Rendina v. Commissioner
1996 Tax Ct. Memo LEXIS 412, 72 T.C.M. 474, 1996 T.C. Memo. 392 (1996)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A corporate distribution of all its assets to a shareholder followed by the cessation of all business activities constitutes a de facto liquidation for tax purposes, even if the corporation does not formally dissolve or adopt a written plan of liquidation. The substance of the transaction and the manifest intent of the parties to wind up corporate affairs will control over the lack of formal procedures.
Facts:
- In 1986, Paul A. Rendina, a CPA, and Thomas J. Ackerman, a contractor, formed Wood Street Apartments, Inc. (WSAI) to construct and sell 18 condominium units.
- WSAI financed the project through a bank loan, approximately $41,200 deposited by Rendina, and $68,000 in loans from three of Rendina's accounting clients (the Fosses, Navars, and Posas).
- By the end of 1988, WSAI had sold 16 of the 18 condominium units, but the project was less profitable than anticipated due to various unexpected costs.
- With two units remaining unsold, Rendina and Ackerman orally agreed that WSAI would transfer title to the two units to Rendina.
- In consideration for the units, Rendina agreed to assume WSAI's outstanding liabilities of $68,000 to the three client-lenders and to discharge the 'debt' WSAI owed him for his cash deposits.
- In December 1988, WSAI transferred the two remaining condominium units to Rendina.
- Following the transfer of its last two assets to Rendina, WSAI ceased to be a going concern, held no other business assets, and stopped all business operations.
- WSAI did not formally dissolve, but its corporate charter was later revoked in 1990 for failure to file and pay state franchise taxes.
Procedural Posture:
- Paul and Janet Rendina filed a joint 1988 federal income tax return, but did not report any income or gain from the receipt of the two condominium units.
- The Commissioner of Internal Revenue determined a tax deficiency, asserting that the transfer of the units was a taxable dividend of $135,800, and also determined additions to tax for negligence and substantial understatement.
- The Rendinas (petitioners) challenged the Commissioner's determination by filing a petition in 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 a corporation's distribution of its final assets to a shareholder, after which the corporation ceases all business activity, constitute a de facto liquidation for tax purposes even if no formal dissolution procedures are followed?
Opinions:
Majority - Judge Beghe
Yes, the distribution of the corporation's final assets under these circumstances constitutes a de facto liquidation. A status of liquidation exists when a corporation ceases to be a going concern and its activities are merely for the purpose of winding up its affairs. The court found that the substance of the transaction, rather than its form, dictates its tax treatment. Applying a three-part test from Estate of Maguire, the court found (1) a manifest intention to liquidate, shown by the shareholders' agreement to distribute the final assets in satisfaction of liabilities; (2) a continuing purpose to terminate corporate affairs, as WSAI ceased all operations; and (3) corporate activities directed toward this objective, as WSAI sold or distributed all its assets. The lack of a formal liquidation plan, corporate resolution, or state law dissolution is not determinative. As a liquidating distribution, the transaction is treated as an exchange of stock under § 331, resulting in a capital gain for Rendina, calculated as the fair market value of the condos, less liabilities assumed, less his adjusted basis in the stock.
Analysis:
This decision solidifies the application of the 'substance over form' doctrine to corporate liquidations in tax law. It establishes that a liquidation can be recognized for tax purposes based on the economic reality of the corporation's cessation, even without adherence to legal formalities. This provides a basis for shareholders in informally wound-down corporations to claim capital gains treatment on final distributions, which is often more favorable than dividend treatment. However, the case also serves as a cautionary tale, as the court still upheld negligence and understatement penalties, demonstrating that while the substantive treatment may be favorable, failure to properly document and report the transaction carries significant risk.
