Opinion ID: 387153
Heading Depth: 2
Heading Rank: 2

Heading: Application of Section 368(a)(1)(D)

Text: 35 The Roses contend that if taxpayers structure a transaction as a sale and liquidation, Section D can be applied to reclassify the transaction as a reorganization only if the Government can show a tax-avoidance motive in the taxpayer's structuring of the transaction. Appellants essentially argue that if a transaction meets the requirements for both a § 337 liquidation and a § 368(a)(1)(D) reorganization, the Government is precluded from considering the transaction to be a Section D reorganization if the taxpayers are able to show a business purpose for structuring the transaction as a sale and liquidation. The Government contends that Section D applies as a matter of law when its technical requirements are met. 9 36 In making their argument the appellants rely on cases in which the courts have recharacterized transactions as reorganizations after finding the transactions to be contrived plans to bail out corporate earnings and profits without appropriate payment of taxes. In Gregory v. Helvering, 293 U.S. 465, 55 S.Ct. 266, 79 L.Ed. 596 (1935), the Supreme Court held that taxpayers cannot take advantage of the tax-free reorganization provisions of the Internal Revenue Code in absence of a business purpose for the transaction other than a purpose to avoid taxes. 10 37 On its face, § 368(a)(1)(D) does not require a finding of tax avoidance before it can be applied. In the recent case of Atlas Tool Co. v. Commissioner, supra, the Third Circuit considered an almost identical factual situation. The court held that no tax-avoidance motive need be found in order to classify as a Section D reorganization a transaction which consisted of the dissolution of one corporation and transfer of its assets to another corporation. The court based its holding on the fact that the I.R.C. provisions governing taxation of reorganization were intended to apply only to transactions that were founded upon a business purpose. The court stated: 38 There is no disagreement among the parties that a business purpose is required for a reorganization. The (appellants) contend that there was a business purpose for liquidation as opposed to reincorporation, and that from this business purpose for liquidation one can infer a non-tax avoidance motive for the overall transaction. However, the liquidation-reincorporation doctrine is aimed at recharacterizing liquidations in light of the entire transaction, notwithstanding liquidation motives. Thus the liquidation purpose alone, and therefore the inference of a non-tax avoidance motive from it, cannot by definition be dispositive, and certainly does not prevent the characterization of the transaction as a D reorganization. (Footnotes omitted.) 39 Atlas, supra, at 866. 40 We agree with the reasoning and conclusion of the Third Circuit in Atlas Tool. 11 We hold that once a sale and liquidation meets the technical requirements of § 368(a)(1)(D), it can be reclassified as a Section D reorganization without the necessity of the Government showing that the transaction was structured as a sale and liquidation to receive more favorable tax treatment. The fact that the taxpayers can show a valid business purpose for the sale and liquidation does not preclude a qualifying transaction from being classified as a Section D reorganization.