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1. Zenz v. Quinlivan
In Zenz v. Quinlivan, 213 F.2d 914 (6th Cir. 1954), the sole
shareholder of a corporation decided to sell the corporation to a
competitor. Because the competitor did not want to assume the
tax liabilities associated with the corporation’s accumulated
earnings and profits, the competitor purchased only part of the
shareholder’s stock. Three weeks later, after a corporate
reorganization and corporate action, the corporation redeemed the
balance of the shareholder’s stock. On her tax return, the
redeemed shareholder reported the transaction as a redemption of
all of her stock under section 115(c) of the Internal Revenue
Code of 1939 and claimed that the transaction must be treated as
a sale or exchange of stock. The Commissioner determined that
the redemption was essentially equivalent to the distribution of
a taxable dividend and recharacterized the redemption proceeds as
dividend income.
The Court of Appeals for the Sixth Circuit reversed the
decision of the lower court, which had upheld the Commissioner’s
determination. The Court of Appeals acknowledged the “general
principle” that “a taxpayer has the legal right to decrease the
amount of what otherwise would be his taxes or altogether avoid
them, by means which the law permits.” Zenz v. Quinlivan, supra
at 916. The Court of Appeals refused to decide the issue
presented based on the taxpayer’s motivation to avoid taxes.
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