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threatened with an unintended dividend. Except for the tax
consequences, the shareholder’s economic positions are
identical. Obviously, in this area of the tax law, the form
employed is critical and taxpayers are free to choose the
form most beneficial to themselves. It is against this
background that the rule of Wall has been limited to circum-
stances where the obligation which has been discharged is
both primary and unconditional. [Fn. refs. omitted.]
If a redemption satisfied a primary and unconditional
obligation of the remaining shareholder, the remaining share-
holder was generally treated as having received a constructive
dividend. See Hayes v. Commissioner, 101 T.C. 593, 599 (1993).
While the primary and unconditional standard is often referred to
as determinative of whether a redemption of one shareholder’s
stock is a constructive dividend to the remaining shareholder,
this is an oversimplification. The standard really determines
only whether a redemption of one shareholder’s stock should be
treated as a corporate distribution to the remaining share-
holder.1 While treating a redemption of one shareholder’s stock
as a corporate distribution to the remaining shareholder has
generally resulted in a finding that the remaining shareholder
received a constructive dividend, dividend treatment also depends
1The constructive “treatment” of the participants in a
redemption that satisfied the primary and unconditional
obligation of the remaining shareholder under pre-sec.-1041 case
law would be the same as that prescribed in Q&A-9, Temporary
Income Tax Regs., 49 Fed. Reg. 134453 (Aug. 31, 1984); i.e., the
transferring shareholder would be treated as transferring stock
to the remaining shareholder who would be treated as transferring
the stock to the redeeming corporation in return for the
corporate distribution.
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