Comm'r of Internal Revenue

This case is not covered by Casetext's citator
Tax Court of the United States.Sep 11, 1969
52 T.C. 934 (U.S.T.C. 1969)

Docket No. 1497-66.



Max Thelen, Jr., and David M. Bridges, for the petitioners. Charles W. Nyquist, for the respondent.

Max Thelen, Jr., and David M. Bridges, for the petitioners. Charles W. Nyquist, for the respondent.

Petitioners owned the stock of two corporations. In 1959, petitioners sold the stock of one to the other corporation under a contract in which the acquiring corporation agreed to pay petitioners $1,500,000, without interest, over a period of 10 years. Petitioners reported the 1961 payment of $150,000 as an amount realized in exchange for a capital asset. Respondent determined that the 1961 payment was a dividend and should receive ordinary-income treatment instead. The parties agreed that the sale should be treated as a distribution in redemption of the stock of the acquiring corporation. Held:

1. The distribution in redemption was essentially equivalent to a dividend, and should therefore be treated as a distribution of property to which sec. 301 applies. Sec. 302(d), I.R.C. 1954; and

2. The payment received by petitioners in 1961 was taxable dividend income as determined by respondent, and not capital gain as reported by them. Secs. 301 and 316, I.R.C. 1954.

HOYT, Judge:

Respondent determined a deficiency in petitioners' individual income tax for 1961 in the amount of $71,903.38. The following two issues must be decided: (1) Whether payments received by petitioners from the sale of stock in one of their controlled corporations to another of their controlled corporations, treated here as a distribution in redemption of the stock of the acquiring corporation, were essentially equivalent to a dividend; and if so, (2) whether the acquiring corporation's contractual obligation to pay petitioners $1,500,000 over a period of 10 years represented a distribution of money or other property in the year of the obligation within the meaning of section 301(b)(1)(A).

All references are to the Internal Revenue Code of 1954.


Those facts which were stipulated are found accordingly and incorporated herein by this reference.

Petitioners are husband and wife. They filed their joint Federal income tax return for the year 1961 with the district director of internal revenue at Los Angeles, Calif. Pauline Vinnell is a party hereto solely because she filed a joint income tax return with her husband for the year 1961. Therefore, Allan S. Vinnell will hereafter be referred to as petitioner.

Petitioner had been engaged in the contracting business for many years prior to 1944 in southern California and elsewhere. His operations began as a sole proprietorship doing business under the name of A. S. Vinnell Co. On May 26, 1944, petitioner caused a Mexican company to be incorporated under the name Cia. Vinnell de Mexico, S.A. (hereinafter referred to as CVM). All of the stock in CVM was owned by petitioner at all times prior to December 31, 1959.

On August 25, 1944, La Victoria y Asociados, S.A. (hereinafter referred to as LVA) was incorporated in Mexico. Petitioner participated in this venture with Ortiz Rubio, a Mexican national. The stock ownership of LVA upon its incorporation was as follows: CVM, 125 shares; Ortiz Rubio, 125 shares. LVA has been engaged in the construction business in Mexico at all times since its incorporation. In 1954, LVA's field manager purchased a total of 10 percent of the outstanding stock, 5 percent each from CVM and Ortiz Rubio. Upon the field manager's death in 1955, CVM acquired his interest. On January 1, 1956, after the payment of stock dividends, the stock ownership of LVA was as follows: CVM, 1,375 shares; Ortiz Rubio, 1,125 shares.

On October 5, 1945, petitioner incorporated his domestic contracting business as Vinnell Construction Co., a California corporation. The name was changed to Vinnell Co., Inc., on March 29, 1946, and to Vinnell Corp. by resolution adopted on January 4, 1960, and filed with the secretary of state of California on January 11, 1960. That corporation will hereinafter be referred to as Vinnell Corp. Petitioners were the sole stockholders of Vinnell Corp. at all times prior to December 1959. Allan owned 55 percent of the common stock, and Pauline the other 45 percent.

During the years from 1950 to 1960, the corporations under petitioner's control generally were in need of working capital. The only cash which they had available was either that which petitioners supplied, or that which was borrowed and guaranteed by them personally. The receivables of Vinnell Corp., CVM, and various subsidiaries were all pledged as a part of Vinnell Corp.‘s revolving line of credit with the Bank of America which was established in 1956 for all operations. The petitioner also personally guaranteed that line of credit. Overall, the one master line of credit was used for all petitioner's corporations, and all operating loans came through that line. This financing arrangement continued through the year in issue and at least up until the time of trial.

