Strong v. Comm'r

(A) Employees performing services for such corporation in connection with activities involving a field referred to in paragraph (e)(4) of this section,

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For purposes of this paragraph (e)(5), the term "substantially all" means an amount equal to or greater than 95 percent.

Petitioner argues that the treasury shares should be taken into consideration when applying the percentage ownership test as set forth in section 448(d)(2)(B) and section 1.4481T(e)(5)(i), Temporary Income Tax Regs., supra. Under petitioner's argument, percentage of ownership would be as follows:

Petitioner maintains that although the treasury shares were not outstanding shares, they nonetheless had a "contra value" ² of $ 53,999 at the end of its 2002 and 2003 taxable*52 years. Accordingly, says petitioner, due to this "value", the shares should be considered as held by "by value" pursuant to section 44(d)(2)(B) and therefore included when applying the ownership test as described in section 1.448-1T(e)(5)(i), Temporary Income Tax Regs., supra.

Petitioner's rationale may be summarized as follows: First, petitioner argues that it should not be bound for purposes of determining ownership under section 448(d)(2)(B) by the shares listed on Schedule E of Form 1120, as that Form only solicits information regarding the ownership*53 of stock by officers of the corporation in relationship to each other and not the corporation's full stock- ownership profile. Second, petitioner argues that its treasury shares should be characterized as "by value" pursuant to section 1.4481T(e)(5)(i), Temporary Income Tax Regs., supra, because under New York law, the shares were acquired and retained by the corporation, and the amount that they were acquired for ($ 53,999) establishes a present value to the corporation. We disagree.

Petitioner's argument that it did not include treasury shares on Schedule E of the Form 1120 because Schedule E only asks for shares held by corporation officers "in relation to one another" is incorrect and meritless. While Schedule E does solicit information with respect to the shares held by officers, it clearly asks in sections (d) and (e) for the percentage of total corporation stock owned by each officer. The corporation is asked to provide the percentage of the total stock owned by the officers and not, as petitioner argues, the percentages of stock each owns in relationship to the other. Accordingly, petitioner correctly indicated on its Forms 1120 for 2002 and 2003 that Mr. Apgar and Mr. Oliver*54 together owned 100 percent of the corporation's outstanding stock. If petitioner intended the treasury shares to be included in the total shares of corporation stock listed on Schedule E, then it would have listed the percentages owned by Mr. Apgar and Mr. Oliver accordingly. For example, petitioner alleges that the total number of common stock shares was 344, with Mr. Apgar holding 122 shares, Mr. Oliver holding 50 shares, and each then owning 35.5 percent and 14.5 percent of the total shares, respectively. Petitioner, however, did not indicate these ownership percentages on its Schedule E for either 2002 or 2003.

Petitioner next argues that it indicated the percentages of each officer's stock ownership in relation to the other because the directions attached to Schedule E require that it list "the deductible part of each officer's compensation". This argument, however, has no relationship to the percentage of stock owned by the officers but rather deals exclusively with the total compensation of officers as indicated on Schedule E, section (f). Accordingly, we cannot conclude that there is merit in any of petitioner's arguments with respect to its completed Schedules E.

Petitioner*55 next argues that the 172 shares of treasury stock should be factored into the ownership test as described in section 448(d)(2)(B) and section 1.448-1T(e)(5)(i), Temporary Income Tax Regs., 52 Fed. Reg. 22766 (June 16, 1987), as the shares held a 'contra value' to petitioner in both tax years of $ 53,999. We disagree.

New York Business Corporation Law sec. 102(a)(14) (McKinney 2003) defines treasury shares as: "shares which have been issued, have been subsequently acquired, and are retained uncancelled by the corporation. Treasury shares are issued shares, but not outstanding shares, and are not assets."

Petitioner argues that even though it purchased the acquired shares, and the shares remain uncanceled, they nonetheless have a 'contra value', and, while not assets, the shares are still held "by value" in accordance with section 448(d)(2)(B) and section 1.448- 1T(e)(5)(i), Temporary Income Tax Regs., supra. We disagree with petitioner's creative characterization of its treasury shares.

Treasury stock, while held by a corporation, has no value. Christie v. Fifth Madison Corp., 211 N.Y.S.2d 787, 796 (App. Div. 1961).*56 Treasury stock has no value because it carries no voting rights, rights to dividends, or rights to distributions. Id. Treasury shares are actually a legal fiction and a figure of speech only used to explain the rights and rules that apply upon their reissue. Id. at 796. Treasury stock, therefore, is not an "asset" of the corporation. Its only value is what petitioner might receive in consideration for its reissuance. In this case, when petitioner acquired its stock, the stock could be reissued for consideration (i.e., cash), and the cash would increase its assets and the reissued shares would be reflected in an increase in its shareholder equity.

Most importantly, contrary to petitioner's assertion, the acquisition of treasury stock is actually a contraction of corporate capital. Specifically, in this case, when petitioner reacquired shares in 2002, the total cost of its treasury stock was $ 53,999. On the Schedule L balance sheets for 2002 and 2003, petitioner correctly subtracted $ 53,999 from its retained earnings. This calculation was done because when stock is reacquired by a corporation there is a necessary and corresponding reduction in retained earnings and shareholder*57 equity. The treasury stock is held in a contra equity account, so named because it reduces total shareholder equity in the corporation. Only a subsequent resale of treasury stock would result in an expansion of shareholder equity. It follows then that because treasury stock has no value if and until it is resold, that it is not held "by value" per section 448(d)(2)(B).

In this case, the only stock which was held "by value" is the stock owned by Mr. Apgar and Mr. Oliver. Because Mr. Apgar and Mr. Oliver are petitioner's employees, and as they together hold 100 percent of petitioner's stock, petitioner meets the ownership test defined in section 1.448-1T(e)(5)(i), Temporary Income Tax Regs., supra.

Finally, we note that because New York corporation law provides that petitioner, a professional service corporation engaged in architectural services, may issue shares only to individuals who are licensed architects in New York State, we suspect that the treasury shares at the heart of this case were reacquired by petitioner from Mr. Apgar and Mr. Oliver for the purpose of circumventing the ownership test of section 448(d)(2)(B) and hence, avoiding application*58 of the 35-percent flat tax. N.Y. Bus. Corp. Law sec. 1507 (McKinney 2003). Accordingly, we sustain respondent's determination.

Decision will be entered for respondent.