to a section 331 liquidation. Instead, respondent views the several transactions before us as being no more than a continuation of Lammert (Old); or, in the alternative, as constituting a corporate reorganization under section 368(a)(1)(F). Each of these theories poses intriguing questions in an area of the law which is marked by uncertainty and conflict. Due to the importance which we attach to respondent's alternate contention in which he raises the question of an (F) reorganization, we will first address ourselves to this argument.
SEC. 301. DISTRIBUTIONS OF PROPERTY.
(a) IN GENERAL. — Except as otherwise provided in this chapter, a distribution of property (as defined in section 317(a)) made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in subsection (c).
SEC. 356. RECEIPT OF ADDITIONAL CONSIDERATION.
(a) GAIN ON EXCHANGES.
(1) RECOGNITION OF GAIN. — If —
(A) section 354 or 355 would apply to an exchange but for the fact that
(B) the property received in the exchange consists not only of property permitted by section 354 or 355 to be received without the recognition of gain, but also of other property or money,
then the gain, if any, to the recipient shall be recognized, but in an amount not in, excess of the sum of such money and the fair market value of such other property.
(2) TREATMENT AS DIVIDEND. — If an exchange is described in paragraph (1) but has the effect of the distribution of a dividend, then there shall be treated as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be treated as gain from the exchange of property.
SEC. 331. GAIN OR LOSS TO SHAREHOLDERS IN CORPORATE LIQUIDATIONS.
(a) GENERAL RULE. —
(1) COMPLETE LIQUIDATION. — Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock.
SEC. 368. DEFINITIONS RELATING TO CORPORATE REORGANIZATIONS.
(a) REORGANIZATION. —
(1) IN GENERAL. — For purposes of parts I and II and this part, the term "reorganization" means —
* * * * * * *
(F) a mere change in identity, form, or place of organization, however effected.
A. Liquidation or ( F) Reorganization
Though aged, section 368(a)(1)(F) has, until recently, received little administrative or judicial attention. Our task here is to determine whether the case at bar falls within the narrow grasp of section 368(a)(1)(F). We do not think that it does.
See Rev. Rul. 69-185, 1969-1 C.B. 108; Rev. Rul. 69-516, I.R.B. 1969-41, 10.
Section 368(a)(1)(F) defines a reorganization as "a mere change in identity, form, or place of organization, however effected."
In Associated Machine, 48 T.C. 318 (1967), revd. 403 F.2d 622 (C.A. 9, 1968), we stated as a principle at page 326 that the "wording of subparagraph (F) is simple and clear. 'Mere' means 'nothing more or other than.' "
In Hyman H. Berghash, 43 T.C. 743, 752 (1965), affd. 361 F.2d 257 (C.A. 2, 1966), we made the following observation with regard to the scope of a reorganization under subparagraph (F):
Although the exact function and scope of the (F) reorganization in the scheme of tax-deferred transactions described in section 368(a)(1) have never been clearly defined, it is apparent from the language of subparagraph (F) that it is distinguishable from the five preceding types of reorganizations as encompassing only the simplest and least significant of corporate changes. The (F) -type reorganization presumes that the surviving corporation is the same corporation as the predecessor in every respect, except for minor or technical differences. * * *
Hence, while a mere change of corporate domicile would seem to come well within the parameters of subparagraph (F), "a change which involves the retirement of some shareholders, the addition of others, a shift in the proportionate interests of those who continue, and increase in capital" would seem to be outside of the literal terms of this provision.
See Lane, "The Reincorporation Game: Have the Ground Rules Really Changed?," 77 Harv. L. Rev. 1235-1236.
In Berghash, the Commissioner argued that the transaction on which the Court had to pass judgment constituted an (F) reorganization. There the taxpayer was a retail druggist who held 99 percent of the stock of a corporation (D-B) which owned and operated a drugstore. The taxpayer and a pharmacist named Lettman, who was then in his employ, entered into a contract to establish a new drugstore corporation (D) in a prospective shopping plaza. The shopping plaza never materialized and no capital was ever paid into D until the transaction which was at issue in the case. After several unsuccessful efforts to find a new location, Lettman insisted that taxpayer sell Lettman a 50-percent share in the D-B corporation or Lettman would be forced to strike off on his own. Taxpayer agreed to the sale of 50 percent of his ownership interest in the corporation. However, since Lettman could only raise $25,000 and since the D-B corporation's assets were worth well over $100,000, taxpayer and Lettman arrived at the following plan: First, the shareholders of D-B corporation (taxpayer owning 99 percent of the outstanding shares and his wife owning 1 percent of the outstanding shares) adopted a section 331 plan of complete liquidation; second, D-B corporation transferred its operating assets to D corporation in exchange for 50 percent of D's common stock (valued at $25,000) and a negotiable promissory note for the difference between $25,000 and the value of the assets transferred; third, Lettman purchased the outstanding shares of common stock for $25,000; and fourth, D-B distributed all of its assets, including the D stock, in a complete liquidation.
In holding that the transaction did not constitute an (F) reorganization, we relied upon the following principle stated at page 752:
The decisions involving subparagraph (F) or its counterpart in prior revenue acts consistently have imposed at least one major limitation on transactions that have been claimed to qualify thereunder: if a change in stock ownership or a shift in proprietary interest occurs, the transaction will fail to qualify as an ( F) reorganization. Helvering v. Southwest Corp., 315 U.S. 194, affirming 119 F.2d 561, affirming a Memorandum Opinion of this Court. [Emphasis supplied.]
