Estate of Kamborian v. Commissioner

The taxpayers (plaintiffs) were individuals who owned 76 percent of X Corporation’s stock. Two of the taxpayers were trustees of a trust that held an additional 13 percent (50,000 shares, worth $600,000) of X’s stock. The taxpayers also individually owned 100 percent of Y Corporation’s stock, none of which was owned by the trust. X acquired all of Y’s stock in exchange for about 23,000 shares of X (out of approximately 400,000 total outstanding X shares), which increased the taxpayers’ holdings of X to around 77 percent. As part of the acquisition agreement, the trust purchased 418 shares of X for $5,000. By considering these transfers as a single transaction and combining the trust’s holdings of X with their own, the taxpayers claimed that they possessed over 80 percent of X’s stock after the transfer and thus that the transaction was eligible for nonrecognition, or tax-free, treatment pursuant to § 351(a) of the Internal Revenue Code. However, the Commissioner of Internal Revenue (the Commissioner) (defendant) determined that the trust’s transfer was not part of the same transaction as required by § 351(a) because (1) the trust did not formerly own Y stock, (2) the 418 shares of X purchased by the trust were of relatively small value compared to the 50,000 shares of X that the trust already owned, and (3) the trust’s main purpose for its transfer was to obtain nonrecognition treatment for the taxpayers. The tax court ruled in the Commissioner’s favor. The taxpayers appealed.