54 T.C. 408">*408 Respondent determined deficiencies in petitioners' income taxes for the years 1962, 1963, and 1964 in the amounts of $ 2,392.52, $ 6,700.86, and $ 9,638.31, respectively.

The only question for decision is whether the proceeds of certain stock redemptions shall be treated as capital gains or as dividends.

FINDINGS 1970 U.S. Tax Ct. LEXIS 196">*197 OF FACT

Some of the facts have been stipulated and are so found. The stipulations, together with exhibits attached thereto, are incorporated herein by this reference.

At the time of the filing of the petition in this case, the petitioners, Otis P. Leleux and Louise S. Leleux, were husband and wife, and resided in New Iberia, La. They filed a joint income tax return for each of the years 1962, 1963, 1964, 1965, and 1966 with the district director of internal revenue in New Orleans, La. Louise S. Leleux is a petitioner in this case only because she filed joint returns with her husband. Otis P. Leleux will hereinafter sometimes be referred to as the petitioner.

Gulf Coast Line Contracting Co., Inc., referred to hereinafter as Gulf Coast, is a corporation, which was incorporated under the laws of the State of Louisiana in June 1946. The domicile and address of Gulf Coast is New Iberia, La. Gulf Coast, since its incorporation in 54 T.C. 408">*409 1946, has been engaged in the business of electrical and telephone line construction, underground cable construction, and right-of-way clearance and maintenance.

Throughout the existence of Gulf Coast the ownership of the company has been represented solely by 1970 U.S. Tax Ct. LEXIS 196">*198 common stock. Gulf Coast declared the first cash dividend in the history of the company in December 1960, in the amount of $ 10 per share; these cash dividends were distributed to the shareholders in 1961. Stock dividends were declared and distributed to the stockholders of the company in the following ratio on the dates indicated: September 23, 1953, dividend of two shares of common stock for each share of common stock owned; December 31, 1960, dividend of one share of common stock for each two shares of common stock owned.

The total stock dividend distributions were 346 shares in 1953 and 255 shares in 1960. In connection with these stock dividends Gulf Coast reduced the earned surplus stated on its corporate books and records $ 100 per dividend share distributed and increased the capital stock outstanding account by an equivalent amount. The accumulated earnings of Gulf Coast on December 31, 1961, were in excess of $ 100,415.71.

Petitioners acquired their stock in Gulf Coast as follows:

On 1970 U.S. Tax Ct. LEXIS 196">*199 December 31, 1961, there were 750 outstanding shares of Gulf Coast stock, held as follows:

54 T.C. 408">*410 Otis has been the president and general manager of Gulf Coast ever since its incorporation. Since 1961 the other officers of the company have been Louise Leleux, secretary-treasurer, and William McClelland, vice president. Roland Breaux has been the accountant for Gulf Coast during this same period. He is related to both of the petitioners and they are his godparents. The stockholders mentioned above, with the exception of Wesley P. Thibodeaux, constituted the entire board of directors of the corporation.

On May 8, 1956, the petitioner, Breaux, and McClelland, incorporated Gulf Louisiana Construction Co., Inc., hereinafter referred to as Gulf Louisiana. Since its incorporation, that company, like Gulf Coast, has been engaged in the construction of electrical and telephone lines, and of underground cables. 1970 U.S. Tax Ct. LEXIS 196">*200 In addition, a large part of Gulf Louisiana's business has consisted of renting equipment to Gulf Coast. Since 1961, the common stock of Gulf Louisiana has been held as follows:

In December of 1961, Otis offered 70 of his 638 shares of Gulf Coast stock to the company for redemption. Gulf Coast accepted Otis' offer by redeeming the 70 shares and distributing $ 10,500 to him. The following resolution adopted by the shareholders of Gulf Coast at the annual meeting on January 10, 1962, indicated the purported reason for the redemption:

Resolved that the corporation accept the offer of Mr. O. P. Leleux to sell Seventy (70) Shares of the Capital Stock of Gulf Coast Line Contracting Company, Incorporated to the corporation for the price of $ 150.00 per share. The purpose of this stock redemption is to equalize the investment of stockholders in this corporation. The stock so repurchased will become Treasury stock of the corporation. [Emphasis supplied.]

