1963 U.S. Tax Ct. LEXIS 21">*21 Decision will be entered for the petitioner.
Petitioner owned 145 shares of the common stock of a corporation, such shares having a basis in her hands, as well as a fair market value, of $ 206,625. The remaining 5 outstanding shares of the corporation were owned by petitioner's son. On December 13, 1957, after having severed her relationship as an officer and director, all of petitioner's shares in the corporation were redeemed for a price of $ 206,625. Petitioner reported the redemption on her 1957 return as a sale of stock at basis, resulting in no gain or loss. Through inadvertence, however, she did not attach to this return the agreement provided for by
41 T.C. 214">*215 Respondent determined a deficiency in petitioner's income tax for the year 1957 in the amount of $ 167,048.29.
The principal issues presented are whether the provisions of
FINDINGS OF FACT
Most of the facts necessary for a resolution of the above issues have been stipulated by the parties and are found accordingly.
Georgie S. Cary (hereinafter referred to as petitioner) is an individual presently residing in Dallas, Tex. Her individual income tax return for the taxable year 1957 was filed with the district director1963 U.S. Tax Ct. LEXIS 21">*25 of internal revenue, Dallas, Tex.
Petitioner is the widow of Dr. E. H. Cary. Dr. Cary died testate on December 11, 1953, appointing the Republic National Bank of Dallas and his son, E. H. Cary, Jr., independent coexecutors and trustees of his estate. Under the terms of Dr. Cary's will, the residue of his estate was left in equal shares to four separate trusts, one for each of his four children, with petitioner, the surviving widow, having a life interest in each of these trusts.
Dr. Cary's estate at the time of his death consisted only of community property in which petitioner, as his surviving wife, had a one-half interest. The principal assets of his estate consisted of 145 shares of common capital stock in the Medical Arts Hospital of Dallas (hereinafter sometimes referred to as Medical), a Texas corporation, and other miscellaneous stocks, bonds, and real estate. From the time of its incorporation to the time of Dr. Cary's death, all of the outstanding stock in the Medical Arts Hospital was owned as follows:
| 5 | Shares by E. H. Cary, Jr. |
| 72.5 | Shares representing the community half interest of Dr. Cary. |
| 72.5 | Shares representing the community half interest of petitioner. |
| 150 | Total |
1963 U.S. Tax Ct. LEXIS 21">*26 41 T.C. 214">*216 In closing the administration of Dr. Cary's estate petitioner received, as part of her community property share, the 145 shares of Medical Arts stock. For Federal estate tax purposes these shares were reported by the E. H. Cary estate at a total fair market value of $ 206,625, or $ 1,425 per share, and this valuation was accepted by the Commissioner of Internal Revenue as correct. Pursuant to the provisions of section 1014(b)(6), petitioner's basis for the 145 shares thus received was $ 206,625. After the settlement of Dr. Cary's estate, all of the outstanding stock in the Medical Arts Hospital was owned 5 shares by E. H. Cary, Jr., and 145 shares by petitioner.
On December 12, 1957, petitioner resigned the positions which she had held as an officer and director of Medical Arts Hospital. On December 13, 1957, Medical redeemed the 145 shares of its stock held by petitioner, distributing to her in exchange the sum of $ 206,625 which was both petitioner's basis for such stock and the fair market value thereof on the date of the redemption. Immediately after the redemption all of the outstanding 5 shares of Medical's stock were owned by E. H. Cary, Jr., petitioner's son, 1963 U.S. Tax Ct. LEXIS 21">*27 and none were owned directly by petitioner.
On her Federal income tax return for the taxable year 1957, petitioner reported the December 13, 1957, transaction as a sale of stock resulting in no gain or loss, on the theory that the distribution by Medical was in complete redemption of all of the Medical stock owned by her and that the amount received was equal to her basis in the stock redeemed. Petitioner's income tax return for the taxable year 1957 was prepared and filed by a reputable firm of certified public accountants in Dallas, Tex., specializing in the auditing and preparation of Federal income tax returns. This firm had prepared petitioner's Federal income tax returns for many years, was fully conversant with her financial affairs, and was advised of petitioner's resignation on December 12, 1957, from the board of Medical, as well as the stockholder resolution authorizing the December 13, 1957, stock redemption.
In 1959, during an audit of petitioner's 1957 return by the Internal Revenue Service, it was discovered that petitioner had failed to file with that return an agreement, as provided by
41 T.C. 214">*217 Since her resignation from the board on December 12, 1957, petitioner has not served either as an employee, officer, or director of Medical; nor, since the redemption of her stock on December 13, 1957, has she reacquired any interest in that corporation as a stockholder. In his notice of deficiency respondent determined that the distribution made by Medical to petitioner in redemption of her stock on December 13, 1957, was the essential equivalent of a taxable dividend in the amount of $ 206,625.
OPINION
The tax treatment to be accorded distributions in redemption of stock made after December 31, 1954, is controlled by
(A) In the case of a distribution described in * * *
(i) immediately after the distribution the distributee has no interest in the corporation (including an interest as officer, director, or employee), other 1963 U.S. Tax Ct. LEXIS 21">*30 than an interest as a creditor,
(ii) the distributee does not acquire any such interest (other than stock acquired by bequest or inheritance) within 10 years from the date of such distribution, and
(iii) the distributee, at such time and in such manner as the Secretary or his delegate by regulations prescribes, files an agreement to notify the Secretary or his delegate of any acquisition described in clause (ii) and to retain such records as may be necessary for the application of this paragraph.
