Esmark, Inc. v. Commissioner

*171 Respondent determined the following deficiencies in petitioner's corporate income tax: *172

*15 After concessions, the primary issue for decision is whether petitioner must recognize $ 452,681,864 of long-term capital gain as a result of Mobil Oil Corp.'s 1980 acquisition of one of petitioner's subsidiaries. If that issue is decided against petitioner, we must also decide whether the equal protection clause of the United States Constitution requires application of sec. 633(f) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2281, to the transaction before us.

FINDINGS OF FACT

Many of the facts have been stipulated, and the facts set forth in the stipulation are incorporated in our findings by this reference. Esmark, Inc., and affiliated companies (petitioner) had its principal offices in Chicago, Illinois, when its petition was filed.

Petitioner was a Delaware corporation organized as a holding company, which directly or indirectly held a number of operating subsidiaries. The various businesses carried on by petitioner's subsidiaries were divided into five broad segments or categories consisting of: (1) Foods; (2) chemicals and industrial products; (3) energy; (4) personal products; and (5) high fidelity and automotive products.

The food*16 segment consisted of Swift & Co. (Swift) and related subsidiaries that engaged in packing fresh meats and the manufacture and sale of processed foods. Swift represented petitioner's most longstanding business and was the business for which petitioner was most widely known.

The energy segment consisted of Vickers, a holding company, and its three principal operating subsidiaries: Vickers Petroleum Corp. (VPC), Doric Petroleum, Inc. (Doric), and TransOcean Oil, Inc. (TransOcean). Vickers owned all of the issued and outstanding stock of VPC and *173 TransOcean. VPC, in turn, owned all of the issued and outstanding stock of Doric until September 18, 1980, when the Doric stock was transferred to Vickers.

During the latter part of 1979 and the early part of 1980 petitioner experienced a serious liquidity problem. This problem was primarily the result of (i) the sharp rise in crude oil prices during the 1979 "energy crisis" that greatly increased VPC's inventory costs, (ii) the continued poor performance of Swift, (iii) record high short-term interest rates that increased the cost of inventory and other short-term financing, and (iv) an agreement to purchase the assets of Tridan*17 Corp. for $ 45 million.

Petitioner's management also believed that petitioner's stock was undervalued. Petitioner's common stock was publicly traded on the New York stock exchange with a trading range of between $ 23.75 and $ 35.50 per share during the 12 months prior to April 24, 1980. By early 1980, petitioner's management had determined that petitioner's stock price did not reflect the underlying or "breakup" value of the company's separate assets, as such value was calculated by investment bankers to be $ 55 to $ 71 per share, more than twice the $ 25.50-per-share closing price of petitioner's common stock on April 24, 1980. The market value of petitioner's energy assets, in particular, had appreciated greatly during the period in question.

Petitioner's management attributed the failure of petitioner's stock price to reflect the underlying value of its assets to the public market's perception of petitioner as primarily a food company dominated by Swift, a company that had been a poor financial performer for several years. Petitioner's management believed that the disparity or "spread" between the trading value of petitioner's stock and the underlying value of its assets made*18 the company an attractive target for a takeover at a price that was less than could be realized for the shareholders if petitioner was "broken up."

As an initial response to petitioner's financial problems, Donald P. Kelly, petitioner's president and chief executive officer (Kelly), informally proposed to petitioner's board of directors at its April 24, 1980, meeting that petitioner borrow $ 300 million by issuing to a foreign investor *174 subordinated debentures that would be convertible into petitioner's common stock. A portion of the proceeds were to be used to acquire petitioner's shares through a tender offer. Petitioner's board of directors responded unfavorably to Kelly's proposal but asked management to pursue various restructuring alternatives, including a sale of the energy segment.

At the May 1980 board of directors meeting, Kelly presented a restructuring plan which included a reorganization of Swift and a sale of the energy segment to be followed by a self-tender for 50 percent of petitioner's outstanding shares. The board responded favorably to this plan and instructed Kelly to develop more definite proposals for the June 1980 meeting.

At its next meeting on*19 June 26, 1980, the board formally approved proceeding with the restructuring program outlined by Kelly in May. The program included the following elements: (1) The closing of certain units of Swift's fresh meats division and the disposition of the remaining fresh meats units, (2) the disposition of certain of petitioner's minor businesses, (3) the disposition of all of the energy segment, and (4) the redemption by petitioner of approximately 50 percent of its stock if the energy segment were sold for cash.