The minutes of all the meetings of the shareholders or directors of Gulf Coast during the years 1962 through 1967 were prepared 1970 U.S. Tax Ct. LEXIS 196">*201 by Roland Breaux, the accountant for the corporation and a stockholder and director. Shortly after the minutes were prepared, they were always read aloud to the participants in the meeting for the purpose of assuring the accuracy of their contents, and then signed by all of the participants. Breaux has served as accountant for Gulf Coast, Gulf 54 T.C. 408">*411 Louisiana, and Otis Leleux, individually, during all years relevant to this case. Breaux has been a certified public accountant since 1950, and prior to that time he was a deputy collector for the Internal Revenue Service.

Also during 1962 Gulf Coast distributed a cash dividend of $ 5 per share. At a meeting of the stockholders on January 19, 1963, it was resolved to pay another cash dividend of $ 5 per share, but no action was then taken with respect to the redemption of additional shares held by petitioner.

On May 15, 1963, while Gulf Coast was installing an underground cable at Lake Charles, La., a high-pressure gas main ruptured, causing an explosion and fire. In excess of 100 property damage and personal injury claims resulting from the accident were filed against Gulf Coast. The accident also resulted in the death of three construction 1970 U.S. Tax Ct. LEXIS 196">*202 workers. Over 100 automobiles, other vehicles, and heavy equipment were either damaged or destroyed; moreover, certain properties of the Louisiana highway department, Citcon Refinery, and United Gas, suffered heavy damage.

Gulf Coast anticipated, and was so advised by counsel, that if the company should be held liable for the property damage and personal injury resulting from the above accident, the dollar amount of its liability would greatly exceed its insurance coverage.

In view of this potential drain on Gulf Coast's large accumulation of earnings and profits, the shareholders decided to attempt to "salvage" these earnings for themselves by initiating the redemption of some of their shares. It was agreed by the stockholders that Otis' stock should be redeemed first since he had the most to lose and had been with the corporation longer than the other stockholders.

After the fire of May 15, 1963, Otis offered 163 shares of his Gulf Coast stock to the company for redemption, which amount consisted of 65 shares previously intended for redemption, plus an additional 98 shares. Gulf Coast accepted his offer on May 31, 1963, by redeeming these shares and distributing a total of $ 25,000 1970 U.S. Tax Ct. LEXIS 196">*203 to him.

In return for the redemption of the aforementioned 65 shares, Otis received $ 2,000 in cash plus a note in the amount of $ 8,000. The latter note was backdated January 20, 1963, and made payable at the rate of $ 500 per month for 17 months. Otis received a demand note in the amount of $ 15,000 as a distribution in redemption of the additional 98 shares. The latter note was backdated January 22, 1963. Both of these notes were fully paid on September 9, 1963.

Before the fire of May 15, 1963, Gulf Coast rented equipment from Gulf Louisiana under oral contract. Certain pieces of this equipment were destroyed in the fire. Gulf Louisiana was paid $ 18,000 by the 54 T.C. 408">*412 Houston Fire & Casualty Co. due to the loss of this equipment; thereafter, that insurance company was subrogated to the rights and claims of Gulf Louisiana with respect to the destroyed equipment.

On August 13, 1963, the shareholders of Gulf Coast met and formally resolved to pay Gulf Louisiana the difference between the $ 18,000 insurance proceeds and a higher amount which they described as the "total value" of the equipment which was lost. Although the actual cost to Gulf Louisiana for the equipment was only $ 18,911.43, 1970 U.S. Tax Ct. LEXIS 196">*204 it was determined that the total value was $ 32,550. Gulf Coast paid Gulf Louisiana the difference of $ 14,550. The total value determined by the Gulf Coast shareholders was an approximation of the cost of new or better equipment rather than the actual fair market value of the equipment which was lost in the fire. The following schedule sets forth the pertinent data with respect to the actual cost, adjusted basis, and total value (as described by the shareholders) of the individual pieces of equipment:

