Estate of Schneider v. Commissioner

Al Schneider was the principal shareholder of American National Corporation (ANC), which was a holding company that owned all the stock of Schneider Transport, Inc. (Transport). Schneider’s shares of ANC were subject to a buy-sell agreement that gave ANC right of first refusal before Schneider could sell his stock to a third party. Employees of Transport were eligible for an employee stock-ownership plan known as the ANC Plan, which allowed employees who received bonuses the option to receive part of their bonuses as ANC stock. Employees who participated in the plan were subject to certain vesting rules, and such rules were stamped on the stock certificates issued to the employees. However, the stock was not subject to a right-of-first-refusal provision. The ANC Plan provided that the board of directors could choose for employees to purchase the stock directly from current shareholders rather than issue new shares. In 1974, 1975, and 1976, Schneider sold some of his ANC shares pursuant to this plan; ANC waived its right of first refusal for these sales. The Transport employees who opted to receive a portion of their bonuses as shares received two checks, one for the cash amount of the bonus and one stamped “pay to the order of Al J. Schneider.” Once the employees had endorsed the latter checks, Transport collected the checks and gave them to Schneider. ANC then issued shares to the participating employees, which were stamped with notices of the ANC Plan restrictions. Schneider reported the amounts received for his shares as sales subject to capital gains taxes. The commissioner of the Internal Revenue Service (defendant) assessed tax deficiencies because he deemed the transactions to be redemptions of shares by the corporation, which were dividends subject to ordinary income tax rates. Schneider died in 1983, and his estate (plaintiff) was substituted as a party. Schneider’s estate appealed to the United States Tax Court, which ruled in favor of the commissioner. The estate then appealed to the United States Court of Appeals for the Seventh Circuit.