Auto Finance Co. v. Commissioner

Auto Finance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent

Auto Finance Co. v. Commissioner

Docket No. 52753

United States Tax Court

24 T.C. 416; 1955 U.S. Tax Ct. LEXIS 168;

June 17, 1955, Filed

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Decision will be entered under Rule 50.

Petitioner was the controlling stockholder of two automobile dealer corporations. As part of a plan to dispose of its entire interest in each company at its book value, petitioner caused each company to distribute a preferred stock dividend of a total par value about equal to its accumulated earnings or profits. At each closing transaction at which it disposed of its entire interest in each company, petitioner's common stock was purchased by minority stockholders and others, and its preferred stock of one company was redeemed and that of the other was in part redeemed and in part transferred to one of the common stock purchasers. Held, the amount received attributable to the disposition of its preferred stock of each dealer company was part of the proceeds of the sale of petitioner's entire interest in that company and was not a dividend or essentially equivalent to the distribution of a taxable dividend. Zenz v. Quinlivan, (C. A. 6, 1954) 213 F. 2d 914, followed.

O. R. McGuire, Jr., Esq., and Richard A. Mullens, Esq., for the petitioner.

Ralph V. Bradbury, Jr., Esq., for the respondent.

Fisher, Judge.

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FISHER

Respondent determined a deficiency in petitioner's income tax for the taxable year ended August 31, 1948, in the amount of $ 143,705.01. The issue involved is whether amounts received upon the redemption or transfer of preferred stock of two companies controlled by petitioner as part of a plan to dispose of its entire interest in each of those companies, are taxable as dividends or as parts of the proceeds of the sale of its interest in each company.

FINDINGS OF FACT.

Some of the facts were stipulated by the parties. Those so stipulated are found accordingly and incorporated herein by this reference.

The petitioner was organized in 1934 under the laws of the State of South Carolina. Its home office is in Spartanburg, South Carolina, and its principal branch office is in Charlotte, North Carolina. Its income tax return for the taxable year ended August 31, 1948, was filed with the then collector of internal revenue for the district of North Carolina.

The principal business activity of the petitioner prior to World War II was the installment financing of automobiles. Other activities of the petitioner, either directly or through subsidiaries, have usually been related to the automobile business. For many years, and until his death in January 1948, the active head and the predominant personality of petitioner was Herman A. Moore.

On March 2, 1942, in the light of the virtual stoppage of production of new automobiles, petitioner sold its receivables and agreed with the purchaser not to engage in the business of automobile financing for 3 years. It then entered the general investment business.

Shortly prior to the disposition of its receivables, the officers of petitioner began considering the acquisition of some retail outlets for automobiles. While they anticipated a period of low earnings from such business, or even a period of losses, they looked forward to petitioner's reentry into the automobile finance business when new automobiles were again produced, and they regarded large retail outlets for automobiles as possible sources of paper during the period when the finance business was being built up again. It was the intention of the officers of petitioner to retain ownership of any outlets acquired for only a few years after the end of World War II, and to sell out after the finance business of the dealerships had been secured for the petitioner. In pursuance of this plan petitioner acquired interests in Victory Motors, Inc., at Atlanta, Georgia, and Liberty Motors, Inc., at Birmingham, Alabama, as set out below.

In March 1942, petitioner caused the incorporation of Victory Motors, Inc., and acquired for it the assets of Harrison Motor Company, Atlanta, Georgia. The 1,000 shares of $ 100 par value common stock were issued in the names of various individuals, but petitioner was the actual owner of all the stock and furnished all funds involved. Victory operated under a franchise from the Chrysler Corporation as a wholesale distributor and retail dealer for Dodge and Plymouth automobiles in the Atlanta territory.

In June 1943, petitioner caused the incorporation of Liberty Motors, Inc., and acquired for it the assets of W. F. Green Motor Company, Birmingham, Alabama. Petitioner furnished substantially all money required to organize Liberty and was the actual owner of 90 per cent of the 1,500 shares of $ 100 par value outstanding common stock. Liberty operated under a franchise from the Chrysler Corporation as a wholesale distributor and retail dealer for Dodge and Plymouth automobiles in the Birmingham territory.

