Estate of Durkin v. Commissioner

Halpern, J., dissenting: Although I fully join in Judge Beghe’s dissent, I write separately to emphasize my astonishment at the result reached by the majority and to provide an abbreviated critique for those without the appetite for Judge Beghe’s seven-course analysis.

Consider the following example: X Corp. is a successful, closely held corporation, whose outstanding stock consists of 100 shares, each worth $lx, held equally by A and B, unrelated individuals. A decides that she has had enough of the corporate world and wishes to dispose of her shares and move to Florida. B wants to continue with X Corp. A offers her shares to B, but B has insufficient funds to buy them. There is, however, $40x in the X Corp. treasury, and B can obtain $10x. To accomplish a buyout of A, it is agreed that, sequentially, on the same day, (1) X Corp. will distribute $40x to A and (2) B will then purchase A’s 50 shares for $10x. Not being advised by tax counsel, A, B, and X Corp. characterize the distribution of $40x from X Corp. to A as a dividend. A’s tax preparer, however, is wiser, and treats the whole $50x received by A as a payment in exchange for her stock. I am certain that, notwithstanding what the parties called the distribution from X Corp., this Court should treat the transaction as reported by A’s tax preparer. See Smith v. Commissioner, 82 T.C. 705 (1984); Roth v. Commissioner, T.C. Memo. 1983-651 . I do not think that result would change if, in addition to the facts stated, A, at the same time, purchased an asset from X Corp. at a fair market value price. In essence, that latter case is the case at hand, except that, in the case at hand, the “dividend” was achieved by way of a bargain purchase from the corporation. I fail to see how the tax result for the case at hand can be any different than for the hypotheticals here presented. Accordingly, I believe the majority is wrong.

Whalen and Beghe, JJ., agree with this dissent.