Elliott v. Commissioner of Internal Revenue

Randall Elliott (plaintiff) was the sole shareholder of Centrifix Corporation, which was involved in the engineering of liquid and gas purification. Centrifix purchased property in 1946. From 1946 until 1950, half the property was occupied and used by Centrifix, and the remaining half was rented to third parties. Centrifix did not reflect the net income or loss of the rental of the property on its books, and the gross income was merely 8 percent of the cost of the property and was only a small part of the total income of Centrifix. In 1950, Centrifix sold the property and acquired another. A wholly owned subsidiary of Centrifix, Centrifix Management Corporation (Management), was created and acquired the new property from Centrifix in a tax-free exchange in 1950. From 1950 to 1954, Management owned and operated the real estate, renting it to Centrifix and to third parties. In 1954, Elliott exchanged shares of cumulative preferred stock of Centrifix for all the common stock of Management, the discharge of debt owed by Elliott to Centrifix, and cancellation of past-due dividends on the preferred stock. Centrifix had no accumulated earnings and profits in the year of this transaction. Elliott treated the receipt of Management stock as a nontaxable split-off under § 355 of the Internal Revenue Code. The commissioner of the Internal Revenue Service (defendant) assessed additional tax, treating the receipt of the shares as taxable long-term capital gain. Elliott appealed the assessment to the United States Tax Court.