dissenting in part: I cannot join the majority opinion insofar as it disallows petitioner’s loss deductions for the stock he surrendered.
In 1929, a majority of the Board of Tax Appeals held that a shareholder who had surrendered some of his shares to the issuing corporation for its benefit had incurred a deductible loss. Wright v. Commissioner, 18 B.T.A. 471 (1929), modified on another issue 47 F.2d 871 (7th Cir. 1931). Until today, this Court had never wavered from its holding that a shareholder’s disproportionate transfer of stock to the issuing corporation or to a third party for the benefit of the corporation is a disposition of property in which the shareholder’s loss is recognized. We had so held where the transfer was directly to a third party, such as a corporate employee or creditor,1 a view supported by other courts as well.2 We had so held where the transfer was to the corporation as part of a plan to transfer the stock to a third party.3 Finally, in the specific context of this case, we had held that the taxpayer incurred a deductible loss where the non pro rata transfer was to the corporation for it to cancel the shares or to hold them as treasury stock.4 I think that these decisions are sound in law and policy. Today, the majority overrules these decisions on the basis of arguments considered and rejected many times before. I dissent from the majority’s abandonment of this consistent, substantial, and well-reasoned body of case law.
In its zeal to prevent the perceived abuse of an ordinary loss deduction from the disposition of a capital asset, the majority misapplies the basic rules of loss recognition. Loss recognition and loss characterization are related but separate inquiries. An individual taxpayer may deduct losses incurred during the taxable year from transactions entered into for profit. Sec. 165(a), (c)(2). Essential to loss recognition is that the transaction be "closed” during the year for which the loss is claimed, fixed by identifiable events occurring in that year. Sec. 1.165-l(d)(l), Income Tax Regs.
The majority erroneously concludes that a disproportionate or non pro rata surrender of shares of stock is an "open” transaction, reasoning that the fact and amount of the shareholder’s, loss can be ascertained only when he has disposed of his remaining shares. When considering a claimed loss from a disposition of property, we must focus on the precise property for which the loss was claimed. The majority’s open transaction analysis stands up only if the shareholder’s entire stock investment is viewed as a single, indivisible property unit. This is the "unitary view” of stock ownership, which until today we have always rejected. Indeed, until today the cases were uniformly to the contrary. I doubt that the majority means to suggest that a shareholder who disposes of a portion of his shares at a gain, to enhance the value of his remaining stock investments, may postpone his recognition of that gain by reducing his basis in his remaining shares.5 Consistent application of the majority’s unitary view, however, would seem to require that result.
The property disposed of in this case and for which the loss deduction was claimed was only the stock that petitioner had surrendered. When viewed in this light, the majority’s open transaction analysis fails. This approach is the "fragmented view” or fractional view of stock ownership, which, until today, was the rule in this Court. Under the "fractional view,” each individual share is a separate property unit, and absent a specific statutory provision, gain or loss is recognized on the disposition of each discrete share. Each share of stock represents a fractional ownership interest in a corporation consisting of three elements — the right to dividends, the right to assets on dissolution, and, in most cases, the right to vote in the corporation’s affairs. See B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders, sec. 14.31, at 14-94 — 14-95 (4th ed. 1979). When a shareholder disposes of a share of stock, those rights are lost, and his aggregate interest in the corporation in comparison to the interests of the other shareholders has been changed.6 Such a change results regardless of the method and character of the stock disposition. See Downer v. Commissioner, 48 T.C. 86, 90-91 (1967). With a non pro rata surrender of shares to the issuing corporation, what the shareholder has after the surrender is not what he had before the surrender.
Outside of the area of stock transfers to or for the benefit of the corporation, the case law similarly reflects the fractional view of stock ownership. A shareholder disposing of stock must proceed essentially share by share; he cannot aggregate his bases and his amounts realized. Curtis v. United States, 336 F.2d 714, 722 (6th Cir. 1964); Mahaffey v. Commissioner, 1 T.C. 176, 182-183 (1942), revd. on another issue 140 F.2d 879 (8th Cir. 1944). Cf. Sicanoff Vegetable Oil Corp. v. Commissioner, 27 T.C. 1056, 1071-1072 (1957). The tax law generally favors a fractional, divisible view of property, seeking to allocate basis and recognize gain or loss immediately when a part of a larger property is disposed of. See sec. 1.61-6(a), Income Tax Regs.;7 Foster v. Commissioner, 80 T.C. 34, 216-217 (1983); Fasken v. Commissioner, 71 T.C. 650, 655-657 (1979).
