A closely held corporation made to its shareholders a
distribution of assets in kind and was dissolved. The stockholders
transferred the property to a purchaser. In an action by the
corporation for refund of a capital gains tax on the sale, the
Court of Claims found, upon proper supporting evidence, that the
sale was made by the shareholders, rather than by the corporation,
and entered judgment for the corporation.
the record does not require a finding that the
sale was made by the corporation, rather than by the shareholders,
and the judgment of the Court of Claims is affirmed.
Commissioner v. Court Holding Co., 324 U.
, distinguished. Pp. 338 U. S.
(a) A corporation may liquidate or dissolve without subjecting
itself to the corporate gains tax, even though a primary motive is
to avoid the burden of corporate taxation. P. 338 U. S.
(b) In this case, it was for the Court of Claims (the trial
court), upon consideration of the entire transaction, to determine
the factual category in which the transaction belonged. P.
338 U. S.
113 Ct.Cl. 460, 83 F. Supp. 843, affirmed.
In an action for refund of a federal tax, the Court of Claims
gave judgment for the plaintiff. 113 Ct.Cl. 460, 83 F. Supp. 843.
This Court granted certiorari. 338 U.S. 846. Affirmed,
338 U. S.
Page 338 U. S. 452
MR. JUSTICE BLACK delivered the opinion of the Court.
A corporation selling its physical properties is taxed on
capital gains resulting from the sale. [Footnote 1
] There is no corporate tax, however, on
distribution of assets in kind to shareholders as part of a genuine
liquidation. [Footnote 2
respondent corporation transferred property to its shareholders as
a liquidating dividend in kind. The shareholders transferred it to
a purchaser. The question is whether, despite contrary findings by
the Court of Claims, this record requires a holding that the
transaction was, in fact, a sale by the corporation subjecting the
corporation to a capital gains tax.
Details of the transaction are as follows. The respondent, a
closely held corporation, was long engaged in the business of
generating and distributing electric power in three Kentucky
counties. In 1936, a local cooperative began to distribute
Tennessee Valley Authority power in the area served by respondent.
It soon became obvious that respondent's Diesel-generated power
could not compete with TVA power, which respondent had been unable
to obtain. Respondent's shareholders, realizing that the
corporation must get out of the power business unless it obtained
TVA power, accordingly offered to sell all the corporate stock to
the cooperative, which was receiving such power. The cooperative
refused to buy the stock, but countered with an offer to buy from
the corporation its transmission and distribution equipment. The
corporation rejected the offer because it would have been compelled
to pay a heavy capital gains tax. At the same time, the
shareholders, desiring to save payment of the
Page 338 U. S. 453
corporate capital gains tax, offered to acquire the transmission
and distribution equipment and then sell to the cooperative. The
cooperative accepted. The corporation transferred the transmission
and distribution systems to its shareholders in partial
liquidation. The remaining assets were sold, and the corporation
dissolved. The shareholders then executed the previously
contemplated sale to the cooperative.
Upon this sale by the shareholders, the Commissioner assessed
and collected a $17,000 tax from the corporation on the theory that
the shareholders had been used as a mere conduit for effectuating
what was really a corporate sale. Respondent corporation brought
this action to recover the amount of the tax. The Court of Claims
found that the method by which the stockholders disposed of the
properties was avowedly chosen in order to reduce taxes, but that
the liquidation and dissolution genuinely ended the corporation's
activities and existence. The court also found that at no time did
the corporation plan to make the sale itself. Accordingly, it found
as a fact that the sale was made by the shareholders, rather than
the corporation, and entered judgment for respondent. One judge
dissented, believing that our opinion in Commissioner v. Court
Holding Co., 324 U. S. 331
required a finding that the sale had been made by the corporation.
Certiorari was granted, 338 U.S. 846, to clear up doubts arising
out of the Court Holding Co.
Our Court Holding Co.
decision rested on findings of
fact by the Tax Court that a sale had been made and gains realized
by the taxpayer corporation. There, the corporation had negotiated
for sale of its assets and had reached an oral agreement of sale.
