Glacier State Electric Supply Company v. Commissioner

Donald Rearden and J. Kenneth Parsons formed Glacier State Electric Supply Company (Glacier State) (plaintiff). Rearden, Parsons, and their wives owned the entirety of Glacier State’s stock. After a few years of success, Rearden and Parsons joined Arthur Pyle to form an offshoot corporation, Glacier State Electric Supply Company of Billings (GSB). Of the 339 shares of GSB stock, Rearden and Parsons each owned one share, Pyle owned 113 shares, and Glacier State owned 224 shares. The parties entered an agreement that upon the death of either Rearden or Parsons, GSB would redeem one-half of its stock owned by Glacier State as well as the decedent’s single share. Parsons died. GSB made redemption payments to Glacier State for 112 of its 224 shares. These payments were assigned to Parsons’s estate. The Commissioner of Internal Revenue (the commissioner) (defendant) recognized the 112 redeemed GSB shares as conferring long-term capital gains on Glacier State. The resulting tax assessment was challenged by Glacier State, which invoked the step-transaction doctrine to argue that the various steps in the transaction should be viewed as a single transaction and that Rearden, Parsons, and Pyle had regarded the 339 GSB shares as being equally shared among them. However, at trial in the United States Tax Court, testimony established that Rearden and Parsons had frequently discussed holding the shares as individuals but decided against it. Glacier State also argued that the redemption should be treated as a dividend distribution, in which case a significant amount of it would qualify for deduction from Glacier State’s gross income.