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P owned 100 percent of the stock in two
corporations, C and L. During 1995 and 1996, C made a
series of remittances totaling $89,728.73 which were
treated as loans from C to P, followed by subsequent
loans from P to L. P also lent additional funds to L.
Thereafter, in late 1996, promissory notes payable by L
to P in the amount of $252,481.03 were converted into a
single promissory note of $77,481.03 and additional
paid-in capital of $175,000.00. Then, in December of
1996, P transferred his shares in L to C in exchange
for release from the $174,133.20 liability he had
previously incurred to C.
Held: To the extent of $12,247.70, the transfer
of L stock to C in exchange for debt release is
excepted from redemption characterization pursuant to
sec. 304(b)(3)(B), I.R.C., and, under secs. 351 and
357, I.R.C., generates no gain or loss.
Held, further, to the extent of $161,885.50, the
stock transfer is to be recast as a redemption, and
taxed as a dividend distribution, in accordance with
secs. 301, 302, and 304, I.R.C.
Kerry R. Hawkins and Kenneth W. Klingenberg, for
petitioners.
Brian A. Smith and C. Glenn McLoughlin, for respondent.
OPINION
NIMS, Judge: Respondent determined a Federal income tax
deficiency for petitioners’ 1996 taxable year in the amount of
$56,449.00. The principal issue to be decided is the proper
application of section 304, which could in turn require
application of sections 301 and 302, to the facts of this case.
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