Each plan for the restructuring of petitioner which included a disposition of the energy segment also included a contraction of petitioner's capital structure by a major redemption of petitioner's shares because (1) the energy segment was a very large segment of petitioner's ongoing business with very heavy capital requirements, and its disposition would substantially reduce its need for working and investment capital; (2) an accompanying redemption of shares was necessary to avoid making petitioner a "sitting duck" for an outside acquirer who could deprive petitioner's shareholders of existing value; and (3) it would permit its shareholders, especially those who had invested in*20 petitioner because of its energy assets, to redeem or sell their stock at the value of the underlying assets.

Shortly after the June meeting and prior to any solicitation of bids for the energy segment, petitioner's management, in consultation with its tax and financial advisers, *175 began to analyze the various forms of transactions that would accomplish petitioner's dual goals of disposing of its energy segment and redeeming 50 percent of its outstanding stock. One of the options it considered was the "tender offer/redemption" format ultimately used. Such a format had been used and reported in the press in a public transaction several months earlier involving a subsidiary of I.U. International. Under such a tender offer/redemption format, a third party would acquire petitioner's stock in a public tender offer, and petitioner would distribute the stock of Vickers in redemption of the tendered shares.

In consultation with its investment bankers, petitioner decided to open data rooms containing confidential information about the energy segment for prospective bidders who would submit bids during a prescribed time period. This process was designed to uncover the highest values*21 that prospective purchasers would assign to the energy property. Petitioner would then negotiate an agreement that would result in the highest net value for its shareholders.

In early July, petitioner's investment bankers distributed certain documents to prospective bidders, including (1) a copy of the I.U. International prospectus (describing a tender offer/redemption transaction), and (2) the "Qualification and Bidding Terms." The Qualification and Bidding Terms stated that Esmark was not then expressing a preference as to the form of consideration that would be acceptable; however, any bid proposing noncash consideration was required to set forth the bidder's valuation of that consideration and the basis on which it was valued. Bidders were warned that bids not susceptible of clear valuation immediately would be disadvantaged. Petitioner expressed a preference that the bids state a clear market value because that would permit petitioner to assess the relative value of the submitted bids.

During July, petitioner conveyed to prospective bidders, through its investment bankers, its preference to exchange the stock of Vickers (the only asset of which would be the stock of TransOcean) *22 for petitioner's own stock through a tender offer/redemption format. This preference was also personally conveyed by Kelly to various bidders, including Mobil Oil Corp. (Mobil).

*176 Petitioner's management pursued the tender offer/redemption format primarily because it was believed to result in no recognition of taxable income to petitioner and would, therefore, provide the shareholders with the highest end value for their Esmark stock. Additional anticipated advantages of the tender offer/redemption format were that (i) it would minimize the likelihood of an outside tender offer at an inadequate price because no cash would be held by petitioner at any time, and (ii) petitioner's obligation for establishing the fairness of the offer and the consequent exposure to subsequent lawsuits was greatly reduced by having a third-party tender, as opposed to a self-tender for petitioner's shares. Management was sensitive to the second consideration because protracted shareholder litigation resulting from petitioner's 1974 tender offer for TransOcean had recently concluded. The expected tax benefits were, however, the most important reason for selection of the tender offer/redemption*23 format.

Mobil was willing to accommodate petitioner's tax planning by agreeing to the tender offer/redemption if Mobil received assurances that the tender offer format would not cost Mobil any more than its bid and would not expose Mobil to additional liabilities or costs. On August 20, 1980, just before the 6 p.m. deadline for bids, Mobil executives in New York submitted a bid for TransOcean, which by its terms incorporated a draft agreement providing that Mobil would, at petitioner's option, employ the tender offer/redemption format. It was Mobil's understanding, prior to the delivery of this bid, that the form of the transaction would be the tender offer/redemption format.

In addition to the Mobil bid, six of the seven other bids submitted for TransOcean expressed the willingness of the bidder to structure the transaction in the manner desired by petitioner, with several including specific references to the use of the tender offer/redemption format.

Under the bidding procedure designed by petitioner and its investment bankers, the bid was not an offer and the designation of the highest bid was not an acceptance, as there were other material items to be dealt with before agreement*24 could be reached. Designation of the highest bidder merely entitled Mobil to enter into final negotiations. *177 Accordingly, even after petitioner notified Mobil that it was the successful bidder and Mobil had arranged to go to Chicago the next day to conclude an agreement, petitioner instructed its investment bankers not to communicate to other bidders about the status of their bids.

