concurring: Although I agree with the result reached by the majority, I cannot agree with the reasoning by which it concludes that the distributions in this case were not essentially equivalent to dividends. The Court, I believe, fails to give full effect to the attribution rules and fails to apply properly the tests which have been established for determining when a distribution is essentially equivalent to a dividend.
In this case, we have an individual, who owned 49.5 percent of the stock of a corporation and whose sons owned the remaining stock of the corporation, arranging to have his stock redeemed by the corporation. It may be that if this redemption had occurred before the enactment of the Internal Bevenue Code of 1954, the redemption would have been treated as a sale. However, section 302(c) (1) of the 1954 Code provides that the attribution rules of section 318 shall be applied for purposes of section 302. Accordingly, in determining whether this redemption is to be treated as essentially equivalent to a dividend, we must look at it as if the distribution had been made to an individual who owned all of the stock of the corporation. In other cases, this Court has recognized that the attribution rules are now applicable in determining whether a redemption is to be treated as a dividend, Thomas G. Lewis, 35 T.C. 71 (1960); Ralph L. Humphrey, 39 T.C. 199 (1962), but in this case, the Court refuses to give full effect to those attribution rules.
The majority recognizes that the mere fact that the petitioner wishes to retire from the business is not a sufficient reason to treat the redemption as a sale; yet, the Court finds that there was a business purpose for the redemption, when, in fact, none was established in the record. All that this record shows is that the petitioner believed that the Ford Motor Co. wanted younger people to manage the dealership. However, the petitioner was not at the time of this redemption engaged in the active management of the business, and we were not given any reason why he needed to redeem his stock in order to transfer management into younger hands.
Though I disagree with the reasoning of the majority, I agree with the result because I have concluded that there was a waiver of the attribution rules under section 302(c) (2) and a complete termination of the petitioner’s interest within the meaning of section 302(b) (3). 1 agree with the majority that the several redemptions of the petitioner’s stock should be treated as a single redemption terminating liis actual ownership in the corporation. Yet, the question remains as to whether he has met the conditions of section 302(c) (2) so as to waive the application of the attribution rules.
1 cannot agree with the respondent’s contention that petitioner’s position as director and vice president, subsequent to the redemption, violates the condition of section 302(c) (2) (A) (i). I am convinced that petitioner performed no services as an officer or director after June 1956. Even the informal and infrequent consultations which he rendered to the company prior to that time were discontinued after ho signed the contract selling his shares to the corporation. Thus, in no way did he serve the corporation or direct its affairs. Moreover, the petitioner was paid no compensation as an officer or director subsequent to the sale.1 His $l,000-per-month salary as president was terminated at the time of the sale of his shares and termination of his interest and activities. Hence, he did not benefit from the activities of the corporation in any way other than to receive the payments for the redemption of his stock. Cf. Leon R. Meyer, 46 T.C. 65 (1966), on appeal (C.A. 8, June 15,1966); Eev. Eul. 59-119,1959-1 C.B. 68.
As I read section 302(c) (2) (A) (i), it does not provide that every officer or director shall be treated as having retained an interest in a corporation. It provides merely that a retained interest may include an interest as an officer or director, but it does not require us to find that every officer or director has retained an interest. The purpose of section 302(c) (2) is to provide that when there is a bona fide severance of the shareholder’s interest, he will receive capital gains treatment.2 On the other hand, although there is no direct judicial authority or statement in the legislative history of section 302(c) (2), I believe that Congress did not intend us to hold that an officer or director who performs no duties, receives no compensation, and exercises no influence has retained an interest in the corporation. It is a fair inference from the section as a whole and from its legislative history that Congress was concerned with the situation in which there was a nominal transfer of stock in a family corporation, although the transferor continued to control the corporation and benefit by its operations. Immediately after the enactment of the 1954 Code, it was recognized that section 302(c) (2) (A) (i) did not prohibit office holding per se, but was concerned with a retained financial stake in the corporation, such as a profit-sharing plan, or in the creation of an ostensible sale that really changed nothing so far as corporate management was concerned.3 Finally, I believe that form should not be placed above substance, that in substance this petitioner did not retain an interest in the corporation, and that accordingly he has met the condition of section 302(c) (2) (A) (i).4
As an additional reason for holding section 302(c) (2) inapplicable, the respondent has argued that the agreement required by section 302(c) (2) (A) (iii) has not been filed, but I do not agree with this argument. In support of this argument, the respondent contends that the agreement was not filed in accordance with the regulations in that it was not filed in duplicate and was not filed timely. These regulations provide:
Sec. 1.302-4 Termination of shareholder's interest.
