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United States v. Cumberland Public Service Co.

338 U.S. 451, 70 S. Ct. 280 (1950)

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United States v. Cumberland Public Service Co.

United States Supreme Court

338 U.S. 451, 70 S. Ct. 280 (1950)

Facts

Cumberland Public Service Co. (Cumberland) (plaintiff) generated and distributed power in Kentucky. A local electricity cooperative began to distribute power in the same area as Cumberland. Cumberland could not compete with the cooperative, so Cumberland sought to sell its corporate stock to the cooperative. The cooperative declined but offered to buy Cumberland’s transmission and distribution equipment. Cumberland declined because the sale of equipment would have created a large corporate-gains tax liability. Instead, Cumberland shareholders offered to acquire the equipment through a partial liquidation and then sell the equipment to the cooperative. The cooperative accepted the shareholders’ proposal, and the shareholders executed their liquidation plan to acquire and then sell the equipment to the cooperative. The commissioner of the Internal Revenue Service (IRS) (defendant) treated the sale of equipment by the shareholders as a corporate sale and assessed and collected a $17,000 tax on Cumberland. The commissioner had determined that the sale by shareholders was a mere conduit for what was in reality a corporate sale. Cumberland filed an action in the court of claims to recover the amount of the tax. The court of claims entered judgment for Cumberland, finding that the liquidation of Cumberland was genuine and that at no time did Cumberland itself plan to sell the equipment. The government appealed to the United States Supreme Court.

Rule of Law

Issue

Holding and Reasoning (Black, J.)

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