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Keywords

corporation

Related Cases

Intermountain Lumber Co. and Subsidiaries v. Commissioner of Internal Revenue, 65 T.C. 1025

Facts

Dee Shook and Milo Wilson, along with two other individuals, incorporated S & W Sawmill, Inc. in 1964. Shook transferred his sawmill property to the corporation in exchange for 364 shares of stock. However, he had an agreement to sell 182 shares to Wilson, which was to be financed through a series of payments. This agreement was executed before the sawmill was deeded to the corporation, and Shook's ownership of the shares was subject to the terms of this agreement.

On July 15, 1964, Shook executed a bill of sale for his sawmill equipment and deeded his sawmill site to S & W… In exchange, Shook received 364 S & W shares on July 15, 1964.

Issue

Did Dee Shook have 'control' of the requisite percentage of stock immediately after the exchange for the incorporation to be a tax-free exchange under section 351(a)?

Rule

Under section 351, no gain shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock, and immediately after the exchange, such person or persons are in control of the corporation, defined as owning at least 80% of the total combined voting power of all classes of stock entitled to vote.

Section 351 provides, in part, that no gain shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation and immediately after the exchange such person or persons are in control of the corporation.

Analysis

The court analyzed whether Shook had relinquished control of the shares due to the agreement to sell half of his stock to Wilson. It concluded that Shook's obligations under the agreement indicated he had effectively given up the right to control the shares, as he was required to transfer them upon Wilson's payments. Therefore, Shook did not own the requisite percentage of stock to maintain control immediately after the exchange.

After considering the entire record, we have concluded that Shook and Wilson intended to consummate a sale of the S & W stock, that they never doubted that the sale would be completed, that the sale was an integral part of the incorporation transaction, and that they considered themselves to be coowners of S & W upon execution of the stock purchase agreement in 1964.

Conclusion

The court concluded that the incorporation was a taxable event because Shook did not control the requisite percentage of stock immediately after the exchange, thus failing to meet the requirements of section 351.

We thus believe that Shook, as part of the same transaction by which the shares were acquired… had relinquished when he acquired those shares the legal right to determine whether to keep them.

Who won?

Petitioner (Intermountain Co.) prevailed because the court found that the transaction was taxable due to the lack of control by Shook immediately after the exchange.

We accordingly hold for petitioner.

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Keywords

Related Cases

Ahles Realty Corporation v. Commissioner of Internal Revenue, 71 F.2d 150, 14 A.F.T.R. 259, 1935-1 C.B. 245

Bush Brothers & Co. v. Commissioner of Internal Revenue, 73 T.C. 424

Haft Trust v. C. I. R., 510 F.2d 43, 35 A.F.T.R.2d 75-650, 75-1 USTC P 9209

Strassburger v. Commissioner of Internal Revenue, 124 F.2d 315, 42-1 USTC P 9173, 28 A.F.T.R. 650

Palmer v. Commissioner of Internal Revenue, 302 U.S. 63, 58 S.Ct. 67, 82 L.Ed. 50, 37-2 USTC P 9532, 19 A.F.T.R. 1201, 1937-2 C.B. 251