Petition — Chrome Plate, Inc. v. United States

@upreme Court, U.

FILED

JUN 26 1980

| MICHAEL RODAK, JR., CLERM

i

IN

THE SUPREME COURT

OF THE

UNITED STATES

October Term, 1979

No. _#9=20 50

Chrome Plate, Inc., Petitioner

Vv.

United States of America, Respondent

Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Fifth Circuit

John Dean Harris

Counsel for Petitioner

P.O. Box 17406

San Antonio, Texas

Page

aE TEER eeepc eo eh eid ar l

he ae le aah wae aks 4's we x Koen 1

SN RESETS EEL EP MRE 2

Statutes, federal rules, and regulations involved ....... 2

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Reasons for granting the writ ..........cccccccccccce 6

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CITATIONS

Cases Page

American Potash and Chemical Corporation v.

United States, 399 F.2d 194 (Ct.Cl. 1968)......... 5,6

13, 17, 26

Baker Commodities, Inc. v. Commissioner of Inter-

nal Revenue, 48 T.C. 374 (1967), aff’d on another

ground, 415 F.2d 519 (9th Cir. 1969).............. 19

Franklin B. Biggs v. Commissioner of Internal

Ss Mer FG, BO. FU, BPO c ccc cece wesececes 27

Bijou Park Properties, Inc. v. Internal Revenue Ser-

Ee eas ee CEI a 6s ook oS eins WES cs ceaes 19

Blueberry Land Company, Inc. v. Commissioner of

Internal Revenue, 361 F.2d 93 (Sth Cir. 1966) ...... 16

Boise Cascade Corp. v. United States, 228

F.Supp.770 (Idaho, 1969), aff’d per curiam, 429

ee es dg 5's sn 40's § vale He 8% s 20

Broadview Lumber Company, Inc. v. U.S., 36 AFTR

2d 75-6367, 75-2 U.S.T.C. § 9832, 40 AFTR 2d

77-5650 (7th Cir. 1977), rev’g in part and modify-

ee. nas cewaeseubebesece 15,17

Commissioner v. Court Holding Co., 45-1 U.S.T.C.

¢q 9125, 324 U.S. 331, 65 S.Ct. 707 (1945) ......... 8,9

Georgia Pacific Corporation v. United States, 264

F.2d GE COUR eae cece ces ccc ccs. 15, 20

Kanawha Gas and Utility Co. v. Commissioner of In-

ternal Revenue, 214 F.2d 685 (Sth Cir. 1954) ....... 15

Mary B. Kass v. Commissioner of Internal Revenue

GO T Bi ee cece c cee 23

Kimbell-Diamond Milling Co, v. Commissioner of

Internal Revenue, 14 T.C. 74 (1950), aff’d per

curiam, 187 F.2d 718 (Sth Cir. 1951) cert denied,

342 UB. Gar es eee cc sc ce ccc. 8, 10, 14

Madison Square Garden Corporation v. Commis-

sioner of Internal Revenue, 500 F.2d 611 (2nd Cir.

Le Pe ee 23, 24

Pacific Transportation Co. v. Commissioner of In-

ternal Revenue Service, 483 F.2d 209 (9th Cir.

1973), cert. denied, 415 U.S. 948 (1974) ........... 20

Supreme Investment Corporation v. United States,

468 FF .2e Fr as wc ccc cece eee 15,17

United States v. M.O.J. Corporation, 274 F.2d 713

(Sein Cin. FR wa ea icc ccc eee. 15, 26

YOC Heating Corporation v. Commissioner of Inter-

nal Revenue, 61 T.C. 168 (1973) ..........0.00. 23, 24

_ Statutes

Internal Revenue Code of 1954 (26 U.S.C.)

S SAQEaD nc ois ca EEG Sad cc ccc cscs 16

§ SSGCEE cu cn we eae icc cc cc ccee 18

§ S3QGR AD... ssa nua eas 5, 6, 7, 8, 9, 11, 12, 13

14, 16, 17, 18, 19, 20, 22, 24, 25

ee 6 Pepe eee 20, 21, 22

Eh) Peer ee eee 4, 10, 1i, 21

PD. L. SOG eer o cs cc ccc cece 21

Miscellaneous

Barnovitz, Problems in Achieving Parity in Tax

Treatment Under Section 337 and 334(b)(2), 34

N.Y.U. Institute on Federal Taxation 57 ....... 23, 24

Bittker and Eustice, Federal Income Taxation of Cor-

porations and Shareholders, Chapter 11, Complete

I 5c 50:6 b neg nand das akes es ks omens shes 21

General Revenue Revision, Hearings of Committee

on Ways and Means, House of Representatives,

83rd Congress, Ist Session, 40 topics pertaining to

the General Revision of the Internal Revenue

CC ie ME EE spb sn's vba S howe bien ess chk 8

H.Rep.No. 1337, 83rd Cong., 2d Sess. 38 (1954)... 10, 13

H.Rep. No. 2543, 83rd Cong., 2d Sess. 48 (1954) ..... 10

14, 20

S.Rep.No. 1622, 83rd Cong., 2d Sess. 48 (1954) ...... 10

14, 20

cs ka cawakaewkeel ener sh he 12

IEEE vc'v t's bss e050 fekaeCaaseawes 12

IN

THE SUPREME COURT

OF THE

UNITED STATES

October Term, 1979

No.

CHROME PLATE, INC., Petitioner

v.

UNITED STATES OF AMERICA, Respondent

Petition for a Writ of Certiorari to the United States Court

of Appeals for the Fifth Circuit

Petitioner requested that a writ of Certiorari be issued

to review the decision of the United States Court of Ap-

peals for the Fifth Circuit in this case (No.77-3402) which

was entered on April 2, 1980.

OPINION BELOW

The opinion of the United States Court of Appeals for

the Fifth Circuit (App. A, infra, pp. A-1 to A-17) is

reported in 614 F.2d 990 (Sth Cir. 1980). The opinion of

the United States District Court, Western District of

Texas, San Antonio (App. B, infra, pp. B-1 to B-13) is

reported in 442 F. Supp. 1023. The judgment of the

United States District Court for the Western District of

Texas, San Antonic Division setting in Bankruptcy and its

memorandum of Decision (App. C., infra, pp. C-1 to C-9)

is unreported.

JURISDICTION

The opinion of the United States Court of Appeals for

the Fifth Circuit was entered on April 2, 1980. The

jurisdiction of this Court is invoked under 28 U.S.C.

1254(1).

QUESTION PRESENTED

Should petitioner who has fully complied with all of the

requirements as intended by Congress in order to obtain a

cost of stock basis in assets, as well as fully complying with

the requirements set out by the Court of Claims, be denied

that tax treatment?

STATUTORY PROVISIONS AND JUDICIALLY

CREATED DOCTRINES INVOLVED

The pertinent provisions of the statute and judicially

created doctrines are set forth in Appendix D, infra, pp.

D-1 to D-S5.

STATEMENT OF THE CASE

1. BACKGROUND

This case involves the tax consequences arising out of a

series of corporate transactions in which the Petitioner

purchased the stock of six corporations from unrelated

third persons which was a taxable transaction to the

sellers. At that time, Petitioner was a corporation primari-

ly engaged in the business of chrome plating aircraft

cylinders. The sellers were engaged in the sale and repair

of airplanes and airplane engines through six corporations

and a sole proprietorship.

The sellers refused to sell the assets of the six corpora-

tions. They would only sell the stock. After extensive

negotiations and research, the transaction was carefully

planned and executed in order to fulfill the restrictive col-

lateral requirements of the sellers and the tax needs of all

parties.

On December 28, 1972, the sellers sold all of their stock

in the six corporations to Petitioner in a transaction tax-

able to the sellers. Chrome Plate Industries, Inc. (first tier

subsidiary), was a newly formed corporation incorporated

in December 1972, all of the outstanding stock of which

was owned by Petitioner. In payment for their stock in the

six corporations, sellers received from Chrome Plate In-

dustries, Inc., $39,000 in cash and $811,000 in notes.

2

Immediately following the purchase of the stock of the

six corporations, Chrome Plate Industries, Inc., transfer-

red the stock to Page Industries of Oklahoma, Inc. (PIOI,

second tier subsidiary), in exchange for 849,000 shares of

the common stock of PIOI. PIOI was also a newly formed

corporation incorporated in December 1972. Upon its in-

corporation, PIOI had issued 1,000 shares of its stock to

Chrome Plate Industries, Inc.; thus, PIOI was a wholly

owned subsidiary of Chrome Plate Industries, Inc., which

is a wholly owned subsidiary of Petitioner. On December

29, 1972, the six corporations were liquidated, and PIOI

succeeded to their assets. The plan was structured for

PIOI to receive the liquidated assets instead of Petitioner

for two business considerations not for tax reasons. First,

the liquidated assets were inventory. If Petitioner had

received the assets, they would have been commingled

with Petitioner’s other inventory. The sellers demanded

that their notes be collateralized by the unsold assets ac-

quired from them. Therefore, a cumbersome release pro-

cedure would have been required each time Petitioner

wanted to sell some of the acquired assets, unless the assets

were separated and identifiable. Second, a multimillion

dollar law suit was pending against one of the six corpora-

tions at the time of the transaction. The Petitioner feared

that if the suit had been successful, Petitioner, as the

parent corporation, might have been found liable.

The series of transactions described above all occurred

within twenty-four hours.

Upon liquidating the six corporations, the Petitioner

stepped up the basis of the assets in these corporations to

$850,000, the cost of the stock, from their cost basis in the

hands of the six corporations. The Internal Revenue Ser-

vice denied the stepped-up basis in the assets received from

the six corporations, and determined that the basis of the

assets in the hands of the Petitioner was the same as their

basis in the hands of the six corporations. The Internal

Revenue Service reached this conclusion because it deter-

mined that PIOI (second tier subsidiary) received the stock

3

of the six corporations from Chrome Plate Industries, Inc.

(first tier subsidiary) in a transaction to which Section 351

of the Internal Revenue Code of 1954 (26 U.S.C.) infra,

applied.

The series of corporate transactions described above may

be illustrated as follows:

CHROME PLATE, INC.

Parent

o> ONTO

Files CHROME PLATE $849,000 cash and notes

Consolidated INDUSTRIES, INC. 3»

cia Wines Ist Tier Subsidiary | _ 6 Corporations

¥ 351 Exchange r 2 sid

"7 Stock of & Corporations

A

Return

Stock of

6 Corporations

—— <P SK VEC

849,000 Shares of

PIOI Stock

v

PAGE INDUSTRIES

OF OKLAHOMA, INC.

(PION)

2nd Tier Subsidiary

gs 332(b) Liquidation

r

4)

6 Corporation’s

Stock

Assets of 6

Corporations

i e— DT TPS OSCw

6 Corporations

3rd Tier Subsidiary

2. COURSE OF PROCEEDING AND DISPOSITION IN

COURTS BELOW

In June of 1974, Petitioner filed a claim for refund of

taxes based upon a net operating loss carryback from the

end of December 31, 1973. In February of 1975, Petitioner

filed under Chapter XI of the Bankruptcy Act. In

November of 1976, the Director of Internal Revenue filed

a claim in the Bankruptcy Court alleging a deficiency in in-

come taxes and a recoupment of tentative over assessment

previously allowed as a result of Petitioner’s carryback fil-

ed in June of 1974. In April of 1977, Petitioner filed a Mo-

tion for Partial Summary Judgment requesting a denial of

the claim for refund. The government filed a Motion for

Partial Summary Judgment in opposition to Petitioner’s

Motion for Summary Judgment. The case was argued

before the Bankruptcy Court on June 13, 1977, with the

Bankruptcy Judge ruling in favor of the Petitioner, relying

primarily on American Potash and Chemical Corporation

v. United States, 399 F.2d 194 (Ct.Cl. 1968). The govern-

ment appealed the decision and on November 4, 1977, the

District Court, without hearing oral argument, reversed

the Bankruptcy Court, with instructions to allow the

government’s claim for income taxes stating that ‘‘the

Bankruptcy judge. . . simply ignored the Code and applied

Pre-1954 Internal Revenue Code Case-Law to the transac-

tion and held for the Plaintiff.”’ In concluding, the

District Court held that the Kimbell-Diamond doctrine has

been supplanted by § 334(b)(2) and therefore applied only

to those transactions that satisfy the requirements of that

provision. The petitioner appealed the District Court’s

decision to the United States Court of Appeals for the

Fifth Circuit and, on April 2, 1980, in a lengthy opinion,

the Fifth Circuit affirmed the decision of the District

Court.

REASONS FOR GRANTING THE WRIT

1. This case merits review by this Court on Certiorari

because the decision of the Court of Appeals is in direct

conflict with the holding of the Court of Claims in

American Potash and Chemical Corporation v. United

Stutes, 399 F.2d 194 (Ct.Cl. 1968). In American Potash

and Chemical Corporation v. U.S., the Court of Claims

stated the following:

The question before us is whether Congress intended

to preempt the subsequent use of the step transaction

doctrine by enacting § 334(b)(2). We find that it did

not intend to eliminate the Kimbell-Diamona

doctrine.

+ * +

The Kimbell-Diamond doctrine, without question, re-

mains viable for individual taxpayers because §

334(b)(2) is applicable only to corporate taxpayers.

We cannot conclude that Congress intended to dif-

ferentiate between corporate and individual taxpayers

and permit the use of the judicial Kimbell-Diamond

doctrine by an individual who has acquired stock dur-

ing a period in excess of 12 months, and to deny its

application to a corporate taxpayer under the same

circumstances. There is nothing in the legislative

history to indicate that this anomaly. was intended. In

the absence of some specific direction that Kimbell-

Diamond is no longer viable, we find that it has not

been preempted by § 334(b)(2).

. + *

Moreover, where Congress intends to modify or

change an existing judicial rule, it generally makes

some statement of its purpose for enacting a par-

ticular statute.

We cannot infer that Congress had any intent other

than to establish a precise rule under which a taxpayer

could proceed, assured that the cost basis of its stock

acquired to obtain the assets would become the basis

6

of the assets when they were received in the subsequent li-

quidation. We conclude that the Kimbell-Diamond doc-

trine has not been preempted.’’ [Emphasis supplied.]

The Fifth Circuit ruled in the instant case the following:

We hold positively and conclusively that the Kimbell-

Diamond doctrine is abolished in regard to corporate

taxpayers, and the only opportunity to receive a cost

basis in complete liquidation of a subsidiary is by ful-

ly complying with § 334(b)(2).

2. This case merits review by this Court on Certiorari

because if the District Court decision is allowed to stand,

taxpayers may enter into a transaction identical to the

steps taken in the instant case and receive an unpaid for

tax basis in assets in direct conflict to the principles of the

Kimbell-Diamond doctrine. Surely Congress did not pass

§ 334(b)(2) to allow a taxpayer benefits which are in direct

conflict with the Kimbell-Diamond doctrine if the stated

intent of Congress was to effec‘uate the principles of that

doctrine.

ARGUMENT

PETITIONER’S BASIS IN THE ASSETS

RECEIVED FROM THE LIQUIDATION

OF SIX CORPORATIONS SHOULD BE

EQUAL TO THE COST OF ACQUIRING

THE STOCK OF THE SIX CORPORA-

TIONS.

The question presented in this case involves the basis to

be assigned certain assets acquired by Petitioner on liqui-

dation of the six corporations, which had become its whol-

ly owned subsidiary corporation. Petitioner contends that

it is entitled to a stepped-up basis in the assets equal to the

cost of acquiring the stock of the six corporations, or

$850,000. The Government contends that the Petitioner

must carry over the six corporation’s basis in the assets, or

approximately $250,000. The denial of a cost of stock

basis of the assets is inconsistent with the intent of

7

Congress as well as inconsistent with the tax treatment of

the shareholders of the six corporations, who reported the

transaction as a taxable event and paid tax on the gain

resulting from the sale of the stock of the six corporations.

