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Johnson Trust v. Commissioner of Internal Revenue, 71 T.C. 941

Facts

The Rodgers P. Johnson Trust, created by the will of Rodgers P. Johnson, redeemed its stock in Crescent Oil Co. in 1973. The trust was administered by Harrison F. Johnson, who filed tax returns for the trust. Upon the grantor's death, the trust was established to benefit his wife, Martha M. Johnson, and their son, Philip R. Johnson. The trust held 112 shares of Crescent Oil stock, which were redeemed in exchange for shares of Union Gas Co. The trustees filed waiver agreements to prevent the attribution of stock owned by Martha to Philip, which was central to the tax implications of the redemption.

The Rodgers P. Johnson Trust, created by the will of Rodgers P. Johnson, redeemed its stock in Crescent Oil Co. in 1973. The trust was administered by Harrison F. Johnson, who filed tax returns for the trust.

Issue

Whether the redemption of stock by Crescent Oil Co. should be treated as a payment in exchange for the stock under section 302 of the Internal Revenue Code, considering the waiver agreements filed by the trustees.

Whether the redemption of stock by Crescent Oil Co. should be treated as a payment in exchange for the stock under section 302 of the Internal Revenue Code, considering the waiver agreements filed by the trustees.

Rule

Section 302(a) allows for exchange treatment of stock redemptions if certain conditions under section 302(b) are met, including not being essentially equivalent to a dividend, being substantially disproportionate, or resulting in a complete redemption of all stock owned by the shareholder.

Section 302(a) allows for exchange treatment of stock redemptions if certain conditions under section 302(b) are met, including not being essentially equivalent to a dividend, being substantially disproportionate, or resulting in a complete redemption of all stock owned by the shareholder.

Analysis

The court analyzed the applicability of section 302(b) to the trust's situation, particularly focusing on the waiver agreements that prevented the attribution of stock owned by Martha Johnson to Philip Johnson. The court found that the trust's ownership interest in Crescent Oil was only slightly reduced after the redemption, which did not constitute a meaningful reduction as required for exchange treatment under section 302(b)(1). Additionally, the trust did not meet the criteria for a substantially disproportionate redemption under section 302(b)(2).

The court analyzed the applicability of section 302(b) to the trust's situation, particularly focusing on the waiver agreements that prevented the attribution of stock owned by Martha Johnson to Philip Johnson.

Conclusion

The court concluded that the redemption of stock by Crescent Oil Co. did not qualify for exchange treatment under section 302, and thus the trust was subject to ordinary income treatment for the redemption.

The court concluded that the redemption of stock by Crescent Oil Co. did not qualify for exchange treatment under section 302, and thus the trust was subject to ordinary income treatment for the redemption.

Who won?

The Commissioner of Internal Revenue prevailed in this case, as the court ruled that the trust's redemption did not meet the requirements for exchange treatment under section 302.

The Commissioner of Internal Revenue prevailed in this case, as the court ruled that the trust's redemption did not meet the requirements for exchange treatment under section 302.

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