Finally, in distinguishing Berghash from the facts which were presented to us in Pridemark, Inc., 42 T.C. 510 (1964), affirmed in part and reversed in part 345 F.2d 35 (C.A. 4, 1965), we made the following observation at page 754 relating to the fact that, in Berghash, the D corporation, once it obtained all of the operating assets of the D-B corporation, continued in exactly the same capacity as its predecessor:
Despite the fact that all of the operating assets were carried over to the successor corporation, which continued exactly the same business, in the same location, as had been conducted by the predecessor, the radical shift in stock ownership which occurred precludes us from holding that the transaction amounted to no more than "a mere change in identity, form, or place of organization" within the meaning of section 368(a)(1)(F). Cushman Motor Works v. Commissioner, * * * [ 130 F.2d 977]; Joseph C. Gallagher, * * * [ 39 T.C. 144]. [Emphasis supplied.]
Though the facts presented in the instant case do not closely parallel those which we had before us in Berghash, we believe the principles developed in that case are determinative of the issue herein presented.
Prior to Henry's death, Lammerts (Old) was owned exclusively by Henry and Parkinson; while subsequent to Henry's death, and prior to the distribution of assets in liquidation of the "old" corporation, Henry's estate and Parkinson held all the outstanding stock of Lammerts (Old). By contrast, Hildred and Parkinson owned all the shares of stock in Lammerts (New) with Parkinson owning all the common stock, and Hildred owning all the preferred stock. Hence, there was a marked difference in the ownership of Lammerts (Old) vis-a-vis Lammerts (New).
Even if, under New York law, it could be said that Hildred and Parkinson, as specific legatees, obtained equitable title to the business assets of Lammerts (Old) upon Henry's death, Hildred did not, prior to the liquidation, have effective command over the use or disposition of these assets for purposes of the continuity-of-interest requirements so as to fall within subpar. (F). The disposition of the business assets of Lammerts (Old) was controlled by the dispositive provisions of Henry's will and accomplished by his executors. As such, we do not feel that either Parkinson or Hildred can be regarded as having stepped into the preliquidation shoes of the decedent (or his estate) so as to succeed to his former proprietary interest in Lammerts (Old).
Our finding is to be contrasted with the holding of the Second Circuit in Bard-Parker Co. v. Commissioner, 218 F.2d 52 (C.A. 2, 1954), affirming 18 T.C. 1255 (1952), certiorari denied 349 U.S. 906 (1955), which is urged upon us by respondent. There it was held that liquidating trustees served merely as a "conduit" through which title to the assets of the transferring corporation passed to the acquiring corporation in a tax-free reorganization. The taxpayer in Bard-Parker contended that the transfer of the assets did not constitute a tax-free reorganization under then section 112(b)(4) because: (a) In accordance with the applicable New York statute, once the old company was dissolved, title to its assets then vested in its former directors as liquidating trustees; (b) therefore, these individuals (as opposed to the old corporation) transferred the assets of the old corporation to the new corporation; and (c) the literal terms of the statute could, therefore, not be complied with since section 112(b)(4), related solely to a reorganization in which a corporation exchanged property for securities in another corporation. In holding that the transactions did constitute a reorganization, the Court of Appeals at pages 56-57 used the following language, part of which was quoted from Helvering v. Limestone Co., 315 U.S. 179 (1942):
SEC. 112. RECOGNITION OF GAIN OR LOSS [I.R.C. 1939].
(b) EXCHANGES SOLELY IN KIND. —
* * * * * * *
(4) SAME. — GAIN OF CORPORATION. — No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.
"the separate steps were integrated parts of a single scheme. Transitory phases of an arrangement frequently are disregarded under these sections of the revenue acts where they add nothing of substance to the completed affair. * * * Here they were no more than intermediate procedural devices utilized to enable the corporation to acquire all the assets of the old one pursuant to a single reorganization plan."fn2 * * * [Footnote omitted.]
See also Davant v. Commissioner, 366 F.2d 874, 884 (C.A. 5, 1966), affirming in part and reversing on other grounds 43 T.C. 540 (1965), in which the Fifth Circuit rejected an argument similar to the argument posited by the taxpayer in Bard-Parker.
Given the facts which we have before us, we cannot say that the separate steps which took place in this case were "integrated parts of a single scheme" in which Henry's executors merely served as conduits for the distribution of the corporation's operating assets, and should, therefore, be disregarded. In the first place, a period of approximately 3 years passed between the execution of the testamentary instrument by Henry and his demise. Secondly, the decision to liquidate and to distribute the assets of the corporation was made on the advice of counsel. Hence, the executors acted under the mandate of Henry's will only after being instructed by counsel that no other recourse was available to them. Thirdly, the decision to reincorporate was made several months after Henry's death.
With the above firmly in mind, it remains to be determined whether the shareholders of record prior to the transactions which are alleged to have constituted the (F) reorganization were predominantly the same as those persons who wound up with the proprietary interest in the corporation subsequent to such transactions. See, e.g., Helvering v. Southwest Corp., 315 U.S. 194 (1942), reversing 119 F.2d 561 (C.A. 5, 1941), affirming a Memorandum Opinion of this Court; Joseph C. Gallagher, 39 T.C. 144 (1962); and Hyman H. Berghash, supra.
As stated earlier, we hold that the stock ownership in Lammerts, Inc. (Lammerts (New)), after the transactions referred to above, was not the same as the proprietary interest in Lammerts (Old) which existed just prior to the first of these transactions, i.e., the distribution of assets to Parkinson and the estate. This is reflected by the chart which follows. As such, an (F) reorganization could not have taken place under the case law cited above. Ownership interest in shares (FMV) Lammerts Lammerts Common (Old) (New) Estate (Henry) ...................................... 634 0 Parkinson ........................................... 66 461 Hildred ............................................. 0 0 Preferred Hildred ............................................. 0 1,498 Parkinson ........................................... 0 0 Moreover, the capital structure of the new corporation was substantially different from that of the old. This is not the type of transition contemplated by the (F) reorganization framework. Again quoting from our opinion in Berghash, "The (F)-type reorganization presumes that the surviving corporation is the same corporation as the predecessor in every respect, expect for minor or technical differences."