The passage of Internal Revenue Code § 334(b)(2) was

an effort by Congress to create parity between the direct

acquisition of assets from a corporation and the purchase

of stock of a corporation and immediately liquidating that

corporation for the purpose of acquiring its assets. In a

line of pre-1954 cases, the Courts formulated two basic tax

concepts, each of which were established and successfully

argued by the Internal Revenue Service. The first concept

is known as the substance over form doctrine and was pro-

mulgated by Commissioner v. Court Holding Co., 45-1

U.S.T.C. 4 9125, 324 U.S. 331; 65 S.Ct. 707 (1945). The

doctrine basically requires the Court to view a series of

transactions as a whole without giving independent tax

significance to the individual steps of the transaction. In

1950, the Tax Court held in Kimbell-Diamond Milling Co.

v. Commissioner, Supra, that for tax purposes, if a tax-

payer engages in a series of step transactions, one must

disregard the various steps taken and look to the substance

of the transaction. Although the Kimbell-Diamond deci-

sion reached an equitable result based on the facts of that

case, it created confusion as to the state of the law because

of the subjective intent required to be proven by the tax-

payer. Because of the amount of litigation resulting from -

the judicially created subjective intent test, taxpayers re-

quested Congress to pass a law providing definite rules ~

relating to the tax treatment of liquidations of subsidiary

corporations. In 1953, at hearings of the Committee on

Ways and Means, House of Representatives, 83rd Con-

gress, Ist Session, the American Bar Association, as part

of its testimony, addressed the question of corporations

being able to purchase the stock of other corporations, im-

mediately liquidating those corporations, and being able

to allocate the cost of the stock to the assets acquired. Part

of its testimony as reported in General Revenue Revision,

at Page 1321, states:

8

The problem is intensified by the fact that corpora-

tions are often unwilling to sell their assets because

the gain would be subject to a double tax and since

their shareholders are unwilling to liquidate the

corporation and then sell the assets because of their

fear of violating the doctrine of Court Holding Com-

pany case (324 U.S. 331), a corporate purchaser often

finds it necessary to buy the stock of a corporation in

order to acquire its assets. The law should provide a

definite rule as to tax treatment of a transaction of

this type.

RECOMMENDATION: Provide that § 112(b)(6) of

the Internal Revenue Code shall be generally ap-

plicable regardless of the purpose for which the

transferor’s stock was acquired, but permit taxpayers

to elect to treat § 112(b)(6) as inapplicable if the li-

quidation occurs within one year after the stock of the

transferor is acquired, and provide that § 112(b)(6)

shall not be applicable if the acquisition of the stock

of the transferor results in a non-recognition of gain

under § 112(f) of the Internal Revenue Code.

Other testimony before the Committee relating to the

Kimbell-Diamond doctrine requested the same thing in a

set of rules, that if followed would assure the taxpayer a

cost of stock basis in the ussets.

It appears clear from the testimony at the hearings of

the Committee for Ways and Means that taxpayers were

requesting Congress to pass legislation providing a way

where they could be assured of the tax consequences

before entering into a transaction. Congressional intent

can be shown in the following House and Senate Reports.

See House Report No. 2543, 83rd Congress, 2nd Session,

which states at Page 36:

(c) Basis of assets received and liquidation of sub-

sidiaries - The accompanying Conference Report con-

tains an amendment to § 334(b)(2). Under § 334(b)(2)

which relates to the so-called Kimbell-Diamond pro-

blem, a parent corporation which liquidates its

9

subsidiary (the stock of which was purchased within the

time and in the manner prescribed) receives the assets of

the subsidiary on the same basis at which the parent held

the subsidiary stock, ...

The accompanying Committee Report (House Report

1337, 83rd Congress, 2nd Session) states at Page 38:

Moreover, under the bill, a shareholder will in general

be permitted to receive the purchase price for his

stock as his basis for the assets distributed to him in li-

quidation irrespective of the assets cost to the cor-

poration. In this respect, the principle of Kimbell-

Diamond Milling Co. (187 F.2d 718) is effectuated.

Also, See Senate Report No. 1622, 83rd Congress, 2nd

Session, which states at Page 48:

Under the House Bill, a shareholder would in all cases

be permitted to receive the purchase price for his

stock as his basis for the assets distributed to him

regardless of the assets cost to the corporation. In this

respect the principles of Kimbell-Diamond Milling

Co. (187 F.2d 718) are effectuated. Since the applica-

tion of the rule of this case is presently in the area of

liquidation by a parent corporation of the subsidiary,

the rule has been limited by your Committee to li-

quidations of this type. Accordingly, your Committee

has provided that where a corporation purchases

stock of another corporation and within two years

after the purchase a plan of liquidation is adopted,

the basis of the assets of the subsidiary received by the

parent will be the amount paid for the subsidiary

stock.

In determining why Congress excluded a § 351 transac-

tions from the term ‘‘purchase’’ as it applies to § 334(b)(2)

one must look to Senate Report No. 1622, 83rd Congress,

2nd Session, at Page 257 which states in part:

Paragraph (2) of Subsection (b) incorporates into

your Committee’s bill rules effectuating principles

derived from Kimbell-Diamond Milling Co.

10

Paragraph (2) accordingly provides that if property is

received by a corporation in a distribution in com-

plete liquidation of its subsidiary then, provided the

conditions of this paragraph are met, the basis of the

property in the hands of the distributee shall be the

adjusted basis of the stock with respect to which the

distribution was made.

Paragraph (3) defines the term ‘‘purchase’’ to mean

any acquisition of stock but only if the requirements

of subparagraph (A), (B), and (C) are met.

Subsection (B) makes clear that stock acquired in an

exchange to which § 351 applies does not constitute

stock acquired by purchase.

In general, your Committee intends to limit the

definition of the term ‘‘purchase’’ to cases where the

acquisition of the stock was made in a taxable tran-

saction. [Emphasis supplied]

It is clear from the above that Congress reacted to the

request of the taxpayers in enacting § 334(b)(2). §

334(b)(2) provides a set of rules under which, if followed

exactly, guarantees the taxpayer a cost-of-stock basis of

assets acquired through the liquidation of a subsidiary.

However, Congress did not state that § 334(b)(2) was the

exclusive way to receive a step-up in basis. This was

acknowledged by the United States in its brief filed in the

District Court below at Page 18:

Conceitedly, the Committee reports fail to state ex-

pressly that § 334(b)(2) was to be the exclusive means

by which a distribution was to obtain a cost-of-stock

basis for the assets received in a corporate liquida-

tion.

The petitioner agrees with the government in its position

that if a taxpayer meets all the requirements of § 334(b)(2)

it will receive a cost-of-stock basis irrespective of intent of

the taxpayer. However, the petitioner does not agree with

the government’s position that it is the exclusive avenue to

qualification for cost-of-stock basis. A comprehensive

analysis of the Senate and House Reports indicate that

11

§ 334(b)(2) was enacted to effectuate the principles of the

Kimbell-Diamond doctrine. Both the House and Senate

Committees recognized the validity of the tax doctrine

created in that decision. It would be inconsistent for Con-

gress then to eliminate that doctrine by the passage of a

narrowly defined law. Furthermore, the position take by

the government in this case is inconsistent with Revenue

Rulings issued in 1967 and 1974. Although Revenue Rul-

ing 67-274 makes no reference to the Kimbell-Diamond

doctrine specifically, the holding that the initial acquisi-

tion of stock is to be disregarded as transitory and that the

transaction is to be treated as an acquisition of assets,

represents an application of the principles of the Kimbell-

Diamond doctrine. Further, Revenue Ruling 74-35

acknowledges the validity of those principles. The peti-

tioner believes that the Internal Revenue Service would not

cite the principles in later Revenue Rulings if it believed

the doctrine was supplanted by § 334(b)(2) and did not sur-

vive the enactment of that Section.

The petitioner believes that Congress enacted §

334(b)(2) to insure taxpayers of a method of receiving a

cost-of-stock basis for assets received in a corporate li-

quidation. However, Congress wanted to place safeguards

within § 334(b)(2) so that taxpayers could not take un-

justified tax advantage of that Section. Therefore, Con-

gress passed § 334(b)(2) which defines ‘‘purchase’’ of

stock for purposes of § 334(b)(2). Congress obviously in-

tended to require the parent corporation to purchase stock

of a subsidiary from an unrelated person in a transaction

which is taxable to the seller. This is exactly what happen-

ed in the instant case. The Petitioner believes that in the

specific circumstances of this case it has effectively met all

of the requirements of § 334(b)(2) Congress intended in

order to receive a cost-of-stock basis. It is hard to believe

that Congress passed a law which would effectively trap

the unwary and limit achieving a cost-of-stock basis if the

requirements that Congress intended have been met.

12

The first case to address the issue of Congressional in-

tent as it relates to the Kimbell-Diamond doctrine and §

334(b)(2) was American Potash and Chemical Corpora-

tion v. U.S., 399 F.2d 194 (Ct.Cl. 1968). It was the only

case which had been decided at the time the petitioner

entered into the transaction in question. In American

Potash and Chemical Corporation v. U.S., the Court of

Claims stated the following:

The question before us is whether Congress intended

to preempt the subsequent use of the step transaction

doctrine by enacting § 334(b)(2). We find that it did

not intend to eliminate the Kimbell-Diamond doc-

trine.

There is no instance in the legislative history where

Congress states either that § 334(b)(2) is the exclusive

exception to the carryover rule, or that the Kimbell-

Diamond rule ‘s superseded or, on the other hand,

that it is viable.

Obviously Congress intended to inject some degree of

certainty into an area of the tax law previously oc-

cupied by problems of proving that a taxpayer had

the requisite intent. It is not a necessary conclusion

therefrom that Congress intended, by establishing an

objective route for obtaining a cost basis without the

need for proving an intent to acquire assets, to pro-

hibit both the government and taxpayers from further

resort to proof of a subjective intent to obtain the

assets without the need for proving an intent to ac-

quire assets without complying with the precise objec-

tive tests of § 334(b)(2). [Emphasis supplied.]

Our examination of the relevant legislative history rein-

forces our conclusion that Kimbell-Diamond is not

‘*dead.’’ The House Report on the 1954 Code, H. Rep.

No. 1337, 83rd Cong., 2d Sess. 38 (1954) reads:

. . . Under the bill a shareholder will in

general be permitted to receive the purchase

price for his stock as his basis for the assets

distributed to him in liquidation irrespective

of the assets’ cost to the corporation. In this

13

respect the principle of Kimbell-Diamond Mill-

ing Co. (187) F.2d 718 (40 AFTR (328)) is effec-

tuated. [Emphasis supplied.]}

The Senate Report, however, modified the original

House proposal and limited the scope of the section

to corporate situations where a corporation purchases

the stock of another corporation and within two years

after the purchase adopts a plan of liquidation. The

House proposal would have made the cost-of-stock

basis rule applicable to all taxpayers, both individuals

and corporations.

The Senate concluded that its substitute provision

‘‘effectuates principles derived from Kimbell-

Diamond Milling Co., supra.’’ S. Rep. supra, pp. 38,

A109. The principle of § 334(b)(2) is derived from the

broader, more general rule of Kimbell-Diamond. It is

a precise, narrow and objective application of the

broader doctrine.

The Kimbell-Diamond doctrine, without question, re-

mains viable for individual taxpayers because §

334(b)(2) is applicable only to corporate taxpayers.

We cannot conclude that Congress intended to dif-

ferentiate between corporate and individual taxpayers

and permit the use of the judicial Kimbell-Diamond

doctrine by an individual who has acquired stock dur-

ing a period in excess of 12 months, and to deny its

application to a corporate taxpayer under the same

circumstances. There is nothing in the legislative

history to indicate that this anomaly was intended. In

the absence of some specific direction that Kimbell-

Diamond is no longer viable, we find that it has not

been preempted by § 334(b)(2).

Moreover, where Congress intends to modify or

change an existing judicial rule, it generally makes

some statement of its purpose for enacting a par-

ticular statute.

We cannot infer that Congress had any intent other

than to establish a precise rule under which a taxpayer

could proceed, assured that the cost basis of its stock

14

The Fifth Circuit has been faced with the question of the

step transaction many times. The Fifth Circuit affirmed

the Kimbell-Diamond doctrine and has upheld its validity

in several cases. The principle was also articulated by the

Fifth Circuit in Georgia Pacific Corporation v. U.S., 264

F.2d 61 (Sth Cir. 1954), and in Kanawha Gas and Utility

Co. v. Commissioner, 214 F.2d 685 (Sth Cir. 1954), and in

1960, the Court decided United States v. M.O.J. Corpora-

tion, 274 F.2d 713 (Sth Cir. 1960). Although M.O.J/. Cor-

poration was decided under the 1939 Code, it upheld the

validity of the Kimbell-Diamond doctrine applied with full

vigor to the admitted facts in that case. In Revenue Ruling

60-246, Internal Revenue Service announced that they

would follow the decision of the United States Court of

Appeals for the Fifth Circuit in United States v. M.O.J.

Corporation, supra. Thus, once again, the Internal

Revenue Service recognized the doctrine of Kimbell-

Diamond after the passage of the 1954 Code.

The government in its reply brief filed in the District

Court below, and the Seventh Circuit in its decision of

Broadview Lumber Company, Inc. v. U.S., 40 AFTR 2d

77-5650d (7th Cir. 1977) insinuated that the Fifth Circuit

had decided that § 334(b)(2) had preempted the Kimbell-

Diamond doctrine in Supreme Investment Corporation v.

United States, 468 F.2d 370 (Sth Cir. 1972). The Petitioner

is in agreement with the decision of the Fifth Circuit in

Supreme Investment Corporation, but disagrees with the

conclusion of the government and the Seventh Circuit. In

fact, the Petitioner believes that the decision in Supreme

Investment Corporation supported the Petitioner’s posi-

tion. In Supreme Investment Corporation v. U.S., 468

F.2d at 377, the Court states:

With respect to the receiving corporation, the posi-

tion of Supreme in this case, the statutory rules are

even clearer. The liquidation of C.K.S. meets all the

requirements of § 334(b)(2). § 334(b)(2) is a codifica-

tion of the principles derived from the decision of the

Kimbell-Diamond Co. [Emphasis supplied.] . . . The

15

Kimbell-Diamond case held that a purchase of a cor-

poration stock in order to obtain its assets should be

treated as a direct purchase of the assets, with the

consequence that the costs of the stock should serve

as the basis for the assets. In codifying the Kimbell-

Diamond rule, Congress made a major change: It

substituted a series of objective tests in place of a

determination of the taxpayer’s subjective intent to

obtain corporate assets. § 334(b)(2) is therefore a

mandatory rather than an elective provision, and it

must apply even in cases where the taxpayer’s intent is

not to obtain underlying assets of a corporation but

to purchase and maintain the corporate structure.

We think that the mandatory and objective provisions

of § 334(a)(1), as applied to this case, leaves no room

for the Commissioner to assert §269 to require

Supreme to use a carryover basis.

The taxpayer believes its position is identical to that

of the Fifth Circuit because it is obvious that the Con-

gressional intent in enacting § 344(b)(2) was to pro-

vide a method where the taxpayer would be sure of

receiving the tax benefits which it desired. Since

C.K.S. met all the requirements of § 334(b)(2), it was

entitled to a cost-of-stock basis in the assets as

specifically provided for by Congress. Also, in

Supreme Investment Corporation, the Court cited

one of its earlier decisions, Blueberry Land Co. v. In-

ternal Revenue, 361 F.2d 93 (Sth Cir. 1966), in which

it held:

Each case must be decided on its own merits by

examining the form and substance of the transac-

tion and the purpose of the relevant tax provi-

sions to determine whether recognition of the

form of the transaction would defeat the

statutory purposes. 361 F.2d at 101.

The petitioner believed that the Fifth Circuit had ruled

that when the intent of Congress conflicts with the literal

reading of the statutes, the interpretation of the statute

must be construed so that Congressional intent will

16

prevail. It should be noted that in Supreme Investment

Corporation, the government took an opposite position

than in the current case. In Supreme Investment Corpora-

tion, the government argued that despite Supreme’s literal

compliance with § 334(b)(2), Supreme should be required

to use a carryover basis.

The petitioner’s conclusions that the Fifth Circuit had

not ruled that the Kimbell-Diamond doctrine had been

abolished before this instant case is verified in the opinion

of the Fifth Circuit where in 614 F.2d 990, at 998 states:

Without making an affirmative decision, the Fifth

Circuit seemed to imply that the doctrine was still

viable under the 1954 Code in Griswold v. C.I.R., 400

F.2d 427, 431 (Sth Cir. 1968).

In Broadview Lumber Co., Inc. v. U.S., 75-2 U.S.T.C.

q 9832 (N.D. Ind., 1975), the Court held:

In arriving at this conclusion, the Court rejects

Defendant’s position that Congress, in enacting §

334(b)(2) preempted the Kimbell-Diamond doctrine.

Rather the Court chooses to follow the position of the

Court of Claims in American Potash and Chemical

Corporation v. U.S., supra, that Kimbell-Diamond is

still viable despite¢the enactment of § 334(b)(2).