The practice in the construction business required the contractor to furnish payment and performance bonds for its jobs. The bonding company's willingness to provide such bonds was directly related to the contractor's ‘quick assets,’ that is, the cash and receivables which would be satisfied within 1 year. Thus Vinnell Corp.‘s lack of capital and working capital was a limitation on the amount of work it could undertake.

In the late 1950's, the companies under petitioner's control were borrowing increasingly larger sums of money from the bank and obtaining larger bonds from the bonding company. The construction business, unlike many other businesses, depends heavily upon a single personality as the driving force of the business. The bank and bonding company became interested in what would happen to the organization if anything should happen to petitioner. As the liabilities grew, the question became more important. They were therefore anxious to create an arrangement which would guarantee the continuity of management within the organization. The program which was planned would take care of Pauline Vinnell, who owned approximately half the stock, but simultaneously keep the management in the hands of the company's key employees.

In 1956, L. E. Howard was employed by petitioner to supervise the financial aspects of the business in its entirety. He determined that the disconnected situation under which the various companies held their assets should be consolidated in order to give them greater strength with the bank and an increased bonding capacity. He therefore brought changes which satisfied the bank that ‘all the eggs were in one basket,‘ and thus strengthened the credit position. When Howard was offered his position in Vinnell Corp. by petitioner, he was assured that eventually employees such as himself would be given an opportunity to acquire an equity interest in that corporation. He was also assured of a bonus based upon net profits of the business operation. That figure was to include the net profits of CVM as well as Vinnell Corp.

On June 30, 1959, the Vinnell Foundation, a nonprofit corporation, was incorporated under the laws of California. The petitioners were among its first directors along with others engaged in the petitioner's construction operation and two of their lawyers. Having no descendants, or close relatives to whom they wished to leave their considerable estates, the petitioners' motive for establishment of the foundation was to carry out various charitable wishes after their deaths, such as to provide for schools and the protection of the health of youngsters.

On or about December 21, 1959, Vinnell Corp. liquidated its wholly owned subsidiary Vinnell Corp. of California. The sum of $2,774,242.06 was added to the earned surplus account of Vinnell Corp. because of the liquidation. Vinnell Corp. transferred $1,743,750 from the earned surplus account to the capital stock account in connection with a subsequent recapitalization. On December 31, 1959, the balance in the earned surplus account was $562,485.31.

On September 21, 1959, Vinnell Corp. presented a plan for recapitalization to the Commissioner of Internal Revenue. Under the plan, Pauline Vinnell would exchange her common stock representing 45-percent interest in Vinnell Corp. for preferred stock and possibly some common stock, with a total par value of $580,000. In addition, 250,000 shares of $10 par value common stock were to be sold to key management personnel. On December 14, 1959, the Internal Revenue Service issued a ruling which approved the proposed recapitalization. At no place in either the request for a ruling, in the submitted stockholders' agreement, or in the correspondence with respect thereto was it mentioned that Allan proposed to sell his CVM stock to Vinnell Corp.

On November 6, 1959, an application for a permit authorizing the issue and sale of securities under a plan of reorganization, and proposing to sell not more than 40,000 shares of common stock of Vinnell Corp. to named key executives was filed by Vinnell Corp. with the Department of Investment, Division of Corporations, State of California. The application also sought permission to issue 12,375 shares of 6-percent cumulative nonparticipating $100 par value preferred stock to Pauline Vinnell in return for her 450 shares of $100 par value common stock. No mention of a proposed purchase of petitioner's CVM stock was made in this application. The reasons given in the application for the proposed recapitalization were as follows:

(a) to provide the management officers and employees of Applicant an opportunity for substantial stock ownership in Applicant; and

(b) to provide that, in the event of the death of Mr. Vinnell, control of the corporation should not be in the hands of Mrs. Vinnell.

On December 30, 1959, the commissioner of corporations of the State of California issued the permit to grant Vinnell Corp.‘s request in the application to recapitalize.

