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benefit from the redemption. From this latter perspective, the
redemption simply reflects a shareholder's sale of stock to the
corporation. Given these considerations, courts have consis-
tently held that a corporate distribution to redeem one share-
holder’s stock could be treated as a corporate dividend to the
remaining shareholder only if the redemption transaction satis-
fied the remaining shareholder’s primary and unconditional
personal obligation to purchase the stock. See Arnes v. Commis-
sioner, 102 T.C. 522, 527 (1994) (Arnes II); Edler v. Commis-
sioner, T.C. Memo. 1982-67, affd. 727 F.2d 857 (9th Cir. 1984).
As we explained in Edler:
The issue is whether the stock redemption resulted in a
constructive dividend to petitioner. We are faced with the
rule that where a corporation redeems stock which its re-
maining shareholder was obligated to buy, the remaining
shareholder receives a constructive dividend. Wall v.
United States, 164 F.2d 462 (4th Cir. 1947). However, the
rule of Wall has been limited to those circumstances where
the obligation of the purchasing shareholder is both primary
and unconditional. Enoch v. Commissioner, 57 T.C. 781
(1972); Priester v. Commissioner, 38 T.C. 316 (1962). If,
on the other hand, the corporation redeems stock which the
remaining shareholder was not obligated to buy, no construc-
tive dividend is received by that shareholder. Edenfield v.
Commissioner, 19 T.C. 13 (1952).
Applying the above rules, certain disparate tax conse-
quences become apparent. When two shareholders own a corpo-
ration, there is no practical economic difference between
using a stock redemption and using a dividend distribution
to the remaining shareholder to fund the acquisition of the
selling shareholder’s stock. Nevertheless, the tax conse-
quences to the remaining shareholder are profoundly differ-
ent. A knowledgeable shareholder could negotiate a redemp-
tion by the corporation and escape harsh tax consequences to
himself; whereas, a less knowledgeable shareholder might
unwilling commit himself to effect the purchase and be
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