In its opinion, the District Court followed the rationale

of American Potash and Chemical Corporation. In

August of 1977, the Seventh Circuit overruled the decision

of the District Court in Broadview Lumber Co., Inc, v.

U.S., supra. However, the petitioner believes that the deci-

sion rendered by the Seventh Circuit is consistent with the

position of the petitioner. In examining the Congressional

intent, the Seventh Circuit stated:

Throughout the legislative reports accompanying the

1954 Internal Revenue Code, the language used to

describe the function of § 334(b)(2) is that it permits

the taxpayer to retain as his basis for the distributed

assets his cost of acquiring the liquidated corpora-

tion’s stock. That choice of language indicates that

17

Congress viewed Kimbell-Diamond as providing tax-

payers with a valuable exception to the general! rule

that the basis of assets acquired by shareholders in li-

quidation should be carried over from the liquidated

corporation. § 334(b)(2) was enacted to clarify when

that exception would apply.

As the Tax Court has recognized, Congress has

established few guidelines for analysis of integrated

or step transactions, and it has generally avoided

strict rules due to the practical difficulties of trying to

provide for all possible forms of corporate transac-

tions. The Courts have been left to fashion rules

responsive to the varied transactions. . . .The

mechanical rules of § 334(b)(2) provide a clear

method for determining what basis will apply to

assets received in liquidation and the most frequently

reoccurring fact situations, liquidations of a sub-

sidiary by a parent. It is a solution to a common tax

planning problem to lessen the uncertainties surroun-

ding prior tax law.

We hold that the subjective tests of Kimbell-Diamond

are not applicable to the facts here. [Emphasis sup-

plied.]

In ruling that § 334(b)(2) did not apply because the stock

was acquired from persons to whom § 318(a) applied, the

Court stated:

The Senate Report expressly declared that in general

it intended: ‘‘to limit the definition of the term ‘pur-

chase’ to cases where the acquisition of the stock was

made in a taxable transaction.’’ Keeping in mind our

view that § 334(b)(2) was intended to permit taxpayers

to obtain an exception to the general rule of §

334(b)(1), we take that to mean that Congress did not

want taxpayers who had acquired assets through

stock transactions which avoided taxation to be able

to take advantage of a step-up basis as well.

In finding for the taxpayer, the Seventh Circuit concluded

by saying:

18

Finding that the subjective intent test of Kimbell-

Diamond have been replaced in certain circumstances

by the objective standards of Section 334(b)(2)....

Also, in a footnote, the Court stated:

Our finding that the close corporation relationship in-

volved herein which precludes Section 334 (b)(2)

treatment of cost as basis is consistent with our inter-

pretation of the nature of that section. Because the

section will often convey a substantial benefit upon

the taxpayer by giving him a stepped-up basis, Con-

gress imposed the attribution rule of Section 318(a) to

insure that those benefits are not obtained by ar-

tificial transactions between closely related parties or

economic interests.

The petitioner concurs with the decision of the Seventh

Circuit because it believes that it is consistent with Con-

gressional intent.

In Baker Commodities, Inc. vs. Commissioner, 48

T.C.374 (1967), the Tax Court held Baker was not entitled

to a step-up in basis of the assets for two reasons: (1) It

claimed partnership business was transferred to a corpora-

tion in 351 transfer. Although the facts are complicated, it

is clear that the Court was correct in its decision because

there was no taxable transaction entered into by the

transferor and Congress specifically intended in the

passage of 334(b)(3)(B) to exclude a step-up in basis of

assets when the transferor did not incur a taxable transac-

tion. (2) The Tax Court held that Baker should not be

allowed a step-up in basis because the transaction also in-

volved related parties and would be excluded under Sec-

tion 334(b)(3)(C). The petitioner believes that the decision

was also consistent with the intent of Congress.

Also, in Bijou Park Properties, Inc. vs. Internal

Revenue Service, 47 T.C. 207 (1966), the Court determin-

ed that the liquidation in that case did not qualify under

Section 334(b)(2) because the stock was purchased from

related parties where Section 318(a) applied.

19

In support of its position, the government cited Pacific

Transportation Co. v. Commissioner, 483 F.2d 209 (9th

Cir. 1973) cert. denied 415 U.S. 948 (1974), and Boise

Cascade Corp. V. United States, 288 F.Supp. 770 (Idaho,

1969), aff’d per curiam 429 F.2d 426 (9th Cir. 1973) in its

Reply Brief. The taxpayer contends that neither of these

cases is in point with the case at hand. In each case, both

parties agree that a Section 334(b)(2) liquidation has oc-

curred. The only question presented in those cases is how

to allocate the basis of the assets acquired in the 334(b)(2)

liquidation. Further, the government argues that Ninth

Circuit rejects any inquiry into the corporation’s intent in

the acquisition of stock. In the instant case, the petitioner

is not asking the Court to determine the intent of the peti-

tioner, but to determine the intent of Congress in passing

Section 334(b)(2) and Section 334(b)(3)(B).

The only argument the government presents in not

allowing the petitioner to receive a cost-of-stock basis in

the assets received in the liquidation is that it does not

meet the formal definition of ‘‘purchase’’ in 334(b)(3).

However, the petitioner did effectively purchase the stock

of the six corporations from independent third parties in a

taxable event to the sellers. It is clear that in a transaction

such as this, Congress intended the purchaser to receive a

step-up in basis of the assets equal to what it paid for the

stock.

In determining why Congress excluded a Section 351

transaction from the term ‘‘purchase’’ as it applies to Sec-

tion 334(b)(2), one must look to Senate Report No. 1622,

83rd Congress, Second Session, at page 257, where it con-

cludes by stating:

In general, your Committee intends to limit the

definition of the term ‘purchase’ to cases where the

acquisition of the stock was made in a taxable tran-

saction.

It is undisputed that Congress intended the term ‘‘tax-

able transaction’’ to mean that the transaction results in a

taxable event to the seller of the stock.

20

Section 351 provides that gain shall not be recognized if

property is exchanged solely for stock or securities of a

controlled corporation. The Government insinuates that

since one of the steps of the transaction was a Section 351

transaction, the petitioner avoided a taxable transaction

and thus received a tax benefit. This is not true. The peti-

tioner merely met the statutory requirements of Section

351 in one of the steps of the transaction. However, it

received no tax benefit. If the step of the transaction had

not met the requirement of Section 351 and was deemed to

be a taxable transaction, no tax liability would have

resulted. The tax basis of the property transfer was equal

to the fair market value of the property. Therefore, even if

a taxable event occurred, there would not have been any

gain realized.

In discussing the purchase requirements under §

334(b)(3), Bittker and Eustice state in their section on

complete liquidations, paragraph 11.44, that:

Thus, the statutory Kimbell-Diamond rule applies

primarily to essentially one shot purchases of stock by

the parent corporation from unrelated parties in tran-

sactions that as to the sellers, are taxable events (i.e.,

in which their gain or loss on the transfer is recogniz-

ed).

* * *

§ 334(b)(3) (definition of ‘‘purchase’’) was amended

by P.L. 89-809 (1966) to cure the timing problem

created by § 334(b)(3)(C) where a chain of sub-

sidiaries was acquired and liquidated into the parent

in the wrong order, i.e., where stock of the first tier

subsidiary is acquired by purchase, and assets of the

second tier subsidiary are ultimately acquired by the

purchaser parent corporation after a prior liquidation

of the first tier subsidiary. Under this amendment the

parent can now liquidate the first tier subsidiary

before liquidating the second tier subsidiary and

21

attain 334(b)(2) treatment with respect to the latter’s

assets notwithstanding § 334(b)(3)(C).

Prior to this amendment, if the parent liquidated its first

tier subsidiary before liquidating the second tier sub-

sidiary, stock of the second tier subsidiary technically

could not have been acquired by purchase because of the

attribution principles of § 334(b)(3)(C). If the order were

reversed, however, § 334(b)(2) would apply to give the

parent a step-up in basis for assets of the second tier sub-

sidiary. In order to eliminate this formal distinction, based

solely on the order of liquidation of a chain of sub-

sidiaries, § 334(b)(3) was amended to provide that §

334(b)(3) would not apply to the parent’s acquisition of

the second tier subsidiary stock if it made the qualifying

purchase of the first tier subsidiary’s stock.

Congress recognized that the formal distinction of the

order of liquidation should make no difference as to

whether the parent received a cost-of-stock basis because

the purchase met all the criteria intended by Congress in

order to receive a cost-of-stock basis. The petitioner sub-

mits that is exactly the situation in the instant case. The

petitioner purchased stock from independent third parties

in which the sellers recognized gain. That is the transaction

that Congress intended in order to get a cost-of-stock

basis. Had the steps of the transaction of the petitioner

been changed only slightly, with no effect of the end result

at all, there would be no argument that it is entitled to a

cost-of-stock basis. Congress recognized one problem and

corrected it in 1966. The petitioner believes that if Con-

gress corrected the mere formal distinction in the liquida-

tion of a chain of subsidiaries, it would do the same in a

situation identical to the one presented by the petitioner.

In support of its position in this case, the government

cited as authority, on page 17 of its Brief filed in the

District Court, the following:

The results which attains herein denying a stepped-up

basis in the liquidating corporation’s assets by reason

of the failure to meet ‘purchase’ requirements of

§ 334(b)(2), has also been contemplated by

22

commentators who have warned against structuring

such transactions in a manner which Plaintiff

adopted. See Barnovitz, Problems in Achieving Pari-

ty in Tax Treatment under Sections 337 and 334(b)(2),

34 N.Y.U. Institute of Federal Taxation, 57, 110,

1976.

Although Barnovitz warns of a potential attack by the

Internal Revenue Service on structuring a transaction in

the manner the petitioner adopted, the article clearly sup-

ports the position of the petitioner. After describing a set

of facts identical to the ones in this case, Barnovitz sub-

mits that the Internal Revenue Service could argue that a

Section 351 transaction had occurred, and therefore, did

not meet the purchase requirements of 334(b)(3). He then

states that:

As cases such as Madison Square Garden Corpora-

tion v. Commissioner, 500 F.2d 611 (2nd Cir. 1974)

and Mary B. Kass v. Commissioner of Internal

Revenue, 60 T.C. 218 (1973), indicate, however, the

Courts generally have refused to deny a step-up in

basis in the acquired corporation’s assets on technical

grounds, where such denial would be inconsistent

with the tax treatment to the shareholders of the ac-

quired corporation. This position is also illustrated by

the recent decision of YOC Heating Corporation v.

Commissioner of Internal Revenue, 61 T.C. 168

(1973).

In the YOC Heating Corporation case, the Internal

Revenue Service took the position that the petitioner did

not meet the formal requirements of § 334(b)(2) and

therefore, should not be allowed a step-up in basis of the

assets acquired equal to the purchase price of the stock of

the acquired corporations. However, the Court allowed

YOC Heating Corporations to receive a cost-of-stock

basis of the assets of the acquired corporation under the

broader principle of the integrated transaction doctrine.

The Court did not appiy the Kimbell-Diamond doctrine,

noting that this latter doctrine had been limited to transac-

tions involving the acquisition of the underlying assets of a

23

corporation by its controlling shareholders. Therefore, it

did not decide whether the Kimbell-Diamond doctrine had

continuing vitality after enactment of § 334(b)(2).

The petitioner contends that the government has cited

Barnovitz out of context. A complete reading of the article

clearly indicates that Barnovitz fully supports the position

of the petitioner. This support is shown in the concluding

paragraphs of the article, which state:

Although the decision of YOC Heating Corporation

does not deal with the question of a step-up in basis

for the acquiring corporation as the ‘‘distributee’’

within the meaning of § 334(b), it does exhibit a

judicial reluctance to take a formalistic approach to

resolve questions of this nature. Jf the acquisition of

the acquired corporation’s stock is for the purpose of

acquiring its underlying assets, and all of the con-

sideration paid for the stock of the acquired corpora-

tion is taxable to its shareholders, the acquiring cor-

poration, irrespective of whether or not it meets the

literal requirements of § 334(b)(2), should obtain a '

step-up in basis in the assets of the acquired corpora-

tion. (Emphasis supplied.) It is difficult to envision a

court which applies the integrated transaction princi-

ple of YOC Heating Corporation and refusing to app-

ly the related Kimbell-Diamond principle when direct-

ly confronted with the issue.

It is noted that the Court of Appeals in Madison

Square Garden Corporation v. Commissioner, ex-

pressed its approval of the Tax Court’s decision in

YOC Heating Corporation.

The position of the Courts on this issue of substance

versus form is consistent with the principle of parity

between a direct asset acquisition and one pursuant to

§ 334(b)(2). The Courts have properly refused to

make 334(b)(2) a trap for the unwary and thus limit

its utility in achieving the step-up in basis and the ac-

quired corporation’s assets that inexorably follows

from a purchase transaction that is taxable to the

shareholders of the acquired corporation.

24

In the instant case, the petitioner desired to purchase the

assets of the six corporations. The sellers refused to sell the

assets but would only agree to sell the stock of the cor-

poration with specific collateral restrictions. Therefore,

the petitioner purchased the stock for the sole purpose of

acquiring the assets of the six corporations in a transaction

which was taxable to the sellers of the stock. As

acknowledged by the Government in its Brief for The Ap-

pellee filed in the Fifth Circuit, at page 15, the Kimbell-

Diamond doctrine states that a purchaser who, in order to

acquire assets, acquires the stock of a company and li-

quidates it, may substitute his basis in the stock for his

basis in the assets. This is exactly what happened in the in-

stant case. The intent of the petitioner to acquire the assets

is immediately evident since the petitioner immediately li-

quidated the six corporations.

The Government argues that even if the rule of Kimbell-

Diamond did survive the passage of § 334(b)(2), it would

not change the results of this case. This conclusion is un-

supportable. The doctrine of Kimbell-Diamond states that

if a purchaser with intent to acquire assets is required to

acquire the stock of a company and liquidate it in order to

obtain the assets of the company, the basis of the assets

should equal the cost of the stock purchased in order to ac-

quire those assets. In the instant case, the seller would not

sell the assets of the six corporations but would only sell

the stock. The Government has never raised the question

as to the intent of the petitioner because it is obvious that

the sole purpose of acquiring the stock was to acquire the

assets. The petitioner has fully complied with the Kimbell-

Diamond doctrine and is entitled to a basis of the assets

equal to what it paid for the stock.

The Government, in contending that the Kimbell-

Diamond doctrine should not apply in this case, argues

that one must look to the entity that eventually

25

holds the assets and not to the intent of the petitioner as to

why it purchased the stock. The Kimbell-Diamond doc-

trine has nothing to do with which entity owns the assets

acquired but merely a question of intent of the petitioner

in acquiring the stock. See United States v. M.O.J. Cor-

poration, 274 F.2d 713 (Sth Cir. 1960).

The Government has taken the position that the peti-

tioner chose the form of the transaction in which it entered

into to acquire the stock of the six corporations. This is in-

correct. The form of the transaction was dictated by the

seller of the stock because of the restrictive collateral re-

quirements insisted upon by the seller. The transaction

took the only form under which the seller would sell the

stock. After substantial research by the petitioner’s cer-

tified public accountant and attorney at law, relying on the

only case dealing with the Kimbell-Diamond doctrine at

the time, American Potash and Chemical Corp. v. United

States, 399 F.2d 194 (Ct. Cl. 1968), and relying on issued

Revenue Rulings, it was determined that the petitioner

fulfilled all the requirements necessary to receive a cost of

stock basis in the assets acquired.

The petitioner has fully complied with all the re-

quirements as intended by Congress to receive a cost of

stock basis in the assets. The seller of the stock entered in-

to a taxable transaction which resulted in gain and a tax

liability to them. Therefore, the reason that Congress ex-

cluded a 351 transaction from the definition of purchase

as it applies to § 334(b)(2) is not present in this case. It was

not the intent of Congress to require a taxpayer to lose tax

basis which it has paid for and can never recover if it has

fulfilled all the requirements as intended by Congress. Jn

Jacts such as this, substance over form must prevail so that

the intent of Congress is satisfied.

The Government took the position in the Court below

that the step transaction and substance-over-form analysis

should apply only to sham transactions or excessively cir-

cuitous routes to an end and only those transactions are ig-

nored for tax purposes. It insinuates that if a substance-

26

over-form analysis benefits the petitioner instead of the

Government, the doctrine should not apply. The Govern-

ment analysis is totally in error. A 1978 Tax Court case

held in ruling for the petitioner the following:

In the case before us, although the formal structure of

the transaction is different, the net result is the same.

