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Court Holding Co. Doctrine




This portion of the introduction to the basic principles of United States federal income taxation of corporate acquisitions is part of the Pillsbury Winthrop Shaw Pittman LLP Tax Page, a World Wide Web demonstration project. Comments are welcome on the design or content of this material.

The information presented is only of a general nature, intended simply as background material, is current only as of the latest revision date, October 15, 2007, omits many details and special rules and cannot be regarded as legal or tax advice.

Comm'r v. Court Holding Co., 324 U.S. 331 (1945).

This doctrine is similar to the step transaction doctrine in that it operates to determine the tax consequences of a series of transactions by viewing those transactions as a whole. But its effect is often to alter for analytic purposes the order of the steps.

Example.

    Prior to repeal of the General Utilities doctrine Corporation A ("A") recognized no gain on a distribution of appreciated property to its shareholders. Those shareholders would be taxed on the fair market value of the distributed property (generally as a dividend unless A were making a liquidating distribution) and would have a basis for the appreciated property equal to that fair market value. If the shareholders then sold the property at that same fair market value, no further gain would be realized. Thus, a distribution followed by shareholder sale resulted in but one level of tax on the appreciation.

    On the other hand, if A itself sold the appreciated property and then distributed the sales proceeds, A would be taxed on the gain and the shareholders would again be taxed on receipt of those proceeds, resulting in two levels (corporate and shareholder) of tax on the appreciation.

    Obviously, a well advised corporation would attempt always to distribute property to its shareholders for subsequent resale. Court Holding Co. operates to "attribute" any such subsequent shareholder sale to the corporation if the shareholder sale can be integrated with the corporate distribution, for example, where, because of the large number of shareholders, the corporation has negotiated a definitive sale agreement with a third party.

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