Rendina v. Commissioner Biying Huang TX /25/2007

Related Information Citation: Rendina V. Commissioner, TC Memo , RIA TC Memo P 96392, 72 CCH TCM 474. Judge: Beghe, J. History: Decision for Taxpayers in part and for Commissioner in part

Facts Petitioner and Ackerman formed WSAI which operated as a C corporation in In 1987 and 1988, WSAI constructed condominium units for sale financed partly by the petitioner’s personal fund and loans from his clients. Toward the end of 1988, WSAI transferred the last two unsold condominiums to petitioner for the debt he assumed and his recovering of investment. Petitioner did not report any income or gain on that taxable year. After the transfer, WSAI held no business assets and ceased doing business. However, it was not formally dissolved.

Issue Are the condominiums received by the petitioner qualified as a liquidating distribution? Yes

Holding Petitioner received the condominium units as a distribution in de facto liquidation of his shares of WSAI, thereby he could reduce his realized gain by the amount of his basis in the shares and by the amount of certain liabilities to third parties that he assumed.

Reasoning According to the de facto liquidation theory, as long as –a corporation shows manifest intent to liquidate –there’s a continuing purpose to terminate corporate affairs –and the activities of the corporation and its shareholders are directed toward that objective even the corporation is not formally dissolved, the distribution of corporate property can be deemed de facto liquidation. Thus such property received is a distribution upon liquidation rather than dividend.