As a matter of general policy, the Chrysler Corporation preferred to grant its franchises only to individuals who were personally owners and managers of its dealerships, although Chrysler had no objection to incorporation. In granting franchises, Chrysler Corporation adhered more strictly to its general policy during periods when anticipated earnings of auto dealers were high than it did during periods when anticipated earnings were low.

In 1946, Chrysler Corporation brought pressure on the petitioner to dispose of its holdings in Victory and Liberty, in order to conform to Chrysler's general policy of having local owner-manager dealers. In an effort to satisfy Chrysler, and at the same time facilitate petitioner's intention of eventually selling Victory and Liberty to the local managing groups, petitioner sold some stock in each corporation to individuals during the period September 1, 1946, to October 7, 1946, inclusive, leaving petitioner on the latter date the owner of 61 per cent of the stock of Victory and 51 per cent of the stock of Liberty. These sales were made at par value, the entire surplus of Victory and Liberty having been declared and paid out as dividends immediately prior to the sales. These were the only dividends declared by Victory and Liberty prior to the year in question.

John H. Lander was vice president and a director of the petitioner until Moore's death. When Victory was organized, he moved to Atlanta and became the active manager of the business. Liberty was operated under his general supervision, although E. L. Scouten and M. B. Casler were the active local managers in Birmingham.

Lander acquired a 25 per cent interest in Victory and a 9 2/3 per cent interest in Liberty in 1946. E. L. Scouten beneficially owned 10 per cent, or 150 shares, of the original stock of Liberty when the corporation was organized. He increased his holdings to 25 per cent, or to 375 shares, in 1946. The owners of the remaining Liberty and Victory stock were employees of the respective corporations and acquired their stockholdings in 1946. On March 24, 1948, petitioner purchased from E. L. Scouten for $ 114,063.75 the 375 shares of Liberty stock owned by him, thereby increasing its interest to 1,140 shares or 76 per cent of the stock outstanding.

Shortly after Moore's death, on January 12, 1948, Lander was elected president of the petitioner. Also shortly thereafter, and as a result of Moore's death, Chrysler Corporation gave notice of the cancellation of the franchises of the two dealerships effective after 90 days (i. e., April 27, 1948), as is the usual practice in such cases. Lander held numerous conferences with Chrysler officials and reported to petitioner's board of directors that it would be necessary, in view of Chrysler Corporation's desires, to transfer control of both dealerships to the local management. A number of proposals were considered which were designed to transfer control of Victory and Liberty to the local groups. The first few proposals provided for petitioner to retain a minority or preferred stock interest in both Victory and Liberty.

A special committee was appointed on April 8, 1948, by petitioner's directors to work out proposals for disposing of petitioner's interest in Victory and Liberty. On April 22, 1948, the special committee met in Detroit, Michigan, with officials of Chrysler Corporation to discuss the notice of cancellation of franchises effective April 27, 1948. It was agreed at this meeting that the notices of cancellation would not become effective on the date stated and that petitioner would proceed to divest itself of its interests in Victory and Liberty in an orderly way at the earliest possible date. Before these interests could be sold, however, a number of liabilities connected with certain commitments of Moore, the petitioner, and the two dealerships had to be worked out to the satisfaction of all parties.

In the meantime, the local managers of the dealerships, Lander in Atlanta, and Casler in Birmingham, were attempting to arrange financing to purchase petitioner's interest in the dealer companies. Neither person was in a position to buy petitioner's common stockholdings because of the substantial earnings reflected in the book value of the common stock. Lander suggested a preferred stock dividend to reduce the book value of the Victory common stock and this idea was adopted by Casler with respect to Liberty. Their idea was that petitioner would retain its share of the preferred stock to be received as dividends, and sell its common stockholdings at their reduced values to the local groups.

Thereafter, the local management groups made several proposals to the special committee, all of which involved the issuance of preferred stock and its redemption over some period. The special committee, however, advised the local groups that it would prefer that any preferred stock issued to petitioner be redeemed immediately, even if petitioner had to lend the two dealer companies the money to do so.

