Chrome Plate, Inc., Matter of

• Decision Date: 02 April 1980
• Docket Number: No. 77-3402,77-3402
• Citation: 614 F.2d 990
• Parties: 80-1 USTC P 9332 In the Matter of CHROME PLATE, INC., Bankrupt. CHROME PLATE, INC., Appellant, v. DISTRICT DIRECTOR OF INTERNAL REVENUE, United States of America, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 990

614 F.2d 990

80-1 USTC P 9332

In the Matter of CHROME PLATE, INC., Bankrupt.

CHROME PLATE, INC., Appellant, v. DISTRICT DIRECTOR OF INTERNAL REVENUE, United States of

America, Appellee.

No. 77-3402.

United States Court of Appeals, Fifth Circuit.

April 2, 1980.

John Dean Harris, San Antonio, Tex., for appellant.

Jamie C. Boyd, U. S. Atty., San Antonio, Tex., M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews, Chief, App. Section, Jonathan S. Cohen, R. Bruce Johnson, Ernest J. Brown, Attys., Tax Div., Dept. of Justice, Washington, D. C., for appellee.

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 Internal 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 aircraft 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. ¹ In return for the stock, CPI paid $850,000 in cash and notes.

Immediately after the acquisition of the Page corporations 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 succeeded to their assets.

Upon the liquidation, PIOI stepped up the basis of the acquired assets from their original cost to Page ² to the cost to 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. ³ On cross motions for partial summary judgment regarding the basis of the Page corporations 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 regarding a complete liquidation of a corporation. § 331(a)(1) states:

Amounts distributed in complete liquidation of a corporation 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 P 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 distributed in complete liquidation of a subsidiary. ⁴ To qualify, a parent corporation ⁵ 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 all other classes of stock. 26 U.S.C. § 332(b)(1). The distribution by the subsidiary must be in complete cancellation or redemption of its stock, and a complete transfer must occur within the taxable year. 26 U.S.C. § 332(b)(2). Finally, the distribution must be made pursuant to a plan of liquidation 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 subsidiary. 26 U.S.C. § 334(b)(1). ⁶ § 334(b)(1) provides for one exception to the above basis rule, which is found in § 334(b)(2). ⁷ See Cabax Mills v. C.I.R., 59 T.C. 401, 406 (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. ⁸

A cost basis under § 334(b)(2) may be used if certain requirements are met regarding property received by a corporation 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 liquidation adopted not more than two years after the date of the above transaction. § 334(b)(2)(A).

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 corporate taxpayers who had acquired assets through transactions 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 P 11.44, at 11-44. The term "purchase", as used in § 334(b)(2)(B), is defined in § 334(b)(3) as any acquisition 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 corporation and immediately after the exchange such person 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 liquidated 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 P 11.44, at 11-48. If a corporate transaction complies with the provisions of § 334(b)(2), it receives a cost basis. Otherwise the transaction falls back under § 334(b)(1), and the parent obtains a carryover basis.

The 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 caused 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 qualified as a § 351 transfer. The control requirements were satisfied, and there was no actual generation of income for either party. See E. I. 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 requirements. The Appellant argues correctly that if CPI had received the liquidated assets directly from the Page corporations, 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. ⁹ See Yoc Heating Corporation v. C.I.R., 61 T.C. 168, 175 (1973).

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...