Donald E. Baker and Barbara M. Baker v. United States

The sole issue on appeal concerns the tax treatment of ordinary distributions to, corporate shareholders when a corporation with no accumulated earnings has current earnings and profits that are insufficient to cover both ordinary distributions and selective redemption distributions paid out during the fiscal year. The question of first impression to be decided here is whether either distribution is to be given priority as a charge against the current earnings and profits.

The district court held that ordinary dividends are to receive preferential treatment in reducing current earnings and…