To reach a different result in the case before us, mere-

ly because the transaction was not so artfully arrang-

ed, would be to exalt form also produces capricious

results; in cases which are not substantially different,

courts are led to reach differing results. . . If we focus

instead on the substance of the transactions, taking

into consideration all steps which are part of an in-

tegrated plan, we reach results which are consonant

with legislative purpose and which treat all taxpayers

evenhandedly. Franklin B. Biggs v. Commissioner of

Internal Revenue, 69 T.C. No. 78, 1978.

It is an undisputable fact that by passing Section 334,

Congress intended to effectuate the principles of the

Kimbell-Diamond doctrine. Presumably, Congress intend-

ed that the Government would enforce that Section in ac-

cordance with those principles.

In the instant case, the petitioner purchased the stock of

the six corporations for $850,000, liquidated them on the

same day, and assigned to the assets acquired (inventory

of used aircraft engines and parts) the $850,000 cost of the

stock. When the Kimbell-Diamond doctrine is applied to

this transaction, it is unrefutable that the petitioner is en-

titled to a basis in the assets equal to his cost of the stock

or $850,000.

If this court rules in favor of the Government’s argu-

ment, one need only to change the value of the carryover

basis of the assets to see how taxpayers can take unjust

advantage of the ruling. Assume that the carryover basis

of the assets acquired had been $1,450,000 instead of

$250,000. Following the theory of the Government, the

petitioner should be entitled to a basis in the assets

acquired of $1,450,000. This interpretation of

27

congressional intent would give the taxpayer an unpaid-

for tax benefit of $600,000, i.e., a tax basis of $1,450,000

for which the taxpayer paid $850,000. In attempting to

deny the petitioner in this case its rightful and equitable

cost basis in the assets acquired, the Government is failing

to follow the intent of Congress in effectuating the prin-

ciples of the Kimbell-Diamond doctrine. It is, in. fact, at-

tempting to destroy the doctrine completely.

CONCLUSION

The petitioner has met all the requirements that were in-

tended by Congress in order to obtain a cost-of-stock

basis. The petitioner is not receiving any unwarranted or

unpaid for tax benefit. It entered into an argreement to

purchase stock of six corporations from unrelated third

persons which was a taxable transaction to the sellers. It

purchased the stock for the sole purpose of acquiring the

assets and liquidated the corporations the same day in

order to get at the assets.

Therefore, the petitioner respectfully requests the Court

to reverse the decision of the District Court and affirm the

decision of the Bankruptcy Court in allowing the peti-

tioner a cost-of-stock basis in the assets which are the sub-

ject of this case and deny the claim by the Internal

Revenue Service for federal income tax.

28

APPENDIX A

In the Matter of CHROME PLATE,

INC., Bankrupt.

CHROME PLATE, INC., Appellant

Vv

DISTRICT DIRECTOR OF INTERNAL

REVENUE, United States

of America, Appellee

No. 77-3402.

United States Court of Appeals,

Fifth Circuit

April 2, 1980

Appeal from the United States District Court for the

Western District of Texas.

Before AINSWORTH, INGRAHAM and GARZA,

Circuit Judges.

GARZA, Judge:

In this case, the court must determine two issues. First,

we must decide whether the corporate taxpayer herein

qualifies for a cost basis under 26 U.S.C. § 334(b)(2).

Second, the court is presented with the question of

whether a certain judicially created rule under the 1939 In-

ternal Revenue Code, known as the Kimbell-Diamond

doctrine, retains continuing viability under the 1954 code.

We resolve both issues in the negative.

The present situation concerns the acquisition of six air-

craft businesses owned or controlled by Clarence E. Page

and the subsequent tax consequences. In 1972, the

Appellant, Chrome Plate, Inc. [Chrome Plate] was a

corporation engaged in the business of chrome plating

aircraft cylinders. The six corporations [the Page

corporations] were engaged in the sale and repair of

airplanes and airplane engines. On December 12, 1972,

Page Industries of Oklahoma, Inc. [PIOI] was created. On

December 15, 1972, Chrome Plate Industries, Inc. [CPI]

was formed which was a wholly owned subsidiary of

Chrome Plate. Shortly thereafter, PIOI issued 1,000

shares of its stock to CPI. On December 28, 1972, all of

the stock in the Page corporations was transferred to

CPI.' In return for the stock, CPI paid $850,000 in cash

and notes.

Immediately after the acquisition of the Page corpora-

tions stock, CPI transferred the Page corporations stock

to PIOI in exchange for 849,000 shares of PIOI common

stock. This transaction rendered PIOI a wholly owned

subsidiary of CPI. The following day, December 29, 1972,

the Page corporations were liquidated, and PIOI succeed-

ed to their assets.

Upon the liquidation, PIOI stepped up the basis of the

acquired assets from their original cost of Page? to the cost

of PIOI of $849,000. Chrome Plate filed a consolidated

income tax return with CPI and PIOI for the taxable year

1973. Following the filing in bankruptcy by Chrome Plate

in 1975, the Internal Revenue Service [IRS] claimed that

Chrome Plate’s basis in the Page corporations’ assets

should have been the same as the basis in the Page

corporations stock.’ On cross motions for partial

1. An individual named O.J. Butts owned 20% of the stock in one

of the corporations, Page Air Parts, Inc. He, too, transferred his

stock to CPI as part of the instant transaction. Thus, after the CPI-

Page corporations transaction, CPI owned all of the stock of the

Page corporations,

2. In the instant case, the basis of the stock in the hands of the Page

corporations was approximately $250,000.

3. The facts leading to the institution of the IRS’s claim are a bit

more detailed. CPI had apparently sold some of the assets from the

Page corporations, which possessed the stepped-up basis. In its con-

solidated 1974 income tax return, Chrome Plate filed a claim for re-

fund of taxes based upon a net operating loss carryback from the

year ended December 31, 1973. In 1975, Chrome Plate filed under

Chapter XI of the Bankruptcy Act. In November of 1976, the 'RS

filed a claim in bankruptcy court alleging a deficiency in income

taxes. The IRS alleged that the net operating loss carryback should

A-2

summary judgment regarding the basis of the Page cor-

porations stock, the bankruptcy judge ruled in favor of

Chrome Plate. On appeal to the district court, the decision

of the bankruptcy judge was reversed. Chrome Plate, Inc.

v. District Director of Internal Revenue, 442 F.Supp. 1023

(W.D.Tex.1977).

I. THE BASIS UNDER THE INTERNAL

REVENUE CODE

26 U.S.C. § 331(a)(1) provides the general rule regar-

ding a complete liquidation of a corporation. § 331(a)(1)

states:

Amounts distributed in complete liquidation of a cor-

poration shall be treated as in full payment in exchange

for the stock.

26 U.S.C. § 1001(c) provides that the entire amount of

the gain or loss on the sale or exchange of stock shall be

recognized except in certain situations. See B. Bittker & J.

Eustice, Federal Income Taxation of Corporations and

Shareholders § 11.40, at 11-30 (4th ed. 1979) [hereinafter

Bittker & Eustice]. One of the exceptions to § 1001(c),

which is applicable in this case is 26 U.S.C. § 332. If the

conditions of § 332 are met, the parent corporation will

realize no gain or loss on the receipt of property dis-

tributed in complete liquidation of a subsidiary.‘ To

be decreased because Chrome Plate claimed an incorrect basis

regarding the Page corporations transaction in 1973. The IRS also

sought a recoupment of tentative overassessment allowed as a result

of the carryback filed in 1974. The recoupment claim regarding an

allegedly bad debt claim is not before this court. The only issue

before the court concerns the basis in the Page corporations stock.

4. This transaction, where a subsidiary is liquidated into a parent, is

also called an ‘‘upstream merger.’’ The rationale for the granting by

Congress of this tax status was that statutory mergers are given such

a status. Since a § 332 type of transaction amounts to a ‘‘practical’’

or ‘‘upstream’’ merger, Congress bestowed upon it the same

benefits given to statutory mergers. See Bittker & Eustice ¢ 11.40, at

11-31.

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qualify, a parent corporation’ must possess at least 80%

of the total combined voting power of all classes of stock

and own at least 80% of the total number of shares of al!

other classes of stock. 26 U.S.C. § 332(b)(1). The distribu-

tion by the subsidiary must be in complete cancellation or

redemption of its stock, and a complete transfer must oc-

cur within the taxable year. 26 U.S.C. § 332(b)(2). Finally,

the distribution must be made pursuant to a plan of li-

quidation under which the transfer of all the property be

completed within three years from the close of the taxable

year during which the first of any series of distributions is

made. 26 U.S.C. § 332(b)(3).

The basis provisions applicable to § 332 transactions are

found in 26 U.S.C. § 334. The general basis utilized upon

a liquidation of a subsidiary under § 332 is a carryover,

i.e., the basis of the property in the hands of the parent

shall be the same as it would be in the hands of the sub-

sidiary. 26 U.S.C. § 334(b)(1).° § 334(b)(1) provides for

one exception to the above basis rule, which is found in §

334(b)(2).” See Cabax Mills v. C.I.R., 59 T.C. 401, 406

5. The pertinent statutes speak in terms of the receiving corporation

(the distributee) and the distributing corporation, rather than

‘‘parent’’ and ‘‘subsidiary.’’ For purposes of clarity, however, the

latter two terms will be used in this opinion.

6. § 334(b)(1) provides as follows:

In general.—If property is received by a corporation in a

distribution in complete liquidation of another corporation

(within the meaning of section 332(b)), then, except as provided in

paragraph (2), the basis of the property in the hands of the

distributee shall be the same as it would be in the hands of the

transferor. If property is received by a corporation in a transfer to

which section 332(c) applies, and if paragraph (2) of this subsec-

tion does not apply, then the basis of the property in the hands of

the transferee shall be the same as it would be in the hands of the

transferor.

7. § 334(b)(2) provides in pertinent part as follows:

(2) Exception.-If property is received by a corporation in a

distribution in complete liquidation of another corporation

(within the meaning of section 332(b)), and if—

(A) the distribution is pursuant to a plan of liquidation adopted

not more than 2 years after the date of the transaction described

in subparagraph (B) (or, in the case of a series of transactions,

the date of the last such transaction); and

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(1972); Bijou Park Properties, Inc. v C.I.R. 47 T.C. 207,

214 (1966). When applicable, the exception allows the

parent corporation to take a cost basis in the property as

opposed to a carryover basis. In other words, under the

exception to § 334(b)(1), the basis of the property in the

hands of the parent will be equal to the cost of the stock

purchased with certain possible adjustments.*®

A cost basis under § 334(b)(2) may be used if certain re-

quirements are met regarding property received by a cor-

poration in a distribution in complete liquidation of

another. The parent corporation must acquire by purchase

stock of the subsidiary possessing at least 80% of the total

voting power of all classes of stock entitled to vote and at

least 80% of the total number of shares of all other classes

of stock during a twelve month period, beginning with the

date of the first purchase of stock. § 334(b)(2)(B)(i). The

distribution must be made pursuant to a plan of liquida-

tion adopted not more than two years after the date of the

above transaction. § 334(b)(2)(A).

(B) stock of the distributing corporation possessing at least 80

percent of the total combined voting power of all classes of

stock entitled to vote, and at least 80 percent of the total

number of shares of all other classes of stock (except nonvoting

stock which is limited and preferred as to dividends), was ac-

quired by the distributee by purchase (as defined in paragraph

(3)) during a 12-month period beginning with the earlier of—

(i) the date of the first acquisition by purchase of such stock, or

(ii) if any of such stock was acquired in an acquisition which is

a purchase within the meaning of the second sentence of

paragraph (3), the date on which the distributee is first con-

sidered under section 318(a) as owning stock owned by the cor-

poration from which such acquisition was made, then the basis

of the property in the hands of the distributee shall be the ad-

justed basis of the stock with respect to which the distribution

was made.

8. The regulations under § 334(b)(2) list the adjustments that must

be made in reaching the parent’s final adjusted basis. See

Int.Rev.Regs. § 1.334-1(c)(4). The purpose for these adjustments is

to place the party in the same basis position as if that party had li-

quidated immediately after acquiring the stock. See Bonovitz, Pro-

blems in Achieving Parity in Tax Treatment Under Sections 337 and

334(b)(2), N.Y.U. Proc. of the 34th Inst. on Fed. Tax 57, 89 (1976)

{hereinafter Bonovitz]. In the present case, however, the issue of ad-

justed basis is not present.

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’*

The need for a ‘‘purchase’’ under § 334(b)(2) is to insure

that a taxable transaction has occurred. In other words,

Congress in enacting § 334(b)(2) did not want to allow cor-

porate taxpayers who had acquired assets through transac-

tions which avoided taxation to also receive the benefits of

a stepped-up cost basis. See Broadview Lumber Co., Inc.

v. United States, 561 F.2d 698, 713 (7th Cir. 1977); Bittker

& Eustice 4 11.44, at 11-44. The term ‘‘purchase’’, as used

in § 334(b)(2)(B), is defined in § 334(b)(3) as any acquisi-

tion of stock except in three circumstances. For present

purposes, Only one of these circumstances is applicable.

The term ‘‘purchase’’ does not include a transaction in

which the stock is ‘‘acquired in an exchange to which [26

U.S.C.] section 351 applies . . .”’ § 334(b)(3)(B).

26 U.S.C. § 351 provides that:

No gain or loss shall be recognized if property is

transferred to the corporation by one or more persons

solely in exchange for stock or securities in such cor-

poration and immediately after the exchange such per-

son or persons are in control (as defined in § 368(c)) of

the corporation.

26 U.S.C. § 368(c) defines the term ‘‘control’’ as the

ownership of stock possessing at least 80% of the total

combined voting power of all classes of stock entitled to

vote and at least 80% of the total number of shares of all

the classes of stock of the corporation.

Thus, a corporate taxpayer may receive a cost basis in li-

quidated assets merely by following the dictates of §

334(b)(2). It is a completely objective test in which the

intent of the receiving corporation is immaterial. See

Broadview Lumber Co, Inc. v. United States, 561 F.2d at

711; Boise Cascade Corporation v. United States, 288 F.

Supp. 770, 774 (D.Idaho 1968), aff’d per curiam, 429 F.2d

426 (9th Cir. 1970); Bittker & Eustice 4 11.44, at 11-48. If

a corporate transaction complies with the provisions of §

334(b)(2), it receives a cost basis. Otherwise the transac-

tion falls back under § 334(b)(1), and the parent obtains a

A-6

carryover basis.

Tre transfer of cash and notes by CPI for the stock of

the Page corporations clearly qualified as a ‘‘purchase’’ as

defined in § 334(b)(3). The sellers of the Page corporations

stock clearly realized a gain upon that sale. It was the next

step taken by CPI which tainted the transaction and caus-

ed this litigation.

The parties in this case concede and the trial court found

that the exchange of the Page corporations stock for the

PIOI stock quaiified as a § 351 transfer. The control re-

quirements were satisfied, and there was no actual genera-

tion of income for either party. See E. J. DuPont de

Nemours and Company v. United States, 471 F.2d 1211,

1214, 200 Ct.Cl. 391 (1973). Since the term ‘‘property’’

encompasses whatever may be transferred, see Hempt

Bros., Inc. v. United States, 354 F.Supp. 1172, 1175

(M.D.Pa.1973) aff'd, 490 F.2d 1172 (3d Cir. 1974), cert.

denied, 419 U.S. 826, 95 S.Ct. 44, 42 L.Ed.2d 50 (1974),

this court agrees that the stock for stock exchange between

CPI and PIOI qualified as a § 351 transfer.

The Appellant has suggested to this court that it

disregard the § 351 exchange as superfluous to the overall

transaction. This court may not do so. To qualify under §

334(b)(2), there must be strict compliance with its require-

ments. The Appellant argues correctly that if CPI had

received the liquidated assets directly from the Page cor-

porations, the transaction would have qualified under §

334(b)(2). This court, however, may not ignore the form

of the transaction deliberately chosen by the taxpayer.’

See Yoc Heating Corporation v. C.1.R., 61 T.C. 168, 175

(1973).

9. In its briefs and in the record in the court below, the reasons for

the inclusion of the § 351 transfer in the transaction are never made

clear. The asserted rationale was that it had been structured to

fulfill the business and tax needs of all parties involved. At oral

argument, counsel for Chrome Plate was asked why PIOI had

received the liquidated assets rather than CPI. Counsel informed

the court that Appellant did so for two reasons. First, counsel stated

that the liquidated assets were inventory. Counsel went on to ex-

plain that if CPI had received the assets, they would have been

A-7

Although CPI acquired the stock by purchase, CPI

could no longer be regarded as the acquiring corporation

following the § 351 transfer. At that point, PIOI rather

than CPI acquired the liquidated assets. There is no doubt

that PIOI satisfied the time limit and stock ownership re-

quirements of § 334(b)(2). PIOI did receive property ‘‘in a

distribution in complete liquidation of another corpora-

tion (within the meaning of section 332(b)) . . .”? 26 U.S.C.

