## Facts

- Clara D. Blaschka owned 92.3% of C. & C. Blaschka, Inc. (C&C); her husband, Carl Blaschka, owned the remaining 7.7%.
- Clara and Carl were executive officers of C&C and served on its board of directors.
- C&C conducted a wholesale glove business in the United States.
- C&C also owned a wholly owned Canadian subsidiary, Max Mayer & Company, Ltd. (Max Mayer), which sold gloves in Canada.
- Under a management agreement, C&C received 3% of Max Mayer’s net sales.
- C&C sold its United States glove business and the name “Max Mayer” to unrelated third parties.
- After the sale, C&C’s directors held several conferences about how to use the funds received.
- Clara individually owned all shares of Clairette Manufacturing Company, Inc. (Clairette), a corporation engaged in owning and managing real estate.
- C&C decided to purchase all of Clara’s Clairette stock and paid her $115,000.
- The corporate minutes reflected a decision to buy Clairette stock but did not mention a plan of partial liquidation.
- On her return, Clara reported the $115,000 as long-term capital gain from the sale of stock.
- The Commissioner assessed a deficiency, treating the $115,000 as a dividend taxable as ordinary income.
- Clara filed a Notice of Protest stating, in substance, that C&C chose to use accumulated earnings to go into a different business rather than liquidate.
- After the Commissioner denied the protest, Clara paid the tax and sued the United States for a refund in the Court of Claims.

## Issues

1. Whether C&C’s $115,000 payment to Clara, made in connection with C&C’s purchase of her Clairette stock after C&C sold its U.S. glove business, qualified as a distribution in partial liquidation under former I.R.C. § 346.
2. Whether the payment was instead a dividend taxable as ordinary income.

## Decision

- The Court of Claims entered judgment for the United States and denied Clara’s refund claim.
- The court held the $115,000 did not qualify as a distribution in partial liquidation under former I.R.C. § 346.
- The court treated the transaction as a dividend taxable as ordinary income rather than capital gain.

## Legal Principles

- A distribution qualifies as a partial liquidation under former I.R.C. § 346 only when the transaction reflects a genuine corporate-level reduction of the corporation’s business, not a redeployment of assets into another ongoing activity.
- Corporate records and objective evidence of a liquidation plan matter; minutes that authorize a purchase or reinvestment, without describing liquidation, support dividend treatment.
- When a corporation uses funds (including proceeds from selling a business line) to buy property from its controlling shareholder, the payment may be treated as a distribution of earnings and profits—economically similar to a cash dividend—if the corporation continues as a profit-seeking enterprise.

## Conclusion

C&C sold its U.S. glove business and then used corporate funds to buy from its controlling shareholder all of her stock in a separate real-estate company, with corporate minutes reflecting an acquisition decision rather than a liquidation plan; because the corporation’s actions showed continuation of the enterprise in a different form rather than a genuine corporate shrinkage under former I.R.C. § 346, the Court of Claims held the $115,000 was properly taxed as an ordinary-income dividend and denied the refund.


Blaschka v. United States, 393 F.2d 983 (1968)