If the distributee acquires such an interest in the corporation (other than by bequest or inheritance) within 10 years from the date of the distribution, then the periods of limitation provided in
The regulation referred to in
The agreement specified in
Immediately after the December 13, 1957, redemption by which the 145 shares of Medical stock owned by petitioner were redeemed, her son, E. H. Cary, Jr., continued to own the remaining 5 outstanding shares of stock in that corporation. Unless the application of the constructive ownership rules of
Petitioner did not file the agreement contemplated by
We agree with petitioner. The essence of
The Senate version of
Moreover, in order to qualify for nonattribution between members of a family, sub-paragraph (A)(iii) [of
It would thus appear that a primary purpose for the addition of
As we have hereinbefore noted, what is essential with respect to
Relying on the case of
Looking once again to the legislative history of
1963 U.S. Tax Ct. LEXIS 21">*37 that in any case in which the
However, consistent with the theory that some statute of repose is necessary in order to insure the taxpayer, who has made an honest return, that after such period his tax liability will not be reopened, see
In the event that the
Thus, as originally written,
This same result 1963 U.S. Tax Ct. LEXIS 21">*39 was reached by the District Court in the recent case of
I disagree with * * * [Archbold] because in my opinion the three year statute does not bar recovery of additional taxes upon reacquisition of stock within ten years. * * *
* * * *
If the statute of limitation extends to one year after notice, regardless of a filed agreement, both the taxpayer and the Government are fully protected. Obviously, a filed agreement1963 U.S. Tax Ct. LEXIS 21">*40 would make it easier for the Director to detect reacquisitions; but detection is not the essence of
1963 U.S. Tax Ct. LEXIS 21">*41 In affirming Van Keppel we note that the Tenth Circuit chose to distinguish, rather than disagree with, the Third Circuit's affirmance of Archbold. 6 The Tenth Circuit found that:
Nothing in the statutes or regulations precludes the Director from accepting an agreement filed after the prescribed period. Established administrative practice has long recognized and accepted amended returns filed after the due date "for the purpose of correcting clear errors or plain mistakes inhering in original returns." [Citing authorities.]
* * * *
The Director did not reject the agreement or the amended return. Unless the assessment of the deficiency may be considered a rejection, the Government has never disclaimed the agreement and the taxpayers are bound by it. The situation 41 T.C. 214">*222 is different from that presented in Archbold v.United States [citation]. That case did not consider a claim of mistake. [In Archbold,] after the Director had made a deficiency assessment on the basis that a redemption was ordinary income, the taxpayers offered to file an amended return appending the required agreement. Here the failure of the taxpayers to file the agreement was a 1963 U.S. Tax Ct. LEXIS 21">*42 mistake, the submission of the agreement preceded the assessment, and the record does not disclose any rejection of the agreement other than the deficiency assessment. * * * Acceptance of the late filing was discretionary. Fairness to the taxpayers requires that the discretion be exercised for their benefit and failure to do so was an abuse of discretion. [Emphasis supplied.]
While, as stated earlier, we disagree with the substantive rationale of the Archbold case, it is to be noted that all of the factors used by the Tenth Circuit to distinguish Van Keppel from Archbold are present here. Petitioner is a widow, who was 73 years of age at the time of the December 13, 1957, redemption of her Medical stock. Her return for the year 1957 was prepared by competent certified public accountants, familiar with her financial affairs, in consultation with her attorneys. On her 1957 return the 1963 U.S. Tax Ct. LEXIS 21">*43 redemption was reported as a sale of stock. Through the inadvertence of someone, no
It is our decision that the provisions of
This disposition of the case makes it unnecessary for us to consider other issues raised by the parties.
Decision will be entered for the petitioner.
Footnotes
1. H. Rept. No. 1337, 83d Cong., 2d Sess., p. A75 (1954).↩
2. S. Rept. No. 1622, 83d Cong., 2d Sess., p. 236 (1954).↩
3. H. Rept. No. 1337, 83d Cong., 2d Sess., p. A75-76 (1954).↩
4. S. Rept. No. 1622, 83d Cong., 2d Sess., p. 236 (1954).↩
5. In Van Keppel, a husband owned 1,124, and a wife owned 375, of the 2,000 authorized shares of stock in a corporation. In 1956 the corporation redeemed all of the wife's shares of stock. This transaction was reported in 1956 by the taxpayers as a sale of the wife's stock resulting in capital gain. The taxpayers' 1956 joint return was prepared by a CPA in consultation with the taxpayers' lawyer. "Through the inadvertence of someone, no
[sec. 302(c)(2)(A)(iii)↩ ] agreement was attached to the [1956] return." In 1958, during an audit of the 1956 return, it was discovered that no agreement had been filed. The taxpayers promptly submitted an agreement to the district director and he did not reject it. They then filed an amended return for 1956 to which a copy of the agreement was attached. Receipt of this return was duly acknowledged by the district director. Thereafter, the Commissioner of Internal Revenue determined that the proceeds of the 1956 redemption were taxable as a dividend and a deficiency for 1956 was accordingly assessed.6. See
United States v. Van Keppel, 321 F.2d 717, 720↩ (C.A. 10, 1963), footnote 9.