Coady v. Commissioner

M. Christopher and Edmund Coady (plaintiff) owned Christopher Construction Company. Following disagreements between Christopher and Coady, the two entered into an agreement for the division of Christopher Construction into separate construction enterprises. Christopher Construction organized E. P. Coady and Co., to which it transferred roughly half of its assets. E. P. Coady and Co. transferred all its stock to Christopher Construction, which then distributed the stock to Coady. This stock had a value of $140,000. In exchange, Coady transferred his stock in Christopher Construction, in which he had a basis of $72,500, to Christopher. Both entities remained actively engaged in the construction business. Coady reported no gain on his federal income-tax return, citing Internal Revenue Code § 355, The provision permitted tax-free treatment of a division of businesses formerly operated by a single corporation into two corporations. This tax-free treatment required both the parent and spin-off corporations to be engaged in the active conduct of the same trade or business in which they were engaged for the previous five years. However, the Commissioner of Internal Revenue (the commissioner) (defendant) determined that Coady had indeed realized a gain of $67,500. The commissioner reasoned that § 355 forbade tax-free treatment of transactions representing the division of a single trade or business, and that Christopher Construction had been engaged in only one business—construction—prior to the transaction. Coady sought a redetermination in the United States Tax Court.