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Keywords

corporation

willcorporation

Related Cases

Tiffany v. C.I.R., 16 T.C. 1443

Facts

The petitioner, an individual from New Jersey, sold 3,202 shares of Air Cruisers, Inc. to the company for $200,669.34. He had been associated with the company since its inception and had previously held a significant number of shares. However, due to strained relations with other stockholders and dissatisfaction with the company's failure to pay dividends, he sought to sell his shares. After the sale, he had no further beneficial interest in the company, despite remaining a stockholder of record for a short period.

Petitioner, an individual residing in Englewood, New Jersey, filed his income and victory tax return for 1943 with the collector of internal revenue for the third district of New York. In 1929 petitioner became associated with Anthony H. Fokker, an airplane designer, inventor, and manufacturer, and remained with Fokker until Fokker's death in 1939, when he became sole executor under Fokker's will.

Issue

Is the payment received by the petitioner for the sale of his stock in Air Cruisers, Inc. taxable as a dividend under section 115(g) of the Internal Revenue Code?

Rule

Under section 115(g) of the Internal Revenue Code, if a corporation cancels or redeems its stock in a manner that is essentially equivalent to a taxable dividend, the amount distributed shall be treated as a taxable dividend.

If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend.

Analysis

The court analyzed the circumstances surrounding the sale of stock and determined that the petitioner did not retain any beneficial interest in the stock after the sale. Unlike the case of James F. Boyle, where the stockholder retained a similar fractional interest, the petitioner had completely divested himself of his stock interest. The court concluded that the transaction was an outright purchase by the company and not a distribution of corporate profits.

We are satisfied that petitioner did not retain any beneficial interest whatever in any stock of the company after December 13, 1943. Although it is true that he remained a stockholder of record, to the extent of 300 shares, until May 16, 1944, the fact is that he delivered those shares, endorsed in blank, to Gerrish on December 1, 1943, accompanied by an irrevocable proxy entitling Gerrish to vote the stock.

Conclusion

The court held that the payment of $200,669.34 received by the petitioner was not a taxable dividend under section 115(g) of the Internal Revenue Code.

The payment of $200,669.34 to petitioner in December 1943 was not made at such time and in such manner as to be a dividend or essentially equivalent to a taxable dividend.

Who won?

Petitioner prevailed in the case because the court found that he had no beneficial interest in the stock after the sale, distinguishing his situation from that of James F. Boyle.

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