Dick and Barbara Patton, William Patton and William Patton, Independent for the Estate of Bernice Patton v. The United States

FRIEDMAN, Circuit Judge.

The issue in this appeal from the United States Claims Court is the taxability as corporate dividends of two transactions by which a former subchapter S corporation attempted to make a tax-free distribution of its earnings by purchasing certificates of deposit for its shareholders. The Claims Court held that both transactions constituted taxable dividends and therefore granted summary judgment for the government in the taxpayers’ refund suit. We affirm with respect to one transaction and reverse with respect to the other.

I

A. Under Subchapter S of the Internal Revenue…