Starman Investment, Inc. v. United States

The IRS assessed an accumulated earnings tax deficiency against Starman under Int.Rev.Code § 531. The company paid the tax and filed suit in the district court for a refund. The district court granted judgment for the taxpayer and the government filed a timely notice of appeal. We affirm.

The Starman stock is held by four brothers and their uncle, all of whom were active in the company’s business. Before 1968, the company was engaged in manufacturing its own line of products and in distributing the products of another company, ITE. Some time in 1967, ITE announced its desire to distribute its own products and asked about buying the corporate business. The shareholders decided that it was not feasible to continue in business without distributing ITE’s line; therefore, they decided to sell ITE all the corporation’s assets except its real estate, life insurance and profit-sharing trust. Most of the shareholders were to be employed by ITE but only one was to receive an employment contract. The company did not liquidate; it leased the real estate to ITE and invested the cash proceeds in a savings account. The ultimate issue before us is: was avoidance of taxes to the…