On December 30, 1959, the board of directors of Vinnell Corp. adopted a resolution to purchase petitioner's interest in CVM for $1,500,000, payable in equal installments over a 10-year period. As of December 31, 1959, the book value of CVM was $1,580,918.66, stipulated by the parties as follows:

+---------------------------------------------------------------------+ ¦ASSETS ¦ +---------------------------------------------------------------------¦ ¦Cash ¦ ¦$5,022.93 ¦ ¦ +-------------------------------+------------+----------+-------------¦ ¦Note receivable-Vinnell Corp ¦ ¦500,323.32¦ ¦ +-------------------------------+------------+----------+-------------¦ ¦Account receivable-Vinnell Corp¦ ¦179,302.20¦ ¦ +-------------------------------+------------+----------+-------------¦ ¦Account receivable-La Victoria ¦ ¦340,813.72¦ ¦ +-------------------------------+------------+----------+-------------¦ ¦Machinery ¦332,971.49 ¦ ¦ ¦ +-------------------------------+------------+----------+-------------¦ ¦Reserve ¦(332,971.49)¦.00 ¦ ¦ +-------------------------------+------------+----------+-------------¦ ¦Investment-La Victoria stock ¦ ¦552,000.00¦ ¦ +-------------------------------+------------+----------+-------------¦ ¦Other assets ¦ ¦3,456.49 ¦ ¦ +-------------------------------+------------+----------+-------------¦ ¦Total assets ¦ ¦ ¦$1,580,918.66¦ +---------------------------------------------------------------------+

LIABILITIES Account payable-A. S. Vinnell $229,564.06 Taxes payable 731.66 Total liabilities $230,295.72 Capital stock 46,391.75 Retained earnings 1,304,231.19 Total liabilities and capital 1,580,918.66

The purchase price agreed to by petitioner and Vinnell Corp. was an approximation of the book value of CVM. The resolution adopted by the corporation's board of directors, consisting of the two petitioners, L. E. Howard, Jr., and Samuel S. Gill, authorized the purchase and stated that Vinnell Corp. had sufficient earned surplus to make the purchase, and that the installment payments would not impair its credit or cause it to be unable to meet its debts as they became payable.

On that same date, an agreement for purchase and sale of the CVM stock by petitioner to Vinnell Corp. for $1,500,000 was executed and consummated. The agreement obligated Vinnell Corp. to pay petitioner $1,500,000 for the CVM stock in equal installments of $150,000 each for 10 years. The first payment was made at the time of the sale. Vinnell Corp. agreed to make the payments annually unless one of them were prohibited by a loan agreement with an obligee of the corporation, in which case that payment would be deferred until succeeding anniversary dates of the sales agreement following the 10th anniversary date thereof. The payments were also to be subordinate to any claims of the Bank of America. The corporation was not in a position to pay cash at the time of the sale, but petitioner fully expected to be paid off within the 10-year period. By December 31, 1961, three payments of $150,000 each had been made to petitioner pursuant to the agreement.

On October 31, 1960, CVM was liquidated into Vinnell Corp. Its net worth at that time was $1,562,855. Petitioner and his advisers had discussed such a move as early as mid-December 1959. Even before the sale of CVM to Vinnell Corp., CVM's spare cash was available for the credit of the group to provide additional operating funds for the entire group. CVM had no direct banking relations as such; its financing arrangements had always been handled as a part of those of Vinnell Corp.

On July 11, 1960, CVM sold its stock in LVA to Vinnell International Corp., a wholly owned Panamanian subsidiary of Vinnell Corp. for $522,000. The LVA stock was first sold to petitioner as a strawman, and then by him to Vinnell International Corp.

On December 30, 1959, petitioner executed a stockholders' agreement which imposed certain restrictions upon the sale of stock in Vinnell Corp. This agreement was executed at the same time the sales agreement for the CVM stock was executed and consummated. Part of the agreement provided that the petitioner herein would not carry on a contracting business in his individual capacity or through the medium of any other corporation besides Vinnell Corp. He agreed to sell all his stock in CVM to Vinnell Corp. on mutually agreeable terms. As already mentioned, the plan of recapitalization which Vinnell Corp. had submitted to the Commissioner of Internal Revenue on September 21, 1959, with a request for a ruling on taxability of the transaction, made no mention of the proposed sale by petitioner of his CVM stock. The paragraph appearing in the stockholders' agreement of December 30, 1959, was omitted from the proposed agreement submitted to the Internal Revenue Service on September 21, 1959.

On April 11, 1963, petitioner and the other shareholders of Vinnell Corp. executed a stockholders' agreement which superseded the agreement of December 30, 1959. Petitioner also agreed in the later agreement not to carry on a contracting business in his individual capacity or through any corporation but Vinnell Corp. or one of its subsidiaries.

