Haft Trust v. Commissioner of Internal Revenue

United States Court of Appeals for the First Circuit · Corporations

CorporationsCorporate redemptionsDividend equivalenceConstructive ownershipIRC § 302(b)(1)IRC § 318stock redemptionconstructive ownership

Facts

Four trusts for Burt Haft and Marcia Haft's children each owned 25,000 shares of Haft-Gaines Company stock, and in June 1967 the corporation redeemed all of those shares during bitter divorce proceedings between Burt and Marcia Haft. Under § 318 attribution rules, despite the trusts' complete divestment of their directly held shares, their attributed proportional interests increased slightly from 31 2/3 percent to 33 1/3 percent after the redemption. The record described serious family discord: the divorce involved bitter charges, disputes over property settlement, and Burt Haft's prolonged indifference toward and lack of support for the children. The Tax Court did not make findings on whether that hostility undermined the assumption of continuing family control.

Issue

After United States v. Davis, may family hostility still mitigate the effect of § 318 constructive ownership rules when deciding under § 302(b)(1) whether a stock redemption is not essentially equivalent to a dividend? Put differently, are the attribution rules under § 318 conclusive in the § 302(b)(1) inquiry, or may a court consider family discord as part of the facts and circumstances bearing on meaningful reduction of ownership or control?

Rule

In applying § 302(b)(1), the § 318 constructive ownership rules must be taken into account, but they are not automatically determinative. The inquiry remains a facts-and-circumstances determination focused on whether the redemption produced a meaningful reduction in the shareholder's proportionate interest or a genuine change in relative economic interests or control, and family discord may be considered insofar as it negates the presumption of continuing family control underlying attribution.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Portland, Maine, Harbor Loom Works redeemed all shares held by a trust for Nina Solis's two children. After the redemption, Nina's siblings still held most of the company, and under § 318 the children's attributed ownership percentage rose slightly because fewer shares remained outstanding. The children had been estranged from Nina for years after a bitter guardianship dispute, and they had no contact with her or her siblings.

How should a court most likely analyze whether the redemption is "not essentially equivalent to a dividend" under § 302(b)(1)?

Explanation. The majority held that § 318 constructive ownership must be taken into account in the § 302(b)(1) inquiry, but it is not automatically determinative. The ultimate question is whether the redemption caused a meaningful reduction in the shareholder's proportionate interest or a genuine change in relative economic interests or control. Family discord may be considered insofar as it undermines the assumption of continuing unified family control.