Cerone v. Commissioner - 87 T.C. 1 (1986)

Rule:

I.R.C. § 302(b)(1) provides that I.R.C. § 302(a) shall apply if the redemption is not essentially equivalent to a dividend. I.R.C. § 302(b)(3) provides that I.R.C. § 302(a) shall apply if the redemption is in complete redemption of all of the stock of the corporation owned by the shareholder.

Facts:

Petitioner Michael Cerone and his son were each 50 percent shareholders in Stockade Cafe, Inc.. Because of hostility between father and son, Stockade redeemed all of the father’s stock therein. After the redemption, the father continued to work as an employee of Stockade for several years, but he retained no control over, and was not involved in the management of, Stockade after the redemption. The commissioner ruled that the redemption was a distribution essentially equivalent to a dividend. 

Issue:

Should the distributions received by the father from Stockade in redemption of his stock in the corporation be treated as being received in exchange for such stock under section 302(a)?

Answer:

No

Conclusion:

The court held that there was no family hostility exception to the I.R.C. § 318 family attribution rules. The commissioner correctly refused to take family discord into account in applying the attribution rules. The redemption was essentially equivalent to a dividend within the meaning of I.R.C. § 302(b)(1). The redemption did not cause any reduction in the taxpayer's proportionate interest in the corporation because he was treated as owning 100 percent of the corporation's stock both before and after the redemption. The corporation's redemption of the taxpayer's stock was not a complete redemption within the meaning of I.R.C. § 302(b)(3).