324 U.S. 331 (U.S. Supreme Court 1945)
Commissioner v. Court Holding Co.
When a corporation negotiates and effectively commits to sell property, can it avoid corporate-level tax on the gain by distributing the property to its shareholders, who then immediately consummate the sale with the same buyer on the same terms?
The incidence of taxation depends upon the substance of the transaction. The tax consequences of a transaction are not controlled solely by the form in which legal title is conveyed. A sale by one person cannot be transformed for tax purposes into a sale by another by using the latter as a conduit through which to pass title. Where a corporation has negotiated and arranged a sale to the point that only ministerial acts remain, a later distribution of the property to shareholders who close the transaction on the same terms will be disregarded; the gain is taxable to the corporation.
No. The Supreme Court held that the sale was, in substance, a sale by the corporation, and the gain was taxable to the corporation despite the last-minute distribution and shareholder conveyance. The judgments below were reversed.
Court Holding is a canonical statement of the substance-over-form doctrine in tax law and a staple of first courses in federal income tax and corporate tax. It teaches that courts will collapse prearranged, integrated steps to reflect economic reality and prevent the use of shareholders as conduits to avoid corporate-level tax on asset sales. The case pairs with United States v. Cumberland Public Service Co., which reached the opposite result on materially different facts, to help students learn how timing, negotiation control, and independent shareholder action can change the tax characterization. For planners, it underscores the risks of prearranged sales through liquidation and the importance of genuine, independent shareholder decision-making and timing if a sale is to be treated as a shareholder-level transaction.