CIR v. Wilson, 19869.

• Decision Date: 03 December 1965
• Docket Number: No. 19869.,19869.
• Citation: 353 F.2d 184
• Parties: COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. Marne S. WILSON, Marjorie M. Wilson, Lyle C. Wilson and Peggy Wilson, Respondents.
• Court: U.S. Court of Appeals — Ninth Circuit

353 F.2d 184 (1965)

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. Marne S. WILSON, Marjorie M. Wilson, Lyle C. Wilson and Peggy Wilson, Respondents.

No. 19869.

United States Court of Appeals Ninth Circuit.

December 3, 1965.

John B. Jones, Jr., Acting Asst. Atty. Gen., Meyer Rothwacks, David O. Walter, Michael K. Cavanaugh, Attys., Dept. of Justice, Washington, D. C., for petitioner.

Alfred E. Holland, Sacramento, Cal., for respondents.

Before JERTBERG, Circuit Judge, MADDEN, Judge of the Court of Claims, and DUNIWAY, Circuit Judge.

MADDEN, Judge:

The Commissioner of Internal Revenue seeks review and reversal by this court of a decision of the Tax Court of the United States setting aside income tax deficiencies which the Commissioner had assessed against these taxpayers. No problem relating to the jurisdiction of the Tax Court or of this court is involved.

Our question is whether the Tax Court was right in concluding that when a corporation in which the taxpayers were the sole stockholders formed another corporation, transferred certain assets of the existing corporation to it, and then transferred the stock in the second corporation to the taxpayers, that was not a distribution taxable to the taxpayers as a dividend paid by the first corporation, but was a tax-free transaction pursuant to Section 355 of the Internal Revenue Code of 1954, 26 U.S.Code, 1958 ed., § 355.

One William C. Wilson operated a furniture store business. He died in 1950. His widow and his two sons, who are the taxpayers in this litigation, continued the business as a partnership. In 1955 Wilson's Furniture, Inc., hereinafter called Wilson's Inc., was formed. The assets of the partnership were transferred to the corporation, and all of the stock of the corporation was issued to the two sons, the father's widow being paid for her partnership interest by a note of the corporation to her for $49,310.31.

In 1958 Wilson's Inc. formed another corporation, Wil-Plan, and transferred to it the conditional sales contracts which Wilson's Inc. had on hand as a result of selling furniture on deferred payments. An automobile owned by Wilson's Inc. was also transferred to Wil-Plan in this transaction. All of the stock in Wil-Plan was distributed to the two taxpayers herein, who, as we have seen, were the sole stockholders in Wilson's Inc. The fair market value of the stock in Wil-Plan delivered to each of the two taxpayers was $69,020.07. The accumulated earnings and profits of Wilson's Inc., at the time of the incorporation of Wil-Plan, were $48,889.98.

The taxpayers did not, in their tax returns for 1958, include any income attributable to the stock in Wil-Plan which had been distributed to them in that year. The Commissioner of Internal Revenue mailed timely deficiency notices to each of them, asserting a deficiency against each of some $11,000. The taxpayers filed in the Tax Court timely petitions for redetermination of the deficiencies. As we have seen, the Tax Court decided in favor of the taxpayers, and the Commissioner seeks, in this court, review and reversal of that decision.

Section 355 of the Internal Revenue Code of 1954 is difficult reading and will not be reproduced in this opinion. Its purpose and the purpose of its predecessors is to give to stockholders in a corporation controlled by them the privilege of separating or "spinning off" from their corporation a part of its assets and activities and lodging the separated part in another corporation which is controlled by the same stockholders. Since, after the spin-off, the real owners of the assets are the same persons who owned them before, Congress has been willing that these real owners should be allowed, without penalty, to have their real ownership divided into smaller artificial entities than the single original corporation, if the real owners decide that such a division would be desirable. Congress early learned, however, that shareholders would select the part of the assets of an original corporation which could most readily be converted into cash or its equivalent, spin off those parts into the second corporation, distribute the stock in that corporation to themselves, and thus have available for sale and capital gains tax treatment the stock in that corporation, though in fact what they sold represented accumulated earnings of the original corporation, which earnings, if they had been paid directly to the shareholders of the original corporation, would have been fully taxable to them as dividend income.

Section 355 contains, as did its predecessors, a prohibition against the use of the spin-off as a "device for the distribution of the earnings and profits of the distributing corporation or the controlled corporation." § 355(a) (1) (B). The section also contained other requirements which had to be complied with in order to qualify a spin-off as a tax-free transaction. The Commissioner urges that some of these requirements were not complied with but, in view of the position which we take in this opinion, we find it unnecessary to resolve those problems.

As we have indicated above, the general purpose of Congress in sanctioning in proper cases, tax-free spin-offs was to permit the real owners of enterprises to rearrange their units and evidences of ownership to suit their own ideas of how best to carry on...