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In another analogous case, Hobby v. Commissioner, 2 T.C. 980
(1943), in order to avoid anticipated redemptions of certain
preferred shares of stock and taxation of the resulting gain at
short-term capital gain rates, the taxpayer sold the shares to
friends before the scheduled redemptions, and he reported long-
term capital gains on the sales. The taxpayer’s friends paid for
the shares with borrowed funds. The taxpayer incurred no
liability for repayment of those loans. The Commissioner sought
to disregard the taxpayer’s stock sales as tax-motivated and
determined that the taxpayer’s gain was a short-term gain on the
redemption of the shares. Citing Chisholm v. Commissioner,
supra, we noted that the taxpayer’s “primary purpose to realize
the gain was a legitimate business purpose, even though it also
had a collateral favorable tax effect”, and held for the
taxpayer. Hobby v. Commissioner, supra at 985. Citing Hobby, we
reached the same result in Beard v. Commissioner, 4 T.C. 756
(1945), a case involving facts virtually identical to those in
Hobby. In Beard v. Commissioner, supra at 758, by making the
following observation, we echoed Judge Hand’s admonition in
Chisholm v. Commissioner, supra at 15, that the issue “always is
whether the transaction under scrutiny is in fact what it appears
to be in form”: “The Commissioner is * * * required to tax * * *
[the taxpayer] in accordance with what occurred, and he is not
permitted to distort the transaction by giving it an artificial
character upon which a larger tax could be imposed if it were
true.”
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