On December 30, 1959, Pauline Vinnell surrendered her 450 shares of common stock in Vinnell Corp. and received in return 12,375 shares of its preferred stock. On that same day, petitioner surrendered his 550 shares of common stock and received in return 151,250 shares of common stock.

No dividends were declared on common stock by Vinnell Corp. in 1961 or prior years. As of December 31, 1961, the earned surplus account of the corporation showed a balance of $878,323.35.

On or about June 1, 1960, 10 of the executives of Vinnell Corp. purchased common stock of Vinnell Corp. at $10 per share, pursuant to the permit referred to above. The purchases were for cash, and were financed in part by funds advanced to the executives by petitioner through a special bank account with the Bank of America opened by him for that purpose. The 10 executives executed notes in his favor and received checks drawn on the special bank account which were used to purchase the stock in Vinnell Corp. from petitioner. On June 15, 1960, the stock certificates were delivered to the executives and they executed the stockholders' agreement referred to above. The corporation received $385,000 in cash as paid-in capital as a result of these sales of stock.

The common stock of Vinnell Corp. after issuance of stock on June 15, 1960, was as follows:

+-------------------------+ ¦ ¦Number of ¦ +-------------+-----------¦ ¦Name ¦shares ¦ +-------------+-----------¦ ¦A.S. Vinnell ¦151,250 ¦ +-------------+-----------¦ ¦McNamara ¦7,500 ¦ +-------------+-----------¦ ¦Hayes ¦2,500 ¦ +-------------+-----------¦ ¦Howard ¦6,000 ¦ +-------------+-----------¦ ¦Norwood ¦2,500 ¦ +-------------+-----------¦ ¦Griffith ¦2,000 ¦ +-------------+-----------¦ ¦Griggs ¦5,000 ¦ +-------------+-----------¦ ¦Buckley ¦2,500 ¦ +-------------+-----------¦ ¦Hilger ¦2,000 ¦ +-------------+-----------¦ ¦Pope ¦3,500 ¦ +-------------+-----------¦ ¦Hodgson ¦5,000 ¦ +-------------+-----------¦ ¦ ¦189,750 ¦ +-------------------------+

Prior to the recapitalization, the petitioners owned 100 percent of the stock in Vinnell Corp. On June 15, 1960, petitioner owned 79.7 percent of the common stock and Pauline owned the issued preferred stock.

In December of 1959, 1960, and 1961, Vinnell Corp. made payments to petitioner of $150,000 each, pursuant to the agreement for sale of the CVM stock. Petitioners reported income each year in the amount of $145,360.80 as capital gains on the installment basis. It is stipulated that no adjustment was made with respect to these gains and the income tax liability for petitioners for the years 1959 and 1960 are not at issue herein, the statute of limitations having expired. Respondent determined that the entire $150,000 payment made in 1961 was a dividend taxable at ordinary income tax rates and increased petitioner's dividend income accordingly ‘by $149,950.00 (Dividend of $150,000.00 less dividend exclusion of $50.00)‘ for that year. Reported capital gains were adjusted to eliminate therefrom the $145,360.80 returned.


The sale of the CVM stock by petitioner to Vinnell Corp. falls within the purview of section 304(a)(1), and the parties so agree. That section requires that property received by petitioner in return for the CVM stock be treated as a distribution in redemption of the stock of the acquiring corporation (Vinnell Corp.). For the purposes of the present case, the term ‘property’ is defined by section 317 as money, securities, or other property.

SEC. 304. REDEMPTION THROUGH USE OF RELATED CORPORATIONS.(a) TREATMENT OF CERTAIN STOCK PURCHASES.—(1) ACQUISITION BY RELATED CORPORATION (OTHER THAN SUBSIDIARY).— For purposes of sections 302 and 303, if—(A) one or more persons are in control of each of two corporations, and(B) in return for property, one of the corporations acquires stock in the other corporation from the person (or persons) so in control,then (unless paragraph (2) applies) such property shall be treated as a distribution in redemption of the stock of the corporation acquiring such stock. In any such case, the stock so acquired shall be treated as having been transferred by the person from whom acquired, and as having been received by the corporation acquiring it, as a contribution to the capital of such corporation.

