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Himmel v. C. I. R., 41 T.C. 62

Facts

Isidore and Lillian Himmel, residents of New Haven, Connecticut, filed joint income tax returns for 1957 and 1958. The H. A. Leed Co., incorporated in 1946, was engaged in processing aluminum and had insufficient capital for its business needs. Isidore Himmel had made significant advances to the corporation, totaling $38,150, which were recorded as loans. In 1948, the corporation issued preferred stock to Himmel in exchange for these advances. In 1957 and 1958, the corporation redeemed portions of Himmel's preferred stock, leading to the tax dispute regarding whether these distributions were equivalent to dividends.

Petitioners Isidore and Lillian Himmel are husband and wife residing in New Haven, Conn. They filed a joint income tax return for each of the taxable years with the district director of internal revenue for the district of Connecticut.

Issue

Whether the distributions made by the H. A. Leed Co. to Isidore Himmel in redemption of his preferred stock were essentially equivalent to dividends and thus includable in his gross income as taxable dividends.

The sole issue is whether distributions of $5,000 and $7,000 which the H. A. Leed Co. made to petitioner Isidore Himmel in 1957 and 1958, respectively, in redemption of part of the shares of preferred stock which petitioner held in said company, were essentially equivalent to dividends and hence are includable in his gross income as taxable dividends.

Rule

Distributions in redemption of stock are treated as dividends under section 301 of the Internal Revenue Code if they are essentially equivalent to dividends, which is determined by examining the facts and circumstances of each case.

The subject of redemptions of corporate stock is governed by section 302 of the 1954 Code, and certain other Code sections therein mentioned.

Analysis

The court analyzed the ownership structure and the nature of the distributions. It noted that the redemptions did not significantly alter Himmel's control over the corporation, as he retained a substantial percentage of ownership. The distributions were not pro rata, but given Himmel's dominant ownership, they were deemed substantially pro rata. The corporation had sufficient earnings and profits to cover the distributions, and there was no plan to contract the business. The court concluded that the distributions were essentially equivalent to dividends.

Thus far considered, all the factors point toward dividend equivalence. Petitioner relies largely upon an alleged corporate business purpose in the issuance and redemption of the preferred stock, to tip the scales in his favor.

Conclusion

The court decided in favor of the respondent, determining that the distributions made to Isidore Himmel were taxable as ordinary income because they were essentially equivalent to dividends.

We therefore decide the case for the respondent.

Who won?

The Commissioner of Internal Revenue prevailed in the case, as the court found that the distributions were taxable as ordinary income due to their equivalence to dividends.

The respondent determined deficiencies in the income taxes of the petitioners for the calendar years 1957 and 1958, in the amounts of $2,346.11 and $3,287.45, respectively.

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