Stock Redemptions and Partial Liquidations Under the Internal Revenue Code of 1954

When a shareholder transfers to a corporation its own stock inexchange for money or other property, the transaction may resembleeither an ordinary sale of stock to an outsider in an arm slength bargain or the receipt by the shareholder of a dividend fromthe corporation. The sale analogy is appropriate, for example,when the owner of preferred stock instructs his broker to sell hisstock and the broker by chance effects a sale to the corporation,which happens to be buying up its preferred stock at the time. Thepreferred shareholder ought to be able to treat the transaction likeany other sale, reporting the difference between his adjusted basisand the sales price as capital gain or loss. On the other hand, whenthe owner of a one-man corporation having only common stockoutstanding forgoes dividends for a period of years and then sellssome of his shares to the corporation for cash, the transaction ismore like a dividend than a sale. Although the shareholderhas surrendered some of his stock, his interest in the corporation\u27sassets and his control of the corporation\u27s fate are undisturbed. Ifthe transaction were not taxed as a dividend, moreover, the shareholdercould enter upon a long-range program of intermittenttransfers of stock to his corporation, employing tax-free stock dividendsif necessary to replace his shares and to restore the corporation\u27sstated capital for the benefit of nervous creditors. For shareholderswho could adopt such a plan of intermittent sales ofstock, the tax on dividend income would become a dead letter