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(2d Cir. 1977), the corporation redeemed an employee’s stock as
part of terminating his employment, which was done in order to
extricate the corporation from an unfavorable financial and
management situation. We found that the “origin and nature of
the [redemption] payment was a capital transaction” and, relying
upon the cases of Gilmore, Woodward, and Hilton, rejected the
corporation’s attempt to deduct that payment. We declined to
accept the taxpayer’s argument that the amount paid to the
disaffected employee over and above the value of the stock he
surrendered was deductible compensation. We found that any
compensatory aspect of the transaction was inseparable from the
capital aspect–-the elimination of his equity interest. We
explained that “there is nothing in the record to indicate that
* * * [the employee] would have been paid anything * * * had he
wished to retain his * * * shares”. We distinguished Five Star
Manufacturing Co. v. Commissioner, supra, which had allowed a
deduction of redemption payments, on the basis of our finding
that the redemption in the Harder Servs., Inc. case was not
necessary to preserve the corporation.
The Supreme Court provided a further development in Ark.
Best v. Commissioner, 485 U.S. 212 (1988). There, it held that
the taxpayer could not deduct as an ordinary and necessary
business expense the loss it incurred on a disposition of a
subsidiary’s stock, although the stock had been acquired with the
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