Court Opinion

ID: 4481552
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:14:57.407024+00
Date Added: 2024-06-11T08:49:12.963645
License: Public Domain

SteReett, /., dissenting: I respectfully disagree with the majority’s view of the tax consequences flowing from the liquidation-reincorporation transaction involved in issue one of the case at bar. In my opinion, it ignores the realities of the situation to say that during the period between Henry’s death (June 15, 1961) and the liquidation of Lammerts (Old) (January 2, 1962) it was the estate, rather than Hildred and Parkinson, which had a proprietary interest in the 634 shares of Lammerts (Old) previously owned by Henry. To the contrary, the facts reveal that Hildred and Parkinson were co-executors of the estate and consequently, held legal title to the stock of Lammerts (Old) with full power to vote such stock. In addition, as the sole beneficiaries of the estate, insofar as the assets of Lammerts (Old) were concerned, Hildred and Parkinson were the beneficial owners of that stock. Thus, Hildred and Parkinson held both the legal and equitable interests of the Lammerts (Old) stock, giving them complete dominion and control over the assets of the corporation. Ill light of the foregoing, I would revise the majority’s chart reflecting the various preliquidation and postliquidation ownership interests in Lammerts, Inc., to set forth the facts more realistically, as follows: Ownership interest in shares Lammerts Common (Old) (New) Estate (Hildred and Parkinson)- 634 0 Parkinson_ 66 461 Pretferreü Hildred_ 0 1,498 When the transaction is viewed in this posture, it can he seen that there was continuity of proprietary interest throughout, i.e., both Hildred and Parkinson had an ownership interest in Lammerts, Inc., before and after the liquidation-reincorporation transaction. Furthermore, continuity of business enterprise is present in the transaction at issue. With the exception of certain accounts receivable, a loan to shareholders, and the Ramp Oarage property, the assets of Lammerts (Old) remained in corporate solution following their transfer to the new corporate shell. Indeed, all of the operating assets of Lammerts (Old) were transferred to Lammerts (Hew) and that corporation without interruption continued to carry on exactly the same business which had previously been conducted by Lammerts (Old). Finally, I have been unable to discern any valid business purpose for the complete liquidation of Lammerts (Old). Section 331 was intended by Congress to be used on the occasion of a corporation terminating its business. Davant v. Commissioner, 366 F. 2d 874, 882-883 (C.A. 5, 1966), affirming in part and reversing on other grounds 43 T.C. 540 (1965). However, as noted earlier, such a termination did not occur, but instead, the operating assets of Lammerts (Old) were reincorporated in Lammerts (New) and used to carry on the same business. I am therefore compelled to the conclusion that the liquidation in and of itself had no independent validity, but instead, was one step in a series of integrated steps in a unitary plan which resulted in Lammerts (New) receiving a stepped-up basis in the assets received from Lammerts (Old). In a simultaneous but functionally unrelated transaction (which will be more fully discussed later), the Ramp Garage, the accounts receivable, and the shareholder loan were siphoned off in a distribution which petitioners contend should be taxable at the favorable capital gains rates. That the reincorporation of the operating assets of Lammerts (Old) was foreordained is apparent for several reasons. First, Parkinson and Hildred went out of their way to retain the name Lammerts, Inc., for the new corporate shell by changing the name of Lammerts (Old) to Lammerts Associates, Inc., on the same day that they filed a certificate of incorporation for Lammerts (New) under the name of Lammerts, Inc. Second, G.M.’s direct dealer selling agreement before the liquidation-reincorporation was with Lammerts, Inc., and the one executed on May 2, 1962, after the transaction, was similarly with Lammerts, Ine. The expiration date of both agreements was the same, October 31,1965, and all other provisions were identical except for the elimination of the name of Henry P. Lammerts as a participant in ownership and operation. Thus, a highly desirable degree of continuity for business, goodwill, and contractual relationship purposes was maintained. Third, the high risks of tort or breach of contract claims inherent in the automobile dealership business certainly made it prudent, if not mandatory, for the business to be operated within a corporate shell. For the foregoing reasons, I believe that the liquidation-reincorporation transaction would more properly be treated within the scope of the reorganization provisions of the 1954 Code. There is ample authority wherein this Court has deemed it appropriate to collapse the liquidation-reincorporation steps thereby treating the arrangement as a unitary