At the time Mobil was designated the successful bidder, Mobil and petitioner had agreed on the tender offer/redemption format and on other items. However, other material terms remained unresolved. On the next day, August 21, Mobil and petitioner negotiated (i) a $ 10-million increase in Mobil's bid price and (ii) a reduction by petitioner in its override interest in certain TransOcean properties.

On August 21, 1980, petitioner and Mobil entered into a written agreement (the exchange agreement), which was ultimately performed. Mobil and petitioner both recognized that there was no binding contract between the parties until the exchange agreement was signed.

Petitioner would not have agreed to enter into the exchange agreement with Mobil unless Mobil agreed to do the tender offer provided for*25 in the exchange agreement. If Mobil had not agreed to the tender offer/redemption format, petitioner would have determined that Allied Chemical Corp., which had agreed to this format, was the highest bidder, and would have entered into negotiations with it for an agreement.

Throughout the bidding process, petitioner did not rule out the possibility of a cash sale if that would produce the highest net value for petitioner's stockholders. However, it was recognized that a cash sale had both tax and tender offer disadvantages, and, in fact, petitioner never agreed to, or even entered into negotiations for, a disposition of TransOcean for cash. Rather, the only agreement ever negotiated or entered into by petitioner was the agreement with Mobil that provided for the tender offer/redemption transaction.

In the exchange agreement, Mobil agreed to make a best-efforts tender offer for 11,918,333 shares of petitioner's publicly held common stock at a price of $ 60 per share, and petitioner agreed to redeem that stock in exchange for 975 shares (97.5 percent) of stock of Vickers (the only asset of which would be the stock of TransOcean) at an exchange *178 rate of 12,224 of petitioner's*26 shares for one Vickers share. In the event that Mobil was unable to acquire enough of petitioner's shares to effect an exchange for 975 Vickers shares, Mobil had an option to purchase (but petitioner did not have the right to require Mobil to purchase) for cash the balance of the 975 Vickers shares at a price of $ 733,435.90 per share.

On August 28, 1980, petitioner's board of directors ratified the execution and delivery of the exchange agreement. On September 2, 1980, pursuant to the exchange agreement, Mobil made a tender offer to purchase up to 11,918,333 shares of petitioner's stock held by the public for $ 60 per share. The 11,918,333 shares represented approximately 54.1 percent of the petitioner's shares outstanding on July 26, 1980. During the 2 weeks following the execution of the exchange agreement, petitioner entered into agreements with other companies to sell Doric and VPC. The cash received by petitioner from the sales of VPC and Doric totaled nearly $ 400 million (including working capital adjustments estimated to be in excess of $ 120 million).

Petitioner deferred declaration of the quarterly dividend normally paid on October 1, 1980, to October 20, 1980. Deferral*27 of petitioner's dividend prevented tendering shareholders who held shares on the previously anticipated record date from receiving a dividend. Only those shareholders who did not tender their shares to Mobil, and who held their shares on the deferred record date, received the dividend. Under no circumstances would Mobil, which completed its tender offer on October 3, have received the dividend.

On October 3, 1980, Mobil, through its wholly-owned subsidiary-assignee Mobil-TransOcean, Inc. (MTO) completed its tender offer and acquired 11,918,333 shares of petitioner's stock. The transfers by the tendering shareholders were duly recorded on petitioner's stock transfer records and a stock certificate for such shares was issued to MTO. Later on the same day, pursuant to the exchange agreement, petitioner redeemed the 11,918,333 shares of its stock acquired by MTO in exchange for 975 shares (i.e., 97.5 percent) of the stock of Vickers.

*179 In acquiring its Esmark stock, Mobil and its assignee MTO dealt directly with petitioner's public shareholders, each of whom decided independently whether or not to tender his Esmark shares. Petitioner never directly received any of the money*28 paid by Mobil in its acquisition of petitioner's stock, nor did petitioner pay any money to petitioner's public shareholders. In Mobil's tender offer, each of petitioner's shareholders was individually solicited and independently determined whether or not to sell his stock. Petitioner made no recommendation to its shareholders as to whether or not its shareholders should tender their stock to Mobil.

