The Edna Louise Dunn Trust v. Commissioner

American Telephone and Telegraph Company (AT&T) was the parent company of several subsidiaries. AT&T owned nearly all outstanding stock in these subsidiaries. However, in the case of Pacific Telephone and Telegraph Company (Pacific), AT&T owned 85 percent of the stock. In a 1982 merger, AT&T acquired the remaining 15 percent of Pacific stock. The transaction was treated as taxable. Later that year, a longstanding antitrust suit against AT&T was resolved by an agreement under which AT&T would be divested of certain holdings in the subsidiaries, which were each placed in one of seven regional holding companies. One of these holding companies was PacTel Group (PacTel). Pursuant to a plan of reorganization, AT&T transferred all Pacific stock to PacTel in exchange for PacTel stock—an exchange recognized by the government as a nontaxable reorganization. The PacTel stock was then distributed to AT&T’s stockholders, who received one share of PacTel for every share of AT&T. The Edna Louise Dunn Trust (the trust) (plaintiff) received 40 shares of PacTel stock. The Commissioner of Internal Revenue (defendant) ruled that a portion of PacTel stock must be taxable to AT&T shareholders as stock acquired in a taxable transaction. A deficiency of $29.64 was assessed against the trust. The trust challenged the assessment in the United States Tax Court, arguing that the PacTel stock, unlike the 15 percent ownership of Pacific stock, was acquired in a nontaxable exchange.