## Facts

- A closely held corporation was owned entirely by Mrs. Zenz after her husband (the founder) died.
- After later personal and business changes, Mrs. Zenz sought to exit the business and transfer it to a competitor.
- The transfer occurred in two steps close in time:
  - The competitor bought 47 of 108 shares from Mrs. Zenz for cash.
  - About three weeks later, the corporation redeemed Mrs. Zenz’s remaining 61 shares using accumulated earnings and profits.
- After the sale and redemption, the competitor owned 100% of the corporation, and Mrs. Zenz had no remaining equity or other shareholder interest.
- The Commissioner treated the redemption proceeds as a distribution “essentially equivalent to a taxable dividend” under I.R.C. § 115(g) (1939 Code) to the extent of earnings and profits, and assessed a deficiency.
- Mrs. Zenz claimed the overall transaction terminated her interest and the redemption proceeds should receive sale-or-exchange (capital gain) treatment.

## Issues

1. Whether a corporation’s redemption of a shareholder’s remaining stock, undertaken shortly after the shareholder sells part of her stock to a new owner as part of a plan to transfer control, is “essentially equivalent to the distribution of a taxable dividend” under I.R.C. § 115(g) when the shareholder’s interest is completely terminated.

## Decision

- The Sixth Circuit reversed the district court.
- The court held that when a redemption completely extinguishes the taxpayer’s shareholder interest and the taxpayer retains no beneficial interest, the distribution is not essentially equivalent to a taxable dividend as to that shareholder.
- The redemption proceeds were to be treated as consideration received in exchange for stock (capital gain treatment), not as a dividend under § 115(g).

## Legal Principles

- Under I.R.C. § 115(g) (1939 Code), a redemption is taxed as a dividend only if made “at such time and in such manner” that it is essentially equivalent to a dividend; the determination depends on the facts and circumstances.
- A distribution cannot be treated as essentially dividend-equivalent to a shareholder when the redemption completely terminates that shareholder’s interest and leaves the shareholder with no beneficial interest in the corporation.
- Related steps that implement a single plan to transfer ownership and eliminate the seller’s interest may be evaluated as an integrated transaction; the formal sequencing of the steps does not control the dividend-equivalence analysis when the end result is a complete termination.

## Conclusion

Because the sale and subsequent redemption fully terminated Mrs. Zenz’s interest in the corporation and left her with no beneficial interest, the redemption was not essentially equivalent to a dividend under § 115(g) and was taxable as a sale or exchange of stock.


Zenz v. Quinlivan, 213 F.2d 914 (6th Cir. 1954)