The Farmers Union Corporation v. Commissioner of Internal Revenue

In 1951, the Farmers Union Corporation operated a retail hardware business and also had substantial real estate holdings in San Jose, California. It desired to get out of the retail business, and transferred the inventory and related assets constituting that business to seven of its 134 shareholders, receiving in return 8000 of its 20,000 shares of stock. In its tax returns for 1951 it treated the transaction as a sale of inventory, claiming that it incurred a loss of $226,349.84, and reported a total loss of $246,952.11, $217,527.20 of which was attributed to this transaction. In its 1952 and 1953 returns, it used $16,544.54 and $26,982.-20, as net loss carry-over deductions, pursuant to § 122(b) (2) (B) of the Internal Revenue Code, 26 U.S.C.A. § 122 (b) (2) (B). (All references are to the Internal Revenue Code of 1939, unless otherwise noted). It deducted as business expenses $450 in 1951 and $1,650.50 in 1952, paid for legal, escrow and accounting fees incurred in the claimed sale. The Commissioner, asserting deficiencies for each year, disallowed the claimed losses for 1951, 1952 and 1953, on the grounds that the transaction was a partial liquidation and not a sale, and…