Kamborian v. Commissioner

Jacob S. Kamborian was the founder and president of International Shoe Machine Corp. (International). Michael Becka was International’s vice president and general manager. Jacob’s daughter and Becka were the trustees of the Elizabeth Kamborian Trust (the trust), established by Jacob for his wife, Elizabeth. Jacob, Becka, Jacob’s son and daughter, and the trust (collectively, the shareholders) (plaintiffs) owned shares of International. All the shareholders except the trust owned shares in Campex. The Campex shareholders exchanged their Campex stock for International Stock. After the transaction, they collectively owned 77.3 percent of International’s outstanding stock. To satisfy the requirements of § 368(c) of the Internal Revenue Code, and in turn qualify for nonrecognition of the exchange under § 351 of the Internal Revenue Code, the transferors needed to own at least 80 percent of International’s stock. The trust purchased $5,000 of unissued International stock to help the Campex shareholders reach the § 368(c) requirement. On their federal income-tax returns, the shareholders did not report the stock transfers. The shareholders believed that they formed one transferor group that qualified for § 351 nonrecognition. The Commissioner of Internal Revenue (the Commissioner) (defendant) disallowed the nonrecognition. The Commissioner reasoned that Treasury Regulation 1.351-1(a)(I)(ii) (the treasury regulation) disallowed the trust from being included in the transferor group because the trust’s transfer was an accommodation transfer. The shareholders appealed.