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Green Hills.13 Petitioner received through the arbitrator’s
award a payment compensating him for his increased Federal income
tax liability. Petitioner would receive a windfall if he were
not required to pay the tax which was already paid to him as part
of the sale of his Green Hills stock. Petitioner makes no
persuasive argument that removes this situation from the general
definition of a shareholder under section 1.1361-1, Income Tax
Regs.
13 The purchase price was increased by the distributive
share of taxable income multiplied by a fraction the numerator of
which is .1367 and the denominator of which is .7070. The
.1367/.7070 fraction is about 0.1933. Thus, the purchase price
was increased by about 19.33 percent of the total distributive
share of income. The top marginal rate of tax on ordinary income
for unmarried individuals for 1998, 1999, and 2000, was 39.6
percent. Sec. 1(c). However, the top marginal rate on capital
gains income for 1998 was 20 percent, see sec. 1(h)(1)(C), or 18
percent for qualified 5-year gain, see sec. 1(h)(2)(B).
Petitioner incurred tax on his distributive share of income at
the ordinary income rates, and increased his basis in his Green
Hills stock by the same amount. If he had sold his stock in
1998, he would not have incurred tax on his distributive share of
income in 1998, 1999, and 2000, but his capital gain would have
been higher by the amount of this distributive share of income.
Even though petitioner’s taxable income would be the same, he
incurred more tax than he would have because the capital gains
rates are lower than the ordinary income rates. Respondent
asserts (and petitioner does not deny) that the arbitrator used a
formula to increase the purchase price to compensate petitioner
for the difference between Federal income tax imposed on a
distributive share of income (for which he would not have been
held liable if he had sold the stock on Sept. 24, 1998, but which
the parties recognized petitioner was liable or for which he was
going to be liable) and that imposed on the change in his capital
gain (which would have been higher had the stock been sold in
1998 and petitioner not incurred an additional distributive share
of income).
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