SCOTUS Reports

Tag: Treasury Stock

  • Winkelman v. Commissioner, 6 T.C. 496 (1946): Defines Partial Liquidation and Tax Implications of Stock Redemption

    Winkelman v. Commissioner, 6 T.C. 496 (1946)

    A distribution by a corporation in exchange for its stock is considered a sale of stock, taxable as such, rather than a partial liquidation when the stock is retained as treasury stock and not canceled or redeemed.

    Summary

    Winkelman exchanged his stock in Michigan, along with cash, for all the stock of New York and Delaware corporations. The Tax Court addressed whether this exchange constituted a sale of capital assets or a distribution in partial liquidation. The court held it was a sale because Michigan retained Winkelman’s shares as treasury stock rather than canceling or redeeming them, distinguishing it from a partial liquidation under Section 115(i) of the Internal Revenue Code. The court also determined Winkelman’s cost basis for computing gain and the tax implications of payments directed to New York and Delaware under the original agreement.

    Facts

    Winkelman, an owner of Class B stock in Michigan, agreed with Goetz to exchange his 435 shares plus cash for all stock in New York and Delaware. Michigan never canceled Winkelman’s shares but held them as treasury stock. The agreement included a provision for Winkelman to receive half of any recovery on doubtful assets, to be paid to Winkelman, New York, or Delaware at his direction. An accounting error led to Winkelman overpaying, resulting in a settlement payment from the accounting firm partially reimbursed by Michigan.

    Procedural History

    The Commissioner determined the transaction was a distribution in partial liquidation, making the gain fully taxable. Winkelman challenged this determination in Tax Court, arguing it was a sale of capital assets subject to a lower tax rate. The Commissioner amended the answer to adjust Winkelman’s basis due to a settlement received relating to an overpayment. The Tax Court ruled in favor of Winkelman, finding the transaction was a sale, not a partial liquidation, and determined the appropriate cost basis.

    Issue(s)

    1. Whether the exchange of stock and cash for the stock of other corporations constituted a sale or exchange of capital assets versus a distribution in partial liquidation under Section 115(c) of the Internal Revenue Code.
    2. What was the correct basis for computing Winkelman’s gain on the transaction, considering the settlement received for an overpayment?
    3. Whether payments made to New York and Delaware at Winkelman’s direction should be included in Winkelman’s income for the tax year.

    Holding

    1. No, the exchange was a sale because the shares were retained as treasury stock, not canceled or redeemed; therefore, it does not meet the definition of a partial liquidation under Section 115(i) of the Internal Revenue Code.
    2. The correct basis is the original cost of the stock plus the actual cash paid because the settlement received was the result of a separate tort claim, not a modification of the original sales contract.
    3. Yes, these payments are includable in Winkelman’s income because Winkelman had the option to receive the funds directly, making them constructively received despite being directed to third parties.

    Court’s Reasoning

    The court reasoned that Section 115(i) defines partial liquidation as a distribution in complete cancellation or redemption of stock. Since Michigan held the shares as treasury stock, there was no cancellation or redemption. The court cited Alpers v. Commissioner, 126 F.2d 58, highlighting the distinction between stock acquired for retirement versus holding as treasury stock. Regarding the basis, the court distinguished Borin Corporation, 39 B.T.A. 712, because the settlement was a separate tort claim against the accounting firm, not a modification of the original agreement with Goetz. As for the payments to New York and Delaware, the court applied the doctrine of Helvering v. Horst, 311 U.S. 112, stating that because Winkelman had control over where the funds were directed, he constructively received them. The court stated, “The statute applies, not to a distribution in liquidation of the corporation or its business, but to a distribution in cancellation or redemption of a part of its stock.”

    Practical Implications

    This case clarifies the distinction between a stock sale and a partial liquidation for tax purposes. The key factor is whether the corporation cancels or redeems the stock, or holds it as treasury stock. Attorneys should carefully examine the corporation’s treatment of the stock. Furthermore, it reinforces the principle of constructive receipt, impacting how payments to third parties are treated for tax purposes when the taxpayer has control over the funds’ destination. It is a reminder to carefully document the nature of settlements and ensure they are treated consistently with the underlying transactions to avoid unintended tax consequences.

