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Thus, despite section 304(b)’s command to treat the RHI sale as a
redemption by RHI, the Commissioner contends that post-sale em-
ployment by either RHI or HMI is a prohibited interest.
So far, so good, for the Commissioner. This analysis looks
as if it is purely legal, and so only a new “theory”. In ana-
lyzing the RHI sale under section 304, it seems, there is no
different evidence that the Hursts could have introduced that
would change the analysis.
But this is where the Commissioner’s failure to raise the
deemed redemption analysis before filing his answering brief be-
gins to look less like a tardy-though-forgivable new theory, and
more like an unforgivable-if-unaccompanied-by-evidence introduc-
tion of a new matter. The Commissioner may well be right that
the Hursts’ sale of their RHI stock couldn’t steer into the safe
harbor of section 302(b)(3). However, there are several other
paragraphs of section 302(b), and if the Commissioner had raised
his section 304 argument earlier, it seems likely that the Hursts
would have counterpunched by exploring whether one of those other
paragraphs would have helped their cause.
Consider, for example, section 302(b)(1), which allows for
exchange treatment of a redemption not essentially equivalent to
a dividend. In order to qualify for exchange treatment under
this provision, a transaction needs to satisfy the “meaningful
reduction * * * [in] proportionate interest” test set out in
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