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When a shareholder transfers to a corporation its own stock in
exchange for money or other property, the transaction may resemble
either an ordinary sale of stock to an outsider in an arm s
length bargain or the receipt by the shareholder of a dividend from
the corporation. The "sale" analogy is appropriate, for example,
when the owner of preferred stock instructs his broker to sell his
stock and the broker by chance effects a sale to the corporation,
which happens to be buying up its preferred stock at the time. The
preferred shareholder ought to be able to treat the transaction like
any other sale, reporting the difference between his adjusted basis
and the sales price as capital gain or loss. On the other hand, when
the owner of a one-man corporation having only common stock
outstanding forgoes dividends for a period of years and then sells
some of his shares to the corporation for cash, the transaction is
more like a "dividend" than a "sale." Although the shareholder
has surrendered some of his stock, his interest in the corporation's
assets and his control of the corporation's fate are undisturbed. If
the transaction were not taxed as a "dividend," moreover, the shareholder
could enter upon a long-range program of intermittent
transfers of stock to his corporation, employing tax-free stock dividends
if necessary to replace his shares and to restore the corporation's
stated capital for the benefit of nervous creditors. For shareholders
who could adopt such a plan of intermittent "sales" of
stock, the tax on dividend income would become a dead letter.

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