§ 334(b)(2). Nonetheless, PIOI, the receiving corporation,

acquired the stock ‘‘in an exchange to which section 351

applies . . .”’ 26 U.S.C. § 334(b)(3)(B). Under a clear

reading of the statute, neither CPI nor PIOI qualify under

§ 334(b)(2).

Appellant also argues that PIOI, CPI and itself should

be regarded as a single entity since a consolidated income

tax return had been filed. The filing of such a return,

however, is insufficient to destroy the separate existence of

the corporations. As long as a corporation conducts some

type of business activity, it remains a separate taxable enti-

ty. See Moline Properties, Inc. v. Commissioner, 319 U.S.

436, 438-39, 63 S.Ct. 1132, 1133-1134, 87 L.Ed. 1499

(1943). A parent corporation possesses a separate ex-

istence and is treated separately from a subsidiary unless

there are circumstances justifying disregard of the cor-

porate entity. See Evans v. C.I.R., 557 F.2d 1095, 1099

(Sth Cir. 1977). See also Western Beef, Inc. v. Compton

Investment Co., 611 F.2d 587 at 590 (Sth Cir. 1980) (a

division of a corporation is not a separate legal entity,

apart from the corporation, but a subsidiary corporation

is separate); Walker v. Newgent, 583 F.2d 163, 167 (Sth

Cir. 1978), cert. denied, 441 U.S. 906, 99 S.Ct. 1994, 60

commingled with CPI’s other inventory. Counsel argued that it

then would have been difficult to procure a release every time CPI

wanted to sell some of the acquired assets. Second, counsel stated

that a multimillion dollar law suit had been pending against one of

the Page corporations at the time. Appellant feared that if the suit

had been successful, CPI, as the parent, could have been found

liable. This court accepts the above reasons as true and assumes that

CPI possessed legitimate purposes for the transaction.

A-8

L.Ed.2d 374 (1979) (fact tiiat p2rent corporation owned

100% of subsidiary’s stock is not sufficient by itself to

merge the two for purposes of establishing an agency rela-

tionship). In order to disregard the corporate entity, there

needs to be a showing that separativeness of functions was

not maintained. See Quarles v. Fuqua Industries, Inc.,

504 F.2d 1358, 1362 (10th Cir. 1974). Such a showing does

not exist here. There has been no contention that the three

corporations did not carry out separate functions nor that

any of them was not created for valid business reasons.

Thus, under the requirements of § 334(b)(2), the Ap-

pellant as well as its subsidiaries have failed to qualify.

Regardless of the Appellant’s reasons for structuring the

transaction as it did, it has not complied with the cost basis

exception in § 334, and under the statute it must receive a

carryover basis.

Il. THE KIMBELL-DIAMOND DOCTRINE

The Appellant also raises the claim that this court has

the right to ignore the transitory steps of the instant tran-

saction and allow the taxpayer a cost basis based upon his

intent to acquire the assets of the Page corporations. For

this proposition, Appellant relies upon Kimbell-Diamond

Milling Co. v. Commissioner, 14 T.C. 74 (1950), aff'd per

curiam, 187 F.2d 718 (Sth Cir. 1951), cert. denied, 342

U.S. 827, 72 S.Ct. 50, 96 L.Ed. 626 (1951). The Kimbell-

Diamond doctrine provided that when a taxpayer, solely

interested in acquiring a corporation’s assets, purchased

stock and then liquidated the acquired corporation, the

A-9

transaction would be viewed as a purchase of assets and

the various steps would be considered a single transaction.

The Kimbell-Diamond doctrine was created to correct

an inequity in the 1939 Internal Revenue Code. In the 1939

code, § 332’s predecessor was found in 26 U.S.C. §

112(b)(6) and was very similar to the present provisions.

The basis provision for § 112(b)(6), however, provided in

pertinent part that:

If the property was received by a corporation upon a

distribution in complete liquidation of another corpora-

tion within the meaning of section 112(b)(6), then the

basis shall be the same as it would be in the hands of the

transferor.

26 U.S.C. § 113(a)(15).

There was no counterpart to the present § 334(b)(2) in the

1939 code. Thus, under the old code, an acquiring cor-

poration was forced to take a carryover basis in the assets,

regardless of the price paid for the distributing corpora-

tion’s stock. See Cabax Mills v. C.I.R., 59 T.C. 401, 408

(1972). The seeds of Kimbell-Diamond were sowed in

C.I.R. v. Ashland Oil & Refinery Co., 99 F.2d 588 (6th

Cir. 1938), cert. denied, 306 U.S. 661, 59 S.Ct. 786, 83

L.Ed. 1057 (1939), in which the Sixth Circuit held that a

transaction involving solely an acquisition of property

must be viewed as a whole “‘and closely related steps will

not be separated either at the instance of the taxpayer or

the taxing authority.’’ /d. at 591.

With the Ashland precedent in mind, the Tax Court in

1950 was faced with a situation where a fire had destroyed

a milling company’s assets. With the fire insurance pro-

ceeds, the company acquired 100% of the stock of another

milling company. The subsidiary company was then li-

quidated, and the parent received the assets. The tax court

held that when viewed as a single transaction, it amounted

to a purchase of assets, and the taxpayer would receive a

cost basis rather than a carryover. Kimbell-Diamond, 14

T.C. at 80. The Kimbell-Diamond doctrine gave both the

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taxpayer and the IRS a judicial exception to the statutory

carryover basis rule and became an often used procedure

in cases under the 1939 code. See The South Bay Corpora-

tion v. C.I.R., 345 F.2d 698, 703 (2d Cir. 1965); United

States v. M.O.J. Corporation, 274 F.2d 713, 717 (Sth Cir.

1960); United States v. Mattison, 273 F.2d 13, 17 (9th Cir.

1959); Georgia Properties Co. V. Henslee, 138 F.Supp.

587, 590 (M.D.Tenn.1955).

In 1954, Congress added § 334(b)(2) to incorporate

‘rules effectuating principles derived from Kimbell-

Diamond Milling Company. . . .’”’ S.Rep.No.1622, 83d

Cong., 2d Sess. (1954), reprinted in [1954] U.S.Code

Cong. & Admin.News, pp. 4621, 4894. The legislative

history, unfortunately, is not totally clear on whether §

334(b)(2) was enacted to supplant the Kimbell-Diamond

doctrine or merely to borrow from it. Throughout the

committee proceedings, the only mention of this is that §

334(b)(2) ‘‘effectuates’’ the principles of Kimbell-

Diamond. See S.Rep.No.1622, 83d Cong., 2d Sess.

(1954), reprinted in [1954] U.S.Code Cong. &

Admin.News, pp. 4621, 4679, 4894; H.R. Rep.No.1337,

83d Cong., 2d Sess. (1954), reprinted in [1954] U.S.Code

Cong. & Admin.News, pp. 4017, 4063, 4247.

The IRS has opposed the application of the Kimbell-

Diamond doctrine to situations arising under the 1954

code.'® In light of this conflict and unclear legislative

history, the courts had grappled for almost two decades

with the continuing vitality of the Kimbell-Diamond rule

10. The IRS manual lists the use of the Kimbell-Diamond doctrine as

a ‘‘prime issue,”’ one that it will litigate and will not usually concede

or compromise. See [1980] 3 Stand.Fed.Tax.Rep. (CCH) 4 2434; 2

J. Rabkin & M. Johnson, Federal Income, Gift and Estate Taxation

§ 23.11(4) [hereinafter Rabkin & Johnson]. But see American

Potash & Chemical Corporation v. United States, 402 F.2d 1000,

1001 n. 1, 185 Ct.Cl. 161 (1968) (IRS no longer argued that the

Kimbell-Diamond approach is not viable but rather that it was inap-

plicable to the facts of the case); Rev.Rul. 74-35, 1974-1 C.B. 85 (In

language implicitly recognizing the doctrine, IRS rcfers to Rev.Rul.

67-274, 1967-2 C.B. 141, which represented ‘‘an application of the

Kimbell-Diamond principle.’’).

A-11

under the 1954 code. Without making an affirmative deci-

sion, the Fifth Circuit seemed to imply that the doctrine

was still viable under the 1954 code in Griswold v. C.1.R..,

400 F.2d 427, 431 (Sth Cir. 1968). As late as 1973, the tax

court had not decided whether the doctrine could still be

used in post-1954 situations. See Yoc Heating Corporation

v. C.ILR., 61 T.C. 168, 176 (1973); Kass v. C.I.R., 60 T.C.

218, 223 n. 9 (1973).

In 1968, however, the Court of Claims affirmatively

held that Congress did not intend to eliminate the Kimbell-

Diamond by enacting § 334(b)(2). American Potash &

Chemical Corporation v. United States, 399 F.2d 194,

207, 185 Ct.Cl. 161 (1968). The Court of Claims held that

the rationale for the rule was based upon the notion that

substance should prevail over form. Jd. The Court of

Claims concluded that Congress meant to inject a degree

of certainty into the area of tax law by offering an objec-

tive route for obtaining a cost basis without the need for

showing intent to acquire assets. Jd. at 207-08. The Court

of Claims found it anomalous that § 334(b)(2) applies only

to corporate taxpayers, allowing individual taxpayers to

avail themselves of the doctrine. Jd. at 208. The Court of

Claims also discerned no specific direction by Congress

that the doctrine was defunct and, thus, refused to abolish

it. Id. at 209. See also Rose Hills Memorial Park Associa-

tion v. United States, 463 F.2d 425, 433, 199 Ct.Cl. 6

(1972), cert. denied, 414 U.S. 822, 94 S.Ct. 122, 38

L.Ed.2d 55 (1973) (affirming the viability of the Kimbell-

Diamond doctrine.)

Shortly thereafter, a number of circuits refused to

follow the holding in American Potash. In Supreme

Investment Corporation v. United States, 468 F.2d 370,

377 (Sth Cir. 1972), this court held that § 334(b)(2) is a

codification of principles derived from the Kimbell-

Diamond doctrine. This court also held that in enacting §

334(b)(2), Congress made a major change by substituting a

series of objective tests in place of the taxpayers subjective

intent to obtain corporate assets. Jd. Supreme Investment

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did not abolish the doctrine, however. Additionally, the

facts in that case are distinguishable from the present case,

since in Supreme Investment, the taxpayer had met all the

requirements of § 334(b)(2).

The Ninth Circuit has been faced with the Kimbell-

Diamond doctrine twice in Pacific Transport Co. v.

C.I.R., 483 F.2d 209 (9th Cir. 1973), cert. denied, 415

U.S. 948, 94 S.Ct. 1469, 39 L.Ed.2d 563 (1974), and Boise

Cascade Corporation v. United States, 288 F.Supp. 770

(D.Idaho 1968), aff’d per curiam, 429 F.2d 426 (9th Cir.

1970). In Boise Cascade, the Ninth Circuit summarily af-

firmed a district court case which held that § 334(b)(2)

eliminated the subjective intent test of Kimbell-Diamond.

In Pacific Transport, the Ninth Circuit held that the

Kimbell-Diamond philosophy is no longer controlling.

Pacific Transport Co. v. C.I.R. 483 F.2d at 213. Again,

however, both cases involved transactions which

specifically qualified under § 334(b)(2).

The Seventh Circuit has also dealt with the application

of the Kimbell-Diamond doctrine in Broadview Lumber

Co., Inc. v. United States, 561 F.2d 698 (7th Cir. 1977).

The facts in that case clearly involved a § 334(b)(1) tran-

saction in which the government sought to use the

Kimbell-Diamond doctrine to force the taxpayer to receive

a cost basis. The Seventh Circuit held that the Kimbell-

Diamond doctrine is inapplicable ‘‘in cases falling within

the ambit of § 334(b)(2),”’ id. at 712 and n. 30, but it did

not rule out the possibility that it might apply in situations

where § 334(b)(2) is inapplicable. Jd. at 712, 714.

In 1978, the Tax Court, deciding the point which it left

unanswered in Yoc Heating Corporation v. C.I.R., 61

T.C. 168 (1973), held that the only exception to § 334(b)(1)

is found in § 334(b)(2), and, therefore, the Kimbell-

Diamond doctrine has been abolished. Jnternational State

Bank v. C.I.R., 70 T.C. 173, 180-81 (1978).

There is no doubt that in situations where the objective

requirements of § 334(b)(2) have been met, there is no

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room for the Kimbell-Diamond doctrine. It is equally clear

that § 334(b)(2)is a codification of the Kimbell-Diamond

doctrine and was meant to allow a cost basis automatically

without the need for proving the intent to acquire assets.

See Broadview Lumber Co., 561 F.2d at 711; Supreme In-

vestment, 468 F.2d at 377; Madison Square Garden Cor-

poration v. C.I.R., 500 F.2d 611, 612 (2d Cir. 1974); 2

Rabkin & Johnson § 23.11(4). § 334(b)(2) is a mandatory

and not an elective section. See Broadview Lumber Co.,

561 F.2d at 711, Supreme Investment, 468 F.2d at 377. If a

corporate taxpayer complies with the procedures in §

334(b)(2) it must take a cost basis, even if it never had the

initial intent to acquire the assets or receive a cost basis.

See Supreme Investment, 468 F.2d at 377.

However, this court is not dealing with a situation where

a corporation has fulfilled the statutory requirements of §

334(b)(2). Rather, we are asked to apply the Kimbell-

Diamond doctrine in a factual situation in which § 334

(b)(2) has not been met. Outside of the Court of Claims

and the Tax Court, the other courts which have dealt with

the doctrine have never affirmatively held either way

regarding the present factual scenario.'!

The Kimbell-Diamond doctrine was a necessary outlet

for the strict language of § 334’s predecessor. Clearly, a

purchase of stock and subsequent liquidation by the same

corporation done wholly with the intent to acquire assets

was no different than a direct purchase of assets, which

resulted in a cost basis. See Georgia-Pacific Corporation

v. United States, 264 F.2d 161, 163 (Sth Cir. 1959).

11. Bittker & Eustice suggest that the Kimbell-Diamond doctrine

may still possess vitality in cases where the statutory requirements

of § 334(b)(2) are not satisfied. Bittker & Eustice 4 11.44, at 11-48.

See also Bonovitz, supra, at 112-13, writing before the 5th, 7th and

9th Circuits had rendered their decisions, in which he states that

although a situation identical to the present one might not qualify

under § 334(b)(2), the courts are reluctant to take a formalistic ap-

proach and will probably apply the doctrine. Since that publication,

the courts have shown a reluctance to so apply the doctrine, and the

Tax Court has clearly held against it.

A-14

Congress, however, recognized the need to codify such a

practice and did so in 1954. § 113(a)(15) of the old code,

which mandated the receipt of a carryover basis by a cor-

poration upon the complete liquidation of another,

became § 334(b)(1). Congress retained the carryover basis

in such transactions ‘‘except as provided in paragraph (2) .

.. 26 U.S.C. § 334(b)(1). By 1954, Congress was well

aware Of the Kimbell-Diamond doctrine and its objective

intent requirement, yet it provided for only that one excep-

tion to the carryover basis rule, found in § 334(b)(2). Con-

gress included no provision allowing a subjective intent

test to be used when § 334(b)(2) was not satisfied.

Although the legislative history is opaque at best, it does

demonstrate that Congress was inserting the principles of

the Kimbell-Diamond doctrine in the statute.

By a plain reading of § 334(b)(1), however, it is apparent

that Congress meant to codify the Kimbell-Diamond rule

completely in § 334(b)(2). No other exception was enacted

or acknowledged by Congress. The majority opinion of

the Tax Court in /nternational State Bank, thus, seems to

be the correct interpretation of § 334.'? Whenever proper-

ty is received by a corporation in a distribution in complete

liquidation of another corporation pursuant to § 332, the

receiving corporation must take a carryover basis, unless

and only unless the transaction qualifies for a cost basis

under § 334(b)(2).

The Court of Claims, in its defense of the doctrine,

questions the logic of § 334(b)(2)’s applicability to cor-

porations and not individual taxpayers. American Potash,

399 F.2d at 208. Although it may seem anomalous, that

does not give this court the right to twist the meaning of a

statute which clearly requires satisfaction of certain prere-

quisites before a cost basis may be obtained. Congress

12. Judge Tannenwald, concurring in /nternational State Bank, join-

ed by two other judges, was reluctant to discard the doctrine. Judge

Tannenwald advocated that in situations where § 334(b)(2) is not

followed, the tax court ‘‘should not be prevented from utilizing the

flexibility which the Kimbeli-Diamond doctrine affords.’’ Interna-

tional State Bank, 70 T.C. at 182 (Tannenwald, J., concurring).

