SCOTUS Reports

Tag: Section 333

  • 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.

  • Shereff v. Commissioner, 77 T.C. 1140 (1981): Realization vs. Recognition of Gain in Corporate Liquidations

    Shereff v. Commissioner, 77 T. C. 1140 (1981)

    In corporate liquidations under section 333, gain is realized based on fair market value but recognition is limited to specific statutory criteria.

    Summary

    In Shereff v. Commissioner, the Tax Court clarified the distinction between realization and recognition of gain in corporate liquidations under section 333 of the Internal Revenue Code. The petitioners, who owned shares in Petro Realty Corp. , received assets in a liquidation and argued that the unrealized appreciation in the distributed real estate should not be considered in calculating their gain. The court held that while gain is realized based on the fair market value of distributed assets per section 1001, section 333 only limits the recognition of that gain. Thus, the petitioners had to recognize a gain based on the fair market value of the assets they received, affirming the validity of the related IRS regulation.

    Facts

    Louis and Anna Shereff owned 60 shares of Petro Realty Corp. , which owned land, buildings, cash, and securities. In March 1977, Petro’s shareholders voted to liquidate the corporation under section 333, and by April, the liquidation was completed with assets distributed to shareholders, including the Shereffs. The Shereffs received cash, securities, cancellation of a loan, and a one-third interest in real property, which had a fair market value higher than its book value. The Shereffs claimed a capital loss based on the book value of the real estate, while the IRS calculated a capital gain using its fair market value.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in the Shereffs’ 1977 federal income tax, leading them to petition the U. S. Tax Court. The Tax Court, after considering the fully stipulated facts, issued a decision in favor of the Commissioner.

    Issue(s)

    1. Whether, in determining the amount of realized gain or loss from a corporate liquidation under section 333, shareholders must use the fair market value of the distributed property.

    Holding

    1. Yes, because section 1001 requires that gain or loss be realized based on the fair market value of property received in a liquidation, while section 333 only limits the recognition of that gain.

    Court’s Reasoning

    The court distinguished between the realization and recognition of gain. It clarified that section 1001 governs the realization of gain by calculating it based on the fair market value of distributed property. Section 333, however, deals with the recognition of that gain and allows qualified electing shareholders to recognize gain only to the extent specified in the statute. The court upheld the validity of section 1. 333-4(a) of the Income Tax Regulations, which applies section 1001 for calculating realized gain, finding it consistent with the statute. The court rejected the Shereffs’ argument that unrealized appreciation should not be included in the realized gain calculation, emphasizing that section 333 does not alter the general rule of section 1001 but rather offers a tax benefit by limiting the recognition of gain.

    Practical Implications

    This decision underscores the importance of understanding the distinction between realization and recognition of gain in corporate liquidations. Attorneys advising clients on section 333 liquidations must ensure that realized gains are calculated using fair market values of distributed assets, even if recognition of that gain may be limited. This ruling impacts how tax practitioners structure liquidations to minimize tax liability, particularly in cases involving appreciated real property. It also reaffirms the validity of IRS regulations in interpreting tax statutes, providing clarity for future tax planning and compliance. Subsequent cases have relied on this decision to clarify the application of section 333 in various contexts, influencing both tax law practice and corporate restructuring strategies.

  • McCormac v. Commissioner, 67 T.C. 955 (1977): When Liquidation Distributions Are Taxed as Ordinary Income

    McCormac v. Commissioner, 67 T. C. 955 (1977)

    Distributions received by shareholders post-liquidation, representing income from trust assets assigned in lieu of stock, are taxable as ordinary income, not capital gains.

    Summary

    In McCormac v. Commissioner, shareholders of a dissolved corporation received assignments of beneficial interest in a trust in exchange for their stock, pursuant to a section 333 liquidation. The trust, funded by pre-need funeral sales, generated income from investments which was previously distributed to the corporation and reported as dividends and interest. Post-liquidation, the shareholders argued these distributions should be taxed as capital gains. The court held that these payments were ordinary income, following precedent from Mace Osenbach and Ralph R. Garrow, as the shareholders merely substituted for the corporation’s right to receive trust income.

    Facts

    Hawaiian Guardian, Ltd. sold pre-need funerals, retaining 25% of the contract price and placing 75% in trust with Bishop Trust Co. , Ltd. The trust’s income was paid quarterly to Guardian, who reported it as dividend and interest income. In 1969, Guardian was liquidated under section 333, and shareholders, including Scott McCormac and Eleanor Lynn McKinley, received assignments of Guardian’s beneficial interest in the trust in exchange for their stock. Post-liquidation, they received trust income, claiming it as capital gains.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in the petitioners’ income taxes, treating the trust income as ordinary income. The petitioners filed for redetermination with the United States Tax Court, which upheld the Commissioner’s determination.