The special committee was of the opinion that if Victory and Liberty issued a preferred stock dividend in an amount substantially equal to their respective earnings and then redeemed the preferred stock issued to petitioner, the result, for tax purposes, would be that petitioner would receive a dividend taxable at a rate more favorable to it than that applicable to a sale. A preferred stock dividend would also reduce the value of the common stock of both companies to about its par value and thereby make it easier for the purchasers to buy the common stock. It would also give the local managing groups a security which they could use in the financing of their purchases of the common stock and the repayment of loans. Although the committee believed that a cash dividend of all earnings of the two companies would have accomplished the result desired (as it had in 1946), the minority stockholders were opposed on the ground that a cash dividend, as distinguished from a stock dividend, would be taxed in their hands at progressive individual income tax rates, and that the absence of preferred stock would deprive them of the additional security needed by them to finance the common stock purchases. Neither petitioner nor the local groups, however, contemplated any curtailment of the business or operations of either dealer company during 1948.

In April or early May 1948, Ernest H. Woods contacted Casler with a view to furnishing part of the money needed to acquire Liberty. Negotiations progressed between the special committee on the one hand and Lander, Casler, and Woods, on the other. The negotiations contemplated preferred stock dividends by Victory and Liberty, and the immediate redemption thereafter of all the preferred stock certificates to be issued to petitioner by Victory and Liberty and those to be issued by Liberty to Lander.

On May 22, 1948, Casler and Woods were advised in a letter that the board of directors of petitioner, at a meeting held on May 21, 1948, agreed to sell to them all of the stock owned by petitioner in Liberty at book value as of May 31, 1948, subject to several terms and conditions stated in the letter. One of the terms of the letter was that petitioner would lend to Liberty an amount not to exceed $ 175,000. On or around June 1, 1948, however, Casler advised petitioner that the $ 175,000 loan would not be necessary because arrangements had been made to borrow the money from another source at more favorable terms.

At a joint meeting of the stockholders and directors of Liberty held in Birmingham on June 3, 1948, the following resolution was adopted:

Be it Resolved, that the Company declare a stock dividend, payable to the stockholders of record as of this date; said stock dividend to be of preferred stock which will be entitled to a preference of Six Per Cent (6%) cumulative, in dividends, declared in any fiscal year before any dividends are paid upon the common stock of the Company; the dividends to be paid annually, and the stock will be subject to redemption at the option of the Directors by call of designated certificates, or otherwise, upon payment of One Hundred Five Dollars ($ 105) per share and accumulated dividends; * * * each such share to have a nominal or par value of One Hundred Dollars ($ 100), and each stockholder shall be entitled to receive two and one third shares of preferred stock for each share of common stock held by him.

Certificates for 3,500 shares of preferred stock were issued on June 3, 1948, in the names of the following stockholders:

	No. of	No. of
Stockholder	common	preferred
	shares	shares
	owned	issued
Auto Finance Co., Charlotte, N. C.	1,140	2,660
M. B. Casler, Birmingham, Ala	150	350
J. H. Lander, Atlanta, Ga	145	338 1/3
L. R. Dyche, Birmingham, Ala	30	70
C. W. Jennings, Birmingham, Ala	15	35
R. C. Perkins, Birmingham, Ala	10	23 1/3
L. D. Cole, Birmingham, Ala	10	23 1/3
Total	1,500	3,500

On May 31, 1948, the earned surplus of Liberty was $ 355,027.73. The earned surplus of Liberty, computed as of the close of the taxable year ended August 31, 1948, but without diminution by reason of the above distribution, was in excess of $ 355,027.73. No other distribution was made by Liberty during the taxable year ended August 31, 1948.

