SCOTUS Reports

Tag: Knowlton v. Commissioner

  • Knowlton v. Commissioner, 83 T.C. 168 (1984): Interpreting ‘Acquired’ in Corporate Liquidation Tax Law

    Knowlton v. Commissioner, 83 T. C. 168 (1984)

    In the context of corporate liquidation under Section 333(e)(2), the term ‘acquired’ refers to the date when the corporation received the stock or securities, not when the predecessor corporation acquired them.

    Summary

    In Knowlton v. Commissioner, the Tax Court addressed whether stock distributed to a shareholder in a corporate liquidation was ‘acquired’ by the corporation after December 31, 1953, under Section 333(e)(2). The court held that the date of ‘acquisition’ was when the corporation received the stock, not when a predecessor corporation acquired it. This decision was based on the ordinary meaning of ‘acquired’ and the policy against converting cash into securities to defer tax recognition. The court rejected the petitioners’ arguments for relating the acquisition date back to a pre-1954 date due to involuntary receipt or carryover basis, emphasizing that the liquidation was a voluntary act. This ruling impacts how similar cases involving corporate liquidations and tax implications are analyzed.

    Facts

    Petitioner Betty W. Knowlton received shares of General Motors (GM) stock in 1978 from Dunmovin Corp. , which was liquidated under Section 333. Dunmovin had received these GM shares from duPont between 1962 and 1965 as part of an antitrust divestiture order. DuPont had acquired the GM stock before 1954. The key issue was whether these GM shares were ‘acquired’ by Dunmovin after December 31, 1953, impacting the tax treatment of the distribution to Knowlton.

    Procedural History

    The case began with the Commissioner determining tax deficiencies for the Knowltons for 1977 and 1978, which included issues related to the Nitrol and non-Nitrol distributions. The non-Nitrol issue, concerning the GM stock, was severed for trial and submitted fully stipulated. The Tax Court, presided over by Judge Tannenwald, issued a decision on the non-Nitrol issue, holding for the respondent.

    Issue(s)

    1. Whether the GM stock distributed to petitioner Betty W. Knowlton during the liquidation of Dunmovin Corp. was ‘acquired’ by Dunmovin ‘after December 31, 1953’ within the meaning of Section 333(e)(2).

    Holding

    1. Yes, because the GM stock was received by Dunmovin after December 31, 1953, and thus ‘acquired’ on that date under the ordinary meaning of the term, despite being originally acquired by duPont before 1954.

    Court’s Reasoning

    The Tax Court applied the ordinary meaning of ‘acquired’ as the date of receipt, consistent with the guidelines set forth in Commissioner v. Brown, which allows for statutory interpretation to avoid absurd results or thwart statutory purpose. The court examined the legislative history of Section 333(e)(2), finding no clear intent to allow for a ‘relation back’ of acquisition dates in involuntary transactions or where there is a carryover basis. The court also reviewed the Commissioner’s interpretations in various Revenue Rulings, noting that they generally treated the date of acquisition as the date of receipt, with limited exceptions not applicable here. The court rejected the petitioners’ arguments based on the involuntary nature of the GM stock receipt and the carryover basis from duPont, emphasizing that the liquidation itself was a voluntary act by the shareholders. The court concluded that applying the ordinary meaning of ‘acquired’ did not lead to absurd results or thwart the purpose of Section 333.

    Practical Implications

    The Knowlton decision clarifies that for tax purposes under Section 333(e)(2), the ‘acquisition’ date of stock or securities is when the liquidating corporation receives them, not when a predecessor corporation acquired them. This ruling impacts how attorneys advise clients on the tax consequences of corporate liquidations, particularly when dealing with stock received from other entities. Practitioners must consider this when planning liquidations to avoid unexpected tax liabilities. The decision also reinforces the policy against converting cash into securities to defer tax recognition, a consideration in corporate tax planning. Subsequent cases may reference Knowlton when addressing similar issues of acquisition dates in corporate liquidations.

  • Knowlton v. Commissioner, 84 T.C. 160 (1985): Defining ‘Acquired’ for Section 333 Liquidation and Stock Basis

    84 T.C. 160 (1985)

    For the purpose of determining taxable gain in a corporate liquidation under Section 333 of the Internal Revenue Code, stock is considered “acquired” by the corporation on the date it obtains ownership, possession, or control, not necessarily when the holding period tacks back to a prior owner.

    Summary

    In this Tax Court case, the Knowltons challenged the IRS’s determination of a tax deficiency arising from a corporate liquidation. Dunmovin Corp., in which Mrs. Knowlton held stock, liquidated under IRC § 333 and distributed General Motors (GM) stock to shareholders. Dunmovin had received this GM stock as a dividend from DuPont due to an antitrust divestiture. The core issue was whether the GM stock was “acquired after December 31, 1953” by Dunmovin, triggering capital gains tax for Knowlton. The court held that “acquired” means when Dunmovin physically received the GM stock (post-1953), not when DuPont originally acquired it (pre-1954), thus ruling against the Knowltons and upholding the deficiency.