We are thus required to treat this sale of stock as a redemption by petitioner of his stock in Vinnell Corp. Section 302(a) requires us us to treat the redemption as a distribution in exchange for the stock so long as the transaction meets one of the four tests of section 302(b). Petitioner contends that he meets the test of section 302(b)(1) in that the redemption was not essentially equivalent to a dividend. On the other hand, respondent contends that the redemption fails to meet the test, and that therefore section 302(a) cannot apply. Instead, respondent contends that section 302(d) requires us to treat the redemption as a distribution of property to which section 301 applies. The issue as presented by the parties and submitted for decision therefore deals with whether the redemption was essentially equivalent to a dividend. Sec. 302(b)(1). Respondent contends that it was, and so the 1961 installment payment should be treated as a distribution taxable as ordinary income. Petitioner argues that it was not essentially equivalent to a dividend, and asks us to preserve capital gains treatment for the 1961 installment payment.

SEC. 302. DISTRIBUTIONS IN REDEMPTION OF STOCK.(a) GENERAL RULE.— If a corporation redeems its stock (within the meaning of section 317(b)), and if paragraph (1), (2), (3), or (4) of subsection (b) applies, such redemption shall be treated as a distribution in part or full payment in exchange for the stock.

SEC. 302. DISTRIBUTIONS IN REDEMPTION OF STOCK.(b) REDEMPTIONS TREATED AS EXCHANGES.—(1) REDEMPTIONS NOT EQUIVALENT to DIVIDENDS.— Subsection (a) shall apply if the redemption is not essentially equivalent to a dividend.

SEC. 302. DISTRIBUTIONS IN REDEMPTION OF STOCK.(d) REDEMPTIONS TREATED AS DISTRIBUTIONS OF PROPERTY.— Except as otherwise provided in this subchapter, if a corporation redeems its stock (within the meaning of section 317(b)), and if subsection (a) of this section does not apply, such redemption shall be treated as a distribution of property to which section 301 applies.

Essentially, petitioners contend that the sale of the CVM stock to Vinnell Corp. was born of business necessity, and therefore cannot be essentially equivalent to a dividend. They have argued that business purposes made it necessary to contract the various entities which comprised petitioner's construction empire into one operating corporation so as to increase the business ‘quick assets,‘ thereby improving its credit position and bonding capacity. They aver that another purpose of the sale was to make the offer to sell stock in Vinnell Corp. more attractive to its key executives, ‘to the end that the prosperity, further expansion and perpetuity of the business could be assured.’ Thus petitioner contends that the sale of CVM to Vinnell Corp. was designed to go hand-in-hand with the idea of permitting the key executives to acquire an equity interest in the business and was a part of the planned recapitalization.

Section 304(a)(1) was enacted in order to prevent a taxpayer from using brother-sister corporations which he controls as an instrumentality for ‘bailing out’ corporate earnings at capital gains rates. It requires the transaction to be viewed through the section 302 glass with its accompanying safeguards against dividend equivalency, rather than as a sale of stock to an unrelated third party. We therefore will examine each of the motives for the sale put forth by petitioners with a view towards discerning whether a bailout of corporate earnings, such as would give rise to the dividend equivalence result, was being attempted.

Petitioners first contend that the combining of Vinnell Corp. and CVM increased the ‘quick assets' which improved the acquiring corporation's credit position and bonding capacity. This argument finds little support in the record. During the years while petitioner owned both CVM and Vinnell Corp., CVM had no direct banking relations as such, but rather its finances were handled as if it were a part of Vinnell Corp. Before the sale, CVM's spare cash was combined with the operating funds of Vinnell Corp. to provide additional operating funds for the entire group. As reflected in our findings, at the time of sale CVM had only $5,000 in cash on hand and held over $500,000 in notes receivable and $179,000 in accounts receivable of Vinnell Corp. It also held $340,000 in accounts receivable of LVA. When these notes or accounts were due does not appear of record. We conclude that contrary to petitioners' contentions, CVM had almost no quick assets even though it might be regarded from the accounting point of view that some working capital as such was brought into the Vinnell picture by the stock transfer. However, all the corporate loans and bonds had always been personally guaranteed by petitioners, so that in effect petitioner's stock in CVM stood back of all Vinnell Corp.‘s obligations as assets of the guarantor. No additional security therefore actually resulted from the transfer of the CVM stock to Vinnell Corp.