    Issue(s)

    1. Whether the quarterly trust income received by the shareholders after the liquidation of Guardian under section 333 is taxable as ordinary income rather than capital gain?

    Holding

    1. Yes, because the shareholders received the trust income in lieu of the corporation’s right to receive such income, which was previously reported as ordinary income by the corporation.

    Court’s Reasoning

    The court reasoned that the shareholders merely substituted for the corporation’s right to receive trust income, which was previously reported as ordinary income by Guardian. The court relied on Mace Osenbach and Ralph R. Garrow, which established that post-liquidation collections from assigned assets are taxable as ordinary income, not capital gains. The court rejected the petitioners’ argument that the beneficial interest in the trust was sui generis or had no ascertainable fair market value, noting that such a claim was not substantiated with proof. The court emphasized that the Ninth Circuit, to which the case would be appealed, had previously upheld similar decisions, binding the Tax Court under Golsen.

    Practical Implications

    This decision clarifies that when a corporation liquidates under section 333 and assigns its rights to receive income from a trust to its shareholders, those subsequent payments remain ordinary income. Practitioners must carefully evaluate the nature of assets distributed in liquidation to advise clients accurately on tax implications. The ruling reinforces the principle that the character of income does not change merely because of a change in recipient due to liquidation. This case has implications for structuring corporate liquidations and trust arrangements, particularly in industries like pre-need funeral sales, where trust income is a significant component of business operations.

  • Cohen v. Commissioner, 65 T.C. 554 (1975): Irrevocability of Section 333 Liquidation Elections

    Cohen v. Commissioner, 65 T. C. 554 (1975)

    An election under Section 333 of the Internal Revenue Code cannot be revoked except in cases of material mistake of fact.

    Summary

    In Cohen v. Commissioner, the Tax Court ruled that shareholders of Rucind, Inc. could not revoke their Section 333 election to liquidate the corporation, even though they argued they relied on an erroneous earnings and profits figure. The court found that the shareholders had full knowledge of the sale of the corporation’s sole asset and the resulting gain, and their mistake was one of law, not fact. Therefore, the gain from the sale had to be recognized by the corporation, increasing its earnings and profits, and the shareholders were subject to dividend income treatment under Section 333(e). This case underscores the binding nature of Section 333 elections and the limited circumstances under which they can be revoked.

    Facts

    Rucind, Inc. , a New Jersey corporation, owned a tract of land in Norwood, New Jersey, as its sole asset. On February 18, 1969, Rucind, Inc. contracted to sell this property to John E. Purcell for $440,000. On October 1, 1969, the shareholders and directors of Rucind, Inc. adopted a plan to liquidate the corporation under Section 333. The corporation and its shareholders timely filed the necessary forms for this election. On October 3, 1969, the property was transferred to the shareholders, and on October 7, 1969, the shareholders sold the property to Purcell. The shareholders reported the transaction on their 1969 tax returns as an installment sale, while Rucind, Inc. did not include the gain in its taxable income, relying on the Section 333 liquidation provisions.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in the petitioners’ federal income taxes for 1969, asserting that the gain from the sale should be recognized by Rucind, Inc. , increasing its earnings and profits, and thus subjecting the shareholders to dividend income under Section 333(e). The petitioners challenged this determination in the Tax Court, arguing that they should be allowed to revoke their Section 333 election due to a material mistake of fact regarding the corporation’s earnings and profits.

    Issue(s)

    1. Whether the sale of the Norwood property was made by Rucind, Inc. , for tax purposes.
    2. Whether the shareholders of Rucind, Inc. can revoke or avoid an election made under Section 333, thereby avoiding dividend treatment under Section 333(e) and non-recognition of gain by Rucind, Inc. under Section 337.

    Holding

    1. Yes, because Rucind, Inc. executed the contract of sale, the sale was made by the corporation.
    2. No, because the shareholders’ mistake was one of law, not fact, and thus did not allow for revocation of the Section 333 election.

