United States v. Davis
United States Supreme Court
397 U.S. 301, 90 S. Ct. 1041 (1970)
Maclin P. Davis (plaintiff) and his family owned 100 percent of the outstanding shares of a corporation. Davis purchased 1,000 shares of preferred stock for $25,000. This was part of a plan to qualify for a loan because the bank required the company to increase its working capital to qualify. The corporation was to effect its redemption of the preferred stock after the loan was repaid. Eventually, the loan was repaid, and the corporation redeemed Davis’s preferred stock. Davis received $25,000 for the redemption, the amount he paid. Davis reported the sale of his preferred stock as a capital gains transaction with a net gain of zero, so the result was no tax paid on the receipt of the $25,000 sum. The commissioner of the Internal Revenue Service (IRS) (defendant) did not approve Davis’s treatment of the $25,000 payment received for redemption of his preferred stock as capital gains. Instead, the commissioner found that the redemption of Davis’s stock was essentially equivalent to a dividend and was taxable as ordinary income. Davis brought suit in district court, which found in Davis’s favor because the redemption served a legitimate business purpose in a financing plan. The appellate court affirmed the district court ruling. The commissioner appealed to the United States Supreme Court.
Rule of Law
Holding and Reasoning (Marshall, J.)
Dissent (Douglas, J.)
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