Granite Trust Co. v. United States

Building Corporation (Building Corp) was a wholly owned subsidiary of Granite Trust Company (Granite) (plaintiff). Granite financed Building Corp’s operations in exchange for all of Building Corp’s stock. Subsequently, because of pressure to decrease its accounting of the value of the stock on its books, Granite planned to liquidate Building Corp. To avoid the nonrecognition treatment provided by § 332 of the Internal Revenue Code, and thus to be able to recognize the loss on the eventual liquidation, Granite sold and gifted over 20 percent of its Building Corp stock. Granite originally purchased the stock for $100 per share, but the sales were made at $65.50 per share. Through these transactions, the purchasers and recipient received legal title of the stock and nothing prevented the stock from being included in their assets in the event of a bankruptcy, death, or debt collection. The Commissioner of Internal Revenue (the Commissioner) (defendant) determined that Granite’s purported sales and gift transactions should be disregarded for purposes of applying § 332. The Commissioner argued in part that the purported sales and gift did not actually function as such, because Granite still maintained beneficial ownership of the stock even though legal title had been passed to the recipients. The district court agreed with the Commissioner, and Granite appealed.