  • A.J. Tower Co. v. Commissioner, 3 T.C. 96 (1944): Determining Partial Liquidation vs. Stock Purchase for Tax Purposes

    A.J. Tower Co. v. Commissioner, 3 T.C. 96 (1944)

    When a corporation acquires its own stock, the key factor in determining whether it’s a partial liquidation (taxed as short-term capital gain) or a simple stock purchase (taxed as long-term capital gain if held long enough) is the corporation’s intent: whether the stock was acquired for cancellation/retirement or to be held as treasury stock for potential reissue.

    Summary

    A.J. Tower Co. purchased 750 shares of its preferred stock from a trust. The central issue was whether this transaction qualified as a partial liquidation under tax law, requiring the gain to be treated as a short-term capital gain, or as a simple purchase of stock, allowing for treatment as a long-term capital gain. The Tax Court ruled that, based on the company’s history of purchasing and retiring preferred stock under a pre-existing plan to reduce trust ownership, the purchase constituted a partial liquidation, regardless of the company temporarily holding the stock as “treasury stock.” The court emphasized the overarching intent behind the stock acquisition.

    Facts

    • A.J. Tower Co. had a reorganization plan since 1926 to gradually shift ownership from a trust to trust beneficiaries.
    • The plan involved issuing 10,000 shares of preferred stock to the trust and a sinking fund provision, requiring the company to set aside $50,000 annually to acquire and cancel 500 shares of preferred stock after 1928.
    • On July 2, 1941, the company purchased 750 shares of its preferred stock from the petitioner (trust).
    • The shares were initially recorded as “treasury stock” but were mostly transferred to the sinking fund and ultimately canceled in 1942.
    • The company declared two dividends on its common stock in 1941.

    Procedural History

    The Commissioner of Internal Revenue determined that the sale of stock was a partial liquidation, taxable as short-term capital gain. The A.J. Tower Co. petitioned the Tax Court for review of this determination. The Tax Court sustained the Commissioner’s determination.

    Issue(s)

    Whether the acquisition of 750 shares of preferred stock by A.J. Tower Co. from the petitioner in 1941 constituted a distribution in partial liquidation of the company, or an ordinary purchase of stock for holding as treasury stock?

    Holding

    No, the acquisition was a partial liquidation because the company’s primary intent, supported by its history and reorganization plan, was the ultimate cancellation and retirement of the shares, not their reissue as treasury stock.

    Court’s Reasoning

    The court emphasized the importance of determining the corporation’s intent. It noted the 1926 reorganization plan aimed to reduce trust ownership by gradually purchasing and retiring the preferred stock. The sinking fund provision mandated the purchase of 500 shares annually for cancellation. The court reasoned that the purchase of 750 shares in 1941 was part of this ongoing plan, regardless of the temporary designation as “treasury stock.” The court noted that dividends were declared on common stock, implying that the sinking fund requirements were intended to be met. While the company president testified that holding the stock as treasury stock offered potential financial flexibility for government contracts, the court considered this a secondary consideration. The court stated, “the primary and controlling purpose of the board of directors in directing the purchase of the 750 shares in question was for the ultimate cancellation and retirement of the shares, either through the sinking fund or otherwise.” The consistent history of purchasing and retiring preferred shares without reissue further supported this conclusion.

    Practical Implications

    This case illustrates that the tax treatment of a corporation’s acquisition of its own stock hinges on the corporation’s underlying intent. Subsequent actions, like holding the stock as “treasury stock,” are less important than the overarching plan. Tax advisors must thoroughly investigate the history and documentation surrounding such transactions to accurately determine the tax implications. Corporations must carefully document their intent when repurchasing their own shares to support their desired tax treatment. This case also highlights that a long-term plan to liquidate stock will be considered when determining tax status, even if the short-term behavior doesn’t perfectly align with that plan. Later cases will look to the facts and circumstances to determine intent, and the presence of a formal plan greatly increases the likelihood of a finding of partial liquidation.

