King Enterprises, Inc. v. The United States
418 F.2d 511 (1969)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A stock acquisition followed by a pre-planned, though not contractually required, merger of the acquired corporation into the acquiring corporation will be treated as a single, integrated transaction qualifying as a Type A reorganization under the step transaction doctrine's "end result" test.
Facts:
- King Enterprises, Inc. was one of 11 shareholders in Tenco, Inc., a successful instant coffee producer.
- Minute Maid Corporation, seeking to diversify its business, made several proposals to acquire Tenco.
- On September 3, 1959, Tenco shareholders, including King Enterprises, entered a "Purchase and Sale Agreement" to transfer their Tenco stock to Minute Maid.
- In exchange for their stock, the Tenco shareholders received a combination of cash, promissory notes, and Minute Maid stock, with the stock comprising over 50% of the total consideration.
- Prior to the acquisition, Minute Maid's management had internally discussed merging its subsidiaries as a cost-saving measure.
- Shortly after the stock acquisition, on December 10, 1959, Minute Maid's board of directors approved a formal plan to merge Tenco into Minute Maid.
- Approximately seven to eight months after the initial stock transfer, Tenco was officially merged into Minute Maid.
Procedural Posture:
- King Enterprises, Inc. filed its federal income tax return for fiscal year 1960, treating a transaction as a corporate reorganization and cash received as a dividend subject to the 85% intercorporate dividends received deduction.
- The District Director of Internal Revenue assessed a tax deficiency, determining the transaction was a taxable sale of a capital asset.
- King Enterprises paid the assessed deficiency.
- King Enterprises filed suit against the United States in the U.S. Court of Claims seeking a refund of the taxes paid.
- The case was referred to a Trial Commissioner, who issued a report and opinion recommending a finding in favor of King Enterprises.
- The United States initially filed a notice of intention to except to the commissioner's report but later withdrew it.
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 corporation's acquisition of another company's stock for cash, notes, and its own stock, followed shortly by a merger of the acquired company into the acquirer, constitute a single transaction qualifying as a tax-free Type A reorganization under the step transaction doctrine?
Opinions:
Majority - Per Curiam (adopting the opinion of Commissioner Bernhardt)
Yes, the stock acquisition and subsequent merger constitute a single transaction qualifying as a Type A reorganization. The court applies the 'end result' test of the step transaction doctrine, which integrates formally separate transactions when they appear to be component parts of a single transaction intended from the outset to reach an ultimate result. The court distinguished the Supreme Court's decision in Commissioner v. Gordon, holding that its 'binding commitment' requirement was a narrow rule applicable to Type D reorganizations involving divestiture of control, not a universal test for the step transaction doctrine. Based on the facts, including Minute Maid's pre-existing consideration of mergers for business efficiency and the significant tax and asset basis advantages of merging Tenco, the court inferred that the merger was Minute Maid's intended goal from the beginning. Therefore, the initial stock purchase was merely a transitory step in a unified plan of reorganization, not an independent sale.
Analysis:
This case is significant for solidifying the 'end result' test as a key component of the step transaction doctrine, particularly in the context of corporate reorganizations. It limited the applicability of the 'binding commitment' test from Commissioner v. Gordon, preventing it from nullifying the broader substance-over-form principles of the step transaction doctrine. The decision affirms that courts can infer intent from objective facts and business logic, even without an explicit contractual obligation linking the steps. This provides a framework for both taxpayers and the IRS to recharacterize multi-step transactions based on their underlying economic substance rather than their formal structure.
Unlock the full brief for King Enterprises, Inc. v. The United States