1. The liquidation of petitioner, Lammerts, Inc., followed by the incorporation of a new corporation carrying on the same business did not constitute a
2. The liquidation of petitioner, Lammerts, Inc., pursuant to
3. The distribution in redemption of 180 shares of the 1,409 shares of preferred stock held by petitioner Hildred K. Lammerts was essentially equivalent to a dividend because of the attribution rules of
4. The executors of the Estate of Henry P. Lammerts, in not ascertaining the nature of their fiduciary duties, failed to do all that they reasonably might have been expected to do, and the late filing of the fiduciary income tax return occasioned by such failure cannot be allowed to escape penalty under
54 T.C. 420">*420 Respondent determined deficiencies in petitioners' income and estate taxes for the following years: 54 T.C. 420">*421
Docket | Taxable year | Name of petitioner | Deficiency |
No. | |||
6819-65 | D/D 6/15/61 11970 U.S. Tax Ct. LEXIS 194">*196 | Estate of Henry P. Lammerts, | 2 $ 5,145.12 |
deceased, Henry P. Lammerts, Jr., | |||
and Hildred K. Lammerts, executors. | |||
732-66 | 6/16/61 -- 5/31/62 | Estate of Henry P. Lammerts, | 3 82,016.09 |
deceased, Henry P. Lammerts, Jr., | |||
and Hildred K. Lammerts, executors. | |||
733-66 | 1962 | Lammerts, Inc | 1,207.22 |
734-66 | 1962 | Hildred K. Lammerts | 4,049.41 |
Certain concessions having been made by the parties, the issues remaining for decision are:
Issue 1:
(A) Whether the purported liquidation of Lammerts Associates, Inc., was in substance a
(B) Whether the distribution of assets by Lammerts Associates, Inc., was pursuant to a complete liquidation within the intendment of
Issue 2: Whether the redemption of 180 shares of preferred stock by Lammerts, Inc., amounted to a distribution not essentially equivalent to a dividend within the meaning of
Issue 3: Whether the late filing of the fiduciary income tax return was due to reasonable cause so as to prevent the imposition of a penalty under
FINDINGS OF FACT
Some of the facts have been stipulated by the parties and are incorporated herein, along with the exhibits attached 1970 U.S. Tax Ct. LEXIS 194">*197 thereto, by this reference.
Hildred K. Lammerts, one of the petitioners herein, resided in Lewiston, N.Y., at the time the petition herein was filed. Her Federal income tax return for the taxable year 1962 was filed with the district director of internal revenue at Buffalo, N.Y.
Lammerts, Inc., one of the petitioners herein (hereinafter Lammerts (New)) was incorporated under the laws of the State of New York on December 27, 1961. Its principal office at the time it petition was 54 T.C. 420">*422 filed was in Niagara Falls, N.Y. It filed its U.S. corporation income tax return for the taxable year 1962 with the district director of internal revenue at Buffalo, N.Y.
Henry P. Lammerts, Sr. (hereinafter either Henry or decedent), a resident of Lewiston, N.Y., died testate on June 15, 1961, at the age of 73. His son, Henry P. Lammerts, Jr. (hereinafter Parkinson), and his wife, Hildred K. Lammerts (hereinafter Hildred), qualified as executors of his estate. It is in this capacity that Parkinson appears as a petitioner herein. Hildred and Parkinson, as executors, timely filed an estate tax return with the district director of internal revenue at Buffalo, N.Y. On April 15, 1963, they also filed on behalf 1970 U.S. Tax Ct. LEXIS 194">*198 of the estate a fiduciary income tax return for the period from June 16, 1961, to May 31, 1962, with the district director of internal revenue at Buffalo, N.Y.
Lammerts, Inc. (hereinafter Lammerts (Old)), was incorporated under the laws of the State of New York on May 27, 1929. 3 The original shareholders and their ownership interest in said corporation were as follows:
Number of shares | |
Name of shareholder | of common stock |
Peter Lammerts | 351 |
Henry P. Lammerts | 349 |
Total | 700 |
Peter Lammerts and Henry P. Lammerts were father and son, respectively. Their stock ownership in Lammerts (Old) represented all of its issued and outstanding stock. Peter Lammerts died on October 24, 1941. As part of his share of his father's estate, Henry P. Lammerts received his father's 351 shares of common stock of Lammerts (Old), thereby making him owner of all the stock.
During his lifetime Henry P. Lammerts made the following gifts of Lammerts (Old) stock to his son, Parkinson:
Date of gift | Number of shares |
November 1956 | 12 |
November 1957 | 12 |
November 1958 | 14 |
November 1959 | 14 |
November 1960 | 14 |
Total | 66 |
From 1970 U.S. Tax Ct. LEXIS 194">*199 its inception in 1929 until about January 2, 1962, Lammerts (Old) was engaged in the operation of retail automobile sales and 54 T.C. 420">*423 service agencies. During this period it was a dealer for the Buick Division of the General Motors Corp. Its Buick operations, originally located at 5043 6th Street, Niagara Falls, N.Y., were later relocated to the corner of First Street and Elk Street, Niagara Falls, N.Y. (which address will hereinafter be referred to as the Ramp Garage). The land and building constituting the Ramp Garage property was owned by Lammerts (Old). In January 1961, Lammerts (Old) again moved its Buick operations; this time to 838 66th Street, Niagara Falls, N.Y. The new premises were leased from Pine Land Realty Co., Inc., a corporation owned entirely by Parkinson.
Prior to 1949 Lammerts (Old) operated what was known in the automobile industry as a dual dealership. In addition to the Buick agency it also was a dealer for the Cadillac Division of General Motors. The operations of the Cadillac agency were conducted at 5043 6th Street, Niagara Falls, N.Y.
Around 1949 the Cadillac and Buick dealerships were separated. On August 19, 1946, a corporation by the name of Lammerts Motor 1970 U.S. Tax Ct. LEXIS 194">*200 Ramp Corp. was formed under the laws of the State of New York for the purpose of selling and servicing Cadillac automobiles. The original shareholders and their stockholdings in said corporation were as follows:
Number of shares | |
Name of shareholder | of common stock |
Henry | 30 |
Hildred K. Lammerts | 30 |
Parkinson | 40 |
Total | 100 |
On or about October 29, 1948, the name of Lammerts Motor Ramp Corp. was changed to Lammerts Cadillac Corp. (hereinafter Cadillac). Cadillac operated as a Cadillac automotive sales and service agency in the city of Nigara Falls until January 1961.
