## Facts

- Texon Royalty Company (Texon) was a Delaware corporation engaged in oil and gas operations and held producing leases, including interests connected to the Agua Dulce oil field.
- A serious blowout in the Agua Dulce field led to litigation against Texon and created business uncertainty.
- In response, Texon reduced and rearranged its operations, including a substantial sale of leases and equipment and an overall contraction of its business.
- On April 1, 1943, Texon made a distribution in kind to its two sole shareholders, Georgia Sullivan and Betty Garnett, in cancellation of 2,000 shares (two-fifths) of its outstanding stock.
- Deficiencies were asserted against the shareholders’ husbands because the couples filed joint returns under Texas community-property law.
- The Commissioner treated the distribution as essentially equivalent to a taxable dividend under Internal Revenue Code of 1939 § 115(g).
- The Tax Court held § 115(g) inapplicable and treated the transaction as a distribution in partial liquidation under § 115(c), producing capital-gain treatment.

## Issues

1. Whether Texon’s distribution in kind made in connection with redeeming and cancelling two-fifths of its outstanding shares was “essentially equivalent to the distribution of a taxable dividend” under I.R.C. § 115(g).
2. Whether the distribution instead qualified as a distribution in partial liquidation under I.R.C. § 115(c), taxable as a sale or exchange of the redeemed stock (capital gain).

## Decision

- The Fifth Circuit affirmed the Tax Court.
- The court held the distribution was not essentially equivalent to a taxable dividend under § 115(g).
- The court held the distribution was properly treated as a distribution in partial liquidation under § 115(c), taxable as exchange treatment (capital gain).
- The court relied substantially on the Tax Court’s findings that the redemption occurred alongside a real reduction in Texon’s business and capital structure.

## Legal Principles

- Whether a stock redemption is “essentially equivalent” to a dividend under I.R.C. § 115(g) is a fact-dependent determination based on the time, manner, and surrounding circumstances of the redemption.
- A redemption connected to a genuine contraction of corporate business and a meaningful reduction of capital may be treated as a partial liquidation under I.R.C. § 115(c) rather than as dividend-equivalent under § 115(g).
- Appellate review gives substantial deference to the Tax Court’s factual findings supporting characterization of a redemption as a bona fide partial liquidation.

## Conclusion

The Fifth Circuit held that Texon’s in-kind distribution made to redeem and cancel two-fifths of its shares, undertaken amid asset sales and a contraction of operations following blowout-related litigation, was a partial liquidation under § 115(c) rather than a dividend-equivalent redemption under § 115(g), so the shareholders’ gain received exchange (capital-gain) treatment.


Commissioner v. Sullivan, 210 F.2d 607 (5th Cir. 1954)