Analyze all or a portion of Television Industries, Inc. v. CIR, using the Issue, Rule, Application, and Conclusion methodology in your comments below. Remember to “Blue Book” where appropriate.
Television Industries, Inc. v. CIR, 284 F. 2d 322 – Court of Appeals, 2nd Circuit 1960
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Facts: Wertheim (W) owned 900 shares (or 90%) of Nedick’s stock. Nedick’s repurchased the other 100 shares pursuant to an option. Potential buyer, Phoenix (P), wanted to buy stock from W. P agreed to buy the stock in exch. for 3 installment payments to be made over 6 mo. period for a total purchase price of $3,600,000. P made the first 2 installments and when 3rd installment was due, P borrowed the money from a third party lender. P used the money to pay the 3rd installment. At that point, P owned all of the outstanding stock. P offered to sell 260 shares to Nedick’s for $1,026,385 and Nedick’s accepted. P used $1,000,000 of that money to pay off the lender.
Issue: How should the transaction in which P surrenders 260 shares for $1,026,385 from Nedick’s be taxed?
Application: Basically, this is an acquisition with a redemption as part of the transaction where part of the consideration of P pays to acquire N is being paid out of N. N’s assets themselves are being used to pay for some of purchase of N.
Conclusion: The transaction is essentially equivalent to a dividend. At the time of the redemption, P owned 100% of N. After the redemption, P still owns 100% of N. Since, P is the sole shldr of this company, P doesn’t meet the safe harbor and there is no evidence of a partial liquidation. The 1/3 interest in fact resulted in a distribution of e & p out of corporation. That momentary interest, even thou short-lived, was significant.