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Intermountain Lumber Company V. Commissioner. Sarah K. Bragg June 18, 2007. Transfer of Property for Stock. Judge Wilson United States Tax Court, 1976 Examines Section 351 Issue: Court determination of “control” as is requisite in applying Section 351. S & W Sawmill, Inc. (1 of 3).
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Intermountain Lumber Company V. Commissioner Sarah K. Bragg June 18, 2007
Transfer of Property for Stock • Judge Wilson • United States Tax Court, 1976 • Examines Section 351 • Issue: Court determination of “control” as is requisite in applying Section 351.
S & W Sawmill, Inc. (1 of 3) • Shook and Wilson partnered to build a saw mill. • Wilson co-guaranteed a $200,000 loan to provide financing. • Shook and Wilson created S & W Sawmill, Inc. and created a contract with the following stipulations regarding ownership of stock:
S & W Sawmill, Inc. (2 of 3) • 1. Dee Shook is to sell to Milo E. Wilson 182 shares of stock in S & W for the agreed price of $500 per share. • 2. Wilson is to pay Shook for said stock, interest only until 1969 at which time principal payments of $15,000 per year are to commence.
S & W Sawmill, Inc. (3 of 3) • 3. As each principal payment is made the proportionate number of shares of stock are to be transferred on the corporate records and delivered to Wilson. • Shook also executed an irrevocable proxy allowing Wilson voting rights in all the stock.
Intermountain Lumber Co. • On July 1, 1967 Intermountain Lumber Co. bought all outstanding shares of S & W stock. • An agreement was made to pay Shook $91,000 more than Wilson.
The Problems Arise • Shook: my transferred assets into S & W were non-taxable under Section 351. • Intermountain: the transfers were taxable because of the lack of pertinent “control” • Intermountain wished to use the higher FMV basis for depreciation purposes.
The Court’s Decision • Shook and Wilson intended to consummate the sale of the said stock. • Shook relinquished the legal right to retain stock. • Therefore he did not have the requisite “control” of company to take advantage of Section 351.
Conclusion • Section 351 – No Gain or Loss to be recognized if property is transferred for stock and that person is then in control. • Simply a transfer of form. • Shook’s transaction was a “Sale” and not simply a transfer of form.