On June 25, 1948, the Liberty transactions were closed. Petitioner relinquished its certificate for 2,660 shares of Liberty preferred stock and received the following checks therefor:

Received from --	Amount
Liberty Motors, Inc	$ 24,000
Ernest H. Woods	242,000
	$ 266,000

Also at the closing, the sale of petitioner's common stock of Liberty was consummated and petitioner received the following checks therefor:

Received from --	Amount
Liberty Motors, Inc	$ 1,066.17
M. B. Casler	9,818.15
Ernest H. Woods	108,002.86
	$ 118,887.18

On that same day Liberty retired all of the preferred stock issued to Lander and 240 of the 2,660 shares issued to petitioner. The remaining 2,420 shares issued to petitioner were transferred to Woods who, pursuant to a prior arrangement, transferred 1,650 shares to one John Jemison who had previously arranged for a bank loan with which to pay for this stock using it as collateral. As a condition for this loan, the bank required that he obtain an agreement from Liberty to redeem those shares within 1 year. With respect to these shares, on June 28, 1948, the board of directors of Liberty resolved to redeem 3 blocks of 375 shares each and 1 block of 525 shares, respectively, 90 days, 183 days, 270 days, and 360 days from that date. By April 1949, of the 1,650 shares transferred to Jemison, 1,050 had been retired by Liberty and 600 had been transferred to a pension trust. At the end of January 1950, 1,990 1/3 shares of the total issue of 3,500 shares of preferred stock had been retired by Liberty.

In its Federal income tax return for the taxable year ended August 31, 1948, petitioner reported as dividends received from domestic corporations the amount of $ 751,074.20 and claimed a dividends received credit of 85 per cent of this amount, or $ 638,413.07. The total of $ 751,074.20 reported as dividends included the amount of $ 266,000 which was claimed by petitioner to be a dividend from Liberty. The $ 118,887.18 received for the common stock on June 25, 1948, from Woods, Liberty, and Casler was reported as the sale price of the common stock.

With respect to the disposition of its interest in Victory Motors, Inc., on July 8, 1948, petitioner's board of directors authorized the sale of its Victory stock to Lander at its book value as of June 30, 1948, pursuant to the plan which had been previously negotiated. This plan contemplated a preferred stock dividend by Victory of $ 500,000, which was the approximate earned surplus at June 30, 1948. With respect to its 61 per cent interest in Victory, petitioner was to receive a certificate for preferred shares with a total par value of $ 305,000. Petitioner was also to lend Victory $ 200,000 and purchase certain real estate from Victory at book value in order to provide the cash to enable Victory to redeem the preferred stock certificate issued to petitioner.

On August 5, 1948, the stockholders and directors of Victory authorized the issuance on August 11, 1948, of a dividend of 5 shares of $ 100 par value preferred stock on each share of common to stockholders of record as of April 30, 1948. On August 11, 1948, certificates of preferred stock were issued by Victory in the names of the following stockholders:

	No. of	No. of
Stockholder	common	preferred
	shares	shares
	owned	issued
Auto Finance Co	610	3,050
John H. Lander	250	1,250
Thomas I. Smith	100	500
Randal R. Smith	10	50
Harry L. Mayer	10	50
Evans Hall, Jr	10	50
Edwin E. Lytle	10	50
Total	1,000	5,000

On that same day, petitioner loaned Victory $ 200,000 and purchased the real estate as agreed. The net cash realized by Victory from the real estate was approximately $ 100,000. Also on that day, the directors of Victory adopted the following resolutions:

Resolved that the Corporation redeem the 3050 shares of preferred stock now owned and issued in the name of Auto Finance Company, of Charlotte, N. C., at and in accordance with the conditions specified on the certificates.

Further Resolved that the shares so redeemed be offered for resale to the present owners of common stock and such other persons as the Directors shall designate from time to time and that all shares not sold shall be retained as Treasury Stock.

At the closing on August 11, 1948, the preferred stock certificate issued to petitioner was returned to Victory, and petitioner received Victory's check for $ 305,000 in exchange therefor. Petitioner also received a check from Lander in the amount of $ 100,552.40 in payment for petitioner's 610 shares of common stock in Victory. This common stock was immediately reissued as follows:

Stockholder	Shares
John H. Lander	500
Thomas I. Smith	50
Randal R. Smith	15
Harry L. Mayer	15
Evans Hall, Jr	15
Edwin E. Lytle	15
Total	610

Each of the above individuals furnished the money for the purchase of the stock in proportion to the reissue thereof, but for convenience Lander handled the transaction in a single check.