A-15

either ignored or chose to exclude the individual tax-

payers, but we may not assume from either alternative that

this court thus has the right to equalize the situation. Con-

gress has specifically provided for corporate taxpayers,

and we are bound by that legislation.

This court is completely cognizant of the fundamental

tax concept that substance should be exalted over form.

See C.I.R. v. Court Holding Co., 324 U.S. 331, 334, 65

S.Ct. 707, 89 L.Ed. 981 (1945); United States v. Kennedy

Construction Co. of NSB, Inc., 572 F.2d 492, 495 (Sth

Cir. 1978). The court is also aware that the Kimbell-

Diamond rule was based upon the notion of substance

over form. Kimbell-Diamond, 14 T.C. at 80. We cannot

and do not refute this principle. In Kimbell-Diamond, it

was a necessary tool to correct an apparent oversight by

Congress. An appellate court, however, would be disserv-

ing itself and the taxpayers as well as committing legal

dishonesty if, relying solely upon the notion that substance

should prevail over form, it created additional exceptions

to a statute which clearly corrected that prior oversight

and provides for only one exception. The statute itself ex-

alts form over substance. We may not act as a beneficent

paternal rectifier of legislation which is not constitutional-

ly deficient. In light of the provisions of § 334, there is

simply no room to utilize the substance over form doc-

trine. See Griswold v. C.I.R., 400 F.2d 427, 431 (Sth Cir.

1968)(noting that the form of a transaction often controls

the tax consequences).

Thus, we hold definitively and absolutely that the

Kimbell-Diamond doctrine is extinct under the 1954 code

regarding corporate taxpayers. The doctrine has been

codified in § 334(b)(2), which is now the sole exception to

the application of a carryover basis to corporations

following the complete liquidation of another corpora-

tion. Although today’s decision extinguishing the Kimbell-

Diamond cuts against the taxpayer herein, that does not

intimate that the taxpayer will always meet with failure.

Rather the mechanistic approach of § 334(b)(2) gives the

A-16

corporate taxpayer an assurance that it will receive a cost

basis if it only fulfills the statutory requirements. In truth,

the Kimbell-Diamond doctrine itself was a double edged

sword which could be and often was used by the IRS to re-

quire a taxpayer to receive a basis which the latter did not

seek. See Broadview Lumber Company, 561 F.2d at 711 n.

28; United States v. Mattison, 273 F.2d at 17 n. 4.

This is a case in which it is quite fitting to apply Justice

Holmes’ oft cited phrase that ‘‘hard cases make bad law.”’

Northern Securities Co. v. United States, 193 U.S. 197,

400, 24S.Ct. 436, 48 L.Ed. 679 (1904) (Holmes, J., dissen-

ting). This case seems inequitable to the Appellant.

Chrome Plate truly believed that its transaction would

qualify under § 334 (b)(2).'* The sellers of the Page stock

did realize a gain, and CPI did acquire the stock by pur-

chase. Likewise, PIOI met all the mechanical requirements

of the liquidation. But the same corporation that made the

purchase did not receive the property due to the prohibited

§ 351 transaction. Even so, it may appear inequitable to

not retain the Kimbell-Diamond doctrine in such a case.

But to do so would require a convoluted reading of §

334(b)(2), its purpose and its history. If we retained the

Kimbell-Diamond doctrine in a hard case such as this one,

we would undoubtedly be creating bad law. We refuse to

do so.

We hold positively and conclusively that the Kimbell-

Diamond doctrine is abolished in regard to corporate tax-

payers, and the only opportunity to receive a cost basis in

complete liquidation of a subsidiary is by fully complying

with § 334(b)(2). In the present case, the Appellant will not

be allowed a cost basis under § 334(b)(2) because of the

inclusion of a § 351 transfer in the transaction. The

Appellant is therefore required to take a carryover basis

under § 334(b)(1).

AFFIRMED.

13. Although the Appellant was clearly aware of § 334(b)(2), it can-

not be faulted for its actions. When the transaction was planned

and consummated, the only case law available was that of American

Potash. Both the Appellant’s accountant and attorney relied upon

that case and truly believed that a cost basis would be applicable

pursuant to the saa cane ce 4 doctrine.

A-l

APPENDIX B

CHROME PLATE, INC.

Vv

DISTRICT DIRECTOR OF

INTERNAL REVENUE

No. SA-75-68-BK

United States District Court

Western District of Texas

San Antonio Division

November 7, 1977

MEMORANDUM ORDER

SUTTLE, District Judge.

This case comes before the court on an appeal by the

Defendant from a decision of the bankruptcy court.

Jurisdiction is founded on § 23 of the Bankruptcy Act, 11

U.S.C. § 46.

There are three issues on appeal: the Defendant alleges

that the bankruptcy court lacked subject-matter jurisdic-

tion to entertain the Plaintiff’s claim that it was owed a tax

refund by the United States; the Defendant maintains that

the bankruptcy court erred in allowing Plaintiff’s sub-

sidiary to take a stepped-up basis in assets received in the

liquidation of six corporations, contending that §

334(b)(1) of the Internal Revenue Code, 26 U.S.C. §

334(b)(1), applies to the transaction; and the Plaintiff now

asserts that it is entitled to attorney’s fees under The Civil

Rights Attorney’s Fees Awards Act of 1976, 42 U.S.C. §

1988. Since this is a Chapter XI rearrangement, the Plain-

tiff bankrupt has been allowed to function as a debtor in

possession.

I

During the proceedings below, the bankruptcy judge

upheld the Plaintiff’s claim that it was entitled to an in-

come tax refund of $135,557.18 from the United States.

The gist of the claim was that an account receivable

became worthless during 1973, thus giving rise to a bad

business debt.' The law is settled that an income tax re-

fund based on payments made prior to the filing of a

bankruptcy petition constitutes ‘‘property’’ to which title

vests in the trustee under § 70(a)(5) of the Bankruptcy Act,

11 U.S.C. § 110(a)(5). Kokoszka v. Belford, 417 U.S. 642,

94 S.Ct. 2431, 41 L.Ed.2d 374 (1974). The Government

contends, however, that the Plaintiff pursued its refund

claim in the wrong forum: that to the extent the Plaintiff

was seeking affirmative relief the bankruptcy court was

without subject-matter jurisdiction to entertain the com-

plaint. This court finds that the Government is correct.

A.

It is beyond dispute that, as a sovereign, the United

States cannot be sued without its consent. Affiliated Ute

Citizens of Utah v. United States, 406 U.S. 128, 141-42, 92

S.Ct. 1456, 31 L.Ed.2d 741 (1972); United States v. Sher-

wood, 312 U.S. 584, 586, 61 S.Ct. 767, 85 L.Ed. 1058

(1941). By virtue of the Tucker Act, the United States has

waived sovereign immunity and consented to be sued for

the recovery of any internal revenue tax alleged to have

been erroneously or illegally assessed or collected, 28

U.S.C. § 1346(a)(1). This is, of course, the exact nature of

the Plaintiff’s claim. Original jurisdiction to hear claims

arising under the Act, however, is clearly limited under §

1346(a) to the district courts concurrent with the Court of

Claims. The issue in this case thus becomes virtually indis-

tinguishable from that confronted by the Ninth Circuit in

Danning v. United States, 259 F.2d 305 (9th Cir. 1958), |

cert. denied, 359 U.S. 911, 79 S.Ct. 587, 3 L.Ed.2d 574

(1959): whether a bankruptcy court has jurisdiction to

hear a counterclaim for affirmative relief asserted by the

trustee against the United States that arises out of the same

transaction as the claim filed by the Government in the

bankruptcy proceedings. The Danning court found that

the bankruptcy court lacked jurisdiction, holding that, ab-

sent a specific statutory waiver, ‘‘an affirmative judgment

1. The Plaintiff originally filed its claim for a refund with the

Internal Revenue Service on June 7, 1976.

B-2

against the United States cannot be entered on a counter-

claim without specific statutory authorization for affir-

mative relief against the government on the counterclaim

as such.’’ 259 F.2d at 309-310.

The United States has specifically consented to waive

sovereign immunity with regard to the type of claim in-

volved here: a suit for the refund of ‘‘erroneously”’ col-

lected taxes. However, Congress has also specifically

authorized that such suits may only be brought in a district

court or the Court of Claims. This rigid requirement is not

waived simply because the United States asserts a claim for

taxes in a bankruptcy proceeding and the trustee wishes to

raise a counterclaim and resolve both matters at once. The

court is not unmindful of the purposes behind the Bank-

ruptcy Act, especially the need and desirability for swift

and complete adjudication of all of a bankrupt’s debts

and claims in a single proceeding. Nevertheless, if there is

a clash between the purposes of the Bankruptcy Act and

the principle of sovereign immunity, it is the Bankruptcy

Act that must yield. As Professor Wright has written:

Moreover, if Congress in fact has consented to a par-

ticular kind of suit, it may define the conditions under

which it is willing to be sued and the general rule long

has been that the government’s consent is to be strictly

interpreted. Thus, for example, an action may be

brought only in the court designated . . . 14 Wright,

Miller & Cooper, Federal Practice and Procedure:

Jurisdiction § 3654, pp. 160-161 [footnotes omitted].

The Supreme Court reaffirmed this principle only last

term in United States v. Testan, 424 U.S. 392, 399, 96

S.Ct. 948, 47 L.Ed.2d 114 (1976). See also Safeway

Portland E.F.C.U. v. Federal Dep. Ins. Corp., 506 F.2d

1213, 1216 (9th Cir. 1974). Thus, the court finds that the

strict limitations of 28 U.S.C. § 1346(a)(1) preclude the

bankruptcy judge from exercising subject-matter jurisdic-

tion over the Plaintiff’s claim.

B-3

B.

In order to avoid potential problems in future litigation,

the court believes it necessary to correct a fundamental er-

ror in the bankruptcy judge’s findings. The judge held that

even a strict construction of § 1346(a)(1) would not present

a bar to that court’s reaching a determination of the Plain-

tiff’s claim. He based his conclusion upon the definition

given ‘‘courts of bankruptcy’’ by § 1(10) of the Bank-

ruptcy Act, 11 U.S.C. § 1(10):

[they] shall include the United States district courts and

the district courts of the Territories and possessions to

which this Act is or may hereafter be applicable.

From this definition, the bankruptcy judge apparently

deduced that Congress intended for bankruptcy courts to

function as district courts. This assessment is the exact

converse of the situation. District courts have traditionally

been empowered to sit as courts of bankruptcy. When they

do so, their jurisdiction and powers are /imited to those

conferred upon them by the Bankruptcy Act. First State

Bank, etc. v, Sand Springs State Bank, 528 F.2d 350, 353

(10th Cir. 1976). Bankruptcy courts also sit as courts of

bankruptcy. That is all they do. They are not district

courts, nor can they function as such. Their powers and

jurisdiction are also derived solely from the scope of the

Act, Katchen v. Landy, 382 U.S. 323, 327, 86 S.Ct. 467,

15 L.Ed.2d 391 (1966); Jn re Harwald Company, 497 F.2d

443 (7th Cir. 1974); their jurisdictiona! bounds cannot ex-

ceed it.

II

The second question before the court concerns the pro-

per basis to be applied to assets that the Plaintiff received

in the liquidation of six subsidiary corporations. The rules

for determining such bases are found in I.R.C. § 334(b);

subsection (1) provides the general rule, which requires a

carryover basis, while subsection (2) provides a limited ex-

ception to that rule that allows a corporation to take a

stepped-up or cost basis. The Government contends that

B-4

the transaction by which the Plaintiff acquired its sub-

sidiaries was a transfer within the purview of I.R.C. § 351;

that a transfer of this nature closes the door to a §

334(b)(2) exception thereby bringing the subsequent li-

quidation within the ambit of § 334(b)(1); and that, as a

result, the Plaintiff’s basis in the assets should equal that

of the subsidiary corporations. The Plaintiff maintains

that in passing § 334 Congress did not intend to preempt

the doctrine of Kimbell-Diamond Milling Co. v. Commis-

sioner, 14 T.C. 74 (1950), aff’d per curiam, 187 F.2d 718

(Sth Cir. 1951), cert. denied, 342 U.S. 827, 72 S.Ct. 50, 96

L.Ed. 626 (1951), which holds that, for purposes of deter-

mining tax liability, the substance of a transaction should

be examined rather than the form: the ultimate purpose is

the controlling factor rather than the various steps under-

taken to achieve it. Applying that doctrine to its own tran-

saction, the Plaintiff contends that, since its aim was to ac-

quire the assets, the basis of those assets should be

stepped-up to equal the Plaintiff’s cost in acquiring them.

The bankruptcy judge agreed with the Plaintiff and denied

the Government’s claim for $52,967.34 in income taxes.

This court believes that the bankruptcy judge was in error

and therefore reverses his decision.

The facts giving rise to the Government’s claim are not

in issue; they revolve around a series of corporate transac-

tions by which the Plaintiff acquired six aircraft businesses

owned by Clarence Page. On December 28, 1972, Page

transferred all his stock in six corporations to Chrome

Plate Industries, Inc. (CPII), a newly formed corporation

(December 15, 1972) of which all the outstanding stock

was owned by the Plaintiff.? Mr. Page received $850,000

in cash and notes for his stock. CPII then transferred its

newly acquired Page stock to Page Industries of

Oklahoma, Inc. (PIOI), in exchange for 849,000 shares of

2. Mr. Page had a partner, Mr. O.J. Butts, who owned 20 percent

of the stock in one of the companies. Mr. Butts also transferred his

stock to CPII as part of the deal; therefore, for convenience sake,

this order shall refer to the businesses as the Page corporations.

B-5

PIOI common stock. PIOI was itself a newly formed cor-

poration (December 12, 1972) and was a wholly owned

subsidiary corporation of the Plaintiff. The day after these

transactions commenced, December 29, 1972, the Page

corporations were liquidated and PIOI succeeded to their

assets. PIOI then stepped up the basis of those assets from

their original cost to Page to their cost to PIOI, $849,000.

It is this step-up that is in issue.

A.

The court must begin its inquiry with an analysis of the

applicable sections of the Internal Revenue Code. The

general rule for determining the basis of property received

by a corporation from the liquidation of a subsidiary is

found in § 334(b)(1):

If property is received by a corporation in a distribution

in complete liquidation of another corporation (within

the meaning of section 332(b)), then, except as provided

in paragraph (2), the basis of the property in the hands

of the distributee shall be the same as it would be in the

hands of the transferor .. .’

Section 334(b)(2) permits a distributee to use its own cost

as the basis for the assets if the distribution itself meets

certain prerequisites. At issue here is the requirement

detailed in § 334(b)(2)(B) that:

stock of the distributing corporation possessing at least

80 percent of the total combined voting power of all

classes of stock entitled to vote . . . was acquired by the

distributee by purchase (as defined in paragraph (3)).. .

Paragraph (3), § 334(b)(3)(B), specifically excludes from

the definition of ‘‘purchase’’ stock that is acquired in an

exchange to which § 351 applies. The Government con-

tends that PIOI acquired the Page corporation stock by

virtue of a § 351 exchange with CPII, which, therefore,

renders § 334(b)(2) inapplicable to the transaction.

3. There is no dispute that the liquidation involved here was ‘‘within

the meaning of section 332(b).”’

B-6

Section 351 governs transfers to a corporation controll-

ed by the transferor. The general rule found in subsection

(a) is:

No gain or loss shall be recognized if property is

transferred to a corporation . . . by one or more persons

solely in exchange for stock or securities in such cor-

poration and immediately after the exchange such per-

son or persons are in control (as defined in section

368(c)) of the corporation.

Control, as defined by § 368(c), ‘‘means the ownership

of stock possessing at least 80 percent of the total number

of shares of all other classes of stock of the corporation.”’

It is uncontroverted that CPII was in control of PIOI

within the meaning of § 368(c) immediately after the ex-

change.

Retracing its steps through this thoroughly tangled web

of statutory intrigue, the court believes that the issue—as

far as concerns the application of the Internal Revenue

Code to the transactions in question—is this: if the

transfer of Page stock from CPII to PIOI was a transfer

within the meaning of § 351, then when PIOI subsequently

liquidated the Page stock it was precluded from adopting a

§ 334(b)(2) cost basis for assets it received; it was required,

instead, to carryover the original Page basis for those

assets under the terms of the general rule announced in

§ 334(b)(1). Thus, the court again turns its attention to the

requirements of § 351.

