Dover Corporation v. Commissioner

Dover Corporation (Dover) (plaintiff) was the parent company of Dover UK (DUK). H&C was a wholly owned subsidiary of DUK and, thus, an indirect subsidiary of Dover. Dover and DUK agreed to sell H&C’s stock to another company (Thyssen). After all escrow conditions were satisfied, the transaction was completed, and all of DUK’s shares of H&C were transferred to Thyssen. Dover subsequently sought and was granted an extension of time by the Internal Revenue Service (IRS) (defendant) to file paperwork to retroactively treat H&C as a “disregarded entity” under the applicable Treasury regulations, effective immediately before the sale of H&C stock to Thyssen. As a result of the retroactive reclassification of H&C as a disregarded entity, the sale of H&C’s stock to Thyssen was deemed a liquidation of H&C’s assets for tax purposes. On Dover’s tax returns, Dover reported the gains from the sale of H&C’s assets as though Dover’s subsidiary, DUK, was actually engaged in H&C’s business at the time of the sale and thus reported no taxable foreign personal holding company income (FPHCI). The IRS issued a deficiency notice, asserting that the sale of H&C’s assets did not constitute a sale of property used or held for use in DUK’s business, and thus, Dover received taxable FPHCI. The IRS also argued that Dover’s election to treat H&C as a disregarded entity could lead to abuse of the Treasury regulations. Dover petitioned for judicial review of the alleged tax deficiency.