During the year 1948, the above shareholders of Cadillac acquired additional shares of common stock as reflected below:
Additional | |
Name of shareholder | shares acquired |
Henry | 120 |
Hildred | 120 |
Parkinson | 160 |
Total | 400 |
These shares, when coupled with the 100 shares originally issued, represented all the issued and outstanding common stock of Cadillac.
Sometime in 1958 the General Motors Corp. (Cadillac division) came to Cadillac and requested that a new facility be built to house the Cadillac agency since the building located at 5043 6th Street was built before the turn of the century. Cadillac informed General Motors that 54 T.C. 420">*424 it could not afford to build a 1970 U.S. Tax Ct. LEXIS 194">*201 new facility by itself. After much negotiation, General Motors finally agreed to the unification of the Cadillac and Buick agencies operated by Cadillac and Lammerts (Old). As a result, Cadillac sold all of its assets which were connected with the automotive agency business (except the real property) to Lammerts (Old). The sale took place during January 1961. Thereafter, Cadillac's operations were limited to the management of several parcels of real estate located in the city of Niagara Falls.
As a result of its acquisition of the automobile business formerly conducted by Cadillac, Lammerts (Old) entered into a new direct dealer selling agreement with the General Motors Corp. which was to be effective from January 16, 1961, to October 31, 1965. This agreement contemplated that Henry and Parkinson would substantially and actively participate in either the ownership and/or operation of the dealership and that General Motors could terminate the agreement in the event of the death or incapacity (for reasons of health) of either Henry or Parkinson. Like the Buick dealership agreement which had been in effect from March 1, 1956, through October 31, 1960, 41970 U.S. Tax Ct. LEXIS 194">*203 this agreement also provided 1970 U.S. Tax Ct. LEXIS 194">*202 that if either party died or became incapacitated, General Motors would offer the dual dealership to the surviving party if he qualified as an agency operator and if he owned or 54 T.C. 420">*425 acquired within a reasonable time a 25-percent financial interest in the successor dealership.
On June 15, 1961, Henry died testate at the age of 73. Paragraph fourth of Henry's will (dated November 13, 1958) provided as follows:
I presently own all the common stock of LAMMERTS, INC., a New York corporation, other than a few shares held by my son, HENRY PARKINSON LAMMERTS, JR. Included in the assets of that corporation are real property located at First Street and Elk Place, in the City of Niagara Falls, New York; certain stocks, bonds or securities of other corporations; and the remainder consisting of the operating assets of a Buick automobile sales and service agency, including new and used automobiles, 1970 U.S. Tax Ct. LEXIS 194">*204 automotive parts, tools, fixtures and operating capital, all of which are hereinafter referred to as the "operating business assets". I hereby direct my executors to effect the liquidation of that corporation and, upon such liquidation, to cause the distribution of the assets in kind. Since it is the desire of my son, HENRY PARKINSON LAMMERTS, JR., to continue in the active operation of the Buick automobile agency, I direct my executors to vote for the distribution to my said son, on account of the shares which he may hold in said corporation, an undivided interest in the "operating business assets", and to further vote for the distribution of the remainder of the assets, including such remaining portion of the "operating business assets", to my estate for the shares held by me at the time of my death.
I give and bequeath to my said son, HENRY PARKINSON LAMMERTS, JR., such portion of the "operating business assets" as, when added to the portion which he shall receive upon such corporate liquidation, will make a total of twenty-five percent (25%) interest in said operating business. The remaining seventy-five percent (75%) of the undivided interest in such "operating business assets" 1970 U.S. Tax Ct. LEXIS 194">*205 I give and bequeath to my wife, HILDRED K. LAMMERTS, to be hers absolutely. In the event my wife, HILDRED K. LAMMERTS, should predecease me, I give and bequeath the entire share of the "operating business assets" to my son, HENRY PARKINSON LAMMERTS, JR. I further direct my executors to make the distributions herein provided immediately upon the liquidation of the said corporation, provided there are sufficient remaining assets in my said estate to insure the payment of estate obligations and estate taxes.
The effect of the above provision, when coupled with paragraphs Fifth and Sixth of the will, was threefold: First, it assured Parkinson the 25-percent ownership interest in Lammerts (Old) which would be required for renewal of the agency contracts with General Motors. 5 Second, it preserved the rest of Henry's estate for his wife Hildred who, under paragraphs Fifth and Sixth of the will, was entitled to (a) an outright share of the residuary estate equal to the maximum marital deduction allowable in determining the Federal estate taxes payable by reason of Henry's death and (b) a life income interest in the remainder. 54 T.C. 420">*426 Third, it effectively isolated and removed the Ramp Garage 1970 U.S. Tax Ct. LEXIS 194">*206 property from the other assets of the business.
At a special meeting held on December 14, 1961, the stockholders of Lammerts (Old) adopted a plan of dissolution and approved a change in the name of the corporation from "Lammerts, Inc." to "Lammerts Associates, Inc."
On December 27, 1961, Lammerts (Old) filed a certificate of change of name with the Department of State for the State of New York and changed its name to Lammerts Associates, Inc. (also referred to hereinafter as Lammerts (Old)).
On January 2, 1962, a special meeting of the board of directors of Lammerts (Old) was held to effectuate the dissolution of the corporation. In the minutes of this meeting, the "net worth" of the corporation was reported to be as follows:
Net value of real property (Ramp Garage) | $ 78,591.65 |
Operating business assets | 214,085.58 |
Total net worth | 292,677.23 |
The directors resolved 1970 U.S. Tax Ct. LEXIS 194">*207 that the assets of the corporation would be distributed in liquidation as follows:
Distribution to -- | ||
Kind of property | Estate | Parkinson |
Undivided interest in operating assets of business | $ 186,490.30 | $ 27,595.28 |
Real property (Ramp Garage) | 78,591.65 | |
Total | 265,081.95 | 27,595.28 |
Upon receiving the distribution in liquidation in accordance with the resolution adopted by the board of directors of Lammerts (Old) on January 2, 1962, the executors of the estate made a distribution of all of the undivided interest held by it in the operating assets of the automotive sales-service agency (valued at $ 179,810.15) 61970 U.S. Tax Ct. LEXIS 194">*208 to the legatees in Henry's will:
(a) To Hildred -- an undivided part of the said business held by the estate, said portion having a value of $ 154,812.70.
