Rev. Rul. 77-360

The Internal Revenue Service will dispose of cases under section 301 of the Internal Revenue Code of 1954 (relating to distributions of property by a corporation to a shareholder), that are substantially identical on their facts to the case of Maher v. Commissioner, 469 F. 2d 225 (8th Cir. 1972), reversing 55 T.C. 441 (1970), nonacquiescence, 1977-2 C.B. , in accordance with the decision of the United States Court of Appeals for the Eighth Circuit.

In the Maher case the taxpayer, pursuant to an agreement entered into in April 1963, purchased all the stock of corporations W, X, Y and Z. The taxpayer paid for the stock in cash and by executing two promissory notes. The stock was then placed in escrow to secure payment of the notes and performance of the agreement. On December 31, 1963, pursuant to an agreement with W, the taxpayer assigned to W all "right, title and interest" in the stock of X in exchange for W's assumption of the taxpayer's liability on the notes. However, the taxpayer remained secondarily liable on the notes and the stock continued to be held in escrow. W made payments of principal and interest on the notes in 1965, 1966, and 1967, and the notes were fully paid in 1967. The accumulated earnings and profits of W for each of its taxable years 1965, 1966, and 1967 exceeded the amount of the principal and interest payments made by W on the notes in those years.

The Court of Appeals Affirmed the Tax Court's determination that the above transaction was a distribution (in the amount of the notes) by W in redemption of its stock under section 304(a)(1) of the Code that was equivalent to a dividend to the taxpayer pursuant to section 302(d) and was therefore taxable under section 301(a).

The Court of Appeals also held, because the taxpayer remained secondarily liable on the notes, that the dividend was taxable to the taxpayer in the years payments were made by W on the notes rather than in 1963, the year W assumed the liability to pay the notes.

Further, the court held that the amount paid by W as "interest" pursuant to the agreement was not properly deductible on its corporate return but represented additional dividend income to the taxpayer in the year paid by W.