Estate of Jacob S. Kamborian et al. v. Commissioner of Internal Revenue
469 F.2d 219 (1972)
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Rule of Law:
For a group of transferors to be considered a single 'control' group under § 351 of the Internal Revenue Code, their individual transfers of property to a corporation must be part of a single, economically integrated transaction, not separate transfers artificially combined solely to satisfy the 80% control requirement.
Facts:
- Four individuals (the taxpayers) owned approximately 76% of the stock of X corporation and 100% of the stock of Y corporation.
- A trust held approximately 13% of the stock of X corporation.
- For bona fide business reasons, the taxpayers arranged for X corporation to acquire their Y corporation stock.
- The taxpayers transferred all their Y stock to X corporation in exchange for 22,871 additional shares of X stock.
- Pursuant to the same formal agreement, the trust purchased 418 shares of X stock for $5,016 in cash.
- After the transaction, the taxpayers' direct holdings in X corporation increased to 77.3%.
- The combined holdings of the taxpayers and the trust in X corporation exceeded 80% after both parts of the transaction were complete.
Procedural Posture:
- The taxpayers treated the exchange of their Y corporation stock for X corporation stock as a non-taxable event under § 351.
- The Commissioner of Internal Revenue determined that the exchange was a taxable event and assessed tax deficiencies against the taxpayers.
- The taxpayers petitioned the U.S. Tax Court to challenge the Commissioner's determination.
- The Tax Court ruled in favor of the Commissioner, upholding the tax deficiencies.
- The taxpayers (as petitioners) appealed the Tax Court's decision to the U.S. Court of Appeals for the First Circuit.
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Issue:
Does a transaction qualify as a tax-free exchange under Internal Revenue Code § 351 when the 80% control requirement is met only by including a person whose contribution of property is relatively small and made primarily to enable the other transferors to obtain tax-free treatment?
Opinions:
Majority - Aldrich, J.
No. A transaction does not qualify for tax-free treatment under § 351 where the 80% control threshold is met by including a transferor whose participation lacks economic substance and is intended solely to facilitate tax avoidance for others. The purpose of § 351 is to defer tax recognition where there has been a 'mere change in the form of ownership' and the taxpayer has not truly 'cashed in.' For multiple transfers to be aggregated, they must be part of a single, economically connected transaction. In this case, the taxpayers exchanged their Y stock for X stock, while the trust made a very small, unrelated cash purchase of X stock. The Tax Court found the trust's primary motive was to help the taxpayers avoid taxes. This artificial 'concatenation' of transfers frustrates the statute's purpose and cannot be used to make a single transaction out of otherwise unrelated events. Allowing such a structure would render the control requirement meaningless.
Analysis:
This decision reinforces the 'substance over form' doctrine in tax law, specifically within the context of § 351 corporate formations and reorganizations. The court established that a mechanical satisfaction of the statutory requirements is insufficient; the transactions must be economically integrated and not merely structured to achieve a tax benefit. This precedent serves as a warning against using accommodation parties—those who participate in a transaction with a small, unrelated contribution solely to help others meet a statutory threshold. Future transactions seeking § 351 protection will be scrutinized to ensure that all members of the purported 'control group' have a substantive and interconnected role in the exchange.
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