Between 1958 and May 15, 1963, Gulf Coast did not own any operating construction equipment; the necessary equipment was generally rented from Gulf Louisiana. At a meeting on August 13, 1963, the shareholders of Gulf Coast resolved to purchase certain equipment from Gulf Louisiana; at some undetermined time prior to September 30, 1963, Gulf Louisiana transferred the equipment set forth below to Gulf Coast:

On 1970 U.S. Tax Ct. LEXIS 196">*205 March 2, 1964, the shareholders of Gulf Coast held a meeting at which it was resolved that a cash dividend of $ 10 per share would be 54 T.C. 408">*413 paid to all stockholders as of January 1, 1964. In addition, the minutes of the meeting indicated that 240 of Otis' shares were redeemed:

A motion was made by Mr. W. R. McClelland, and seconded by Mr. Roland Breaux that in line with the adjustment of capital interest of Mr. O. P. Leleux in the Gulf Coast Line Contracting Company that the offer of Mr. O. P. Leleux to sell 240 shares of capital stock to the Gulf Coast Line Contracting Company for $ 135.24 or a total consideration of $ 32,457.60 be accepted. Payment for this to be made in cash. [Emphasis supplied.]

Like the redemption of 1963, Otis initiated this redemption for the purpose of "salvaging" a large amount of the accumulated earnings of the corporation which would otherwise have been susceptible to the property damage and personal injury claims arising out of the fire of May 15, 1963.

The following schedule shows the number and percentage of outstanding shares held by Otis and Louise Leleux in Gulf Coast from December 31, 1961, through December 31, 1964:

As a consequence of the above redemptions (and purchases of stock noted immediately above), the proportionate interests of the other stockholders were increased. On December 31, 1964, Breaux and McClelland each held 57 shares representing 20.5 percent of the outstanding shares, while in 1961 they each had owned only a 5.9-percent interest; Thibodeaux's 15 shares represented a 5.4-percent interest after the redemptions, while in 1961 his 15 shares were only 1.9 percent of the outstanding stock.

At the time of the trial, no further redemptions of the outstanding stock of Gulf Coast had been effected, since the redemption of 240 of Otis' shares in 1964.

As previously mentioned, Otis has been the president, general manager, and a member of the board of directors of Gulf Coast ever since the incorporation of the company in June 1946. Although he had given some thought to retiring from business life by January 2, 1968, his 62d birthday, he was still working full time at the time of the trial 1970 U.S. Tax Ct. LEXIS 196">*207 of this case.

In his capacity as general manager of Gulf Coast, Otis did a considerable amount of traveling in Louisiana, Texas, and Mississippi54 T.C. 408">*414 to supervise construction jobs for the company. At times he even "had to run some of the jobs." After 1961, however, he found that it was not necessary for him to do this supervisory work as much as before; instead, he spent more of his time at the main office in New Iberia, La. At no time after 1961, however, did he relinquish any substantial amount of his authority over the general management of the company.

In addition to his duties in connection with Gulf Coast, Otis has also acted as the president and principal officer of Gulf Louisiana since the incorporation of the latter company. With the exception of Gulf Louisiana's equipment-rental business, the operations of the two companies have been substantially the same. Otis generally has carried on the business of these two corporations at the same time, and has divided his working time equally between them. At the time of the trial, Otis was still continuing to perform his duties at Gulf Louisiana. Since 1960, none of Otis' stock in Gulf Louisiana has been redeemed or sold.

On his 1970 U.S. Tax Ct. LEXIS 196">*208 income tax returns for 1962, 1963, 1964, 1965, and 1966, Otis reported income from wages and salaries for each of these years in the amounts of $ 18,461.41, $ 16,511.15, $ 38,153.20, $ 83,764.34, and $ 56,223.21, respectively.

In August of 1965, the district director of internal revenue, New Orleans, La., notified the petitioners that an examination of the facts surrounding the redemptions in 1962, 1963, and 1964 indicated that those redemptions were essentially equivalent to dividends. The petitioners filed a protest with the district director dated September 22, 1965; they swore to the truth of its contents before a notary public. The protest states, in pertinent part, as follows:

[After 1961] [it] became desirable to continue operations in [Gulf] Louisiana, rather than [Gulf] Coast, where stock ownership was closer to the value of the stockholders to the business. Louisiana owned all of the equipment required for the work, having a cost of $ 170,000.00. Louisiana had trained personnell [sic], as did Coast and could expend to take up the Coast people.

