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willcorporationrespondent

Related Cases

Seda v. Commissioner of Internal Revenue, 82 T.C. No. 36, 82 T.C. 484, Tax Ct. Rep. (CCH) 41,067

Facts

Petitioners, LaVerne V. Seda and LaVerne F. Seda, organized B & B Supply Company in 1957 and owned all of its stock. Due to declining health, they decided to redeem their stock in 1979, selling it to the company for $299,000, while their son James became the sole owner. Despite resigning from their positions, Mr. Seda continued to work for the company and received a salary, which later became a point of contention regarding the tax implications of the stock redemption.

On June 30, 1979, petitioners entered into a redemption agreement wherein the company redeemed all of petitioners' stock for $299,000 ($12.50 per share).

Issue

The main issues were whether the redemption of petitioners' stock was taxable as a dividend under section 301 or as long-term capital gain under section 302(a), and whether payments received by Mr. Seda were compensation for services or partial payment for redeemed stock.

The issues before us are (1) whether the redemption of all petitioners' stock in a certain corporation was taxable as a dividend distribution under section 301 or as a long-term capital gain under section 302(a), and (2) whether a certain sum was paid to petitioner, LaVerne V. Seda, as compensation for his services or as partial payment for his redeemed stock.

Rule

The court applied the rules under sections 301 and 302 of the Internal Revenue Code, particularly focusing on section 302(b)(3) which requires a complete termination of interest for capital gain treatment, and section 318(a)(1) regarding family attribution rules.

Section 302(a) provides that a distribution of property to a shareholder by a corporation in redemption of stock will be treated as a sale or exchange of such stock if the redemption falls within one of four categories enumerated in section 302(b).

Analysis

The court determined that Mr. Seda's continued employment with the company after the redemption meant that the redemption did not constitute a complete termination of interest as required by section 302(b)(3). Consequently, the stock redemption was treated as a dividend distribution under section 301. The court also found that the payments received by Mr. Seda were salary, not partial payment for redeemed stock, as he had not severed his interest in the company.

After the redemption, Mr. Seda continued to work for the company for almost two years and received a salary of $1,000 per month. By receiving that salary Mr. Seda did retain a financial stake in the company.

Conclusion

The court concluded that the redemption of petitioners' stock was taxable as a dividend and that Mr. Seda's payments were taxable as salary, denying the petitioners' claim for an overpayment.

Thus, we find that petitioners failed to satisfy section 302(c)(2)(A)(i).

Who won?

The Commissioner prevailed in the case, as the court upheld the determination that the stock redemption was not a complete termination of interest and thus taxable as a dividend.

Respondent determined deficiencies in petitioners' Federal income tax as follows: Year Deficiency $22,015 17,801.

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Keywords

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