The majority also suggests that the unitary view is necessary in order to find a transaction entered into for profit. In other words, the majority treats the stock surrender, itself, rather than the original investment in stock as the transaction entered into for profit. To avoid the conclusion that the surrender, if viewed as a closed transaction, was not profit motivated, the majority finds the requisite profit objective in the taxpayer’s hope that the value of his remaining stock investment will be protected and enhanced. Whether this anticipated benefit will materialize cannot be ascertained until the disposition of the remaining shares. Hence, the majority concludes, the transaction is still open, and thus the taxpayer, as yet, has realized no loss. Again, I disagree.
Generally, the requisite- profit objective for dealings in property is established (or not established) when the property is acquired. See B. Bittker, Federal Taxation of Income, Estates and Gifts, par. 25.3 (1981).8 The discussion of the taxpayer’s reasons for surrendering the stock — enhancing the value of the corporation and hence the value of his remaining shares — is to negate the Government’s argument that the surrender was a gift. See Mack v. Commissioner, 45 B.T.A. 602 (1941), affd. 129 F.2d 598 (2d Cir. 1942), denying the taxpayer a loss deduction on the ground that the surrender was a gift. Once the taxpayer has disproved respondent’s claim that the stock surrender was for personal (not profit motivated) reasons, the profit objective of his initial stock acquisition characterizes its disposition.
Nothing in the recent reversals by the Fifth and Sixth Circuits requires the majority’s abandonment of this Court’s long-held "fragmented view” of stock ownership. See Tilford v. Commissioner, 705 F.2d 828 (6th Cir. 1983), revg. 75 T.C. 134 (1980), cert. denied 464 U.S._(1983); Schleppy v. Commissioner, 601 F.2d 196 (5th Cir. 1979), revg. Smith v. Commissioner, 66 T.C. 622 (1976).9 The majority states, and I agree, that the direct-surrender cases and third-party transfer cases must be considered together. Given this analytical framework, I find the majority’s reliance upon the Fifth Circuit’s Schleppy opinion misplaced. The majority and I both agree that the Schleppy court totally misread our opinion in Estate of Foster v. Commissioner, 9 T.C. 930 (1947).10 The Schleppy court did not consider the third-party cases and the .direct-surrender cases together. The Fifth Circuit’s attempt to distinguish Downer v. Commissioner, supra, as involving a transfer to a third party rather than a surrender to the corporation epitomizes its mischaracterization of the issue.11 The Fifth Circuit suggested that after the transfer of stock to a third party, Downer had something less than what he had had before the transfer, but that in Schleppy, the taxpayer somehow had the same interest in the corporation after the surrender of stock as he had had before the surrender. I believe this is wrong and that the error arises from an implicit reliance on a "unitary view” of a shareholder’s stock investment. The Fifth Circuit also analogized Schleppy’s surrender of shares of stock to a cash contribution to the corporation. Again, this disregards the fact that a cash contribution does not change a shareholder’s proportionate interest in the corporation vis-á-vis the other shareholders, whereas the non pro rata surrender of shares, does.
I also do not read as much into the Sixth Circuit’s reversal in Tilford v. Commissioner, supra, as does the majority. The clear focus of the Sixth Circuit’s Tilford opinion was section 83 and section 1.83-6(d), Income Tax Regs., which that court read as legislatively changing the result in Downer v. Commissioner, supra. The Tilford court’s passing reference to Schleppy v. Commissioner, supra, cannot be read as rejecting our "fragmented view” of stock ownership or as embracing the Fifth Circuit’s implicit reliance on a "unitary view” of stock ownership. Given the Sixth Circuit’s view of section 83 and the pertinent regulation, that court did not have before it the issue presented in the instant case.
