United States v. Davis (397 U.S. 301)/Dissent Douglas

Mr. Justice DOUGLAS, with whom Mr. Justice BRENNAN concurs, dissenting.

I agree with the District Court, 274 F.Supp. 466, and with the Court of Appeals, 408 F.2d 1139, that respondent's contribution of working capital in the amount of $25,000 in exchange for 1,000 shares of preferred stock with a par value of $25 was made in order for the corporation to obtain a loan from the RFC and that the preferred stock was to be redeemed when the loan was repaid. For the reasons stated by the two lower courts, this redemption was not 'essentially equivalent to a dividend,' for the bona fide business purpose of the redemption belies the payment of a dividend. As stated by the Court of Appeals:

'Although closely-held corporations call for close scrutiny     under the tax law, we will not under the facts and      circumstances of this case, allow mechanical attribution      rules to transform a legitimate corporate transaction into a      tax avoidance scheme.' 408 F.2d, at 1143-1144.

When the Court holds it was a dividend, it effectively cancels § 302(b)(1) from the Code. This result is not a matter of conjecture, for the Court says that in the case of closely held or one-man corporations a redemption of stock is 'always' equivalent to a dividend. I would leave such revision to the Congress.