Citizens Bank & Trust Co. v. Commissioner

John D. MacArthur (plaintiff) was the sole shareholder and chief executive officer of an insurance company, Bankers Life and Casualty Company (Bankers). John’s brother, Telfer MacArthur, worked in the publishing and printing industry and owned Pioneer Publishing Company (Pioneer). In 1950 John and Telfer formed Brookshore Company (Brookshore) to supply Bankers with its printed material. Telfer managed Brookshore, and John supplied Brookshore with capital and contracts with Bankers. John and Telfer each received half of Brookshore’s outstanding stock. In 1957 the brothers entered into a mutual-buyout agreement, agreeing that if one brother died, the remaining brother would purchase the deceased brother’s interest in Brookshore. The agreement stated that the maximum price of the buyout would be $200,000. Telfer died in 1960. The representatives of Telfer’s estate did not want to sell Telfer’s interest in Brookshore to John, because they believed it was worth at least $244,000. Eventually, John agreed to purchase Telfer’s interest in Brookshore for $200,000 and Telfer’s interest in Pioneer for $175,000. Bankers gave a $375,000 check to Telfer’s estate for the purchase. The Commissioner of Internal Revenue (the Commissioner) (defendant) determined that the $200,000 that Bankers paid for Telfer’s interest in Brookshore was a taxable dividend to John because the payment relieved John’s obligation to purchase the stock. John appealed.