(b) To Parkinson -- the remainder of the undivided part of the said business held by the estate, said portion having a value of $ 24,997.45.
On December 27, 1961, a certificate of incorporation, dated December 18, 1961, was filed by Lammerts, Inc. (hereinafter Lammerts (New)), with the Department of State for the State of New York. 54 T.C. 420">*427 The authorized capital stock of Lammerts (New) consisted of 1,000 shares of $ 100 par value common stock, and 3,000 shares of $ 100 par value, noncumulative, nonvoting preferred stock.
Also, on January 2, 1962, Hildred transferred most of the undivided interest in the operating assets of the agency which she had received from the estate to Lammerts (New).
The amount transferred was valued at $ 149,812.70. In return she received 1,498 shares of $ 100 par value preferred stock of Lammerts (New) and cash of $ 12.70. Parkinson also transferred to Lammerts (New) most of his undivided interest ($ 46,104.24) in the automotive business (part of which he had received from Lammerts (Old) and part of which he had received from the estate), and received in return 461 shares of $ 100 par value common stock of Lammerts (New) plus cash of $ 4.24.
A comparison of the 1970 U.S. Tax Ct. LEXIS 194">*209 opening balance sheet of Lammerts (New) as of January 2, 1962, with the closing balance sheet of Lammerts (Old) as of December 30, 1961, reveals that Lammerts (New) acquired all of the assets and liabilities of Lammerts (Old) except for regular accounts receivable in the amount of $ 2,688.83, a loan to the shareholders in the amount of $ 9,979.81, and the Ramp Garage property with a book value of $ 78,591.65.
No interruption of the automobile agency business occurred as a result of the foregoing transactions. Business was resumed, as usual, following the January 1 holiday weekend. The employees of Lammerts (New) were the same persons who had been employed by Lammerts (Old). The agency business telephone number was left unchanged. Bank accounts, stationery, and the Lammerts (Old) employees' identification numbers were left intact. No notice was given to the public that the dual automobile agency was operating under a new corporate structure. Only the office manager and office bookkeeper were aware of the fact that a transition had occurred.
An information return setting forth the terms of liquidation set forth in the resolution adopted by the shareholders of Lammerts (Old) on January 1970 U.S. Tax Ct. LEXIS 194">*210 2, 1962, was never filed with the district director's office of the Internal Revenue Service as required. 7
In 1967 Lammerts Associates, Inc. (Lammerts (Old)), was dissolved pursuant to the provisions of section 203-A of the New York 54 T.C. 420">*428 Tax Law as amended. Lammerts (Old), under the then name "Lammerts Associates, Inc.," did not, subsequent to the fiscal year 1961, file a corporate tax return.
As of December 31, 1960, the board of directors of Lammerts (Old) consisted of Henry, Parkinson, Robert W. Seigner, and E. Russell Sandham. As 1970 U.S. Tax Ct. LEXIS 194">*211 a result of Seigner's resignation in April 1961 and Henry's death in June 1961, Hildred and Elizabeth K. Lammerts (the wife of Parkinson) were elected to the board of directors on June 26, 1961. There were no further changes in the membership of the board of directors during the remainder of 1961 or during the entire year 1962. During the year 1962 the board of directors of Lammerts (New) consisted of Hildred, Parkinson, E. Russell Sandham, and Elizabeth K. Lammerts.
On or about May 2, 1962, new dealer selling agreements were entered into by Lammerts (New) with General Motors, which were to be effective from May 2, 1962, to October 31, 1965. Each of these agreements recited that the agreement was a personal service contract and that it was being entered into in reliance on the personal qualifications of Parkinson and on the expectation that he would substantially participate in the ownership and operation of the dealership. Except for the deletion of Henry's name, the terms of each of these dealership agreements were identical with those described earlier.
At a special stockholders meeting held on December 15, 1962, the stockholders of Lammerts (New) authorized the purchase by the 1970 U.S. Tax Ct. LEXIS 194">*212 corporation of 180 shares of its preferred stock from Hildred for the sum of $ 18,000 (which amount represented the par value of said shares).
Paul H. Reid, Jr. (hereinafter Reid), who represents petitioners in the instant proceedings, prepared the estate tax return for the Estate of Henry Lammerts. Reid, however, was not retained to prepare Federal income tax returns for either the corporation or the individual members of the Lammerts family. An accountant named DeLyden had always been used by the family for the preparation of both corporation and personal income tax returns. DeLyden had in the past been given free access to all the books and records of the corporation. No specific instructions were given to DeLyden by either Henry or Parkinson. DeLyden or one of his representatives would merely prepare whatever returns were necessary (corporate or individual), using the books and records which were always available to them. However, DeLyden never had access to the records which pertained to the income of the estate for the period from June 15, 1961, to May 31, 1962, since these records were maintained in the office of Reid.
54 T.C. 420">*429 Neither Parkinson nor Hildred, the two executors of 1970 U.S. Tax Ct. LEXIS 194">*213 Henry's estate, ever discussed the matter of preparing a fiduciary income tax return with DeLyden. Parkinson, who apparently assumed responsibility for such family matters as tax returns, had never acted as executor of any estate prior to the time he was appointed as one of the executors of his father's estate. As a result of his inexperience, he was under the impression that the only return that had to be filed was the estate tax return. Sometime in 1963, DeLyden discovered that the fiduciary income tax return had not been filed and immediately apprised Parkinson of the necessity of filing such a return, whereupon he (DeLyden) was instructed by Parkinson to prepare it. The return was prepared by DeLyden and filed by the estate on April 15, 1963, some 7 months after the statutory filing deadline.
OPINION
The primary question in this case is whether the distribution by Lammerts (Old) of certain property, not transferred to Lammerts (New), resulted in ordinary income to the estate (pursuant to either
A.
Though aged,
In
In
Although the exact function and scope of the (F) reorganization in the scheme of tax-deferred transactions described in
Hence, while a mere change of corporate domicile would seem to come well within the parameters of subparagraph (F), "a change which involves the retirement of some shareholders, the addition of others, a shift in the proportionate interests of those who continue, and increase in capital" 13 would seem to be outside of the literal terms of this provision.
