## Facts

- Bernard E. Niedermeyer and Tessie S. Niedermeyer filed a joint federal income tax return for 1966.
- The Niedermeyer family held closely held interests in two Oregon corporations: American Timber & Trading Co., Inc. (American Timber) and Lents Industries, Inc. (Lents).
- Petitioners owned approximately 22–23% of American Timber common stock and 125 shares of American Timber preferred stock; their sons owned the majority of American Timber common stock.
- Petitioners directly owned no stock in Lents, but three of their sons owned a controlling interest in Lents.
- On September 8, 1966, petitioners sold all of their American Timber common stock to Lents.
- On December 28, 1966, petitioners contributed all of their American Timber preferred stock to a tax-exempt family foundation.
- Petitioners reported the September 1966 stock-sale proceeds as long-term capital gain.
- The Commissioner determined a $73,280.08 deficiency for 1966, treating the proceeds as a deemed redemption through a related corporation under I.R.C. § 304(a)(1), taxable under §§ 301 and 302 as dividend-equivalent ordinary income to the extent of earnings and profits.

## Issues

1. Whether petitioners’ sale of American Timber common stock to Lents was treated as a redemption through the use of a related corporation under I.R.C. § 304(a)(1), applying constructive ownership rules.
2. If § 304(a)(1) applied, whether the deemed redemption qualified for exchange treatment under § 302(a) (including § 302(b)(1) or § 302(b)(3)) or instead was a distribution to which § 301 applied.

## Decision

- The Tax Court sustained the Commissioner’s deficiency determination.
- The court held that the September 8, 1966 transaction was a § 304(a)(1) redemption through a related corporation because, under § 318 attribution, petitioners were treated as controlling both corporations.
- The court rejected petitioners’ attempt to avoid attribution based on alleged family discord, finding the record did not support disregarding § 318 attribution.
- The court held the transaction did not qualify for exchange treatment under § 302(b)(3) (no complete termination after attribution) or § 302(b)(1) (no meaningful reduction; essentially equivalent to a dividend).
- The proceeds were therefore treated as a distribution under § 301, taxable as dividends to the extent of earnings and profits.

## Legal Principles

- A sale of stock to a corporation can be recharacterized under I.R.C. § 304(a)(1) as a redemption when the same persons are treated as controlling both the acquiring and issuing corporations, including by constructive ownership.
- Stock ownership attribution under I.R.C. § 318 applies to determine control for § 304 and to evaluate § 302 redemption tests.
- Alleged family hostility does not defeat statutory attribution absent persuasive evidence warranting disregard of the attribution rules on the facts.
- For § 302(b)(3), a “complete termination” requires that, after attribution, the shareholder is treated as having no interest in the corporation.
- For § 302(b)(1), the redemption must produce a meaningful reduction in the shareholder’s proportionate interest (as measured after attribution); otherwise the distribution is treated as dividend-equivalent and governed by § 301.

## Conclusion

The Tax Court treated petitioners’ stock sale to a family-related corporation as a § 304 deemed redemption because § 318 family attribution established control, and it taxed the proceeds under § 301 as dividend-equivalent distributions because the transaction did not satisfy § 302 exchange-treatment tests after attribution.


Niedermeyer v. Commissioner, 62 T.C. 280 (1974)