The opinion
Sterrett, J, dissenting: As argued by the parties the issue presented to the Court is whether the sale in question was made pursuant to a plan of complete liquidation as contended by petitioner or was merely part of an integrated transaction constituting a reorganization as maintained by respondent.
Specifically respondent asserts that the entire transaction qualifies as a reorganization within the meaning of sections 368(a)(1)(D) and 354. 1 I would hold otherwise on the grounds that the legislative history 2 makes it quite clear that section 354(b) was not designed to cover divisive reorganizations (a split-up in this case).
This Court has faced before, on several occasions, the issue of how to categorize a transaction that does not meet the requirements of the reorganization provisions. In Joseph C. Gallagher, 39 T.C. 144 (1962), we said:
The liquidation of Delaware, although the business was continued by California with considerable change in the corporate structure, falls squarely within the first definition of a partial liquidation.32 Congress intended that in this situation, any redemption could not be treated as essentially equivalent to a dividend, and that this problem of the continuation of a business must be dealt with, if at all, under the reorganization sections. Since these facts do not fall within the careful language of those sections, the distributions should be treated as payment in exchange for the stock. To find differently would be to enact that provision which has failed on two separate occasions to be enacted by Congress. See H. Conf. Rept. No. 2543, to accompany H.R. 8300 (Pub. L. 591), 83d Cong., 2d Sess., p. 41 (1954),33 and H.R. 4459, 86th Cong., 1st Sess., sec. 26 (1959). [ 39 T.C. at 163 ; fns. omitted; emphasis added.]
Our Gallagher approach was approved in Commissioner v. Berghash, 361 F. 2d 257, 260 (C.A. 2, 1966), affirming 43 T.C. 743 (1965). See also Estate of Henry P. Lammerts, 54 T.C. 420 (1970), affirmed per curiam in part and remanded per stipulation 456 F. 2d 681 (C.A. 2, 1972).
Since the transaction then does not fall within the reorganization provisions, which are designed to cover the instances of the continuation of an existing business through a liquidation coupled with an intercorporate transfer, it follows under the teachings of prior case law that the transaction must, perhaps by definition of terms, be treated as a liquidation.
For years respondent, when faced with a liquidation-reincorporation transaction, had sought to extract an ordinary income tax on the distribution either by calling the transaction a reorganization with boot or a naked distribution taxable under section 301 or 302. Insofar as I am aware respondent has only prevailed when this or any court has found a reorganization accompanied by a nonqualifying distribution taxable as boot. 3 When a court has not found a reorganization, respondent has inevitably lost with the distribution deemed to be made in exchange for stock. Never has the respondent prevailed on the section 301-302 argument.
Now for the first time, if the logic of the majority’s holding is extended, the respondent will win his point. “How sweet it will be” and who could have expected it when the respondent was simply trying to forestall the applicability of section 337 by invoking the reorganization provisions. The majority’s holding is rather gratuitous, to say the least.
The majority seeks to make its decision at the corporate level more palatable by suggesting that consistency is not required between the transaction’s treatment at the corporate level and at the shareholder level, 4 implying that a section 337 liquidation must be more “complete” than a section 331 liquidation. This novel suggestion finds no support in any decisional law and in fact flies in the face of the discussion of these sections in such cases as Commissioner v. Berghash, supra, and Breech v. United States, 439 F. 2d 409 (C.A. 9, 1971). In my judgment the majority is simply playing with words in order to reach what is, I suspect, a preconceived desired result. An unfortunate byproduct of this form of rationalization is the creation of uncertainty where none had existed and, if there is one thing our income tax laws do not need, it is more uncertainty.
The majority seems preoccupied with a continuity of shareholder interest approach. The minimal (less than 15 percent) continuity of assets is ignored. Even the House version of section 357 of the 1954 Code required, among other things, a 50-percent continuity of assets before ignoring a purported liquidation. The opinion leaves up in the air what magic percentage combination of shareholder and asset transfer will, in the future, invalidate an asserted liquidation.
In this fully stipulated case I note that there is no evidence that there was, or was not, a business purpose to the transaction in issue. Of course, it is well established that the existence of a business purpose is irrelevant to the determination of whether a complete liquidation took place. United States v. Cumberland Public Service Co., 338 U.S. 451, 455 (1950).
Finally, the majority relies heavily on certain dicta 5 in Pridemark, Inc. v. Commissioner, 345 F. 2d 35 (C.A. 4, 1965). This reliance is rather odd since the fact of the matter is that the final holding of that court was that a liquidation had in fact taken place. I must also note that in Pridemark, as in the instant case, the controlling shareholders remained the same and that, also in both cases, minimal assets were “reincorporated.” It may well be argued that the majority has misconstrued its authority.
For the foregoing reasons I would stick with existing law and find for petitioner.
Dawson and Drennen, JJ, agree with this dissent. Respondent does not suggest that sec. 355 is applicable, presumably because of the requirements contained in subsec. (b)(1) thereof.
See S. Rept. No. 1622, to accompany H.R. 8300 (Pub. L. No. 591), 83d Cong., 2d Sess., pp. 263-264, 265, 266(1954).
The majority did not mention that this was the finding of the courts in the decisions it cites on pp. 437-438 in support of its conclusion.
Yet see the discussion in Madison Square Garden Corp. v. Commissioner, 500 F. 2d 611 (C.A. 2, 1974), on the question of consistency.
Dicta, incidentally, which has apparently been rejected by the Courts of Appeals for three circuits. Commissioner v. Berghash, 361 F. 2d 267 (C.A. 2, 1966), Breech v. Commissioner, 439 F. 2d 409 (C.A. 9, 1971), Genecov v. United States, 412 F. 2d 556 (C.A. 5, 1969).
An examination of the record in the Pridemark case reveals, in unobjected-to requests for findings of fact by the respondent, that Pridemark continued making sales for Golden Key into October 1958 and that the agency agreement between them was not in fact terminated until Oct. 24, 1958. The very next month, November 1958, the old shareholders of Pridemark initiated a search for a new builder of homes that it could sell. Thus, the shareholders sought to remain, and were subsequently successful, in the same line of business activity virtually without a break. The Court of Appeals still found that a valid liquidation had taken place. We must note, however, that the Court of Appeals, 345 F. 2d at 41, found that the principal shareholders stopped selling homes “for over one year,” but I respectfully submit that this factual holding is in error.