Tsn liquidating corporation
TSN paid the additional tax due as a result of such treatment by the Internal Revenue Service, filed a claim for a refund and subsequently instituted this action against the Internal Revenue Service. On audit, the Internal Revenue Service took the position that Waterman had realized a long-term capital gain of ,800,000 on the sale of the capital stock of the subsidiaries and increased its taxable income accordingly.
Union Mutual thereupon contributed to the capital of CLIC $1,120,000 in municipal bonds and purchased from CLIC additional capital stock of CLIC for $824,598 in cash paid to CLIC. As finally consummated, the dividends and the sale of the capital stock of the subsidiaries took the following form: (3) Thirty minutes later, after the closing of the sale of the capital stock of the subsidiaries had occurred, Pan-Atlantic held a special meeting of its new Board of Directors, and the Board authorized Pan-Atlantic to borrow $2,800,000 from Mc Lean and a corporation controlled by Mc Lean.
The final purchase price paid by Union Mutual to the selling stockholders of CLIC was $823,822, of which TSN's share was $747,436. The Board of Directors of Waterman rejected Mc Lean's offer, but authorized Waterman's president to submit a counter proposal providing for the sale of all the capital stock in the subsidiaries for $700,000, but only after the subsidiaries paid dividends to Waterman in the aggregate amount of $2,800,000.
On May 20, 1969, the closing was held and Union Mutual purchased substantially all the outstanding capital stock of CLIC, including the shares held by TSN. Because the treasury regulations on consolidated returns provided that the dividends received from an affiliated corporation are exempt from tax, a sale of capital stock of the subsidiaries for $700,000, after a dividend payment to Waterman by the subsidiaries of $2,800,000, would, at least in theory, have produced no taxable gain.
624 F.2d 1328 80-2 USTC P 9640 TSN LIQUIDATING CORPORATION, INC., Plaintiff-Appellant,v. Accordingly, the (Stock Purchase Agreement) required CLIC to dispose some of the investment portfolio assets. During these negotiations, the representatives of the purchasers and of the sellers could not agree upon the value of certain assets (including a contingent receivable referred to as the Cabot payment). The (purchasers) did not agree to pay the stockholders $6.50 or any other sum from the surplus. It declined the original offer and proposed to cast the sale of the stock in a two step transaction. The Internal Revenue Service also cites Basic as authority for the disallowance of dividend treatment for the distribution of the unwanted assets in this case.
The management of CLIC regarded the Union Mutual offer as a good one, and tried without success to get Union Mutual to take the entire investment portfolio. In Coffey, the principal case relied upon by TSN, the taxpayers owned the stock of Smith Brothers Refinery Co., Inc. Representatives of the purchasers and representatives of the sellers examined and discussed the various assets owned by Smith Brothers Refinery Co., Inc., and the liabilities of the company, with a view to reaching an agreement upon the fair market value of the stock. Waterman recognized that since its basis for tax purposes in the stock was $700,180, a taxable gain of approximately $2,800,000 would result from the sale. We view the sham aspect the hollow sound of the transaction described in Waterman as one of the critical aspects of that decision, and we decline to extend the Waterman rule to a case which admittedly does not involve a sham and which, in other important respects, is factually different from Waterman.