See p. 430 supra.
We hold that the transactions commencing with the distribution of Lammerts (Old) assets to its then shareholders did not collectively or independently constitute the type of occurrence contemplated by section 368(a)(1)(F).
In arriving at the above conclusion we are not unmindful of the Ninth Circuit's holdings in Estate of Stauffer v. Commissioner, 403 F.2d 611 (C.A. 9, 1968), reversing 48 T.C. 277 (1967), and in Associated Machine, supra; and the Fifth Circuit's opinion in Reef Corporation v. Commissioner, 368 F.2d 125 (C.A. 5, 1966), affirming in part and reversing in part a Memorandum Opinion of this Court. In each of these cases we held on doctrinal grounds that (F) reorganizations had not taken place and in each instance our determination was reversed on appeal with the result being an attenuation of what we thought to be the fairly narrow terms of the statute.
In Associated Machine we held that even though the fusion of brother-sister corporations may constitute a statutory reorganization for purposes of section 368(a)(1)(A), it did not constitute a "mere change in identity, form, or place of organization" for purposes of section 368(a)(1)(F). Relying in part on the legislative history of the (F)-type reorganization and on our holding, in Hyman H. Berghash, supra, we adopted the view that "the wording of subparagraph (F) * * * envisions a corporate rearrangement involving changes in the structure of only one corporation — a transaction where both prior to and after the reorganization there is only one corporation."
Sec. 368(a)(1)(F), I.R.C. 1954. See fn. 11 supra.
48 T.C. at 326.
In the Stauffer case we were presented with an issue almost identical to the (F) reorganization question presented in the Associated Machine case and there, too, we held that no (F) reorganization had occurred. The basis for our determination in Stauffer is summed up, in part, by the following language which appears at page 300 of our opinion:
Certainly, it is necessary that there be continuity of both proprietary interest and enterprise in order to qualify as an (F) reorganization. But that is not enough, for there may be other changes that are too significant to be ignored in determining whether there was a "mere change in identity, form, or place of organization." And in this case substantial changes did occur when the separate businesses of three separate corporations were united in a new corporation.
Relying heavily on the language of Davant v. Commissioner, supra, the Ninth Circuit reversed both cases on the general principle that where there is a shift in the operating assets from the transferor corporation to its alter ego (whether it be a viable corporation or a corporate shell) and where the identity of proprietary interest remains intact and the business enterprise of the transferor corporation continues unimpaired, an (F) reorganization has taken place.
In Estate of Stauffer v. Commissioner, 403 F.2d 611, supra, see the Court of Appeal's language at page 619 and in Associated Machine see the Court of Appeal's reasoning, 403 F.2d at 625, culminating in the following language:
"At least where there is a complete identity of shareholders and their proprietary interests, as here, we hold that the type of transaction involved is a type (F) reorganization. * * *" (Emphasis theirs.)
We do not believe that the above appellate court decisions detract from the conclusions we have reached in the instant proceeding. Without commenting on the overall approach used by the circuit court in these decisions, it need only be stated that in neither instance could there have been an (F) reorganization without an identity of shareholder interest. Therefore, although the above holdings of the Ninth Circuit are at loggerheads with this Court's interpretation of subparagraph (F), we do not find these cases to be in conflict with the conclusions we have reached herein. Reef Corporation v. Commissioner, supra, involved a fact pattern different from the two cases discussed above. In Reef, the old corporation (RF) was composed of two groups of shareholders — the Butler group which owned 52 percent of the stock and the Favrot group which owned 48 percent of the stock. The Butler group was determined to buy out the Favrot group and the following plan was devised to accomplish this objective. A new corporation was formed (R) and the Butler group received all the common stock of R in exchange for a portion of their holdings in RF stock. Both groups sold the remaining RF stock to a third party (S) and each received notes of S in return. The Favrot group also received some cash. R then sold its holdings in RF stock to S for S's notes. This placed all of the stock of RF in S. S then caused RF to sell all of its assets to R in a section 337 sale. RF received R notes in the transaction which were distributed to S in complete liquidation of RF. S then distributed the R notes pro rata to the holders of his personal notes (R, the Butler group and the Favrot group) in complete satisfaction of his personal notes. The net result of the above transactions was that the Butler group which formerly owned 52 percent of the continuing enterprise now owned a 100-percent interest. Under these facts we held that though a (D) reorganization had taken place, the changes which occurred in the proprietary interests were such that (F) reorganization treatment would not be proper.
In Stauffer, we declined to accept the holding of the Fifth Circuit in Davant v. Commissioner, 366 F.2d 874, insofar as it permitted (F) reorganization treatment to the merger of brother-sister corporations, stating at page 303: "With all due respect to the Court of Appeals, we do not accept its interpretation of subparagraph (F)."
See Rev. Rul. 69-185, supra at fn. 12, which states that the Internal Revenue Service will not follow the decisions of the Court of Appeals for the Ninth Circuit in the Stauffer and Associated Machine cases, nor that portion of the Fifth Circuit's opinion in Davant, supra, which deals with the question of whether a combination of two or more commonly owned operating corporations can qualify as an (F)-type reorganization. Cf. Rev. Rul. 69-516, id.
Reef Corporation, T.C. Memo 1965-72.
The Fifth Circuit, on cross-appeal from the Commissioner, reversed our determination with regard to this issue on the ground that (a) continuity of shareholder interest was present through the Butler group and (b) the elimination of the Favrot group's proprietary interest represented a section 302 redemption "functionally unrelated" to be (F) reorganization entered into by the Butler group.