In
In holding that the transaction did not constitute an (F) reorganization, we relied upon the following principle stated at page 752:
The decisions involving subparagraph (F) or its counterpart in prior revenue acts consistently have imposed at least one major limitation on transactions that have been claimed to qualify thereunder:
Finally, in distinguishing
Despite the fact that all of the operating assets were carried over to the successor corporation, which continued exactly the same business, in the same location, as had been conducted by the predecessor, the
54 T.C. 420">*432 Though the facts presented in the instant case do not closely parallel those which we had before us in
Prior to Henry's death, Lammerts (Old) was owned exclusively by Henry and Parkinson; while subsequent to Henry's death, and prior to the distribution of assets 1970 U.S. Tax Ct. LEXIS 194">*221 in liquidation of the "old" corporation, Henry's estate and Parkinson held all the outstanding stock of Lammerts (Old). By contrast, Hildred and Parkinson owned all the shares of stock in Lammerts (New) with Parkinson owning all the common stock, and Hildred owning all the preferred stock. Hence, there was a marked difference in the ownership of Lammerts (Old) vis-a-vis Lammerts (New). 14
Our finding is to be contrasted with the holding 1970 U.S. Tax Ct. LEXIS 194">*222 of the Second Circuit in
"the separate steps were integrated parts of a single scheme. Transitory phases of an arrangement frequently are disregarded under these sections of the revenue acts where they add nothing of substance to the completed affair. * * * Here they were no more than intermediate procedural devices utilized to enable the corporation to acquire all the assets of the old one pursuant to a single reorganization plan." n2 * * * [Footnote omitted.]
See also
Given the facts which we have before us, we 1970 U.S. Tax Ct. LEXIS 194">*224 cannot say that the separate steps which took place in this case were "integrated parts of a single scheme" in which Henry's executors merely served as conduits for the distribution of the corporation's operating assets, and should, therefore, be disregarded. In the first place, a period of approximately 3 years passed between the execution of the testamentary instrument by Henry and his demise. Secondly, the decision to liquidate and to distribute the assets of the corporation was made on the advice of counsel. Hence, the executors acted under the mandate of Henry's will only after being instructed by counsel that no other recourse was available to them. Thirdly, the decision to reincorporate was made several months after Henry's death.
With the above firmly in mind, it remains to be determined whether the shareholders of record prior to the transactions which are alleged to have constituted the (F) reorganization were predominantly the same as those persons who wound up with the proprietary interest in the corporation subsequent to such transactions. See, e.g.,
As stated earlier, we hold that the stock ownership in Lammerts, Inc. (Lammerts (New)), after the transactions referred to above, was not the same as the proprietary interest in Lammerts (Old) which existed just prior to the first of these transactions, i.e., the distribution of assets to Parkinson and the estate. This is reflected by the chart which follows. As such, an (F) reorganization could not have taken place under the case law cited above.
Ownership interest in shares (FMV) | Lammerts | Lammerts |
Common | (Old) | (New) |
Estate (Henry) | 634 | 0 |
Parkinson | 66 | 461 |
Hildred | 0 | 0 |
Preferred | ||
Hildred | 0 | 1,498 |
Parkinson | 0 | 0 |
54 T.C. 420">*434 Moreover, the capital structure of the new corporation was substantially different from that of the old. This is not the type of transition contemplated by the (F) reorganization framework. Again quoting from our opinion in
We hold that the transactions commencing with the distribution of Lammerts (Old) assets to 1970 U.S. Tax Ct. LEXIS 194">*226 its then shareholders did not collectively or independently constitute the type of occurrence contemplated by
In arriving at the above conclusion we are not unmindful of the Ninth Circuit's holdings in
In
In the
Certainly, it is necessary that there be continuity of both proprietary interest and enterprise in order to qualify as an (F) reorganization. But that is not enough, for there may be other changes that are too significant to be ignored in determining whether there was a "mere change in identity, form, or place of 54 T.C. 420">*435 organization." And in this case substantial changes did occur when the separate businesses of three separate corporations were united in a new corporation.
Relying heavily on the language of
We do not believe that the above appellate court decisions detract from the conclusions we have reached in the instant proceeding. Without commenting on the overall approach used by the circuit court in these decisions, it need only be stated that in neither instance could there have been an (F) reorganization without an identity of shareholder interest. 1970 U.S. Tax Ct. LEXIS 194">*229 Therefore, although the above holdings of the Ninth Circuit are at loggerheads with this Court's interpretation of subparagraph (F), 20 we do not find these cases to be in conflict with the conclusions we have reached herein. 21
The Fifth Circuit, on cross-appeal from the Commissioner, reversed our determination with regard to this issue on the ground that (a) continuity of shareholder interest was present through the Butler group and (b) the elimination of the Favrot group's proprietary interest represented a
To the extent that the circuit court in
Respondent's other argument is that a complete liquidation within the intendment of
In
The concept of a continuation of the existing business through a
This principle was reaffirmed in
Respondent relies, in part, on the following language from
Clearly, this liquidation cannot come within the intention of Congress in enacting the complete liquidation provisions. Those provisions contemplate that operating assets will no longer be used by the stockholders to carry on the business as a corporation. It has long been recognized that taxpayers cannot liquidate a corporation with the intention of immediately reincorporating it in order to hold back liquid assets and cash for the purpose of getting capital gains treatment * * *. Such a liquidation reincorporation transaction does not qualify for
We find the facts of
Respondent also relies upon the following language used by the Court of Appeals in
The Code provides no definition of "complete liquidation" * * * [An] indication of what distributions are meant to be accorded favored treatment is found in an early report of the Senate Finance Committee. S. Rep. No. 398, 68th Cong., 1st Sess. 12 (1924). There a distribution in complete liquidation was analogized to a sale of stock in that the shareholder "surrenders his interest in the corporation and receives money in place thereof." The corporation must have ceased to be a going corporate concern, or if the enterprise is continued in corporate form, the shareholder must have disassociated himself from it. See Regs. 1.332-2(c) (1955). * * *
We agree with the respondent that the Code 1970 U.S. Tax Ct. LEXIS 194">*237 provides no definition of a "complete liquidation." However, we cannot agree that the excerpt from the Senate Finance Committee report (which appears quoted above) sheds any light on either the liquidation-reincorporation area generally, or on the particular facts presented in the instant case. 27
In this regard, 1970 U.S. Tax Ct. LEXIS 194">*238 we note the following language of the Court of Appeals in
The only point upon which we see any need to expand upon the Tax Court's decision is the Commissioner's argument [rejected by the Tax Court] that, if the business of the liquidated corporation is continued by the new corporation, there is no "complete liquidation" within the meaning of
We are in complete agreement with the Tax Court's resolution of this issue; 54 T.C. 420">*439 its interpretation reflects the normal meaning of the words "complete liquidation" in
Nor, as respondent further argues, are we persuaded that
(c) A liquidation which is followed by a transfer to another corporation of all 1970 U.S. Tax Ct. LEXIS 194">*239 or part of the assets of the liquidating corporation or which is preceded by such a transfer
As we read
The basis for the regulations quoted above seems to be found in the legislative history of the 1954 Code. The first legislative effort intended to deal explicitly with the reincorporation problem was passed by the House in 1954, but rejected by the Senate. The Senate-House conference committee, which also rejected it, commented as follows:
The House bill in section 357 contained a provision 1970 U.S. Tax Ct. LEXIS 194">*240 dealing with a device whereby it has been attempted to withdraw corporate earnings at capital gains rates by distributing all the assets of a corporation in complete liquidation and promptly reincorporating the business assets. This provision gave rise to certain technical problems and it has not been retained in the bill as recommended by the accompanying conference report. It is the belief of the managers on the part of the House that, at the present time, the possibility of tax avoidance in this area is not sufficiently serious to require a special statutory provision. It is believed that this possibility can appropriately be disposed of by judicial decision
Just what force should be given to the conferees' report and the regulations seemingly promulgated thereunder is somewhat unclear.
