Intermountain Lumber Company V. Commissioner

Sarah K. Bragg

June 18, 2007

Transfer of Property for Stock

Judge WilsonUnited 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.