Associated Wholesale Grocers, Inc. v. United States

In 1976 Super Market Developers, Inc., purchased 99.97 percent of the outstanding shares of Weston Investment Co. (Weston), a corporation that owned supermarkets. Super Market Developer’s parent corporation, Associated Wholesale Grocers, Inc. (Associated) (plaintiff) decided to sell some of its subsidiary corporations. A manager of one of Weston’s grocery stores, Thomas Elder, purchased a subsidiary of Weston, Weston Market, in 1980. Elder created a corporation, Elder, Inc., for the transaction. To effect the merger, Weston was merged into Elder, Inc., and subsequently Weston was terminated. Super Market Developers then repurchased all the assets it sold to Elder, Inc., except those related to Weston Market. Associated treated the transaction as a sale and declared a capital loss of approximately $2,350,000. The Internal Revenue Service (IRS) (defendant) denied the loss, arguing that the transaction was not a sale but was a liquidation of Associated’s subsidiary. As a result, the liquidation was nonrecognizable under § 332 of the Internal Revenue Code. The IRS also assessed a deficiency against Associated. Associated filed a lawsuit against the IRS in federal district court, arguing that the transaction did not fall under § 332, because Elder, Inc., owned Weston at the time of its liquidation and before Associated repurchased Weston’s assets. The district court granted summary judgment in favor of the IRS. Associated appealed.