    Court’s Reasoning

    The court applied the legal principle from Commissioner v. Court Holding Co. that the sale was made by Rucind, Inc. , as evidenced by the corporation’s execution of the contract of sale. Regarding the revocation of the Section 333 election, the court relied on the regulation that such elections are irrevocable except in cases of material mistake of fact. The court found that the petitioners’ mistake was a misunderstanding of the law, not a mistake of fact, as they were fully aware of the sale and the resulting gain. The court cited Estate of George Stamos and Raymond v. United States to support its conclusion that ignorance of the law or misapplication of the law does not allow for revocation of an election. The court also distinguished the case from Meyer’s Estate v. Commissioner, where a material mistake of fact was present.

    Practical Implications

    This decision reinforces the importance of careful consideration before making a Section 333 election, as it is generally irrevocable. Taxpayers must fully understand the legal and tax consequences of such an election and cannot rely on ignorance of the law or misapplication of the law to revoke it. This case may influence how tax practitioners advise clients on corporate liquidations, emphasizing the need for accurate calculation of earnings and profits and thorough understanding of the applicable tax laws. It also highlights the potential for the IRS to challenge the tax treatment of corporate liquidations and the importance of proper documentation and adherence to tax procedures.

  • Dunavant v. Commissioner, T.C. Memo. 1975-72: Strict Compliance Required for Section 333 Liquidation Election

    Dunavant v. Commissioner, T.C. Memo. 1975-72

    Strict compliance with the procedural requirements of tax elections, specifically the timely filing of Form 964 for Section 333 liquidations, is mandatory and cannot be substituted by substantial compliance, even if the IRS receives similar information through other means.

    Summary

    Shareholders of D&G, Inc. sought to utilize the tax benefits of a Section 333 corporate liquidation but failed to file Form 964, the Election of Shareholder Under Section 333 Liquidation. They argued that filing Form 966 (Corporate Dissolution or Liquidation) with attached documentation containing similar information constituted substantial compliance. The Tax Court rejected this argument, holding that strict adherence to the statutory requirement of filing Form 964 within 30 days of adopting the liquidation plan is essential for qualifying as electing shareholders under Section 333. The court emphasized that the timely filing of Form 964 is a substantive requirement, not merely procedural, and is crucial for the administration of Section 333.

    Facts

    Lee R. Dunavant, Herman H. Gorlick, and Morris Gorelick were the sole shareholders, officers, and directors of D&G, Inc.

    On November 28, 1969, D&G, Inc.’s board of directors and shareholders formally resolved to dissolve and liquidate the corporation under Section 333 of the Internal Revenue Code within one calendar month.

    D&G, Inc. filed Form 966 with the IRS, reporting the corporate liquidation and attaching minutes of the shareholder meeting and the Statement of Intent to Dissolve.

    The shareholders, however, did not file Form 964, Election of Shareholder Under Section 333 Liquidation, within 30 days of adopting the plan of liquidation.

    On December 21, 1969, D&G, Inc. completed the liquidation, distributing assets to the shareholders in exchange for their stock.

    The shareholders argued that because Form 966 and its attachments provided the IRS with essentially the same information as Form 964, they were in substantial compliance with Section 333 requirements.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in the petitioners’ federal income taxes for 1969, disallowing Section 333 treatment.

    The shareholders petitioned the Tax Court to contest the Commissioner’s determination.

    The Tax Court heard the case based on a stipulated set of facts.

    Issue(s)

    1. Whether the petitioners, by filing Form 966 and providing related information, substantially complied with the requirements of Section 333, despite not filing Form 964.

    2. Whether strict adherence to the regulatory requirement of filing Form 964 within 30 days is mandatory for shareholders to qualify for the benefits of Section 333 liquidation.

    Holding

    1. No, the petitioners did not substantially comply with Section 333 because the statute explicitly requires a written election (Form 964) from the shareholders, and this requirement was not met.

    2. Yes, strict adherence to the requirement of filing Form 964 within 30 days is mandatory because it is a statutory prerequisite for qualifying as an electing shareholder under Section 333.

    Court’s Reasoning

    The Tax Court emphasized that while it sometimes allows for relaxation of procedural requirements in tax elections, it has never done so for Section 333 or its predecessor without a timely Form 964 filing. The court distinguished cases where substantial compliance was accepted, noting that the requirement to file Form 964 goes to the “substance or essence of the statute,” not merely a procedural detail.

    The court stated, “Filing of a written election under section 333(c) has a substantive effect not only on the classification of the particular individual shareholder as a ‘qualified electing shareholder’ but also on the status of every other electing individual because of the 80-percent rule of section 333(c)(1).”

    The court reasoned that the purpose of requiring a written election within 30 days is to provide “specific, contemporaneous, and incontrovertible evidence of a binding election to accept the tax consequences imposed by the section.”