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(a) The agreement specified in section 302(c) (2) (A) (iii) shall be in the form of a separate statement in duplicate signed by the distributee and attached to his return timely filed for the year in which the distribution described in section 302(b)(3) occurs. The agreement shall recite that the distributee has not acquired any interest in the corporation (as described in section 302(c) (2) (A) (i)) since such distribution, and that he agrees to notify the district director for the internal revenue district in which such return is filed of any acquisition of such an interest in the corporation within 30 days after such acquisition if such acquisition occurs within 10 years from the date of such distribution.
In an opinion reviewed by the Court, this Court held that the requirements of section 302(c) (2) (A) (iii) are procedural and directory and compliance with the regulations is not a mandatory condition for the application of section 302(c) (2) (A). Georgie S. Cary, 41 T.C. 214 (1963), nonacq. 1964-2 C.B. 8. In the Cary case, the Court ascertained that section 302(c) (2) (A) (iii) was added by the Senate primarily to enable the respondent to require the distributee to maintain records fully identifying the amount of tax payable had the redemption been treated as a dividend. In that case, the Court held that a substantial compliance with the Code was all that is necessary — it is not necessary to comply literally with all the rules of the regulations. If the distributee fully reports his income from the distribution, he may comply with the Code by filing an agreement when his inadvertence is brought to his attention, even at a time when his returns are being audited. Van Keppel v. United States, 206 F. Supp. 42 (D. Kans. 1962), affd. 321 F. 2d 111 (C.A. 10, 1963). I believe that the petitioner substantially complied with the requirements of section 302 (c) (2) (A) (iii). Rejection of petitioner’s agreement because it did not accompany the return, because it was not in duplicate, or because the return was not timely was an abuse of discretion. Pearce v. United States, 226 F. Supp. 702 (W.D.N.Y. 1964) .5
Respondent has also asserted that petitioner’s agreement is improper because it should have promised to notify the district director of any reacquisition within 10 years commencing on December 31,1961. Petitioner’s tendered agreement specified July 1, 1956, as the date for the beginning of the 10-year period. However, I cannot find that petitioner’s agreement was inconsistent with the Code or with respondent’s regulations. The regulations make no provision expressly for distributions which occur in more than 1 taxable year. I do not understand the existing regulations to require the filing of an agreement every year. In this case, the petitioner treated the redemption as occurring on July 1,1956, and treated the 10-year period as beginning to run after that date; for purposes of preparing and filing the agreement, I think that this is not an unreasonable interpretation of the regulations.
Accordingly, I would find that the terms of section 302(c) (2) were met, and the stock owned by the petitioner’s sons should not be attributed to the petitioner for the purpose of section 302(b) (3). I am aware that section 302(c) (2) (B) (ii) might apply to this case and require us to apply the stock attribution rules.6 Indeed, the facts presented suggest that there may have been a disposition of the type described in that provision. However, the respondent has not argued that such a disposition occurred, and the record shows clearly that the parties did not consider that provision to be an issue in this case.
Therefore, I would limit the holding in this case to a decision for the petitioner under section 302 (b) (3).
Atkins, J., agrees with this concurring opinion.I certainly cannot find compensation in tie fact that tlie directors once decided to buy a medical policy for tbe officers when the record does not show that a policy was purchased or whether it covered the petitioner.
H. Rept. No. 1337, 83d Cong., 2d Sess., p. 36 (1954) ; S. Rept. No. 1622, 83d Cong., 2d Sess., p. 45 (1964).
Bittker, Stock Redemptions and Partial Liquidations Under the Internal Revenue Code of 1954,” 9 Stanford L. Rev. 13, 33, fn. 72 (1956).
The majority opinion states that the record contains an indication that petitioner resigned his positions in 1962 and that such an indication gives rise to a suspicion that his offices had significance. I can see other explanations of this resignation, if it occurred, and consequently do not attach much significance to it.
Archbold v. United States, 201 F. Supp. 329 (D.N.J. 1962), affirmed per curiam 311 F. 2d 228 (C.A. 3, 1963), appears to be the only ease suggesting a contrary result, and its rationale was seriously questioned in Georgie S. Cary, 41 T.C. 214.
Section 302(c) (2) (B), in pertinent part, provides that:
(B) Subparagraph (A) of this paragraph shall not apply if—
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(ii) any person owns (at the time of the distribution) stock the ownership of which is attributable to the distributee under section 318(a) and such person acquired any stock in the corporation, directly or indirectly, from the distributee within the 10-year period ending on the date of the distribution, unless such stock so acquired from the distributee is redeemed in the same transaction.
The preceding sentence shall not apply if the acquisition (or, in the case of clause (ii), the disposition) by the distributee did not have as one of its principal purposes the avoidance of Federal income tax.