## Facts

- Five shareholders owned virtually all stock of A & S Transportation Co., a small corporation operating a barge.
- The barge required replacement, but A & S lacked sufficient resources and credit.
- To obtain a bank loan guaranteed by the Federal Maritime Commission (FMC), the FMC required at least $150,000 in additional private capital.
- The FMC offered two options: subordinated debt or issuance of nonvoting, nondividend-paying, noncumulative preferred stock that was not redeemable until the loan was fully repaid; A & S chose the preferred-stock option.
- In 1959, the shareholders bought $150,000 of the special preferred stock in proportion to their common-stock holdings.
- The loan was fully repaid by 1964; A & S redeemed the preferred stock in 1965 and 1966 in two equal installments.
- The shareholders received only their original investment (no premium).
- The Commissioner treated the redemption proceeds as ordinary income, asserting the redemptions were “essentially equivalent to a dividend” under I.R.C. § 302(b)(1), relying on United States v. Davis.

## Issues

1. Whether redemption of preferred stock in a closely held corporation that does not change shareholders’ relative ownership interests must be treated as “essentially equivalent to a dividend” under I.R.C. § 302(b)(1), notwithstanding a bona fide financing purpose and redemption at cost.
2. Whether United States v. Davis imposes a categorical rule under § 302(b)(1) that forecloses a facts-and-circumstances inquiry in closely held corporations.

## Decision

- The Tax Court upheld the Commissioner’s characterization of the redemptions as dividend-equivalent under § 302(b)(1), treating United States v. Davis as controlling where relative ownership interests did not change.
- The Third Circuit affirmed (without published opinions in the related appeals).
- The Supreme Court denied certiorari; Justice Powell, joined by Justices Douglas and Blackmun, dissented from the denial and argued the case warranted review to clarify the scope of Davis and § 302(b)(1).

## Legal Principles

- A denial of certiorari leaves the lower court judgment in place and does not constitute a merits determination by the Supreme Court.
- Under the approach applied by the Tax Court and Third Circuit, a redemption in a closely held corporation that produces no meaningful change in shareholders’ relative economic interests is treated as “essentially equivalent to a dividend” under I.R.C. § 302(b)(1), even if motivated by a non-tax business purpose.
- The dissenting view expressed that § 302(b)(1)’s “not essentially equivalent to a dividend” language contemplates a facts-and-circumstances inquiry and should not be read as categorically displaced in closely held corporations, particularly where stock was issued to satisfy a regulatory financing condition and later redeemed at cost.

## Conclusion

The Supreme Court declined review, leaving intact lower court decisions taxing the shareholders’ preferred-stock redemptions as ordinary-income dividends under I.R.C. § 302(b)(1) because the redemptions did not alter proportional ownership, despite evidence that the preferred stock was issued and later redeemed to satisfy a bona fide, regulator-imposed financing structure.


Albers v. Commissioner, 414 U.S. 982 (1973)