To the extent that the circuit court in Reef predicated its holding on the premise that the discontinuance of the minority group's proprietary interest in R resulted from a redemption "functionally unrelated" to the transactions comprising the reorganization which was there held to have taken place, we do not feel that the Reef case forbids the conclusion which we have reached in the case at bar. However, to the extent that the circuit court's opinion in Reef can be read as being in conflict with the continuity-of-interest rules laid down in the Berghash and Southwest Corp. cases, we would have to respectfully disagree with the Fifth Circuit and follow Berghash, which was upheld by the Second Circuit in which an appeal from this case would lie.
In this regard, we note, without further comment, the language used by the Fifth Circuit at page 137 of the opinion:
"The Tax Court's position might have more force if the change in proprietary interests were to new persons and less than 50% of the former stockholders' interest in the old corporation remained in the new corporation. Then the change begins to look like a sale of the assets to a new and legally separate entity followed by a bona fide liquidation. * * *" ( 368 F.2d at 137.)
Cf. the following language from our opinion in Berghash:
"* * * Berghash, who had owned all of the stock (except the two shares owned by his wife) of the old Delavan-Bailey Drug Co., Inc., wound up as the owner of only 50 percent of the stock of the successor corporation. * * * [This] radical shift in stock ownership which occurred precludes us from holding that the transaction amounted to no more than "a mere change in identity, form, or place of organization" within the meaning of section 368(a)(1)(F). * * *" ( 43 T.C. at 754.)
See fn. 26 infra.
B. Section 331 Liquidation or Section 301 Dividend
Respondent's other argument is that a complete liquidation within the intendment of section 331 did not take place and that Lammerts (New) is merely a continuation of Lammerts (Old). Under respondent's theory the distribution of the Ramp Garage and accounts receivable not retained by Lammerts (New) would be taxable to the estate as a dividend by virtue of sections 301 and 316. We do not accept respondent's theory.
SEC. 316. DIVIDEND DEFINED.
(a) GENERAL RULE. — For purposes of this subtitle, the term "dividend" means any distribution of property made by a corporation to its shareholders —
(1) out of its earnings and profits accumulated after February 28, 1913, or
(2) out of its earnings and profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made.
Except as otherwise provided in this subtitle, every distribution is made out of earnings and profits to the extent thereof, and from the most recently accumulated earnings and profits. To the extent that any distribution is, under any provision of this subchapter, treated as a distribution of property to which section 301 applies, such distribution shall be treated as a distribution of property for purposes of this subsection.
In Joseph C. Gallagher, supra, we stated at page 157 that —
The concept of a continuation of the existing business through a section 331 liquidation,fn13 coupled with an intercorporate transfer, falls into the general area of corporate reorganizations, so that it is in the so-called reorganization sections, if anywhere, that we should expect it to be dealt with. [Footnote omitted.]
This principle was reaffirmed in Hyman Berghash, supra. We now find it apposite to the issue at hand. We have already found that a reorganization under subparagraph (F) did not take place, and since no other form of reorganization is urged by respondent, we find the language quoted from Gallagher to be determinative of the issue at hand. Even so, because of the complexities which inhere in this area of the law, we deem it wise to consider the various arguments raised by respondent with regard to this issue.
Note, also the opinion of the Court of Appeals in Berghash where our application of the Gallagher principle was cited with approval. 361 F.2d at 260.
Respondent relies, in part, on the following language from Davant v. Commissioner, supra, in support of his argument that the transactions described above did not constitute a complete liquidation under section 331:
Clearly, this liquidation cannot come within the intention of Congress in enacting the complete liquidation provisions. Those provisions contemplate that operating assets will no longer be used by the stockholders to carry on the business as a corporation. It has long been recognized that taxpayers cannot liquidate a corporation with the intention of immediately reincorporating it in order to hold back liquid assets and cash for the purpose of getting capital gains treatment * * *. Such a liquidation reincorporation transaction does not qualify for section 331 treatment. * * * [366 F.2d 882, 883.]
We find the facts of Davant to be distinguishable from those presented herein; and we do not, therefore, find the above-quoted language to be binding in the instant case. For, in Davant there was a complete identity of shareholder interest. After the transactions there had been fully consummated, the four families who owned all the shares of stock in the transferor corporation wound up with all the shares of stock in the transferee corporation. As determined earlier in this opinion, the shareholders of Lammerts (New) were not the same as the shareholders in Lammerts (Old). Hence, we are not concerned with the kind of alleged abuse which concerned the Court of Appeals in Davant.
Respondent also relies upon the following language used by the Court of Appeals in Pridemark, Inc. v. Commissioner, 345 F.2d 35, 41 (C.A. 4, 1965):
The Code provides no definition of "complete liquidation" * * * [An] indication of what distributions are meant to be accorded favored treatment is found in an early report of the Senate Finance Committee. S. Rep. No. 398. 68th Cong., 1st Sess. 12 (1924). There a distribution in complete liquidation was analogized to a sale of stock in that the shareholder "surrenders his interest in the corporation and receives money in place thereof." The corporation must have ceased to be a going corporate concern, or if the enterprise is continued in corporate form, the shareholder must have disassociated himself from it. See Regs. 1.332-2(c) (1955). * * *
We agree with the respondent that the Code provides no definition of a "complete liquidation." However, we cannot agree that the excerpt from the Senate Finance Committee report (which appears quoted above) sheds any light on either the liquidation-reincorporation area generally, or on the particular facts presented in the instant case.