When the tax consequences of the corporate sale were belatedly
recognized, the corporation purported to "call off" the sale at the
last minute, and distributed the physical properties in kind to the
stockholders. They promptly conveyed these
Page 338 U. S. 454
properties to the same persons who had negotiated with the
corporation. The terms of purchase were substantially those of the
previous oral agreement. One thousand dollars already paid to the
corporation was applied as part payment of the purchase price. The
Tax Court found that the corporation never really abandoned its
sales negotiations, that it never did dissolve, and that the sole
purpose of the so-called liquidation was to disguise a corporate
sale through use of mere formalisms in order to avoid tax
liability. The Circuit Court of Appeals took a different view of
the evidence. In this Court, the Government contended that whether
a liquidation distribution was genuine or merely a sham was
traditionally a question of fact. We agreed with this contention,
and reinstated the Tax Court's findings and judgment. Discussing
the evidence which supported the findings of fact, we went on to
say that "the incidence of taxation depends upon the substance of a
transaction," regardless of "mere formalisms," and that taxes on a
corporate sale cannot be avoided by using the shareholders as a
"conduit through which to pass title."
This language does not mean that a corporation can be taxed even
when the sale has been made by its stockholders following a genuine
liquidation and dissolution. [Footnote 3
] While the distinction between sales by a
corporation as compared with distribution in kind followed by
shareholder sales may be particularly shadowy and artificial
Page 338 U. S. 455
when the corporation is closely held, Congress has chosen to
recognize such a distinction for tax purposes. The corporate tax is
thus aimed primarily at the profits of a going concern. This is
true despite the fact that gains realized from corporate sales are
taxed, perhaps to prevent tax evasions, even where the cash
proceeds are at once distributed in liquidation. [Footnote 4
] But Congress has imposed no tax
on liquidating distributions in kind or on dissolution, whatever
may be the motive for such liquidation. Consequently, a corporation
may liquidate or dissolve without subjecting itself to the
corporate gains tax, even though a primary motive is to avoid the
burden of corporate taxation.
Here, on the basis of adequate subsidiary findings, the Court of
Claims has found that the sale in question was made by the
stockholders, rather than the corporation. The Government's
argument that the shareholders acted as a mere "conduit" for a sale
by respondent corporation must fall before this finding. The
subsidiary finding that a major motive of the shareholders was to
reduce taxes does not bar this conclusion. Whatever the motive and
however relevant it may be in determining whether the transaction
was real or a sham, sales of physical properties by shareholders
following a genuine liquidation distribution cannot be attributed
to the corporation for tax purposes.
The oddities in tax consequences that emerge from the tax
provisions here controlling appear to be inherent in the present
tax pattern. For a corporation is taxed if it sells all its
physical properties and distributes the cash proceeds as
liquidating dividends, yet is not taxed if that
Page 338 U. S. 456
property is distributed in kind and is then sold by the
shareholders. In both instances, the interest of the shareholders
in the business has been transferred to the purchaser. Again, if
these stockholders had succeeded in their original effort to sell
all their stock, their interest would have been transferred to the
purchasers just as effectively. Yet, on such a transaction, the
corporation would have realized no taxable gain.
Congress having determined that different tax consequences shall
flow from different methods by which the shareholders of a closely
held corporation may dispose of corporate property, we accept its
mandate. It is for the trial court, upon consideration of an entire
transaction, to determine the factual category in which a
particular transaction belongs. Here, as in the Court Holding
case, we accept the ultimate findings of fact of the trial
tribunal. Accordingly, the judgment of the Court of Claims is
MR. JUSTICE DOUGLAS took no part in the consideration or
decision of this case.
26 U.S.C. § 22(a); Treas.Reg. 103, § 19.22(a)-19.
". . . No gain or loss is realized by a corporation from the
mere distribution of its assets in kind in partial or complete
liquidation, however they may have appreciated or depreciated in
value since their acquisition. . . ."
Treas.Reg. 103, § 19.22(a)-21.
What we said in the Court Holding Co.
case was an
approval of the action of the Tax Court in looking beyond the
papers executed by the corporation and shareholders in order to
determine whether the sale there had actually been made by the
corporation. We were but emphasizing the established principle
that, in resolving such questions as who made a sale, factfinding
tribunals in tax cases can consider motives, intent, and conduct in
addition to what appears in written instruments used by parties to
control rights as among themselves. See, e.g., Helvering v.
Clifford, 309 U. S. 331
309 U. S.
-337; Commissioner v. Tower, 327 U.
It has also been held that, where corporate liquidations are
effected through trustees or agents, gains from sales are taxable
to the corporation as though it were a going concern. See,
e.g., First Natonal Bank of Greeley, Colorado v. United
86 F.2d 938, 941; Treas.Reg. 103, § 19.22(a)-21.