Coast had paid dividends in cash on $ 75,000.00 outstanding stock of $ 7,500.00 in 1960. ^{11970 U.S. Tax Ct. LEXIS 196">*209}

The working capital of Coast at December 31, 1961 was $ 109,379.41, well in excess of its needs if the business was to be contracted. The decision of the Board of Directors to contract the operations rather than liquidate the corporation completly [sic] was based on the fact that the master contract for work with Southern Bell Telephone and Telegraph was with it and had about a year to run. It was then decided to begin a partial liquidation and contractions of the business operation.

54 T.C. 408">*415 On January 15, 1962, the Board of Directors authorized the first step of partial liquidation by authorizing the purchase of 70 shares of its stock for $ 10,500.00.

On May 15, 1963, Coast suffered a fire loss at Lake Charles, Louisiana. Three men were killed, hundred of automobiles were damaged or destroyed and heavy damage was done to properties of the Louisiana Highway Department, Citcon Refinery, United Gas and Others. All of these have since filed suit against Coast. Also destroyed in the fire was equipment rented by Coast from Louisiana.

On advice of the corporation's attorneys, and insurance carriers, Coast paid to several auto owners 1970 U.S. Tax Ct. LEXIS 196">*210 this damage and also paid Louisiana $ 14,550.00 excess of the value [sic] of equipment destroyed over insurance proceeds received by Louisiana.

Coast was a corporation rich in cash or receivables and some way had to be found to minimize its loss should it lose its suit in court. It was necessary that Coast continue some operations since Bell was a co-defendant in the accident and would not now transfer its master contract to Louisiana. After the accident it was indefinite what was the situation. Louisiana was unwilling to rent its equipment to Coast, not knowing what the situation would be. It was decided by the Board of Directors to purchase equipment from Louisiana so that it could continue to operate on a much reduced scale. The work under the master contract, with Bell's approval, was then all sublet to Louisiana.

It was also decided to try and redeem as much stock as could [be] done in order to salvage as much for the stockholders as possible. It was agreed that since O. P. Leleux had most to loose [sic] and had been with the corporation much longer than the others then he should redeem his stock first. Under the plan already adapted [sic], he would redeem 65 shares in 1963. 1970 U.S. Tax Ct. LEXIS 196">*211 It was decided to redeem an additional 98 shares and after January, 1964, an additional 240 shares was redeemed.

[Emphasis supplied.]

The protest was written by Roland Breaux, the accountant for both Otis and Gulf Coast, but sworn to and executed by the petitioners.

Contrary to the position set forth in the above protest, the business operations of Gulf Coast were not contracted after 1961; in fact, the gross income from operations actually increased substantially during the years 1962 through 1965.

The working capital of Gulf Coast as of the last day of each of the calendar years 1961, 1962, 1963, and 1964 was $ 109,379.41, $ 100,113.47, $ 21,038.26, and $ 3,666.98, respectively.

Neither the minutes of the various meetings of the shareholders and directors of Gulf Coast nor the above-mentioned protest make any reference to a plan for Otis' retirement or the complete redemption of his stock in the company. There has never been any legal obligation on the part of either Otis or the company to effect a complete redemption of Otis' stock. In each of the redemptions of 1962, 1963, and 1964, the number of shares to be redeemed and the redemption price per share were not determined until immediately 1970 U.S. Tax Ct. LEXIS 196">*212 prior to the redemption.

During 1967, Gulf Coast distributed a cash dividend of $ 20 per share.

In his notice of deficiency for the taxable years 1962, 1963, and 1964, 54 T.C. 408">*416 respondent determined that the distributions by Gulf Coast to Otis in redemption of part of his stock each year constituted income essentially equivalent to a dividend.