The phrase quoted in Pridemark appears in the following Senate Finance Committee's explanation of the liquidation provisions of the Revenue Act of 1924 and merely speaks of the treatment to be accorded liquidating dividends:
"The bill treats a liquidating dividend as a sale of the stock, with the result that the gain to the taxpayer is treated not as a dividend subject only to the surtax but as a gain from the sale of property which may be treated as a capital gain. The treatment of liquidating dividends under the bill is substantially the same as provided for in the Revenue Act of 1918. A liquidating dividend is, in effect, a sale by the stockholder of his stock to the corporation; he surrenders his interest in the corporation and receives money in place thereof. * * *" (S.Rept. No. 398, to accompany H.R. 6715 ( Pub.L. No. 176), 68th Cong., 1st Sess., pp. 11-12 (1924).)
In this regard, we note the following language of the Court of Appeals in Berghash:
The only point upon which we see any need to expand upon the Tax Court's decision is the Commissioner's argument [rejected by the Tax Court] that, if the business of the liquidated corporation is continued by the new corporation, there is no "complete liquidation" within the meaning of Sections 331 and 337. This argument, apparently derived from an early report of the Senate Finance Committee, S. Rep. No. 398, 68th Cong., 1st Sess. 12 (1924) and from Treas. Regs. § 1-332-2(c) (1955) has been accepted in a dictum by the Fourth Circuit * * * [in] Pridemark, Inc. v. Commissioner, 345 F.2d 35, 41 (4 Cir. 1965).
We are in complete agreement with the Tax Court's resolution of this issue; its interpretation reflects the normal meaning of the words "complete liquidation" in Sections 331 and 337. * * * [ 361 F.2d 260.]
Nor, as respondent further argues, are we persuaded that section 1.331-1(c) of the regulations constrains us to find that a complete liquidation did not, in fact, occur in the instant case. Section 1.331-1(c) reads as follows:
(c) A liquidation which is followed by a transfer to another corporation of all or part of the assets of the liquidating corporation or which is preceded by such a transfer may, however, have the effect of the distribution of a dividend or of a transaction in which no loss is recognized and gain is recognized only to the extent of "other property." See sections 301 and 356. [Emphasis supplied.]
As we read section 1.331-1(c), a liquidation followed by a transfer to another corporation of all or part of the assets of the liquidating corporation may be denied capital gains status under section 331. However, it is our belief that the above regulations do not compel such a finding where a denial of section 331 liquidation status is not warranted by the facts. We hold on the facts presented herein that a denial of section 331 liquidation status would be unwarranted in the case at bar.
The basis for the regulations quoted above seems to be found in the legislative history of the 1954 Code. The first legislative effort intended to deal explicitly with the reincorporation problem was passed by the House in 1954, but rejected by the Senate. The Senate-House conference committee, which also rejected it, commented as follows:
The House bill in section 357 contained a provision dealing with a device whereby it has been attempted to withdraw corporate earnings at capital gains rates by distributing all the assets of a corporation in complete liquidation and promptly reincorporating the business assets. This provision gave rise to certain technical problems and it has not been retained in the bill as recommended by the accompanying conference report. It is the belief of the managers on the part of the House that, at the present time, the possibility of tax avoidance in this area is not sufficiently serious to require a special statutory provision. It is believed that this possibility can appropriately be disposed of by judicial decision or by regulation within the framework of other provisions of the bill. [Emphasis supplied.]
Conf. Rept. No. 2543, to accompany H.R. 8300 (Pub.L. No. 591), 83d Cong., 2d Sess., p. 41 (1954). The House bill was initiated to shore up pre-1954 case law on reincorporations which was thought to supply inadequate protection against the bail out of corporate earnings at the capital rate. A reincorporation was subject to the provisions of the House bill if more than 50 percent of the old corporation's assets were transferred to a controlled corporation within 5 years after a liquidation, but an exception was provided for transactions not having tax avoidance as a principal purpose. See Bittker, Federal Income, Estate and Gift Taxation 721.
Just what force should be given to the conferees' report and the regulations seemingly promulgated thereunder is somewhat unclear. Pridemark, Inc. v. Commissioner, supra. While the conference report cannot be regarded as law, it appears clear that the committee was aware of the liquidation-reincorporation problem and, nevertheless, concluded that the present statutory scheme, case law, and regulations which might be promulgated in the future were adequate to deal with it. We are in accord with this approach and at the same time we find that the regulations quoted above add little to the case law which we have already found to be not in conflict with the results we have reached.
Respondent next urges that liquidation of Lammerts (Old) did not take place for the following reasons: (a) No interruption of the automobile agency business occurred as a result of the foregoing transactions; (b) the employees of Lammerts (New) were the same persons who had been employed by Lammerts (Old); (c) the agency business telephone number was left unchanged; (d) bank account numbers and stationery were left unchanged; (e) Lammerts (Old) taxpayer identification number was left intact; (f) no notice was given to the public that the dual automobile agency was being operated under a new corporate structure; (g) only the office manager and bookkeeper were aware of the fact that a transition in ownership and management had occurred; and (h) an information return, as required by section 6043(1), was never filed with the district director's office of the Internal Revenue Service.
See fn. 7 supra.
We do not feel that, under the particular facts of this case, any of the reasons set forth above singularly or collectively militate against our decision herein. Petitioners cannot be condemned for the expeditiousness with which the transactions described herein were accomplished. The mere fact that business, under the auspices of Lammerts (New), was resumed without interruption at the termination of Lammerts (Old) does not prove that there was not, in fact, a termination of Lammerts (Old). Cf. Hyman H. Berghash, supra.
We recognize that Lammerts (Old) was derelict in failing to file a notice of liquidation per section 6043(1) and that Lammerts (New) was derelict in failing to obtain a new taxpayer identification number; however, we cannot see how either of these failures may be construed to prevent liquidation status under section 331.
