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Commissioner v. Clark

489 U.S. 726 (1989)

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Commissioner v. Clark

United States Supreme Court

489 U.S. 726 (1989)

Facts

Donald Clark sold his wholly owned company, Basin Surveys, Inc. (Basin), to N. L. Industries, Inc. (NL). The sale took the form of a triangular merger, whereby Basin merged into an NL subsidiary. Clark received a combination of cash and NL common stock in the exchange. Although the NL common stock Clark received had substantial economic value, it comprised less than 1 percent of NL’s outstanding common shares. Clark and his wife (plaintiffs) filed a joint tax return on which they treated the cash Clark received as taxable as long-term capital gain. The Internal Revenue Service (IRS) treated the cash received as essentially equivalent to a dividend taxable as ordinary income. The Clarks petitioned the United States Tax Court for review. The tax court found for the Clarks, and the United States Court of Appeals for the Fourth Circuit affirmed. The IRS appealed to the United States Supreme Court, which granted certiorari.

Rule of Law

Issue

Holding and Reasoning (Stevens, J.)

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