At the bottom of the majority’s opinion today seems to be a policy choice not to allow an ordinary loss for the disposition of a capital asset. Many of the older cases allowing the loss deductions arose before the ordinary-loss, capital-loss question became relevant, but these decisions were firmly grounded in the basic rules for loss recognition. I think that it is inappropriate to warp those loss-recognition rules in the present cases merely to avoid allowing an ordinary-loss deduction. Capital treatment of gain or loss on a "sale or exchange” of a capital asset is clear. Secs. 165(f), 1201-1212. However, not every disposition of a capital asset is a "sale or exchange” so as to generate capital gain or loss. See National-Standard Co. v. Commissioner, 80 T.C. 551 (1983). See generally Bittker, "Capital Gains and Losses — The 'Sale or Exchange’ Requirement,” 32 Hastings L.J. 743 (1981). Congress has acted many times to mandate sale or exchange treatment for various transactions,12 and I think congressional action rather than judicial revision is the appropriate response in this area.
I am also unpersuaded by the majority’s attempt to buttress its policy choice by its stated concern over the tax-avoidance potential and the purported evisceration of section 165(g). I do not perceive in the previous cases the abuse the majority seems to find, and I am confident that traditional tax common law doctrines (substance over form, step transaction, sham, etc.) are sufficient to deal with any abuses that arise. Moreover, the taxpayer bears the burden of proving his deductible loss. Sack v. Commissioner, 33 T.C. 805 (1960); Clement v. Commissioner, 30 B.T.A. 757 (1934); Rule 142(a), Tax Court Rules of Practice and Procedure. This burden, in proper cases, would include the bonafides of his claimed motivation for the stock surrender. If a taxpayer surrenders shares with a genuine goal of preserving his corporation’s existence (as opposed to an anticipatory triggering of a loss from a soon-to-be-worthless stock investment), I see no reason why, as a policy matter, an ordinary-loss deduction should not be allowed.
I am also troubled by the signal the majority sends as to the future of stare decisis in this Court. I would not reverse course at this late date. This Court staked out its position on the issue in 1929 and had consistently adhered to it until today. The arguments on each side are really no different today than they were 55 years ago. The issue raised in this case has been before the Court conference seven times.13 Less than 4 years ago, in Tilford v. Commissioner, supra, we adhered to our consistent line of case law. We did so even though Schleppy had already been decided by the Fifth Circuit, and we did so even though it meant invalidating a Treasury regulation. I see no reason to depart from stare decisis now.
The Fifth and Sixth Circuits have neither expressly considered nor rejected the rationale underlying our cases allowing a loss deduction. I believe that we made the correct decision in 1929, and I dissent from the majority’s rejection of that decision.
Fay, Goffe, and Wiles, JJ., agree with this dissent.Burdick, Executrix v. Commissioner, 20 B.T.A. 742 (1930) (Board reviewed), affd. 59 F.2d 395 (3d Cir. 1932); City Builders Finance Co. v. Commissioner, 21 B.T.A. 800 (1930) (Board reviewed); Clement v. Commissioner, 30 B.T.A. 757 (1934) (Board reviewed); Sack v. Commissioner, 33 T.C. 805 (1960); Downer u. Commissioner, 48 T.C. 86 (1967) (Court reviewed); Tilford v. Commissioner, 75 T.C. 134 (1980) (Court reviewed), revd. 705 F.2d 828 (6th Cir. 1983), cert. denied 464 U.S. __ (1983).
Scherman v. Helvering, 74 F.2d 742 (2d Cir. 1935); Berner v. United States, 151 Ct. Cl. 128, 282 F.2d 720 (1960); Peabody Coal Co. v. United States, 80 Ct. Cl. 202, 8 F. Supp. 845 (1934); Kress u. Stanton, 98 F. Supp. 470 (W.D. Pa. 1951), affd. per curiam 196 F.2d 499 (3d Cir. 1952); compare Webb v. United States, 560 F. Supp. 150 (S.D. Miss. 1982).
Wright v. Commissioner, 18 B.T.A. 471 (1929) (Board reviewed), modified on another issue 47 F.2d 871 (7th Cir. 1931); Budd International Corp. v. Commissioner, 45 B.T.A. 737 (1941), revd. on other grounds 143 F.2d 784 (3d Cir. 1944), cert. denied 323 U.S. 802 (1945); Estate of Foster v. Commissioner, 9 T.C. 930 (1947) (Court reviewed).
