Rickey v. United States
592 F.2d 1251 (1979)
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Rule of Law:
An estate can waive the entity-to-beneficiary attribution rules of I.R.C. § 318(a)(3) to qualify a redemption of all stock it actually owns as a complete termination under § 302(b)(3), thereby receiving capital gains treatment.
Facts:
- Horace B. Rickey, Sr. was the president and principal stockholder of Horace B. Rickey, Inc., owning 1,292 of the 2,255 shares.
- His three children, Horace B. Rickey, Jr., Robert H. Rickey, and Elizabeth Ann Rickey, were the residuary legatees of his will and also owned stock in the company.
- The company's Articles of Incorporation contained a provision requiring a deceased shareholder's stock to be offered to the company for redemption at book value, a practice for which the company maintained life insurance policies.
- Horace B. Rickey, Sr. died in May 1967.
- In accordance with his will, the executrix of his estate offered all 1,292 shares owned by the decedent to the company for redemption.
- The company accepted the offer in June 1967 and paid the estate $383,194 for the shares in October 1967.
- After the redemption, the estate directly owned zero shares, but its beneficiaries (the three children) continued to own their shares, which now constituted a controlling interest of over 81% of the company.
- The estate was closed in June 1968, and the cash proceeds from the redemption were distributed to the children.
Procedural Posture:
- The taxpayers (the decedent's children) treated the redemption proceeds as a distribution in exchange for stock on their 1968 tax returns, reporting no income.
- The Commissioner of Internal Revenue audited the returns, determined the redemption was essentially a dividend, and assessed additional income tax against the taxpayers as distributees of the estate.
- In June 1973, the taxpayers paid the full assessed tax.
- The estate was reopened, and the executrix filed a § 302(c)(2)(A) waiver agreement with the Commissioner in October 1973.
- The taxpayers filed timely claims for a refund, which the Commissioner denied.
- The taxpayers sued for a refund in U.S. District Court.
- The District Court held in favor of the taxpayers, finding the redemption was a complete termination because the waiver was effective.
- The government (appellant) appealed the District Court's decision to the U.S. Court of Appeals for the Fifth Circuit.
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Issue:
Does an estate's redemption of all stock it actually owns qualify as a complete termination under I.R.C. § 302(b)(3), allowing the estate to waive the beneficiary-to-entity attribution rules of I.R.C. § 318(a)(3)?
Opinions:
Majority - Fay, Circuit Judge
Yes. An estate may file a waiver of the entity-to-beneficiary attribution rules of I.R.C. § 318(a)(3) to qualify for a complete termination redemption under § 302(b)(3). The court rejected a 'slavish' and 'crabbed reading' of the tax code that would produce 'inappropriately harsh results' inconsistent with Congressional intent. The purpose of the attribution rules is to prevent tax avoidance schemes where a redemption is economically equivalent to a dividend because the redeeming party maintains an interest through related parties. Here, the estate was not motivated by a desire to benefit the beneficiaries but was merely carrying out the decedent's will to terminate its actual interest and control in the corporation. The court held that where the rationale for applying the attribution rule is absent, a literal application is improper, and principles of 'common sense and basic principles of fairness' should prevail. The court also held that the estate's waiver agreement, filed several years after the redemption, was timely under the 'substantial compliance' doctrine because the estate filed it promptly after a Tax Court decision in Estate of Crawford suggested such a waiver might be permissible, changing the legal landscape from when the redemption occurred.
Analysis:
This decision represents a significant judicial interpretation that expands the availability of the I.R.C. § 302(c)(2) waiver beyond its literal statutory text, which only mentions waiving family attribution rules. By permitting an estate to waive entity attribution, the court prioritized legislative purpose and equity over strict statutory construction. This creates a valuable planning tool for estates holding stock in closely-held corporations, allowing them to achieve capital gains treatment on redemptions even when beneficiaries remain as shareholders. The case signals that courts may be willing to look past the mechanical application of complex attribution rules when such application would frustrate the transaction's economic reality and lead to an unfair result.
