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on the existence of corporate earnings and profits.2
The primary and unconditional standard is applicable to
stock redemptions required by divorce judgments. For example in
Edler v. Commissioner, supra, a divorce settlement and judgment
required a redemption of the wife’s corporate shares leaving the
husband in control of the corporation. This Court and the Court
of Appeals for the Ninth Circuit found that the redemption
required by the “modified” settlement and judgment did not
relieve the husband of a primary and unconditional obligation to
purchase his wife’s stock, and as a result, the husband did not
receive a constructive dividend. In Edler, the “original”
settlement and judgment required the husband to pay his wife for
her stock interest. The Court of Appeals for the Ninth Circuit
noted that had the “original” divorce settlement and judgment
remained in effect, the corporation’s redemption payment to the
wife would have satisfied the husband’s obligation and would have
been treated as a dividend to the husband. See Edler v. Commis-
sioner, 727 F.2d at 860.
Court opinions dealing with taxable years prior to the
enactment of section 1041 generally do not discuss the tax
treatment of the stockholder whose stock was being redeemed.
2No one questions that MMP had earnings and profits in
excess of the redemption payments. MMP’s income tax returns for
the relevant years show unappropriated retained earnings in
excess of $1 million.
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