**Persons’’ as it appears in § 351 has been defined to in-

clude, among others, individuals, trusts, and corpora-

tions. Treas. Reg. 1.351-1(a)(1). Thus CPII fits the defini-

tion of a transferor (‘‘one or more persons’’) under § 351.

There remains, however, the question whether the Page

company stock transferred to PIOI comes within the

definition of ‘‘property’’ for purposes of a § 351 ex-

change. Although there is no single case that expressly

rules on this point, there has been a recent revenue ruling

holding that the sole transferred property in a § 351 ex-

change may be the stock of another corporation. RevRul

74-502, 1974-2 CB, p. 117. Further, courts that have

B-7

examined the scope of § 351 ‘‘property’’ in other contexts

are unanimous in holding that the term should be con-

strued as broadly as possible. See e. g. Hempt Bros., Inc.

v. United States, 490 F.2d 1172, 1175 (3rd Cir. 1974); E. J.

DuPont de Nemours and Co. v. United States, 471 F.2d

1211, 1218-1219, 200 Ct.Cl. 391 (1973). Thus it seems

clear to the court that, in terms of both the practical

aspects of business life and the obvious intent of the

statute, stock constitutes property within the meaning of §

351.

The court finds that the transfer of Page stock from

CPII to PIOI was a § 351 exchange and, by the terms of §

334(b)(3)(B), does not fit the definition of a purchase

necessary to permit PIOI to utilize the cost basis exemp-

tion provided by § 334(b)(2). When the corporate transac-

tions are examined solely in accordance with the specific

provisions of the Code, it is clear that PIOI was required

to use the carryover basis for the assets mandated by §

334(b)(1).

B.

The Plaintiff contends that, regardless of the specific

language found in the Code, § 334(b)(2) was not intended

to preempt the Kimbell-Diamond doctrine. The bankrupt-

cy court upheld this contention and also agreed with the

Plaintiff that in order to determine the proper basis for the

assets the Kimbell-Diamond rule requires a court to look

at the substance of transacticns in question—the specific

intent of the corporation—rather than at the form or pro-

cedure that the corporation undertook. Thus, the

bankruptcy judge did not even attempt to first determine

whether the Plaintiff was entitled to use § 334(b)(2) but,

instead, simply ignored the Code and applied pre-1954 In-

ternal Revenue Code case-law to the transaction and held

for the Plaintiff. This court, having considered the

legislative history of § 334 as well as the cases inat have in-

terpreted the validity of Kimbell-Diamond in light of that

section’s enactment, finds that both the purpose and the

effect of that section was to codify and define the scope of

the Kimbell-Diamond doctrine; therefore, the exception to

B-8

the carryover basis rule afforded by that doctrine remains

available only to the extent that a given liquidation meets

the requirements of §334(b)(2).

Three circuit courts of appeal and the Court of Claims

have considered the impact § 334(b)(2) has had upon

Kimbell-Diamond; only the Court of Claims has held that

the doctrine remains intact. That court, in American

Potash & Chemical Corporation v. United States, 399

F.2d 194, 185 Ct.Cl. 161 (1968), rejected the

Government’s argument that § 334(b)(2) was the exclusive

exception to the carryover basis rule. The court stated that

a review of the legislative history of the 1954 Code in-

dicated that although § 334(b)(2) was intended to

‘*establish a precise rule under which a taxpayer could pro-

ceed’’ assured that it could use a cost-basis for assets it

received in a subsequent liquidation, the statute was not

intended to preempt Kimbell-Diamond; the doctrine of

that case remained available for corporations that wanted

to utilize a cost basis but neglected to insure that the

transfers in question met the standards outlined in the

statute. The difficulty with this interpretation is that its ef-

fect is to render § 334(b)(2) purposeless. If, as the Court of

Claims suggests, a corporation has the option of either

following the blueprint provided by § 334(b)(2) and taking

a cost-basis or else ignoring those requirements and asser-

ting Kimbell-Diamond to obtain that same cost-basis—to

which, having failed to comply with the Code, it would

otherwise no longer be entitled—then § 334(b)(2) is not a

law but simply a piece of advice that Congress has

graciously made available for those corporations that wish

to claim a cost-basis without having to subsequently

demonstrate their subjective intent.

There is not much legislative history regarding the

enactment of § 334; however, the little there is does pro-

vide some insight into the purpose Congress intended it to

serve. Although the House Report merely notes that ‘‘the

consequences prescribed under § 334 reach results which .

. . [effectuate] the principles of Kimbell-Diamond’’,

B-9

H.R.Rep. No. 1337, 83rd Cong., 2d Sess., (1954), 3

U.S.Code Cong. & Admin. News (1954) pp. 4017, 4247,

the Senate Report is far more explicit:

Paragraph (2) of subsection (b) incorporates into your

committee bill rules effectuating principles derived from

Kimbell-Diamond Milling Co., supra. [emphasis added]

S.Rep. 1622, 83rd Cong., 2d Sess. (1954), 3 U.S.Code

Cont. & Admin.News (1954) pp. 4621, 4894. The report

goes on to trace the details of those Code Provisions that

provide the substance of the ‘‘rules’’ designed to effec-

tuate those principles: the result is that only those transac-

tions meeting the requirements of § 334(b)(2) are entitled

to Kimbell-Diamond treatment. The report reveals the

clear intent of Congress to take the broad Kimbell-

Diamond doctrine and mold it into a series of rules that

provide a concise framework and procedure within which

those principles would operate. See 3 U.S.Code Cong. &

Admin.News (1954) at pp. 4894-4895. That this was the

purpose behind § 334(b)(2)—to regulate the use of the

cost-basis exception—has been the conclusion reached by

every circuit court that has considered t'.e issue.

The Ninth Circuit has flatly held that the Kimbell-

Diamond philosophy ‘‘is no longer controlling”’ in situa-

tions involving liquidations to which § 334(b) applies.

Pacific Transport Company v. Commissioner, 483 F.2d

209, 213 (9th Cir. 1973), cert. denied, 415 U.S. 948, 94

S.Ct. 1469, 39 L.Ed.2d 563 (1974). The Pacific Transport

court, adopting the reasoning of an earlier district court

opinion, stated that the purpose of § 334(b)(2) was to

eliminate the subjective intent test and replace it with a

clear, objective standard against which a transaction could

be measured; the intent of the taxpayer at the time the

stock was acquired was no longer material. 483 F.2d at

213-214 citing Boise Cascade Corp. V. United States, 288

F.Supp. 770 (D.Idaho 1968), aff’d per curiam, 429 F.2d

426 (9th Cir. 1970).

B-10

The Fifth Circuit, although not specifically called on to

decide this issue, has also expressed its opinion on the

question:

Section 334(b)(2) is a codification of principles derived

from the decision in Kimbell-Diamond Milling Co. .. .

[I]n codifying the Kimbell-Diamond rule Congress

made a major change: it substituted a series of objective

tests in place of a determination of the taxpayer’s sub-

jective intent to obtain corporation assets.

Supreme Investment Corporation v. United States, 468

F.2d 370, 377 (Sth Cir. 1972).

Finally, in what this court believes is the most cogent

and detailed opinion concerning the application of §

334(b)(2) to date, the Seventh Circuit has joined with the

Ninth and the Fifth in rejecting the construction given §

334(b)(2) by the Court of Claims. Broadview Lumber

Company v. United States, 561 F.2d 698 (7th Cir. 1977).

The Broadview court held that the interpretation given §

334(b)(2) by the court of Claims would render that section

‘*superfluous.’’ The court further noted that one of the

primary purposes behind codification of the Kimbell-

Diamond doctrine was to formulate guidelines that would

obviate the need for litigation that is so often produced by

a test that attempts to measure subjective intent and that,

if codification is to achieve this goal, the statute must be

mandatory and limited to its terms. The court then

discussed the content of § 334(b)(2) and expressly held

that, if the transaction in question cannot satisfy the

definition of ‘‘purchase’’ outlined in § 334(b)(2), then the

terms of § 334(b)(2) have not been met and ‘‘the basis of

the assets obtained in liquidation is carried over instead of

stepped-up.’’ 561 F.2d 713.

This court holds that the Kimbell-Diamond doctrine has

been supplanted by § 344(b)(2) and therefore applies only

to those transactions that satisfy the requirements of that

provision. Since the liquidation of the Page stock was not

one that met those requirements, PIOI was not entitled to

apply a stepped-up basis to the assets it received.

B-11

III

The Plaintiff seeks an award of attorney’s fees pursuant

to the Civil Rights Attorney’s Fees Award Act of 1976, 42,

U.S.C. § 1988. The relevant portion of the statute provides:

.. . [Ijn any civil action or proceeding, by or on behalf

of the United States of America, to enforce, or charging

a violation of, a provision of the United States Internal

Revenue Code. . . the court, in its discretion, may allow

the prevailing party, other than the United States, a

reasonable attorney’s fee as part of the costs.

The Plaintiff has attempted to buttress its claim by charg-

ing that the Government has brought this appeal in bad

faith solely for the purpose of ‘‘harassment.’’ This court

finds the Plaintiff’s charges totally devoid of merit.

Under ordinary circumstances, the court would simply

note that, since the Plaintiff is not the prevailing party in

this appeal, it is not entitled to an award under the statute.

This, unfortunately, is not the ordinary circumstance: the

Plaintiff ‘has made a serious allegation that lacks the

slightest degree of support in either brief or in the record.‘

Although a showing of bad faith by the Government

would aid the Plaintiff’s cause, it can hardly be argued

that the mere fact that an appeal has been filed—especially

one that is permitted as a matter of right and is based on

grounds that are certainly far from frivolous—constitutes,

without more, even the slightest degree of bad faith, much

less harrassment. While the court does not in any way wish

to discourage a party from seeking all forms of relief to

which it may be entitled, no court can permit a party to

cavalierly sprinkle its requests with unfounded allegations

4. The Plaintiff seems to believe that the Government is in bad faith

because the basis on which it rests its claim for income taxes is a

ground that has consistently been denied by all courts having occa-

sion to consider it. This indicates that the Plaintiff’s attorney either

has not read the cases cited in the Government’s brief or else has not

understood them. There is no assertion of bad faith by the Govern-

ment in appealing the bankruptcy court’s decision to grant the

Plaintiff’s counterclaim; presumably this is because the Plaintiff’s

attorney is aware that the only case that is on all fours with the issue

supports the Government’s position.

B-12

intended to seriously impugn the integrity of the opposing

party. Charges of this nature will, in the future, either be

supported by facts or else left unsaid. The Plaintiff’s claim

for an award of attorney’s fees is denied.

The judgment of the bankruptcy court is reversed, and

this case is remanded to that court with instructions to

allow the Government’s claim for income taxes and to dis-

miss the Plaintiff’s counterclaim for lack of jurisdiction.

B-13

APPENDIX C

In the Matter of CHROME PLATE,

INC., Debtor

CHROME PLATE, INC., Plaintiff

Vv

DISTRICT DIRECTOR OF

INTERNAL REVENUE

Defendant

in Bankruptcy

No. SA-75-68-BK

In the United States District Court

For the Western District of Texas

San Antonio Division

July 28, 1977

JUDGMENT GRANTING PLAINTIFF’S MOTION

FOR PARTIAL SUMMARY JUDGMENT DENYING

DEFENDANT’S PROOF OF CLAIM IN THE AMOUNT

OF $52,967.34 AND DENYING DEFENDANT’S MO-

TION FOR PARTIAL SUMMARY JUDGMENT

CLAIMING THIS COURT LACKS SUBJECT MAT-

TER JURISDICTION OVER PLAINTIFF PRO-

SECUTING A CLAIM FOR REFUND OF INCOME

TAXES

JUDGMENT

THOMPSON, Bankruptcy Judge

At San Antonio, Texas.

On the 13th day of June, 1977, came on to be heard the

Plaintiff’s Motion for Partial Summary Judgment Deny-

ing Defendant’s Proof of Claim in the Amount of

$52,967.34 as a recoupment of tentative overassessment of

income tax and Defendant’s Motion for Partial Summary

Judgment Claiming This Court Lacks Subject Matter

Jurisdiction to entertain Plaintiff’s claim for refund of in-

come tax as affirmative relief.

The parties appeared in person and by counsel. The

Court has read the pleadings, heard the evidence and the

argument of counsel.

The Court is of the opinion and it is ORDERED that the

Objection of the Plaintiff to the Defendant’s proof of

claim in the amount of $52,967.34 is sustained, and the

claim is denied.

The Court is of the opinion and it is ORDERED that the

motion by Defendant that this Court lacks subject matter

jurisdiction to entertain Plaintiff’s claim for refund is

denied, and this Court does have jurisdiction to hear this

matter.

C-2

In the Matter of CHROME PLATE,

INC., Debtor

CHROME PLATE, INC., Plaintiff

v

DISTRICT DIRECTOR OF INTERNAL

REVENUE SERVICE

Defendant

in Bankruptcy

No. SA-75-68-BK

United States District Court

Western District of Texas

San Antonio Division

July 28, 1977

MEMORANDUM OF DECISION RE PLAINTIFF’S

MOTION FOR PARTIAL SUMMARY JUDGMENT

DENYING DEFENDANT’S PROOF OF CLAIM AND

DEFENDANT’S MOTION FOR PARTIAL SUMMARY

JUDGMENT CLAIMING THIS COURT’S LACK OF

SUBJECT MATTER JURISDICTION OVER CLAIM

FOR REFUND OF INCOME TAX

MEMORANDUM OF DECISION

This matter is before the Court on the Motion for Par-

tial Summary Judgment Denying the Defendant’s Claim

in the amount of $52,967.34 as a recoupment of tentative

Overassessment of income tax. In the Defendant’s Brief, it

raised a second issue requesting a Partial Summary Judg-

ment claims that this Court lacks subject matter

jurisdiciton to hear claims for refunds as affirmative

relief.

The first issue, the facts of which are uncontroverted,

involves the tax consequences arising out of a series of cor-

porate transactions by which plaintiff, Chrome Plate,

Inc., acquired the aircraft businesses owned or controlled

by Clarence E. Page in December of 1972. At that time,

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plaintiff was a corporation primarily engaged in the

business of chrome plating aircraft cylinders. Mr. Page

was engaged in the sale and repair of airplanes and

airplane engines through six wholly owned and partly

owned corporations and a sole proprietorship. Mr. Page

owned all of the outstanding stock of Jacobs-Page Air-

craft Engine Company, Aircraft Cylinders, Inc., United

Aircraft Engine Salvage Corporation, Page Aircraft Sales,

Inc., and Page Exports, Inc.; he owned 80 percent of the

outstanding stock of a sixth corporation, Page Air Parts,

Inc. Mr. O.J. Butts owned the remaining 20 percent of the

stock in Page Air Parts, Inc. (For convenience, the six cor-

porations named above will be referred to hereafter as the

‘*six Page corporations.’’) Mr. Page also owned a sole

proprietorship doing business under the name of Page Air-

craft Industries.

On December 28, 1972, Mr. Page and Mr. Butts

transferred all of their stock in the six Page corporations

to Chrome Plate Industries, Inc. Chrome Plate Industries,

Inc., was a newly formed corporation incorporated on

December 15, 1972, all of the outstanding stock of which

was owned by plaintiff, Chrome Plate, Inc. In return for

their stock in the six Page corporations, Mr. Page and Mr.

Butts received from Chrome Plate Industries, Inc.,

$39,000 in cash and $811,000 in four-percent notes.

Immediately following its acquisition of the stock of the

six Page corporations, Chrome Plate Industries, Inc.,

transferred this stock to Page Industries of Oklahoma,

Inc. (PIOI), in exchange for 849,000 shares of the com-

mon stock of PIOI. PIOI was also a newly formed cor-

poration incorporated on December 12, 1972. Upon its in-

corporation, PIOI had issued 1,000 shares of its stock to

Chrome Plate Industries, Inc.; thus, PIO was a wholly

owned subsidiary of Chrome Plate Industries, Inc., im-

mediately prior to its receipt of the stock of the six Page

corporations from Chrome Plate Industries, Inc. On

December 29, 1972, the six Page corporations were li-

quidated, and PIOI succeeded to their assets.