There was no evidence offered that the Bank of America demanded or requested the purchase of petitioner's CVM stock, it being merely stated by Vinnell himself on the witness stand that the stock ‘was to be sold or included in the reorganization’ and that the sale transaction was set up and arranged because of the decision of his financial and legal advisers. The evidence of record does not convince us that the motivating force for the sale arose from corporate business purposes to obtain credit or to improve bonding arrangements; we conclude that Vinnell Corp.‘s credit position and bonding capacity were not materially aided by the sale. Petitioners continued to guarantee corporate borrowings and obligations after the sale up to time of trial as they had always done. Thus while the acquisition of the CVM stock might have resulted in the improvement of Vinnell Corp.‘s financial position to some extent, it cannot be regarded as the reason for the purchase.

If Vinnell Corp. was concerned about its credit situation and its capacity to obtain performance bonds, why did it pay out $150,000 in cash and obligate itself to pay an additional $1,350,000 over a 9-year period? A further issuance of stock, common or preferred, in lieu of such an obligation would have obviously been a more satisfactory device to enhance ots financial attractiveness to banks and bonding companies. Kerr v. Commissioner, 326 F.2d 225, 232 (C.A. 9, 1964), affirming 38 T.C. 723 (1962), certiorari denied 377 U.S. 963 (1964).

The next contention as to corporate business purpose put forth by petitioners appears to be similarly unsupported by the facts of record. It is argued that petitioner had intended for years to combine CVM with Vinnell Corp. as a part of the recapitalization and sale of stock to key employees. Petitioner discussed the sale of stock to certain key employees at the time of their employment and thereafter, with the understanding that petitioner would allow them to acquire an equity interest in Vinnell Corp. when conditions permitted. No mention was made at the time such discussions were held of making CVM a subsidiary of Vinnell Corp. or of a sale by petitioner of his stock. Petitioner has alleged that the sale of the CVM stock was an integral part of the recapitalization under which petitioners received different stock and key employees acquired stock interests, yet no mention was made of the CVM sale either to the affected employees, to the State of California in the application to recapitalize, in the plan for recapitalization submitted to the Internal Revenue Service on September 21, 1959, or in the stockholders' agreement attached thereto.

In light of the lack of evidence indicating that the sale was a part of the recapitalization, we are inclined to agree with respondent that it was an afterthought by petitioner rather than a part of his long-range plans. Although petitioner stressed at trial that he had always wanted to bring CVM into Vinnell Corp., he did not know why a sale of his CVM stock was necessary to accomplish that objective.

We conclude that the initiative for the sale originated, at a late date in 1959, with petitioner who was advised by his financial and legal advisers that the transaction, which had not theretofore been contemplated as a part of the recapitalization or plan to permit key employees to become stockholders, be cast as a purchase and sale. As the sole stockholder of CVM and as owner of 55 percent of Vinnell Corp.‘s stock and with his wife (who owned the other 45 percent of that stock), the owner of 100 percent of Vinnell Corp. also, it would strain credibility to believe that initiative to obligate itself to pay petitioner $1,500,000 came from the corporation and not from petitioner. Kerr v. Commissioner, supra.

Secs. 302(c)(1) and 318(a)(1)(A) (i), I.R.C. 1954.

Applying the constructive-ownership rules of section 318(a)(2)(C), there was no change in the stock ownership caused by the sale of CVM to Vinnell Corp. Although subsequently petitioner's constructive ownership of Vinnell Corp., and thus CVM as well, was reduced from 100 percent to 79 percent in June of 1960 when the key employees acquired their stock interests, we have found that the CVM sale was not a part of the recapitalization and sale thereafter of some common stock to employees. Therefore, the distribution in redemption, by itself, did not result in any change in the proportionate ownership of stock by the shareholders.

SEC. 318(a)(2)(C). FROM CORPORATIONS.— If 50 percent or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, such person shall be considered as owning the stock owned, directly or indirectly, by or for such corporation, in that proportion which the value of the stock which such person so owns bears to the value of all the stock in such corporation.

The parties have stipulated that Vinnell Corp. had never paid a dividend. There are no other corporate distributions with which we may compare the one in question in order to find that it was anything but an attempted bailout of corporate earnings at capital gains rates.