Lastly, respondent has stated on brief that:
If respondent is incorrect and an estate that causes a corporation to go through a purely formal liquidation qualifies automatically under section 331, then "a new horizon of tax avoidance possibilities would be opened." * * * For if respondent loses this case, a rush of new codicils may naturally be expected.
In response to this contention, we note that it was the direction of Henry's will which caused the executors of Henry's estate to liquidate Lammerts. It was not an act of their own volition which brought about the liquidation. Assuming arguendo that respondent is correct in his fear, we would not be justified in altering our conclusions merely because a taxpayer, in a given set of circumstances, experiences favorable income tax consequences. Quoting, in part, language cited by the Court of Appeals in Lewis v. Commissioner, 176 F.2d 648, "Our determination of the substantive question must not be controlled by whether in the particular case it is to the advantage of the Government or of the taxpayer" to hold that a section 331 liquidation has been effected. "Rather, the effort should be to seek out the true intendment of the law, [and] let the chips fall how they may in the particular litigation. Otherwise, to change the metaphor, interpretative chickens may come home to roost at a time when the barnyard wears quite a different aspect." 176 F.2d at 648.
Issue 2. Redemption of Preferred Stock
On December 15, 1962, a special meeting of the stockholders of Lammerts (New) was held. Present at that meeting were Hildred, Parkinson, and Paul H. Reid, Jr., the petitioners' attorney. The following is an excerpt from the minutes of that meeting:
A general review of the business operations for the year 1962 was had and a discussion was had relative to the preferred stock of the Corporation. It was unanimously agreed that it would be in the best interest of the Corporation that such preferred stock be retired in part.
As a result, Lammerts (New) redeemed 180 shares of its 6-percent noncumulative, nonvoting preferred stock from Hildred for $18,000 (its book value). During the year 1962, Lammerts (New) reported a taxable income of $25,714.12. No dividends were paid on the preferred shares by Lammerts (New) during the year 1962.
Immediately before this redemption, Hildred owned 1,498 shares of the preferred stock of Lammerts (New), these being all of the outstanding preferred shares. Parkinson owned 461 shares of the common stock of Lammerts (New), these being all of the outstanding common shares.
Respondent contends that redemption of the 180 shares of preferred stock referred to above was essentially equivalent to a dividend under section 302 and subject to ordinary-income tax rates under section 301. we agree with respondent.
Sec. 301(a), see fn. 8 supra.
The problem of determining whether a redemption of stock should be treated as an exchange (pursuant to section 302) or a distribution (pursuant to section 301) is indeed a vexing one. The burden of proof on this issue rests with petitioner. Petitioner concedes, in its reply brief, that the redemption of Hildred's shares does not fit within either of the specific safe-harbor tests of section 302(b)(2) and (3) which, if met, would require capital gains treatment. Petitioner, however, contends that the distribution was not essentially equivalent to a dividend under section 302(b)(1). We hold that petitioner has failed to meet its burden of proof with regard to this question and that the redemption of Hildred's shares was essentially equivalent to a dividend.
See Moore, "Dividend Equivalency — Taxation of Distributions in Redemption of Stock," 19 Tax L. Rev. 249 (1964).
SEC. 302. DISTRIBUTIONS IN REDEMPTION OF STOCK.
(b) REDEMPTIONS TREATED AS EXCHANGES. —
* * * * * * *
(2) SUBSTANTIALLY DISPROPORTIONATE REDEMPTION OF STOCK. —
(A) IN GENERAL. — Subsection (a) shall apply if the distribution is substantially disproportionate with respect to the shareholder.
(B) LIMITATION. — This paragraph shall not apply unless immediately after the redemption the shareholder owns less than 50 percent of the total combined voting power of all classes of stock entitled to vote.
(C) DEFINITIONS. — For purposes of this paragraph, the distribution is substantially disproportionate if —
(i) the ratio which the voting stock of the corporation owned by the shareholder immediately after the redemption bears to all of the voting stock of the corporation at such time, is less than 80 percent of —
(ii) the ratio which the voting stock of the corporation owned by the shareholder immediately before the redemption bears to all of the voting stock of the corporation at such time.
For purposes of this paragraph, no distribution shall be treated as substantially disproportionate unless the shareholder's ownership of the common stock of the corporation (whether voting or nonvoting) after and before redemption also meets the 80 percent requirement of the preceding sentence. For purposes of the preceding sentence, if there is more than one class of common stock, the determinations shall be made by reference to fair market value.
(D) SERIES OF REDEMPTIONS. — This paragraph shall not apply to any redemption made pursuant to a plan the purpose or effect of which is a series of redemptions resulting in a distribution which (in the aggregate) is not substantially disproportionate with respect to the shareholder.
(3) TERMINATION OF SHAREHOLDER'S INTEREST. — Subsection (a) shall apply if the redemption is in complete redemption of all of the stock of the corporation owned by the shareholder.
SEC. 302. DISTRIBUTIONS IN REDEMPTION OF STOCK.
(b) REDEMPTIONS TREATED AS EXCHANGES. —
(1) REDEMPTIONS NOT EQUIVALENT TO DIVIDENDS. — Subsection (a) shall apply if the redemption is not essentially equivalent to a dividend.
The regulations under section 302, in pertinent part, contain the following statements:
Sec. 1.302-2. Redemptions not taxable as dividends.
