## Facts

- George L. Coyle, Sr. (taxpayer) owned 369 of 688 outstanding shares of Coyle & Richardson, Inc. (C & R).
- Taxpayer’s three sons owned, in the aggregate, 288 shares of C & R; taxpayer’s wife owned 1 share; two minority holders owned the remaining 30 shares. Taxpayer and his immediate family thus owned more than 95.6% of C & R.
- The acquiring corporation, Coyle Realty Company (Realty), was owned entirely by taxpayer’s three sons, each holding 125 of 375 outstanding shares.
- Although taxpayer had once held a share of Realty, he owned no Realty stock at the time of the transaction.
- In 1958, taxpayer transferred 66 shares of C & R stock to Realty in exchange for $19,800 in cash.
- Taxpayer reported the transaction as a sale and treated the proceeds as long-term capital gain (sale price minus basis).
- The Internal Revenue Service treated the cash as dividend income and assessed additional tax and interest.
- Taxpayer paid the assessment and filed a timely refund claim; after denial, he brought a tax refund suit.
- The district court ruled for taxpayer and ordered a refund; the United States appealed.
- By the time of the appeal, the suit was prosecuted by the executors of taxpayer’s estate.

## Issues

1. Does I.R.C. § 304 apply where a shareholder of one corporation transfers shares to another corporation owned by his sons, even though the transferor holds no stock in the acquiring corporation at the time of the transfer?
2. If § 304 applies, should the cash received be treated as a dividend (ordinary income) rather than as consideration in an exchange producing capital gain?

## Decision

- The Fourth Circuit reversed the district court’s judgment for the taxpayer.
- The court held that § 304 applied because, using the constructive ownership rules of § 318, taxpayer was treated as controlling both C & R and Realty for purposes of § 304.
- Under § 304, the cash paid by Realty was treated as a distribution in redemption, and the tax character of that distribution was tested under § 302 (with § 318 attribution).
- Because taxpayer’s effective ownership interest in C & R was not meaningfully reduced when family attribution was taken into account, the distribution did not qualify for exchange treatment under § 302 and was taxed as a dividend to the extent of earnings and profits.
- The refund should be denied.

## Legal Principles

- Under I.R.C. § 304(a)(1), when a person who controls two corporations causes one corporation to acquire stock of the other from that person in exchange for property, the property received is treated as a distribution in redemption (not a simple sale).
- “Control” for § 304 purposes is determined using statutory attribution rules; under § 318, stock owned by a taxpayer’s children may be attributed to the taxpayer, so § 304 can apply even if the taxpayer owns no shares of the acquiring corporation directly.
- After § 304 recharacterizes the transaction, whether the distribution is treated as a dividend or as an exchange is determined under § 302, applying § 318 constructive ownership rules.
- Where the transaction does not significantly reduce the taxpayer’s ownership of (and voting power in) the issuing corporation after attribution, the redemption is treated as essentially equivalent to a dividend, producing ordinary income to the extent of corporate earnings and profits.
- A taxpayer cannot defeat § 304 dividend treatment by arranging transfers within a closely held family group through a related corporation; the attribution rules operate mechanically as written.

## Conclusion

Coyle held that when a controlling shareholder transferred stock of a family-controlled corporation to another corporation owned by his sons for cash, § 304 applied through § 318 attribution, and because the transfer did not materially reduce his effective interest in the issuing corporation under § 302, the proceeds were taxable as a dividend rather than as long-term capital gain.


Coyle v. United States, 415 F.2d 488 (1968)