## Facts

- Glacier State Electric Supply Company (Glacier State) was owned by Donald Rearden, J. Kenneth Parsons, and their wives and operated an electrical supply business.
- Rearden and Parsons formed a second corporation with Arthur E. Pyle: Glacier State Electric Supply Company of Billings (GSB).
- GSB issued 339 shares: Rearden (1), Parsons (1), Pyle (113), and Glacier State (224).
- The participants executed a redemption agreement providing that on the death of Rearden or Parsons, GSB would redeem one-half of the GSB shares held by Glacier State and the decedent’s one individually held share.
- After Parsons died, GSB redeemed 112 of Glacier State’s 224 GSB shares and Parsons’s single GSB share.
- Glacier State assigned the redemption payments attributable to its 112 redeemed shares to Parsons’s estate pursuant to the agreement.
- The Commissioner determined that Glacier State realized long-term capital gain on GSB’s redemption of the 112 shares and issued a notice of deficiency.
- Glacier State contested the deficiency, arguing (i) the ownership structure should be recast (including via step-transaction principles) and (ii) the redemption should be treated as a dividend to Glacier State eligible for the intercorporate dividends-received deduction.

## Issues

1. Whether Glacier State’s record ownership of 224 GSB shares should be disregarded (including under step-transaction principles) and treated as ownership by the individual participants.
2. Whether GSB’s redemption of 112 shares held by Glacier State should be treated as an exchange under I.R.C. § 302 (capital gain) or as a dividend-type distribution under I.R.C. §§ 301–302 (potentially supporting a dividends-received deduction).
3. Whether assignment of the redemption proceeds to Parsons’s estate altered the taxpayer that recognized income from the redemption.

## Decision

- The Tax Court sustained the Commissioner’s deficiency determination.
- The court respected Glacier State’s ownership of the 224 GSB shares and rejected Glacier State’s attempt to recharacterize that ownership.
- The court held that GSB’s redemption of 112 shares from Glacier State was treated as a sale or exchange producing long-term capital gain to Glacier State, not a dividend.
- The court held that Glacier State’s assignment of the redemption proceeds to Parsons’s estate did not shift the tax consequences of the redemption away from Glacier State.

## Legal Principles

- Taxpayers are generally bound by the business form and ownership structure they deliberately choose; courts will not disregard that form at the taxpayer’s request solely to obtain more favorable tax results.
- The step-transaction doctrine is not a taxpayer tool to retroactively recast a chosen structure absent persuasive evidence that intermediate steps lacked substantive significance.
- A redemption that results in a meaningful reduction of the shareholder’s proportionate interest can qualify for exchange treatment under I.R.C. § 302, producing capital gain rather than dividend income.
- When a shareholder’s stock is redeemed, the shareholder whose interest is reduced is the proper taxpayer to recognize gain, even if the shareholder directs or assigns the redemption proceeds to another person.

## Conclusion

The Tax Court treated the partial redemption of GSB stock held by Glacier State as an exchange under the corporate redemption rules, producing long-term capital gain to Glacier State, and refused to collapse the structure or reclassify the proceeds as a dividend to support a dividends-received deduction.


Glacier State Elec. Supply Co. v. Comm’r, 80 T.C. 1047 (1983)