    The court found that Form 966, filed by the corporation, and the attached documents did not substitute for the shareholders’ required written election on Form 964. The court noted the absence of any written expression of the shareholders’ intent to elect Section 333 treatment as stockholders.

    The court concluded that it was not at liberty to infer an election when the “unequivocal proof required by Congress does not exist.”

    Practical Implications

    Dunavant v. Commissioner underscores the critical importance of strictly complying with the procedural requirements for tax elections, especially in the context of corporate liquidations under Section 333. Attorneys and CPAs advising clients on Section 333 liquidations must ensure that shareholders file Form 964 correctly and within the strict 30-day deadline. Substantial compliance arguments based on providing similar information through other forms are unlikely to succeed in Section 333 cases. This case reinforces the principle that when a statute explicitly mandates a specific form and filing deadline for a tax election, those requirements are substantive and must be meticulously followed to secure the intended tax benefits. Later cases have consistently cited Dunavant for the proposition that strict compliance is required for Section 333 elections, emphasizing its role in establishing a clear and enforceable standard for these types of tax elections.

  • Dunavant v. Commissioner, 63 T.C. 316 (1974): The Importance of Filing a Timely Election Under Section 333 for Corporate Liquidation

    Dunavant v. Commissioner, 63 T. C. 316 (1974)

    To qualify as an electing shareholder under Section 333 for favorable tax treatment in corporate liquidation, a shareholder must file a timely written election within 30 days of the adoption of the liquidation plan.

    Summary

    In Dunavant v. Commissioner, the Tax Court ruled that shareholders of a liquidating corporation must file Form 964 within 30 days of adopting the liquidation plan to be considered qualified electing shareholders under Section 333 of the Internal Revenue Code. The petitioners, who were the sole officers, directors, and shareholders of their corporation, failed to file this form despite filing Form 966 and other corporate documentation. The court emphasized the statutory requirement for a written election, rejecting the petitioners’ argument of substantial compliance, and held that they were not entitled to Section 333’s tax benefits due to the lack of a timely filing.

    Facts

    Lee R. Dunavant, Herman H. Gorlick, and Morris Gorelick were the sole officers, directors, and shareholders of D & G, Inc. On November 28, 1969, the corporation adopted a plan of liquidation. The corporation filed Form 966 on December 8, 1969, along with minutes of the shareholders’ meeting and the Statement of Intent to Dissolve, which referenced Section 333 in the directors’ minutes but not in the shareholders’ minutes. The corporation fully liquidated on December 21, 1969. However, the shareholders did not file Form 964, which is required for electing shareholders under Section 333.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in the petitioners’ 1969 federal income taxes, leading to the petitioners filing a case with the United States Tax Court. The Tax Court consolidated the cases of the three sets of petitioners and heard them together. The court’s decision was based on the stipulated facts and the legal question of whether the shareholders qualified as electing shareholders under Section 333.

    Issue(s)

    1. Whether the petitioners are qualified electing shareholders entitled to the benefits of Section 333 with respect to the gain realized on the liquidation of their controlled corporation?

    Holding

    1. No, because the petitioners did not file the required written election (Form 964) within 30 days after the adoption of the plan of liquidation as mandated by Section 333(d).

    Court’s Reasoning

    The court’s reasoning focused on the strict requirement of filing a written election within 30 days as per Section 333(d). The court distinguished between procedural and substantive requirements, classifying the filing of Form 964 as substantive due to its impact on the tax treatment of shareholders. The petitioners argued that the information provided in Form 966 and other documents was sufficient for substantial compliance, but the court rejected this, stating that the essence of Section 333 is the requirement for specific, contemporaneous, and incontrovertible evidence of a binding election. The court noted that no written election by the shareholders was present on the record, and the absence of such an election was significant, leading to the conclusion that the petitioners were not qualified electing shareholders.

    Practical Implications

    This decision underscores the importance of strict adherence to statutory filing requirements in tax law, particularly for elections that affect tax treatment. For attorneys and tax professionals, it serves as a reminder to ensure that clients file all necessary forms within the specified time frames to avail themselves of favorable tax treatments. The ruling impacts how similar cases should be analyzed, emphasizing the need for explicit compliance with Section 333’s requirements. It also influences business practices by highlighting the potential tax consequences of failing to make timely elections during corporate liquidations. Subsequent cases have consistently upheld the necessity of timely filing for Section 333 elections, reinforcing the practical implications of this decision.