Kimbell-Diamond Milling Co. v. Comm'r
14 T.C. 74; 1950 U.S. Tax Ct. LEXIS 292 (1950)
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Rule of Law:
When a corporation purchases the stock of another corporation with the sole and explicit intention of acquiring its underlying assets, and promptly liquidates the target corporation, the transaction is treated in substance as a direct purchase of the assets, and the acquirer's basis in those assets is its cost for the stock.
Facts:
- On or about August 13, 1942, Kimbell-Diamond Milling Company's flour mill was destroyed by fire.
- Kimbell-Diamond collected $124,551.10 in insurance proceeds and intended to replace the mill, but wartime restrictions made new construction impractical.
- The directors of Kimbell-Diamond identified that Whaley Mill & Elevator Co. owned comparable physical properties and its stock could be purchased.
- On December 26, 1942, Kimbell-Diamond's board passed a resolution authorizing the purchase of all of Whaley's stock with the explicitly stated purpose of liquidating Whaley 'as soon as practicable' to acquire its mill assets.
- On the same day, Kimbell-Diamond purchased 100% of Whaley's stock for $210,000.
- Three days later, on December 29, 1942, an agreement was executed to completely liquidate Whaley.
- On December 31, 1942, just five days after the stock purchase, Whaley was formally dissolved and all its assets were transferred to Kimbell-Diamond.
Procedural Posture:
- Kimbell-Diamond Milling Company filed its tax returns for the fiscal years ended May 31, 1945 and 1946.
- The Commissioner of Internal Revenue (respondent) determined deficiencies in Kimbell-Diamond's income and excess profits taxes for those years.
- The deficiencies were primarily based on the Commissioner's reduction of the petitioner's basis in the assets it acquired from Whaley Mill & Elevator Co., which in turn lowered allowable depreciation deductions.
- Kimbell-Diamond (petitioner) challenged the deficiencies by filing a petition in the Tax Court of the United States.
- Before the Tax Court, petitioner argued that the issue was already decided in a prior case (res judicata) and that the transaction was a tax-free liquidation entitling it to a carryover basis from Whaley.
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Issue:
Does a taxpayer's purchase of a target corporation's stock, followed by a pre-planned and immediate liquidation of the target to acquire its underlying assets, constitute a single, integrated transaction treated as a direct purchase of assets for tax basis purposes, rather than a tax-free subsidiary liquidation?
Opinions:
Majority - Judge Black
Yes, the transaction constitutes a single, integrated purchase of assets. The court held that where a stock purchase is merely a step in a preconceived plan to acquire the underlying assets of the target corporation, the substance of the transaction governs its tax consequences, not its form. The court looked to Kimbell-Diamond's own board minutes and the liquidation agreement, which unequivocally showed that the 'only intention petitioner ever had was to acquire Whaley’s assets.' Citing precedent like Commissioner v. Ashland Oil & Refining Co., the court applied the step transaction doctrine, refusing to separate the stock purchase from the subsequent liquidation. Because the steps were integrated parts of a single plan to acquire assets, the transaction was not a tax-free liquidation under section 112(b)(6). Therefore, Kimbell-Diamond's basis in the acquired assets is its cost for the Whaley stock, not the carryover basis from Whaley.
Analysis:
This case establishes the influential 'Kimbell-Diamond doctrine,' a specific application of the broader substance-over-form and step transaction doctrines in corporate acquisitions. It provides a key precedent for disregarding the form of a transaction (a stock purchase followed by a liquidation) in favor of its substance (an asset purchase) when the acquirer's intent is clear. This holding prevents taxpayers from selectively achieving a tax-free liquidation while simultaneously getting a cost basis akin to a direct asset purchase. While this judicial doctrine was later largely superseded by the enactment of Internal Revenue Code § 338, which allows an election to treat a stock purchase as an asset purchase, the underlying principle of integrating steps to divine the true nature of a transaction remains a fundamental concept in tax law.
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