    Facts

    Petitioner Betty Knowlton owned stock in Dunmovin Corp., a personal holding company.

    Dunmovin liquidated in June 1978 under IRC § 333, and Knowlton was a qualified electing shareholder.

    As part of the liquidation, Knowlton received General Motors (GM) stock, among other assets.

    Dunmovin had received the GM stock as a dividend from E.I. du Pont de Nemours & Co. (DuPont) in 1962, 1964, and 1965, due to an antitrust divestiture order.

    Dunmovin acquired its DuPont stock before 1954. DuPont acquired the GM stock before 1954.

    At the time of distribution from DuPont to Dunmovin, it was treated as a dividend to Dunmovin, eligible for a dividends received deduction, and Dunmovin took a carryover basis and holding period in the GM stock from DuPont.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in the Knowltons’ federal income tax for 1977 and 1978.

    The case was initially set for trial on “Nitrol issues”.

    Respondent amended the answer to include the “non-Nitrol issue” concerning the tax treatment of the GM stock received in liquidation.

    The Tax Court severed the Nitrol and non-Nitrol issues.

    The non-Nitrol issue (the focus of this opinion) was submitted fully stipulated to the Tax Court.

    Issue(s)

    1. Whether, for purposes of Internal Revenue Code Section 333(e)(2), General Motors stock distributed to Dunmovin Corp. as a dividend in 1962, 1964, and 1965, with respect to DuPont stock acquired before 1954, was “acquired by the corporation after December 31, 1953”.

    Holding

    1. No. The Tax Court held that the General Motors stock was “acquired by the corporation after December 31, 1953” for purposes of Section 333(e)(2) because the plain meaning of “acquired” is when ownership, possession, or control is obtained, which occurred when Dunmovin received the stock in the 1960s.

    Court’s Reasoning

    The court began by considering the plain meaning of “acquired.” Referencing Commissioner v. Brown, 380 U.S. 563 (1965), the court noted that while common meaning is persuasive, it should not be applied if it leads to absurd results or thwarts the statute’s purpose.

    The court found that in common parlance, one “acquires” property when obtaining ownership, possession, or control. Applying this, Dunmovin acquired the GM stock when it received it post-1953.

    The legislative history of Section 333(e)(2) was examined, revealing it was originally a temporary relief measure to facilitate personal holding company liquidations, later made permanent with a December 31, 1953 cutoff date. The legislative history provided little specific guidance on the definition of “acquired” beyond preventing tax avoidance by converting cash into securities before liquidation.

    The court analyzed IRS Revenue Rulings interpreting “acquired” in Section 333. Rev. Rul. 56-171 allowed relation back of the acquisition date in a statutory merger, treating it as a continuation of prior ownership. However, Rev. Rul. 58-92 treated stock received in a Section 351 transaction as “acquired” upon receipt, not relating back to the contributing shareholder’s acquisition date, except for reorganizations or stock dividends which were seen as mere changes in form.

    Rev. Rul. 64-257 ruled that stock received from a foreign predecessor in a reorganization was acquired upon receipt, distinguishing Rev. Rul. 56-171 because the foreign corporation was not eligible for Section 333 treatment.

    The court distinguished the current case from situations where relation back was allowed (mergers, stock dividends), noting the GM stock distribution was a taxable dividend to Dunmovin, not a mere change in form. Dunmovin’s holding changed from DuPont stock to DuPont and GM stock.

    The court rejected the argument that the involuntary nature of the GM stock distribution (due to antitrust divestiture) should change the outcome. Section 1111, enacted to provide relief related to the DuPont divestiture, was deemed not to influence the interpretation of “acquired” in Section 333. Furthermore, the court emphasized that the liquidation of Dunmovin, which triggered the tax issue, was a voluntary act by the petitioners.

    Ultimately, the court concluded that the ordinary meaning of “acquired” should apply, as there was no evidence that this meaning would lead to absurd results or thwart the purpose of Section 333.

    Practical Implications

    Knowlton v. Commissioner clarifies that for Section 333 liquidations, the “acquired” date of stock and securities is generally the date of receipt by the liquidating corporation. This ruling prevents taxpayers from using carryover basis and holding periods to circumvent the “acquired after 1953” limitation in Section 333(e)(2).

    Legal practitioners should advise clients that in Section 333 liquidations, even if stock basis and holding periods tack back to a pre-1954 acquisition by a prior entity, the relevant “acquisition” date for Section 333 purposes is when the liquidating corporation physically received the stock. This case highlights the importance of the plain meaning of statutory language unless legislative intent or absurd results dictate otherwise.

    This decision limits the scope of exceptions where the IRS might allow relation back of the “acquired” date, primarily to situations involving mere changes in corporate form like mergers or stock dividends directly related to stock owned before the cutoff date. It reinforces a stricter interpretation of “acquired” in the context of corporate liquidations and tax recognition.