  • A.J. Tower Co. v. Commissioner, 3 T.C. 96 (1944): Determining Partial Liquidation vs. Stock Purchase for Tax Implications

    A.J. Tower Co. v. Commissioner, 3 T.C. 96 (1944)

    When a corporation acquires its own stock, the tax treatment (as a partial liquidation or as a simple purchase) depends on whether the primary intent was cancellation/retirement of the stock or holding it for potential reissuance.

    Summary

    The A.J. Tower Co. purchased 750 shares of its preferred stock from a shareholder. The central issue was whether this transaction constituted a partial liquidation, which would require the shareholder to recognize 100% of the gain as a short-term capital gain under the then-current tax law, or a simple purchase of stock, where only 50% of the gain would be recognized due to the shareholder’s long-term holding period. The Tax Court determined that the purchase was part of a long-term plan to cancel and retire the preferred stock, making it a partial liquidation. The court emphasized the company’s consistent practice of retiring purchased shares and the broader context of a plan to gradually eliminate trust ownership in the company.

    Facts

    The A.J. Tower Co. reorganized in 1926 with the specific purpose of gradually transferring ownership from a trust to the trust’s beneficiaries.
    As part of this reorganization, 10,000 shares of preferred stock were issued to the trust.
    The company was obligated to set aside $50,000 annually to acquire and cancel 500 shares of preferred stock through a sinking fund.
    In 1941, the company purchased 750 shares of its preferred stock from the petitioner.
    These shares were initially recorded as “treasury stock” and were formally canceled in 1942.
    The company declared two dividends on its common stock in 1941, which it could not legally do if it hadn’t met its sinking fund requirements.

    Procedural History

    The Commissioner of Internal Revenue determined that the sale of stock constituted a partial liquidation.
    The A.J. Tower Co. petitioned the Tax Court for a redetermination of the deficiency.
    The Tax Court ruled in favor of the Commissioner.

    Issue(s)

    Whether the purchase of the 750 shares of preferred stock by the A.J. Tower Co. from the petitioner in 1941 constituted a distribution in partial liquidation under the applicable tax law, or an ordinary purchase of its own stock.

    Holding

    No, because the purchase was made as part of a long-standing plan to acquire and retire all of the company’s preferred stock, indicating a partial liquidation rather than a simple purchase for potential reissuance.

    Court’s Reasoning

    The court distinguished between cases where a corporation buys its stock for cancellation/retirement (partial liquidation) and those where it holds the stock as a treasury asset for potential reissuance (ordinary purchase).
    The court emphasized the original intent of the 1926 reorganization plan, which included a sinking fund to systematically retire the preferred stock.
    The court noted the company’s obligation to purchase shares for the sinking fund in 1941 and reasoned that the purchase of the 750 shares was likely intended to fulfill or exceed this obligation.
    The fact that the shares were initially carried as “treasury stock” was deemed insignificant compared to the broader context of the company’s historical practice of retiring purchased shares. The court stated, “It seems to us that it would be wholly unrealistic, in the face of all the evidence which is in the record, to hold that the particular 750 shares purchased in 1941 were purchased for the purpose of resale and reissue to future stockholders.”
    The court acknowledged the president’s testimony about potentially needing the stock for government contracts but concluded that the primary intent was still ultimate cancellation and retirement.

    Practical Implications

    This case highlights the importance of examining the intent and context behind a corporation’s purchase of its own stock to determine the correct tax treatment.
    Legal practitioners must consider the company’s history, its stated plans, and its actual practices in assessing whether a purchase is a partial liquidation or a simple stock purchase.
    The case emphasizes that even if a corporation temporarily holds purchased stock as “treasury stock,” the ultimate intent to cancel and retire the shares can still lead to a determination of partial liquidation.
    This decision influenced later cases by reinforcing the focus on the corporation’s underlying purpose in acquiring its own shares. It underscores that the mere form of the transaction (e.g., holding shares as treasury stock) is not determinative; the substance of the transaction, as evidenced by the surrounding circumstances, controls.

