Litton Industries, Inc. v. Commissioner

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Litton Industries, Inc. v. Commissioner 84 T.C. 1086 (1987) Presented by Kimberly DeCarrera, Esq. For Advanced Federal Taxation, Tax 8020 On June 20, 2007

The Parties Taxpayer/Petitioner: Litton Industries, Inc. The Stouffer Corporation (the frozen food people) is the wholly-owned subsidiary Respondent: Commissioner, Internal Revenue Service

The Timeline Stouffers is a wholly-owned subsidiary of Litton Industries. On August 1, 1972, Stouffer’s E & P exceeds $30,000,000. On August 23, 1972, Stouffer’s declares a $30,000,000 dividend, payable to Litton as a negotiable promissory note. Two weeks later...

The Timeline On September 7, 1972, Litton publicly announces its interest in selling Stouffers. On March 1, 1973, Nestle Alimentana S.A. Corporation (Nestle), a Swiss Corporation, offers Litton $105,000,000 for Stouffers. On March 5, 1973, Nestle pays $74,962,518 in cash for 100% of the stock and $30,000,000 in cash for the promissory note

The Issue “The issue for decision is whether the $30,000,000 dividend declared by Stouffer on August 23, 1972, and paid to its parent, Litton, by means of a negotiable promissory note was truly a dividend for tax purposes or whether it should be considered part of the proceeds received by Litton from the sale of all of Stouffer’s stock on March 1, 1973.”

The Sides Litton Industries says that the $30,000,000 was a dividend. If a dividend, then Litton is able to deduct 100% under § 243. IRS says that the $30,000,000 was part of the selling price. If part of the selling price, then Litton cannot deduct and gets it taxed at the capital gains rate.

Waterman Steamship Corp. v. Commissioner 50 T.C. 650 (1968), rev’d. 430 F.2d 1185 (5th Cir.1970), cert. denied 401 U.S. 939 (1971) In Waterman, the taxpayer received an offer to buy a wholly-owned subsidiary. After the offer, the subsidiary declared a dividend for the majority of the sales price. The Purchaser was to “promptly” loan money to the subsidiary in order to pay off the promissory note/dividend. All transactions (dividend declaration, authorization from purchaser, authorization from seller, execution of sales agreement) happened in 90 minutes.

The Result The Tax Court distinguishes Waterman Steamship. The Court holds that Stouffer declared a dividend on August 23, 1972 and the $30,000,000 was not part of the sales price.

The End Kimberly DeCarrera law@decarreralaw. com http://www