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Keywords

corporation
corporation

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Bhada (Rohinton K., Patricia A.) v. Commissioner of Internal Revenue; Caamano (Edward J., Janice W.), 89 T.C. No. 67, 89 T.C. 959, Tax Ct. Rep. (CCH) 44,312

Facts

Petitioners were shareholders of McDermott, Inc., a Delaware corporation, which underwent a reorganization where its wholly-owned foreign subsidiary, McDermott International, Inc., became the parent corporation. In exchange for their shares of McDermott, shareholders received shares of International and cash. The reorganization aimed to take advantage of lower income tax rates outside the U.S. and involved a significant exchange of stock and cash between the two corporations.

Petitioners participated in the December, 1982, transactions. In response to the Offer, petitioners Rohinton and Patricia Bhada tendered to International 26 shares of McDermott Common and received in return 26 shares of International Common and $9.10 in cash. Petitioners Edward and Janice Caamano tendered to International 50 shares of McDermott Common and received in return 50 shares of International Common and $17.50 in cash.

Issue

Whether the shares of International common stock received by petitioners in exchange for McDermott common stock constitute 'property' within the meaning of I.R.C. section 304(a)(2)(A).

Whether the shares of International common stock received by petitioners in exchange for McDermott common stock constitute ‘property‘ within the meaning of section 304(a)(2)(A).

Rule

Under I.R.C. section 304(a)(2), if one corporation acquires stock from a shareholder of another corporation in return for property, and the issuing corporation controls the acquiring corporation, then such property shall be treated as a distribution in redemption of the stock of the issuing corporation.

Section 304(a)(2) provides: (2) ACQUISITION BY SUBSIDIARY. — For purposes of sections 302 and 303, if — (A) in return for property, one corporation acquires from a shareholder of another corporation stock in such other corporation, and (B) the issuing corporation controls the acquiring corporation, then such property shall be treated as a distribution in redemption of the stock of the issuing corporation.

Analysis

The court analyzed the definitions of 'property' and 'distribution' under the Internal Revenue Code, concluding that the stock received by the petitioners was not property because it was the stock of the corporation making the distribution. The court emphasized that the transaction did not involve a withdrawal of assets from corporate solution, which is a key factor in determining the applicability of section 304.

From this it follows that International ‘distributed‘ its own stock to petitioners in the December, 1982, exchange and that such stock is not to be deemed property. This is because the International Common was the stock of the corporation making the distribution, it was not property, and section 304 does not apply.

Conclusion

The court concluded that the shares of International stock received by the petitioners do not constitute 'property' under section 304(a)(2)(A), and therefore, section 304 does not apply to the transaction.

Accordingly, we must first determine whether the International Common distributed by International was property before we can determine whether section 304 applies. Because, as we have above held and for the reasons stated, the distribution by a corporation of its own stock is not property, section 304 does not apply (except as to the cash paid to the McDermott shareholders).

Who won?

The prevailing party in this case was the Commissioner of Internal Revenue, as the court ruled in favor of the IRS's interpretation that the shares received were not property under the relevant tax code.

The prevailing party in this case was the Commissioner of Internal Revenue, as the court ruled in favor of the IRS's interpretation that the shares received were not property under the relevant tax code.

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