  • Cohen v. Commissioner, 6 T.C. 200 (1946): Tax Implications of Stock Redemption vs. Sale

    Cohen v. Commissioner, 6 T.C. 200 (1946)

    The tax treatment of a corporation’s acquisition of its own stock depends on whether the transaction constitutes a distribution in partial liquidation (treated as a sale of stock) or a purchase of stock for resale as treasury stock (potentially taxed differently).

    Summary

    The petitioner, a shareholder, received payments from a corporation for her preferred stock. The central issue was whether these payments constituted a distribution in partial liquidation under Section 115(c) of the Internal Revenue Code, or a sale of stock to the corporation. If it was a partial liquidation, the full gain would be taxable. If it was a sale, only 50% of the gain would be taxable. The Tax Court held that the payments were distributions in partial liquidation because the stock was acquired for redemption, not for resale as treasury stock, emphasizing the intent behind the corporate action.

    Facts

    The Cohen family reorganized their company, issuing two classes of preferred stock. The first preferred stock had terms specifying a schedule for redemption. Agnes Cohen and the petitioner owned shares of this first preferred stock. The company redeemed some of the petitioner’s shares. The stock certificates were marked as being acquired as “treasury stock” by the secretary-treasurer, but there was no formal resolution authorizing this designation. The key factual element was the predetermined redemption schedule attached to the first preferred stock. The agreement of 1926 guaranteed that Agnes Cohen and the beneficiaries under Robert Cohen’s will would receive $252,000, the par value of his shares of old common stock. The company issued the first class of preferred stock to fulfill that requirement.

    Procedural History

    The Commissioner of Internal Revenue determined that the payments to the petitioner constituted a distribution in partial liquidation and assessed a deficiency. The petitioner challenged this determination in the Tax Court. The Tax Court upheld the Commissioner’s determination. No further appeal information is available.

    Issue(s)

    1. Whether the amounts received by the petitioner from the corporation constituted a distribution in partial liquidation under Section 115(c) of the Internal Revenue Code.

    Holding

    1. No, because the first preferred stock was issued with the intention that it was to be redeemed, not purchased for holding in the treasury.

    Court’s Reasoning

    The Tax Court reasoned that the controlling factor in determining whether a partial liquidation has occurred is the intent of the corporation in reacquiring its stock. If the stock is purchased to be canceled and retired, it is a distribution in partial liquidation. However, if the stock is purchased to be held as treasury stock for resale, it is an ordinary capital transaction. The court found that the first preferred stock was issued with the specific intention of being redeemed according to a set schedule, as evidenced by the terms on the stock certificates. "It is perfectly obvious that a decision was made when the company was reorganized to issue a special class of stock for the sole purpose of taking care of the object of the agreement of February 20, 1926, and that when that object had been fulfilled through the use of the special stock, to wit, the first preferred stock, that special stock could not be used by any new holder acquiring any shares of the first preferred stock after the periods within which the stated amounts of first preferred stock were to be redeemed." The court disregarded the secretary-treasurer’s notation that the stock was acquired as treasury stock because it was not supported by a formal resolution or the terms of the stock issuance. The Court also noted that treasury stock can be sold to the public but the first preferred stock had restrictions that would render it not able to be resold to the public. "It is inherent in the concept of treasury stock that stock which is so held in the treasury of a corporation is of a type which can be sold to the public; otherwise, treasury stock could not possibly be considered as an asset of the corporation." Because the first preferred stock could not be reissued after the original redemption schedule, it did not have the main attribute of treasury stock.

