Consistency of Ownership
The court looked at the taxpayer’s argument that this should be a liquidation, primarily because it did not qualify for redemption status. The taxpayer pointed to the fact that in order for a transaction to qualify as a redemption there must be a “consistency of ownership”. According to the taxpayer, 84% of the company’s ownership changed during this transaction. The change in ownership is the change between the trust’s ownership of the stock of the Inc company, and Ringwalt’s ownership in the stock of the Co company.
The court rejected the argument that ownership changed considerably. The court looked to the case of Bondy v. Commissioner and found that the assessment of the “continuity of interest ultimately depends upon proof of beneficial ownership without regard to the existence or absence of legal title.” While the legal title of the Inc stock belonged to the trust, Ringwalt essentially had all incidents of ownership other than receiving the income generated by the trust assets. Ringwalt held a reversionary right to the corpus, the assets were subject to an execution by his creditors, and he contained full to allocate receipts between principle and interest. These rights convinced the court that Ringwalt essentially had total control over the assets of the trust, including the stock of the Inc company. Since Ringwalt had control of the stock before the transaction, and had control of the stock after the transaction, the ownership requirement was fulfilled as were the rest of the requirements of a D reorganization.
Analysis
In the Ringwalt case, there was essentially one shareholder of the two companies. While Ringwalt did not own 100% of the company he owned a vast majority of the stock in both corporations, and the other shareholders remained consistent throughout the transaction. Due to his ownership, and the control requirement was satisfied even though there was no issuance of stock by the Co company. While the temporary regulation cited above was not in effect at the time of the Ringwalt case, it does demonstrate the same issue and conclusion as this case does.
If there had been even some change in ownership between the two corporations, then the argument for a reorganization would have become more difficult since there would be a change in the ownership, and there would also be no stock issued or distributed. However, with the same owners, this argument is frivolous since there has been no change in ownership, and the regulations now treat it as the transferee corporation making a deemed distribution of a nominal share of stock, thereby meeting the requirement.
Closing
A type D reorganization, a tax free transaction, can be easily achieved through the reduced control requirements. If unplanned for, this can be an unwelcomed surprise for a taxpayer trying to receive a step up in basis through a normally taxed transaction, such as a liquidation. In addition, while the temporary regulation regarding single owner or structurally similar owners is relatively new, it is clear that this arose from court history and should not result in an unexpected planning change. This type of transaction becomes a challenging planning area, as one has to be aware of the landmines that step transactions and single ownership present.