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has already reported the interest portion of the deferred pay-
ments; Mrs. Read’s only adjustments in issue stem from her
failure to include the principal payments in taxable gain for
1989 and 1990. Mr. Read’s deficiencies arise from respondent’s
inclusion in his ordinary income as dividends of both principal
and interest payments on the stock purchase for 1988, 1989, and
1990.3 Mr. Read also suffers the indirect financial burden of
2(...continued)
agreement with the assurance that the redemption will
be tax free to the remaining shareholder and a capital
gain transaction to the terminating shareholder, the
overall tax costs will ordinarily be less than if the
terminating spouse qualifies for nonrecognition under
section 1041, but the remaining spouse suffers a
dividend tax. This will leave a bigger pie to be
divided in setting the consideration for the shares to
be redeemed. [Fn. ref. omitted.]
Although for the years in issue in the cases at hand, long-
term capital gain and ordinary income were subject to tax at the
same rates, the writer’s observation in Arnes applies to more
recent and current taxable years, in which long-term capital
gains are subject to tax at lower rates than ordinary income.
Even in cases in which there are other remaining
shareholders of the distributing corporation, treating the
corporation’s payment to the departing shareholder ex-spouse as a
distribution in redemption of the purchased stock to the
remaining shareholder ex-spouse will cause the constructive
distribution to be treated as a dividend to the remaining
shareholder ex-spouse under sec. 301 rather than as a
substantially disproportionate redemption under sec. 302(b)(2)
qualifying as a distribution in payment in exchange for the stock
under sec. 302(a), with resulting capital gain treatment. This
is because the proportionate interest in the corporation of the
remaining shareholder ex-spouse will always be increased as a
result of the reduction in the number of outstanding shares that
occurs by reason of the redemption.
3 Mr. Read has not put in issue respondent’s determination
(continued...)
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