American Bantam Car Co. v. Commissioner

American Bantam Car Company (corporation) (plaintiff) was incorporated and exchanged 300,000 shares of common stock for the assets and liabilities of a defunct company, plus $500. No formal written plan existed; an informal agreement among the shareholders held for the exchange to occur and then for 90,000 shares of preferred stock to be marketed to the public by underwriters, who would receive up to 100,000 shares of common stock in addition to commissions. Five days after the exchange occurred, a written agreement was executed between the shareholders and the underwriters in accord with the terms of the informal agreement. Approximately 15 months later, the underwriters had sold 83,618 shares of preferred stock and received 87,900 shares of common stock as commission. On its tax returns, the corporation reported a basis for its assets in the year of incorporation and the following five years of $145,000; for the next two years, the basis used was $840,800. The commissioner for the Internal Revenue Service (defendant) assessed additional taxes, contending that the basis of the assets was carryover basis because the corporation received the assets from the shareholders in a tax-free exchange. The corporation appealed the assessment to the United States Tax Court, contending that the written agreement with the underwriters and the exchange of assets for shares were all part of the same plan and thus, under the step-transaction doctrine, must be considered as one transaction. Therefore, because the original shareholders no longer controlled the corporation after the sale of the preferred stock and issuance of the commission, the transaction would not qualify as a tax-free exchange, and carryover basis would not apply to the assets.