Respondent next urges that liquidation of Lammerts (Old) did not take place for the following reasons: (a) No interruption of the automobile agency business occurred as a result of the foregoing transactions; (b) the employees of Lammerts (New) were the same persons who had been employed by 1970 U.S. Tax Ct. LEXIS 194">*242 Lammerts (Old); (c) the agency business telephone number was left unchanged; (d) bank account numbers and stationery were left unchanged; (e) Lammerts (Old) taxpayer identification number was left intact; (f) no notice was given to the public that the dual automobile agency was being operated under a new corporate structure; (g) only the office manager and bookkeeper were aware of the fact that a transition in ownership and management had occurred; and (h) an information return, as required by
We do not feel that, under the particular facts of this case, any of the reasons set forth above singularly or collectively militate against our decision herein. Petitioners cannot be condemned for the expeditiousness with which the transactions described herein were accomplished. The mere fact that business, under the auspices of Lammerts (New), was resumed without interruption at the termination of Lammerts (Old) does not prove that there was not, in fact, a termination of Lammerts (Old). Cf.
We recognize that Lammerts (Old) was derelict in 1970 U.S. Tax Ct. LEXIS 194">*243 failing to file a notice of liquidation per
Lastly, respondent has stated on brief that:
If respondent is incorrect and an estate that causes a corporation to go through a purely formal liquidation qualifies automatically under
In response to this contention, we note that it was the direction of Henry's will which caused the executors of Henry's estate to liquidate Lammerts. It was not an act of their own volition which brought about 54 T.C. 420">*441 the liquidation. Assuming
On December 15, 1962, a special meeting of the stockholders of Lammerts (New) was held. Present at that meeting were Hildred, Parkinson, and Paul H. Reid, Jr., the petitioners' attorney. The following is an excerpt from the minutes of that meeting:
A general review of the business operations for the year 1962 was had and a discussion was had relative to the preferred stock of the Corporation. It was unanimously agreed that it would be in the best interest of the Corporation that such preferred stock be retired in part.
As a result, Lammerts (New) redeemed 180 shares of its 6-percent noncumulative, nonvoting preferred stock from Hildred for $ 18,000 (its 1970 U.S. Tax Ct. LEXIS 194">*245 book value). 30 During the year 1962, Lammerts (New) reported a taxable income of $ 25,714.12. No dividends were paid on the preferred shares by Lammerts (New) during the year 1962.
Respondent contends that redemption of the 180 shares of preferred stock referred to above was essentially equivalent to a dividend under
The problem of determining whether a redemption of stock should be treated as an exchange (pursuant to
The regulations under
(a) The fact that a redemption fails to meet the requirements of paragraph (2), (3) or (4) of
54 T.C. 420">*443 (b) The question whether a distribution in redemption of stock of a shareholder is not essentially equivalent to a dividend under
Two distinct inferences may be drawn from the above language: The first being that a redemption of nonvoting, non-306 preferred stock from a person owning only preferred stock will ordinarily, but not necessarily, meet the requirements of
It is our conclusion that the application of the attribution rules of
In arriving at the above determination we do not deny that Hildred experienced some change in the ownership rights attached to her preferred shares, to wit, participation in current earnings and the right to corporate assets on liquidation. However, on the facts of this case, we do not feel that these changes weigh heavily enough to alter our determination of dividend equivalency. Compare
The redemption of Hildred's shares came at the heels of a profitable year for Lammerts (New) during which its current earnings and profits exceeded the $ 18,000 paid to Hildred for her preferred shares. In light of the "aura of dividend equivalence" suggested by these factors we believe that, in order to find for petitioners, 1970 U.S. Tax Ct. LEXIS 194">*254 there would have to be present in this case "some raison d'etre for the redemption reasonably related to business exigencies and not founded upon the personal whims of the taxpayer or, * * * upon the machinations of other shareholders whose shares would be attributable to [her]."
Finally, in light of the fact that we have treated Hildred as constructive owner of 100 percent of the common stock of Lammerts (New), we believe the so-called net-effect test, under which dividend equivalency is determined by comparing the economic effect of a hypothetical dividend to that of the actual distribution in redemption of preferred shares, has no application to the facts of this case. 38
Petitioners (in this instance, the Estate of Henry Lammerts) contend that the late filing of the 1970 U.S. Tax Ct. LEXIS 194">*255 fiduciary income tax return for the estate was due to reasonable cause, within the meaning of
The regulations under
Petitioner has the burden of showing that failure to file the required return was due to reasonable cause.
