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Keywords

contractcorporation

willpartnershipcorporationrespondent

Related Cases

Estate of Lennard v. Commissioner of Internal Revenue, 61 T.C. 554

Facts

Milton S. Lennard and his son Gerald established Gerald Metals, Inc. in 1962, with each contributing $100,000 for stock ownership. Milton served as secretary-treasurer and provided accounting services to the corporation. In 1965, Milton agreed to sell his shares back to the corporation, resigning from his officer and director positions, but continued to provide accounting services through his independent accounting firm. The corporation redeemed all of Milton's stock for $275,000, and after the redemption, Gerald increased his ownership to two-thirds of the company.

Milton's initial investment in Metals was $100,000. On May 1, 1962, Milton contributed $100,000 and received 750 preferred shares and 2,500 common shares of the newly organized corporation.

Issue

Whether the redemption of all of Milton S. Lennard's stock constituted a complete termination of his interest in the corporation under sections 302(b)(3) and 302(c)(2) when he continued to render accounting services to the corporation after the redemption.

The issues for decision are (1) whether the redemption of all of Milton S. Lennard's stock in Gerald Metals, Inc., constituted a complete termination of his interest in the corporation under sections 302(b)(3) and 302(c)(2) when he continued to render accounting services to the corporation after the redemption.

Rule

Under section 302(c)(2), the attribution rules do not apply to the redemption of all shares owned by a shareholder if the distributee has no interest in the corporation other than as a creditor immediately after the distribution.

Section 302(c)(2) provides that the attribution rules shall not apply to the redemption of all of the shares of stock of the corporation owned by the shareholder where the distributee, immediately after the distribution, ‘has no interest in the corporation (including an interest as officer, director, or employee), other than an interest as a creditor.’

Analysis

The court analyzed whether Milton's continued provision of accounting services constituted an interest in the corporation. It concluded that Milton acted as an independent contractor, not as an employee, and thus did not retain a prohibited interest in the corporation. The court emphasized that his relationship with the corporation was independent and that he had severed his ownership interest completely upon redemption.

Even if the revenue ruling were controlling, which it is not, we think the facts of this case are different. Milton performed monthly accounting services for the corporation as a certified public accountant and member of an independent accounting partnership.

Conclusion

The court concluded that the redemption of Milton's stock was a complete termination of his interest in the corporation under section 302(b)(3), allowing the petitioners to treat the redemption as a capital gain rather than a dividend.

In view of our conclusion that the redemption was a complete termination of the decedent's interest in the corporation under section 302(b)(3), taking into account the attribution waiver provisions of section 302(c)(2), we need not consider the respondent's contention that the redemption was essentially equivalent to a dividend under section 302(b)(1).

Who won?

Milton S. Lennard and Pauline Lennard prevailed in the case because the court found that the redemption of Milton's stock constituted a complete termination of his interest in the corporation, allowing for capital gains treatment.

Decision will be entered for the petitioners.

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Keywords

Related Cases

Asiatic Petroleum Co., Delaware, Limited, v. Commissioner of Internal Revenue, 79 F.2d 234, 35-2 USTC P 9547, 16 A.F.T.R. 610, 1936-1 C.B. 181

Pridemark, Inc. v. C. I. R., 42 T.C. 510

Holdcroft Transp. Co. v. C.I.R., 153 F.2d 323, 46-1 USTC P 9193, 34 A.F.T.R. 860

Estate of Munter v. Commissioner of Internal Revenue, 63 T.C. 663

Berger Machine Products, Inc. v. Commissioner of Internal Revenue, 68 T.C. 358