## Facts

- John Roberts and his brother operated a plumbing and heating-supply business as a partnership and later transferred the assets to a newly formed corporation.
- Roberts received 1,500 shares and his brother received 500 shares (2,000 total outstanding).
- After the brother died, Roberts inherited the brother’s 500 shares and became the sole owner of all 2,000 shares.
- A few months later, the corporation redeemed 500 shares for $92,000 paid to Roberts, leaving him as the sole shareholder owning 1,500 shares.
- Roberts did not report the $92,000 as income; the Commissioner determined a deficiency, treating the payment as a taxable dividend under I.R.C. § 115(g).
- The Tax Court held the distribution was not essentially equivalent to a dividend and treated it as a redemption of stock previously owned by the deceased (i.e., not a dividend).
- The Commissioner sought appellate review.

## Issues

1. Whether the $92,000 distribution made in connection with the corporation’s redemption of 500 shares was “essentially equivalent to the distribution of a taxable dividend” under I.R.C. § 115(g).
2. Whether the Tax Court clearly erred in characterizing the redemption as non-dividend (liquidation-type) treatment rather than a dividend-equivalent distribution.

## Decision

- The Fourth Circuit reversed the Tax Court as clearly erroneous.
- The court held the redemption distribution to Roberts was essentially equivalent to a taxable dividend under § 115(g), taxable to the extent of the corporation’s earnings and profits accumulated after February 28, 1913.
- The case was remanded with directions to enter a decision for the Commissioner consistent with dividend treatment.

## Legal Principles

- Under I.R.C. § 115(g), a redemption payment is treated as a taxable dividend when, considering the time and manner of the redemption, it is essentially equivalent to a dividend distribution (to the extent of post-1913 earnings and profits).
- Whether a redemption is dividend-equivalent depends on the circumstances of each case, including the practical effect on shareholder ownership and control.
- A redemption in a closely held corporation that does not meaningfully change the shareholder’s proprietary interest and functions chiefly as a distribution of accumulated earnings may be taxed as a dividend, even if structured as a stock cancellation.

## Conclusion

The court treated the corporation’s payment to its sole shareholder for a stock redemption as dividend-equivalent because the transaction left control unchanged and operated in substance as a distribution of corporate earnings rather than a genuine liquidation-type event.


Comm'r of Internal Revenue v. Roberts, 203 F.2d 304 (4th Cir. 1953)