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corporationrespondent

statutewillrespondent

Related Cases

Morgenstern v. Commissioner of Internal Revenue, 56 T.C. 44

Facts

Petitioners H. L. Morgenstern and Cecilia Morgenstern received stock in Hughes Hauling Co. as part of a distribution from M & S Construction, which they argued was a partial liquidation. M & S had incorporated Hughes and held a 67% ownership stake, but the court found that M & S was not actively conducting Hughes' business. The distribution occurred after M & S decided to redeem a portion of its stock, and the fair market value of the stock received was reported as a long-term capital gain on their tax return.

Petitioner received stock in Hughes in exchange for stock in M & S.

Issue

Whether the distribution of stock of Hughes Hauling Co. by M & S Construction constituted a partial liquidation under section 346 of the Internal Revenue Code.

The only bone of contention between the parties is whether the distribution was, as required by section 346(b)(1), attributable to M & S ceasing the active conduct of a trade or business.

Rule

A distribution is treated as a partial liquidation if it is attributable to the corporation's ceasing to conduct an active trade or business that has been actively conducted for the five years preceding the distribution.

A distribution shall be treated as a distribution described in subsection (a)(2) if the requirements of paragraphs (1) and (2) of this subsection are met.

Analysis

The court analyzed whether M & S was actively conducting the business of Hughes at the time of the stock distribution. It concluded that M & S, despite its majority ownership, did not operate Hughes directly, and thus the distribution could not be considered a partial liquidation. The court emphasized the necessity for the distributing corporation to be engaged in the active conduct of the business being liquidated.

The statute requires that the distribution be attributable to the ceasing of conduct of an active trade or business by M & S.

Conclusion

The court ruled that the transaction did not qualify as a partial liquidation under section 346, and therefore, the value of the stock received by the petitioners was taxable as a dividend.

Since Hughes must be viewed as a separate and distinct entity, we hold that the transaction does not qualify under section 345(b) as a partial liquidation and the distribution is taxable as a dividend to the extent of the earnings and profits of M & S under section 301.

Who won?

The respondent prevailed in the case, as the court found that the distribution did not meet the criteria for partial liquidation and was taxable as a dividend.

Decision will be entered for the respondent.

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Keywords

Related Cases

Ashby v. Commissioner of Internal Revenue, 50 T.C. 409

Lincoln Savings & Loan Association v. Commissioner of Internal Revenue, 51 T.C. 82

Scriptomatic, Inc. v. U.S., Not Reported in F.Supp., 1973 WL 708, 33 A.F.T.R.2d 74-827, 74-1 USTC P 9246

Estate of Squier v. C. I. R., 35 T.C. 950

Slappey Drive Indus. Park v. U.S., 561 F.2d 572, 40 A.F.T.R.2d 77-5940, 77-2 USTC P 9696