Holsey v. Commissioner

Joseph R. Holsey (plaintiff) was the president and director of J. R. Holsey Sales Company (the Holsey Company), an Oldsmobile dealership. Holsey’s father, Charles V. Holsey, owned two-thirds of the stock of Greenville Auto Sales Company (Greenville), a Chevrolet dealership. Joseph Holsey was the vice president and director of Greenville. Greenville received all 20 shares of the Holsey Company’s stock in exchange for the rights to an Oldsmobile franchise owned by Greenville. The 20 shares were valued at $11,000. In 1936 Holsey received an option (the first option) from Greenville to purchase half of the issued Holsey Company shares for $11,000 and another option (the second option) to purchase the 10 remaining shares within 10 years of the exercise of the first option. In 1939 Holsey exercised the first option and bought the first half of the outstanding shares. In 1946 the second option was revised to give Holsey the right to purchase the remaining shares of stock for $80,000. The second option was only assignable by Holsey to a corporation in which Holsey owned at least half of the voting stock. In 1951 Holsey assigned the second option to the Holsey Company, and the Holsey Company purchased the 10 remaining outstanding shares from Greenville for $80,000, redeeming the shares. After the purchase, Holsey owned all the outstanding stock—10 shares—in the Holsey Company. The Commissioner of Internal Revenue (the Commissioner) (defendant) determined that the Holsey Company’s redemption of the 10 shares was a constructive dividend to Holsey and, therefore, Holsey owed taxes on the transaction. The United States Tax Court upheld the Commissioner’s determination. Holsey appealed.