On June 30, 1948, the earned surplus of Victory was $ 564,838.17. The earned surplus of Victory computed as of the close of the taxable year ended August 31, 1948, but without diminution by reason of the above distribution, was in excess of $ 564,838.17. No other distribution was made by Victory during its taxable year ended August 31, 1948.

Petitioner reported on its income tax return for that taxable year, dividend income of $ 305,000 from Victory which amount was included in the $ 751,074.20 reported in the return as dividend income. The amount of $ 100,552.40 received from Lander was reported in the return as the sale price of 610 shares of common stock.

The amount received by petitioner attributable to the disposition of its preferred stock of each dealer company was a part of the proceeds of the sale of its entire interest in that company and was not a dividend or essentially equivalent to the distribution of a taxable dividend.

OPINION.

The petitioner, a finance company, acquired controlling interests in two automobile dealer companies during World War II. After the war, in 1948, for various reasons, it desired to divest itself of these interests completely and to transfer control of the dealer companies to those persons who had been managing them. Each of the companies had been operating profitably. The earned surplus of each was substantial and the local managers were unable to raise capital sufficient to purchase petitioner's interest at its then book value. Moreover, petitioner desired to receive its share of the earned surplus of each company as a dividend (for which it would be entitled to a credit of 85 per cent for income tax purposes pursuant to section 26(b) of the Internal Revenue Code of 1939) rather than as part of the proceeds of a sale which would be subject to tax at capital gains rates. The local groups, as minority stockholders, however, were opposed at this time to a cash dividend which would be taxed in their hands at progressive income tax rates.

For the above and other reasons, it was agreed by all concerned that each dealer company would issue preferred stock and declare a preferred stock dividend in an amount approximately equal to its earned surplus, that petitioner's share of the preferred stock would be redeemed by the dealer company, and that petitioner would sell its common stock to the local group, at its then reduced book value. With respect to Victory Motors, Inc., at the closing meeting the preferred stock distributed to petitioner as a dividend was redeemed by Victory at its par value and held by it as treasury stock, and petitioner's common stock was purchased at its reduced book value by John H. Lander and others. With respect to Liberty Motors, Inc., a preferred stock dividend of 2,660 shares was issued to petitioner. Petitioner subsequently received the par value of these shares at the closing when 240 shares were retired by Liberty and the remaining 2,420 shares were transferred to Ernest H. Woods. Also at the closing, petitioner's common stock was purchased at its reduced book value by Woods and M. B. Casler. 1,650 of the 2,420 shares of Liberty preferred stock transferred to Woods were subject to an agreement by Liberty to redeem them within 1 year.

In its return for the taxable year ended August 31, 1948, petitioner reported the proceeds of its disposition of both Victory and Liberty preferred stocks as part of its dividend income for which it claimed an 85 per cent credit. It reported as sales proceeds the amounts received for its Victory and Liberty common stocks. Respondent, however, determined that the amount attributable to the disposition of the preferred stock in each company was not a dividend but was part of the sale price received by petitioner for its common stock in each company. Respondent therefore increased petitioner's net long-term capital gain and reduced its dividend income and credit accordingly.

Petitioner contends, with respect to the Victory preferred stock and the 240 shares of Liberty preferred stock which were redeemed from petitioner by the companies, that the redemptions were in effect distributions of taxable cash dividends within the meaning of section 115 (a) of the 1939 Code, or that they were in whole or part essentially equivalent to distributions of taxable dividends within the meaning of section 115 (g), notwithstanding the concurrent sale of common stock. With respect to the remaining Liberty preferred stock issued to petitioner which was transferred to Woods and not redeemed by the company, petitioner contends first that, if the redemption of 240 shares constituted a taxable cash dividend as contended above, the distribution of the other shares constituted a disproportionate stock dividend which is taxable as dividend income to petitioner. See sec. 115 (f). Alternatively, petitioner contends that the immediate sale of the Liberty preferred stock to Woods, much of which was to be redeemed within 1 year, conclusively establishes that the stock was issued to petitioner as the equivalent of a cash dividend. We disagree with all of petitioner's contentions in the light of our analysis of the instant case as expressed below.

