## Facts

- David Metzger created a trust (1942) benefiting his wife as life income beneficiary and his three children (Jacob, Catherine, and Cecelia) as equal remaindermen; Jacob served as trustee.
- The family dairy business was incorporated as Metzger Dairies, Inc. (MDI) (1946), and the trust became a shareholder.
- After David’s death (1953), Jacob controlled MDI as chief executive; Catherine and Cecelia served as directors.
- Significant hostility developed among the siblings amid declining earnings and other disputes.
- To separate business and family relations, MDI redeemed stock held by Catherine, Cecelia, and the trust (whose shares would ultimately pass to the same siblings as remaindermen).
- As part of the redemption price for Cecelia’s shares, MDI issued a promissory note requiring three annual installments plus interest.
- MDI accrued interest deductions, and Cecelia reported corresponding interest income, but MDI did not pay the interest within 2½ months after each fiscal year end.
- The trust filed an agreement purporting to waive certain attribution rules under I.R.C. § 302(c)(2)(A).
- The Commissioner determined deficiencies, treating the redemption as dividend-equivalent (not exchange treatment) and disallowing MDI’s accrued interest deductions under related-party timing rules.

## Issues

1. Whether family hostility prevents application of I.R.C. § 318(a) attribution when determining if a redemption is “not essentially equivalent to a dividend” under § 302(b)(1).
2. Whether a trust may use § 302(c)(2)(A)(iii) to waive trust-beneficiary attribution under § 318(a)(3) to obtain “complete termination” treatment under § 302(b)(3).
3. Whether family hostility prevents application of I.R.C. § 267(c) attribution, affecting the timing of deductions for accrued interest payable to a related party.

## Decision

- The Tax Court upheld the deficiencies, concluding that statutory attribution applied despite family discord, the trust’s waiver attempt was ineffective, and § 267 barred the interest deductions until timely payment.
- The Fifth Circuit affirmed.
- The redemption was treated as a distribution governed by dividend rules (rather than a sale or exchange).
- MDI’s accrued interest deductions were disallowed where interest was paid more than 2½ months after fiscal year end to a related party under § 267.

## Legal Principles

- Stock attribution under I.R.C. § 318 applies as written and is not negated by family hostility.
- A redemption that does not meaningfully reduce the relevant attributed ownership interest may be treated as “essentially equivalent to a dividend” under § 302(b)(1), resulting in dividend treatment under § 301 via § 302(d).
- The § 302(c)(2) waiver is limited; it does not permit a trust to waive trust-beneficiary attribution under § 318(a)(3) to claim a “complete termination” under § 302(b)(3).
- Related-party attribution under I.R.C. § 267(c) applies notwithstanding family discord.
- Under § 267(a), accrued interest owed to a related party is not deductible until paid; payment made after the statutory window (including the 2½-month rule referenced by the courts) results in disallowance of the accrual-year deduction.

## Conclusion

The courts held that intrafamily hostility does not alter the mechanical application of the Code’s attribution rules: the trust and family members remained attributed owners for § 302 purposes, making the redemption dividend-equivalent, and § 267 related-party attribution required deferral of MDI’s interest deductions until timely payment.


David Metzger Trust v. Comm’r, 693 F.2d 459 (5th Cir. 1982)