Miller v. Commissioner, 45 B.T.A. 292 (1941); Smith v. Commissioner, 66 T.C. 622 (1976), revd. sub nom. Schleppy v. Commissioner, 601 F.2d 196 (5th Cir. 1979). See also Duell v. Commissioner, T.C. Memo. 1960-248; Payne Housing Corp. v. Commissioner, T.C. Memo. 1954-85.
Under the now-overruled cases, a surrendering shareholder has an amount realized measured by the enhanced value of his remaining shares resulting from the surrender. Smith v. Commissioner, supra; Miller v. Commissioner, supra. Given the numerous ways one can acquire stock, it is not implausible that a shareholder surrendering stock would have a basis in the surrendered stock of less than its present fair market value.
Only where the shareholder’s overall interest is unchanged because of a pro rata transfer by all shareholders of a portion of their shares does the disposition of stock constitute a nontaxable, nondeductible contribution to capital. Bed Rock Petroleum Co. v. Commissioner, 29 B.T.A. 118 (1933); Haft v. Commissioner, 20 B.T.A. 431,436-437 (1930); Scoville v. Commissioner, 18 B.T.A. 261 (1929). See also Kistler v. Burnet, 58 F.2d 687 (D.C. Cir. 1932), affg. Fredericks v. Commissioner, 21 B.T.A. 433 (1930); Taylor v. MacLaughlin, 30 F. Supp. 19 (E.D. Pa. 1939).
Sec. 1.61-6(a), Income Tax Regs., provides in pertinent part:
"When a part of a larger property is sold, the cost or other basis of the entire property shall be equitably apportioned among the several parts, and the gain realized or loss sustained on the part of the entire property sold is the difference between the selling price and the cost or other basis allocated to such part. The sale of each part is treated as a separate transaction and gain or loss shall be computed separately on each part. Thus, gain or loss shall be determined at the time of sale of each part and not deferred until the entire property has been disposed of.”
Of course, losses from a transaction entered into primarily for tax benefit rather than for economic profit will not be recognized. See Knetsch v. United States, 172 Ct. Cl. 378, 348 F.2d 932 (1965); Fox v. Commissioner, 82 T.C. 1001 (1984); Smith v. Commissioner, 78 T.C. 350 (1982). The majority, however, has expressly declined to address respondent’s argument that the transaction in this case was primarily tax motivated.
Barring stipulation to the contrary, this case is appealable to the Second Circuit.
In Foster, the issue was the taxpayer’s basis in shares he sold during the taxable year. The amount of his basis depended upon the effect of his disposition of other shares in an earlier year. Contrary to the Fifth Circuit’s reading of Foster, we did not add to the basis of the taxpayer’s remaining shares the entire basis of his surrendered shares. Following Budd International Corp. v. Commissioner, supra, and Miller v. Commissioner, supra, we held that the taxpayer had suffered a deductible loss in the earlier year, and that only the portion of his basis in the surrendered shares that was not allowable as a loss in the earlier year was added to his basis in his remaining shares to decrease his recognized gain upon his ultimate disposition of his remaining shares during the taxable year before the Court.
Likewise, the Fifth Circuit’s observation in Schleppy v. Commissioner, supra, that there were no appellate decisions in the area (601 F.2d at 198) is questionable even when limited to stock surrenders. The Seventh Circuit affirmed our decision in Wright v. Commissioner, supra, involving a surrender to the corporation for reissue to a third party, holding that the taxpayer had suffered a deductible loss. The Third Circuit affirmed Burdick, Executrix v. Commissioner, supra, a case involving a transfer to a third party. The Court of Claims has similarly allowed a loss on a third-party transfer. Peabody Coal Co. v. United States, supra. Other courts have allowed loss deductions in bargain sales to third parties, and these decisions are generally cited along with Wright and its progeny. See Berner v. United States, supra; Scherman v. Helvering, supra; Kress v. Stanton, supra.
See, e.g., secs. 165(g), 331, 1231, 1234(a), 1234A, 1241.
See Wright u. Commissioner, supra; Burdick, Executrix v. Commissioner, supra; City Builders Finance Co. v. Commissioner, supra; Estate of Foster v. Commissioner, supra; Downer v. Commissioner, supra; Tilford v. Commissioner, supra. In Clement v. Commissioner, supra, we adhered to the rationale of the decisions allowing the deductible loss, but held that the taxpayer had failed to prove the amount of his loss.