Jerrold L. Kingsley and June H. Kingsley v. Commissioner of Internal Revenue

Taxpayers appeal from a decision of the Tax Court holding that they must pay tax on interest income imputed under I.R.C. § 483 on the deferred delivery of stock in a corporate reorganization. Gain on the shares transferred in the reorganization was not recognized under I.R.C. .§§ 354, 368. Taxpayers argue on appeal that section 483 may not be applied to a section 354 reorganization, that section 483 by its own terms does not apply to the present case, and that the Tax Court improperly calculated the interest on the deferred stock. We affirm. FACTS

There is no material dispute regarding the facts. Jerrold Kingsley was sole shareholder of Household Research Institute (HRI). On October 31, 1966, he entered into a reorganization agreement with American Home Products (American), to convey all the stock of HRI in return for 17,845 shares of American common stock. The agreement contained warranties by Kingsley regarding HRI’s financial statements, tax liabilities, and insurance claims, and provided that 2,775 shares of American stock would be withheld as security for performance of these warranties. The retained shares would be delivered upon the later of: (1) a final IRS audit of HRI’s…