(a) The fact that a redemption fails to meet the requirements of paragraph (2), (3) or (4) of section 302(b) shall not be taken into account in determining whether the redemption is not essentially equivalent to a dividend under section 302(b)(1). See, however, paragraph (b) of this section. For example, if a shareholder owns only nonvoting stock of a corporation which is not section 306 stock and which is limited and preferred as to dividends and in liquidation, and one-half of such stock is redeemed, the distribution will ordinarily meet the requirements of paragraph (1) of section 302(b) but will not meet the requirements of paragraph (2), (3) or (4) of such section. * * *
(b) The question whether a distribution in redemption of stock of a shareholder is not essentially equivalent to a dividend under section 302(b)(1) depends upon the facts and circumstances of each case. One of the facts to be considered in making this determination is the constructive stock ownership of such shareholder under section 318(a). * * *
Two distinct inferences may be drawn from the above language: The first being that a redemption of nonvoting, non-306 preferred stock from a person owning only preferred stock will ordinarily, but not necessarily, meet the requirements of section 302(b)(1); and, the second being that the analysis of any transaction alleged to fit within section 302(b)(1), including the example cited in section 1.302-2(a) of the regulations, must take into consideration the constructive-ownership rules of section 318. See, e.g., Levin v. Commissioner, 385 F.2d 521 (C.A. 2, 1967), affirming 47 T.C. 258 (1966); and Thomas G. Lewis, 35 T.C. 71 (1960). Petitioner has not argued to the contrary.
The example illustrated in sec. 1.302-2(a), Income Tax Regs., is apparently derived from the legislative history of sec. 302. As originally passed by the House, sec. 302 did not contain the "not essentially equivalent to a dividend" test. The Senate Finance Committee felt that without such a test, sec. 302 would be unnecessarily restrictive. As a result the Senate Finance Committee added sec. 302(b)(1) and explained this addition as follows:
"While the House bill set forth definite conditions under which stock may be redeemed at capital-gain rates, these rules appeared unnecessarily restrictive, particularly in the case of redemptions of preferred stock which might be called by the corporation without the shareholder having any control over when the redemption may take place. Accordingly, your committee follows existing law by reinserting the general language indicating that a redemption shall be treated as a distribution in part or full payment in exchange for stock if the redemption is not essentially equivalent to a dividend. * * * [S.Rept. No. 1622, to accompany H.R. 8300 (Pub.L. No. 591), 83d Cong., 2d Sess., pp. 44-45 (1954).]"
Sec. 318(b)(1) states as follows:
(b) CROSS REFERENCES. —
For provisions to which the rules contained in subsection (a) apply, see —
(1) section 302 (relating to redemption of stock);
Sec. 302(c) states as follows:
(c) CONSTRUCTIVE OWNERSHIP OF STOCK. —
(1) IN GENERAL. — Except as provided in paragraph (2) of this subsection, section 318(a) shall apply in determining the ownership of stock for purposes of this section.
It is our conclusion that the application of the attribution rules of section 318(a)(1)(A)(ii) to the facts of this case precludes us from holding that the redemption of Hildred's shares of preferred stock was not essentially equivalent to a dividend. As we stated in Perry S. Lewis, 47 T.C. 129, 134 (1966), "We think that the indispensable first step in determining dividend equivalency is whether the redemption of stock has caused a meaningful change in the position of the shareholder with relation to his corporation and the other shareholders." (Quotation marks and brackets omitted.) In the instant case, the redemption of the 180 shares of Hildred's preferred stock created no change in her relationship to either Lammerts (New) or her son, Parkinson. Both before and after the redemption she owned directly 100 percent of the outstanding shares of Lammerts (New) preferred and constructively 100 percent of Lammerts (New) common since her son, Parkinson, owned directly all the outstanding common stock. Moreover, Hildred's relationship to the corporation was not significantly changed by virtue of the redemption. Neither before nor after the redemption did she take an active role in the management of the corporation. Hence, the facts of this case are distinguishable from Perry S. Lewis, supra, the only case relied upon by petitioners. In Lewis, the redemption of the shares of stock held by the taxpayer was in conjunction with an overall plan whereby the taxpayer relinquished his duties as president and completely terminated his active role as an officer and director of the corporation. Under these circumstances, we found that the taxpayer's desire to withdraw from both the ownership and management of the business constituted a change in position sufficient to "dispel the aura of dividend equivalence." 47 T.C. at 135. We find no such change of position in the case at bar.
SEC. 318. CONSTRUCTIVE OWNERSHIP OF STOCK.
(a) GENERAL RULE. — For purposes of those provisions of this subchapter to which the rules contained in this section are expressly made applicable —
(1) MEMBERS OF FAMILY. —
(A) IN GENERAL. — An individual shall be considered as owning the stock owned, directly or indirectly, by or for —
* * * * * * *
(ii) his children, grandchildren, and parents.
In arriving at the above determination we do not deny that Hildred experienced some change in the ownership rights attached to her preferred shares, to wit, participation in current earnings and the right to corporate assets on liquidation. However, on the facts of this case, we do not feel that these changes weigh heavily enough to alter our determination of dividend equivalency. Compare Himmel v. Commissioner, 338 F.2d 815 (C.A. 2, 1964), reversing 41 T.C. 62 (1963), distinguishable on its facts, in which relative changes with respect to ownership attributes of preferred stock (i.e., rights to earnings and assets) were considered by the Court of Appeals in arriving at its determination of nondividend equivalency.
The redemption of Hildred's shares came at the heels of a profitable year for Lammerts (New) during which its current earnings and profits exceeded the $18,000 paid to Hildred for her preferred shares. In light of the "aura of dividend equivalence" suggested by these factors we believe that, in order to find for petitioners, there would have to be present in this case "some raison d'être for the redemption reasonably related to business exigencies and not founded upon the personal whims of the taxpayer or, * * * upon the machinations of other shareholders whose shares would be attributable to [her]." 47 T.C. at 134. Cf. Northup v. United States, 240 F.2d 304 (C.A. 2, 1957), reversing a District Court case. In the instant case, no business purpose for the redemption is urged by petitioners.