The preferred stocks issued to petitioner were in part redeemed and in part transferred (to Woods) at the closing transactions pursuant to plans by which petitioner completely divested itself of its entire interests in both dealer companies. Under these circumstances, it is our view that the proceeds received by petitioner for its preferred stocks from either the companies or Woods were in exchange therefor, and are to be treated respectively as part of the total sale price received for its complete interest in each dealer company.

In Carter Tiffany, 16 T. C. 1443 (1951), petitioner was one of three controlling stockholders of Air Cruisers, Inc. Pursuant to his desire to sell his interest in the company, in December 1943, he transferred 300 shares to a fourth party and shortly thereafter sold his remaining 3,202 shares to the company. At the same time and pursuant to the same resolution adopted at a special meeting of stockholders, Boyle, another of the controlling stockholders, sold all but 300 of his shares to the company. The third controlling stockholder had died and his stock was involved in litigation concerning his estate. By mid-1945, however, the estate's stock had also been redeemed by the company and the corporation was thereafter owned equally by Boyle and two others. All of the stock redeemed by the company was held thereafter as treasury stock. In holding that the transaction between the company and petitioner was an outright purchase by the company and a sale by petitioner and that the payment made to petitioner was not a dividend or essentially equivalent to a taxable dividend, we stated in part as follows (p. 1450):

Thus, after the sale of December 13, 1943, petitioner no longer retained any beneficial stock interest whatever. His situation was wholly different from Boyle's. He sold all of his stock. The transaction was not the equivalent of the distribution of a taxable dividend as to him. We conclude that, on the facts of this case, section 115 (g) has no application to petitioner.

The application of the Tiffany case, supra, to the case at hand is illustrated by comparing it with a prior decision distinguished therein, James F. Boyle, 14 T. C. 1382 (1950), affd. (C. A. 3, 1950) 187 F.2d 557">187 F. 2d 557, which involved the transaction, mentioned above, between another stockholder, Boyle, and the company. There we held that, since the upshot of the entire series of events was to distribute earnings to its principal stockholders and to leave Boyle with his identical equity interest in the corporation, the proceeds of the redemption to him was "not merely 'essentially equivalent,' it [was] identical with the distribution of an ordinary dividend."

The major distinction between the Boyle and Tiffany cases is that in the latter the stockholder divested himself completely of his interest in the company. The presence of this factor alone was sufficient to warrant treating the distributions in those cases for tax purposes as sales proceeds to one stockholder (Tiffany) but as a taxable dividend to the other (Boyle). ^{Zenz v. Quinlivan, (C. A. 6, 1954) 213 F. 2d 914. Announcement that the Internal Revenue Service will follow this decision was made in Revenue Ruling 458, 1954-2 C. B. 167.}

In the Zenz case, the taxpayer was the sole stockholder of a corporation which had accumulated earnings and profits. The prospective purchaser of her stock, a competitor, did not want to assume tax liabilities which it was believed were inherent in the accumulation. To avoid this source of future taxable dividends, the purchaser bought part of the taxpayer's stock for cash and 3 weeks later, after corporate reorganization, the company redeemed the balance of her stock which it thereafter held in its treasury. The redemption absorbed substantially all of the accumulated earnings. In holding that the redemption transaction was a sale of the taxpayer's interest in the company and not the distribution of a taxable dividend, the court stated (p. 917):

The use of corporate earnings or profits to purchase and make payment for all the shares of a taxpayer's holdings in a corporation is not controlling, and the question as to whether the distribution in connection with the cancellation or the redemption of said stock is essentially equivalent to the distribution of a taxable dividend under the Internal Revenue Code and Treasury Regulation must depend upon the circumstances of each case.

Since the intent of the taxpayer was to bring about complete liquidation of her holdings and to become separated from all interest in the corporation, the conclusion is inevitable that the distribution of the earnings and profits by the corporation in payment for said stock was not made at such time and in such manner as to make the distribution and cancellation or redemption thereof essentially equivalent to the distribution of a taxable dividend.

