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Intermountain Lumber Co. & Subsidiaries, etc. v. Commissioner - 65 T.C. 1025 (1976)


I.R.C. § 351 provides, in part, that no gain shall be recognized if property is transferred to a 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 of the corporation. "Control" is defined for this purpose in I.R.C. § 368(c) as ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation.


Respondent Commissioner of Internal Revenue (Commissioner) found deficiencies in the tax returns of Intermountain Co., previously known as Intermountain Lumber Co., and its affiliates, arising out of the purchase of petitioner sawmill by petitioner company from the two incorporators, transferee and transferor. Prior to issuance of petitioner sawmill's stock, the incorporators agreed that half the shares of the stock would be owned outright by the transferee incorporator, while the other half were in escrow subject to transfer upon payment of the purchase price by the transferor incorporator pursuant to a sale agreement. Petitioners filed an appeal seeking review of the decision. 


Was the transferee incorporator in control of petitioner sawmill after the transfer?




The court reversed the Commissioner's decision because the initial transaction between the incorporators was a sale as there was more than a mere change in form. When the shares were acquired by the incorporators from the corporation, the transferee incorporator relinquished his control over the shares. The transferor incorporator did not own the requisite percentage of stock immediately after the exchange with the corporation within the meaning of I.R.C. § 368(c) to control the corporation as required for nontaxable treatment under I.R.C. § 351.

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