Also on October 3, 1980, pursuant to incidental provisions of the exchange agreement, petitioner transferred the remaining 25 shares (i.e., 2.5 percent) of the stock of Vickers to MTO in exchange for a 10-percent net profits royalty interest in certain nonproducing TransOcean properties, and executed the "Adjustment Agreement," providing for payments to reflect changes in TransOcean's working capital between April 30, 1980, and the closing. On December 22, 1982, Esmark released its rights to the net profits royalty interest for $ 25,000.

The tender offer/redemption radically contracted petitioner's capital structure and operations. On October 27, 1979, prior to the Mobil-Esmark transaction, petitioner had 20,311,000 shares of common stock outstanding held by approximately 48,000 shareholders. *29 After the Mobil-Esmark transaction, and the sales of Doric and VPC, petitioner had 10,083,000 common shares outstanding, held by about 33,900 shareholders, and no energy business. The tender offer/redemption reduced petitioner's outstanding stock by approximately 54 percent.

On January 26, 1982, Whittaker Corp. (Whittaker) commenced a tender offer as part of a plan to acquire all the common stock of Brunswick Corp. (Brunswick). The offer was amended on February 10, 1982, to a price of $ 27 per Brunswick share and $ 1,257.57 per $ 1,000 amount of Brunswick debentures which were convertible into Brunswick common stock.

*180 Brunswick's management opposed the Whittaker offer because, among other things, it believed that the aggregate price offered by Whittaker was inadequate and did not reflect the value of Brunswick's underlying assets.

Upon its determination that the Whittaker offer was not in the best interests of Brunswick or its shareholders, Brunswick's board of directors began to explore various possibilities to give its shareholders an alternative to the Whittaker offer and directed its investment bankers to explore those alternatives.

Brunswick's*30 investment bankers solicited proposals for the acquisition of Brunswick's subsidiary, Sherwood Medical Industries, Inc. (Sherwood), and obtained at least two offers to acquire the stock of Sherwood. Those offers included (i) an offer by American Home Products Corp. (AHP) for $ 450 million cash and (ii) an offer from another bidder for $ 450 million cash. AHP also agreed to structure the acquisition in the form of a tender offer for Brunswick shares followed by an exchange of those shares for the stock of Sherwood, but at a reduced rate of $ 425 million.

On February 11, 1982, Brunswick entered into an agreement with AHP (the Brunswick exchange agreement) providing that AHP would tender for 14,166,666 shares of the stock of Brunswick and that Brunswick and AHP would immediately exchange 13,772,000 of such shares for all the stock of Sherwood (the Brunswick exchange) and the remaining 394,666 of such shares for the stock of nine other subsidiaries of Brunswick.

Pursuant to the Brunswick exchange agreement, on February 16, 1982, AHP (through its subsidiary) commenced a tender offer to purchase up to 14,166,666 shares of Brunswick common stock at $ 30 per share (the AHP tender offer). *31 Under the Brunswick exchange agreement, AHP would exchange the shares of Brunswick so acquired for the stock of Sherwood at a rate of 1 share of Sherwood for each 13,772 shares of Brunswick. If an insufficient number of Brunswick shares were obtained, AHP had the right to purchase any remaining shares of Sherwood for cash at $ 413,160 per share, and shares of the other nine subsidiaries at varying prices, for a total price not to exceed $ 425 *181 million (including the cost of any Brunswick shares acquired).

Pursuant to the Brunswick exchange agreement, a subsidiary of AHP acquired 14,166,666 shares of the common stock of Brunswick on March 9, 1982. Those shares would represent between 54 percent and 64 percent of the voting stock of Brunswick outstanding on February 11, 1982, depending upon the amount of Brunswick's convertible debentures and convertible preferred stock that were converted to common stock and common stock options that were exercised as of that date.

On March 9, 1982, pursuant to the Brunswick exchange agreement, Brunswick distributed all the stock of Sherwood in exchange for 13,772,000 of the shares of Brunswick common stock acquired by the AHP subsidiary.

*32 In section 633(f) of the 1986 Tax Reform Act, Pub. L. 99-514, 100 Stat. 2085, 2281, Congress exempted Brunswick (by description of the transaction and not by name) from the recognition of any corporate-level gain on the distribution of its Sherwood stock in exchange for the Brunswick stock acquired through the AHP tender offer.

OPINION

Respondent determined that petitioner must recognize long-term capital gain of $ 452,681,864 on the distribution of 97.5 percent of the stock of Vickers Energy Corp. to Mobil Oil Corp., through its wholly owned subsidiary and assignee, Mobil-TransOcean, Inc., in exchange for petitioner's stock.

