F. Norman Phelps and Alice Phelps v. Commissioner of Internal Revenue

We have for consideration a petition of F. Norman Phelps and Alice Phelps, hereafter petitioners, for a review of a decision of the Tax Court of the United States sustaining a determination by the Commissioner of Internal Revenue of a deficiency in petitioners’ Federal Income Taxes for the calendar year 1948.

The question presented is whether distributions from three related corporations in redemption of stock held by the petitioners were essentially equiva lent to the distribution of taxable dividends within the meaning of § 115(g), Internal Revenue Code of 1939, 26 U.S.C.A. § 115 (g).

Prior to the transaction in question, petitioners held half of the outstanding stock in two companies retaining Chevrolet dealership franchises in California, Capitol Chevrolet Company and Mid-Valley Chevrolet Company. The other half of the outstanding stock was held by J. A. Kenyon through both a trust, hereafter called the Kenyon Trust, and a holding company, the J. A. K. Company. J. A. Kenyon created the Kenyon Trust for the benefit of his daughter, leaving himself as trustee with the power to deal with the corpus as absolute owner. The holding company, J. A. K. Company, was wholly owned by J.…