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Chamberlin v. Commissioner

207 F.2d 462 (1953)

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Chamberlin v. Commissioner

United States Court of Appeals for the Sixth Circuit

207 F.2d 462 (1953)

Facts

The Metal Moulding Corporation (Metal) had only common stock outstanding. Metal also had a large earned surplus. Metal did not want to distribute the surplus by issuing a cash dividend because such a dividend would have been taxable income to its shareholders (plaintiffs). To avoid those taxes, Metal negotiated a series of transactions with two insurance companies. Under the plan, Metal issued a stock dividend on its common shares in the form of a new class of preferred stock. The Metal shareholders shortly thereafter, and also according to the plan, sold the preferred stock to the insurance companies for cash. As a result of the transactions, (1) Metal reduced its earned surplus by the value of the issued preferred shares, (2) the original Metal common shareholders ended up with cash in hand, and (3) the insurance companies became the holders of the preferred stock. The common shareholders reported income as long-term capital gain from the sale of the preferred stock to the insurance companies. The Internal Revenue Service (IRS) (defendant) assessed a deficiency, determining that, despite its form, the series of transactions was, in reality, a cash dividend out of Metal’s earnings to its shareholders. Accordingly, the IRS treated the common shareholders as having received a taxable dividend equal to the cash they ultimately received. The common shareholders filed suit in the United States Tax Court, which upheld the deficiency. The common shareholders appealed.

Rule of Law

Issue

Holding and Reasoning (Miller, J.)

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