Parkinson, as the executor of the estate and as the person who apparently assumed responsibility for such estate matters as the preparation of tax returns, had a positive duty to ascertain the nature of his responsibilities as such. The fact that he, in good faith, believed that he had done all that was required of him when the estate tax return was filed is not an excusable circumstance. See, e.g.,
Nor are we persuaded by petitioner's contention that the executors of the estate reasonably relied upon Reid and DeLyden for preparation of the fiduciary income tax return required of the estate. DeLyden testified that most of his work for the Lammerts family and the Lammerts corporations had to do with repeat returns and that he did not think that his offices would be called upon to prepare the fiduciary income tax return. Moreover, the books and records of the estate were maintained in Reid's office. Parkinson and DeLyden never even discussed estate matters. Under these circumstances, any belief on the part of Parkinson that DeLyden would handle the preparation of all tax returns affecting the estate cannot be regarded as reasonable.
Lastly, petitioners may not escape responsibility under 6651(a) by attempting to show reliance on Reid. It is true that under some circumstances it has been held that reliance by a taxpayer upon professional advice may constitute reasonable cause for failure to comply with the law. However, in such cases the matter involved must be "complicated and unusual, justifying such reliance."
54 T.C. 420">*447 Granted that Parkinson's inadvertence was probably predicated upon his mistaken (though unwarranted) belief that DeLyden would prepare all tax returns required of the estate; however, no basis whatsoever existed which might have glossed this belief with a coating of reasonableness since DeLyden was not even supplied with the books and records of the estate until after it was discovered that the return had been overlooked.
Under these facts, petitioners' reliance on the
To reflect the concessions made by the parties and the conclusions reached herein,
Tannenwald,
54 T.C. 420">*448 Let us assume that Henry P. Lammerts had, prior to his death, caused the liquidation of Lammerts (Old) and, after retaining the accounts receivable, loan to shareholder, and Ramp Garage property (hereinafter referred to as the specified assets or the retained specified assets), joined in the immediate transfer of his share of the operating assets of the automobile agency to Lammerts (New) in exchange for the appropriate amount of preferred and common stock. I doubt whether anyone would seriously question that he would have realized dividend income in the 1970 U.S. Tax Ct. LEXIS 194">*262 full amount of the value of the retained assets. Similarly, if Henry P. Lammerts had in his will divided his common stock in Lammerts (Old) between his widow and his son and, upon distribution of the common stock in accordance with those directions, the widow and the son had accomplished the liquidation and reincorporation exchange, with the widow retaining the specified assets, the widow would also clearly have realized a comparable amount of dividend income. Finally, if Henry P. Lammerts had directed his executors to accomplish both the liquidation and the reincorporation exchange and then to distribute the retained specified assets and the preferred stock of Lammerts (New) to his widow and the common stock to his son, the estate would have been properly charged with the same amount of dividend income. This case simply involves the question whether the retained assets should escape the characterization of dividend income simply because, pursuant to a preconceived plan, which was promptly implemented upon the death of Henry P. Lammerts, the liquidation and reincorporation stages are handled separately -- the liquidation by the estate and the reincorporation by the widow and the 1970 U.S. Tax Ct. LEXIS 194">*263 son. I think a negative answer to that question is clearly indicated.
I am aware of the concept -- which is not without its troublesome aspects -- that shareholder as well as corporate purposes may legitimatize various types of corporate readjustments. See
I recognize, of course, that the absence of a "business purpose," developed for application in the corporate reorganization area by
Amounts received on liquidations are treated as the proceeds of an "exchange" only because
The majority does not deny that there was well-nigh perfect continuity of business and, in fact, details the many respects in which the business continued without a break. The only element of business discontinuity was the lapse in the General Motors dealership. But that lapse was solely in consequence of Henry's death and would have occurred whether or not the liquidation-reincorporation took place.
54 T.C. 420">*450 The problem lies with continuity of ownership. After Henry's death, the stock of Lammerts (Old) was technically vested in Henry's estate. By way of contrast, the stock of Lammerts (New) was acquired by Hildred and Parkinson. Thus, continuity of ownership can be established only by viewing the estate as a mere conduit for Hildred's and Parkinson's ownership. I think that this is justifiable. 3 It is actual ownership, and not formal title to the corporate stock, which is important in determining continuity of interest in a corporation.
There is thus complete continuity of ownership, as well as complete continuity of business, between Lammerts (Old) and Lammerts (New). What Hildred and Parkinson had before the liquidation is virtually identical to what they had after the reincorporation. Of course, Hildred's interest in Lammerts (Old) consisted of an interest in an estate which owned common stock in that corporation. Her interest in Lammerts (New) consisted of the direct ownership of preferred stock. I do not regard this difference as great enough to cause any analogy to a sale or exchange to be appropriate. 5 Compare
There 1970 U.S. Tax Ct. LEXIS 194">*269 are numerous examples where the courts have imposed a judicial gloss on the words of provisions of the Internal Revenue Code dealing with the use of the corporate form to bring about readjustments 54 T.C. 420">*451 in business enterprises. Thus, in the reorganization area, the doctrines of "continuity of interest" and "business purpose" have long been accepted tools for decision. E.g.,
The fact that Henry's will directed the liquidation does not require a different conclusion. The testamentary provision was no more than the directive, albeit a posthumous one, of a controlling stockholder. To say that the executors were legally bound to obey, and hence did not act of their own 1970 U.S. Tax Ct. LEXIS 194">*271 volition, is to say no more than that the liquidation was an integral part of a preconceived plan and to confirm the mutual interdependence of the various steps of the transaction.
The liquidation and reincorporation were merely steps in a preconceived plan. They added nothing to the final result and may therefore be disregarded. Cf.
I would hold that there was no liquidation within the meaning of
Neither
Since Lammerts (Old) and Lammerts (New) are to be regarded as the same corporation, the receipt of the retained specified assets constitutes as distribution with respect to stock under
As far as the presence of a reorganization is concerned, I agree that there was not a "mere change in identity, form, or place of organization" so as to constitute an (F) reorganization for the reasons set forth in the majority opinion. I also have great difficulty in finding a (D) reorganization, because this requires accepting the premise that the existence of two corporations should be recognized. Such a holding also involves, as my brother Sterrett's opinion reveals, adopting a dichotomous approach that, on one hand, the entire transaction was "integrated" in order to find a reorganization but that, on the other hand, the distribution and retention of the specified assets were "functionally unrelated" to the reorganization in order to deal with the limitations of the boot provisions of
Sterrett,
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 coexecutors of the estate and consequently, held legal title to the stock of Lammerts (Old) with 1970 U.S. Tax Ct. LEXIS 194">*276 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.