We have already discussed petitioner's allegations regarding a business purpose for the CVM sale above, and found them to be without support in the record. Even if we were to give credence to petitioner's ‘business purpose’ argument that the CVM sale took petitioner out of competition with Vinnell Corp. and was part of the long-range recapitalization plan, thereby making the Vinnell Corp. stock more attractive to the key employees, it has been held many times that the existence of a single business purpose will not of itself conclusively prevent a determination of dividend equivalence. Kerr v. Commissioner, supra; United States v. Fewell, 255 F.2d 496 (C.A. 5, 1958); Bradbury v. Commissioner, 298 F.2d 111 (C.A. 1, 1962), affirming a Memorandum Opinion of this Court; Kessner v. Commissioner, 248 F.2d 943 (C.A. 3, 1957), affirming per curiam 26 T.C. 1046 (1956); Genevra Heman, 32 T.C. 479 (1959); and Neff v. United States, 305 F.2d 455 (Ct. Cl. 1962).

We conclude and hold that here there was no real or meaningful shift in the position of the petitioner, qua stockholder, in relation to the corporation and the other shareholders occasioned by the distribution. Immediately thereafter petitioner owned precisely the same stock interest and yet he had received $150,000 and would receive $1,350,000 more by virtue of the sale agreement. Inasmuch as the distribution was initiated by the petitioner for a stockholder purpose, not a corporate business purpose, and in light of the dividend history, we are of the opinion that it was essentially equivalent to a dividend. We so hold.

After the case was submitted and the parties had filed their briefs, it occurred to us that there was a further issue, not discussed by the parties or presented on brief. This was whether or not the contractual obligation of the 1959 contract itself might not properly be regarded as the distribution of property in that year so that if dividend equivalence were determined, the taxable event took place at that time. In Kerr v. Commissioner, supra, involving issues similar to those presented here, the issuance of a promissory note by the acquiring corporation was held to be essentially equivalent to a dividend in the face amount of the note in the year of issuance even though it was by express terms payable in equal yearly installments thereafter over a period of 5 years. It is clearly contemplated and suggested by section 312(a) (2), by the regulations, and by leading tax treatises that in lieu of distributing cash or property, a corporation may distribute its own obligations with the identical tax consequences.

Secs. 1.301-1(d) and 1.301(h)(2)(i), Income Tax Regs.

Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders, sec. 5.40 (2d ed. 1966).

The petitioner declined to take a position on this issue or to file a supplemental brief, but respondent filed a brief. He suggested that assuming arguendo that the distribution here involved was essentially equivalent to a dividend, there were here a series of distributions pursuant to the acquiring corporation's contractual obligation to petitioner, which was not itself a distribution of money or property within the meaning of section 301(b)(1)(A) in the year of execution, 1959; the payments themselves in the various years, including 1961, constituted dividends at the times they were made.

We agree with respondent and on the record before us conclude and hold that the contractual obligation here involved did not constitute the distribution of an obligation of the acquiring corporation in 1959 so as to subject it to taxation as a money or property distribution in that year. The contract itself was merely written evidence of the obligation of Vinnell Corp. to pay petitioner $1,500,000 over a period of years for his stock of Cia. Vinnell and not intended by the parties to be in payment of that obligation. The contract contained no provision for the payment of interest. The petitioner's rights to payments were subject to various contingencies; they were subject to deferral beyond the 10-year term specified because of prohibitions in any loan agreements with lending institutions or ‘any similar prohibition.’ Furthermore, petitioners specifically agreed that his rights to payments under the contract ‘shall be subordinate to any claims of the Bank of America’ arising under or out of its present lending agreement with Vinnell Corp. and he further agreed to execute any subordination agreement which the bank might require.

Under all of the facts and circumstances here present, the contractual obligation created in 1959 cannot properly be regarded as a distribution in that year of money or property within the meaning of section 301(b)(1)(A). Cf. Nina J. Ennis, 17 T.C. 465 (1951); Dudley T. Humphrey, 32 B.T.A. 280 (1935).

We agree with respondent that the annual payments made by Vinnell Corp. to petitioner under its contract of December 31, 1959, were a series of distributions within the purview of sections 301 and 316 in the years in which they were made. In view of the fact that Vinnell Corp., the acquiring corporation, had accumulated earned surplus of $878,323.35 as of December 31, 1961, and petitioners have not established that accumulated earnings and profits did not equal at least the amount determined by respondent as a taxable dividend, the 1961 payment of $150,000, here involved, is taxable to petitioners as ordinary income. The respondent's determination must be sustained.

Decision will be entered for the respondent.