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Eugene W. And Marie P. Fireoved, in Nos. 71-1565 v. United States of America, in Nos. 71-1566, 71-1567
Court of Appeals for the Third Circuit (1972) | 462 F.2d 1281; 30 A.F.T.R.2d (RIA) 5043; 1972 U.S. App. LEXIS 9111
TL;DR: A shareholder redeemed preferred stock received as a dividend. The court held the proceeds were ordinary income under I.R.C. § 306, finding a tax avoidance purpose and that a prior partial sale of common stock did not immunize the preferred stock because the shareholder retained effective control.
Legal Significance: This case provides a key interpretation of the I.R.C. § 306(b)(4) "tax avoidance purpose" exception. It establishes that retaining effective corporate control after a partial sale of underlying common stock prevents a taxpayer from qualifying for the exception and receiving capital gains treatment on redeemed preferred stock.