## Facts

- Horace B. Rickey, Sr. was president and principal shareholder of Horace B. Rickey, Inc.; at his death (1967) he owned 1,292 of 2,255 outstanding shares.
- The corporation maintained life insurance on key shareholder-employees to fund the purchase of a deceased shareholder’s stock.
- The corporate charter gave the corporation an option to buy a deceased shareholder’s stock at book value; shareholders treated it as effectively requiring a buyout at death.
- In 1968 the corporation redeemed all 1,292 shares held by the decedent’s estate for $383,194.
- The proceeds were distributed through the estate to the decedent’s children/beneficiaries, who were the taxpayers in consolidated refund suits.
- The taxpayers reported the redemption as a complete redemption under I.R.C. § 302(b)(3), taxable as capital gain under § 302(a), not as a dividend.
- The IRS applied I.R.C. § 318(a)(3) (estate-to-beneficiary attribution) and treated the payment as essentially equivalent to a dividend, assessing ordinary-income deficiencies.
- Taxpayers paid the assessments, filed refund claims, prevailed in the district court, and the United States appealed.

## Issues

1. Whether an estate may waive I.R.C. § 318(a)(3) entity-attribution so that a redemption of all shares actually owned by the estate qualifies as a complete termination under I.R.C. § 302(b)(3) and receives capital-gain treatment under § 302(a).
2. Whether the waiver asserted in connection with the redemption was timely and effective.

## Decision

- The Fifth Circuit affirmed the judgment for the taxpayers.
- The court held an estate may waive § 318(a)(3) entity attribution for purposes of applying § 302(b)(3) complete-termination treatment.
- The court held the waiver in this case was timely and effective.
- The redemption therefore qualified for capital-gain treatment rather than dividend treatment.

## Legal Principles

- A redemption of all stock actually owned by an estate can qualify as a “complete redemption” under I.R.C. § 302(b)(3) when attribution under § 318(a)(3) is waived in a manner recognized by § 302(c)(2).
- Attribution rules are aimed at preventing dividend equivalents disguised as redemptions; where a transaction effects an actual termination of the estate’s interest and is not a device to distribute corporate earnings, waiver may be permitted.
- In applying § 302 and § 318 in the estate-redemption setting, courts may look to the transaction’s economic effect rather than treating attribution as automatically controlling when it would defeat complete-termination treatment in a bona fide buyout.
- Challenges to the timing and sufficiency of an estate’s waiver fail where the waiver satisfies applicable requirements and is asserted in connection with claiming complete-termination treatment.

## Conclusion

The Fifth Circuit held that an estate may waive entity attribution under § 318(a)(3) so that a corporation’s redemption of all shares actually held by the estate is treated as a complete termination under § 302(b)(3), and it upheld the waiver as effective, entitling the taxpayers to capital-gain treatment on the redemption proceeds.


Rickey v. United States, 592 F.2d 1251 (5th Cir. 1979)