## Facts

- Joseph W. Imler was a shareholder of Imler Supply Co., a Pennsylvania corporation formed in 1923 with 654 shares outstanding (par value $50), and no history of stock dividends.
- The corporation’s business included retinning and soldering metals and renting space in buildings it owned, including a seven-story building.
- On December 1, 1941, a fire destroyed the top two floors of the seven-story building.
- In April 1942, the corporation collected $28,603 in insurance proceeds related to the fire.
- After obtaining a rebuilding estimate, the corporation chose not to reconstruct the top two floors and instead placed a new roof on the fifth floor, leaving excess insurance proceeds.
- The loss of floors reduced the corporation’s operating capacity and its need for capital.
- Using part of the excess insurance proceeds, the corporation redeemed and retired some outstanding shares, and Imler received cash for shares redeemed.
- The Commissioner determined a $2,410.27 deficiency in Imler’s 1943 income and victory tax, treating the 1942 redemption distribution as essentially equivalent to a taxable dividend.

## Issues

1. Whether the 1942 distribution to Imler in connection with the corporation’s stock retirement was made “at such time and in such manner” as to be essentially equivalent to a taxable dividend, rather than consideration received in a sale or exchange of stock.

## Decision

- The Tax Court held that the distribution was not made at such time and in such manner as to be essentially equivalent to a taxable dividend.
- The court rejected the Commissioner’s deficiency determination and entered decision for Imler.

## Legal Principles

- Whether a stock redemption is “essentially equivalent to a taxable dividend” is a fact-dependent inquiry based on the surrounding circumstances and the transaction’s practical effect.
- A redemption may be treated as a sale or exchange, rather than a dividend-equivalent distribution, when linked to a genuine reduction in corporate operations and capital needs.
- Use of proceeds arising from an involuntary event (such as insurance recovery following destruction of corporate property) to retire stock can indicate a return of unneeded capital rather than a disguised distribution of earnings.

## Conclusion

The Tax Court concluded that a stock retirement funded by excess fire-insurance proceeds after a material reduction in the corporation’s operating capacity reflected a corporate readjustment and return of unneeded capital, not a dividend-equivalent distribution taxable to the shareholder as ordinary income.


Imler v. Commissioner, 11 T.C. 836 (1948)