George L. Riggs, Inc. v. Commissioner
64 T.C. 474; 1975 U.S. Tax Ct. LEXIS 122 (1975)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A plan of liquidation for purposes of IRC § 332 is adopted on the date of the formal shareholder resolution authorizing it, not at an earlier time when liquidation is merely contemplated or intended. A parent corporation may legitimately structure transactions, such as redeeming minority shares, to meet the 80% stock ownership threshold required for non-recognition of gain before formally adopting a plan of liquidation.
Facts:
- George L. Riggs, Inc. (Riggs) owned 72.13% of the common stock and 35.6% of the preferred stock of Standard Electric Time Co.
- On December 27, 1967, Standard's shareholders approved the sale of substantially all its assets, and the company was renamed Riggs-Young Corp. The shareholder notice mentioned that the company "contemplated" a future offer to purchase minority-held common stock.
- In early 1968, Riggs-Young redeemed all of its outstanding preferred stock for business reasons, including eliminating an 8% dividend.
- On April 26, 1968, Riggs-Young made a tender offer to purchase the common stock of all its shareholders except for Riggs and its principal, Frances Riggs-Young. The offer letter stated that if successful, the directors would "consider liquidation."
- By May 9, 1968, enough minority shares had been redeemed for Riggs's ownership of Riggs-Young common stock to exceed 80%.
- On June 20, 1968, the board of directors and shareholders of Riggs-Young held separate meetings and formally voted to adopt a plan of complete liquidation and dissolution.
Procedural Posture:
- George L. Riggs, Inc. filed its Federal income tax return for the taxable year ended March 31, 1969, reporting gain from the liquidation but not recognizing it under the provisions of IRC § 332(a).
- The Commissioner of Internal Revenue determined a deficiency in petitioner’s income tax for that year in the amount of $589,882.28.
- George L. Riggs, Inc. petitioned the United States Tax Court for a redetermination of the deficiency.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a parent corporation's acquisition of the requisite 80% stock ownership in a subsidiary through a tender offer to minority shareholders, an action taken with the intent to qualify for tax-free treatment under IRC § 332, constitute an informal adoption of the plan of liquidation prior to reaching the 80% threshold?
Opinions:
Majority - Drennen, Judge
No. The plan of liquidation was not adopted until the formal shareholder vote, after the parent corporation had met the 80% ownership requirement. A mere intent to liquidate or taking preliminary steps to meet statutory requirements for non-recognition of gain does not constitute the adoption of a plan of liquidation. The court found that IRC § 332 is an elective provision, meaning taxpayers can deliberately structure transactions to meet its requirements. The earlier communications mentioning that liquidation was 'contemplated' or would be 'considered' did not represent a definitive determination to liquidate but were instead possibilities contingent on other events. The court distinguished a mere general intent to liquidate, which is not sufficient, from the actual adoption of a plan, which requires a concrete decision, typically embodied in a formal shareholder resolution. Therefore, the plan was adopted on June 20, 1968, at which point Riggs owned over 80% of the stock, and the liquidation qualified for non-recognition treatment under § 332.
Analysis:
This case solidifies the principle that taxpayers can engage in strategic tax planning to qualify for favorable treatment under IRC § 332. It establishes that the 'adoption of a plan of liquidation' is a specific, formal event, not an amorphous concept tied to the earliest manifestation of intent. The decision provides a clear safe harbor for corporations aiming to execute a tax-free subsidiary liquidation, allowing them to first 'clean up' the subsidiary's capital structure by redeeming minority interests to meet the 80% threshold without fear that these preliminary steps will be collapsed by the IRS to disqualify the transaction. It strongly affirms the elective nature of § 332 and protects a taxpayer's right to arrange their affairs to minimize tax liability.
Unlock the full brief for George L. Riggs, Inc. v. Commissioner