Taxation – Federal Income Tax – Section 355 Held Applicable to the Division of a Single Business
Petitioner, E. P. Coady, and M. Christopher each owned 50 percent of the stock of the Christopher Construction Co., a corporation engaged for more than five years prior to November 15, 1954, in the conduct of a construction business. On that day the parent, Christopher Company, organized a subsidiary, E. P. Coady & Co., to which it transferred approximately one half of its contracts, equipment, and cash. In exchange, the parent company received all the stock of the subsidiary. Immediately thereafter, the parent distributed to petitioner, one of the two equal shareholders of the parent company, all the stock of the subsidiary in exchange for petitioner’s stock in the parent. Although the fair market value of the shares received exceeded the basis of the shares surrendered, petitioner reported no gain from the transaction. Respondent, relying upon Treasury Regulation 1.355-1 (a) which denies tax free distribution under section 3551 upon the division of a single business, assessed a deficiency. In a Tax Court proceeding, held, for petitioner, six judges dissenting.2 Section 355 may properly be applied to a single business; Treasury Regulation 1.355-1 (a) is invalid. Edmund P. Coady and Virginia Coady, 33 T.C. No. 87 (1960).