ULTIMATE FINDINGS OF FACT

1. The redemptions in issue herein were not executed as steps to acquire all of Otis' shares or pursuant to a plan to eliminate Otis' interest in Gulf Coast. No such plan existed in the years before us.

2. The distributions by Gulf Coast in redemption of part of Otis' stock in 1962, 1963, and 1964 were essentially equivalent to dividends.

OPINION

The only issue for determination is whether the distributions with respect to the redemption of Otis' stock in Gulf Coast which occurred in 1962, 1963, and 1964 represented amounts realized on the sale or exchange of property, or, whether they were essentially equivalent to dividends.

Subsection (b) of section 302^{21970 U.S. Tax Ct. LEXIS 196">*214} sets forth the conditions under which redemptions will be treated as exchanges. Petitioner argues that the redemptions in issue herein were either "in complete redemption" of 1970 U.S. Tax Ct. LEXIS 196">*213 all of his stock in Gulf Coast as provided by subsection (b)(3), or in the alternative, were not essentially equivalent to dividends within the meaning of subsection (b)(1). Section 302(d) provides that redemptions which fail to qualify as exchanges will be treated as a distribution 54 T.C. 408">*417 of property to which section 301 applies. Dividends are included in gross income under section 301(c)(1).

Petitioner alleges that in December 1961 he decided that he would like to retire from business and completely 1970 U.S. Tax Ct. LEXIS 196">*215 eliminate his and his wife's interest in Gulf Coast by January 2, 1968, his 62d birthday. He states that in furtherance of this objective, Roland Breaux, the accountant for and a director of Gulf Coast, devised a plan under which their total interest would be gradually withdrawn by a series of yearly redemptions. Under this purported plan, the number of shares to be redeemed each year would be limited to an amount which would allow the company to maintain a satisfactory level of working capital. Petitioner contends that the redemptions in issue herein were made pursuant to this plan.

The redemption of 1964, the last which occurred, reduced Otis' interest in the company to 50.3 percent ³ of the outstanding stock. Later in 1964 the Internal Revenue Service examined the above transactions and advised petitioner that they would be treated as essentially equivalent to dividends. No further redemptions were effected. Although petitioner admits that neither he nor the company was ever contractually obligated to carry out this plan, he contends that there is a "gentleman's agreement" to do so. He states that he and the other directors of Gulf Coast have agreed to redeem his and his wife's 1970 U.S. Tax Ct. LEXIS 196">*216 remaining shares in the company "in as few steps as working capital will allow" in the event the Court decides this case in his favor.

Taking petitioner's arguments in reverse order, we agree with respondent that the distributions in question bear most of the benchmarks of dividend equivalents: there was no corporate business purpose for the respective redemptions; the corporation's business did not contract but on the contrary expanded thereafter; petitioner remained in control of the corporation afterward as before and the initiative for the redemptions came from the shareholders not from the corporation. Considering all of these criteria in the light of the other facts disclosed by the record before us, it would appear that the redemptions in 1961 and subsequent years before us were essentially equivalent to dividends, taxable as ordinary income.

Gulf Coast had accumulated earnings on December 31, 1961, in excess of $ 100,415.71 and prior to that year had never paid a cash dividend. In 1961 the first cash dividend 1970 U.S. Tax Ct. LEXIS 196">*217 ever distributed was $ 10 per share. Thereafter in 1962 $ 5 per share was paid; in 1963 $ 5 per share was paid; in 1964 $ 10 per share was paid; and in 1967 $ 20 per share was paid. There had previously been stock dividends distributed in 54 T.C. 408">*418 1953 and 1960 as described in our findings. We conclude and hold that the redemptions in question all have the net effect of dividend distributions and therefore cannot be treated as exchanges under section 302(b)(1).

Petitioner's principal and almost only real contention for tax relief is under subsection (b)(3) of section 302: that the redemptions in issue represented the first three steps of a plan to terminate his and his wife's interest in Gulf Coast. He notes that where redemptions have been executed pursuant to such a plan, it has been held that dividend equivalence may be avoided under the rationale that the individual redemptions constitute, in substance, the component parts of a single sale or exchange of the entire stock interest. In Re Lukens' Estate, 246 F.2d 403 (C.A. 3, 1957), reversing 26 T.C. 900">26 T.C. 900 (1956); Jackson Howell, 26 T.C. 846">26 T.C. 846 (1956), affd. 247 F.2d 156 (C.A. 9, 1957); Carter Tiffany, 16 T.C. 1443">16 T.C. 1443 (1951); Perry S. Lewis, 47 T.C. 129">47 T.C. 129 (1966).

