Intermountain Lumber Co. v. Commissioner

United States Tax Court · 1976 · Corporations

65 T.C. 1025 (1976)

Updated July 31, 2026

corporationssection 351controlincorporationstock ownershipI.R.C. section 351I.R.C. section 368(c)immediately after the exchange

Facts

Dee Shook transferred all of S & W's initial property, including sawmill equipment and the sawmill site, to the newly formed corporation in July 1964 in exchange for 364 shares, while he and Milo Wilson each also received 1 incorporator share. On the same date, Shook and Wilson executed an "Agreement for Sale and Purchase of Stock" under which Shook was to sell Wilson 182 of those shares on installment terms, with interest, transfer of shares as principal was paid, a right of prepayment, and a one-year grant of voting power to Wilson over the 182 shares; Shook also gave Wilson an irrevocable proxy and placed the 182-share certificates in escrow. Corporate minutes and later documents repeatedly described the arrangement as a sale intended to make Shook and Wilson equal owners, and Wilson deducted interest payments under the agreement. Intermountain later purchased all S & W stock and argued that the original transfer was taxable because Shook lacked the required control immediately after incorporation.

Issue

When a transferor receives stock for property in an incorporation exchange but, as part of the same transaction, is under an irrevocable contractual obligation to sell 50 percent of that stock to another person, does the transferor "control" the corporation immediately after the exchange within the meaning of sections 351 and 368(c)?

Rule

For purposes of section 351, control under section 368(c) depends on actual ownership immediately after the exchange. Traditional incidents of ownership such as legal title, voting rights, and possession of certificates are not conclusive; if, as part of the same transaction by which the shares are acquired, the transferee has irrevocably relinquished the legal right to decide whether to keep the shares, those shares are not owned by the transferee for section 351 control purposes. A later disposition does not defeat control if the transferee was free at the time of acquisition and any plan to dispose of the stock was not a binding obligation.

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In Boise, Idaho, Lena Ortiz transferred all operating assets of her cabinet shop to Gem Valley Millworks, Inc. in exchange for 100 shares. At the same closing, she signed a contract requiring her to sell 25 of those shares to Omar Nash for a fixed price over five years, with Omar allowed to prepay at any time and receive the shares as principal was paid.

Does the incorporation qualify under section 351 based on Lena's control immediately after the exchange?

Explanation. Control under section 368(c) turns on actual ownership immediately after the exchange, not merely on formal title or certificate possession. When, as part of the same transaction by which stock is acquired, the transferor is under a binding obligation to dispose of part of the stock and has relinquished the legal right to decide whether to keep it, those shares are not counted toward section 351 control. Lena therefore lacks ownership of the obligated 25 shares for control purposes.