    Practical Implications

    This case highlights the importance of documenting the intent behind a corporation’s acquisition of its own stock. To achieve the desired tax treatment, corporations must ensure that their actions align with their stated intent. If the intent is to hold the stock as treasury stock for potential resale, corporate records should reflect this intent clearly through resolutions and other documentation. The terms of the stock itself are key. This case serves as a reminder that labels like “treasury stock” are not decisive; the substance of the transaction, including the terms of the stock and the underlying intent, will govern the tax treatment. Later cases would examine the specific facts to decide whether a stock redemption was in fact a partial liquidation, particularly in closely held corporations.

  • Coastal Oil Storage Co. v. Commissioner, T.C. Memo. 1943-170: Corporate Treasury Stock Transactions and Taxable Gain

    T.C. Memo. 1943-170

    A corporation does not realize taxable gain when it deals in its own treasury stock for the purpose of capital readjustment rather than as if it were trading in the shares of another corporation for profit.

    Summary

    Coastal Oil Storage Co. reacquired shares of its own stock from a departing shareholder and held them as treasury stock. Later, facing increased business and a need for capital, it issued these treasury shares to a shareholder who had loaned the company money, crediting the loan balance. The Commissioner of Internal Revenue argued this was a taxable capital gain. The Tax Court held that this transaction was a capital readjustment, not a speculative stock trade, and therefore not subject to income tax under Treasury Regulations.

    Facts

    Coastal Oil Storage Co. (Petitioner) was in the oil and gas well cementing business.

    J.V. Calvert, owning 1/6 of the company’s stock, wanted to leave the business.

    On January 23, 1939, Petitioner bought back Calvert’s 12.5 shares for $375, representing 1/6 of the company’s net worth, and held them as treasury stock.

    Petitioner’s business grew, requiring more working capital.

    E.E. Swift, a shareholder, loaned Petitioner over $30,000.

    On May 31, 1939, Petitioner issued the treasury shares to Swift, crediting $6,600 (1/6 of net assets post-issuance) against Swift’s loan notes.

    The Commissioner determined a deficiency, claiming a $6,225 taxable capital gain from the stock resale.

    Procedural History

    The Commissioner of Internal Revenue determined a tax deficiency against Coastal Oil Storage Co.

    Coastal Oil Storage Co. petitioned the Tax Court to contest the deficiency.

    The Tax Court reviewed the Commissioner’s determination.

    Issue(s)

    1. Whether the issuance of treasury stock by Coastal Oil Storage Co. to a shareholder, in exchange for debt reduction, constitutes a taxable gain for the corporation under Section 19.22(a)-16 of Regulations 103.

    Holding

    1. No, because the transaction was a capital readjustment intended to raise capital, not a dealing in its own shares as if they were shares of another corporation for profit.

    Court’s Reasoning

    The court relied on Regulation 103, Section 19.22(a)-16, which states that whether a corporation’s dealings in its own stock result in taxable gain depends on the nature of the transaction.

    The regulation specifies that original issuance of stock is not taxable, but dealing in treasury stock can be if it’s akin to dealing in another corporation’s stock.

    The court cited Dr. Pepper Bottling Co. of Mississippi, 1 T.C. 80, which held that stock transactions for capital readjustment are not taxable.

    The court distinguished cases cited by the Commissioner (Allen v. National Manufacture & Stores Corporation, Trinity Corporation, Brown Shoe Co. v. Commissioner, Pittsburgh Laundry, Inc.), noting those cases involved profit-seeking motives absent here.

    The court reasoned that Petitioner’s acquisition of stock from Calvert was to remove a shareholder, and the issuance to Swift was to obtain needed capital, not to speculate in its own stock.

    “From the stipulated facts it seems entirely clear that when on January 23, 1939, petitioner acquired from one of its stockholders, J. V. Calvert. 12½ shares of its authorized and issued capital stock by paying over to him a ratable portion of the corporation’s net assets… it was not acquiring the shares as it would acquire the shares of another corporation for a subsequent resale at a profit. It was acquiring these shares because Calvert desired to sever his relations with petitioner and the remaining stockholders desired that this be done.”

