Cerone v. Commissioner
United States Tax Court
87 T.C. 1 (1986)
Facts
Michael N. Cerone (Cerone) (plaintiff) and his son, Michael L. Cerone (Mick) each owned 50 percent of the stock of the Stockade Cafe (Stockade), which they operated together. Cerone and Mick had a contentious relationship, and Stockade eventually redeemed Cerone’s stock, leaving Mick as the sole owner. Following the redemption, Cerone continued to work at Stockade but did not exercise any control. Cerone sought to recognize the redemption payments as capital gains pursuant to § 302(a) of the Internal Revenue Code and argued that § 318(a)(1) was not applicable due to the contentious nature of Cerone’s relationship with Mick. Section 318(a)(1) provides family-attribution rules under which some individuals are treated as constructive owners of stock that is directly owned by a related individual. The Commissioner of Internal Revenue (the Commissioner) (defendant) classified the redemption payments as dividends pursuant to §§ 301(a) and 316 and therefore considered them taxable as ordinary income. The Commissioner argued that, because Cerone maintained an employee interest in Stockade pursuant to § 302(c)(2)(A)(i) following the redemption, § 318(a)(1) applied and made Cerone the constructive owner of 100 percent of Stockade’s shares both before and after the redemption.
Rule of Law
Issue
Holding and Reasoning (Parker, J.)
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