In 1935, the Supreme Court decided General Utilities & Operating Co. v. Helvering, 296 U.S. 200 (1935). The holding of that opinion allowed a corporation to avoid recognition of gain on the distribution of appreciated property to its shareholders. In 1954, Congress codified the General Utilities doctrine in section 311. ¹Section 311(a), (b), *182 and (c) limited the scope of the general rule to cases not involving distributions of installment obligations, LIFO inventory, or property subject to liabilities*33 in excess of basis.

The Tax Reform Act of 1969, Pub. L. 91-172, 84 Stat. 487, amended section 311 by adding a new subsection (d). ² The new subsection substantially undermined the continued vitality of the General Utilities doctrine. As a result of the amendment, corporations no longer enjoyed favorable nonrecognition treatment on most transfers of appreciated property in redemption of stock. This restriction, codified in section 311(d)(1), was subject to its own exceptions and limitations. ³Section 311(d)(2)(B) made section 311(d)(1) inapplicable if, in certain circumstances, a subsidiary's stock was used to redeem the stock of its parent corporation. A parent corporation could thus redeem its own shares*34 with the appreciated stock of a subsidiary and enjoy the nonrecognition treatment promised by the last vestige of the General Utilities doctrine.

*35 The parties agree that petitioner's transaction falls squarely within the literal language of section 311(d)(2)(B). Each requirement of that section has been satisfied. Petitioner consequently argues that it is entitled to the relief *183 set forth in section 311(a). ⁴ If petitioner does not prevail on this issue, it argues that the equal protection clause of the United States Constitution requires application of section 633(f) of the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085, 2281, which exempted Brunswick from corporate level gain on a transaction similar to the one before us.

Respondent contends that petitioner's transaction falls outside of the letter of section 311(a) and the spirit of section*36 311(d)(2)(B). Relying on a number of overlapping "substance over form" arguments, respondent recasts petitioner's transaction as a sale of Vickers to Mobil, followed by a redemption of petitioner's stock for cash.

This is a challenging case. We must decide the primary issue under the rule and principles in effect at the time of the transaction despite historical criticism and subsequent abolition of that rule. To do otherwise, would be to undermine tax planning as an essential ingredient of business decision-making (and as an art).

In 1980, section 311(a) continued in effect the General Utilities doctrine. Although the doctrine was then subject to limitations, it nevertheless remained a principle of corporate taxation. By strictly complying with the formal requirements of the statute, petitioner made a prima facie showing of its entitlement to the benefits promised by section 311(a). Congress enacted a statute under which tax consequences are dictated by form; to avoid those consequences, respondent must demonstrate that the form chosen by petitioner was a fiction that failed to reflect the substance of the transaction.

Respondent's*37 first argument is based on a threshold limitation found in the text of section 311(a). To be free of corporate tax, distributions of appreciated property must be "with respect to * * * stock." The legislative history of *184 section 311(a) suggests that this phrase must be construed in the context of pre-1954 law.

Subsection (a) of section * * * [311] sets forth the general rule and provides (except for the provisions of subsections (b) and (c)) that no gain or loss shall be recognized to a corporation upon a distribution, with respect to its stock, of its own participating or nonparticipating stock (or of rights to acquire such stock) or upon such a distribution of securities or property. Thus, the fact that the property distributed has appreciated or depreciated in value over its adjusted basis to the distributing corporation will in no way alter the application of subsection (a). Your committee does not intend, through subsection (a), to alter existing law in the case of distribution of property, which has appreciated or depreciated in value, where such distributions are made to persons other than shareholders, or are made to shareholders in a capacity other than that of*38 a shareholder. Thus a distribution of property made to a shareholder in his capacity as a creditor of the distributing corporation is not within the rule of subsection (a). [H. Rept. 1337, A90 83d Cong. 2d Sess. (1954). ⁵]

Section 1.311-1(a), Income Tax Regs., refers to section 1.311-1(e) for a description of distributions to which section 311 does not apply. ⁶ Respondent maintains that the latter regulation restates the "existing law" referred to in the 1954 House and Senate committee reports. Relying on a line of cases generated by two court of appeals decisions, as well as on 1934 regulations carried forward until the 1954 Code, respondent proposes a "facts and circumstances" test under which section 311(a) would generally be inapplicable where, after arm's-length bargaining, a transitory shareholder uses *185 stock as a "medium of payment" to acquire corporate property. *39 Respondent argues that this construction of pre-1954 law as "restated" in the regulation is supported by four cases decided under the 1954 Code.

