-6-
money for estate taxes and administration under section 3035 and
to keep control of the company in the Gustafson family.
In 1984 and 1985, petitioner paid $1,702,000 to redeem stock
held by Noel Gustafson's estate. Petitioner also redeemed Julia
Bagley's stock when she died in 1979. During the years in issue,
petitioner expected that it would need about $1,700,000 to redeem
the stock of Pete Gustafson. However, petitioner did not redeem
his stock when he died in 1995 because his estate did not need
money to pay estate taxes. Petitioner plans to redeem Ellen
Gustafson Townsend's stock when she dies. The redemption price
for her 350 shares will be $350,000.
5. Repayment of Debt Owed to Shareholder
During its 1988 fiscal year, petitioner repaid $2,586,750 in
debentures it owed to Pete Gustafson's trust and related interest
of $735,339 ($3,322,089 total). Petitioner's tax attorney
advised petitioner to retire the debentures. Most of the
debentures would have become payable in 20146 or when Pete
Gustafson died, whichever occurred first. Pete Gustafson was 84
years old in 1988 and not in good health.
5 Under sec. 303, a distribution of property to a
shareholder to redeem the shareholder's stock to pay death taxes
is treated as a distribution in full payment in exchange for the
redeemed stock.
6 One of the debentures would have matured in 2015, one in
2016, and one in 2017.
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