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domestic C corporation that had no stock outstanding that was
readily tradable on an established securities market. Petitioner
became the majority shareholder in the company when the company
founder passed away in 1975. Petitioner owned over 82 percent of
the outstanding shares of the company at retirement. Petitioner
did not receive these shares in a distribution from a plan
described in section 401(a) or in a transfer pursuant to an
option or other right to acquire stock to which section 83, 422,
or 423 applied.
At the time of his retirement, petitioner consulted with his
accountant, Ronald C. Midcap, C.P.A. (Mr. Midcap), and an
attorney hired by Mr. Midcap, who Mr. Midcap believed was
familiar with stock sales to ESOPs. Mr. Midcap had prepared
petitioner’s tax returns since 1978 and was also preparing the
tax returns for the company. Mr. Midcap prepared petitioner’s
tax returns for 1996 but had never prepared a tax return with a
transaction involving section 1042 before 1996.
On March 11, 1996, petitioner sold all of his shares in the
company to the W.J. Ruscoe Company Employee Stock Ownership Trust
created pursuant to an ESOP for $1,521,630. At the time of the
sale, petitioner had a basis in the shares of $115,613 and had
owned the shares for at least 3 years. On March 12, 1996,
petitioner deposited the $1,521,630 sale proceeds into an account
with South Trust Securities, Inc. (South Trust).
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Last modified: May 25, 2011