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Kinch v. Commissioner

T.C. Memo. 1942 (1942)

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Kinch v. Commissioner

United States Tax Court

T.C. Memo. 1942 (1942)

Facts

William Kinch and Samuel Dark (plaintiffs) were the sole shareholders of Rock Asphalt & Construction Company, Inc. (Rock Asphalt). Kinch and Dark held both common and preferred stock. As a result of previous dividends paid on the common stock in excess of earnings, Kinch’s and Dark’s basis in their common shares was zero. However, Kinch and Dark still had full-cost bases in their preferred shares. Rock Asphalt declared another dividend on its common stock in excess of its earnings and profits. The distribution was not pursuant to any partial or complete liquidation of Rock Asphalt. To avoid realizing taxable gain on the excess distribution, Kinch and Dark filed a petition in the United States Tax Court to have the excess amount of the distribution be treated as a return of capital on their preferred shares, the basis of which was sufficient to shield any gain.

Rule of Law

Issue

Holding and Reasoning (Sternhagen, J.)

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