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liquidations. In Court Holding, the Supreme Court upheld this
Court's factual finding that the liquidation of the corporation
was not genuine and never occurred for Federal income tax
purposes. Therefore, the corporation continued to own the
apartment building for tax purposes, and the shareholders were
mere conduits used to pass title. In contrast, the Supreme Court
in Cumberland Pub. Serv. upheld the factual finding of the Court
of Claims that a genuine liquidation had occurred, and therefore
the subsequent sale of assets by the shareholders was respected.
Court Holding and Cumberland Pub. Serv. also provide a
broader principle that helps to explain why a corporate
liquidation is respected in one setting and disregarded in
another.18 The substance of a transaction can be found in the
negotiations leading up to the closing. Where the negotiations
have culminated in an understanding that is inconsistent with the
form of the final transaction, that form is said to be
inconsistent with the substance, and the substance must prevail.
Such is the case when a corporation negotiates all the terms and
conditions of a sale of its assets, and then, at the last minute,
distributes assets to its shareholders and the shareholders'
names are conveniently inserted as sellers; the substance of the
negotiations will prevail, and the corporation will be regarded
as the seller for Federal income tax purposes.
18 See Isenbergh, “Musings on Form and Substance in
Taxation”, 49 U. Chi. L. Rev. 859, 871-874 (1982), for a
discussion of the narrow and broad interpretations.
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