*40 Petitioner contends that respondent's construction of section 1.311-1(e), Income Tax Regs., places unwarranted reliance on pre-1954 law. Petitioner argues that section 311(a) swept away a "mass of contradiction and confusion"; and it asserts that the general rule of nonrecognition is thus subject only to the limited exceptions spelled out in the statute, the legislative history, and the post-1954 regulations. To the extent that pre-1954 law is relevant, petitioner argues, the cases and the 1934 regulation relied on by respondent merely support the current regulation's requirement that shareholder status not be "incidental" to the transaction. Petitioner also contends that the four post-1954 cases cited by respondent provide no support for respondent's proposed test.

Respondent's reliance on pre-1954 law is justified. The drafters of subchapter C did not write on a clean slate; the legislative history of section 311(a) explicitly refers to "existing law." Section 1.311-1(e), Income Tax Regs., accordingly alludes to the law as it existed prior to 1954. Commissioner v. S.A. Woods Machine Co., 57 F.2d 635 (1st Cir. 1932), and Commissioner v. Boca Ceiga Development Co., 66 F.2d 1004 (3d Cir. 1933),*41 the "seminal" cases cited by respondent, are the factual bases of the examples set forth in the regulation. Section 1.311-1(e), Income Tax Regs., also retains the essentials of the analysis described in its 1934 predecessor. The critical language of the 1934 regulation, i.e., "if the corporation receives its own stock as consideration upon the [ILLEGIBLE WORD] of property by it * * * the gain or loss resulting is to be computed in the same manner as though the payment had been made in any other property," appears verbatim in regulations section 1.311-1(e). Treas. Reg. 77, art. 66, T.D. 4430 (1934).

Although justified, respondent's reliance on pre-1954 law is largely unavailing. The most that can be said about the multitude of diverse cases cited by the parties is that they tend to support respondent's emphasis on the facts and circumstances surrounding the Esmark transaction. In S.A. *186 Woods and Boca Ceiga, each court stated that its decision turned upon the "real nature" or "purpose" of the transaction. 57 F.2d at 636; 66 F.2d at 1005. If the transaction's "real nature" or "purpose" *42 were found to be a readjustment of the corporation's capital structure, gain would not be recognized. If the transaction were instead found to be a sale, recognition would be appropriate. Most of the cases cited by either party explicitly or implicitly adopt the approach followed in S.A. Woods and Boca Ceiga. ⁷

*43 Section 1.311-1(e), Income Tax Regs., and its 1934 predecessor also support respondent's focus on the facts and circumstances attendant to the Esmark transaction. Although the more recent regulation does not retain the 1934 regulation's explicit prescription of a facts-and-circumstances analysis, section 1.311-1(e), Income Tax Regs., provides that gain or loss must be recognized if the recipient's shareholder status is "incidental" to the transaction. We must thus examine the factual context to determine whether Mobil's ownership of Esmark shares was "incidental" to petitioner's distribution of the Vickers shares within the meaning of the regulation.

Although we agree that we must examine the facts and circumstances surrounding petitioner's transaction, we do not agree with respondent's suggestion that section 311 may never apply where, after arm's-length dealing, a transitory shareholder uses stock as a "medium of payment" to acquire corporate property. Many, if not most, non-pro-rata redemptions are the result of arm's-length bargaining, and neither the statute nor any of the other authorities draws a distinction between "historical" and "transitory" shareholders. ⁸ Stock*44 is a "medium of payment" in every redemption. None of the authorities cited by *187 either party suggest that these characteristics have special significance. In each pre-1954 case cited by the parties, the court avoided invocation of a formulaic test and instead based its decision on the facts before it. The statements of law set forth in these cases are often conflicting and cannot readily be reconciled. In 1954, Congress attempted to settle the issue by enacting section 311(a).

Only four cases decided under the 1954 Code have directly addressed section 1.311-1(e), Income Tax Regs.Honigman v. Commissioner, 55 T.C. 1067 (1971), affd. in part and revd. in part 466 F.2d 69 (6th Cir. 1971), and Bank of America v. United States, 42 AFTR2d 78-5255, 79-1 USTC par. 9170 (N.D. Cal. 1978),