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If the buyer purchased all of the seller’s stock and
later recouped some of the cash outlay by causing the
corporation to redeem part of the newly acquired stock,
the redemption distribution would be a dividend to the
extent of earnings and profits because, as a pro rata
distribution, it could not meet the standards of
��302(b)(1), (2), or (3). The buyer, however, avoids
dividend consequences where the redemption is from the
seller unless the buyer makes the mistake of undertak-
ing a personal obligation to purchase the shares before
the corporation agrees to redeem them.
3 Bittker & Lokken, Federal Taxation of Income, Estates, & Gifts,
par. 93.1.5, at 93-17 (2d ed. 1991).
Although the form of the acquisition may be tailored to suit
the buyer’s tax status (a corporate buyer may prefer the dividend
treatment that, given sufficient earnings and profits, generally
would accompany the redemption of shares purchased from the
seller), once it is tailored, the buyer is stuck with the chosen
form. In an early leading case, Wall v. United States, 164 F.2d
462 (4th Cir. 1947), the taxpayer contracted to purchase stock
from a co-shareholder, agreeing to make a cash downpayment and to
deliver his notes for the remainder of the purchase price. The
taxpayer made the downpayment and received the stock, which he
transferred to two trustees, to be held by them as security for
the notes. After paying the first note, he transferred his
equity in the stock to the corporation and caused it to pay the
remaining notes as they became due. The Court of Appeals for the
Fourth Circuit had no difficulty in finding that the taxpayer’s
transfer of his equity to the corporation in consideration of the
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