However, 1970 U.S. Tax Ct. LEXIS 196">*218 for section 302(b)(3) to apply there must be a complete redemption of all of the stock owned by a shareholder and we have refused to treat a series of redemptions as a single sale unless the redemptions are pursuant to a firm and fixed plan to eliminate the stockholder from the corporation. Isidore Himmel, 41 T.C. 62">41 T.C. 62 (1963), reversed on other grounds 338 F.2d 815 (C.A. 2, 1964). In short, the steps of the plan must be clearly integrated. 26 T.C. 846">Jackson Howell, supra.We have found that the petitioner in the instant case has failed to prove the existence of such a plan. Indeed the record points to a contrary conclusion and the alleged plan appears to us to be afterthought rather than prearrangement. There is just no satisfactory credible evidence before us that the purported plan existed or prompted the redemptions in question.

During the years 1962 through 1964, the corporate minutes of Gulf Coast make no reference to any plan to terminate petitioner's interest. Instead, the minutes indicate that the redemptions were made for a wholly different purpose. With regard to the redemption of 70 shares of Otis' stock in 1962, the first of the redemptions in issue herein, the minutes state 1970 U.S. Tax Ct. LEXIS 196">*219 that "(t)he purpose of this stock redemption is to equalize the investment of stockholders in this corporation." The only other statement as to the purpose of these redemptions was that the redemption of 240 shares in 1964, the last of the redemptions which occurred, was "in line with the adjustment of capital interest of Mr. O. P. Leleux."

Petitioner maintains on brief that in executing the above redemptions he relied upon his legal right, as enunciated in In Re Lukens' Estate, supra, to effect a complete redemption of his stock over a period of 6 years without bearing the tax burden of dividend equivalence. 54 T.C. 408">*419 However, his written protest to the Internal Revenue Service dated September 22, 1965, with regard to the transactions in question does not mention any plan to terminate petitioners' interest in Gulf Coast. Instead, he took the position at that time that the above redemptions were in furtherance of a "partial liquidation and contractions of the business operation," and indicated that the corporation also intended to redeem a portion of the stock of the other shareholders to this end. ⁴ Only one other avowed purpose for these redemptions was indicated in the protest. The redemptions 1970 U.S. Tax Ct. LEXIS 196">*220 occurring in 1963 and 1964 allegedly represented an attempt to shield, for Otis' benefit, as much of the accumulated earnings as possible from the potential creditors who had incurred losses in the fire of May 15, 1963. The latter contention is fully supported by the evidence of record in this case.

Petitioner avers that his purported plan provided for his gradual retirement from business. However, the evidence is not persuasive that at any time during the years before us any such plan existed and at the time of the trial we find that Otis had not relinquished any substantial amount of his authority over the general management of Gulf Coast. Further, he admittedly had made no efforts toward his eventual retirement from the other corporation which he controls, Gulf Louisiana, where he performs similar duties.

After careful consideration of all the facts of record, we conclude and hold that the redemptions in issue were not executed pursuant to a firm and fixed plan to eliminate petitioner's interest in Gulf Coast. Hence we must reject the petitioner's contention that the individual redemptions were merely 1970 U.S. Tax Ct. LEXIS 196">*221 parts or steps of a single sale or exchange of his entire stock interest. ⁵41 T.C. 62">Isidore Himmel, supra.

Petitioners having failed to establish by credible or convincing evidence either that the redemptions were not essentially equivalent to dividends or that they were steps or parts of a precise plan to terminate petitioner's interest as a shareholder and completely redeem all of his stock in Gulf Coast, we conclude and hold that the determination of the respondent must be sustained. ^{61970 U.S. Tax Ct. LEXIS 196">*222}

Decision will be entered for the respondent.