plan of reorganization. James Armour, Inc., 43 T.C. 295, 309-310 (1964); John G. Moffatt, 42 T.C. 558, 575 (1964), affd. 363 F. 2d 262 (C.A. 9, 1966), and the cases cited therein. See also sec. 1.331-1 (c), Income Tax Regs. Indeed, the instant transaction aptly fits the mold of a “reorganization” as defined in section 368(a) (1) (D). That section describes a (D) reorganization as “a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor, or one or more of its shareholders * * * ⅛ in control of the corporation to which the assets are transferred.” All of the requisite elements of this definition are fulfilled in the instant case. Lammerts (Old) transferred substantially all of its assets to Lammerts (New), and immediately thereafter, Hildred and Parkinson, who were shareholders of the transferor, were in “control” of the transferee, Lam-merts (New). “Control” is defined in section 368(c) to mean ownership of 80 percent of all classes of both voting and nonvoting stock of the corporation. In this case, Hildred and Parkinson, taken together, owned 100 percent of all the common and preferred stock of Lammerts (New). Section 368(a)(1)(D) further provides that a transaction comes within its terms “only if, in pursuance of the plan, stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 354, 355 [section 355 is not applicable to this case], or 356.” The transaction at issue does qualify for treatment under section 354. Disregarding the intermediate steps and viewing the transaction as a whole, it is clear that in substance there was an exchange by Hildred and Parkinson of stock in Lammerts (Old) for stock in Lammerts (New) as required by section 354(a) (1 ).John O. Moffatt, supra at 577. Moreover, Lammerts (Old) transferred “substantially all” of its assets to Lammerts (New) pursuant to a unitary plan of reorganization within the intendment of section 354(b)(1)(A) and (B). Thus, I would hold that the liquidation-reincorporation transaction qualifies as a tax-free reorganization within the definitional provisions of section 368(a) (1) (D) and the operative provisions of section 354. As a result, the basis of the transferred assets in the hands of Lammerts (New) would be the same basis that the assets had in the hands of Lammerts (Old). See sec. 362(b), I.R.C. 1954. Alternatively, this transaction could well be viewed as an (E) reorganization based upon the reshuffling of the capital structure of Lammerts, Inc. Hildred entered the transaction with a majority interest in the common stock of Lammerts (Old) and emerged owning 100 percent of the preferred stock of Lammerts (New). At the same time, Parkinson went into the transaction owning a minority interest in Lammerts (Old) and came out with 100 percent of the common stock of Lammerts (New). Because of these substantial changes in the capital structure of the corporation, I do not believe that the transaction qualifies as “a mere change in identity, form, or place of organization” within the meaning of section 368 (a) (1) (F). Furthermore, I view the distribution of the Ramp Garage property, the accounts receivable, and the shareholder loan to the estate as being an event which was separate and distinct from the reorganization transaction. While these two events (i.e., the dividend and the reorganization) occurred at the same time, they were functionally unrelated. Reef Corporation v. Commissioner, 368 F. 2d 125 (C.A. 5, 1966), affirming in part and reversing in part a Memorandum Opinion of this Court; and Dam ant v. Commissioner, supra. As the Fifth Circuit said in Reef Corporation v. Commissioner, supra at 134: “The test of whether events should be viewed separately or together as part of a single plan is not temporal but is functional.” Applying this standard to the instant case, I fail to see how the dividend distribution can be said to be either necessary to or in any other way rationally related to the reorganization. I am therefore constrained to conclude that the Ramp Garage property, the accounts receivable, and the shareholder loan, are taxable at ordinary income rates to the extent of earnings and profits as provided under sections 801(a), 301(c), and 316. This conclusion is supported by section 1.301-1 (1), Income Tax Begs., which provides: (1) Transactions treated, as distributions. A distribution to shareholders with respect to their stock is within the terms of section 301 although it takes place at the same time as another transaction if the distribution is in substance a separate transaction whether or not connected in a formal sense. This is most likely to occur in the case of a recapitalization, a reincorporation, or a merger of a corporation with a newly organized corporation having substantially no property. * * * In light of my conclusion that the dividend distribution was functionally unrelated to the reorganization transaction, it of course follows that I believe that the “boot distribution” rules of section 356 are not applicable to this case. Dawson, J., agrees with this dissent.