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Upon liquidating the six Page corporations, PIOI step-

ped up the basis of the assets of these corporations in its

hands to $849,000 from their cost basis in the hands of the

six corporations. The Internal Revenue Service denied this

stepped-up basis in the assets received from the six Page

corporations, and determined that the basis of these assets

in the hands of PIOI was the same as their basis in the

hands of the six Page corporations; that is, PIOI was re-

quired to carry over the basis of these assets from the six

Page corporations. The Internal Revenue Service reached

this conclusion because it determined that PIOI received

the stock of the six Page corporations from Chrome Plate

Industries, Inc., in a transaction to which Section 351 of

the Internal Revenue Code of 1954 (26 U.S.C.) applied.

The plaintiff entered into the series of transactions

described above for the specific purpose of acquiring the

assets of the six Page corporations. After extensive

negotiation and research, the transaction was carefully

planned and executed in order to fulfill the business as well

as the tax needs of the parties. The plaintiff was repre-

sented by a Certified Public Accountant and an Attorney

at Law. The tax consequences were studied by the Cer-

tified Public Accountant and he determined that for tax

purposes the substance of the transaction was an asset ac-

quisition and the steps employed to achieve this result

should not and does not change the nature of the transac-

tion. The Certified Public Accountant relied on the step

transaction doctrine enunciated in the Kimbell-Diamond

Milling Company v. Commissioner, 14 T.C. 74 (1950),

aff’d per curiam, 187 F.2d 78, which remains viable and

was not preempted by the Internal Revenue Code Section

334(b)(2). The step transaction doctrine which was in-

troduced and argued by the Internal Revenue Service is an

attempt to analyze and look through the form of the tran-

saction to the reality of the transaction. In the Kimbell-

Diamond case, the Internal Revenue Service successfully

argued that one must determine the substance of the tran-

saction as opposed to the form and disregard the separate

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steps taken to accomplish the primary objective and con-

sider the transaction a single transaction. In the instant

case, the Internal Revenue Service takes the position that

the Kimbell-Diamond case was heard and decided prior to

the enactment of the Internal Revenue Code of 1954 and

now the step transaction doctrine should be disregarded in

this particular instance. The Internal Revenue Service asks

this Court to look to the form of the transaction over the

substance of the transaction and apply the literal wording

of the Internal Revenue Code, Section 334(b)(3). This

issue has been raised and decided in two cases in two dif-

ferent courts subsequent to the passage of the Internal

Revenue Code of 1954. In 1968, in American Potash and

Chemical Corporation vy. U.S., 399 F.2d 194 (Ct. Cl.

1968), the Court specifically addressed this question. The

Court held that the Kimbell-Diamond doctrine had not

been preempted by the Internal Revenue Code of 1954 and

the doctrine was still viable, and one must still look to the

substance of the transaction as opposed to the form. Ina

later case, Broadview Lumber Company, Inc. v. U.S., 36

AFTR 2d 75-6367, the Court held that ‘‘the Court rejects

the defendant’s position that Congress in enacting

334(b)(2) preempted the Kimbell-Diamond doctrine.

Rather, the Court chooses to follow the position of the

Court of Claims in American Potash and Chemical Cor-

poration v. U.S., supra, that Kimbell-Diamond is still

viable despite the enactment of 334(b)(2).”’

In the instant case, the purported ‘‘steps’’ of the tran-

saction were almost simultaneous. Had the order of the

steps been changed, there was no question that the cor-

poration would be entitled to a stepped-up basis pursuant

to Section 334(b)(2). Regardless of the order of the

‘*steps’’ the end result of the transaction is exactly the

same. Clearly, the substance of the transaction was an

asset acquisition and the plaintiff is entitled to a basis in

the assets equal to what they paid for them.

In its arguments before this Court, the Internal Revenue

Service recognized the Kimbell-Diamond doctrine, and the

C-6

Court’s upholding that doctrine in American Potash and

Chemical Corporation and Broadview Lumber Company,

Inc. The argument presented by the Internal Revenue Ser-

vice is that those courts were wrong in their interpretation

of the law and that this Court should follow the specific

language of the Internal Revenue Code and disregard the

judicial determinations of the previous cases. This Court

elects to follow the judicial precedent set by numerous

courts during the past seventeen years and holds that the

step transaction doctrine as enunciated in Kimbell-

Diamond is still viable. Accordingly it is the opinion of

this Court that the taxpayer is justly entitled to a step up in

basis of the assets and denies the claim by the Internal

Revenue Service in the amount of $52,967.34.

The second issue before this Court is whether or not this

Court has summary jurisdiction to entertain plaintiff’s

claim for refund to the extent that it seeks affirmative

relief. In taking its position, the Internal Revenue Service

claims that this Court lacks summary jurisdiction relying

on Danning v. United States, 259 F.2d 305 (C.A. 9, 1958),

cert. denied 359 U.S. 911 (1959), because the plaintiff

seeks affirmative relief. The Internal Revenue Service

claims its result is obtained because of the doctrine of

sovereign immunity which requires that the sovereign

specifically consents to be sued, citing United States v.

Shaw, 309 U.S. 495 (1940). The court held in Danning,

supra, P. 309:

‘*failing to find a specific statutory waiver, and having

no power to find one by implication or interpretation,

we are bound by the long line of cases to hold that an

affirmative judgment against the United States cannot

be entered on a counterclaim without specific statutory

authorization for affirmative relief against the govern-

ment on the counterclaim as such.’’

The above cited cases do not apply in the instant case

because there is specific statutory language granting jur-

sidiction to the District Courts concurrent with the Court

of Claims granting original jursdiction in any civil action

C-7

against the United States for the recovery of any Internal

Revenue tax alleged to have been erroneously or illegally

assessed and collected 28 U.S.C.A. §1346(a)(1). The

Bankruptcy Act, Chapter I, §i(10) defines Bankruptcy

Courts as follows:

Courts in bankruptcy ‘‘shall include the United States

district courts and the district courts of the Territories

and possessions to which this Act is or may hereafter be

applicable.”’

Therefore, this court falls within 28 U.S.C.A. §1346(a)(1).

The cases cited by the Internal Revenue Service were

decided prior to the adoption of the Bankruptcy rules

which include Part VII, Adversary Proceedings. Under the

Rules of Bankruptcy Procedure, Part VII, Adversary Pro-

ceedings, Rule 701 provides that ‘‘the rules of this Part VII

govern any proceeding instituted by a party before the

bankruptcy judge to recover money or property.”’ A claim

for refund of previously paid income taxes is merely a

claim to recover money for the Internal Revenue Service.

Therefore, in accordance with Part VII, this Court has

jurisdiction.

The right for the claim for refund was created on

December 31, 1973, and continues through today. Thus,

the plaintiff owned and constructively possessed the asset

the date of filing of the petition in bankruptcy, which was

February 10, 1975. Upon the filing of a petition in

bankruptcy, all property in bankrupt’s actual or construc-

tive possession passes at once into custody of the

Bankruptcy Court. It is settled that the Bankruptcy Courts

have summary jurisdiction to adjudicate controversies

relating to property over which they have actual or con-

structive possession. In Re American Southern Publishing

Company, 426 F.2d 160 (1970); In Re Naviera Azta, S.A..,

500 F.2d 390 (1974). Since this Court has constructive

possession of plaintiff’s right of claim for refund, it

follows that this Court has jurisdiction to adjudicate the

questions relating to it.

C-8

In addition to the above, Rule 915(a), Waiver of Objec-

tion to Jurisdiction, states that a party waives objection to

jurisdiction in any adversary proceeding for a contested

matter and thereby consents to such jurisdiction if he does

not make objection in a timely motion or answer, which-

ever occurs first. The Advisory Committee notes to Rule

915 states that the premise of Subsection (a) is that a party

to a controversy being litigated in the Bankruptcy Court

must object to the Court’s jurisdiction at the first oppor-

tunity in order to avoid being deemed to have consented

thereto. In defendant’s answer, it did not object to the

jurisdiction of this Court, it merely questioned whether it

had summary jurisdiction. The Internal Revenue Service

did not object to the Referee to act as Judge, nor whether

the Court had jurisdiction. This Court finds that the Inter-

nal Revenue Service did not properly object to the jurisdic-

tion question.

Accordingly, it is the opinion of this Court that it does

have summary jurisdiction to entertain plaintiff’s claim

for refund and denies defendant’s motion for partial sum-

mary judgment questioning such jurisdiction.

APPENDIX D

Internal Revenue Code of 1954 (26 U.S.C.):

Sec. 332. Complete liquidations of subsidiaries.

(a) General Rule

No gain or loss shall be recognized on the receipt by a

corporation of property distributed in complete li-

quidation of another corporation.

(b) Liquidations to Which Section Applies.

For purposes of subsection (a), a distribution shall be

considered to be in complete liquidation only if—

(1) the corporation receiving such property was, on

the date of the adoption of the plan of liquidation,

and has continued to be at all times until the receipt of

the property, the owner of stock (in such other cor-

poration) possessing at least 80 percent of the total

combined voting power of all classes of stock entitled

to vote and the owner of at least 80 percent of the

total number of shares of all other classes of stock

(except nonvoting stock which is limited and prefer-

red as to dividends); and either

(2) the distribution is by such other corporation in

complete cancellation or redemption of all its stock,

and the transfer of all the property occurs within the

taxable year; in such case the adoption by the

shareholders of the resolution under which is

authorized the distribution of all the assets of such

corporation in complete cancellation or redemption

of all its stock shall be considered an adoption of a

plan of liquidation, even though no time for the com-

pletion of the transfer of the property is specified in

such resolution; or

(3) such distribution is one of a series of distribu-

tions by such other corporation in complete cancella-

tion or redemption of all its stock in accordance with

a plan of liquidation under which the transfer of all

the property under the liquidation is to be completed

within 3 years from the close of the taxable year during

which is made the first of the series of distributions under

the plan, except that if such transfer is not completed

within such period, or if the taxpayer does not continue

qualified under paragraph (1) until the completion of such

transfer, no distribution under the plan shall be considered

a distribution in complete liquidation.

If such transfer of all the property does not occur

within the taxable year, the Secretary or his delegate

may require of the taxpayer such bond, or waiver of the

statute of limitations on assessment and collection, or

both, as he may deem necessary to insure, if the transfer

of the property is not completed within such 3-year

period, or if the taxpayer does not continue qualified

under paragraph (1) until the completion of such

transfer, the assessment and collection of all income

taxes then imposed by law for such taxable year or

subsequent taxable years, to the extent attributable to

property so received. A distribution otherwise con-

stituting a distribution in complete liquidation within

the meaning of this subsection shall not be considered as

not constituting such a distribution merely because it

does not constitute a distribution or liquidation within

the meaning of the corporate law under which the

distribution is made; and for purposes of this subsection

a transfer of property of such other corporation to the

taxpayer shall not be considered as not constituting a

distribution (or one of a series of distributions) in com-

plete cancellation or redemption of all the stock of such

other corporation, merely because the carrying out of

the plan involves (A) the transfer under the plan to the

taxpayer by such other corporation of property, not at-

tributable to shares owned by the taxpayer, on an ex-

change described in section 361, and (B) the complete

cancellation or redemption under the plan, as a result of

exchanges described in section 354, of the shares not

owned by the taxpayer.

* * +

D-2

Sec. 334. Basis of property received in liquidations.

* *

*

(b) Liquidation of Subsidiary.

(1) In general. If property is received by a corpora-

tion in a distribution in complete liquidation of

another corporation (within the meaning of section

332 (b)), then, except as provided in paragraph (2),

the basis of the property in the hands of the

distributee shall be the same as it would be in the

hands of the tranferor. If property is received by a

corporation in a transfer to which section 332 (c) ap-

plies, and if paragraph (2) of this subsection does not

apply, then the basis of the property in the hands of

the transferee shall be the same as it would be in the

hands of the transferor.

(2) Exception. If property is received by a corpora-

tion in a distribution in complete liquidation of

another corporation (within the meaning of section

332 (b)), and if—

(A) the distribution is pursuant to a plan of li-

quidation adopted not more than 2 years after the

date of the transaction described in subparagraph

(B) (or, in the case of a series of transactions, the

date of the last such transaction); and

(B) stock of the distributing corporation possess-

ing at least 80 percent of the total combined voting

power of all classes of stock entitled to vote, and at

least 80 percent of the total number of shares of all

other classes of stock (except nonvoting stock

which is limited and preferred as to dividends), was

acquired by the distributee by purchase (as defined

in paragraph (3)) during a 12-month period beginn-

ing with the earlier of—

(i) the date of the first acquisition by purchase

of such stock, or

(ii) if any of such stock was acquired in an ac-

quisition which is a purchase within the meaning

of the second sentence of paragraph (3), the date

D-3

on which the distributee is first considered under

section 318 (a) as owning stock owned by the cor-

poration from which such acquisition was made,

then the basis of the property in the hands of the

distributee shall be the adjusted basis of the stock

with respect to which the distribution was made. For

purposes of the preceding sentence, under regulations

prescribed by the Secretary or his delegate, proper ad-

justment in the adjusted basis of any stock shall be

made for any distribution made to the distributee

with respect to such stock before the adoption of the

plan of liquidation, for any money received, for any

liabilities assumed or subject to which the property

was received, and for other items.

(3) Purchase defined.—For purposes of paragraph

(2)(B), the term, ‘‘purchase’’ means any acquisition

of stock, but only if—

(A) the basis of the stock in the hands of the

distributee is not determined (i) in whole or in part

by reference to the adjusted basis of such stock in

the hands of the person from whom acquired, or

(ii) under section 1014 (a) relating to property ac-

quired from a decedent,

(B) the stock is not acquired in an exchange to

which section 351 applies; and

(C) the stock is not acquired from a person the

ownership of whose stock would, under section

318 (a), be attributed to the person acquiring such

stock.

Notwithstanding subparagraph (C) of this paragraph,

for purposes of paragraph (2) (B), the term ‘‘pur-

chase’’ also means an acquisition of stock from a cor-

poration when ownership of such stock would be at-

tributed under section 318 (a) to the person acquiring

such stock, if the stock of such corporation by reason

of which such ownership would be attributed was ac-

quired by purchase (within the meaning of the

preceding sentence).

D-4

(4) Distributee defined.—For purposes of this

subsection, the term ‘‘distributee’’ means only the

corporation which meets the 80 percent stock owner-

ship requirements specified in section 332(b).

(c) Property Received in Liquidation Under Section

333.—If—

(1) property was acquired by a shareholder in the li-

quidation of a corporation in cancellation or redemp-

tion of stock, and

(2) with respect to such acquisition—

(A) gain was realized, but

(B) as a result of an election made by the

shareholder under section 333, the extent to which

gain was recognized was determined under section 333,

then the basis shall be the same as the basis of such stock

cancelled or redeemed in the liquidation, decreased in

the amount of any money received by the shareholder,

and increased in the amount of gain recognized to him.

Sec. 351. Transfer to corporation controlled

*

by transferor.

(a) General Rule.—No gain or loss shall be recognized

if property is tranferred to a corporation (including, in

the case of transfers made on or before June 30, 1967, an

investment company) by one or more persons solely in

exchange for stock or securities in such corporation and

immediately after the exchange such person or persons

are in control (as defined in section 368(c)) of the cor-

poration. For purposes of this section, stock or securities

issued for services shall not be considered as issued in

return for property.

*

. Sec. 368. Definitions relating to corporate

*

reorganizations.

* *

(c) Control.—For purposes of part I (other than section

304), part II, and this part, the term ‘‘control’’ means the

ownership of stock possessing at least 80 percent of the

total combined veting power of all classes of stock entitled

to vote and at least 80 percent of the total number of

shares of all other classes of stock of the corporation.

D-5

Step transaction doctrine, promulgated in C./.R. v.

Ashland Oil & Refinery Co., 99 F.2d 588 (6th Cir. 1938),

cert. denied, 306 U.S. 661, 59 S.Ct. 786, 83 L.Ed. 1057

(1939). A transaction involving solely an acquisition of

property must be viewed as a whole ‘‘and closely related

steps will not be separated either at the instance of the tax-

payer or the taxing authority.’’ Jd. at 591.

Substance Over Form Doctrine, also known as the

Kimbell-Diamond Doctrine, promulgated in Kimbell-

Diamond Milling Co. v, Commissioner, 14 T.C. 74 (1950).

Aff’d per curiam, 187 F.2d 718 (5th Cir. 1951), cert.

denied, 342 U.S. 827, 72 S.Ct. 50, 96 L.Ed. 626 (1951).

When a taxpayer, solely interested in acquiring a corpora-

tion’s assets, purchased stock and then liquidated the ac-

quired corporation, the transaction would be viewed as a

purchase of assets and the various steps would be con-

sidered a single transaction.