Finally, in light of the fact that we have treated Hildred as constructive owner of 100 percent of the common stock of Lammerts (New), we believe the so-called net-effect test, under which dividend equivalency is determined by comparing the economic effect of a hypothetical dividend to that of the actual distribution in redemption of preferred shares, has no application to the facts of this case.
For a recent discussion of the principles underlying the "net effect test," see Commissioner v. Estate of Antrim, 395 F.2d 430 (C.A. 4, 1968), affirming a Memorandum Opinion of this Court.
Issue 3. Penalty for Late Filing
Petitioners (in this instance, the Estate of Henry Lammerts) contend that the late filing of the fiduciary income tax return for the estate was due to reasonable cause, within the meaning of section 6651(a), since the executors of the estate relied upon DeLyden, their long-time accountant, and Paul H. Reid, Jr., attorney to the estate, to file all necessary tax returns. Petitioners also contend that the failure of the executors to file on time should be excused since neither Parkinson nor Hildred had previously acted as executors of an estate and were unaware of the necessity of filing a fiduciary income tax return.
SEC. 6651. FAILURE TO FILE TAX RETURN.
(a) ADDITION TO THE TAX. — In case of failure to file any return required under authority of subchapter A of chapter 61 (other than part III thereof), * * * on the date prescribed therefore (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as tax on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate.
The regulations under section 6651(a) defined reasonable cause in accordance with the following standard: "If the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time, then the delay is due to a reasonable cause." Sec. 301.6651-1(a)(3), Proced. Admin. Regs. For a similar definition, see George S. Van Schaick, Supt. of Insurance, 32 B.T.A. 736, 744 (1935).
Petitioner has the burden of showing that failure to file the required return was due to reasonable cause. Wm. J. Lemp Brewing Co., 18 T.C. 586 (1952). Moreover, it is well established that ignorance of the necessity for filing a tax return will not of itself relieve a taxpayer of the 6651(a) penalty. Frank Souza, 33 T.C. 817 (1960); Logan Lumber Co. v. Commissioner, 365 F.2d 846 (C.A. 5, 1966), affirming a Memorandum Opinion of this Court; Haywood Lumber Mining Co., 12 T.C. 735 (1949), reversed on other grounds 178 F.2d 769 (C.A. 2, 1950). In the instant case, the estate cannot be relieved of its obligation to timely file a fiduciary income tax return simply because the executors of the estate had never before acted in such capacity and were unaware of the duties incumbent upon them, one of which was the filing of a fiduciary income tax return.
Parkinson, as the executor of the estate and as the person who apparently assumed responsibility for such estate matters as the preparation of tax returns, had a positive duty to ascertain the nature of his responsibilities as such. The fact that he, in good faith, believed that he had done all that was required of him when the estate tax return was filed is not an excusable circumstance. See, e.g., Fides, A.G., v. Commissioner, 137 F.2d 731 (C.A. 4, 1943), affirming 47 B.T.A. 280 (1942), certiorari denied 320 U.S. 797 (1943). In failing to ascertain his obligations as executor, Parkinson's conduct was in our estimation neither "ordinary" nor "prudent." See sec. 301.6651-1(a)(3), Proced. Admin. Regs., supra. Inasmuch as both Parkinson and. Hildred were unfamiliar with the duties and responsibilities incumbent upon them as executors, at least one of them should have sought advice from either DeLyden or Reid as to what Federal tax returns were required of the estate. The record contains not even the slightest hint that either of the executors sought such advice.
Nor are we persuaded by petitioner's contention that the executors of the estate reasonably relied upon Reid and DeLyden for preparation of the fiduciary income tax return required of the estate. DeLyden testified that most of his work for the Lammerts family and the Lammerts corporations had to do with repeat returns and that he did not think that his offices would be called upon to prepare the fiduciary income tax return. Moreover, the books and records of the estate were maintained in Reid's office. Parkinson and DeLyden never even discussed estate matters. Under these circumstances, any belief on the part of Parkinson that DeLyden would handle the preparation of all tax returns affecting the estate cannot be regarded as reasonable.
Lastly, petitioners may not escape responsibility under 6651(a) by attempting to show reliance on Reid. It is true that under some circumstances it has been held that reliance by a taxpayer upon professional advice may constitute reasonable cause for failure to comply with the law. However, in such cases the matter involved must be "complicated and unusual, justifying such reliance." R. A. Bryan, 32 T.C. 104, 133 (1959). In the case at bar, by contrast, the necessity of filing a fiduciary income tax return represented a duty basic to the administration of Henry's estate. All Parkinson had to do to ascertain the nature of this duty was to ask Reid what he (Parkinson), as executor of his father's estate, was obligated to do in order to fully satisfy his fiduciary obligation. He failed to do this.
Granted that Parkinson's inadvertence was probably predicated upon his mistaken (though unwarranted) belief that DeLyden would prepare all tax returns required of the estate; however, no basis whatsoever existed which might have glossed this belief with a coating of reasonableness since DeLyden was not even supplied with the books and records of the estate until after it was discovered that the return had been overlooked.
Under these facts, petitioners' reliance on the Haywood Lumber Mining Co. case is misguided since in the Haywood case, unlike the instant proceeding, petitioners' accountant was supplied with all the necessary information for the preparation of the return in question and was specifically requested to prepare it.
To reflect the concessions made by the parties and the conclusions reached herein,
Decisions will be entered under Rule 50 in docket Nos. 6819-65, 732-66, and 733-66.
Decision will be entered for the respondent in docket No. 734-66.
Reviewed by the Court.
RAUM, J., dissents.
SEC. 301. DISTRIBUTIONS OF PROPERTY.
(c) AMOUNT TAXABLE. — In the case of a distribution to which subsection (a) applies —
(1) AMOUNT CONSTITUTING DIVIDEND. — That portion of the distribution which is a dividend (as defined in section 316) shall be included in gross income.