Family Hostility Can Mitigate the Application of the Constructive Ownership Rules in Determining Whether a Stock Redemption Is Essentially Equivalent to a Dividend
Stoltz, Michael R.
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Summarizes the United States Court of Appeals for the First circuit case Haft Trust v. Commissioner. This case held that “family hostility can mitigate the application of the constructive ownership rules of section 318(1) of the Internal Revenue Code of 1954 in determining whether a stock redemption is essentially equivalent to a dividend under section 32(b)(1).” The family hostility of a divorcing couple led the husband’s company, Haft-Gaines Company, to redeem stock purchase by the wife’s father and granted to trusts for the couple’s children. The Commissioner claimed that the gains were ordinary tax and not, as the taxpayer trusts had claimed, long-term capital gains. The author believes that this standard, allowing evidence of family hostility in deciding whether a stock redemption was equivalent to a dividend, is “overly subjective, unworkable, and inequitable,” and believes that the court should instead apply the uniform rules.