Supreme Court of the United States · 1950 · Corporations
CorporationsCorporate liquidationCapital gains taxclosely held corporationliquidationdistribution in kindcorporate dissolutioncapital gains tax
Facts
A closely held corporation distributed its assets in kind to its shareholders and dissolved. The shareholders then transferred the property to a purchaser. In the refund suit, the evidence showed that the shareholders had first offered to sell their stock and then, in accordance with a counteroffer, caused liquidation of the corporation and distribution of the assets in kind. The Court of Claims found that the sale was made by the shareholders rather than by the corporation.
Issue
When a closely held corporation liquidates, distributes assets in kind to its shareholders, and the shareholders then transfer the property to a purchaser, must the resulting gain be treated as a sale by the corporation rather than by the shareholders? More specifically, did the record require a finding that the sale was made by the corporation?
Rule
A corporation may liquidate or dissolve without subjecting itself to the corporate gains tax even if a primary motive is to avoid corporate taxation. In determining whether gain from a later transfer of distributed assets is attributable to the corporation or to the shareholders, the trier of fact must consider the entire transaction and decide the factual category to which it belongs.
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Maple Run Transit Equipment, a closely held corporation in Toledo, owned a warehouse and loading machinery. After a regional buyer declined to purchase the shareholders' stock but offered to buy the underlying assets instead, the shareholders voted to liquidate, received the assets in kind, dissolved the corporation, and then conveyed the assets to the buyer. The record in a later tax refund suit contains evidence supporting a trial court finding that the shareholders, after distribution, made the sale themselves.
How should the gain most likely be treated under the governing rule?
Explanation. The majority rule is that the trier of fact must consider the entire transaction and determine whether the sale was in fact made by the corporation or by the shareholders. If the record supports a finding that, after liquidation and distribution in kind, the shareholders made the sale, the gain is not imputed to the corporation. Tax motive and close-corporation status do not alone change that result. (Derived from United States v. Cumberland Public Service Co. (n.d.).)