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Petitioner granted Lewis and Tate an ownership interest in SPS as
an inducement to assist petitioner in managing the business.
For tax purposes, the transaction structure implied by the
facts consists of three steps: (1) The transfers of assets by
WIS to SPS in exchange for SPS stock; (2) the distribution by WIS
of SPS stock to petitioner;5 and (3) the transfer by petitioner
to Lewis and Tate of two-thirds of the SPS stock in consideration
of their agreement to render services to SPS. Petitioner’s basis
in the one-third of the SPS stock he retained depends upon
whether he received the stock in a distribution governed by
section 301 or, pursuant to a reorganization, in a distribution
governed by section 354 or 355. If steps 1 and 2 constituted a
reorganization, then petitioner’s basis in the SPS stock
distributed to him would be determined under section 358 by
reference to his basis in WIS stock. If steps 1 and 2 did not
constitute a reorganization, then petitioner’s basis in the SPS
stock distributed to him would be equal to the fair market value
of the stock under section 301(d). In either case, petitioner’s
disposition of two-thirds of the SPS stock in step 3 did not
5 Since the parties agree that both WIS and SPS were S
corporations for all taxable years at issue, there is no need to
consider what effect, if any, WIS’s transitory ownership of SPS
stock in the course of the business reincorporation transaction
would have had on each corporation’s eligibility for S
corporation status. See secs. 1361(b)(1)(B), (2)(A), (c)(6),
1362(d)(2), (f); see also Haley Bros. Constr. Corp. v.
Commissioner, 87 T.C. 498, 516-517 (1986); Rev. Rul. 72-320,
1972-1 C.B. 270.
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