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Law School Case Brief

Litton Indus. v. Commissioner - 89 T.C. 1086 (1987)

Rule:

The term "dividend" is defined in I.R.C. § 316(a) (1954) as a distribution by a corporation to its shareholders out of earnings and profits. 

Facts:

Litton Industries, Inc.’s (“Litton”) subsidiary, Stouffer Corp. (“Stouffer”), declared a $ 30 million dividend, which it paid to Litton in the form of a promissory note. Two weeks later, Litton announced publicly its interest in disposing of Stouffer. At first, Litton prepared a partial public offering of Stouffer's stock. Then, it decided to make a complete public offering. Prior to this public offering, Nestle Alimentana S.A. Corp. (“Nestle”) bought all of the subsidiary's stock for cash and paid the corporation $ 30 million for the promissory note. Litton sought review of the decision of respondent Commissioner of the Internal Revenue Service, which determined a deficiency in its Federal corporate income tax after finding that the $ 30 million dividend the corporation received from Stouffer was proceeds from the sale of the Stouffer's stock.

Issue:

Was the $30 million sum received by Litton considered a dividend from Stouffer?

Answer:

Yes

Conclusion:

The Court held that the dividend declared by the subsidiary was a dividend for tax purposes. The declaration of the dividend and the sale of the stock were substantially separated in time and the subsidiary could have raised sufficient revenue for the dividend from other avenues, such as a partial public offering or borrowing. The term "dividend" was defined in I.R.C. § 316(a) (1954) as a distribution by a corporation to its shareholders out of earnings and profits. The subsidiary had earnings and profits exceeding $ 30 million at the time the dividend was declared and a dividend could be paid by a note. Further, nothing in the record suggested that the transaction was a sham. Thus, it was not proper for the IRS to find a deficiency in the corporation’s payment of Federal corporate income tax.

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