Kamborian v. Commissioner
1971 U.S. Tax Ct. LEXIS 94, 56 T.C. 847 (1971)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Under Treasury Regulation § 1.351-1(a)(1)(ii), stock issued for property of relatively small value in comparison to stock already owned by the transferor will not be treated as issued for property if the primary purpose of the transfer is to qualify the exchanges of other persons for nonrecognition treatment under I.R.C. § 351.
Facts:
- Jacob S. Kamborian and several other individuals (the 'petitioners') owned stock in Campex corporation.
- The petitioners planned to transfer their Campex stock to International corporation in exchange for International stock.
- For this exchange to be tax-free under I.R.C. § 351, the group of transferors needed to own at least 80% of International's stock immediately after the transaction.
- The petitioners' exchange alone would have given them only 77.3% of International's stock, failing the 80% control test.
- The Elizabeth Kamborian Trust, which already owned a significant amount of International stock, was managed by trustee Michael Becka, one of the petitioners.
- As part of an integrated plan, the Elizabeth Kamborian Trust transferred $5,016 in cash to International in exchange for a small number of additional shares.
- If the Trust's transfer was counted, the entire transferor group's ownership would exceed the 80% control threshold, qualifying the entire transaction for nonrecognition of gain.
Procedural Posture:
- The Commissioner of Internal Revenue determined deficiencies in the petitioners' federal income taxes arising from their exchange of Campex stock for International stock.
- The petitioners challenged the Commissioner's determination by filing a petition with the United States Tax Court.
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 Treasury Regulation § 1.351-1(a)(1)(ii) permit the Commissioner to disregard a transfer of property for stock when the property's value is small relative to the transferor's existing holdings and the primary purpose of the transfer is to enable other transferors to meet the 80% control requirement for nonrecognition of gain under I.R.C. § 351?
Opinions:
Majority - Eatoi, Judge
Yes. Treasury Regulation § 1.351-1(a)(1)(ii) is a valid regulation that permits the Commissioner to disregard a nominal transfer made primarily to qualify other exchanges under I.R.C. § 351. The court first held that the regulation is a valid exercise of Treasury authority. It does not improperly reinstate the pre-1954 'proportionate interest' test, as it is narrower in scope and effect; it merely disqualifies a specific transferor's 'token exchange' rather than voiding the entire transaction. Its purpose is to enforce the substance of § 351 over its mere form. The court then found the regulation applicable to the facts. The petitioners' argument to attribute the trust's shares to the individual trustees was rejected, as trustees lack the beneficial interest which represents true economic ownership. The court also determined as a matter of fact that the 'primary purpose' of the trust’s small cash transfer was to qualify the other stockholders' exchanges. The trustee's justifications of avoiding stock dilution or making a 'good investment' were not credible, given the minimal impact on dilution and the integrated planning of the transaction to achieve tax-free status.
Analysis:
This case affirms the 'substance over form' doctrine in the context of I.R.C. § 351 corporate formations. It validates the Treasury's authority to create anti-abuse regulations that prevent taxpayers from satisfying the literal requirements of a statute through transactions that lack economic substance. The decision puts taxpayers on notice that accommodation or 'token' transfers by existing shareholders will be scrutinized and likely disregarded if their main purpose is to enable other parties to gain a tax benefit. Future corporate structuring under § 351 must ensure that all parties included in the 'control' group make a substantive contribution of property for a bona fide business purpose.