    The court further reasoned that if the company had canceled the treasury stock and then issued new stock to Swift, it would clearly be a non-taxable capital transaction, and the actual method used was functionally equivalent.

    Practical Implications

    This case clarifies that not all transactions involving a corporation’s treasury stock result in taxable income.

    It establishes a distinction between taxable “dealing” in own stock and non-taxable capital readjustments.

    The key factor is the purpose and context of the transaction: if the primary purpose is to adjust the corporation’s capital structure (e.g., raising capital, changing ownership), it is less likely to be considered taxable gain.

    This ruling is important for corporations managing their capital and stock, allowing flexibility in treasury stock transactions without automatically triggering income tax consequences, provided the transactions are genuinely for capital purposes and not speculative trading.

    Later cases would likely analyze the specific facts and circumstances to determine whether a treasury stock transaction is more akin to a capital readjustment or a profit-seeking venture.

  • Dr. Pepper Bottling Co. v. Commissioner, 1 T.C. 80 (1942): Corporate Dealings in Own Stock as Capital Transaction

    1 T.C. 80 (1942)

    A corporation does not realize taxable income when it purchases and resells its own stock if the transactions are part of a capital structure readjustment rather than speculative trading.

    Summary

    Dr. Pepper Bottling Co. purchased shares of its own stock to equalize stock control and later resold them at a profit due to capital needs. The Tax Court held that this was a capital transaction, not a taxable gain. The court reasoned that the purchase and resale were integral to adjusting the company’s capital structure and maintaining balanced control, distinguishing it from a corporation dealing in its shares as it would with another company’s stock for profit.

    Facts

    Dr. Pepper Bottling Co. had 500 outstanding shares. A controlling interest was held by Neville, with Hungerford and Tracy-Locke-Dawson holding the remaining shares. To ensure equal control between Hungerford and Tracy-Locke-Dawson and to remove Neville from active management, the company purchased 50 shares from Neville in 1935. Two years later, facing an undistributed profits tax and needing funds, the company resold these treasury shares at a higher price.

    Procedural History

    The Commissioner of Internal Revenue assessed deficiencies against Dr. Pepper for income and excess profits tax for 1937, arguing the resale of stock resulted in taxable income. Dr. Pepper petitioned the Tax Court for a redetermination. The Tax Court reviewed the case and reversed the Commissioner’s determination.

    Issue(s)

    Whether the purchase and subsequent resale of a corporation’s own stock, initially acquired to equalize stock control and later resold due to capital needs, constitutes a taxable gain for the corporation.

    Holding

    No, because the transactions were part of a capital structure readjustment, not a speculative dealing in its own shares as it would treat the shares of another corporation.

    Court’s Reasoning

    The court relied on Treasury Regulations which state that whether a corporation’s dealings in its own stock result in taxable gain depends on the real nature of the transaction. If the shares are acquired or parted with in connection with a readjustment of the capital structure of the corporation, it is a capital transaction and no gain or loss results. The court emphasized that the initial purchase aimed to equalize control among shareholders, and the subsequent resale was driven by the need to distribute dividends and acquire equipment. The court distinguished this from cases where the corporation purchased and resold its stock for profit as it would with another company’s stock. The court noted, “If it was in fact a capital transaction, i. e., if the shares were acquired or parted with in connection with a readjustment of the capital structure of the corporation, the Board rule [that no gain or loss results] applies.” The court found the profit secured by the petitioner was a “mere incident.”

    Practical Implications

    This case clarifies that a corporation’s dealings in its own stock are not automatically taxable events. The key is to examine the underlying purpose and context. If the transactions are integral to adjusting the capital structure, such as maintaining balanced control or raising capital for essential business needs, they are treated as capital transactions without immediate tax consequences. This ruling allows corporations flexibility in managing their capital structure without triggering unexpected tax liabilities, provided they can demonstrate a clear connection between the stock transactions and a legitimate capital readjustment purpose. Later cases distinguish this ruling by focusing on the intent of the corporation at the time of purchase; if the intent is to resell for profit, the gains are taxable.