54 T.C. 420">*454 In 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 |
Preferred | ||
Hildred | 0 | 1,498 |
When the transaction is viewed in this posture, it can be 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 Garage property, the assets of Lammerts 1970 U.S. Tax Ct. LEXIS 194">*277 (Old) remained in corporate solution following their transfer to the new corporate shell. Indeed, all of the
Finally, I have been unable to discern any valid business purpose for the complete liquidation of Lammerts (Old).
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 1970 U.S. Tax Ct. LEXIS 194">*278 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 54 T.C. 420">*455 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
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.
Indeed, the instant transaction aptly fits the mold of a "reorganization" as defined in
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 1970 U.S. Tax Ct. LEXIS 194">*282 that the transaction qualifies as "a mere change in identity, form, or place of organization" within the meaning of
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.
I am therefore constrained to conclude that the Ramp Garage property, the accounts receivable, and the shareholder loan, are taxable at ordinary income 1970 U.S. Tax Ct. LEXIS 194">*283 rates to the extent of earnings and profits as provided 54 T.C. 420">*457 under
(l)
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
1. Cases of the following petitioners are consolidated herewith: Estate of Henry P. Lammerts, deceased, Henry P. Lammerts, Jr., and Hildred K. Lammerts, Executors, docket No. 732-66; Lammerts, Inc., docket No. 733-66; and Hildred K. Lammerts, docket No. 734-66.↩
1. Date of decedent's death (D/D) -- 6/15/61.
2. Federal estate tax.↩
3. Income tax -- $ 65,341.14 and addition to the tax under the provisions of
2. All statutory references, unless otherwise specified, are to the Internal Revenue Code of 1954, as amended.↩
3. The name Lammerts (Old) will be used in referring to this corporation for all times prior to and after the changing of its name to Lammerts Associates, Inc., on Dec. 27, 1961. It was dissolved in 1967.↩
4. The applicable portions of this agreement were as follows: In Consideration * * * of the promises hereinafter made by the parties to each other, it is agreed as follows: * * * * THIRD: This is a personal contract, being entered into in reliance upon and in consideration of the personal qualifications of and representations with respect thereto of the following named persons, who actively and substantially participate in the ownership or in the operations, or both in the ownership and in the operations of the Dealer: * * * * H. P. Lammerts H. P. Lammerts, Jr. * * * * TERMINATION OF AGREEMENT * * * * B. Termination for Cause * * * * (3) In the event of the death or incapacity of Dealer or any person named in Paragraph Third hereof Buick may terminate this Agreement. * * * * * * * D. Rights of Surviving Persons Named in Paragraph Third If this Agreement should be terminated by Buick under the provisions of subsection 23B(3) or 23B(4) a and at the time of such termination another person is named in Paragraph Third on the basis of being qualified as an operator as distinguished from being qualified solely on the basis of a financial interest, and if such other person owns a financial interest of at least twenty-five per cent (25%) or acquires such an interest within a reasonable time (considering then existing circumstances) after the date of such termination * * * Buick shall offer such other person a new Selling Agreement for the unexpired balance of the term of the Selling Agreement being terminated. * * *
5. Since Parkinson controlled the corporation which, at the time of Henry's death, owned the real property facilities in which Lammerts (Old) was housed, a bequest of a percentage of the operating assets of the business was all that was required to satisfy the ownership requirements of the General Motors agency contract. See fn. 4
6. Though the book value of the undivided interest in the operating assets of the agency distributed to the estate was determined to be $ 186,490.30, the actual worth of these assets was stipulated at a value of $ 179,810.15. No explanation was offered by the parties as to the reason for this discrepancy.
It was also stipulated that the distribution to Parkinson was made by the executors of the estate (as opposed to the directors of the corporation).
7. Under
Every corporation shall -- (1) Within 30 days after the adoption by the corporation of a resolution or plan for the dissolution of the corporation or for the liquidation of the whole or any part of its capital stock, make a return setting forth the terms of such resolution or plan and such other information as the Secretary or his delegate shall by forms or regulations prescribe; * * *↩
8.
(a) In General. -- Except as otherwise provided in this chapter, a distribution of property (as defined in section 317(a)) made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in subsection (c).↩
9.
(a) Gain on Exchanges. (1) Recognition of gain. -- If -- (A) section 354 or 355 would apply to an exchange but for the fact that (B) the property received in the exchange consists not only of property permitted by section 354 or 355 to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property. (2) Treatment as dividend. -- If an exchange is described in paragraph (1) but has the effect of the distribution of a dividend, then there shall be treated as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be treated as gain from the exchange of property.↩
10.
(a) General Rule. -- (1) Complete liquidation. -- Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock.↩
11.
(a) Reorganization. -- (1) In general. -- For purposes of parts I and II and this part, the term "reorganization" means -- * * * * (F) a mere change in identity, form, or place of organization, however effected.
12. See
13. See Lane, "The Reincorporation Game: Have the Ground Rules Really Changed?,"
14. Even if, under New York law, it could be said that Hildred and Parkinson, as specific legatees, obtained equitable title to the business assets of Lammerts (Old) upon Henry's death, Hildred did not, prior to the liquidation, have effective command over the use or disposition of these assets for purposes of the continuity-of-interest requirements so as to fall within subpar. (F). The disposition of the business assets of Lammerts (Old) was controlled by the dispositive provisions of Henry's will and accomplished by his executors. As such, we do not feel that either Parkinson or Hildred can be regarded as having stepped into the preliquidation shoes of the decedent (or his estate) so as to succeed to his former proprietary interest in Lammerts (Old).↩
15. SEC. 112. RECOGNITION OF GAIN OR LOSS [
(b) Exchanges Solely in Kind. -- * * * * (4) Same. -- Gain of corporation. -- No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.↩
16. See p. 430
17.
18.
19. In
"
20. In
21. See
22.