In view of the fact that the application of Section 115 (g) of the Internal Revenue Code contemplates that the shareholder receiving the distribution will remain in the corporation, the circumstances of this proceeding militate against treating taxpayer's sale as a distribution of a taxable dividend.

In the instant case, petitioner concedes that the intentions of its officers were to bring about a complete disposition and liquidation of its interest in each of the dealer companies. In carrying out this intention, part of its equity interest in each dealer company (the common stock and the unredeemed portion of the Liberty preferred stock) was transferred to minority stockholders and others, and part (the redeemed preferred stock) was surrendered to the dealer companies.

We see no material distinction between the method of disposition adopted in the instant case and those involved in the Zenz and Tiffany case, supra. In each of the three cases, the taxpayer transferred a portion of an equity interest in a corporation by sale to others and the balance thereof was redeemed by the company out of its earnings and profits, both transactions being part and parcel of a plan to dispose of the stockholders' entire equity interest. The fact that petitioner herein, as part of the over-all disposal plan, had previously caused a portion of its equity interest in each company to be represented by preferred stock, we deem to be immaterial under the circumstances here present. Accordingly, we hold that the amount received by petitioner attributable to the disposition of its preferred stock of each dealer company was a part of the proceeds of the sale of its entire interest in that company, as determined by respondent.

Our holding herein with respect to the Liberty preferred stock transferred to Woods (as distinguished from the other preferred stock which was redeemed) is not inconsistent with our decision in O. P. Chamberlin, 18 T. C. 164 (1952), revd. (C. A. 6, 1953) 207 F. 2d 462. That case involved a so-called preferred stock bail-out plan pursuant to which (a) a corporation declared a preferred stock dividend, and (b) the stockholders (including petitioner), with the exception of one minor stockholder, thereafter sold their dividend stock to insurance companies for cash in accordance with an agreement among the corporation, the stockholders, and the insurance firms. We held there that the dividend was not a true stock dividend, but the equivalent of a cash dividend distribution constituting ordinary taxable income in the amount of the value of the preferred shares received. The Court of Appeals, in reversing, held that the transaction was a nontaxable stock dividend followed by a sale which resulted in the taxpayer realizing long-term capital gain, as distinguished from a taxable dividend.

It is obvious that the stockholders involved in the Chamberlin case transactions did not divest themselves of their entire interest in the corporation therein concerned, nor did they intend to do so. After the stock dividend had been distributed to the common stockholders and sold by them, they still retained, through their common stockholdings, an equity interest in the company and voting control thereof, although subject, of course, to the rights of the preferred stockholders. In this respect, the case at hand differs materially, and it is unnecessary for us to decide here whether or not we will hereafter follow the views expressed by the Court of Appeals for the Sixth Circuit in the Chamberlin case.

We have given careful consideration to the cases of T. J. Coffey, Jr., 1410">14 T. C. 1410 (1950); United National Corporation, 2 T. C. 111 (1943), reversed on another issue (C. A. 9, 1944) 143 F.2d 580">143 F. 2d 580; and Rosenbloom Finance Corporation, 24 B. T. A. 763 (1931), reversed on another issue (C. A. 3, 1933) 66 F. 2d 556. It is our view that the facts therein considered differ in material respects from those before us and we hold that the cases are not here controlling.

Other adjustments determined by respondent were not assigned as error by petitioner.

Decision will be entered under Rule 50.

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Footnotes

• 1. It is noted that there are three groups of stockholders involved in the transactions herein under consideration: The petitioner which was completely divested of its interests in both companies, Lander whose Liberty preferred stock was redeemed at the closing but who retained his Liberty common stock and his Victory stocks, and the other minority stockholders of both dealer companies who retained the preferred stock distributed to them. Only petitioner is before the Court in the instant case, however, and we therefore express no views as to distributions to Lander and the other stockholders. Cf. Marie W. F. Nugent-Head Trust, 17 T. C. 817, 823, 824↩ (1951).