Ringgold Telephone Co. v. Commissioner of Internal Revenue

Ringgold Telephone Company (Ringgold) (plaintiff) was a Georgia corporation that acquired a minority partnership interest in a partnership. Well after acquiring the interest, Ringgold filed an election to cease being treated as a corporation for federal-tax purposes and instead to be treated as an S corporation. Accordingly, Ringgold became subject to tax on any built-in gain tax in the partnership interest on the date the election became effective (the effective date). Six months after the effective date, during the same taxable year, Ringgold sold its partnership interest to the partnership’s controlling partner for approximately $5.2 million. There was not an active market for the partnership’s interest at this time. On its tax return for that year, Ringgold listed the partnership interest as worth $2.6 million on the effective date based on a report it commissioned from an outside appraiser. The commissioner of the Internal Revenue Service (IRS) (defendant) assessed a deficiency in the amount of built-in gain tax that Ringgold owed, claiming that the partnership interest was worth an amount on the effective date equal to the amount it sold for six months later. Evidence was presented by several experts as to the fair value of the interest on the effective date, with estimates ranging from roughly $2.7 million to $5.15 million. Additionally, evidence was presented that the controlling partner had a history of paying inflated prices for certain assets for strategic business purposes.