23. In this regard, we note, without further comment, the language used by the Fifth Circuit at page 137 of the opinion:
"The Tax Court's position might have more force if the change in proprietary interests were to new persons and less than 50% of the former stockholders' interest in the old corporation remained in the new corporation. Then the change begins to look like a sale of the assets to a new and legally separate entity followed by a bona fide liquidation. * * *" (
Cf. the following language from our opinion in
"* * * Berghash, who had owned all of the stock (except the two shares owned by his wife) of the old Delavan-Bailey Drug Co., Inc., wound up as the owner of only 50 percent of the stock of the successor corporation. * * * [This] radical shift in stock ownership which occurred precludes us from holding that the transaction amounted to no more than "a mere change in identity, form, or place of organization" within the meaning of
24. See fn. 26
25.
(a) General Rule. -- For purposes of this subtitle, the term "dividend" means any distribution of property made by a corporation to its shareholders -- (1) out of its earnings and profits accumulated after February 28, 1913, or (2) out of its earnings and profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribution was made.
26. Note, also the opinion of the Court of Appeals in
27. The phrase quoted in
"The bill treats a liquidating dividend as a sale of the stock, with the result that the gain to the taxpayer is treated not as a dividend subject only to the surtax but as a gain from the sale of property which may be treated as a capital gain. The treatment of liquidating dividends under the bill is substantially the same as provided for in the Revenue Act of 1918. A liquidating dividend is, in effect, a sale by the stockholder of his stock to the corporation; he surrenders his interest in the corporation and receives money in place thereof. * * *" (S.Rept. No. 398, to accompany H.R. 6715 (Pub. L. No. 176), 68th Cong., 1st Sess., pp. 11-12 (1924).)↩
28. Conf. Rept. No. 2543, to accompany H.R. 8300 (Pub. L. No. 591), 83d Cong., 2d Sess., p. 41 (1954). The House bill was initiated to shore up pre-1954 case law on reincorporations which was thought to supply inadequate protection against the bail out of corporate earnings at the capital rate. A reincorporation was subject to the provisions of the House bill if more than 50 percent of the old corporation's assets were transferred to a controlled corporation within 5 years after a liquidation, but
29. See fn. 7
30. Immediately before this redemption, Hildred owned 1,498 shares of the preferred stock of Lammerts (New), these being all of the outstanding preferred shares. Parkinson owned 461 shares of the common stock of Lammerts (New), these being all of the outstanding common shares.↩
31.
(c) Amount Taxable. -- In the case of a distribution to which subsection (a) applies -- (1) Amount constituting dividend. -- That portion of the distribution which is a dividend (as defined in
32. See Moore, "Dividend Equivalency -- Taxation of Distributions in Redemption of Stock,"
33.
(b) Redemptions Treated as Exchanges. --
* * * *
(2) Substantially disproportionate redemption of stock. -- (A) In general. -- Subsection (a) shall apply if the distribution is substantially disproportionate with respect to the shareholder. (B) Limitation. -- This paragraph shall not apply unless immediately after the redemption the shareholder owns less than 50 percent of the total combined voting power of all classes of stock entitled to vote. (C) Definitions. -- For purposes of this paragraph, the distribution is substantially disproportionate if -- (i) ratio which the voting stock of the corporation owned by the shareholder immediately after the redemption bears to all of the voting stock of the corporation at such time, is less than 80 percent of -- (ii) the ratio which the voting stock of the corporation owned by the shareholder immediately before the redemption bears to all of the voting stock of the corporation at such time. For purposes of this paragraph, no distribution shall be treated as substantially disproportionate unless the shareholder's ownership of the common stock of the corporation (whether voting or nonvoting) after and before redemption also meets the 80 percent requirement of the preceding sentence. For purposes of the preceding sentence, if there is more than one class of common stock, the determinations shall be made by reference to fair market value. (D) Series of redemptions. -- This paragraph shall not apply to any redemption made pursuant to a plan the purpose or effect of which is a series of redemptions resulting in a distribution which (in the aggregate) is not substantially disproportionate with respect to the shareholder.
(3) Termination of shareholder's interest. -- Subsection (a) shall apply if the redemption is in complete redemption of all of the stock of the corporation owned by the shareholder.↩
34.
(b) Redemptions Treated as Exchanges. -- (1) Redemptions not equivalent to dividends. -- Subsection (a) shall apply if the redemption is not essentially equivalent to a dividend.↩
35. The example illustrated in
"While the House bill set forth definite conditions under which stock may be redeemed at capital-gain rates, these rules appeared unnecessarily restrictive, particularly in the case of redemptions of preferred stock which might be called by the corporation without the shareholder having any control over when the redemption may take place. Accordingly, your committee follows existing law by reinserting the general language indicating that a redemption shall be treated as a distribution in part or full payment in exchange for stock if the redemption is not essentially equivalent to a dividend. * * * [S.Rept. No. 1622, to accompany H.R. 8300 (Pub. L. No. 591), 83d Cong., 2d Sess., pp. 44-45 (1954).]"↩
36.
(b) Cross References. -- For provisions to which the rules contained in subsection (a) apply, see -- (1)
(c) Constructive Ownership of Stock. -- (1) In General. -- Except as provided in paragraph (2) of this subsection,
37.
(a) General Rule. -- For purposes of those provisions of this subchapter to which the rules contained in this section are expressly made applicable -- (1) Members of family. -- (A) In General. -- An individual shall be considered as owning the stock owned, directly or indirectly, by or for -- * * * * (ii) his children, grandchildren, and parents.↩
38. For a recent discussion of the principles underlying the "net effect test," see
39.
(a) Addition to the Tax. -- In case of failure to file any return required under authority of subchapter A of chapter 61 (other than part III thereof), * * * on the date prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as tax on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate.
1. The liquidation-reincorporation area is a prickly thicket through which the courts, the respondent, and even the Congress, have traveled only with considerable difficulty. See, e.g., Wood, "A Proposed Treatment of Reincorporation Transactions,"
2. Technical liquidations utilized as a means of effecting a reorganization, e.g.,
3. I realize that this line of reasoning may cast doubt upon the liability of the estate for the tax on the dividend represented by the retained specified assets. But petitioners have not raised this issue, even alternatively, and consequently we need not concern ourselves with this aspect of the case.↩
4.
5. My rationale is based upon the merger of the technical title of the estate into the actual ownership of Hildred and Parkinson and not upon a recognition of actual ownership by the former and the attribution thereof to the latter. I recognize that the statutory attribution rules are not applicable to reorganizations. See
6. I think that the majority has misinterpreted the language it quotes from
7. The parties stipulated that a "complete liquidation" had taken place, and this may have played some part in the decision. See