## Facts

- Ray Collishaw owned all shares of Bleily & Collishaw, Inc. (B&C).
- B&C, a construction company, acquired shares of Maxdon Construction, Inc. (Maxdon), with which it had a business relationship.
- Before any redemptions, B&C owned 225 of Maxdon’s 750 outstanding shares (30%).
- Donald Neumann, Maxdon’s president and controlling shareholder, wanted to obtain sole ownership and control of Maxdon.
- Collishaw agreed to sell all of B&C’s Maxdon shares for $200 per share, and was willing to sell the entire block at once.
- Neumann lacked sufficient cash to buy all of B&C’s shares immediately, so Maxdon redeemed B&C’s shares in seven installments over about 23 weeks.
- The redemptions occurred between August 17, 1973, and February 22, 1974, and reduced B&C’s Maxdon holdings from 225 shares to zero.
- B&C reported the amounts received as dividends.
- The Commissioner determined the payments should be treated as amounts received in exchange for stock under I.R.C. § 302(a) because, in substance, the series of redemptions constituted a complete termination of B&C’s interest under § 302(b)(3); the Commissioner assessed a deficiency.
- B&C petitioned the U.S. Tax Court; after an adverse ruling, B&C appealed to the Ninth Circuit.

## Issues

1. Whether the seven installment redemptions should be treated together as a single transaction that completely redeemed all of B&C’s Maxdon stock under I.R.C. § 302(b)(3).
2. Whether § 302(b)(3) can apply when the parties did not execute a formal, contractually binding agreement at the outset requiring redemption of all shares.
3. Whether the distributions were taxable as dividends under I.R.C. §§ 301 and 316 or as payments in exchange for stock under § 302(a) by reason of § 302(b)(3).

## Decision

- The Tax Court held that the redemptions were executed pursuant to a plan to terminate B&C’s entire stock interest in Maxdon and therefore were aggregated and treated, in substance, as one complete redemption under § 302(b)(3).
- The Tax Court held that a contractually binding redemption obligation was not required where the record showed a firm intent and course of conduct to eliminate B&C’s ownership, with timing driven by financing limits.
- Because § 302(b)(3) applied, the Tax Court sustained the Commissioner’s determination that the payments were treated as amounts received in exchange for stock under § 302(a), not as dividends.
- The Ninth Circuit affirmed the Tax Court’s judgment, concluding that the Tax Court’s findings regarding the existence of a plan and its application of § 302(b)(3) were supported by the record.

## Legal Principles

- A corporate distribution in redemption of stock is treated as a sale or exchange under I.R.C. § 302(a) only if one of the § 302(b) tests is met; otherwise, the distribution is generally taxed as a dividend to the extent of earnings and profits under §§ 301 and 316.
- Under I.R.C. § 302(b)(3), sale-or-exchange treatment applies when a distribution is “in complete redemption of all of the stock of the corporation owned by the shareholder.”
- For § 302(b)(3), multiple redemptions may be treated as parts of a single redemption when carried out pursuant to a plan to terminate the shareholder’s entire interest; substance controls over the form of separate steps.
- A written, contractually enforceable obligation to redeem all shares at the outset is not a prerequisite; what matters is whether the facts show a firm plan to end the shareholder’s ownership, even if the redemptions occur in installments due to cash constraints.
- On appellate review, the existence of a plan to terminate the shareholder’s interest is primarily a factual determination; the court of appeals will not disturb it absent clear error.

## Conclusion

Bleily & Collishaw held that seven installment redemptions of a corporate shareholder’s entire block of stock, carried out over several months because the buyer lacked immediate financing, could be aggregated and treated as a complete redemption under I.R.C. § 302(b)(3). As a result, the payments were treated as received in exchange for stock under § 302(a), rather than as dividends, and the Ninth Circuit affirmed the Tax Court’s decision.


Bleily & Collishaw, Inc. v. Commissioner, 72 T.C. 751 (1979), 647 F.2d 169 (1981)