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Litton Industries, Inc. v. Commissioner
United States Tax Court
89 T.C. 1086 (1987)
Stouffer Corporation (Stouffer) was a wholly owned subsidiary of Litton Industries, Inc. (Litton) (plaintiff). In 1972 Stouffer declared a $30,000,000 dividend from its earnings and profits that it gave to Litton through a promissory note. That same year, Litton and Stouffer executives began planning to sell Stouffer, potentially through a public offering of Stouffer stock. In 1973 Nestle Alimentana S.A. Corporation (Nestle) purchased all of Stouffer’s stock from Litton for $105,000,000, paying $75,000,000 in cash for the outstanding stock and $30,000,000 in cash to pay off the promissory note. The Commissioner of Internal Revenue (the Commissioner) (defendant) determined a deficiency against Litton. The Commissioner argued that the dividend Litton received from Stouffer was a sham transaction meant to reduce the sale price of Stouffer and, therefore, reduce Litton’s tax liability from its sale of Stouffer to Nestle. The Commissioner held that instead of a dividend, the $30,000,000 should be included in the proceeds Litton received from the sale of Stouffer to Nestle. Litton appealed.
Rule of Law
Holding and Reasoning (Clapp, J.)
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