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Keywords

corporation

willcorporation

Related Cases

Lovell and Hart, Inc. v. C.I.R., T.C. Memo. 1970-335, 1970 WL 1861, 29 T.C.M. (CCH) 1599, T.C.M. (P-H) P 70,335, 1970 PH TC Memo 70,335

Facts

Lovell and Hart, Inc., a Kentucky corporation, transferred its construction equipment and cash to Watts and Call Construction Company, which was formed by two of its minority stockholders. The transfer included a stock certificate from Watts and Call to Lovell and Hart, and the equipment was valued significantly higher than its adjusted basis. Additionally, notes were issued by Watts and Call to some of Lovell and Hart's shareholders in connection with this transfer. The case arose when the Commissioner determined that Lovell and Hart realized a taxable gain from this transaction under section 351 of the Internal Revenue Code.

Accordingly, on December 28, 1964, Watts and Call Construction Company, Inc. (‘Watts & Call’) was incorporated under the laws of the Commonwealth of Kentucky.

Issue

Did Lovell and Hart, Inc. receive 'other property' within the meaning of section 351(b) of the Internal Revenue Code during its transfer of property to Watts and Call Construction Company?

The controversy herein concerns the application of section 351 to a series of transactions involving the transfer of petitioner's construction business to Watts & Call, a new corporation.

Rule

Under section 351(a) of the Internal Revenue Code, no gain or loss is recognized if property is transferred to a corporation solely in exchange for stock, provided the transferor is in control of the corporation immediately after the exchange. However, section 351(b)(1) states that if other property or money is received in addition to stock, any gain must be recognized.

Subsection (a) of section 351, I.R.C. 1954, provides for nonrecognition of gain or loss ‘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.’ However, subsection (b)(1) of section 351 provides that if subsection (a) would apply to a transaction but for the fact that other property or money is received in addition to the stock or securities permitted to be received under subsection (a), then any gain to the recipient of such other property or money shall be recognized.

Analysis

The court analyzed whether the notes issued by Watts and Call to Lovell and Hart's shareholders constituted 'other property' under section 351(b). It concluded that the notes were issued in connection with the transfer of Lovell and Hart's construction business to Watts and Call, and thus, the gain realized from this transaction was taxable. The court found that the notes were effectively constructively received by Lovell and Hart, even though they were issued directly to the shareholders.

The Commissioner contends that the notes were issued by Watts & Call in connection with the transfer of petitioner's construction business. The record, considered as a whole, supports his position. The Commissioner relies primarily upon the minutes of a special meeting of the board of directors of Watts & Call, held on or about February 26, 1965, which stated that the notes were issued ‘in connection with the transfer of equipment’ from petitioner.

Conclusion

The court upheld the Commissioner's determination that Lovell and Hart realized a taxable gain of $137,634.96 from the transfer of property to Watts and Call, as the notes issued were considered 'other property' under section 351(b).

Decision will be entered under Rule 50.

Who won?

The Commissioner of Internal Revenue prevailed in the case, as the court affirmed the determination of a taxable gain based on the issuance of notes to shareholders, which were deemed 'other property' under the tax code.

The Commissioner contends that the notes were issued by Watts & Call in connection with the transfer of petitioner's construction business.

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